Exhibit 13
PAGE 14
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
On November 3, 2000, Emery Worldwide Airlines (EWA) and the U.S. Postal Service
(USPS) announced an agreement to terminate their contract for the
transportation and sortation of Priority Mail. Under terms of the agreement,
the USPS, on January 7, 2001, assumed responsibility for services covered under
the contract, except for certain air transportation and related services
described below under "Discontinued Operations." Accordingly, the results of
operations, net assets, and cash flows of the Priority Mail operations have
been segregated and classified as discontinued operations. A summary of
selected terms of the agreement, summary financial data, and related
information are included in Note 2 of the Notes to Consolidated Financial
Statements.
Net income available to common shareholders in 2000 was $126.8 million ($2.36
per diluted share), including a $13.5 million after-tax loss ($0.24 per diluted
share) from discontinuance of the Priority Mail operations, and a $2.7 million
after-tax loss ($0.05 per diluted share) from the cumulative effect of an
accounting change. The change in our accounting policy for revenue recognition
on in-transit freight is described in Note 1 of the Notes to Consolidated
Financial Statements. Comparative results of continuing operations were also
affected byunusual items discussed below under "Continuing Operations." Net
income available to common shareholders of $182.3 million ($3.35 per diluted
share) in 1999 benefited from after-tax income of $3.0 million ($0.06 per
diluted share) from discontinued Priority Mail operations. In 1998, net income
available to common shareholders was $130.8 million ($2.45 per diluted share),
including an after-tax loss of $2.1 million ($0.04 per diluted share) from
discontinued operations.
CONTINUING OPERATIONS
Net income from continuing operations (income from continuing operations
reduced by preferred stock dividends) for 2000 declined to $143.1 million
($2.65 per diluted share) from $179.3 million ($3.29 per diluted share) in
1999 due to lower operating income and higher other net expenses, partially
offset by a lower effective tax rate. Operating income of $290.0 million in
2000 declined from $354.2 million in 1999 due primarily to lower operating
income from Emery and the Other segment, partially offset by record operating
income from Menlo. Revenue of $5.57 billion in 2000 increased 10.6% from
$5.04 billion in 1999 due primarily to higher revenue from Con-Way, Emery and
Menlo.
Operating income for all reporting segments in 2000 was adversely affected by a
20.8% increase in health and welfare costs, including prescription drug
coverage. In 2001, health and welfare costs are expected to continue
increasing at a lower rate than in 2000. This increase, along with higher
anticipated pension expense, will likely have an adverse effect on operating
results in 2001.
Management believes that a slowing domestic economy in the fourth quarter of
2000 adversely affected the operating results of all reporting segments. If
the slowing trend continues, 2001 revenue will likely decline and operating
income will likely be adversely affected unless proportionate cost reductions
can be made.
Excluding the unusual items described below, net income from continuing
operations was $151.9 million ($2.81 per diluted share) in 2000 compared to
$158.9 million ($2.93 per diluted share) in 1999. Excluding unusual items,
operating income in 2000 was $307.8 million compared with $327.7 million in
1999.
Net income from continuing operations in 1999 increased 34.9% from net income
of $132.9 million ($2.49 per diluted share) earned from continuing operations
in 1998 due primarily to higher operating income, lower other net expenses and
a lower tax rate. Operating income of $354.2 million in 1999 increased 20.5%
over 1998, reflecting growth in operating income at all of our reporting
segments. Revenue in 1999 increased 11.2% from $4.53 billion in 1998 due
primarily to higher revenue from Con-Way, Emery and Menlo. An improved
international economy and a strong domestic economy aided revenue and operating
income in 1999.
Excluding the unusual items, net income from continuing operations in 1999
increased 19.5% from 1998 and operating income in 1999 increased 11.5% from
1998.
Unusual Items
Results of continuing operations included various unusual or non-recurring
items that affected reported results in 2000 and 1999:
For 2000, operating income for Emery included an $11.9 million unusual loss
($0.12 per diluted share) from the termination of certain aircraft leases and
Con-Way's operating income included a $5.5 million non-recurring loss from the
sale of certain assets of Con-Way Truckload Services ($0.06 per diluted share).
Other net expenses in 2000 included a $2.6 million unusual net gain ($0.03 per
diluted share) from the sale of securities.
PAGE 15
Operating income in 1999 benefited from a $16.5 million net gain ($0.17 per
diluted share) from the settlement of a lawsuit. Another non-recurring net gain
of $10.1 million ($0.10 per diluted share) was recognized in operating income
on the sale of the assets of VantageParts, our former wholesale distributor of
truck parts and supplies. These unusual gains in 1999 are included in operating
income for the Other segment. In addition, other net expenses in 1999 included
a $9.6 million net gain from the sale of securities ($0.10 per diluted share).
Con-Way Transportation Services
Con-Way's revenue in 2000 increased 8.9% over 1999 to $2.04 billion due
primarily to higher revenue per hundredweight (yield) and an increase in weight
per day (weight or tonnage). In 2000, revenue per hundredweight for the
regional carriers increased 7.1% over 1999 due primarily to higher rates
obtained for Con-Way's core premium services; a larger percentage of
inter-regional joint services, which command higher rates on longer lengths of
haul; and, to a lesser extent, fuel surcharges. Total and less-than-truckload
(LTL) weight per day transported by Con-Way's regional carriers in 2000
increased 3.2% and 3.3%, respectively, over 1999. Tonnage in 2000 was
positively impacted by continued growth in inter-regional joint services.
Con-Way's management believes that tonnage growth in 2000 compared to 1999 was
adversely affected by a slowing domestic economy in the last half of 2000 and
by the closures of two of Con-Way's competitors in the second quarter of 1999,
which management believes created additional demand for Con-Way's services in
the last half of 1999. Revenue in 1999 was 11.5% higher than in 1998 as
Con-Way's regional carriers increased total weight per day by 7.2%, LTL weight
per day by 7.4%, and yield by 5.7%.
Con-Way's operating income in 2000 fell just shy of the record $228.8 million
earned by Con-Way in 1999 due in part to a $5.5 million loss from the sale of
certain assets of Con-Way Truckload Services. Excluding the non-recurring
charge, operating income for 2000 increased 1.7% from 1999 due primarily to
higher revenue and continued emphasis on operating efficiencies, including
increased utilization of the freight network, partially offset by higher
employee benefit costs. Higher diesel fuel costs in 2000 and in the last half
of 1999 were mitigated by a fuel surcharge implemented by Con-Way in August
1999. Operating losses from Con-Way's multi-client warehousing and logistics
business, which was formed in the fourth quarter of 1998, negatively affected
operating income in 2000 and 1999. Con-Way's record operating income in 1999
grew 10.6% over operating income of $206.9 million in 1998 due primarily to
higher revenue and operating efficiencies.
Emery Worldwide
Emery's revenue in 2000 increased 8.3% to a record $2.61 billion. Higher
revenue in 2000 was due primarily to an increase in international airfreight
revenue and, to a lesser extent, fuel surcharges. International airfreight
revenue for 2000, including fuel surcharges, increased 20.4% over 1999 due
primarily to increases in weight (freight volume) and revenue per pound
(yield). Weight and yield in 2000, which were favorably affected by improved
economic conditions in the international markets served by Emery, increased
11.6% and 7.8%, respectively, over 1999. North American airfreight revenue for
2000, including fuel surcharges, was essentially unchanged from 1999. In 2000,
a 7.9% decline in North American airfreight weight was partially offset by a
9.1% increase in yield (including fuel surcharges). Improved yield in 2000
was due in part to an increase in the percentage of higher-yielding guaranteed
delivery service provided and Emery's ongoing yield management, which is
designed to eliminate or reprice certain low-margin business. Lower weight
transported in North America for 2000 was due in part to a slowing domestic
economy, which adversely affected certain industries served by Emery, and
Emery's ongoing yield management.
Emery's revenue in 1999 was 9.3% higher than revenue of $2.20 billion in 1998.
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 revenue. Growth in international revenue was accomplished with a
10.2% increase in weight per day and 2.4% higher yield. 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.
Emery's operating income was $28.4 million in 2000 compared to operating income
of $75.5 million in 1999. Operating income in 2000 was adversely affected by an
$11.9 million charge for the termination of certain aircraft leases and by
higher airhaul costs. Domestically, airhaul expense was negatively impacted by
higher aircraft maintenance costs, including an increase in amortization from
shortened maintenance cycles resulting from a recent Federal Aviation
Administration directive. Internationally, reduced airlift capacity in some
international markets adversely affected airhaul margins. Higher jet fuel costs
in 2000 and the last quarter of 1999 were substantially mitigated by a fuel
surcharge implemented by Emery in September 1999. Operating income in 1999
increased 17.4% from 1998 due primarily to higher international airfreight
revenue and revenue from the Express Mail contract.
PAGE 16
In September 2000, Chutta Ratnathicam was named chief executive officer of
Emery Worldwide, succeeding Roger Piazza, who retired. Mr. Ratnathicam most
recently served as CNF's chief financial officer and served as Emery's interim
CEO for a brief period in 1998 prior to Mr. Piazza's appointment.
Under Mr. Ratnathicam, Emery's management intends to continue positioning Emery
as a premium service provider, focusing on achieving higher yield with a
reduced cost structure. In North America, management will seek to improve yield
by requiring compensation that is commensurate with premium services.
Internationally, management will focus on expanding Emery's variable-cost-based
operations and actively renegotiating airhaul rates in an effort to improve
operating margins, mitigate higher fuel prices, and balance directional
capacity. Management will continue efforts to increase Emery's international
revenue as a percentage of its total revenue.
In January 2001, the USPS and Federal Express Corporation (FedEx) announced an
exclusive agreement in which the USPS will pay FedEx to haul Express Mail and
Priority Mail. In 2000, EWA recognized revenue of $229.1 million and operating
income of $28.2 million from a 10-year contract with the USPS to transport
Express Mail and other classes of mail. This contract expires in January 2004.
Even though EWA has received no notice of termination of its Express Mail
contract from the USPS, there can be no assurance that the USPS will not
terminate EWA's Express Mail contract prior to its scheduled expiration in
January 2004. Any termination or non-renewal of this contract will likely have
a material adverse effect on our results of operations or financial condition.
EWA filed a lawsuit against the USPS alleging that an exclusive contract with
FedEx violates the USPS' own procurement regulations, which require that all
purchases over $10,000 "must be made on the basis of adequate competition
whenever feasible or appropriate," and that such a contract violates the USPS'
regulatory requirement to provide "fair and equal treatment" to all potential
suppliers. The U.S. Court of Federal Claims in January 2001 declined to issue
a temporary restraining order barring the USPS from signing the exclusive
contract for air transportation network services with FedEx; however, EWA's
lawsuit against the USPS over the Express Mail contract is still before the
courts. If the USPS terminates the Express Mail contract with EWA before its
scheduled expiration date, EWA would be entitled to reimbursement of costs
related to servicing the contract.
Menlo Logistics
Menlo's revenue in 2000 was a record $890.8 million, exceeding revenue of
$716.0 million in 1999 by 24.4%. Higher revenue in 2000 was due to continued
growth in logistics contracts, including several large contracts secured in
the fourth quarter of 1999, and consulting fees earned on contracts entered
into in 2000. Revenue in 1999 increased 22.0% over revenue of $586.8 million
in 1998 due partially to a full year of revenue from several large logistics
contracts awarded in the second quarter of 1998 and higher revenue from other
contracts awarded prior to 1998.
A portion of Menlo's revenue is attributable to logistics contracts for which
Menlo manages the transportation of freight but subcontracts the actual
transportation and delivery of products to third parties. Menlo refers to this
as purchased transportation. Menlo's net revenue (revenue less purchased
transportation) was $265.6 million in 2000, $206.6 million in 1999, and $189.1
million in 1998. Operating income for Menlo in 2000 was a record $33.3
million, a 49.6% increase over operating income of $22.3 million in 1999.
Higher operating income was primarily attributable to increased revenue from
core supply chain projects and an increase in the percentage of revenue from
higher-margin consulting fees. Operating income in 1999 increased 14.4% from
$19.5 million earned by Menlo in 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.
Other Operations
In 2000, the Other segment included the operating results of Road Systems and
Vector SCM, a new joint venture described below. In 1999, the Other segment
included Road Systems, and prior to the sale of its assets in May 1999,
VantageParts. Also included in the Other segment in 1999 were a $16.5 million
non-recurring net gain from the settlement of a lawsuit, and a $10.1 million
non-recurring net gain from the VantageParts asset sale. In 1998, the Other
segment included Road Systems and VantageParts. In December 2000, CNF and
General Motors formed a joint venture, Vector SCM, to provide logistics
services to General Motors. The operating results of Vector SCM are reported as
an equity investment in the Other segment. Startup costs for Vector SCM in 2000
were $560,000 and are expected to be approximately $6 million in the first
quarter of 2001.
PAGE 17
Other Net Expense
Other net expenses in 2000 increased 30.9% from 1999 due primarily to a $9.6
million net gain from the sale of securities in December 1999. Higher interest
expense in 2000 also contributed to the increase in other net expenses, but was
partially offset by higher investment income in 2000 and a $2.6 million net
gain from the sale of securities in March 2000. Long-term debt transactions
described in Note 4 of the Notes to Consolidated Financial Statements
contributed to a 15.4% increase in interest expense in 2000 compared to 1999.
Other net expense in 1999 decreased 45.2% from 1998 due primarily to the $9.6
million net gain from the sale of securities in 1999 and lower interest
expense. The decline in interest expense was partially due to a net reduction
of long-term debt as described in Note 4 of the Notes to Consolidated Financial
Statements.
Income Taxes
The effective tax rate for 2000 was 42.1% compared to 43.6% in 1999 and 44.4%
in 1998. The reductions in the effective tax rate were primarily attributable
to the implementation of tax planning strategies and resolution of tax issues.
DISCONTINUED OPERATIONS
On November 3, 2000, EWA and the USPS announced an agreement to terminate their
contract for the transportation and sortation of Priority Mail. Under terms of
the agreement, the USPS on January 7, 2001 assumed operating responsibility for
services covered under the contract, except certain air transportation and
related services. As a part of the termination agreement, EWA agreed to provide
certain air transportation and related services to the USPS for a transition
period of not less than ninety days. In January 2001, EWA received notification
from the USPS of its intention to terminate the requirement for EWA to provide
transition air transportation and related services, effective April 23, 2001.
The USPS has agreed to reimburse EWA for Priority Mail contract termination
costs, including costs of contract-related equipment, inventory, and operating
lease commitments, up to $125 million (the "Termination Liability Cap"). On
January 7,2001, the USPS paid EWA $60 million toward the termination costs. The
termination agreement provides for this provisional payment to be adjusted if
actual termination costs are greater or less than $60 million, in which case
either the USPS will be required to make an additional payment or EWA will be
required to return a portion of the provisional payment. We believe that
contract termination costs incurred by EWA are reimbursable under the
termination agreement and do not exceed the Termination Liability Cap. However,
there can be no assurance that all termination costs incurred by Emery will be
recovered.
Under the termination agreement, EWA agreed to dismiss a complaint filed in
April 2000 in the U.S. Court of Federal Claims that requested a declaration of
contract rights under the Priority Mail contract and a ruling that the USPS
was in breach of contractual payment obligations. However, the termination
agreement preserves EWA's right to pursue claims for underpayment which it
believes are owed by the USPS under the contract. EWA intends to pursue these
claims and has initiated litigation in the U.S. Court of Federal Claims for
that purpose. These claims are to recover costs of operating under the
contract as well as profit and interest thereon.
At December 31, 2000, our financial statements included $176.2 million of
unbilled revenue with respect to the Priority Mail contract. Unbilled revenue
represents the accrual of revenue sufficient only to recover costs and
therefore does not include profit or interest on either unbilled revenue or
profit. Any unbilled revenue that we do not recover would be written off and
reflected in operating results for discontinued operations in the current
period. Any amount of litigation award in excess of unbilled revenue would be
reflected as income from discontinued operations in the current period. We
believe our position with respect to claims for underpayment under the
Priority Mail contract is reasonable and well founded; however, there can be
no assurance that litigation will result in an award sufficient to recover
unbilled revenue recognized under the contract. Accordingly, we can give no
assurance that matters relating to the Priority Mail contract with the USPS
will not have a material adverse effect on our financial condition or
results of operations.
As a result of the above, the results of operations and net assets of the
Priority Mail operations have been segregated and classified as discontinued
operations. A summary of selected terms of the agreement, summary financial
data, and related information are included in Note 2 of the Notes to
Consolidated Financial Statements.
PAGE 18
LIQUIDITY AND CAPITAL RESOURCES
Continuing Operations
In 2000, cash and cash equivalents decreased $41.7 million to $104.5 million.
The net use of cash from investing activities of $234.1 million was funded with
$162.7 million of cash provided by operating activities, $32.4 million provided
by financing activities and a reduction in cash.
Operating activities in 2000 generated net cash of $162.7 million compared to
$396.0 million of cash generated by operating activities in 1999. Cash from
operations in 2000 was provided primarily by income from continuing operations
before depreciation and amortization (excluding the cumulative after-tax effect
of an accounting change). Positive operating cash flows in 2000 were partially
offset by changes in receivables, unamortized aircraft maintenance, accrued
liabilities and accrued income taxes. In 2000, a $15.8 million increase in
unamortized aircraft maintenance was the result of $55.4 million of cash used
in capitalized maintenance costs, partially offset by a $39.6 million non-cash
write-off of unamortized aircraft maintenance costs against the lease return
provision, related in part to the termination of certain aircraft leases. As
described in Note 13 of the Notes to Consolidated Financial Statements, the
Company is currently under examination by the Internal Revenue Service (IRS)
for tax years 1987 through 1998 on various issues. In connection with that
examination, we paid the IRS $93.4 million in August 2000 for tax and interest
related to issues raised under the examination. Funding was provided by
liquidating short-term investments and with borrowings under short-term credit
lines. Also described in Note 13 of the Notes to Consolidated Financial
Statements, the decline in accrued liabilities in 2000 was due in part to a
$29.6 million payment to the IRS in settlement of a proposed IRS adjustment
related to excise taxes. Cash from operations in 1999 increased $112.7 million
over 1998 and was provided primarily by income from continuing operations
before depreciation and amortization, and an increase in accrued liabilities.
Investing activities in 2000 used $69.4 million less cash than in 1999. Capital
expenditures of $235.2 million in 2000 declined $89.4 million from 1999. For
2000, Con-Way spent $122.6 million of cash primarily on infrastructure and
Emery spent $68.1 million of cash primarily on infrastructure and aircraft
equipment. Capital expenditure declines by Con-Way and Emery in 2000 of $89.4
million and $32.1 million, respectively, were partially offset by the
in-process construction of a CNF corporate administration and information
technology facility. In 2000, $66.7 million of revenue equipment was acquired
by Con-Way under operating leases while no new capital items were acquired by
Con-Way under operating leases in 1999. Proceeds from sales of securities in
2000 were $2.6 million, down from $9.6 million in 1999. The sale of certain
assets of Con-Way Truckload Services in 2000 generated cash of $7.3 million in
2000 compared to $29.3 million of cash provided by the sale of assets of
VantageParts in 1999. Software expenditures in 2000 declined $15.6 million from
1999. Cash used in investing activities in 1999 was $52.4 million higher than
in 1998 due primarily to a $109.7 million increase in capital expenditures by
Con-Way, partially offset by proceeds from the sale of VantageParts and
securities in 1999.
Financing activities in 2000 provided cash of $32.4 million compared to a $58.9
million reduction in cash in 1999. As discussed in Note 4 of the Notes to
Consolidated Financial Statements, a portion of the net proceeds of $197.5
million from the issuance in March 2000 of $200 million of 8 7/8% Notes due
2010 were used to repay borrowings outstanding under lines of credit. The net
cash used by financing activities in 1999 compared to $12.7 million of positive
financing cash flow in 1998 was due primarily to long-term debt transactions
described in Note 4 of the Notes to Consolidated Financial Statements and
fluctuations in short-term borrowings.
We maintain a $350 million unsecured credit facility with no borrowings
outstanding at December 31, 2000. The $350 million facility is also available
for issuance of letters of credit. Under that facility, outstanding letters of
credit totaled $71.8 million at December 31, 2000. Available capacity under
the $350 million facility was $278.2 million at December 31, 2000.
At December 31, 2000 we also had $100.0 million of uncommitted lines with no
outstanding borrowings. Under other unsecured facilities, $73.6 million in
letters of credit and bank guarantees were outstanding at December 31, 2000.
Our ratio of total debt to capital increased to 31.4% at December 31, 2000 from
30.5% at December 31, 1999, primarily due to the March 2000 issuance of $200
million of 8 7/8% Notes due 2010.
PAGE 19
Discontinued Operations
As described above under "Results of Operations," cash flows from the Priority
Mail operations have been segregated and classified as net cash flows from
discontinued operations in the Statements of Consolidated Cash Flows. As
described in Note 2 of the Notes to Consolidated Financial Statements, EWA
received payments in the fourth quarter of 2000 totaling $102.1 million from
the USPS for rate adjustments. Also described in Note 2, EWA in January 2001
received a $60 million provisional payment toward reimbursable termination
costs, as provided under a termination agreement signed by EWA and the USPS in
November 2000.
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.
MARKET RISK
We are exposed to a variety of market risks, including the effects of interest
rates, commodity prices and foreign currency exchange rates. Our policy is to
enter into derivative financial instruments only in circumstances that warrant
the hedge of an underlying asset, liability or future cash flow against
exposure to some form of commodity, interest rate or currency-related risk.
Additionally, the designated hedges should have high correlation to the
underlying exposure such that fluctuations in the value of the derivatives
offset reciprocal changes in the underlying exposure. Our policy prohibits
entering into derivative instruments for speculative purposes.
We may be exposed to the effect of interest rate fluctuations in the fair value
of our long-term debt and capital lease obligations, as summarized in Notes 4
and 5 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 $23 million at December 31, 2000.
We use interest rate swaps to mitigate both the impact of interest rate
volatility on cash flows related to lease payments and on the fair value of our
long-term debt. Cash flow hedges include interest rate swaps on variable-rate
equipment lease obligations. As of December 31, 2000, we estimate that the net
payments under these swaps given a hypothetical adverse change of 10% in market
interest rates would not have a material effect on our financial condition or
results of operations.
In 2000, we entered into interest rate swaps designated as fair value hedges.
The underlying exposure of these swaps is the fluctuation in fair value of the
$200 million of 8 7/8% Notes due 2010 issued in March 2000. Under the
measurement criteria of hedge effectiveness of SFAS 133, which we plan to adopt
effective January 1, 2001, the value of these fair value hedges varies
inversely with the fluctuation in fair value of the $200 million 8 7/8% Notes.
As of December 31, 2000, the change in the fair value of these interest rate
swaps given a hypothetical 10% change in interest rates would be approximately
$14 million.
At December 31, 2000, we had not entered into any derivative contracts to hedge
our foreign currency exchange exposure.
ACCOUNTING STANDARDS
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 delayed 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 plan to adopt the statement in the
first quarter of 2001 without a material impact on our financial condition and
results of operations.
PAGE 20
CNF TRANSPORTATION INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
(Dollars in thousands)
2000 1999
ASSETS
Current Assets
Cash and cash equivalents $ 104,515 $ 146,263
Trade accounts receivable, net (Note 1) 881,268 781,802
Other accounts receivable 59,478 49,416
Operating supplies,
at lower of average cost or market 42,271 45,314
Prepaid expenses 47,301 41,132
Deferred income taxes (Note 6) 105,502 76,032
Net current assets of discontinued
operations (Note 2) - 25,710
Total Current Assets 1,240,335 1,165,669
Property, Plant and Equipment, at Cost
Land 130,101 119,403
Buildings and leasehold improvements 692,312 564,278
Revenue equipment 797,444 816,172
Other equipment 420,788 375,482
2,040,645 1,875,335
Accumulated depreciation and amortization (934,123) (828,088)
1,106,522 1,047,247
Other Assets
Deferred charges and other assets (Note 13) 137,393 177,442
Capitalized software, net (Note 1) 89,829 86,097
Unamortized aircraft maintenance, net (Note 1) 242,468 226,629
Goodwill, net (Note 1) 254,887 265,896
Net non-current assets of discontinued
operations (Note 2) 173,507 90,354
898,084 846,418
Total Assets $3,244,941 $3,059,334
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
PAGE 21
CNF TRANSPORATION INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
(Dollars in thousands except per share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
2000 1999
Current Liabilities
Accounts payable $ 418,157 $ 395,617
Accrued liabilities (Note 3) 317,650 377,919
Accrued claims costs (Note 1) 145,558 121,917
Current maturities of long-term debt and
capital leases (Notes 4 and 5) 7,553 6,452
Short-term borrowings (Note 4) - 40,000
Income taxes payable (Notes 6 and 13) 1,777 53,455
Net current liabilities of discontinued
operations (Note 2) 68,214 -
Total Current Liabilities 958,909 995,360
Long-Term Liabilities
Long-term debt and guarantees (Note 4) 424,116 322,800
Long-term obligations under capital
leases (Note 5) 110,533 110,646
Accrued claims costs (Note 1) 82,502 77,774
Employee benefits (Note 9) 252,482 216,500
Other liabilities and deferred credits 51,163 45,450
Aircraft lease return provision (Note 1) 33,851 82,910
Deferred income taxes (Note 6) 144,463 114,946
Total Liabilities 2,058,019 1,966,386
Commitments and Contingencies (Notes 4, 5 and 13)
Company-Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary Trust
Holding Solely Convertible Debentures
of the Company (Note 7) 125,000 125,000
Shareholders' Equity (Note 8)
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 824,902 and
840,407 shares, respectively 8 8
Additional paid-in capital, preferred stock 125,459 127,817
Deferred compensation, Thrift and Stock
Plan (Note 10) (80,602) (87,600)
Total Preferred Shareholders' Equity 44,865 40,225
Common stock, $.625 par value; authorized
100,000,000 shares; issued 55,426,605 and
55,306,947 shares, respectively 34,642 34,567
Additional paid-in capital, common stock 331,282 328,721
Retained earnings 855,314 747,936
Deferred compensation, restricted stock
(Note 11) (1,423) (2,010)
Cost of repurchased common stock (6,770,628
and 6,856,567 shares, respectively) (166,939) (169,057)
1,052,876 940,157
Accumulated foreign currency translation
adjustments (27,378) (8,039)
Minimum pension liability adjustment (Note 9) (8,441) (4,395)
Accumulated Other Comprehensive Loss (35,819) (12,434)
Total Common Shareholders' Equity 1,017,057 927,723
Total Shareholders' Equity 1,061,922 967,948
Total Liabilities and Shareholders'
Equity $3,244,941 $3,059,334
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
PAGE 22
CNF TRANSPORTATION INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLDATED INCOME
YEARS ENDED DECEMBER 31
(Dollars in thousands except per share data)
2000 1999 1998
REVENUES $5,572,377 $5,037,301 $4,530,686
Costs and Expenses
Operating expenses 4,611,079 4,079,152 3,658,583
General and administrative
expenses 506,986 483,661 442,799
Depreciation 164,346 146,828 135,385
Net gain on sale of assets of
parts distribution operation - (10,112) -
Net gain on legal settlement - (16,466) -
5,282,411 4,683,063 4,236,767
OPERATING INCOME 289,966 354,238 293,919
Other Income (Expense)
Investment income 2,373 189 327
Interest expense (29,972) (25,972) (32,627)
Dividend requirement on preferred
securities of subsidiary
trust (Note 7) (6,250) (6,250) (6,250)
Miscellaneous, net (Note 12) 5,079 10,055 (1,557)
(28,770) (21,978) (40,107)
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 261,196 332,260 253,812
Income taxes (Note 6) 109,880 144,752 112,756
Income from Continuing Operations
before Accounting Change 151,316 187,508 141,056
Discontinued operations, net
of tax (Note 2) - 2,966 (2,078)
Loss from discontinuance, net
of tax (Note 2) (13,508) - -
(13,508) 2,966 (2,078)
Cumulative effect of accounting change,
net of tax (Note 1) (2,744) - -
Net income 135,064 190,474 138,978
Preferred stock dividends 8,261 8,218 8,169
NET INCOME AVAILABLE TO COMMON
SHAREHOLDERS $ 126,803 $ 182,256 $ 130,809
Weighted-Average Common Shares
Outstanding (Note 1)
Basic 48,490,662 48,189,618 47,659,745
Diluted 55,901,374 56,019,317 55,514,318
Earnings Per Share (Note 1)
Basic
Income from continuing operations $ 2.95 $3.72 $ 2.79
Discontinued operations, net of tax - 0.06 (0.05)
Loss from discontinuance, net of tax (0.28) - -
Cumulative effect of accounting
change, net of tax (0.06) - -
Net Income Available to Common
Shareholders $ 2.61 $3.78 $ 2.74
Diluted
Income from continuing operations $ 2.65 $3.29 $ 2.49
Discontinued operations, net of tax - 0.06 (0.04)
Loss from discontinuance, net of tax (0.24) - -
Cumulative effect of accounting
change, net of tax (0.05) - -
Net Income Available to Common
Shareholders $ 2.36 $3.35 $ 2.45
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
PAGE 23
CNF TRANSPORTATION INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLDIATED CASH FLOWS
YEARS ENDED DECEMBER 31
(Dollars in thousands)
2000 1999 1998
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR $ 146,263 $ 73,897 $ 97,617
Operating Activities
Net income 135,064 190,474 138,978
Adjustments to reconcile net income
to net cash provided by operating
activities:
Discontinued operations, net of tax 13,508 (2,966) 2,078
Cumulative effect of accounting
change, net of tax 2,744 - -
Depreciation and amortization 190,651 164,876 145,840
Increase in deferred income taxes 47 27,686 26,069
Amortization of deferred compensation 7,356 11,858 9,764
Provision for uncollectible accounts 9,070 15,229 11,050
Loss (gain) from sales of property, net 692 3,038 (1,220)
Loss (gain) from sales of assets
of businesses, net 5,459 (10,112) -
Gain from sales of equity securities (2,619) (9,625) -
Changes in assets and liabilities:
Receivables (131,694) (94,539) (70,857)
Prepaid expenses (6,169) (8,454) 2,164
Unamortized aircraft
maintenance (55,419) (34,999) (16,170)
Accounts payable 22,634 50,749 1,375
Accrued liabilities (54,931) 51,571 17,387
Accrued claims costs 24,923 35,459 16,494
Income taxes (49,761) (11,885) 2,226
Employee benefits 31,936 29,987 32,050
Aircraft lease return provision 5,366 34,629 (3,827)
Deferred charges and credits 18,340 (38,723) (19,234)
Other (4,502) (8,245) (10,830)
Net Cash Provided by Operating
Activities 162,695 396,008 283,337
Investing Activities
Capital expenditures (235,221) (324,604) (217,725)
Software expenditures (19,211) (34,811) (48,245)
Proceeds from sales of equity securities 2,619 9,625 -
Proceeds from sales of assets of
businesses 7,263 29,260 -
Proceeds from sales of property 10,441 16,986 14,872
Net Cash Used in Investing Activities (234,109) (303,544) (251,098)
Financing Activities
Proceeds from issuance of long-term
debt 198,752 162,400 46,000
Proceeds for issuance costs of
long-term debt (1,300) - -
Repayment of long-term debt, guarantees
and capital leases (96,513) (195,396) (51,469)
Proceeds from (repayment of) short-term
borrowings, net (40,000) (3,000) 43,000
Proceeds from exercise of stock options 1,792 7,474 5,483
Payments of common dividends (19,425) (19,311) (19,068)
Payments of preferred dividends (10,903) (11,078) (11,212)
Net Cash Provided by (Used in)
Financing Activities 32,403 (58,911) 12,734
Net Cash Provided by (Used in)
Continuing Operations (39,011) 33,553 44,973
Net Cash Provided by (Used in)
Discontinued Operations (2,737) 38,813 (68,693)
Increase (Decrease) in Cash and Cash
Equivalents (41,748) 72,366 (23,720)
CASH AND CASH EQUIVALENTS, END OF YEAR $ 104,515 $ 146,263 $ 73,897
Supplemental Disclosure
Cash paid for income taxes, net
of refunds $ 82,002 $ 63,207 $ 67,955
Cash paid for interest, net of
amounts capitalized 32,806 35,833 33,141
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
PAGE 24
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 Deferred Retained
Shares Amount Shares Amount Capital Compensation Earnings
BALANCE, DECEMBER 31, 1997 865,602 $ 9 54,370,182 $33,981 $433,905 $(104,347) $473,250
Net income - - - - - - 138,978
Other comprehensive loss:
Foreign currency translation
adjustment - - - - - - -
Minimum pension liability
adjustment - - - - - - -
Comprehensive income - - - - - - -
Exercise of stock options including
tax benefits of $2,576 - - 321,079 201 7,858 - -
Issuance of restricted stock, net of
forfeitures - - 106,446 67 3,935 (4,852) -
Issuance of employee stock awards - - - - 13 - -
Recognition of deferred compensation - - - - - 9,764 -
Repurchased common stock issued for
conversion of preferred stock (11,411) - - - (1,357) - -
Common dividends declared
($.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 854,191 9 54,797,707 34,249 444,354 (99,435) 584,991
Net income - - - - - - 190,474
Other comprehensive income:
Foreign currency translation
adjustment - - - - - - -
Minimum pension liability
adjustment - - - - - - -
Comprehensive income - - - - - - -
Exercise of stock options including
tax benefits of $4,198 - - 446,128 279 11,393 - -
Issuance of restricted stock, net of
forfeitures - - 63,112 39 2,387 (2,033) -
Issuance of employee stock awards - - - - 12 - -
Recognition of deferred compensation - - - - - 11,858 -
Repurchased common stock issued for
conversion of preferred stock (13,784) (1) - - (1,608) - -
Common dividends declared
($.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 840,407 8 55,306,947 34,567 456,538 (89,610) 747,936
Net income - - - - - - 135,064
Other comprehensive loss:
Foreign currency translation
adjustment - - - - - - -
Minimum pension liability
adjustment - - - - - - -
Comprehensive income - - - - - - -
Exercise of stock options including
tax benefits of $281 - - 115,732 72 2,001 - -
Issuance of restricted stock, net of
forfeitures - - 3,926 3 295 229 -
Issuance of employee stock awards - - - - 1 - -
Recognition of deferred compensation - - - - - 7,356 -
Repurchased common stock issued for
conversion of preferred stock (15,505) - - - (2,094) - -
Common dividends declared
($.40 per share) - - - - - - (19,425)
Series B, Preferred dividends
($12.93 per share) net of tax
benefits of $2,547 - - - - - - (8,261)
BALANCE, DECEMBER 31, 2000 824,902 $ 8 55,426,605 $34,642 $456,741 $ (82,025) $855,314
CNF TRANSPORTATION INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
(Dollars in thousands except per share data)
Accumulated
Cost of Other
Repurchased Comprehensive Comprehensive
Common Stock Income (Loss) Income
BALANCE, DECEMBER 31, 1997 $(172,048) $ (6,647)
Net income - - $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 $2,576 - -
Issuance of restricted stock, net of
forfeitures - -
Issuance of employee stock awards 13 -
Recognition of deferred compensation - -
Repurchased common stock issued for
conversion of preferred stock 1,357 -
Common dividends declared
($.40 per share) - -
Series B, Preferred dividends
($12.93 per share) net of tax
benefits of $2,982 - -
BALANCE, DECEMBER 31, 1998 (170,678) (17,135)
Net income - - $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 $4,198 - -
Issuance of restricted stock, net of
forfeitures - -
Issuance of employee stock awards 13 -
Recognition of deferred compensation - -
Repurchased common stock issued for
conversion of preferred stock 1,608 -
Common dividends declared
($.40 per share) - -
Series B, Preferred dividends
($12.93 per share) net of tax
benefits of $2,774 - -
BALANCE, DECEMBER 31, 1999 (169,057) (12,434)
Net income - - $135,064
Other comprehensive loss:
Foreign currency translation
adjustment - (19,339) (19,339)
Minimum pension liability
adjustment - (4,046) (4,046)
Comprehensive income - - $111,679
Exercise of stock options including
tax benefits of $281 - -
Issuance of restricted stock, net of
forfeitures - -
Issuance of employee stock awards 24 -
Recognition of deferred compensation - -
Repurchased common stock issued for
conversion of preferred stock 2,094 -
Common dividends declared
($.40 per share) - -
Series B, Preferred dividends
($12.93 per share) net of tax
benefits of $2,547 - -
BALANCE, DECEMBER 31, 2000 $(166,939) $(35,819)
<FN>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
PAGE 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE ONE:
DESCRIPTION OF BUSINESS AND 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 primarily regional less-than-truckload trucking, domestic
and international air freight, full service logistics management, and
trailer manufacturing. As described in Note 2 "Discontinued Operations,"
the sortation and transportation operations with the U.S. Postal Service
are reflected as discontinued operations due to the termination of the
Priority Mail contract, effective January 7, 2001, and except where
otherwise noted, is excluded from the accompanying notes. See Note 14
"Segment Reporting" for further discussion of the Company's operating
segments, markets and product lines.
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.
Recognition of Revenues
As a result of recent pronouncements, including SEC Staff Accounting
Bulletin No. 101, the Company elected to prospectively adopt, effective
January 1, 2000, a change in accounting method for recognition of its
freight transportation revenue to a preferable method. CNF now
recognizes the allocation of freight transportation revenue between
reporting periods based on relative transit time in each reporting
period with expenses recognized as incurred. Previously, revenue was
recognized when freight was received for shipment and the estimated
costs of performing the transportation service were accrued. The pro
forma effect of the accounting change on prior years' operating results
is not material.
Revenue from long-term contracts is recognized in accordance with
contractual terms as services are provided.
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, Net
Trade accounts receivable are net of allowances of $21,722,000 and
$26,163,000 at December 31, 2000 and 1999, 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 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. 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.
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.
Goodwill
Goodwill, 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. Accumulated amortization at December 31, 2000 and 1999
was $116,810,000 and $105,887,000, respectively.
Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the total amount of an asset may
not be recoverable. An impairment loss is recognized when estimated future
undiscounted cash flows expected to result from the use of the asset and
its eventual disposition are less than its carrying amount. If the asset
is not considered recoverable, an amount equal to the excess of the
carrying amount over the estimated discounted cash flows will be charged
against the asset with a corresponding expense to the income statement.
PAGE 27
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.
Beginning January 1, 1999, the Company began to participate in a
reinsurance pool to reinsure mostly workers compensation and vehicular
liabilities. Insurer participants in the pool cede and each reinsurer
participant assumes an equivalent amount of its percentage participation.
Reinsurance does not relieve the Company of its liabilities under the
original policy. However, in the opinion of management, the Company's
reinsurers are sound and any potential exposure to the Company for
non-payment is minimal.
Aircraft Lease Return Provision
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
aircraft lease return provision represents the costs accrued for this
obligation and any estimated unusable maintenance at the date of lease
return or other disposal.
In March 2000, the Securities and Exchange Commission (SEC) communicated
its interpretation of certain accounting issues related to major
maintenance expenditures. As a result of the SEC's comments, the Company
reclassified Emery's aircraft lease return provision. Accordingly, the
aircraft lease return provision is reported separately as a liability
rather than being shown as a reduction of Unamortized Aircraft Maintenance.
Prior periods have been reclassified.
Foreign Currency Translation
Adjustments resulting from translating foreign functional currency
financial statements into U.S. dollars are included in the Foreign Currency
Translation Adjustment as Other Comprehensive Income (Loss) in the
Statements of Consolidated Shareholders' Equity.
Earnings Per Share (EPS)
Basic EPS for continuing operations is computed by dividing reported income
from continuing operations (after preferred dividends) by the
weighted-average shares outstanding. Diluted EPS for continuing operations
is calculated as follows:
(Dollars in thousands except per share data)
2000 1999 1998
Earnings:
Net income from continuing
operations $143,055 $179,290 $132,887
Add-backs:
Dividends on preferred stock,
net of replacement funding 1,424 1,337 1,274
Dividends on preferred
securities of subsidiary
trust, net of tax 3,816 3,816 3,816
$148,295 $184,443 $137,977
Shares:
Weighted-average shares
outstanding 48,490,662 48,189,618 47,659,745
Stock option and restricted
stock dilution 342,826 695,099 708,042
Series B preferred stock 3,942,886 4,009,600 4,021,531
Preferred securities of
subsidiary trust 3,125,000 3,125,000 3,125,000
55,901,374 56,019,317 55,514,318
Diluted earnings per share
from continuing operations $2.65 $3.29 $2.49
Reclassification
Certain amounts in prior years' financial statements have been reclassified
to conform to the current year presentation.
NOTE TWO:
DISCONTINUED OPERATIONS
On November 3, 2000, Emery Worldwide Airlines (EWA) and the U.S. Postal
Service (USPS) announced an agreement to terminate their contract for the
transportation and sortation of Priority Mail. The contract was originally
scheduled to terminate in the first quarter of 2002, subject to renewal
options. Under terms of the agreement, the USPS on January 7, 2001, assumed
operating responsibility for services covered under the contract, except
certain air transportation and related services. As a part of the
termination agreement, EWA agreed to provide certain air transportation and
related services to the USPS for a transition period of not less than ninety
days. In January 2001, EWA received notification from the USPS of its
intention to terminate the requirement for EWA to provide transition air
transportation and related services, effective April 23, 2001.
The USPS has agreed to reimburse the Company for Priority Mail contract
termination costs, including costs of contract-related equipment, inventory,
and operating lease commitments, up to $125 million (the "Termination
Liability Cap").
PAGE 28
On January 7, 2001, the USPS paid EWA $60 million toward the
termination costs. The termination agreement provides for this provisional
payment to be adjusted if actual termination costs are greater or less than
$60 million, in which case either the USPS will be required to make an
additional payment or EWA will be required to return a portion of the
provisional payment.
Under the termination agreement, EWA agreed to dismiss a complaint filed in
April 2000 in the U.S. Court of Federal Claims that requested a declaration
of contract rights under the Priority Mail contract and a ruling that the
USPS was in breach of contractual payment obligations. However, the
termination agreement preserves EWA's right to pursue claims for underpayment,
and EWA has initiated litigation in the U.S. Court of Federal Claims for that
purpose. These claims are to recover costs of operating under the contract as
well as profit and interest thereon. The Company's accounting policy for
revenue recognition under the Priority Mail contract, including claims for
underpayment relating to the period through the effective termination date on
January 7, 2001, is described below.
As a result of the contract termination, the results of operations of the
Company's Priority Mail contract have been segregated and classified as
discontinued operations in the Statements of Consolidated Income for all
periods presented. Assets and liabilities have been reclassified in the
Consolidated Balance Sheet from their historical classifications to
separately reflect them as net assets of discontinued operations. Cash flows
related to discontinued operations have been segregated and classified
separately as net cash flows from discontinued operations in the Statements
of Consolidated Cash Flows.
The summarized results of discontinued operations were as follows:
Years Ended December 31
(Dollars in thousands) 2000 1999 1998
Revenues $593,952 $555,509 $410,804
Operating income (loss) before taxes - 4,862 (3,401)
Income taxes (benefits) - 1,896 (1,323)
Income (loss) from discontinued
operations $ - $ 2,966 $ (2,078)
Loss from discontinuance,
net of tax benefits $ (13,508) $ - $ -
The loss from discontinuance of $13.5 million recognized in the third
quarter of 2000, which is reported net of $8.6 million of income tax
benefits, includes estimates for the write-down of non-reimbursable assets,
legal and advisory fees, costs of providing transportation services for a
three-month period following the effective termination date, certain
employee-related costs and other non-reimbursable costs from discontinuance.
The net assets of discontinued operations were as follows:
(Dollars in thousands) 2000 1999
Current Assets
Accounts receivable $ 10,324 $132,505
Other 15,796 1,545
26,120 134,050
Property, plant and equipment, net 66,316 83,787
Long-term receivables and other assets 184,348 25,355
Total assets of discontinued
operations 276,784 243,192
Current Liabilities 94,334 108,340
Long-term liabilities 77,157 18,788
Total liabilities of discontinued
operations 171,491 127,128
Net assets of discontinued operations $105,293 $116,064
The Priority Mail contract provided for the re-determination of prices paid
to EWA under the contract, which gave rise to unbilled revenue. Unbilled
revenue representing contract change orders or claims were included in
revenue only when it was probable that the change order or claim would
result in additional contract revenue and if the amount could be reliably
estimated. The Company recognized unbilled revenue related to claims
sufficient only to recover costs. Unbilled revenue excludes profit under
the contract and interest attributable to both unbilled revenue and profit.
Any unbilled revenue that EWA does not recover would be written off and
reflected in operating results for discontinued operations in the current
period. Any amount of litigation award in excess of unbilled revenue would
be reflected as income from discontinued operations in the current period.
Accordingly, no operating profit has been recognized in connection with the
Priority Mail contract beginning in the third quarter of 1999, when EWA filed
a claim for proposed higher prices, and including periods prior to the
effective termination date on January 7, 2001. The amount of unbilled revenue
related to EWA's Priority Mail contract recognized at December 31, 2000 and
1999 was $176.2 million and $123.7 million, respectively. Unbilled revenue at
December 31, 2000 is included in net non-current assets of discontinued
operations in the Consolidated Balance Sheets. As described above, the
Company is pursuing recovery of this amount plus profit and interest thereon.
As a result of a decision in August 2000 in the U.S. Court of Federal Claims,
the USPS increased its provisional rate paid to EWA for transportation and
sortation of Priority Mail for 2000. The USPS also increased the provisional
rate paid to EWA for 1999.
PAGE 29
Based on these rate adjustments, early in the fourth quarter of 2000, EWA
received payments totaling $102.1 million from the U.S. Postal Service.
Unbilled revenue at December 31, 2000 has been reduced by the $102.1 million
payment from the USPS.
NOTE THREE:
ACCRUED LIABILITIES
Accrued liabilities consist of the following as of December 31:
(Dollars in thousands) 2000 1999
Other accrued liabilities $107,819 $137,081
Holiday and vacation pay 70,506 63,256
Taxes other than income taxes 38,576 69,251
Wages and salaries 31,571 33,270
Incentive compensation 34,206 35,874
Estimated revenue adjustments 29,352 30,733
Interest 5,620 8,454
Total accrued liabilities $317,650 $377,919
NOTE FOUR:
DEBT AND GUARANTEES
As of December 31, long-term debt and guarantees consisted of the following:
(Dollars in thousands) 2000 1999
Long-term borrowings under lines
of credit $ - $ 90,000
7.35% Notes due 2005 (interest payable
semi-annually) 100,000 100,000
TASP Notes guaranteed, 6.00% to 8.54%,
due through 2009 (interest payable
semi-annually) 128,000 134,400
8 7/8% Notes due 2010 (interest payable
semi-annually) 198,816 -
6.84% Industrial Revenue Bonds due 2014
(interest payable quarterly) 4,800 4,800
431,616 329,200
Less current maturities (7,500) (6,400)
Total long-term debt and guarantees $424,116 $322,800
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, 2000, the
Company had no borrowings and $71.8 million in letters of credit outstanding
under this agreement. At December 31, 1999, $50.0 million of borrowings were
outstanding with $59.8 million in letters of credit.
At December 31, 2000, the Company had $100.0 million of other uncommitted
lines of credit with no outstanding borrowings. At December 31, 1999, $150.0
million of other uncommitted lines of credit had no outstanding borrowings
and $80.0 million was outstanding under a $100.0 million supplemental credit
facility that expired in September 2000. 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.
The aggregate principal amount of $117.7 million of the Company's unsecured
9 1/8% 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 weighted-average interest rate on borrowings outstanding under lines of
credit at December 31, 1999 was 7.2%.
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 a rate of 6.0% and a maturity date of
January 1, 2006. At December 31, 2000, $66.0 million was outstanding under
these refinanced notes, which 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 outstanding at December 31, 2000
are subject to redemption at the option of the holders should a certain
designated event occur or ratings by both Moody's and S&P of senior unsecured
indebtedness decline below investment grade.
The 7.35% Notes due in 2005 contain certain covenants limiting the incurrence
of additional liens.
The Company's consolidated interest expense as presented on the Statements of
Consolidated Income is net of capitalized interest of $4,636,000 in 2000,
$5,864,000 in 1999, and $2,342,000 in 1998. The aggregate annual maturities
and sinking fund requirements of Long-Term Debt and Guarantees for the next
five years ending December 31 are $7,500,000 in 2001, $8,700,000 in 2002,
$10,100,000 in 2003, $12,000,000 in 2004 and $112,700,000 in 2005.
PAGE 30
NOTE FIVE:
LEASES
The Company and its subsidiaries are obligated under various 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 million of Series A refinancing bonds due in February
2018 with an interest rate of 5.625%. The remaining $62 million are due in
2009 and bear rates of interest between 6.05% and 6.20%, and have various
call provisions. Included in property, plant and equipment is $83 million
of Hub-related equipment and leasehold improvements, including recent
expansion costs.
Future minimum lease payments under all leases with initial or remaining
non-cancelable lease terms in excess of one year, at December 31, 2000,
are as follows:
Capital Operating
(Dollars in thousands) Leases Leases
Year ending December 31:
2001 $ 6,819 $175,146
2002 6,819 144,747
2003 6,819 96,899
2004 6,819 68,401
2005 6,819 38,975
Thereafter (through 2018) 156,570 61,006
Total minimum lease payments 190,665 $585,174
Amount representing interest (80,079)
Present value of minimum lease
payments 110,586
Current maturities of obligations
under capital leases (53)
Long-term obligations under
capital leases $110,533
Certain operating leases contain financial covenants. The most restrictive
covenant requires Emery to maintain minimum amounts of fixed-charge coverage.
Rental expense for operating leases is comprised of
the following:
(Dollars in thousands) 2000 1999 1998
Minimum rentals $240,429 $221,047 $203,714
Sublease rentals (6,069) (7,436) (4,001)
Amortization of deferred gains (1,147) (1,639) (4,012)
$233,213 $211,972 $195,701
NOTE SIX:
INCOME TAXES
The components of pretax income and income taxes are as follows:
(Dollars in thousands) 2000 1999 1998
Pretax income
U.S. corporations $230,391 $319,458 $244,239
Foreign corporations 30,805 12,802 9,573
Pretax income from
continuing operations $261,196 $332,260 $253,812
Income taxes (benefits)
Current
U.S. federal $ 89,020 $ 95,629 $ 74,076
State and local 7,383 14,285 8,458
Foreign 13,430 7,152 4,153
$109,833 $117,066 $ 86,687
Deferred
U.S. federal $ (1,583) $ 26,787 $ 25,048
State and local 1,630 899 1,021
47 27,686 26,069
Total income taxes $109,880 $144,752 $112,756
The components of deferred tax assets and liabilities at December 31, relate
to the following:
(Dollars in thousands) 2000 1999
Deferred tax assets
Reserves for accrued claims costs $ 48,092 $ 40,688
Reserves for post retirement health
benefits 45,843 42,411
Reserves for employee benefits 87,192 81,064
Other reserves not currently deductible 52,181 43,016
233,308 207,179
Deferred tax liabilities
Depreciation and amortization 224,013 200,924
Unearned revenue 1,220 3,530
Other 47,036 41,639
272,269 246,093
Net deferred tax liability $ 38,961 $ 38,914
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.
PAGE 31
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:
2000 1999 1998
U.S. statutory tax rate 35.0% 35.0% 35.0%
State income taxes (net of federal
income tax benefit) 2.8 3.3 3.8
Foreign taxes in excess of U.S.
statutory rate 1.0 0.8 0.9
Non-deductible operating expenses 0.8 1.0 1.0
Amortization of goodwill 1.2 0.9 1.2
Foreign tax credits, net (0.5) (0.4) (1.6)
Other, net 1.8 3.0 4.1
Effective income tax rate 42.1% 43.6% 44.4%
The cumulative undistributed earnings of the Company's foreign subsidiaries
(approximately $35.4 million at December 31, 2000), 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 $3.7 million.
Certain contingencies related to income taxes are discussed in Note 13
"Commitments and Contingencies."
NOTE SEVEN:
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 therefore 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.
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.
NOTE EIGHT:
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 10 "Thrift and
Stock Plan," at the rate of 4.71 shares for each share of preferred stock
subject to antidilution 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
(a) 1.3 multiplied by (b) the number of shares of common stock into which the
Series B preferred stock is convertible on the record date of such vote.
PAGE 32
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
SFAS 130, "Reporting Comprehensive Income," 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 disclosed Comprehensive Income
in the Statements of Consolidated Shareholders' Equity.
NOTE NINE:
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 95% 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 reported information for the defined benefit pension plan was not restated
for discontinued operations due to the immaterial effect on the periods
presented. The Company recognized a gain from the curtailment of the projected
benefit obligation of $2.4 million in 2000, which is included in the Loss from
Discontinuance. 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) 2000 1999
Change in benefit obligation:
Projected benefit obligation at beginning
of year $ 397,121 $ 390,867
Service cost-benefits earned during
the year 33,866 37,733
Interest cost on projected benefit
obligation 33,571 30,525
Actuarial loss (gain) 12,493 (51,645)
Benefits paid (11,808) (10,359)
Projected benefit obligation at end
of year 465,243 397,121
Change in plan assets:
Fair value of plan assets at beginning
of year 434,347 354,550
Actual return on plan assets (12,804) 88,878
Transfers from defined contribution plan 1,209 1,278
Benefits paid (11,808) (10,359)
Fair value of plan assets at end of year 410,944 434,347
Funded status (54,299) 37,226
Unrecognized actuarial gain (66,084) (135,214)
Unrecognized prior service costs 11,206 6,632
Unrecognized net asset at transition (3,388) (4,517)
Accrued benefit cost $(112,565) $ (95,873)
Weighted-average assumptions as of December 31:
Discount rate 7.75% 8.00%
Expected long-term rate of return on assets 9.50% 9.50%
Rate of compensation increase 5.00% 5.00%
Net pension cost includes the following:
(Dollars in thousands) 2000 1999 1998
Service cost-benefits earned during
the year $ 33,866 $ 37,733 $ 30,497
Interest cost on projected benefit
obligation 33,571 30,525 25,338
Expected return on plan assets (40,866) (33,298) (29,386)
Net amortization and deferral (7,523) 21 56
Net pension cost $ 19,048 $ 34,981 $ 26,505
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, 2000
and 1999, the accrued benefit cost was $20,058,000 and $16,706,000,
respectively, and the net periodic pension cost was $4,951,000 in 2000,
$4,290,000 in 1999, and $4,036,000 in 1998.
Also included in Employee Benefits in the Consolidated Balance Sheet at
December 31, 2000, was a minimum pension liability for the unfunded
supplemental program. The non-cash adjustment for the minimum pension
liability of $9,580,000 was offset by an intangible asset of $1,139,000 and
accumulated other comprehensive loss of $8,441,000.
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.
PAGE 33
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) 2000 1999
Change in benefit obligation:
Accumulated benefit obligation at beginning
of year $84,774 $89,947
Service cost-benefits earned during
the year 1,449 1,558
Interest cost on accumulated
benefit obligation 6,669 6,289
Benefit payments (5,138) (4,343)
Actuarial gain (3,124) (8,677)
Accumulated benefit obligation at end
of year 84,630 84,774
Unrecognized net actuarial gain 13,889 10,854
Unrecognized prior service benefit 279 334
Accrued benefit cost $98,798 $95,962
Assumptions as of December 31:
Weighted-average discount rate 7.75% 8.00%
At December 31, 2000, a 9.5% annual rate of increase in the per capita cost of
covered medical benefits was assumed for 2001 and was assumed to decrease
gradually to 5.5% for 2006 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 2001 and was assumed to remain at that level thereafter.
Net periodic post retirement benefit cost includes the following:
(Dollars in thousands) 2000 1999 1998
Service cost-benefits earned during
the year $1,449 $1,558 $2,228
Interest cost on accumulated
benefit obligation 6,669 6,289 6,046
Net amortization and deferral (144) (55) (55)
Net periodic post retirement
benefit cost $7,974 $7,792 $8,219
A one-percentage-point change in assumed health care cost trend rates would
change the aggregate service and interest cost by $697,000 and the accumulated
benefit obligation by approximately $6,230,000.
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 $36,134,000, $47,068,000, and $33,809,000 in 2000, 1999, and
1998, respectively, and by hourly participants was $30,612,000, $24,053,000,
and $36,500,000 in 2000, 1999, and 1998, respectively.
NOTE TEN:
THRIFT AND STOCK PLAN
The Company sponsors the CNF Thrift and Stock Plan (TASP), a voluntary defined
contribution plan with a leveraged ESOP 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% percent of a
participant's basic compensation. Company contributions to the TASP were
$13,282,000 in 2000, $13,735,000 in 1999, and $10,491,000 in 1998, 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 debt. 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 plan, 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. During 2000, 1999, and 1998, $6,998,000,
$7,236,000, and $6,983,000, respectively, of deferred compensation expense
was recognized.
PAGE 34
At December 31, 2000, the TASP owned 824,902 shares of Series B preferred
stock, of which 299,255 shares have been allocated to employees. At
December 31, 2000, the Company has reserved, authorized and unissued common
stock adequate to satisfy the conversion feature of the Series B preferred
stock.
NOTE ELEVEN:
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 option grants awarded 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 from
continuing operations as reported net of preferred dividends would have been
$133.2 million, $177.3 million and $130.8 million for the years 2000, 1999
and 1998, respectively. Diluted earnings per share would have been $2.38,
$3.16 and $2.36 per share for the years 2000, 1999 and 1998, respectively.
These pro forma effects of applying SFAS 123 are not indicative of future
amounts. The weighted-average grant-date fair value of options granted in
2000, 1999 and 1998 was $14.26, $15.65, and $17.22 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,
5.6%-6.9%; expected life, 5.8 years; dividend yield, 1.4%;
and volatility, 60.0%.
The following is a summary of stock option data:
Wtd. Avg.
Number of Exercise
Options Price
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
Granted 1,749,950 26.24
Exercised (115,732) 15.48
Expired or canceled (131,267) 33.02
Outstanding at December 31, 2000 4,727,947 $26.90
Options exercisable as of December 31:
2000 2,013,257 $24.78
1999 2,020,646 23.66
1998 2,194,975 20.66
The following is a summary of the stock options outstanding and exercisable
at December 31, 2000:
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-$16.26 371,636 2.8 $14.26 371,636 $14.26
$18.05-$27.06 2,551,678 5.3 23.75 863,378 19.40
$29.63-$43.06 1,804,633 7.8 33.95 778,243 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 certain market prices of the Company's
common stock. Shares are 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:
2000 1999 1998
Wtd. Wtd. Wtd.
Avg. Fair Avg. Fair Avg. Fair
Shares Value Shares Value Shares Value
Awarded 19,258 $34.50 63,112 $33.08 112,113 $38.51
Forfeited 15,332 23.87 - - 5,667 34.41
PAGE 35
The weighted-average fair value for shares awarded in 2000 excludes 15,276
shares awarded for settlement of pension liabilities due to certain directors.
Total compensation expense recognized for restricted stock in 2000, 1999, and
1998 was $358,000, $4,622,000, and $2,781,000, respectively.
At December 31, 2000, the Company had 2,658,550 common shares available for
the grant of stock options, restricted stock, or other stock-based incentive
compensation.
NOTE TWELVE:
FINANCIAL INSTRUMENTS
The Company has several interest rate swap agreements. Interest rate swaps
that effectively convert $128.3 million of variable-rate lease obligations to
fixed-rate obligations expire through 2005. Interest rate differentials to be
paid or received are recognized over the life of each agreement as
adjustments to operating expense. Interest rate swaps that effectively convert
the Company's 8 7/8% Notes due 2010 to floating-rate obligations expire in 2010.
Interest rate differentials are recognized as adjustments to interest expense.
The Company is exposed to credit loss on the interest rate swaps, but does not
anticipate any loss due to the creditworthiness of its swap counterparties.
The fair values of the interest rate swaps, as presented below, reflect the
estimated amounts that the Company would receive if the contracts were
terminated at the reported date.
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments at December 31:
2000 1999
Carrying Carrying
(Dollars in thousands) Amount Fair Value Amount Fair Value
Short-term borrowings $ - $ - $ 40,000 $ 40,000
Long-term debt 431,616 451,000 329,200 315,000
Off-balance sheet receivables:
Interest rate swaps - 20,600 - 7,600
Fuel purchase contracts - - - 1,100
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, 2000,
and are subject to transferability restrictions.
NOTE THIRTEEN:
COMMITMENTS AND CONTINGENCIES
In addition to letters of credit outstanding under its $350 million unsecured
credit facility and other uncommitted lines of credit discussed in Note 4
"Debt and Guarantees," the Company at December 31, 2000, had $73.6 million in
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 certain worker's compensation, tax and public
liability claims that were pending as of September 30, 1996. In some cases,
these indemnities are supported by letters of credit under which the Company
is liable to the issuing bank and by bonds issued by surety companies. In
order to secure CFC's obligation to reimburse and indemnify the Company
against liability with respect to these claims, as of December 31, 2000, CFC
had provided the Company with approximately $6.0 million of letters of credit.
However, the letters of credit 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 1998 on various issues. In connection with
those examinations, the IRS proposed adjustments for tax years 1987 through
1990. The Company filed a protest concerning the proposed adjustments for tax
years 1987 through 1990 and engaged in discussions with the Appeals Office of
the IRS. After those discussions failed to produce a settlement, in March 2000,
the IRS issued a Notice of Deficiency (the Notice) for the years 1987 through
1990 with respect to various issues, including aircraft maintenance and matters
related to CFC for years prior to the spin-off, which are described below.
Based upon the Notice, the total amount of the deficiency for items in years
1987 through 1990, including taxes and interest, was $149 million as of
December 31, 2000. The amount due under the Notice was reduced in the third
quarter of 2000 by a portion of the Company's $93.4 million payment to the IRS,
which is described below.
PAGE 36
Under the Notice, the IRS has assessed a substantial adjustment for tax years
1989 and 1990 based on the IRS' position that certain aircraft maintenance
costs should have been capitalized rather than expensed for federal income tax
purposes. The Company believes that its practice of expensing these types of
aircraft maintenance costs is consistent with industry practice and the
recently issued Treasury Ruling 2001-4. As described below, the IRS has
proposed an additional adjustment, based on the same IRS position with respect
to aircraft maintenance, for subsequent tax years not included under the Notice.
Under the Notice, the IRS is also 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 provided 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. At
December 31, 1999, the Company had 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
but reimbursable by CFC under the tax sharing agreement. In May 2000, the
Company and CFC settled certain federal tax matters relating to CFC on issues
for tax years 1984 through 1990. Under the settlement agreement, the Company
received from CFC cash of $16.7 million, a $20.0 million note due in 2004, and
a commitment to transfer to the Company land and buildings with an estimated
value of $21.2 million. In the last half of 2000, the Company received real
property with an estimated value of $21.2 million in settlement of CFC's
commitment to transfer land and buildings. Prior to its transfer, the real
property collateralized CFC's obligation to the Company.
As discussed above, the IRS is seeking to recover $149 million under the
Notice. In addition to the issues covered under the Notice for tax years 1987
through 1990, the IRS in May 2000 proposed additional adjustments for tax years
1991 through 1996 with respect to various issues, including matters relating to
CFC for years prior to the spin-off, and as mentioned above, aircraft
maintenance costs.
In June 2000, the Company settled the tax issue relating to the manner in which
Emery Worldwide calculated and paid aviation excise taxes. The Company paid
$29.6 million to the IRS in settlement of proposed excise tax adjustments for
tax years 1990 through 1999, which approximated the amount previously accrued
by the Company for the aviation excise tax issue.
In the third quarter of 2000, the Company paid $93.4 million to the IRS to stop
the accrual of interest on amounts due under the Notice for tax years 1987
through 1990 and under proposed adjustments for tax years 1991 through 1996 for
all issues except aircraft maintenance costs.
The Company intends to vigorously contest the Notice and the proposed
adjustments as they pertain to the aircraft maintenance issue, and is
evaluating courses of action for the other items covered under the Notice and
proposed adjustments. However, there can be no assurance that the Company will
not be liable for all of the amounts due under the Notice and proposed
adjustments. 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 financial condition or results of
operations.
In addition to the matters discussed above, the Company and its subsidiaries
are defendants in various lawsuits incidental to their businesses. It is the
opinion of management that the ultimate outcome of these actions will not have
a material impact on the Company's financial condition or results of
operations.
NOTE FOURTEEN:
SEGMENT REPORTING
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 Road Systems, a trailer manufacturer, and Vector SCM, a joint venture formed
with General Motors in December 2000. Vector SCM will serve as a logistics
service provider to General Motors. VantageParts, the Company's former
wholesale distributor of truck parts and supplies, was also included in the
Other segment prior to the sale of its assets in May 1999.
Intersegment revenue and related operating income have been eliminated to
reconcile 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.
PAGE 37
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.
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 reporting, freight transportation revenues are allocated to
international locations (except for Canada) when one or both of the shipment
origination or destination locations are outside of the United States. Canada,
which operates as an integrated part of the North America freight operations,
is allocated 50 percent of the revenue when either the origination or
destination location is in Canada and the other location is in the United
States or an international location. Revenues for contract services are
allocated to the country in which the services are performed. Long-lived assets
outside of the United States were immaterial for all periods presented.
(Dollars in thousands) 2000 1999 1998
Revenues
United States $4,127,040 $3,810,177 $3,459,918
Canada 149,862 132,190 112,721
North America 4,276,902 3,942,367 3,572,639
International 1,295,475 1,094,934 958,047
Total $5,572,377 $5,037,301 $4,530,686
CNF TRANSPORTATION INC. AND SUBSIDIARIES
OPERATING SEGMENTS
YEAR ENDED DECEMBER 31, 2000
(Dollars in thousands)
Adjustments,
Discontinued
Operations, Con-Way
Eliminations and Transportation Emery Menlo
Consolidated the Parent Services Worldwide Logistics Other
Revenues $5,572,377 $ (56,664) $2,045,580 $2,628,816 $903,964 $ 50,681
Inter-company
eliminations - 56,664 (684) (20,674) (13,164) (22,142)
Net revenues 5,572,377 - 2,044,896 2,608,142 890,800 28,539
Operating income 289,966 - 227,312(a) 28,365(b) 33,303 986
Depreciation and
amortization 190,651 9,544 93,115 80,620 6,939 433
Capital expenditures 235,221 31,992 122,592 68,087 12,291 259
Identifiable assets 3,244,941 520,689 1,011,734 1,516,394 170,326 25,798
Year Ended December 31, 1999
Revenues $5,037,301 $ (56,880) $1,879,053 $2,420,220 $727,593 $ 67,315
Inter-company
eliminations - 56,880 (837) (11,804) (11,585) (32,654)
Net revenues 5,037,301 - 1,878,216 2,408,416 716,008 34,661
Operating income 354,238 - 228,820 75,514 22,255 27,649(c)
Depreciation and
amortization 164,876 10,242 85,418 61,781 6,842 593
Capital expenditures 324,604 6,359 211,971 100,219 5,642 413
Identifiable assets 3,059,334 479,671 968,507 1,439,957 141,184 30,015
Year Ended December 31, 1998
Revenues $4,530,686 $ (77,826) $1,684,879 $2,232,815 $598,750 $ 92,068
Inter-company
eliminations - 77,826 (888) (29,341) (11,915) (35,682)
Net revenues 4,530,686 - 1,683,991 2,203,474 586,835 56,386
Operating income 293,919 - 206,945 64,299 19,459 3,216
Depreciation and
amortization 145,840 6,601 77,269 55,025 6,138 807
Capital expenditures 217,725 6,052 102,290 101,935 7,115 333
Identifiable assets 2,659,105 397,184 825,615 1,278,228 125,728 32,350
<FN>
(a) Includes a $5.5 million loss, $3.2 million after tax, from the sale of
certain assets of Con-Way Truckload Services.
(b) Includes an $11.9 million loss, $6.9 million after tax, from the termination
of certain aircraft leases.
(c) Includes a $16.5 million net gain, $9.3 million after tax, from a lawsuit
settlement, and a $10.1 million net gain, $5.7 million after tax, from the
sale of a truck parts operation.
PAGE 38
NOTE FIFTEEN:
QUARTERLY FINANCIAL DATA (UNAUDITED)
(Dollars in thousands except per share data)
March 31 June 30 September 30 December 31
2000-QUARTER ENDED
Revenues $1,321,894 $1,401,146 $1,409,613 $1,439,724
Operating income 71,469 87,131 54,940(c)(d) 76,426
Income from continuing
operations before income taxes 66,456(b) 79,589 46,832 68,319
Income taxes 28,244 33,825 19,435 28,376
Net income from continuing
operations(a) 36,178 43,692 25,350 37,835
Discontinued operations, net
of tax - - (13,508) -
Cumulative effect of accounting
change, net of tax (2,744) - - -
Net income available to common
shareholders 33,434 43,692 11,842 37,835
Per share:
Basic earnings
Continuing operations 0.75 0.90 0.52 0.78
Discontinued operations,
net of tax - - (0.28) -
Cumulative effect of
accounting change, net
of tax (0.06) - - -
Net income available to
common shareholders 0.69 0.90 0.24 0.78
Diluted earnings
Continuing operations 0.67 0.80 0.47 0.70
Discontinued operations,
net of tax - - (0.24) -
Cumulative effect of
accounting change, net
of tax (0.05) - - -
Net income available to
common shareholders 0.62 0.80 0.23 0.70
Market price range $26.19-$34.75 $22.73-$34.38 $20.25-$29.50 $21.94-$33.81
Common dividends 0.10 0.10 0.10 0.10
March 31 June 30 September 30 December 31
1999-QUARTER ENDED
Revenues $1,137,137 $1,243,438 $1,290,182 $1,366,544
Operating income 79,127(e) 93,940(f) 85,768 95,403
Income from continuing
operations before income taxes 71,393 84,949 78,202 97,716(g)
Income taxes 31,212 37,016 34,018 42,506
Net income from continuing
operations(a) 38,154 45,872 42,147 53,117
Discontinued operations, net
of tax 2,115 851 - -
Net income available to common
shareholders 40,269 46,723 42,147 53,117
Per share:
Basic earnings
Continuing operations 0.80 0.95 0.87 1.10
Discontinued operations,
net of tax 0.04 0.02 - -
Net income available to
common shareholders 0.84 0.97 0.87 1.10
Diluted earnings
Continuing operations 0.71 0.84 0.77 0.97
Discontinued operations,
net of tax 0.03 0.02 - -
Net income available to
common shareholders 0.74 0.86 0.77 0.97
Market price range $34.15-$44.55 $32.56-$45.52 $34.64-$45.19 $28.28-$38.38
Common dividends 0.10 0.10 0.10 0.10
<FN>
(a) Reduced by preferred stock dividends.
(b) Includes a $2.6 million net gain, $1.5 million after tax,
($0.03 per basic and diluted share) from the sale of securities.
(c) Includes a $5.5 million loss, $3.2 million after tax,
($0.07 per basic share and $0.06 per diluted share) from the
sale of certain assets of Con-Way Truckload Services.
(d) Includes an $11.9 million loss, $6.9 million after tax,
($0.14 per basic share and $0.12 per diluted share) from the
termination of certain aircraft leases.
(e) Includes a $16.5 million net gain, $9.3 million after tax,
($0.19 per basic share and $0.17 per diluted share) from a
lawsuit settlement.
(f) Includes a $10.1 million net gain, $5.7 million after tax,
($0.12 per basic share and $0.10 per diluted share) from the
sale of a truck parts operation.
(g) Includes a $9.6 million net gain, $5.4 million after tax,
($0.11 per basic share and $0.10 per diluted share) from the
sale of securities.
PAGE 39
REPORTS
MANAGEMENT REPORT ON REPONSIBILITY 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.
Gregory L. Quesnel
President, Chief Executive and Chief Financial Officer
Kevin S. Coel
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, 2000 and 1999, and the related statements of consolidated income, cash
flows and shareholders' equity for each of the three years in the period ended
December 31, 2000. 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 auditing standards generally
accepted in the United States. 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, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
As explained in Note 1 to the Consolidated Financial Statements, effective
January 1, 2001, the Company changed its method of accounting for recognition
of its in-transit freight transportation revenue.
Arthur Andersen LLP
San Francisco, California
January 26, 2001
PAGE 40
FIVE YEAR FINANCIAL SUMMARY
(Dollars in thousands except per share data)
2000 1999 1998 1997 1996
SUMMARY OF OPERATIONS
Revenues $5,572,377 $5,037,301 $4,530,686 $4,215,165 $3,662,183
Con-Way Transportation
Services 2,044,896 1,878,216 1,683,991 1,473,188 1,292,082
Emery Worldwide 2,608,142 2,408,416 2,203,474 2,249,594 1,968,058
Menlo Logistics 890,800 716,008 586,835 455,892 359,377
Other 28,539 34,661 56,386 36,491 42,666
Operating income (loss) 289,966 354,238 293,919 277,865 192,148
Con-Way Transportation
Services 227,312(c) 228,820 206,945 147,155 101,049
Emery Worldwide 28,365(d) 75,514 64,299 113,963 78,415
Menlo Logistics 33,303 22,255 19,459 17,178 10,918
Other 986 27,649(f) 3,216 (431) 1,766
Depreciation and
amortization 190,651 164,876 145,840 123,391 95,746
Interest expense 29,972 25,972 32,627 39,553 39,766
Income from continuing
operations before income
taxes 261,196(e) 332,260(g) 253,812 234,812 147,132
Income taxes 109,880 144,752 112,756 106,839 66,951
Income from continuing
operations(a) 143,055 179,290 132,887 120,087 71,589
Discontinued operations,
net of tax(b) - 2,966 (2,078) (7,929) (36,386)
Loss from discontinuance,
net of tax(b) (13,508) - - - (16,247)
Cumulative effect of
accounting change, net
of tax (2,744) - - - -
Net Income available to
common shareholders 126,803 182,256 130,809 112,158 18,956
PER SHARE
Net income from continuing
operations, basic 2.95 3.72 2.79 2.59 1.63
Discontinued operations,
net of tax(b) - 0.06 (0.05) (0.17) (0.83)
Loss from discontinuance,
net of tax(b) (0.28) - - - (0.37)
Cumulative effect of
accounting change, net
of tax (0.06) - - - -
Net income available to
common shareholders 2.61 3.78 2.74 2.42 0.43
Net income from continuing
operations, diluted 2.65 3.29 2.49 2.33 1.48
Discontinued operations,
net of tax(b) - 0.06 (0.04) (0.15) (0.73)
Loss from discontinuance,
net of tax(b) (0.24) - - - (0.33)
Cumulative effect of
accounting change, net
of tax (0.05) - - - -
Net income available to
common shareholders 2.36 3.35 2.45 2.18 0.42
Dividends declared and paid on
common stock 0.40 0.40 0.40 0.40 0.40
Common shareholders' equity 20.90 19.15 15.48 13.26 10.86
STATISTICS
Total assets $3,244,941 $3,059,334 $2,659,105 $2,421,496 $2,081,866
Long-term obligations 534,649 433,446 467,635 473,488 477,201
Capital expenditures 235,221 324,604 217,725 183,164 200,835
Effective income tax rate 42.1% 43.6% 44.4% 45.5% 45.5%
Basic average shares 48,490,662 48,189,618 47,659,745 46,236,688 44,041,159
Market price range $20.25-$34.75 $28.28-$45.52$21.63-$49.94 $20.25-$50.88 $17.25-$29.38
Number of shareholders 8,802 9,520 9,870 15,560 16,090
Number of regular full-time
employees 28,700 28,300 26,500 26,300 25,100
<FN>
(a) Reduced by preferred stock dividends.
(b) Includes the results of Priority Mail operations, except for 1996,
which reflects the results of CFC, the Company's former long-haul LTL
segment.
(c) Includes a $5.5 million loss, $3.2 million after tax, ($0.07 per basic
share and $0.06 per diluted share) from the sale of certain assets of
Con-Way Truckload Services.
(d) Includes an $11.9 million loss, $6.9 million after tax, ($0.14 per
basic share and $0.12 per diluted share) from the termination of
certain aircraft leases.
(e) Includes a $2.6 million net gain, $1.5 million after tax, ($0.03 per
basic and diluted share) from the sale of securities.
(f) Includes a $16.5 million net gain, $9.3 million after tax, ($0.19 per
basic share and $0.17 per diluted share) from a lawsuit settlement, and
a $10.1 million net gain, $5.7 million after tax, ($0.12 per basic
share and $0.10 per diluted share) from the sale of a truck parts
operation.
(g) Includes a $9.6 million net gain, $5.4 million after tax, ($0.11 per
basic share and $0.10 per diluted share) from the sale of securities.