Exhibit 13
PAGE 8
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Consolidated Results
Net income available to common shareholders for 1999 increased 39.3% over
1998 to a record $182.3 million ($3.78 per basic share and $3.35 per
diluted share) due primarily to higher operating income, a decline in other
net expense, and a lower effective tax rate. Operating income of $359.1
million increased 23.6% over 1998 on double-digit percentage growth at all
of our reporting segments. Higher operating income in 1999 was largely
attributable to a 13.2% increase in revenue to $5.59 billion. Higher
consolidated revenue in 1999 was comprised of increases from all of our
reporting segments and was aided by improved international economic
conditions and continued strength in the domestic economy.
Results of operations in 1999 included three unusual gains. Operating
income benefited from a $16.5 million net gain ($0.19 per basic share and
$0.17 per diluted share) on the settlement of a lawsuit in January 1999. In
May 1999, another non-recurring net gain of $10.1 million ($0.12 per basic
share and $0.10 per diluted share) was recognized in operating income on
the sale of the assets of VantageParts, our wholesale distributor of truck
parts and supplies. Also, other net expense in 1999 included a $9.6 million
net gain from the sale of equity securities in December 1999 ($0.11 per
basic share and $0.10 per diluted share). Excluding the unusual gains, net
income available to common shareholders for 1999 would have been $161.8
million ($3.36 per basic share and $2.98 per diluted share).
Net income available to common shareholders for 1998 increased 15.8% over
1997 to $130.8 million ($2.74 per basic share and $2.45 per diluted share)
due primarily to higher operating income, a decrease in other net expense,
and a lower effective tax rate. The increase in 1998 operating income was
primarily the result of significantly higher income from Con-Way
Transportation Services, increased income from Menlo Logistics and a
reduction in loss from the Other segment, which consists mostly of the
operations under the Priority Mail contract with the U.S. Postal Service.
Revenue in 1998 of $4.94 billion increased 15.8% over 1997 due primarily to
higher revenue from Con-Way, Menlo and the Other segment. The Other
segment's revenue in 1998 benefited from higher revenue from the Priority
Mail operations, which were fully implemented late in the second quarter of
1998.
Con-Way Transportation Services
Con-Way's revenue in 1999 increased to a record $1.88 billion, an 11.5%
increase over 1998. Higher revenue was primarily the result of increased
tonnage (weight) and revenue per hundredweight (yield). Total weight
transported by the Con-Way regional carriers increased 7.0% and less-than-
truckload (LTL) weight increased 7.1% over 1998. Yield in 1999 was 5.7%
higher than in 1998 due primarily to higher rates earned on Con-Way's core
premium services and a larger percentage of inter-regional joint services,
which command higher rates on longer lengths of haul. We believe that
closures of two of Con-Way's competitors in the second quarter of 1999
created additional demand for Con-Way's services in the last half of 1999.
Revenue in 1998 was 14.3% higher than in 1997 as Con-Way's regional
carriers increased total weight by 6.2%, LTL weight by 6.6%, and yield by
approximately 10%.
Con-Way's operating income in 1999 grew 10.6% over 1998 to a record $228.8
million. Increased operating income in 1999 was due primarily to higher
revenue, better capacity utilization, increased load factor, and other
operating efficiencies. Start-up costs incurred during the first year of
operations for Con-Way's new multi-client warehousing and logistics
business negatively affected operating income in 1999. Con-Way's 1998
operating income of $206.9 million increased 40.6% over 1997 due primarily
to expansion of core premium services, growth in inter-regional joint
services, lower fuel costs and productivity improvements, including better
capacity utilization, increased load factor, and freight handling
efficiencies.
Emery Worldwide
In 1999, Emery increased revenue 9.3% over 1998 to a record $2.41 billion.
Increases in international airfreight revenue and revenue from an Express
Mail contract with the U.S. Postal Service were partially offset by
slightly lower North American airfreight revenue. Growth in international
revenue was accomplished primarily with a 10.2% increase in pounds
transported (weight or freight volume) and 2.4% higher revenue per pound
(yield). Freight volume and yield were favorably affected by improved
economic conditions in the international markets served by Emery. The small
0.7% decline in North American airfreight revenue was primarily the result
of a 5.7% drop in weight partially offset by a 5.3% increase in yield.
PAGE 9
Improved yield in North America was achieved in part from an increase in the
percentage of higher yielding guaranteed service, which was introduced in
January 1999, and Emery's yield management program, which is designed to
eliminate or reprice low-margin business. Although Emery's yield management
program in North America was a factor in achieving higher yield, it also
contributed to lower weight transported.
Emery's revenue in 1998 decreased 2.1% from 1997 due primarily to lower
North American and international airfreight revenue partially offset by
higher revenue from other transportation services, including the Express
Mail contract. North American airfreight revenue in 1998 declined 9.6% from
1997 due primarily to an 8.2% decrease in weight with essentially no change
in yield. Airfreight volume in North America fell in 1998 from 1997 due
largely to lower demand from certain industries served by Emery, increased
ground-based transportation and Emery's yield management program.
International airfreight revenue was down 5.0% on a weight decline of 0.8%
and a 3.4% decrease in yield. International freight volume and yield were
negatively affected by adverse economic conditions in the international
markets served by Emery.
Emery's operating income in 1999 increased 17.4% from 1998 due primarily to
higher airfreight revenue and revenue from the Express Mail contract.
Higher operating income on airfreight revenue in 1999 was achieved
primarily with a strong 1999 fourth quarter in which international
airfreight revenue increased 25.8%. Operating income in 1998 declined 43.6%
from 1997 due primarily to higher incremental costs of implementing service
initiatives and lower revenue. Initiatives intended to improve Emery's
domestic premium service mix included increases in short-term airlift costs
and modification of other freight handling processes. With lower revenue in
1998, the additional costs of the service initiatives contributed to a more
dramatic margin decline.
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 costs. Key initiatives include
replacing older aircraft with newer aircraft having lower maintenance
costs, including wide-body aircraft, and the recent reconfiguration of its
hub sortation center. Internationally, Emery's management will focus on
expanding its variable-cost-based operations and will continue its efforts
to increase international revenue as a percentage of total revenue.
Menlo Logistics
Menlo's 1999 record revenue of $716.0 million exceeded 1998 revenue by
22.0% due in part to a full year of revenue from several large logistics
contracts secured in the second quarter of 1998 and higher revenue from
other contracts secured prior to 1999. Several additional large contracts
were also secured in the fourth quarter of 1999. Menlo's revenue in 1998 of
$586.8 million was 28.7% higher than 1997 due in part to the addition of
the new contracts secured in the second quarter of 1998 and an increase in
revenue from contracts existing prior to 1998.
Menlo's operating income of $22.3 million in 1999 increased 14.4% from 1998
due primarily to increased revenue. Higher business development and
information systems costs incurred during 1999 contributed to lower
operating income as a percentage of revenue than in 1998. In 1998, Menlo
increased operating income to $19.5 million, a 13.3% improvement over 1997.
Higher revenue and better margins from existing contracts in 1998 were
partially offset by the costs of implementing several large new contracts
in the second quarter of 1998.
Other Operations
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 the sale of its assets in May 1999,
VantageParts. Also included in the Other segment's operating income for
1999 were net gains on the settlement of a lawsuit in January 1999 and on
the VantageParts asset sale.
The Other segment's revenue of $590.2 million in
1999 increased 26.3% over 1998 due primarily to revenue of $555.5 million
from the Priority Mail operation, a 35.2% increase over 1998. The Priority
Mail operation was not fully implemented until late in the second quarter
of 1998. Higher Priority Mail revenue was partially offset by loss of
revenue from VantageParts following the sale of its assets in May 1999.
PAGE 10
Revenue for the Other segment in 1998 increased to $467.2 million from
$88.1 million in 1997 due to an increase in Priority Mail revenue to $410.8
million in 1998 from $51.6 million in 1997. Revenue in 1998 benefited from
the operation of 10 Priority Mail Processing Centers, which were not fully
implemented until late in the second quarter of 1998.
In 1999, operating income of $32.5 million for the Other segment increased
from essentially break-even results in 1998 due primarily to a $16.5
million net gain from a lawsuit settled in January 1999 and a $10.1 million
net gain on the sale of the assets of VantageParts. In addition, the
Priority Mail operation in 1999 generated operating income of $4.8 million
compared with an operating loss of $3.0 million incurred during the start-
up phase of the Priority Mail contract in 1998. As discussed below, all
Priority Mail operating income in 1999 was recognized in the first six
months and break-even results were recognized in the second half. The near
break-even results of the Other segment in 1998 increased from the $13.4
million operating loss recorded in 1997. The improvement in 1998 operating
income was primarily the result of a reduction in the Priority Mail
operating loss to $3.0 million in 1998 from $13.0 million in 1997. The 1998
operating loss for Priority Mail reflected costs incurred during completion
of the start-up phase in the first half of 1998 and the costs of
maintaining service levels and making required system modifications for the
December 1998 holiday season. The Priority Mail operating loss in 1997
included higher cost levels during the start-up phase of operations.
In accordance with the Priority Mail contract, in February 1999, Emery
Worldwide Airlines (EWA), our subsidiary that operates the contract,
submitted a proposal to the U.S. Postal Service (USPS) for 1999 pricing. We
believe that our proposal was reasonably determined and justifiable based
upon EWA's experience of operating under the Priority
Mail contract.
EWA did not receive a counter-proposal from the USPS. Consequently, EWA in
the third quarter of 1999 filed a claim with the USPS for proposed higher
prices.
Through the second quarter of 1999, Priority Mail contract revenue was
billed at a provisional rate set by the USPS, pending a final price
determination. The USPS responded to the EWA claim with unilateral price
reductions for both prior and future periods. The current rate is below
EWA's cost to service this contract. Unless the rate is increased or until
negotiation or litigation results in favorable pricing or contract changes,
EWA will be compensated below its cost of operating the contract.
Also, in August 1999, the USPS denied EWA's previously filed claim for
reimbursement of additional costs incurred during the 1998 holiday season.
Consistent with our accounting policies described in Note 1 of the Notes to
Consolidated Financial Statements, unbilled revenue from the Priority Mail
contract is recognized in our financial statements. In accordance with
generally accepted accounting principles, EWA recognizes unbilled revenue
related to claims sufficient only to recover costs of operating under the
contract. Accordingly, no operating profit was recognized in connection
with the Priority Mail contract in the last half of 1999. As a result of
the claims discussed above and the USPS's decision to assert price
reductions, EWA recognized $123.7 million of revenue through December 31,
1999 that is now in dispute and attributable to claims made by EWA under
the contract. Until the dispute is resolved, we expect that any shortfall
between EWA's billed revenue from the Priority Mail contract and its costs
of operating under the contract will be recognized as unbilled revenue and
as a result, we will generally continue to record break-even operating
results under the Priority Mail contract in our financial statements.
If we determine that the unbilled revenue is not collectable, the
uncollectable amount will be charged as expense to operations in the period
when and if that determination is made.
We are in active negotiations with the USPS to resolve the pricing and
operational issues involving the Priority Mail contract. We disagree with
the USPS's actions and intend to vigorously contest our claim for price
determination and denial of the 1998 holiday claim by appropriate action.
While every attempt is being made to conclude the negotiations in a
beneficial manner, we intend to pursue litigation should negotiations fail.
We believe our position is reasonable and well founded; however, there can
be no assurance as to the outcome. Likewise, if determined adversely to us,
there can be no assurance that this matter will not have a material adverse
effect on our results of operations.
PAGE 11
Other Net Expense
Other net expense in 1999 decreased 45.2% from 1998 due primarily to a $9.6
million net gain from the sale of equity securities and lower interest
expense. The decline in interest expense was partially due to the July 1998
refinancing of a capital lease obligation at a lower interest rate and the
repayment of the 91/8% Notes at maturity. The repayment of $117.7 million
of 91/8% Notes in August 1999 was funded in part with $90.0 million of
lower-interest rate long-term borrowings under unsecured lines of credit.
Partially offsetting lower interest expense in 1999 was increased interest
expense on higher average short-term borrowings. Capitalized interest on
construction projects in 1999 also contributed to lower interest expense
compared to 1998. Other net expense for 1998 was down 6.8% compared to 1997
from the beneficial refinancing of debt obligations in 1998 and 1997. Lower
interest expense on lower average short-term borrowings in 1998 was
partially offset by dividend requirements on preferred securities of a
subsidiary trust (TECONs) issued in June 1997.
The net gain from the sale of equity securities discussed above resulted
from the sale by Emery in December 1999 of 34% of its holdings in Equant
N.V., an international data network services provider. As discussed in Note
11 of the Notes to Consolidated Financial Statements, the remaining shares
held by Emery are carried at essentially no cost and are subject to
transferability restrictions.
Income Taxes
The effective tax rate for 1999 decreased to 43.5% from 44.5% in 1998 due
primarily to higher income in 1999. The effective tax rate for 1998 was
44.5% compared to a rate of 45.5% for 1997. The decline in the 1998 tax
rate was primarily attributable to higher income, the implementation of tax
planning strategies and lower non-deductible expenses.
LIQUIDITY AND CAPITAL RESOURCES
In 1999, cash and cash equivalents increased $72.4 million to $146.3
million. Cash from operations of $445.1 million provided funding for $369.7
million of capital and software expenditures, $36.0 million of net debt
reduction and $30.4 million of dividend payments. The $72.4 million
increase in cash during 1999 included three unusual gains. Operating
activities included a $16.5 million net gain on a settlement of a lawsuit
and investing activities included $29.3 million of proceeds on the sale of
the assets of VantageParts and $9.6 million of net proceeds on the sale of
equity securities. In 1998, net capital and software expenditures of $303.2
million and dividend payments of $30.3 million exceeded the $266.8 million
of cash flow provided by operating activities. These requirements were
funded with a $23.7 million decline in cash and cash equivalents and a
$43.0 million increase in short-term borrowings.
Cash from operations in 1999 increased $178.3 million over 1998 and was
provided primarily by net income before depreciation, amortization and
deferred taxes. Cash from operations in 1998, which declined $21.4 million
from 1997, was generated primarily from net income before depreciation,
amortization and deferred taxes.
Investing activities in 1999 used $10.6 million more cash than in 1998.
Capital expenditures of $335.0 million in 1999 increased $67.3 million from
1998 due primarily to a $109.7 million increase in Con-Way's capital
expenditures, partially offset by a $39.5 million decline in capital
expenditures for the Priority Mail contract. During 1999, Con-Way spent
$212.0 million, primarily on revenue equipment and infrastructure in
connection with its capital reinvestment program. Partially offsetting the
increased capital expenditures in 1999 was a $16.7 million decline in
software expenditures from 1998 and $38.9 million of proceeds on the sale
of the assets of VantageParts and equity securities. Cash used in investing
activities in 1998 was $54.9 million higher than in 1997 due primarily to a
$25.3 million increase in capital expenditures and a $40.4 million increase
in software expenditures. Higher capital expenditures by Emery were
partially offset by lower expenditures for the Priority Mail operation.
Capital expenditures related to the Priority Mail contract during 1998
declined compared to 1997 given required capital expenditures in 1997
related to the start-up phase of the Priority Mail contract.
Financing activities in 1999 used $58.9 million compared to $12.7 million
provided by financing activities in 1998 due primarily to fluctuations in
borrowings. As discussed in Note 3 of the Notes to Consolidated Financial
Statements, $72.4 million of Thrift and Stock Plan notes guaranteed by CNF
were refinanced at a lower rate in July 1999. Financing activities provided
PAGE 12
$12.7 million in 1998 compared to $24.4 million used in 1997, reflecting
increased short-term borrowings in 1998. In October 1998, we refinanced
$46.0 million of Series A revenue bonds.
As discussed above under "Results of Operations" for the "Other" segment,
the rate currently being paid to EWA by the USPS under the Priority Mail
contract is below EWA's cost to service the contract. Until the dispute
over pricing is resolved, our liquidity will be negatively affected by the
shortfall between EWA's compensation from the contract and its cost of
operation.
In addition to the $350 million unsecured credit facility, we entered into
a supplemental $100 million unsecured credit facility in September 1999.
This supplemental credit facility was to provide additional liquidity until
designated long-term borrowings under lines of credit are refinanced with a
longer-term instrument, as discussed below. At December 31, 1999, we had
$130.0 million of borrowings outstanding under these unsecured credit
facilities. Of the $130.0 million outstanding under the unsecured credit
facilities, $90.0 million were classified as long-term debt based on our
ability and intent to refinance the borrowings on a long-term basis. The
$90.0 million of long-term borrowings under lines of credit were used to
partially fund the repayment of $117.7 million of 91/8% Notes, which
matured in August 1999.
The $350 million facility is also available for issuance of letters of
credit. Under that facility, outstanding letters of credit totaled $59.8
million at December 31, 1999. Available capacity under the $350 million
facility and the supplemental line of credit was $260.2 million at December
31, 1999.
At December 31, 1999, we also had $150.0 million of uncommitted lines with
$12.3 million in letters of credit outstanding, leaving $137.7 million of
additional short-term borrowing availability. Under other unsecured
facilities, $50.4 million in letters of credit were outstanding at December
31, 1999.
We 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.
In February 2000, we intend to issue $200.0 million of debentures with a 30-
year term. The proceeds from this offering are intended to be used
primarily to repay borrowings under the unsecured credit facilities and for
other general corporate purposes.
Our ratio of total debt to capital decreased to 30.5% at December 31, 1999,
from 36.4% at December 31, 1998, primarily due to lower borrowings and
higher shareholders' equity from net income. Our 36.4% debt-to-capital
ratio at December 31, 1998 declined from 37.9% at December 31, 1997 due to
higher shareholders' equity from net income.
CYCLICALITY AND SEASONALITY
Our businesses operate 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, for
a typical year, the months of September and October usually have the
highest business levels while the months of January and February usually
have the lowest business levels. Operations under the Priority Mail
contract peak in December primarily due to higher shipping demand related
to the holiday season.
MARKET RISK
Our policy is to enter into derivative financial instruments only in
circumstances that warrant the hedge of an underlying asset or liability
against exposure to some form of market, interest rate or currency-related
risk. This policy also prohibits entering into derivative instruments for
trading purposes.
In certain situations, we used derivative financial instruments to mitigate
potential volatility in interest rates. At December 31, 1999, these
derivatives consisted of plain vanilla interest rate swaps with high
correlation to the underlying exposure such that fluctuations in the value
of the derivatives offset reciprocal changes in the underlying exposure.
The underlying exposure consists primarily of equipment lease obligations
with variable interest rate components that are adjusted quarterly. At
December 31, 1999, we estimate that the net payments under the swaps given
a hypothetical adverse change of 10% in market interest rates would not
have a material effect on our financial position or results of operations.
We may also be exposed to the effect of interest rate fluctuations in the
fair value of our long-term debt and capital lease obligations, as
described in Notes 3 and 4 of the Notes to Consolidated Financial
Statements. The change in the fair value of our long-term obligations given
a hypothetical 10% change in interest rates would be approximately $14
million at December 31, 1999.
PAGE 13
During 1999, we entered into fuel purchase contracts to hedge our market
exposure to fuel prices. At December 31, 1999, we estimate that a change in
the fair value of these contracts given a hypothetical 10% change in the
price of the hedged fuel would not have a material effect on our financial
position or results of operations.
At December 31, 1999, we had not entered into any derivative contracts to
hedge our foreign currency exchange exposure.
ACCOUNTING STANDARDS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1,
which provides for the capitalization of the costs of internal-use software
if certain criteria are met, is effective for fiscal years beginning after
December 15, 1998. As provided by SOP 98-1, we elected to adopt the
pronouncement early and applied the new provisions prospectively as of
January 1, 1998. Prior to adoption of SOP 98-1, it was our policy to
capitalize purchased software costs and to expense all internally developed
internal-use software costs. For the years ended December 31, 1999 and
1998, costs of $27.3 million and $35.9 million, respectively, were
capitalized as internally developed internal-use software.
In June 1999, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of
the Effective Date of FASB Statement No. 133" (SFAS 137). SFAS 137 delays
by one year the effective date of FASB Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133). SFAS 133
establishes accounting and reporting standards requiring that every
derivative instrument be recorded in the balance sheet as either an asset
or liability measured at its fair value and that changes in fair value be
recognized currently in earnings unless specific hedge accounting criteria
are met. Qualifying hedges allow a derivative's gains and losses to offset
related results on the hedged item in the income statement. SFAS 133 will
now be effective January 1, 2001. We do not expect the adoption of SFAS 133
to have a material impact on our financial position or results of
operations and we plan to adopt the statement in the first quarter of 2001.
YEAR 2000
State of Readiness
As of January 31, 2000, we have not experienced any significant adverse
effects related to Y2K compliance issues. Additionally, we are not aware of
any problems experienced by third parties with which we transact business.
Costs to Address Y2K Compliance
In 1996, we began assessing and correcting potential Y2K information
systems problems for our mission-critical business systems. Since that
time, we expensed $38.1 million on Y2K compliance through December 31,
1999. All Y2K costs have been funded from operations. We expensed $14.9
million and $19.7 million for the years ended December 31, 1999 and 1998,
respectively. For the year ended December 31, 1999, we capitalized $7.4
million of purchased software costs and $27.3 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 replaced non-compliant systems.
Risks & Contingency Plans
We believe our efforts to address Y2K issues have been successful in
avoiding any material adverse effect on our financial position or results
of operations. We do not expect any material adverse effect on our
financial position and results of operations but will continue to monitor
for Y2K-related problems. Should problems arise, we will implement the Y2K
business resumption contingency plans we previously established.
FORWARD LOOKING STATEMENTS
Certain statements in this annual report, including statements regarding
anticipated earnings, constitute "forward-looking statements" and are
subject to a number of risks and uncertainties, and should not be relied
upon as predictions of future events. The factors included in this report
and in Item 7 of our 1999 Annual Report on Form 10-K as well as other
filings with the Securities and Exchange Commission, could cause actual
results and other matters to differ materially from those in such forward-
looking statements. As a result, no assurance can be given as to future
financial position or results of operations.
PAGE 14
CNF TRANSPORTATION INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
(Dollars in thousands)
1999 1998
ASSETS
Current Assets
Cash and cash equivalents $ 146,263 $ 73,897
Trade accounts receivable, net of allowance (Note 1) 914,307 810,550
Other accounts receivable 25,419 51,865
Operating supplies, at lower of average cost or market 46,019 41,764
Prepaid expenses 41,971 32,741
Deferred income taxes (Note 5) 26,254 89,544
Total Current Assets 1,200,233 1,100,361
Property, Plant and Equipment, at Cost
Land 119,403 114,146
Buildings and leasehold improvements 573,688 468,123
Revenue equipment 854,519 714,195
Other equipment 447,962 425,476
1,995,572 1,721,940
Accumulated depreciation and amortization (864,538) (737,464)
1,131,034 984,476
Other Assets
Deferred charges and other assets (Note 12) 200,739 128,627
Capitalized software, net (Note 1) 88,157 64,285
Unamortized aircraft maintenance, net (Note 1) 162,951 143,349
Goodwill, net (Note 1) 265,896 268,314
717,743 604,575
Total Assets $3,049,010 $2,689,412
<FN>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
PAGE 15
CNF TRANSPORTATION INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
(Dollars in thousands except per share data)
1999 1998
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 305,954 $ 285,832
Accrued liabilities (Note 2) 543,353 446,171
Accrued claims costs 99,940 108,028
Current maturities of long-term debt and capital leases (Notes 3 and 4) 6,452 5,259
Short-term borrowings (Note 3) 40,000 43,000
Income taxes payable (Notes 5 and 12) 53,455 12,340
Total Current Liabilities 1,049,154 900,630
Long-Term Liabilities
Long-term debt and guarantees (Note 3) 322,800 356,905
Long-term obligations under capital leases (Note 4) 110,646 110,730
Accrued claims costs 81,978 58,388
Employee benefits (Note 8) 217,519 190,268
Other liabilities and deferred credits 45,450 55,268
Deferred income taxes (Note 5) 128,515 115,868
Total Liabilities 1,956,062 1,788,057
Commitments and Contingencies (Notes 3, 4 and 12)
Company-Obligated Mandatorily Redeemable Preferred Securities
of Subsidiary Trust Holding Solely Convertible Debentures of
the Company (Note 6) 125,000 125,000
Shareholders' Equity (Note 7)
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 840,407 and 854,191 respectively 8 9
Additional paid-in capital, preferred stock 127,817 129,914
Deferred compensation, Thrift and Stock Plan (Note 9) (87,600) (94,836)
Total Preferred Shareholders' Equity 40,225 35,087
Common stock, $.625 par value; authorized 100,000,000 shares;
issued 55,306,947 and 54,797,707 shares, respectively 34,567 34,249
Additional paid-in capital, common stock 328,721 314,440
Retained earnings 747,936 584,991
Deferred compensation, restricted stock (Note 10) (2,010) (4,599)
Cost of repurchased common stock
(6,856,567 and 6,922,285 shares, respectively) (169,057) (170,678)
940,157 758,403
Accumulated foreign currency translation adjustments (8,039) (9,140)
Minimum pension liability adjustment (Note 8) (4,395) (7,995)
Accumulated Other Comprehensive Loss (12,434) (17,135)
Total Common Shareholders' Equity 927,723 741,268
Total Shareholders' Equity 967,948 776,355
Total Liabilities and Shareholders' Equity $3,049,010 $2,689,412
<FN>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
PAGE 16
CNF TRANSPORTATION INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
YEARS ENDED DECEMBER 31
(Dollars in thousands except per share data)
1999 1998 1997
REVENUES $ 5,592,810 $ 4,941,490 $ 4,266,801
Costs and Expenses
Operating expenses 4,576,967 4,045,047 3,474,447
General and administrative expenses 516,326 461,230 416,391
Depreciation 166,995 144,695 111,096
Net gain on sale of assets of parts distribution operation (10,112) - -
Net gain on legal settlement (16,466) - -
5,233,710 4,650,972 4,001,934
OPERATING INCOME 359,100 290,518 264,867
Other Income (Expense)
Interest expense (25,972) (32,627) (39,553)
Dividend requirement on preferred securities of
subsidiary trust (Note 6) (6,250) (6,250) (3,471)
Miscellaneous, net (Note 11) 10,244 (1,230) (29)
(21,978) (40,107) (43,053)
Income before income taxes 337,122 250,411 221,814
Income taxes (Note 5) 146,648 111,433 100,925
NET INCOME 190,474 138,978 120,889
Preferred stock dividends 8,218 8,169 7,886
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 182,256 $ 130,809 $ 113,003
Average Shares Outstanding (Note 1)
Basic 48,189,618 47,659,745 46,236,688
Diluted 56,019,317 55,514,318 53,077,468
Earnings Per Share (Note 1)
Basic $ 3.78 $ 2.74 $ 2.44
Diluted $ 3.35 $ 2.45 $ 2.19
<FN>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
PAGE 17
CNF TRANSPORTATION INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
YEARS ENDED DECEMBER 31
(Dollars in thousands)
1999 1998 1997
Cash and Cash Equivalents, Beginning of Year $ 73,897 $ 97,617 $ 82,094
Operating Activities
Net income 190,474 138,978 120,889
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 190,461 163,382 123,391
Increase in deferred income taxes 75,937 40,022 31,840
Amortization of deferred compensation 11,858 9,764 7,132
Provision for uncollectible accounts 15,229 11,050 12,528
Losses (gains) from property disposals, net 3,038 (1,309) 927
Gain on sale of assets of parts distribution operation, net (10,112) - -
Gain on sale of equity securities (9,625) - -
Changes in assets and liabilities:
Receivables (97,853) (137,613) (156,721)
Prepaid expenses (9,287) 2,941 (4,433)
Accounts payable 20,900 17,768 57,663
Accrued liabilities 96,403 22,934 73,740
Accrued claims costs 14,082 18,390 9,626
Income taxes (11,885) 2,226 17,564
Employee benefits 30,851 34,070 25,881
Deferred charges and credits (52,338) (40,937) (25,783)
Other (13,014) (14,873) (6,034)
Net Cash Provided by Operating Activities 445,119 266,793 288,210
Investing Activities
Capital expenditures (335,008) (267,668) (242,343)
Software expenditures (34,705) (51,415) (11,022)
Proceeds from sale of equity securities 9,625 - -
Proceeds from sale of assets of parts distribution operation 29,260 - -
Proceeds from sales of properties 16,986 15,836 5,043
Net Cash Used in Investing Activities (313,842) (303,247) (248,322)
Financing Activities
Proceeds from issuance of long-term debt 162,400 46,000 1,997
Repayment of long-term debt, guarantees and capital leases (195,396) (51,469) (4,020)
Proceeds from (repayment of) net short-term borrowings (3,000) 43,000 (155,000)
Proceeds from issuance of subsidiary preferred securities, net of
costs of issuance - - 121,431
Proceeds from exercise of stock options 7,474 5,483 41,500
Payments of common dividends (19,311) (19,068) (18,497)
Payments of preferred dividends (11,078) (11,212) (11,776)
Net Cash Provided by (Used in) Financing Activities (58,911) 12,734 (24,365)
Increase (Decrease) in Cash and Cash Equivalents 72,366 (23,720) 15,523
Cash and Cash Equivalents, End of Year $ 146,263 $ 73,897 $ 97,617
Supplemental Disclosure
Cash paid for income taxes, net of refunds $ 63,207 $ 67,955 $ 38,568
Cash paid for interest, net of amounts capitalized 35,833 33,141 47,948
<FN>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
PAGE 18
CNF TRANSPORTATION INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
(Dollars in thousands except per share data)
Preferred Stock Series B Common Stock Additional
Number of Number of Paid-in
Shares Amount Shares Amount Capital
Balance, December 31, 1996 875,191 $ 9 51,595,827 $ 32,247 $ 375,987
Net income - - - - -
Other comprehensive loss:
Foreign currency translation adjustment - - - - -
Comprehensive income - - - - -
Exercise of stock options including
tax benefits of $16,612 - - 2,688,824 1,681 56,431
Issuance of restricted stock - - 85,531 53 2,771
Recognition of deferred compensation - - - - -
Repurchased common stock issued
for conversion of preferred stock (9,589) - - - (1,284)
Common dividends declared ($.40 per share) - - - - -
Series B, Preferred dividends ($12.93 per
share) net of tax benefits of $3,389 - - - - -
Balance, December 31, 1997 865,602 9 54,370,182 33,981 433,905
Net income - - - - -
Other comprehensive loss:
Foreign currency translation adjustment - - - - -
Minimum pension liability adjustment - - - - -
Comprehensive income - - - - -
Exercise of stock options including
tax benefits of $2,576 - - 321,079 201 7,858
Issuance of restricted stock, net of forfeitures - - 106,446 67 3,935
Issuance of employee stock awards - - - - 13
Recognition of deferred compensation - - - - -
Repurchased common stock issued
for conversion of preferred stock (11,411) - - (1,357)
Common dividends declared ($.40 per share) - - - - -
Series B, Preferred dividends ($12.93 per
share) net of tax benefits of $2,982 - - - - -
Balance, December 31, 1998 854,191 9 54,797,707 34,249 444,354
Net income - - - - -
Other comprehensive income:
Foreign currency translation adjustment - - - - -
Minimum pension liability adjustment - - - - -
Comprehensive income - - - - -
Exercise of stock options including
tax benefits of $4,198 - - 446,128 279 11,393
Issuance of restricted stock, net of forfeitures - - 63,112 39 2,387
Issuance of employee stock awards - - - - 12
Recognition of deferred compensation - - - - -
Repurchased common stock issued
for conversion of preferred stock (13,784) (1) - - (1,608)
Common dividends declared ($.40 per share) - - - - -
Series B, Preferred dividends ($12.93 per
share) net of tax benefits of $2,774 - - - - -
Balance, December 31, 1999 840,407 $ 8 55,306,947 $ 34,567 $ 456,538
<FN>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
PAGE 19
CNF TRANSPORTATION INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
(Dollars in thousands except per share data)
Cost of Accumulated
Repurchased Other
Deferred Retained Common Comprehensive Comprehensive
Compensation Earnings Stock Income (Loss) Income
Balance, December 31, 1996 $ (108,655) $ 378,744 $(173,332) $ 3,279
Net income - 120,889 - - $ 120,889
Other comprehensive loss:
Foreign currency translation adjustment - - - (9,926) (9,926)
Comprehensive income - - - - $ 110,963
Exercise of stock options including
tax benefits of $16,612 - - - -
Issuance of restricted stock (2,824) - - -
Recognition of deferred compensation 7,132 - - -
Repurchased common stock issued
for conversion of preferred stock - - 1,284 -
Common dividends declared ($.40 per share) - (18,497) - -
Series B, Preferred dividends ($12.93 per
share) net of tax benefits of $3,389 - (7,886) - -
Balance, December 31, 1997 (104,347) 473,250 (172,048) (6,647)
Net income - 138,978 - - $ 138,978
Other comprehensive loss:
Foreign currency translation adjustment - - - (2,493) (2,493)
Minimum pension liability adjustment - - - (7,995) (7,995)
Comprehensive income - - - $ 128,490
Exercise of stock options including
tax benefits of $2,576 - - - -
Issuance of restricted stock, net of forfeitures (4,852) - - -
Issuance of employee stock awards - - 13 -
Recognition of deferred compensation 9,764 - - -
Repurchased common stock issued
for conversion of preferred stock - - 1,357 -
Common dividends declared ($.40 per share) - (19,068) - -
Series B, Preferred dividends ($12.93 per
share) net of tax benefits of $2,982 - (8,169) - -
Balance, December 31, 1998 (99,435) 584,991 (170,678) (17,135)
Net income - 190,474 - - $ 190,474
Other comprehensive income:
Foreign currency translation adjustment - - - 1,101 1,101
Minimum pension liability adjustment - - - 3,600 3,600
Comprehensive income - - - - $ 195,175
Exercise of stock options including
tax benefits of $4,198 - - - -
Issuance of restricted stock, net of forfeitures (2,033) - - -
Issuance of employee stock awards - - 13 -
Recognition of deferred compensation 11,858 - - -
Repurchased common stock issued
for conversion of preferred stock - - 1,608 -
Common dividends declared ($.40 per share) - (19,311) - -
Series B, Preferred dividends ($12.93 per
share) net of tax benefits of $2,774 - (8,218) - -
Balance, December 31, 1999 $ (89,610) $ 747,936 $(169,057) $ (12,434)
<FN>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
PAGE 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Principal Accounting Policies
Basis of Presentation and Principles of Consolidation: The consolidated
financial statements include the accounts of CNF Transportation Inc. and
its wholly owned subsidiaries (the Company or CNF).
Organization: CNF is a management company of global supply chain services
with businesses in regional less-than-truckload (LTL) trucking, domestic
and international air freight, full service logistics management, postal
sortation and transportation services, and trailer manufacturing. See Note
13 "Segment Reporting" for further discussion of the Company's operating
segments, markets and product lines.
Recognition of Revenues: Freight transportation revenue is recognized when
freight is received for shipment. The estimated costs of performing the
total transportation service are then accrued. This revenue recognition
method does not result in a material difference from in-transit or
completed service methods of recognition.
Revenue from long-term contracts is recognized in accordance with
contractual terms as services are provided. Under certain long-term
contracts, there are provisions for price re-determination that give rise
to unbilled revenue. Unbilled revenue representing contract change orders
or claims is included in revenue only when it is probable that the change
order or claim will result in additional contract revenue and if the amount
can be reliably estimated. The Company recognizes unbilled revenue related
to claims sufficient only to recover costs. When adjustments in contract
revenue are determined, any changes from prior estimates are reflected in
earnings in the current period. The amount of unbilled revenue recognized
in Trade Accounts Receivable in the Consolidated Balance Sheets at December
31, 1999 and 1998 was $106.2 million and $11.0 million, respectively. In
addition, as a result of the U.S. Postal Service's unilateral price
reductions discussed under "Other" segment in "Management's Discussion and
Analysis," $17.5 million of revenue actually collected by the Company is
now in dispute.
Cash Equivalents: Short-term interest-bearing instruments with maturities
of three months or less at the date of purchase are considered cash
equivalents.
Trade Accounts Receivable: Trade accounts receivable are net of allowances
of $26,163,000 and $21,098,000 at December 31, 1999 and 1998, respectively.
Property, Plant and Equipment: Property, plant and equipment are
depreciated on a straight-line basis over their estimated useful lives,
which are generally 25 years for buildings and improvements, 10 years or
less for aircraft, 5 to 10 years for tractor and trailer equipment and
3 to 10 years for most other equipment. Leasehold improvements are
amortized over the shorter of the terms of the respective leases or the
estimated useful lives of the assets.
Expenditures for equipment maintenance and repairs, except for aircraft,
are charged to operating expenses as incurred; betterments are capitalized.
Gains (losses) on sales of equipment are recorded in operating expenses.
Capitalized Software: Capitalized Software, net, consists of costs to
purchase and develop internal-use software. In March 1998, the American
Institute of Certified Public Accountants issued Statement of Position 98-1
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" (SOP 98-1). SOP 98-1, which provides for the capitalization
of the costs of internal-use software if certain criteria are met, was
effective for fiscal years beginning after December 15, 1998. As provided
by SOP 98-1, the Company elected to adopt the pronouncement early and
applied the new provisions prospectively as of January 1, 1998. Prior to
adoption of SOP 98-1, it was the Company's policy to capitalize purchased
software costs and to expense all internally developed internal-use
software costs. For the years ended December 31, 1999 and 1998, costs of
$27.3 million ($0.32 per basic share and $0.28 per diluted share) and $35.9
million ($0.42 per basic share and $0.36 per diluted share) were
capitalized as internally developed internal-use software and are included
in Capitalized Software, net, in the Consolidated Balance Sheets.
Amortization of capitalized software is computed on an item-by-item basis
over a period of 3 to 10 years, depending on the estimated useful life of
the software.
PAGE 21
Unamortized Aircraft Maintenance: The costs to perform required maintenance
inspections of engines and aircraft frames for leased and owned aircraft
are capitalized and amortized to expense over the shorter of the period
until the next scheduled maintenance or the remaining term of the lease
agreement. Accordingly, the Company has recorded unamortized maintenance of
$226,629,000 and $198,973,000 at December 31, 1999 and 1998, respectively.
Under certain of the Company's aircraft lease agreements, the Company is
expected to return the aircraft with a stipulated number of hours remaining
on the aircraft and engines until the next scheduled maintenance. The
Company has recorded $63,678,000 and $55,624,000 at December 31, 1999 and
1998, respectively, to accrue for this obligation and any estimated
unusable maintenance at the date of lease return or other disposal. The net
amount, which represents the difference between maintenance performed
currently and that required or remaining at the expiration of the lease or
other disposal, is classified as Unamortized Aircraft Maintenance, net, in
the Consolidated Balance Sheets.
Goodwill: Goodwill, net, which represents the costs in excess of net assets
of businesses acquired, is capitalized and amortized on a straight-line
basis up to a 40-year period. Impairment is periodically reviewed based on
a comparison of estimated, undiscounted cash flows from the underlying
segment to the related investment. In the event goodwill is not considered
recoverable, an amount equal to the excess of the carrying amount of
goodwill less the estimated discounted cash flows from the segment will be
charged against goodwill with a corresponding expense to the income
statement. Based on this review, management does not believe goodwill is
impaired. Accumulated amortization at December 31, 1999 and 1998 was
$105,887,000 and $95,194,000, respectively.
Income Taxes: The Company follows the liability method of accounting for
income taxes.
Accrued Claims Costs: The Company provides for the uninsured costs of
medical, casualty, liability, vehicular, cargo and workers' compensation
claims. Such costs are estimated each year based on historical claims and
unfiled claims relating to operations conducted through December 31. The
actual costs may vary from estimates based on trends of losses for filed
claims and claims estimated to be incurred but not filed. The long-term
portion of accrued claims costs relate primarily to workers' compensation
and vehicular claims that are payable over several years.
Foreign Currency Translation: Adjustments resulting from translating
foreign functional currency financial statements into U.S. dollars are
included in the Foreign Currency Translation Adjustment in the Statements
of Consolidated Shareholders' Equity.
Earnings Per Share (EPS): Basic EPS is computed by dividing reported Net
Income Available to Common Shareholders by the weighted-average shares
outstanding. Diluted EPS is calculated as follows:
(Dollars in thousands
except per share data) 1999 1998 1997
Earnings:
Net income available to
common shareholders $182,256 $130,809 $113,003
Add-backs
Dividends on preferred
stock, net of replacement
funding 1,337 1,274 1,231
Dividends on preferred
securities of subsidiary
trust, net of tax 3,816 3,816 2,118
$187,409 $135,899 $116,352
Shares:
Weighted-average shares
Outstanding 48,189,618 47,659,745 46,236,688
Stock option and restricted
stock dilution 695,099 708,042 1,029,415
Series B preferred stock 4,009,600 4,021,531 4,075,254
Preferred securities of
subsidiary trust 3,125,000 3,125,000 1,736,111
56,019,317 55,514,318 53,077,468
Diluted earnings per share $3.35 $2.45 $2.19
Estimates: Management makes estimates and assumptions when preparing the
financial statements in conformity with generally accepted accounting
principles. These estimates and assumptions affect the amounts reported in
the accompanying financial statements and notes thereto. Actual results
could differ from those estimates.
Recent Pronouncements: In December 1999, the Securities and Exchange
Commission released Staff Accounting Bulletin No. 101 (SAB 101). In
addition to providing guidance on the recognition and disclosure of revenue
in financial statements, SAB 101 also addresses the income statement
presentation of revenue for certain business activities. SAB 101 clarifies
issues to be considered in assessing whether revenue for certain
transactions should be reported gross, with a separate display of costs of
services to arrive at gross profit, or on a net basis. The Company is
PAGE 22
currently evaluating SAB 101 to determine the effect, if any, on the income
statement presentation of its revenue.
Reclassification: Certain amounts in prior years' financial statements have
been reclassified to conform to the current year presentation.
2. Accrued Liabilities
Accrued liabilities consisted of the following as of December 31:
(Dollars in thousands) 1999 1998
Other accrued liabilities $187,172 $113,397
Purchased transportation 101,651 83,446
Taxes other than income taxes 70,830 56,840
Holiday and vacation pay 66,232 59,237
Wages and salaries 39,086 40,550
Incentive compensation 36,382 34,587
Estimated revenue adjustments 33,546 39,799
Interest 8,454 18,315
Total accrued liabilities $543,353 $446,171
3. Debt and Guarantees
As of December 31, long-term debt and guarantees consisted of the
following:
(Dollars in thousands) 1999 1998
Long-term borrowings under
lines of credit $ 90,000 $ -
7.35% Notes due 2005 (interest
payable semi-annually) 100,000 100,000
6.14% Industrial Revenue Bonds
due 2014 (interest payable
quarterly) 4,800 4,800
TASP Notes guaranteed, 6.00% to
8.54%, due through 2009 (interest
payable semi-annually) 134,400 139,600
91/8% Notes due 1999 (interest
payable semi-annually) - 117,705
329,200 362,105
Less current maturities (6,400) (5,200)
Total long-term debt
and guarantees $322,800 $356,905
The Company has a $350 million unsecured credit facility to provide for
letter of credit and working capital needs. Borrowings under the agreement,
which expires in December 2001, bear interest at a rate based upon select
indices plus a margin dependent on the Company's credit rating. The
agreement contains various restrictive covenants that limit the incurrence
of additional indebtedness and require the Company to maintain minimum
amounts of net worth and fixed charge coverage. At December 31, 1999 and
1998, the Company had $50.0 million and $28.0 million, respectively, of
borrowings and $59.8 million and $66.6 million, respectively, of letters of
credit outstanding under this agreement. In September 1999, the Company
obtained an additional $100 million unsecured credit facility with a one-
year term to supplement the $350 million credit facility described above.
At December 31, 1999, $80.0 million was outstanding under the supplemental
unsecured facility.
At December 31, 1999, the Company had $150.0 million of other uncommitted
lines of credit with $12.3 million issued under letters of credit and no
borrowings, leaving $137.7 million available for additional short-term
borrowings. At December 31, 1998, $150.0 million of uncommitted lines of
credit had $11.2 million in letters of credit outstanding and $15.0 million
of short-term borrowings.
At December 31, 1999, $40.0 million of the $130.0 million outstanding under
the unsecured credit lines were classified as short term with the remaining
$90.0 million classified as long term based on the Company's ability and
intent to refinance this amount on a long-term basis. At December 31, 1998,
all borrowings under lines of credit were classified as short term.
The weighted-average interest rate of borrowings under lines of credit
outstanding at December 31, 1999 and 1998, was 7.2% and 7.1%, respectively.
The aggregate principal amount of $117.7 million of the Company's unsecured
91/8% Notes was paid in full on the August 15, 1999 maturity date. The
redemption of these notes was made in part with $90.0 million of borrowings
under lines of credit.
The Company guarantees the 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 an interest rate of 6.0% and a
maturity date of January 1, 2006. These refinanced notes contain financial
covenants that require the Company to maintain minimum amounts of net worth
and fixed charge coverage. The remaining $62.0 million of TASP notes
PAGE 23
outstanding at December 31, 1999 are subject to redemption at the option of
the holders should a designated event occur or ratings by both Moody's and
Standard & Poors of senior unsecured indebtedness decline below investment
grade.
The 7.35% Notes due in 2005 contain covenants limiting the incurrence of
additional liens.
The Company's interest expense as presented on the Statements of
Consolidated Income is net of capitalized interest of $5,864,000 in 1999,
$2,342,000 in 1998 and $2,077,000 in 1997.
The aggregate annual maturities of Long-Term Debt and Guarantees for the
next five years ending December 31 are $6.4 million in 2000, $97.5 million
in 2001, $8.7 million in 2002, $10.1 million in 2003, and $12.0 million in
2004.
4. Leases
The Company and its subsidiaries are obligated under non-cancelable leases.
The principal capital lease covers a sorting facility in Dayton, Ohio (the
Hub). The Hub is financed by City of Dayton, Ohio revenue bonds. These
bonds consist of $46.0 million of Series A bonds due in February 2018 with
an interest rate of 5.625%. The remaining $62.0 million are due in 2009 and
bear rates of interest between 6.05% and 6.20%, and have call provisions.
Included in property, plant and equipment is $33,215,000 of equipment and
leasehold improvements, net, related to the Hub.
Future minimum lease payments with initial or remaining non-cancelable
lease terms in excess of one year, at December 31, 1999, are as follows:
Capital Operating
(Dollars in thousands) Leases Leases
Year ending December 31
2000 $ 6,819 $187,825
2001 6,819 123,889
2002 6,819 79,920
2003 6,819 53,551
2004 6,819 33,435
Thereafter (through 2018) 163,389 36,570
Total minimum lease payments 197,484 $515,190
Amount representing interest (86,786)
Present value of minimum lease
Payments 110,698
Current maturities of obligations
under capital leases (52)
Long-term obligations under
capital leases $110,646
Certain operating leases contain financial covenants equal to or less
restrictive than covenants on debt. Certain operating leases also contain
provisions that allow the Company to extend the leases for various renewal
periods.
The Company has entered into commitments for operating leases for nine new
aircraft to be delivered in 2000. Subject to delivery, the total amount of
these operating lease commitments will be approximately $9.4 million in
2000, $20.2 million in 2001 through 2003, $15.3 million in 2004, and $36.0
million thereafter.
Rental expense for operating leases is comprised of the following:
(Dollars in thousands) 1999 1998 1997
Minimum rentals $253,425 $232,008 $203,521
Sublease rentals (7,436) (4,001) (5,087)
Amortization of deferred
Gains (1,639) (4,012) (4,487)
$244,350 $223,995 $193,947
5. Income Taxes
The components of pretax income and income taxes are as follows:
(Dollars in thousands) 1999 1998 1997
Pretax income
U.S. corporations $324,320 $240,838 $206,055
Foreign corporations 12,802 9,573 15,759
Total pretax income $337,122 $250,411 $221,814
Income taxes
Current
U.S. federal $ 50,348 $ 59,429 $ 49,187
State and local 13,211 7,829 12,109
Foreign 7,152 4,153 7,789
$ 70,711 $ 71,411 $ 69,085
Deferred
U.S. federal $ 73,474 $ 37,284 $ 31,162
State and local 2,463 2,738 678
75,937 40,022 31,840
Total income taxes $146,648 $111,433 $100,925
PAGE 24
The components of deferred tax assets and liabilities at December 31,
relate to the following:
(Dollars in thousands) 1999 1998
Deferred tax assets
Reserves for accrued claims
costs $ 44,034 $ 44,400
Reserves for post retirement
health benefits 42,417 39,452
Reserves for employee benefits 82,438 66,916
Other reserves not currently
deductible 44,195 45,904
213,084 196,672
Deferred tax liabilities
Depreciation and amortization 218,700 194,691
Unbilled revenue 57,239 4,601
Other 39,406 23,704
315,345 222,996
Net deferred tax liability $(102,261) $(26,324)
Deferred tax assets and liabilities in the Consolidated Balance Sheets are
classified based on the related asset or liability creating the deferred
tax. Deferred taxes not related to a specific asset or liability are
classified based on the estimated period of reversal. Although realization
is not assured, management believes it more likely than not that all
deferred tax assets will be realized.
Income taxes vary from the amounts calculated by applying the U.S.
statutory income tax rate to the pretax income as set forth in the
following reconciliation:
1999 1998 1997
U.S. statutory tax rate 35.0% 35.0% 35.0%
State income taxes (net of federal
income tax benefit) 3.3 3.8 4.3
Foreign taxes in excess of
U.S. statutory rate 0.8 0.9 1.0
Non-deductible operating expenses 0.9 1.1 1.2
Amortization of goodwill 0.9 1.2 1.4
Foreign tax credits, net (0.4) (1.6) (1.1)
Other, net 3.0 4.1 3.7
Effective income tax rate 43.5% 44.5% 45.5%
The cumulative undistributed earnings of the Company's foreign subsidiaries
(approximately $24.4 million at December 31, 1999), which if remitted are
subject to withholding tax, have been reinvested indefinitely in the
respective foreign subsidiaries' operations unless it becomes advantageous
for tax or foreign exchange reasons to remit these earnings. Therefore, no
withholding or U.S. taxes have been provided. The amount of withholding tax
that would be payable on remittance of the undistributed earnings would
approximate $3.1 million.
Certain contingencies related to income taxes are discussed in Note 12
"Contingencies and Other Commitments."
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.
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.
PAGE 25
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. Shareholders' Equity
Series B Preferred Stock
In 1989, the Board of Directors designated a series of 1,100,000 preferred
shares as Series B Cumulative Convertible Preferred Stock, $.01 stated
value, which is held by the CNF Thrift and Stock Plan (TASP). The Series B
preferred stock is convertible into common stock, as described in Note 9
"Thrift and Stock Plan," at the rate of 4.71 shares for each share of
preferred stock subject to anti-dilution adjustments in certain
circumstances. Holders of the Series B preferred stock are entitled to vote
with the common stock and are entitled to a number of votes in such
circumstances equal to the product of 1.3 multiplied by the number of
shares of common stock into which the Series B preferred stock is
convertible on the record date of such vote. Holders of the Series B
preferred stock are also entitled to vote separately as a class on certain
other matters. The TASP trustee is required to vote the allocated shares
based upon instructions from the participants; unallocated shares are voted
in proportion to the voting instructions received from the participants
with allocated shares.
Comprehensive Income
In 1998, the Company adopted Statement of Financial Accounting Standards
(SFAS) 130, "Reporting Comprehensive Income," which requires companies to
report a measure of all changes in equity except those resulting from
investment by owners and distribution to owners, in a financial statement
for the period in which they are recognized. The Company has elected to
disclose Comprehensive Income in the Statements of Consolidated
Shareholders' Equity.
8. Employee Benefit Plans
Pension Plans
The Company has a non-contributory defined benefit pension plan (the Plan)
covering non-contractual employees in the United States. The Company's
annual pension provision and contributions are based on an independent
actuarial computation. Although it is the Company's funding policy to
contribute the minimum required tax-deductible contribution for the year,
it may increase its contribution above the minimum if appropriate to its
tax and cash position and the Plan's funded status. Benefits under the Plan
are based on a career average final five-year pay formula. Approximately
92% of the Plan assets are invested in publicly traded stocks and bonds.
The remainder is invested in temporary cash investments, real estate funds
and investment capital funds.
The following sets forth the change in funded status and the determination
of the accrued benefit cost included in Employee Benefits in the
Consolidated Balance Sheets at December 31:
(Dollars in thousands) 1999 1998
Change in benefit obligation
Projected benefit obligation
at beginning of year $390,867 $330,658
Service cost-benefits earned
during the year 37,733 30,497
Interest cost on projected
benefit obligation 30,525 25,338
Actuarial loss (gain) (51,645) 10,712
Benefits paid (10,359) (6,338)
Projected benefit obligation
at end of year 397,121 390,867
Change in plan assets
Fair value of plan assets
at beginning of year 354,550 312,818
Actual return on plan assets 88,878 46,136
Transfers from defined
contribution plan 1,278 1,934
Benefits paid (10,359) (6,338)
Fair value of plan assets
at end of year 434,347 354,550
Funded status 37,226 (36,317)
Unrecognized actuarial gain (135,214) (26,745)
Unrecognized prior service costs 6,632 7,816
Unrecognized net asset at transition (4,517) (5,646)
Accrued benefit cost $ (95,873) $(60,892)
Weighted-average assumptions as of
December 31
Discount rate 8.00% 7.00%
Expected long-term rate of
return on assets 9.50% 9.50%
Rate of compensation increase 5.00% 5.00%
PAGE 26
Net pension cost included the following:
(Dollars in thousands) 1999 1998 1997
Service cost-benefits earned
during the year $37,733 $30,497 $23,664
Interest cost on projected
benefit obligation 30,525 25,338 21,818
Expected return on plan assets (33,298) (29,386) (25,511)
Net amortization and deferral 21 56 (200)
Net pension cost $34,981 $26,505 $19,771
The Company also has a supplemental retirement program that provides
additional benefits for compensation excluded from the basic Plan. The
annual provision for these programs is based on independent actuarial
computations using assumptions consistent with the Plan. At December 31,
1999 and 1998, the accrued benefit cost was $16,706,000 and $14,174,000,
respectively, and the net periodic pension cost was $4,290,000 in 1999,
$4,036,000 in 1998 and $2,462,000 in 1997.
Also included in Employee Benefits in the Consolidated Balance Sheets at
December 31, 1999 and 1998 was a minimum pension liability for the unfunded
supplemental program. At December 31, 1999, the non-cash adjustment for the
minimum pension liability of $6,111,000 was offset by an intangible asset
of $1,716,000 and accumulated other comprehensive loss of $4,395,000.
Post Retirement Plans
The Company has a retiree health plan that provides benefits to all non-
contractual employees at least 55 years of age with 10 years or more of
service. The retiree health plan limits benefits for participants who were
not eligible to retire before January 1, 1993, to a defined dollar amount
based on age and years of service and does not provide employer-subsidized
retiree health care benefits for employees hired on or after January 1,
1993.
The following sets forth the change in accumulated benefit obligation and
the determination of the accrued benefit cost included in Employee Benefits
in the Consolidated Balance Sheets at December 31:
(Dollars in thousands) 1999 1998
Change in benefit obligation
Accumulated benefit obligation at
beginning of year $89,947 $79,898
Service cost-benefits earned
during the year 1,558 2,228
Interest cost on accumulated
benefit obligation 6,289 6,046
Benefit payments (4,343) (3,966)
Actuarial loss (gain) (8,677) 5,741
Accumulated benefit obligation
at end of year 84,774 89,947
Unrecognized net actuarial gain 10,854 2,177
Unrecognized prior service
benefit 334 389
Accrued benefit cost $95,962 $92,513
Weighted-average discount rate
at December 31 8.00% 7.00%
At December 31, 1999, a 6.5% annual rate of increase in the per capita cost
of covered medical benefits was assumed for 2000 and was assumed to
decrease gradually to 5.5% for 2002 and remain at that level thereafter. A
5.5% annual rate of increase in the per capita cost of dental and vision
benefits was assumed for 2000 and was assumed to remain at that level
thereafter.
Net periodic post retirement benefit cost included the following:
(Dollars in thousands) 1999 1998 1997
Service cost-benefits earned
during the year $1,558 $2,228 $2,043
Interest cost on accumulated
benefit obligation 6,289 6,046 5,697
Net amortization and deferral (55) (55) (244)
Net periodic post retirement
benefit cost $7,792 $8,219 $7,496
A one-percentage-point change in assumed health care cost trend rates would
change the aggregate service and interest cost by $693,000 and the
accumulated benefit obligation by approximately $8,474,000.
Other Compensation Plans
The Company and each of its subsidiaries have adopted various plans
relating to the achievement of specific goals to provide incentive
compensation for designated employees. Total compensation earned by
salaried participants of those plans was $47,799,000, $34,929,000 and
$51,900,000 in 1999, 1998 and 1997, respectively, and by hourly
participants was $26,220,000, $36,500,000 and $38,100,000 in 1999, 1998 and
1997, respectively.
PAGE 27
9. Thrift and Stock Plan
The Company sponsors the CNF Thrift and Stock Plan (TASP), a voluntary
defined contribution plan with a leveraged employee stock ownership plan
feature, for non-contractual U.S. employees. In 1989, the TASP borrowed
$150,000,000 to purchase 986,259 shares of the Company's Series B
Cumulative Convertible Preferred Stock. This stock is only issuable to the
TASP trustee. The TASP satisfies the Company's contribution requirement by
matching up to 50% of the first 3% of a participant's basic compensation.
Company contributions to the TASP were $13,735,000 in 1999, $10,491,000 in
1998 and $9,921,000 in 1997, in the form of common and preferred stock.
The Series B Preferred Stock earns a dividend of $12.93 per share and is
used to repay the TASP debt. Any shortfall is paid in cash by the Company.
Dividends on these preferred shares are deductible for income tax purposes
and, accordingly, are reflected net of their tax benefits in the Statements
of Consolidated Income. Allocation of preferred stock to participants'
accounts is based upon the ratio of the current year's principal and
interest payments to the total TASP principal and interest serviced. Since
the Company guarantees the debt, it is reflected in Long-term Debt and
Guarantees in the Consolidated Balance Sheets. The TASP guarantees are
reduced as principal is paid.
Each share of preferred stock is convertible into common stock, upon an
employee ceasing participation in the TASP, at a rate generally equal to
that number of shares of common stock that could be purchased for $152.10,
but not less than the minimum conversion rate of 4.71 shares of common
stock for each share of Series B preferred stock.
Deferred compensation expense is recognized as the preferred shares are
allocated to participants and is equivalent to the cost of the preferred
shares allocated and the TASP interest expense for the year, reduced by the
dividends paid to the TASP. In 1999, 1998 and 1997, $7,236,000, $6,983,000
and $6,649,000, respectively, of deferred compensation expense was
recognized.
At December 31, 1999, the TASP owned 840,407 shares of Series B preferred
stock, of which 267,494 shares have been allocated to employees. At
December 31, 1999, the Company has reserved, authorized and unissued common
stock adequate to satisfy the conversion feature of the Series B preferred
stock.
10. Stock-Based Compensation
Stock Options
Officers and non-employee directors have been granted options under the
Company's stock option plans to purchase common stock of the Company at
prices equal to the market value of the stock on the date of grant. Options
granted prior to June 30, 1998 generally are exercisable one year from the
date of grant. Stock options granted subsequent to June 30, 1998 generally
vest ratably over four years following the grant date. The options
generally expire 10 years from the dates of grant.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees." Had compensation cost for the Company's
stock-based compensation plans been determined in accordance with SFAS 123,
"Accounting for Stock-Based Compensation," pro forma net income as reported
net of preferred dividends would have been $175.1 million, $123.6 million
and $109.3 million in 1999, 1998 and 1997, respectively. Diluted earnings
per share would have been $3.22, $2.32 and $2.12 per share in 1999, 1998
and 1997, respectively. These pro forma effects of applying SFAS 123 are
PAGE 28
not indicative of future amounts. The weighted-average grant-date fair
value of options granted in 1999, 1998 and 1997 was $15.65, $17.22 and
$12.28 per share, respectively. The following assumptions were used with
the Black-Scholes options pricing model to calculate the option values:
risk free, weighted-average rate, 5.0%-6.5%; expected life, 5.8 years;
dividend yield, 1.0%; and volatility, 50.0%.
The following is a summary of stock option data:
Wtd. Avg.
Number of Exercise
Options Price
Outstanding at December 31, 1996 4,906,488 $16.46
Granted 492,500 32.47
Exercised (2,688,824) 15.42
Expired or canceled (122,566) 26.77
Outstanding at December 31, 1997 2,587,598 20.12
Granted 711,350 38.29
Exercised (321,079) 17.07
Expired or canceled (46,850) 38.24
Outstanding at December 31, 1998 2,931,019 24.60
Granted 751,100 30.92
Exercised (446,128) 16.75
Expired or canceled (10,995) 30.78
Outstanding at December 31, 1999 3,224,996 $27.13
Options exercisable as of December 31
1999 2,020,646 $23.66
1998 2,194,975 20.66
1997 2,051,347 17.35
The following is a summary of the stock options outstanding and exercisable
at December 31, 1999:
Outstanding Options Exercisable Options
Remaining Wtd. Avg. Wtd. Avg.
Range of Number Life in Exercise Number Exercise
Exercise Prices of Options Years Price of Options Price
$11.08-$16.26 428,109 3.5 $13.93 428,109 $13.93
$18.05-$22.75 922,637 5.6 19.37 922,637 19.37
$29.63-$43.63 1,874,250 8.9 33.97 669,900 35.77
Restricted Stock
Under terms of the Company's stock-based compensation plans, shares of the
Company's common stock are awarded to executive officers and, to a lesser
extent, directors. Restrictions on the shares generally expire one-third
per year dependent on the achievement of goals. Shares are initially valued
at the market price of the Company's common stock at the date of award.
The following table summarizes information about restricted stock awards
for the years ended December 31:
1999 1998 1997
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Shares Fair Value Shares Fair Value Shares Fair Value
Awarded 63,112 $33.08 112,113 $38.51 85,531 $33.02
Forfeited - - 5,667 34.41 - -
Total compensation expense recognized for restricted stock in 1999, 1998
and 1997 was $4,622,000, $2,781,000 and $483,000, respectively.
At December 31, 1999, the Company had 281,159 common shares available for
the grant of stock options, restricted stock, or other stock-based
compensation.
11. Financial Instruments
The Company has several interest rate swap agreements, including swaps
entered into in 1999. These agreements, which expire through 2005,
effectively convert $119.9 million of variable rate lease obligations to
fixed rate obligations. Interest rate differentials to be paid or received
are recognized over the life of each agreement as adjustments to operating
expense. At December 31, 1999, the Company had fuel purchase contracts to
hedge the market price fluctuations of 4.5 million gallons of jet fuel. The
Company is exposed to credit loss on the interest rate swaps and fuel
purchase contracts, but does not anticipate any loss due to the credit-
worthiness of its counterparties. The fair values of the interest rate
swaps and fuel purchase contracts, as presented below, reflect the
estimated amounts that the Company would receive upon the termination of
the contracts at the reported date.
The following table presents the carrying amounts and estimated fair values
of the Company's financial instruments at December 31:
1999 1998
Carrying Fair Carrying Fair
(Dollars in thousands) Amount Value Amount Value
Short-term borrowings $ 40,000 $ 40,000 $ 43,000 $ 43,000
Long-term debt and
guarantees 329,200 315,000 362,105 385,000
Off-balance sheet
receivables
Interest rate swaps - 7,600 - 700
Fuel purchase
contracts - 1,100 - -
PAGE 29
In December 1999, the Company recognized a $9.6 million net gain on the
sale of Emery's holdings in the equity securities of Equant N.V., an
international data network service provider. Approximately 34% of Emery's
holdings in the securities were sold in December 1999 and the resulting
gain was recognized in Miscellaneous, net in the Statements of Consolidated
Income. The remaining shares held by Emery are carried at essentially no
cost at December 31, 1999, and are subject to transferability restrictions
that only allow the Company to sell the securities when and if certain
secondary offerings are made. The transferability restrictions lapse in
June 2000.
12. Contingencies and Other Commitments
In addition to letters of credit outstanding under its $350 million
unsecured credit facility and other uncommitted lines of credit discussed
in Note 3 "Debt and Guarantees," the Company, at December 31, 1999, had
$50.4 million of letters of credit outstanding under other unsecured letter
of credit facilities.
In connection with the December 2, 1996 spin-off of Consolidated
Freightways Corporation (CFC), the Company's former long-haul LTL segment,
the Company agreed to indemnify certain states, insurance companies and
sureties against the failure of CFC to pay a number of 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 December 31, 1999, CFC had provided the Company with
approximately $11.0 million of letters of credit and $7.5 million of real
property collateral. However, the letters of credit and collateral provided
by CFC are less than the Company's maximum contingent liability under these
indemnities.
The Company is currently under examination by the Internal Revenue Service
(IRS) for tax years 1987 through 1996 on various issues. In connection with
that examination, the IRS is seeking additional taxes, plus interest, for
certain matters relating to CFC for those periods. 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.
Any failure to receive reimbursement for a significant portion of those
payments, whether due to CFC successfully contesting their obligation to
reimburse us or for any other reason, could have a material adverse effect
on the Company's results of operations. At December 31, 1999, the Company
has recognized approximately $53 million in Deferred Charges and Other
Assets in the Consolidated Balance Sheets for amounts receivable from CFC
and a corresponding payable for amounts due the IRS.
The IRS has proposed a substantial adjustment for tax years 1987 through
1990 based on the IRS' position that some of our 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 during 2000. If
this occurs, the Company intends to contest the assessment by appropriate
legal proceedings.
PAGE 30
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's results of
operations.
The IRS has also 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.
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's results of
operations.
In addition to the matters discussed above, the Company and its
subsidiaries are defendants in various lawsuits incidental to their
businesses. It is the opinion of management that the ultimate outcome of
these actions will not have a material impact on the Company's financial
position or results of operations.
13. Segment Reporting
In 1998, the Company adopted SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 changes the method of
disclosing segment information to the manner in which the Company's chief
operating decision maker organizes the components for making operating
decisions, assessing performance and allocating resources. The Company has
organized the segments based on the type of transportation services
provided.
The operations of the Company are comprised of four business segments: Con-
Way Transportation Services, Emery Worldwide, Menlo Logistics, and Other.
Con-Way provides regional one- and two-day LTL freight trucking and full-
service truckload freight delivery throughout the U.S., Canada and Mexico,
expedited and guaranteed ground transportation, and integrated supply chain
services. Emery provides expedited and deferred domestic and international
air cargo services, ocean delivery, and customs brokerage. Domestically,
Emery relies primarily on its dedicated aircraft and ground fleet to
provide its services. Internationally, Emery acts principally as a freight
forwarder. Menlo is a full-service contract logistics company that
specializes in developing and managing complex distribution networks.
The Other segment consists primarily of the operations under a Priority
Mail contract with the U.S. Postal Service, and includes Road Systems, a
trailer manufacturer, and prior to the sale of its assets in May 1999,
VantageParts, a wholesale distributor of truck parts and supplies.
Intersegment revenues and related operating income have been eliminated to
reconcile to consolidated revenue and operating income. Management
evaluates segment performance primarily based on revenue and operating
income; therefore, other items included in pretax income, consisting
primarily of interest income or expense, are not reported in segment
results. Operating income is net of all corporate expenses, which are
allocated based on measurable services provided each segment or for general
corporate expenses allocated on a revenue and capital basis.
PAGE 31
Identifiable corporate assets consist primarily of deferred charges and
other assets, property and equipment and deferred taxes. Certain corporate
assets that are used to provide shared data processing and other
administrative services are not allocated to individual segments.
For geographic information, revenues are allocated between the United
States and international (except Canada), depending on whether the
shipments are between locations within the United States or between
locations where one or both are outside the United States. Canada, which
operates as an integrated part of the North American operation, includes 50
percent of the revenue where one of the locations is in the United States
or an international location. Long-lived assets outside the United States
were immaterial for all periods presented.
Geographic Information
(Dollars in thousands) 1999 1998 1997
Revenues
United States $4,365,686 $3,870,722 $3,177,792
Canada 132,190 112,721 114,001
North America 4,497,876 3,983,443 3,291,793
International 1,094,934 958,047 975,008
Total $5,592,810 $4,941,490 $4,266,801
Operating Segments
(Dollars in thousands)
<CAPTIONS>
Adjustments, Con-Way
Eliminations Transportation Emery Menlo
Consolidated and the Parent Services Worldwide Logistics Other
Year Ended December 31, 1999
Revenues $5,592,810 $ (93,970) $1,903,056 $2,420,220 $727,593 $635,911
Inter-company eliminations - 93,970 (24,840) (11,804) (11,585) (45,741)
Net revenues 5,592,810 - 1,878,216 2,408,416 716,008 590,170
Operating income 359,100 - 228,820 75,514 22,255 32,511(a)
Depreciation and amortization 190,461 10,241 85,418 61,781 6,842 26,179
Capital expenditures 335,008 6,359 211,971 100,219 5,642 10,817
Identifiable assets 3,049,010 219,243 968,507 1,459,189 141,184 260,887
Year Ended December 31, 1998
Revenues 4,941,490 (103,292) 1,710,345 2,232,815 598,750 502,872
Inter-company eliminations - 103,292 (26,354) (29,341) (11,915) (35,682)
Net revenues 4,941,490 - 1,683,991 2,203,474 586,835 467,190
Operating income (loss) 290,518 - 206,945 64,299 19,459 (185)
Depreciation and amortization 163,382 6,601 77,269 55,025 6,138 18,349
Capital expenditures 267,668 6,052 102,290 101,935 7,115 50,276
Identifiable assets 2,689,412 196,980 825,615 1,278,228 125,728 262,861
Year Ended December 31, 1997
Revenues 4,266,801 (100,712) 1,480,364 2,278,755 473,379 135,015
Inter-company eliminations - 100,712 (7,176) (29,161) (17,487) (46,888)
Net revenues 4,266,801 - 1,473,188 2,249,594 455,892 88,127
Operating income (loss) 264,867 - 147,155 113,963 17,178 (13,429)
Depreciation and amortization 123,391 6,262 65,560 45,483 4,331 1,755
Capital expenditures 242,343 2,896 109,328 58,795 11,504 59,820
Identifiable assets 2,421,496 166,840 736,449 1,257,140 109,291 151,776
<FN>
(a) Includes a $16.5 million net gain on a lawsuit settled in January 1999,
and a $10.1 million net gain on the VantageParts asset sale in May 1999.
PAGE 32
Note 14. Quarterly Financial Data (Unaudited)
(Dollars in thousands except per share data)
<CAPTIONS>
1999-Quarter Ended March 31 June 30 September 30 December 31
Revenues $1,255,323 $1,361,637 $1,408,391 $1,567,459
Operating income 82,595(a) 95,334(b) 85,768 95,403
Income before income taxes 74,861 86,343 78,202 97,716(c)
Income taxes 32,565 37,559 34,018 42,506
Net income 42,296 48,784 44,184 55,210
Net income available to common
shareholders 40,269 46,723 42,147 53,117
Per share
Basic earnings 0.84(a) 0.97(b) 0.87 1.10(c)
Diluted earnings 0.74(a) 0.86(b) 0.77 0.97(c)
Market price range 34.15-44.55 32.56-45.52 34.64-45.19 28.28-38.38
Common dividends paid 0.10 0.10 0.10 0.10
1998-Quarter Ended March 31 June 30 September 30 December 31
Revenues $1,089,866 $1,199,654 $1,282,510 $1,369,460
Operating income 44,805 84,003 89,043 72,667(d)
Income before income taxes 34,077 74,533 79,227 62,574
Income taxes 15,164 33,167 35,257 27,845
Net income 18,913 41,366 43,970 34,729
Net income available to common
shareholders 16,906 39,326 41,939 32,638
Per share
Basic earnings 0.36 0.83 0.88 0.68(d)
Diluted earnings 0.33 0.73 0.78 0.61(d)
Market price range 34.81-49.94 35.00-44.50 26.81-47.94 21.63-38.94
Common dividends paid 0.10 0.10 0.10 0.10
<FN>
(a) Includes a $16.5 million net gain ($0.19 per basic share and $0.16 per
diluted share) on a lawsuit settled in January 1999.
(b) Includes a $10.1 million net gain ($0.12 per basic share and $0.10 per
diluted share) on the VantageParts asset sale in May 1999.
(c) Includes a $9.6 million net gain ($0.11 per basic share and $0.09 per
diluted share) on the sale of equity securities in December 1999.
(d) Includes $5.1 million of income ($0.06 per basic share and $0.05 per
diluted share) for the recovery of a portion of costs charged in 1997 from the
discontinuance of rail container service and other unusual items.
PAGE 33
Reports
Management Report on Responsibility for Financial Reporting
The management of CNF Transportation Inc. has prepared the accompanying
financial statements and is responsible for their integrity. The statements
were prepared in accordance with generally accepted accounting principles,
after giving consideration to materiality, and are based on management's
best estimates and judgments. The other financial information in the annual
report is consistent with the financial statements.
Management has established and maintains a system of internal control.
Limitations exist in any control structure based on the recognition that
the cost of such system should not exceed the benefits derived. Management
believes its control system provides reasonable assurance as to the
integrity and reliability of the financial statements, the protection of
assets from unauthorized use or disposition, and the prevention and
detection of fraudulent financial reporting. The system of internal control
is documented by written policies and procedures that are communicated to
employees. The Company's internal audit staff independently assesses the
adequacy and the effectiveness of the internal controls which are also
tested by the Company's independent public accountants.
The Board of Directors, through its audit committee consisting of five
independent directors, is responsible for engaging the independent
accountants and assuring that management fulfills its responsibilities in
the preparation of the financial statements. The Company's financial
Statements have been audited by Arthur Andersen LLP, independent public
accountants. Both the internal auditors and Arthur Andersen LLP have access
to the audit committee without the presence of management to discuss
internal accounting controls, auditing and financial reporting matters.
/S/Gregory L. Quesnel
Gregory L. Quesnel
President and Chief Executive Officer
/S/Chutta Ratnathicam
Chutta Ratnathicam
Senior Vice President and Chief Financial Officer
/S/Gary D. Taliaferro
Gary D. Taliaferro
Controller
Report of Independent Public Accountants
To the Shareholders and Board of Directors of CNF Transportation Inc.
We have audited the accompanying consolidated balance sheets of CNF
Transportation Inc. (a Delaware Corporation) and subsidiaries as of
December 31, 1999 and 1998, and the related statements of consolidated
income, cash flows and shareholders' equity for each of the three years in
the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CNF Transportation Inc.
and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
As explained in Note 1 to the consolidated financial statements, effective
January 1, 1998, the Company changed its method of accounting for the costs
of internal use software to reflect the adoption of Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use."
/s/Arthur Andersen LLP
San Francisco, California
January 28, 2000
PAGE 34
Five Year Financial Summary
<CAPTIONS>
(Dollars in thousands
except per share data) 1999 1998 1997 1996 1995
Summary of Operations
Revenues(a) $5,592,810 $4,941,490 $4,266,801 $3,662,183 $3,290,077
Con-Way Transportation
Services 1,878,216 1,683,991 1,473,188 1,292,082 1,152,164
Emery Worldwide 2,408,416 2,203,474 2,249,594 1,968,058 1,766,301
Menlo Logistics 716,008 586,835 455,892 359,377 287,652
Other 590,170 467,190 88,127 42,666 83,960
Operating income (loss)(a) 359,100 290,518 264,867 192,148 186,687
Con-Way Transportation
Services 228,820 206,945 147,155 101,049 96,573
Emery Worldwide 75,514 64,299 113,963 78,415 81,734
Menlo Logistics 22,255 19,459 17,178 10,918 6,325
Other 32,511(d) (185) (13,429) 1,766 2,055
Interest expense 25,972 32,627 39,553 39,766 33,407
Income from continuing
operations before income
taxes 337,122(e) 250,411 221,814 147,132 152,942
Income taxes 146,648 111,433 100,925 66,951 66,723
Income from continuing
operations(b) 182,256 130,809 113,003 71,589 75,420
Loss from discontinued
operations(c) - - - (52,633) (28,854)
Net income available to
common shareholders 182,256 130,809 113,003 18,956 46,566
Per Share
Net income from continuing
operations, basic $ 3.78(d,e) $ 2.74 $ 2.44 $ 1.63 $ 1.79
Loss from discontinued
operations(c) - - - (1.20) (0.68)
Net income available to
common shareholders, basic 3.78 2.74 2.44 0.43 1.11
Net income from continuing
operations, diluted 3.35(d,e) 2.45 2.19 1.48 1.64
Dividends paid on common stock 0.40 0.40 0.40 0.40 0.40
Common shareholders' equity 19.15 15.48 13.26 10.86 15.76
Statistics
Total Assets $3,049,010 $2,689,412 $2,421,496 $2,081,866 $2,084,958
Long-term obligations 433,446 467,635 473,488 477,201 480,410
Capital expenditures 335,008 267,668 242,343 200,835 167,253
Effective income tax rate 43.5% 44.5% 45.5% 45.5% 43.6%
Basic average shares 48,189,618 47,659,745 46,236,688 44,041,159 42,067,842
Market price range $28.28-$45.52 $21.63-$49.94 $20.25-$50.88 $17.25-$29.38 $20.25-$27.88
Number of shareholders 9,520 9,870 15,560 16,090 15,980
Number of regular full-time
employees(f) 30,800 29,200 26,300 25,100 21,400
<FN>
(a) In 1998, the Company adopted SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information." As required by SFAS 131, 1995 through 1997
figures have been restated.
(b) Includes preferred stock dividends.
(c) Reflects the results of Consolidated Freightways Corporation, the Company's
former long-haul LTL segment, that was spun off in December 1996.
(d) Includes a $16.5 million net gain ($0.19 per basic share and $0.17 per
diluted share) on a lawsuit settled in January 1999, and a $10.1 million net
gain ($0.12 per basic share and $0.10 per diluted share) on the VantageParts
asset sale in May 1999.
(e) Includes a $9.6 million net gain ($0.11 per basic share and $0.10 per
diluted share) on the sale of equity securities in December 1999.
(f) Excludes supplemental and regular part-time employees.