UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
___TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
COMMISSION FILE NUMBER 1-5046
CNF Inc.
Incorporated in the State of Delaware
I.R.S. Employer Identification No. 94-1444798
3240 Hillview Avenue, Palo Alto, California 94304
Telephone Number (650) 494-2900
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months and (2) has been subject to such
filing requirements for the past 90 days.
Yes xx No ____
Number of shares of Common Stock, $.625 par value,
outstanding as of April 30, 2002: 48,038,058
PAGE 2
CNF INC.
FORM 10-Q
Quarter Ended March 31, 2002
___________________________________________________________________________
_
___________________________________________________________________________
_
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 2002 and December 31, 2001 3
Statements of Consolidated Income -
Three Months Ended March 31, 2002 and
2001 5
Statements of Consolidated Cash Flows -
Three Months Ended March 31, 2002 and 2001 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 6. Exhibits and Reports on Form 8-K 31
SIGNATURES 32
PAGE 3
CNF INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31, December 31,
2002 2001
------------- -------------
ASSETS
Current Assets
Cash and cash equivalents $ 407,622 $ 400,763
Trade accounts receivable, net 663,094 677,684
Other accounts receivable 59,286 56,860
Operating supplies, at lower
of average cost or market 19,939 20,244
Prepaid expenses 63,010 46,948
Deferred income taxes 190,407 125,347
------------- -------------
Total Current Assets 1,403,358 1,327,846
------------- -------------
Property, Plant and Equipment, at Cost
Land 148,112 149,499
Buildings and leasehold improvements 748,921 739,197
Revenue equipment 613,608 618,329
Other equipment 414,013 411,546
------------- -------------
1,924,654 1,918,571
Accumulated depreciation
and amortization (871,391) (848,042)
------------- -------------
1,053,263 1,070,529
------------- -------------
Other Assets
Deferred charges and
other assets (Note 2) 237,146 224,605
Capitalized software, net 79,863 79,891
Goodwill, net (Note 1) 240,515 240,523
Deferred income taxes -- 46,626
------------- -------------
557,524 591,645
------------- -------------
Total Assets $ 3,014,145 $ 2,990,020
============= =============
The accompanying notes are an integral part of these statements.
PAGE 4
CNF INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2002 2001
------------- -------------
Current Liabilities
Accounts payable $ 346,602 $ 338,730
Accrued liabilities (Note 2) 336,598 323,989
Accrued claims costs 136,768 126,981
Accrued aircraft leases and return
provision 222,149 61,009
Current maturities of long-term debt
and capital leases 13,165 11,765
Income taxes payable 24,264 21,501
------------- -------------
Total Current Liabilities 1,079,546 883,975
------------- -------------
Long-Term Liabilities
Long-term debt and guarantees 424,411 436,055
Long-term obligations under
capital leases 124,061 129,760
Accrued claims costs 113,170 122,273
Employee benefits 278,873 275,764
Other liabilities and deferred
credits (Note 2) 121,238 120,858
Accrued aircraft leases and return
provision 67,369 258,248
Deferred income taxes 25,700 --
------------- -------------
Total Liabilities 2,234,368 2,226,933
------------- -------------
Commitments and Contingencies (Note 9)
Company-Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary
Trust Holding Solely Convertible
Debentures of the Company (Note 7) 125,000 125,000
Shareholders' Equity
Preferred stock, no par value; authorized
5,000,000 shares: Series B, 8.5%
cumulative, convertible, $.01 stated
value; designated 1,100,000 shares;
issued 797,392 and 805,895 shares,
respectively 8 8
Additional paid-in capital, preferred
stock 121,275 122,568
Deferred compensation, Thrift and
Stock Plan (71,421) (73,320)
------------- -------------
Total Preferred Shareholders' Equity 49,862 49,256
------------- -------------
Common stock, $.625 par value; authorized
100,000,000 shares; issued 55,646,631
and 55,559,909 shares, respectively 34,779 34,725
Additional paid-in capital, common stock 333,976 332,066
Retained earnings 446,281 432,918
Deferred compensation, restricted stock (1,151) (1,013)
Cost of repurchased common stock
(6,628,855 and 6,669,393 shares,
respectively) (163,443) (164,441)
------------- -------------
650,442 634,255
------------- -------------
Accumulated Other Comprehensive Loss
(Note 4) (45,527) (45,424)
------------- -------------
Total Common Shareholders' Equity 604,915 588,831
------------- -------------
Total Shareholders' Equity 654,777 638,087
------------- -------------
Total Liabilities and Shareholders'
Equity $ 3,014,145 $ 2,990,020
============= =============
The accompanying notes are an integral part of these statements.
PAGE 5
CNF INC.
STATEMENTS OF CONSOLIDATED INCOME
(Dollars in thousands except per share amounts)
Three Months Ended
March 31,
------------------------------
2002 2001
------------- -------------
REVENUES $1,067,074 $ 1,278,465
Costs and Expenses
Operating expenses 881,090 1,073,786
General and administrative expenses 109,776 127,202
Depreciation 35,844 43,749
------------- -------------
1,026,710 1,244,737
------------- -------------
OPERATING INCOME 40,364 33,728
Other Income (Expense)
Investment income 1,608 729
Interest expense (5,885) (7,793)
Dividend requirement on preferred
securities of subsidiary trust (Note 7) (1,563) (1,563)
Miscellaneous, net (1,302) 827
------------- -------------
(7,142) (7,800)
------------- -------------
Income before Taxes 33,222 25,928
Income Tax Provision (12,956) (10,371)
------------- -------------
Net Income 20,266 15,557
Preferred Stock Dividends 2,005 2,040
------------- -------------
NET INCOME AVAILABLE TO COMMON
SHAREHOLDERS $18,261 $13,517
============= =============
Weighted-Average Common Shares
Outstanding (Note 6)
Basic shares 48,928,532 48,658,337
Diluted shares 56,482,649 56,432,452
Earnings per Common Share (Note 6)
Basic $ 0.37 $ 0.28
============= =============
Diluted $ 0.35 $ 0.26
============= =============
The accompanying notes are an integral part of these statements.
PAGE 6
CNF INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Dollars in thousands)
Three Months Ended
March 31,
-------------------------------
2002 2001
------------- -------------
Cash and Cash Equivalents, Beginning of Year $ 400,763 $ 104,515
Operating Activities
Net income 20,266 15,557
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 40,492 51,048
Increase (Decrease) in deferred income
taxes 6,512 (2,353)
Amortization of deferred compensation 1,899 1,825
Provision for uncollectible accounts 3,521 2,899
(Gains) Losses from sales of property
and equipment (14,078) 434
Changes in assets and liabilities:
Receivables 11,830 53,241
Prepaid expenses (16,062) (17,973)
Unamortized aircraft maintenance - (5,569)
Accounts payable 10,541 (16,009)
Accrued liabilities and aircraft
leases (6,868) 17,179
Accrued incentive compensation 8,742 (29,190)
Accrued claims costs 684 17,364
Income taxes 2,763 5,566
Employee benefits 3,109 12,090
Aircraft lease return provision (12,332) (6,562)
Deferred charges and credits 549 2,162
Other (6,206) (2,841)
------------- -------------
Net Cash Provided by Operating Activities 55,362 98,868
------------- -------------
Investing Activities
Capital expenditures (24,142) (42,291)
Software expenditures (4,287) (5,508)
Proceeds from sales of property 5,396 915
------------- -------------
Net Cash Used in Investing Activities (23,033) (46,884)
------------- -------------
Financing Activities
Repayments of long-term debt, guarantees
and capital leases (14,398) (7,529)
Proceeds from exercise of stock options 1,532 972
Payments of common dividends (4,898) (4,872)
Payments of preferred dividends (5,274) (5,376)
------------- -------------
Net Cash Used in Financing Activities (23,038) (16,805)
------------- -------------
Net Cash Provided by Continuing Operations 9,291 35,179
------------- -------------
Net Cash Provided by (Used in) Discontinued
Operations (2,432) 6,591
------------- -------------
Increase in Cash and Cash Equivalents 6,859 41,770
------------- -------------
Cash and Cash Equivalents, End of Year $ 407,622 $ 146,285
============= =============
The accompanying notes are an integral part of these statements.
PAGE 7
CNF INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Principal Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements of CNF Inc. and its
wholly-owned subsidiaries (CNF) have been prepared by CNF, without audit by
independent public accountants, pursuant to the rules and regulations of
the Securities and Exchange Commission. In the opinion of management, the
consolidated financial statements include all normal recurring adjustments
necessary to present fairly the information required to be set forth
therein. Certain information and note disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted from these statements
pursuant to such rules and regulations and, accordingly, should be read in
conjunction with the consolidated financial statements included in CNF's
2001 Annual Report to Shareholders.
On December 5, 2001, CNF announced the formation of a new global supply
chain services company called Menlo Worldwide, which includes the operating
results of Emery Forwarding, Menlo Worldwide Logistics, Menlo Worldwide
Technologies, and Vector SCM. Refer to Note 5, "Business Segments," for a
description of CNF's reporting segments effective January 1, 2002.
Goodwill
Effective January 1, 2002, CNF adopted SFAS 142, "Goodwill and Other
Intangible Assets." SFAS 142 specifies that goodwill and some intangible
assets will no longer be amortized but instead will be subject to periodic
impairment testing. Pursuant to SFAS 142, CNF has evaluated whether its
goodwill is impaired and has determined that, as of January 1, 2002, CNF
was not required to make an adjustment to the carrying value of the assets.
In accordance with SFAS 142, CNF ceased annual goodwill amortization of
approximately $10 million associated with the Emery Forwarding segment.
New Accounting Standards
In June 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations," which will be effective for CNF on January 1, 2003. SFAS 143
addresses the financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. CNF is in the process of evaluating the financial
statement impact of adoption of SFAS 143.
In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which supercedes SFAS 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of." SFAS 144 also supercedes the accounting and reporting
provisions of APB No. 30, "Reporting the Effects of Disposal of a Segment
of a Business," for the disposal of a segment of a business. CNF adopted
SFAS 144 effective January 1, 2002 with no material financial statement
impact.
Reclassification
Certain amounts in prior-year financial statements have been reclassified
to conform to current-year presentation.
PAGE 8
2. Discontinued Operations
On November 3, 2000, Emery Worldwide Airlines (EWA) and the U.S. Postal
Service (USPS) announced an agreement (the "Termination Agreement") to
terminate their contract for the transportation and sortation of Priority
Mail (the "Priority Mail contract"). The Priority Mail contract was
originally scheduled to terminate in the first quarter of 2002, subject to
renewal options. Under the terms of the Termination Agreement, the USPS on
January 7, 2001 assumed operating responsibility for services covered under
the Priority Mail contract, except certain air transportation and related
services, which were terminated effective April 23, 2001.
The USPS 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 with interest or EWA will be required to return a
portion of the provisional payment with interest. The Termination
Agreement preserved EWA's right to pursue claims for underpayment of other
amounts owed to EWA under the contract, which were ultimately settled in
September 2001 as described below.
On September 26, 2001, EWA entered into an agreement with the USPS to
settle claims relating to the underpayment of amounts owed to EWA under the
Priority Mail contract with the USPS (the "Settlement Agreement"). Under
the Settlement Agreement, EWA received a $235 million payment from the USPS
on September 28, 2001 to settle all claims under the Priority Mail
contract. These claims were to recover costs of operating under the
contract as well as profit and interest thereon. The Priority Mail
Termination Agreement described above is unaffected by the Settlement
Agreement.
Under the Settlement Agreement, on September 28, 2001, EWA also received a
$70 million provisional payment from the USPS for termination costs and
other claims related to EWA's Express Mail contract, which was terminated
by the USPS "for convenience" effective August 26, 2001. The Settlement
Agreement provides for the provisional payment to be adjusted if actual
termination costs and other agreed upon claims related to the Express Mail
contract are greater or less than $70 million, in which case either the
USPS will be required to make an additional payment with interest, subject
to the limitation described in the following paragraph, or EWA will be
required to return a portion of the provisional payment with interest.
As of March 31, 2002 and December 31, 2001, the $70 million provisional
payment was included in Deferred Credits in CNF's Consolidated Balance
Sheets; this amount will continue to be included in Deferred Credits until
it is used to retire the remaining $80 million in assets included in
Deferred Charges related to the Express Mail contract. The Settlement
Agreement provides that the total amount payable by the USPS for
termination costs and other claims relating to the Express Mail contract,
including the $70 million provisional payment, may not exceed $150 million.
On December 14, 2001, EWA filed a termination settlement proposal with the
USPS for recovery of EWA's costs of providing service under the terminated
Express Mail contract as well as costs incurred by EWA's subcontractors for
performing services under the Express Mail contract. Any recovery of such
costs would be offset in whole or in part by the $70 million provisional
payment received in 2001.
Results of the former Express Mail contract are included in the Emery
Forwarding reporting segment and are therefore not reported as discontinued
operations.
Operating Results and Gain (Loss) from Discontinuance
-----------------------------------------------------
As a result of the termination of the Priority Mail contract, the results
of operations, and cash flows of the Priority Mail operations have been
segregated and classified as discontinued operations. Net non-current
assets of discontinued operations of $3.1 million at March 31, 2002 and
December 31, 2001, respectively, were included in Deferred Charges and
Other Assets in the Consolidated Balance Sheets. Net current liabilities
of discontinued operations of $3.1 million and $5.6 million at March 31,
2002 and December 31, 2001, respectively, were included in Accrued
Liabilities.
PAGE 9
The Priority Mail contract provided for an annual re-determination of
prices paid to EWA. Because of disputes between the USPS and EWA, these
prices never were re-determined and, as a result, EWA did not receive any
additional payments to which it would have been entitled upon a favorable
re-determination. Accordingly, beginning in the third quarter of 1999
until January 7, 2001, EWA recognized as "unbilled revenue" under the
Priority Mail contract, an amount of revenue sufficient only to cover costs
of operating under the contract. As a result, no operating profit was
recognized in connection with the Priority Mail contract since the third
quarter of 1999, when EWA filed a claim for re-determined higher prices.
Prior to the January 7, 2001 settlement, CNF recorded revenues in amounts
up to the costs incurred.
As a result of the Settlement Agreement, this unbilled revenue was fully
recovered and EWA in the third quarter of 2001 recognized a gain from
discontinuance of $39.0 million, net of $24.9 million of income taxes.
In the first quarter of 2001, revenue of $10.2 million was recognized for
the period prior to the USPS assuming operating responsibility for services
covered under the Priority Mail contract on January 7, 2001. Subsequent to
January 7, 2001, no revenue was recognized under the Priority Mail
contract.
3. Restructuring Charges
In June 2001, Emery began an operational restructuring to align it with
management's estimates of future business prospects for domestic heavy air
freight and address changes in market conditions, which deteriorated due to
a slowing domestic economy, loss of EWA's contracts with the USPS to
transport Express Mail and Priority Mail and, to a lesser extent, loss of
business to ground transportation providers.
The $340.5 million restructuring charge recognized in the second quarter of
2001 consisted primarily of non-cash impairment charges, including the
write-off of $184.2 million for unamortized aircraft maintenance and $89.7
million for aircraft operating supplies, equipment and other assets. Asset
impairment charges were based on an evaluation of cash flows for North
American operations and, for certain assets, independent appraisals. Also
included in the restructuring charge was $66.6 million for estimated future
cash expenditures related primarily to the return to the lessors of certain
aircraft leased to Emery and the termination of the related leases.
As described in "Menlo Worldwide-Emery Forwarding-Regulatory Matters" under
"Management's Discussion and Analysis," the Federal Aviation Administration
(FAA) required EWA to suspend its air carrier operations on August 13,
2001. In response to the FAA suspension, as well as the terrorist actions
described below in Note 9, "Commitments and Contingencies-Terrorist
Attacks," the growing unpredictability and uncertainty of the FAA's
requalifictaion process, and a worsening global economic downturn, Emery's
management re-evaluated Emery's restructuring plan. CNF announced on
December 5, 2001 that Emery in 2002 would become part of CNF's new Menlo
Worldwide group of supply chain service providers and would continue to
provide full North American forwarding services utilizing aircraft operated
by other air carriers instead of EWA's fleet of aircraft, and that EWA would
cease air carrier operations. In connection with the revised restructuring
plan, in the fourth quarter of 2001 Emery recognized additional restructuring
charges of $311.7 million for the planned disposal of leased aircraft,
cessation of EWA's remaining operations, employee separation, and other
costs.
The $311.7 million restructuring charge recognized in the fourth quarter of
2001 includes primarily accruals for scheduled undiscounted rental payments
for aircraft leased to Emery and estimated costs of returning those
aircraft upon expiration of the related leases. Actual costs may differ
from those estimates and that difference would be recognized as additional
expense or income in the period when and if that determination can be made.
For 2002, the scheduled rental payments of the aircraft aggregate $61.0
million. However, Emery may pay a larger portion of its scheduled rental
payments in 2002 or thereafter, which could be substantial, if EWA
successfully negotiates the early termination of aircraft leases or in
connection with defaults under aircraft leases. See Note 9, "Commitments
and Contingencies-Restructuring Charges and Regulatory Matters."
PAGE 10
The following table represents the cumulative activity related to Emery's
2001 restructuring plan:
(In Millions) Cumulative Charged Reserves at
Total Cash Against March 31,
Charges Usage Assets 2002
---------- ---------- ---------- ----------
Employee separations $ 6.1 $ (2.5) $ -- $ 3.6
Asset impairments 278.0 -- (278.0) --
Aircraft and other costs 368.1 (40.5) -- 327.6
---------- ---------- ---------- ----------
$ 652.2 $ (43.0) $ (278.0) $ 331.2
========== ========== ========== ==========
As a result of the restructuring charge recognized in the second quarter of
2001, Emery wrote off all remaining unamortized aircraft maintenance.
Also, the 2001 restructuring charges included accruals for obligations
related to scheduled rental payments and the estimated costs of returning
the leased aircraft. The obligation for scheduled rental payments was
accrued based on the estimate of undiscounted cash payments payable under
the lease agreements.
There can be no assurance that Emery will not be required to incur
additional charges or expend additional amounts in the future in connection
with matters relating to the cessation of EWA's air carrier operations or
the termination of EWA's aircraft leases, particularly if one or more of
the events described in Note 9, "Commitments and Contingencies" were to
occur, which could have a material adverse effect on CNF's financial
condition, cash flows, and results of operations.
PAGE 11
4. Comprehensive Income (Loss)
Comprehensive Income (Loss), which is a measure of all changes in equity
except those resulting from investments by owners and distributions to
owners, was as follows:
Three Months Ended
March 31,
--------------------------
(Dollars in thousands) 2002 2001
---------- ----------
Net income $ 20,266 $ 15,557
Other comprehensive income (loss)
Cumulative effect of accounting
change, net of tax (Note 8) -- 3,005
Change in fair value of cash flow
hedges (Note 8) 1,179 (2,796)
Foreign currency translation
adjustment (1,282) (1,474)
---------- ----------
(103) (1,265)
---------- ----------
Comprehensive income $ 20,163 $ 14,292
========== ==========
The following is a summary of the components of Accumulated Other
Comprehensive Loss:
March 31, December 31,
(Dollars in thousands) 2002 2001
------------ ------------
Cumulative effect accounting change, net
of tax (Note 8) $ -- $ 3,005
Accumulated change in fair value of cash
flow hedges (Note 8) (364) (4,548)
Accumulated foreign currency translation
adjustments (34,064) (32,782)
Minimum pension liability adjustment (11,099) (11,099)
------------ ------------
Accumulated other comprehensive loss $ (45,527) $ (45,424)
============ ============
5. Business Segments
Selected financial information for CNF's continuing operations is shown
below. CNF evaluates performance of the segments based on several factors.
However, the primary measurement focus is based on segment operating
results, excluding significant non-recurring and/or unusual items. The
prior period has been reclassified to exclude discontinued operations.
On December 5, 2001, CNF announced the formation of a new global supply
chain services company called Menlo Worldwide, which includes the operating
results of Emery Forwarding, Menlo Worldwide Logistics, Menlo Worldwide
Technologies, and Vector SCM.
PAGE 12
Consistent with SFAS 131, "Disclosures about Segments of an Enterprise and
Related Information", CNF discloses segment information in the manner in
which the components are organized for making operating decisions,
assessing performance and allocating resources. Accordingly, operating
results are reported along CNF's three lines of business: Con-Way
Transportation Services, Menlo Worldwide, and CNF Other. Within the Menlo
Worldwide group, Emery Forwarding, Menlo Worldwide Logistics and Menlo
Worldwide Other individually represent separate reporting segments. The
operating results of EWA, a separate subsidiary of CNF, are included in the
Emery Forwarding reporting segment for periods prior to the cessation of
EWA's air carrier operations in December 2001. The Menlo Worldwide Other
reporting segment consists of Menlo Worldwide Technologies and Vector SCM.
The CNF Other reporting segment includes the operating results of Road
Systems and certain CNF corporate activities. Operating results in the
prior period have been reclassified to conform to the current-year
reporting segment presentation.
Three Months Ended
March 31,
------------------------------
(Dollars in thousands) 2002 2001
------------- -------------
Revenues
Con-Way Transportation $ 454,799 $ 469,201
Menlo Worldwide
Emery Forwarding 394,796 583,290
Menlo Worldwide Logistics 219,956 225,364
------------- -------------
614,752 808,654
------------- -------------
CNF Other 3,418 9,202
------------- -------------
1,072,969 1,287,057
------------- -------------
Intersegment Revenue Eliminations
Con-Way Transportation (68) (231)
Menlo Worldwide
Emery Forwarding (35) (92)
Menlo Worldwide Logistics (3,447) (2,769)
------------- -------------
(3,482) (2,861)
------------- -------------
CNF Other (2,345) (5,500)
------------- -------------
(5,895) (8,592)
------------- -------------
Net Revenues
Con-Way Transportation 454,731 468,970
Menlo Worldwide
Emery Forwarding 394,761 583,198
Menlo Worldwide Logistics 216,509 222,595
------------- -------------
611,270 805,793
------------- -------------
CNF Other 1,073 3,702
------------- -------------
$ 1,067,074 $ 1,278,465
============= =============
Operating Income (Loss)
Con-Way Transportation $ 33,721 [b] $ 36,735
Menlo Worldwide
Emery Forwarding (5,713)[c] (6,547)
Menlo Worldwide Logistics 7,753 [d] 8,171
Menlo Worldwide Other [a] 1,309 (4,614)[f]
------------- -------------
3,349 (2,990)
------------- -------------
CNF Other 3,294 [e] (17)
------------- -------------
$ 40,364 $ 33,728
============= =============
[a] Includes the operating results of Vector SCM, an equity-method investment.
[b] Includes an $8.7 million net gain, $5.3 million after tax, from the sale
of property.
[c] Includes a $9.9 million net gain, $6.0 million after tax, from a payment
under the Air Transportation Safety and System
Stabilization Act.
[d] Includes a $1.9 million net gain, $1.1 million after tax, from a contract
termination.
[e] Includes a $2.4 million net gain, $1.4 million after tax, from the sale
of property.
[f] Includes $4.6 million of operating losses related to startup costs for
Vector SCM.
PAGE 13
6. Earnings Per Common Share
Basic earnings per common share (EPS) was computed by dividing net income
by the weighted-average common shares outstanding. The calculation for
diluted EPS was calculated as shown below.
Three Months Ended
(Dollars in thousands except March 31,
per share data) ----------------------------
2002 2001
------------- -------------
Earnings:
Net income $ 18,261 $ 13,517
Add-backs:
Dividends on preferred
stock, net of
replacement funding 283 319
Dividends on preferred
securities of subsidiary
trust, net of tax 954 954
------------- -------------
$ 19,498 $ 14,790
------------- -------------
Shares:
Basic shares (weighted-average
common shares outstanding) 48,928,532 48,658,337
Stock options 674,991 632,316
Series B preferred stock 3,754,126 4,016,799
Preferred securities of
subsidiary trust 3,125,000 3,125,000
------------- -------------
56,482,649 56,432,452
------------- -------------
Diluted earnings per
common share $ 0.35 $ 0.26
------------- -------------
7. Preferred Securities of Subsidiary Trust
On June 11, 1997, CNF Trust I (the Trust), a Delaware business trust wholly
owned by CNF, 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 CNF
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 CNF. 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). CNF 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 CNF 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 CNF, 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 CNF at
100% of the principal plus accrued and unpaid interest. Upon any redemption
of the Debentures, a like aggregate liquidation amount of TECONS will be
redeemed. The TECONS do not have a stated maturity date, although they are
subject to mandatory redemption upon maturity of the Debentures on June 1,
2012, or upon earlier redemption.
PAGE 14
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 CNF's common stock
at a conversion rate of 1.25 shares of CNF's common stock for each TECONS,
subject to adjustment in certain circumstances.
8. Derivative Instruments and Hedging Activities
Effective January 1, 2001, CNF adopted SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS 137 and SFAS 138.
SFAS 133 establishes accounting and reporting standards requiring that
every derivative instrument, as defined, be recorded on the balance sheet
as either an asset or liability measured at 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
or losses to offset related results on the hedged item in the income
statement or be deferred in Other Comprehensive Income (Loss) until the
hedged item is recognized in earnings.
CNF is exposed to a variety of market risks, including the effects of
interest rates, commodity prices, foreign currency exchange rates and
credit risk. CNF's 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 the 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.
CNF formally documents its hedge relationships, including identifying the
hedge instruments and hedged items, as well as its risk management
objectives and strategies for entering into the hedge transaction. At
hedge inception and at least quarterly thereafter, CNF assesses whether the
derivatives are effective in offsetting changes in either the cash flows or
fair value of the hedged item. If a derivative ceases to be a highly
effective hedge, CNF will discontinue hedge accounting, and any gains or
losses on the derivative instrument would be recognized in earnings during
the period it no longer qualifies for hedge accounting.
For derivatives designated as cash flow hedges, changes in the derivative's
fair value are recognized in Other Comprehensive Income (Loss) until the
hedged item is recognized in earnings. Any change in fair value resulting
from ineffectiveness is recognized immediately in earnings. For
derivatives designated as fair value hedges, changes in the derivative's
fair value are recognized in earnings and offset by changes in the fair
value of the hedged item, which are recognized in earnings to the extent
that the derivative is effective.
CNF's cash flow hedges include interest rate swap derivatives designated to
mitigate the effects of interest rate volatility on floating-rate operating
lease payments. Fair value hedges include interest rate swap derivatives
designated to mitigate the effects of interest rate volatility on the fair
value of fixed-rate long-term debt. CNF's current interest rate swap
derivatives qualify for hedge treatment under SFAS 133.
In accordance with the transition provisions of SFAS 133, in the first
quarter of 2001 CNF recorded in Other Assets a transition adjustment of
$20.6 million to recognize the estimated fair value of interest rate swap
derivatives, a $4.9 million ($3.0 million after tax) transition adjustment
in Accumulated Other Comprehensive Income (Loss) to recognize the estimated
fair value of interest rate swap derivatives designated as cash flow
hedges, and a $15.7 million transition adjustment in Long-Term Debt to
recognize the difference between the carrying value and estimated fair
value of fixed-rate debt hedged with interest rate swap derivatives
designated as fair value hedges.
PAGE 15
In the first quarter of 2002, the estimated fair value of CNF's fair value
hedges decreased $1.6 million, and offset an equal decline in the estimated
fair value of CNF's fixed-rate long-term debt. Cash flow hedges in the
first quarter of 2002 increased $1.9 million ($1.2 million after tax).
9. Commitments and Contingencies
IRS Matters
CNF is currently under examination by the Internal Revenue Service (IRS)
for tax years 1987 through 1999 on various issues. In connection with those
examinations, the IRS proposed adjustments for tax years 1987 through 1990
after which CNF filed a protest 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 years prior to the spin-off of
Consolidated Freightways Corporation (CFC), CNF's former long-haul LTL
segment, on December 2, 1996. Based upon the Notice, the total amount of
the deficiency for items in years 1987 through 1990, including taxes and
interest, was $167.5 million as of March 31, 2002. The amount originally
due under the Notice was reduced in the third quarter of 2000 by a portion
of CNF's $93.4 million payment to the IRS, which is described below.
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 aircraft
maintenance and matters relating to CFC for years prior to the spin-off.
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. CNF believes that its practice of expensing
these types of aircraft maintenance costs is consistent with industry
practice and Treasury Ruling 2001-4. CNF intends to vigorously contest the
Notice and the proposed adjustments as they pertain to the aircraft
maintenance issue.
CNF paid $93.4 million to the IRS in the third quarter of 2000 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 matters relating to CFC for years prior to the spin-off and for all
other issues except aircraft maintenance costs.
There can be no assurance that CNF will not be liable for all of the
amounts due under the Notice and proposed adjustments. As a result, CNF 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 CNF's
financial condition, cash flows, or results of operations.
Spin-off of CFC
In connection with the spin-off of CFC, CNF 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 CNF is liable to the issuing
bank and by bonds issued by surety companies. Although CFC is obligated to
reimburse and indemnify CNF against liability with respect to these claims,
CFC's obligation is not secured by any collateral and there can be no
assurance that CFC will, in fact, reimburse and indemnify CNF. Any failure
by CFC to reimburse or indemnify CNF for a substantial amount of these
claims could have a material adverse affect on CNF's financial condition,
cash flows, or results of operations.
Restructuring Charges and Regulatory Matters
Due in large part to the restructuring charge incurred in connection with
the cessation of EWA's air carrier operations as described in Note 3,
"Restructuring Charges," CNF was required to obtain amendments to its bank
revolving credit facility, which provide for the pledge of collateral by
CNF and its principal subsidiaries upon specified downgrades of CNF's
senior unsecured long-term debt securities. This restructuring charge also
resulted in defaults under leases pursuant to which EWA leases some of its
aircraft. In addition, the restructuring charges recognized by Emery during
2001 reflect CNF's estimate of the costs of terminating EWA's air carrier
operations and restructuring Emery's business and related matters. Although
CNF believes that the estimate is adequate to cover these costs based on
information currently available and assumptions management believes are
reasonable under the circumstances, Emery will be required to recognize
additional charges or credits if actual results differ from management's
estimates. Additional charges could result in defaults under CNF's bank
revolving credit facility and other debt instruments and under aircraft
leases. For further discussion of these matters, see "Menlo Worldwide-
Emery Forwarding-Regulatory Matters" and "Liquidity and Capital
Resources-Restructuring Charges and Regulatory Matters," under
"Management's Discussion and Analysis."
PAGE 16
As a result of the matters discussed above, CNF can provide no assurance
that these matters will not have a material adverse effect on CNF's
financial condition, cash flows, or results of operations in the future.
Terrorist Attacks
Operating results at Emery were adversely affected by the terrorist attacks
on September 11, 2001. Contractors providing air carrier service to Emery
were grounded on September 11 and 12 and did not resume service until the
evening of September 13, which adversely affected Emery's results of
operations.
In response to the terrorist attacks, the U.S. Congress passed the Air
Transportation Safety and System Stabilization Act (the "Act"), a $15
billion emergency economic assistance package intended to mitigate
financial losses in the air carrier industry. The legislation provides for
$5 billion in direct loss reimbursement and $10 billion in federal loan
guarantees and credits, expands war risk insurance coverage for air
carriers, and provides some government assistance for short-term increases
in insurance premiums. In March 2002, Emery received an $11.9 million
payment under the Act, resulting in a $9.9 million net gain reported in
Emery's first-quarter operating loss in 2002. The payment made to Emery
under the Act is subject to audit. Emery is seeking additional payments
under the Act.
Other
CNF is a defendant in various other lawsuits incidental to its businesses.
It is the opinion of management that the ultimate outcome of these actions
will not have a material impact on CNF's financial condition, cash flows,
or results of operations.
PAGE 17
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
On December 5, 2001, CNF announced the formation of a new global supply
chain services company called Menlo Worldwide, which includes the operating
results of Emery Forwarding, Menlo Worldwide Logistics, Menlo Worldwide
Technologies, and Vector SCM.
Consistent with SFAS 131, "Disclosures about Segments of an Enterprise and
Related Information," CNF discloses segment information in the manner in
which the components are organized for making operating decisions,
assessing performance and allocating resources. Accordingly, operating
results are reported along CNF's three lines of business: Con-Way
Transportation Services, Menlo Worldwide, and CNF Other. Within the Menlo
Worldwide group, Emery Forwarding, Menlo Worldwide Logistics and Menlo
Worldwide Other individually represent separate reporting segments. The
Emery Forwarding reporting segment consists of Emery Forwarding and, for
periods prior to the cessation of its air carrier operations in December
2001, Emery Worldwide Airlines ("EWA"), a separate subsidiary of CNF. The
Menlo Worldwide Other reporting segment consists of Menlo Worldwide
Technologies and Vector SCM. The CNF Other reporting segment includes the
operating results of Road Systems and certain CNF corporate activities.
Operating results in the prior period have been reclassified to conform to
the current-year reporting segment presentation.
As used in Management's Discussion and Analysis, all references to CNF,
"the Company", "we," "us," and "our" and all similar references mean CNF
Inc. and its subsidiaries, unless otherwise expressly stated or the context
otherwise requires.
=====================
RESULTS OF OPERATIONS
=====================
Net income available to common shareholders in the first quarter of 2002 of
$18.3 million increased 35.1% from the first quarter of 2001 due primarily
to several unusual gains in the 2002 first quarter. Menlo Worldwide's
operating results included Emery Forwarding's $9.9 million pre-tax net gain
($0.11 per diluted share) from a payment under the Air Transportation
Safety and System Stabilization Act and Menlo Worldwide Logistics' $1.9
million pre-tax net gain ($0.02 per diluted share) from the early
termination of a contract. Operating results at the Con-Way Transportation
Services reporting segment and the CNF Other reporting segment included pre-
tax net gains of $8.7 million ($0.09 per diluted share) and $2.4 million
($0.03 per diluted share), respectively, from sales of excess properties.
Excluding the unusual items in the first quarter of 2002, first-quarter net
income available to common shareholders in 2002 was $4.4 million, a decline
from $13.5 million in 2001 due primarily to a decline in operating results
from Con-Way and Emery Forwarding.
CONTINUING OPERATIONS
=====================
Revenue of $1.07 billion in the first quarter of 2002 declined 16.5% from
the first quarter of last year due primarily to lower revenue from Emery
Forwarding, and to a lesser extent, a decrease in revenue from all other
reporting segments. Management believes that revenue for all reporting
segments in the first quarter of 2002 was adversely affected by continued
weakness in the global economy.
Operating income of $40.4 million in the 2002 first quarter rose 19.7% from
$33.7 million in last year's first quarter. Excluding unusual gains in the
first quarter of 2002, first-quarter operating income declined to $17.6
million in 2002 from $33.7 million in 2001 due primarily to lower operating
income at Con-Way, a higher operating loss at Emery Forwarding, and to a
lesser extent, a decline in Menlo Worldwide Logistics' operating income.
The decline in operating results at all reporting segments was due
primarily to lower revenue.
Other net expense in the first quarter fell 8.4% from last year's first
quarter due primarily to a 24.5% reduction in interest expense and higher
investment income. Lower interest expense in the 2002 first quarter
reflects lower interest expense on long-term debt, which was effectively
converted from fixed rate to floating rate with interest rate swaps.
PAGE 18
The effective tax rate of 39.0% in the first quarter of 2002 declined from
40.0% in the first quarter of 2001 due in part to tax planning strategies
and resolution of tax issues.
Con-Way Transportation Services
- -------------------------------
First-quarter revenue from Con-Way in 2002 declined 3.0% from last year's
first quarter due primarily to lower revenue from Con-Way's regional
carriers, which was adversely affected by the loss of a major customer in
the first quarter of 2002. Also, Con-Way's first quarter of 2002 included
1.5 fewer working days than the same quarter last year. Less-than-
truckload (LTL) and total tonnage per day (weight) in the first quarter of
2002 increased 2.4% and 2.1%, respectively, over the 2001 first quarter
while revenue per hundredweight (yield) over the same period declined 3.6%.
Yield in the first quarter of 2002 was positively affected by a higher
percentage of inter-regional joint services, which typically command higher
rates on longer lengths of haul, but was negatively impacted by a decline
in fuel surcharges and a more competitive pricing environment when compared
to the same quarter last year. The decline in 2002 first-quarter regional
carrier revenue was partially offset by an increase in revenue from Con-Way
Now, Con-Way Logistics, and Con-Way Air Express, a domestic air freight
forwarding company that began operations in May 2001.
Con-Way's operating income of $33.7 million in the first quarter of 2002,
which included an $8.7 million net gain from the sale of excess property,
declined 8.2% from the prior-year first quarter. Excluding the unusual
gain, first-quarter operating income in 2002 declined to $25.0 million, a
31.8% decrease from first-quarter 2001, due primarily to lower revenue and
operating income from Con-Way's regional carriers and a 2002 first-quarter
operating loss at Con-Way Air Express, which began operations in May 2001.
Menlo Worldwide
- ---------------
Emery Forwarding
----------------
Operating Results
First-quarter revenue for Emery Forwarding (Emery) was $394.8 million in
2002, a 32.3% decline from the first quarter of last year, due primarily to
lower North American and international airfreight revenue and the
termination by the USPS of EWA's contract to transport Express Mail,
effective August 26, 2001, as described below under " - Express Mail
Contract." In the first quarter of last year, Emery recognized $47.5
million of revenue from the Express Mail contract. Emery's first quarter
of 2002 included 1.5 fewer working days than the same quarter last year.
Average international airfreight revenue per day in the first quarter of
2002, including fuel surcharges, fell 14.8% from the same quarter last year
due primarily to a 9.0% decline in average pounds transported per day
(weight) and a 6.3% decrease in revenue per pound (yield). Emery's
management believes that declines in first-quarter international weight and
yield in 2002 were due to weak economic conditions in the markets served by
Emery, particularly in Europe.
In the first quarter of 2002, average North American revenue per day,
including fuel surcharges, fell 30.5% from last year's first quarter due
largely to declines in weight and yield of 22.5% and 10.3%, respectively.
Emery's management believes that lower first-quarter weight in 2002 was
primarily due to continued weakness in U.S. economic conditions, loss of
business to ground transportation providers, and a reduction in the number
of aircraft routes and domestic markets served by Emery. Emery's
management also believes that lower yield in the first quarter of 2002 was
due in part to Emery's efforts to increase second-day and economy service,
which contributed to a higher percentage of lower-margin service offerings
and a lower percentage of higher-yielding next-day service.
PAGE 19
Emery's first-quarter operating loss of $5.7 million in 2002 declined 12.7%
from last year's $6.5 million first-quarter operating loss. The first
quarter of 2002 included a $9.9 million net gain from a payment under the
Air Transportation Safety and System Stabilization Act and the first
quarter of 2002 benefited from the elimination of $2.6 million of goodwill
amortization upon adoption of SFAS 142, "Goodwill and Other Intangible
Assets", effective January 1, 2002. The first quarter of 2001 included
operating income of $3.6 million from the Express Mail contract with the
USPS, which was terminated effective August 26, 2001. Excluding the
Stabilization Act payment in the 2002 first quarter and goodwill
amortization and Express Mail operating income in the 2001 first quarter,
Emery's first-quarter operating loss in 2002 was $15.6 million, an increase
from a $7.6 million operating loss in 2001 due primarily to the revenue
decline in the first quarter of 2002.
Restructuring Charges
In June 2001, Emery began an operational restructuring to align it with
management's estimates of future business prospects for domestic heavy air
freight and address changes in market conditions, which deteriorated due to
a slowing domestic economy, loss of EWA's contracts with the USPS to
transport Express Mail and Priority Mail and, to a lesser extent, loss of
business to ground transportation providers.
The $340.5 million restructuring charge recognized in the second quarter of
2001 consisted primarily of non-cash impairment charges, including the
write-off of $184.2 million for unamortized aircraft maintenance and $89.7
million for aircraft operating supplies, equipment and other assets. Asset
impairment charges were based on an evaluation of cash flows for North
American operations and, for certain assets, independent appraisals. Also
included in the restructuring charge was $66.6 million for estimated future
cash expenditures related primarily to the return to the lessors of certain
aircraft leased to Emery and the termination of the related leases.
As described below under "-Regulatory Matters," the Federal Aviation
Administration (FAA) required EWA to suspend its air carrier operations on
August 13, 2001. In response to the FAA action, as well as the terrorist
actions described below under " - Terrorist Attacks," the growing
unpredictability and uncertainty of the FAA's requalification process, and
a worsening global economic downturn, Emery's management re-evaluated Emery's
restructuring plan. As described above, CNF announced on December 5, 2001
that Emery in 2002 would become part of CNF's new Menlo Worldwide group of
supply chain service providers and would continue to provide full North
American forwarding services utilizing aircraft operated by other air
carriers instead of EWA's fleet of aircraft, and that EWA would cease air
carrier operations. In connection with the revised restructuring plan, in
the fourth quarter of 2001 Emery recognized additional restructuring
charges of $311.7 million for the planned disposal of leased aircraft,
cessation of EWA's remaining operations, employee separation costs for 157
Emery employees, and other costs.
The restructuring charges in 2001 were based in part on significant
estimates and assumptions made by Emery's management as to the amount and
timing of aircraft rental payments and the costs of returning those
aircraft upon expiration of the leases. The $311.7 million restructuring
charge recognized in the fourth quarter of 2001 includes primarily accruals
for scheduled undiscounted rental payments for aircraft leased to Emery and
estimated costs of returning those aircraft upon expiration of the related
leases. Actual costs may differ from those estimates and that difference
would be recognized as additional expense or income in the period when and
if that determination can be made. For 2002, the scheduled rental payments
of the aircraft aggregate $61.0 million. However, Emery may pay a larger
portion of its scheduled rental payments in 2002 or thereafter, which could
be substantial, if EWA successfully negotiates the early termination of
aircraft leases or in connection with defaults under aircraft leases. See
"-Regulatory Matters" and "Liquidity and Capital Resources-Restructuring
Charges and Regulatory Matters" below.
Refer to Note 3, "Restructuring Charges," for the cumulative activity
related to Emery's 2001 restructuring plan.
PAGE 20
Regulatory Matters
Internationally, Emery operates as an air freight forwarder using mostly
commercial airlines. Prior to the suspension and subsequent cessation of
EWA's air carrier operations in 2001, Emery provided air transportation
services in North America using owned and leased aircraft operated by EWA
and aircraft operated by third parties.
Until August 13, 2001, EWA operated as an airline. Although EWA has ceased
air carrier operations, EWA still has an air carrier certificate issued by
the FAA and is subject to maintenance, operating and other safety-related
regulations promulgated by the FAA and is subject to FAA inspections. Based
on issues identified during inspections conducted by the FAA, on August 13,
2001 EWA was required to suspend its air carrier operations as part of an
interim settlement agreement with the FAA. On December 5, 2001, CNF
announced that EWA was ceasing its air carrier operations. Since EWA's
suspension of its air carrier operations on August 13, 2001, Emery has been
providing services to its customers in North America by utilizing aircraft
operated by other air carriers. This resulted in substantial additional
expense during 2001, partially offset by savings resulting from the
furlough of approximately 800 EWA employees as described in the next
paragraph. Emery intends to continue to use aircraft operated by third
parties to provide service to its customers in North America, which will
result in Emery continuing to pay both the ongoing lease payments and other
costs associated with EWA's own fleet of grounded aircraft in addition to
the cost of having other air carriers provide service to Emery's North
American customers. However, for financial reporting purposes, Emery's
operating expenses will continue to include the cost of aircraft operated
by other carriers but will not include the scheduled rental payments
relating to EWA's fleet of grounded aircraft and the costs of returning
those aircraft upon expiration of the related leases, except to the extent
that those rental payments and the costs of returning those aircraft upon
expiration of the related leases differ from the corresponding amounts
already accrued as part of the 2001 restructuring charges.
As a result of EWA's suspension of its air carrier operations on August 13,
2001, EWA furloughed approximately 400 pilots and crewmembers. Those pilots
and crewmembers are represented by the Air Line Pilots Association (ALPA)
union under a collective bargaining agreement and ALPA filed a grievance on
their behalf protesting the furlough. The grievance sought pay during the
course of the suspension. CNF is currently involved in arbitration with
respect to this claim. On December 5, 2001, EWA announced that it would
cease operating as an air carrier, and in connection therewith terminated
the employment of all of its pilots and crewmembers, bringing the total
number of terminated employees in 2001 to 800. In addition, ALPA has filed
a grievance on behalf of the pilots and crewmembers protesting the cessation
of EWA's air carrier operations and Emery's use of other air carriers. Some
aspects of the ALPA matters may be subject to binding arbitration. Based on
CNF's current evaluation, management has addressed its estimated exposure
related to the ALPA matters. However, CNF cannot predict with certainty the
ultimate outcome of these matters.
In a final settlement agreement with the FAA entered into on September 17,
2001, EWA agreed to pay a $1 million civil penalty related to alleged
operations, avionics, and maintenance irregularities. The final settlement
agreement was first amended on December 4, 2001 as a result of Emery's decision
to terminate EWA's air carrier operations. Under the first amended settlement
agreement, the FAA agreed not to take action to revoke EWA's air carrier
certificate until, at the earliest, May 15, 2002. The FAA agreed on May 13,
2002, to an extension of the certificate until December 4, 2002. Under a
second amended settlement agreement, the FAA has agreed not to take action to
suspend or revoke the air carrier certificate until December 4, 2002, and EWA
has agreed to surrender the certificate not later than December 4, 2002. Based
on current circumstances, management believes that there is a reasonable
possibility that EWA will be able to complete negotiations relating to the
early termination of leases of substantially all of its aircraft on acceptable
terms, although there can be no assurance in this regard. However, while the
matter is not free from doubt, the surrender of EWA's certificate may result
in a default under leases pursuant to which EWA leases a substantial number of
aircraft. In addition, the fourth-quarter 2001 restructuring charge relating to
the cessation of EWA's air carrier operations has resulted in defaults under
financial covenants in agreements pursuant to which EWA leases some of its
aircraft. Defaults under these leases also could require substantial payments
to be made to the lessors prior to scheduled payment dates. See "Liquidity and
Capital Resources-Restructuring Charges and Regulatory Matters" for further
discussion.
Due in large part to the fourth-quarter 2001 restructuring charge incurred
in connection with the cessation of EWA's air carrier operations, CNF was
required to obtain amendments to its bank revolving credit agreement in
December 2001 in order to remain in compliance with the financial covenants
in that agreement. CNF can provide no assurance that events relating to the
cessation of EWA's air carrier operations will not result in a future
breach of the financial covenants under CNF's revolving credit facility.
See "Liquidity and Capital Resources-Restructuring Charges and Regulatory
Matters" for further discussion.
PAGE 21
Terrorist Attacks
Operating results at Emery were adversely affected by the terrorist attacks
on September 11, 2001. Contractors providing air carrier service to Emery
were grounded on September 11 and 12 and did not resume service until the
evening of September 13, which adversely affected Emery's results of
operations.
In response to the terrorist attacks, the U.S. Congress passed the Air
Transportation Safety and System Stabilization Act (the "Act"), a $15
billion emergency economic assistance package intended to mitigate
financial losses in the air carrier industry. The legislation provides for
$5 billion in direct loss reimbursement and $10 billion in federal loan
guarantees and credits, expands war risk insurance coverage for air
carriers, and provides some government assistance for short-term increases
in insurance premiums. In March 2002, Emery received an $11.9 million
payment under the Act, resulting in a $9.9 million net gain reported in
Emery's first-quarter operating loss in 2002. The payment made to Emery
under the Act is subject to audit. Emery is seeking additional payments
under the Act.
Express Mail Contract
In January 2001, the USPS and Federal Express Corporation (FedEx) announced
an exclusive agreement under which FedEx will transport Express Mail and
Priority Mail. EWA transported Express Mail and other classes of mail for
the USPS under a contract (the "Express Mail contract"), which was
originally scheduled to expire in January 2004; however, the USPS
terminated the Express Mail contract "for convenience" effective August 26,
2001.
As described below under "Discontinued Operations," on November 3, 2000,
EWA and the USPS announced an agreement (the "Termination Agreement") to
terminate their contract for the transportation and sortation of Priority
Mail (the "Priority Mail contract"). On September 26, 2001, EWA entered
into an agreement with the USPS to settle claims relating to the Priority
Mail contract with the USPS (the "Settlement Agreement"). Under the
Settlement Agreement, EWA received a $235 million payment from the USPS on
September 28, 2001 to settle all non-termination claims under the Priority
Mail contract. Under the Settlement Agreement, on September 28, 2001, EWA
also received a $70 million provisional payment from the USPS for
termination costs and other claims related to the Express Mail contract.
The Settlement Agreement provides for the provisional payment to be
adjusted if actual termination costs and other agreed upon claims relating
to the Express Mail contract are greater or less than $70 million, in which
case either the USPS will be required to make an additional payment with
interest, subject to the limitation described in the following paragraph,
or EWA will be required to return a portion of the provisional payment with
interest.
As of March 31, 2002 and December 31, 2001, the $70 million provisional
payment was included in Deferred Credits in CNF's Consolidated Balance
Sheets; this amount will continue to be included in Deferred Credits until
it is used to retire the remaining $80 million in assets related to the
Express Mail contract. The Settlement Agreement provides that the total
amount payable by the USPS for termination costs and other claims relating
to the Express Mail contract, including the $70 million provisional
payment, may not exceed $150 million. On December 14, 2001, EWA filed a
termination settlement proposal with the USPS for recovery of EWA's costs
of providing service under the terminated Express Mail contract as well as
costs incurred by EWA's subcontractors for performing services under the
Express Mail contract. Any recovery of such costs would be offset in whole
or in part by the $70 million provisional payment received in 2001.
Outlook
Under the new Menlo Worldwide group, management will continue Emery's focus
on expanding its variable-cost-based international operations and actively
renegotiating airhaul rates in an effort to improve international operating
margins. In North America, management will continue to position Emery as a
freight forwarder utilizing aircraft operated by other carriers. As a
result, management expects a more flexible variable-cost-based operating
structure in North America with a decline in next-day freight services and
an increase in second-day and deferred services. Management will continue
its efforts to reduce Emery's costs, by reducing the cost structure of the
North American service center and hub network and by minimizing
administrative costs through integration of certain sales, marketing,
finance, accounting, and technology functions.
PAGE 22
Menlo Worldwide Logistics
-------------------------
First-quarter revenue for Menlo Worldwide Logistics (Menlo) in 2002 was
$216.5 million, a 2.7% decline from 2001 due primarily to lower revenue
from transaction-based contracts, which Menlo's management believes was due
to the adverse effect of weak U.S. economic conditions on Menlo's
customers.
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) in the first quarter of 2002 was $63.1
million, compared to $67.4 million in the first quarter of 2001.
Menlo's 2002 first-quarter operating income of $7.8 million declined 5.1%
from $8.2 million in last year's first quarter due primarily to lower
revenue and a decline in the percentage of higher-margin consulting fees.
Operating income in the first quarter of 2002 included a $1.9 million net
gain from the early termination of a contract while last year's first
quarter included $2.0 million of operating income from a customer who filed
for bankruptcy in the second quarter of last year.
Menlo Worldwide Other
---------------------
The Menlo Worldwide Other reporting segment includes the results of Vector
SCM and Menlo Worldwide Technologies. Vector SCM (Vector) is a joint
venture formed with General Motors in December 2000 to provide logistics
services to General Motors. The operating results of Vector are reported
as an equity method investment.
Vector SCM earned operating income of $1.3 million in the first quarter of
2002 compared to last year's first-quarter operating loss of $4.6 million,
which was incurred during Vector's start-up phase.
CNF Other
- ---------
The CNF Other segment includes the results of Road Systems and certain
corporate activities. First-quarter operating income of $3.3 million in
2002 exceeded break-even results in last year's first quarter due primarily
to a $2.4 million net gain from the sale of excess corporate property.
DISCONTINUED OPERATIONS
=======================
On November 3, 2000, EWA and the USPS announced an agreement (the
"Termination Agreement") to terminate their contract for the transportation
and sortation of Priority Mail (the "Priority Mail contract"). The Priority
Mail contract was originally scheduled to terminate in the first quarter of
2002, subject to renewal options. Under the terms of the Termination
Agreement, the USPS on January 7, 2001 assumed operating responsibility for
services covered under the Priority Mail contract, except certain air
transportation and related services, which were terminated effective April
23, 2001.
The USPS 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 with interest or EWA will be required to return a
portion of the provisional payment with interest. The Termination Agreement
preserved EWA's right to pursue claims for underpayment of other amounts
owed to EWA under the contract, which were ultimately settled in September
2001 as described below. CNF believes 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
EWA will receive any additional payments relating to these termination
costs or that all termination costs incurred by EWA will be recovered.
PAGE 23
On September 26, 2001, EWA entered into an agreement with the USPS to
settle claims relating to the underpayment of amounts owed to EWA under the
Priority Mail contract (the "Settlement Agreement"). Under the Settlement
Agreement, EWA received a $235 million payment from the USPS on September
28, 2001 to settle all non-termination claims under the Priority Mail
contract. These claims were to recover costs of operating under the
contract as well as profit and interest thereon. The Priority Mail
Termination Agreement described above is unaffected by the Settlement
Agreement.
Under the Settlement Agreement, on September 28, 2001, EWA also received a
$70 million provisional payment from the USPS to provisionally pay EWA for
termination costs and other claims related to EWA's Express Mail contract,
which is described above under "Emery Forwarding-Express Mail Contract."
Results of the former Express Mail contract are included in the Emery
Forwarding reporting segment and are therefore not reported under
Discontinued Operations.
As a result of the termination of the Priority Mail contract, the results
of operations and cash flows of the Priority Mail operations have been
segregated and classified as discontinued operations. Summary financial
data and related information are included in Note 2, "Discontinued
Operations."
===============================
LIQUIDITY AND CAPITAL RESOURCES
===============================
In the first quarter of 2002, cash and cash equivalents increased by $6.9
million to $407.6 million at March 31, 2002. Cash provided by operating
activities in the first quarter was sufficient to fund investing and
financing activities.
Operating activities in the 2002 first quarter generated net cash of $55.4
million compared to $98.9 million of cash generated by operating activities
in the same quarter last year. Cash from operations in the first quarter of
2002 was provided primarily by net income before non-cash items (including
mostly depreciation, deferred income taxes, and gains from sales of
property). Positive operating cash flows in the 2002 first quarter were
also provided by the collection of receivables and an increase in accounts
payable. Negative operating cash flows consisted primarily of increases in
prepaid expenses and the payment of accrued liabilities, and aircraft lease
return provision payments.
Investing activities in the 2002 first quarter used $23.0 million of cash
compared to $46.9 million used in the same quarter of 2001. Capital
expenditures of $24.1 million in the 2002 first quarter fell from $42.3
million in the same quarter of 2001 due to a $3.6 million reduction at Con-
Way, a $6.8 million reduction at Emery Forwarding, a $3.6 million reduction
at Menlo Worldwide Logistics, and a $4.2 million reduction in corporate
capital expenditures. Financing activities in the 2002 first quarter used
cash of $23.0 million compared $16.8 million used in the same quarter of
2001.
CNF has a $385 million revolving credit facility that matures on July 3,
2006. The revolving credit facility is also available for the issuance of
letters of credit up to $275 million, although the aggregate amount of
letters of credit outstanding under the facility at any time reduces the
amount of borrowings available under the facility at that time by a like
amount. At March 31, 2002, no borrowings were outstanding under the
facility and $188.2 million of letters of credit were outstanding, leaving
available capacity for letters of credit of $86.8 million and available
capacity for cash borrowings of $196.8 million, subject to compliance with
financial covenants and other customary conditions to borrowing. Of the
$188.2 million of letters of credit outstanding, $62.5 million were added
in the first quarter of 2002 for purposes of providing collateral in
replacement of expired surety bonds for CNF workers compensation and
vehicular self-insurance programs. Also, at March 31, 2002, CNF had $20.0
million of uncommitted lines of credit with no outstanding borrowings.
Under other unsecured facilities, $91.8 million in letters of credit, bank
guarantees, and overdraft facilities were outstanding at March 31, 2002.
PAGE 24
Restructuring Charges and Regulatory Matters
Due in large part to the restructuring charge incurred in connection with
the cessation of EWA's air carrier operations as described above under
"Results of Operations-Menlo Worldwide-Emery Forwarding-Restructuring
Charges," CNF was required to obtain amendments to its bank revolving
credit agreement in December 2001 in order to remain in compliance with the
financial covenants in that agreement. The amended credit agreement
provides that, if CNF's senior unsecured long-term debt securities are
rated at less than "BBB-" by Standard & Poor's and less than "Baa3" by
Moody's, CNF, including its principal subsidiaries, will be required to
pledge its accounts receivable as collateral to secure borrowings and other
amounts due under the credit facility, subject to specified limitations,
and, if the aggregate borrowings and other amounts due under the credit
facility exceed a specified amount, CNF, including its principal
subsidiaries, will be required to provide such additional collateral as the
agent bank under the credit facility may reasonably request. CNF's senior
unsecured long-term debt is currently rated "BBB-" by Standard & Poor's
with a stable outlook and "Baa3" by Moody's with a negative outlook, and,
as a result, any further reduction in CNF's senior unsecured long-term debt
ratings by both of these credit rating agencies will require that CNF,
including its principal subsidiaries, pledge collateral to secure the
credit facility as described above. To the extent CNF, including its
principal subsidiaries, pledges collateral to secure amounts due under the
debt facility, CNF, including its principal subsidiaries, may also be
required to pledge some or all of that collateral to equally and ratably
secure its $200 million aggregate principal amounts of 8 7/8% notes due
2010, its $100 million aggregate principal amount of 7.35% notes due 2005,
and $120.5 million aggregate principal amount of Thrift and Stock Plan
notes due through 2009, which are guaranteed by CNF.
CNF cannot provide assurance that matters relating to the cessation of
EWA's air carrier operations will not have a material adverse effect on
CNF's financial condition, cash flows, or results of operations in the
future. Emery intends to continue to use aircraft operated by third parties
to provide service to its customers in North America, which will continue
to result in Emery making additional cash payments, primarily because Emery
will be required to pay both the ongoing lease payments and other payments
associated with EWA's own fleet of grounded aircraft in addition to
payments to other air carriers providing service to Emery's North American
customers.
In addition, the restructuring charges recognized by Emery during 2001
reflect CNF's estimate of the costs of terminating EWA's air carrier
operations and restructuring Emery's business and related matters. CNF
believes that the estimate is adequate to cover these costs based on
information currently available and assumptions management believes are
reasonable under the circumstances. However, there can be no assurance that
actual costs will not differ from this estimate, and if such costs exceed
CNF's estimate Emery will be required to recognize additional charges,
which could result in defaults under CNF's $385 million credit facility and
other debt instruments and under aircraft leases, or other costs and
expenses in connection with these matters. If any of the financial
covenants are breached, CNF will be required to obtain appropriate waivers
or amendments from the requisite banks under the credit facility. If CNF is
unable to obtain these amendments or waivers, CNF would be in default under
the credit facility, and would be prohibited from making borrowings under
the revolving credit facility and could be required by the banks to repay
any outstanding borrowings and replace letters of credit outstanding under
the facility. Under cross-default or cross-acceleration clauses contained
in other debt instruments to which CNF is a party, these events could also
result in other indebtedness becoming or being declared due and payable
prior to its stated maturity. Moreover, to the extent that collateral was
provided to secure borrowings and other amounts due under the $385 million
facility or the notes described above, the banks or the noteholders would
generally be entitled to take possession of the collateral following a
PAGE 25
default. There can be no assurance that CNF would be able to obtain the
necessary waivers or amendments under the $385 million bank credit
agreement were any such defaults to occur or to obtain additional financing
to repay indebtedness or replace letters of credit that may become due as a
result of those defaults. As a result, if a default were to occur under
CNF's $385 million credit facility and if CNF is unable to obtain all
required amendments or waivers, this would likely have a material adverse
effect on CNF's financial condition, cash flows, and results of operations.
As discussed more fully above under "Emery Worldwide - Regulatory Matters,"
under EWA's second amended settlement agreement with the FAA, EWA has agreed
to surrender its air carrier certificate no later than December 4, 2002.
Based on current circumstances, management believes that there is a reasonable
possibility that EWA will be able to complete negotiations relating to the
early termination of leases of substantially all of its aircraft on acceptable
terms, although there can be no assurance in this regard. However, while
the matter is not free from doubt, the surrender of this certificate may
constitute a default under leases pursuant to which EWA leases a substantial
number of its aircraft. In addition, EWA's fourth-quarter restructuring charge
resulted in defaults under certain aircraft leases and any further unusual
charges could also result in defaults under aircraft leases. Upon the
occurrence of a default under any of EWA's aircraft leases, the lessors
generally are entitled to terminate the leases and demand termination payments
or, in certain cases, liquidated damages or similar payments, which could be
substantial. As a result, both the current and any future defaults under these
leases could require that EWA make substantial cash payments to the lessors and
otherwise could have a material adverse effect on CNF's financial condition,
cash flows, and results of operations. In addition, certain of the leases are
guaranteed by Emery or CNF, and upon a default the lessors under those leases
would be entitled to seek recovery from the guarantors.
Holders of certain notes issued by CNF's Thrift and Stock Plan ("TASP"),
which are guaranteed by CNF, have the right to require CNF to repurchase
those notes if, among other things, both Moody's and Standard & Poor's have
publicly rated CNF's long-term senior debt at less than investment grade
unless, within 45 days, CNF shall have obtained, through a guarantee,
letter of credit or other permitted credit enhancement or otherwise, a
credit rating for such notes of at least "A" from Moody's or Standard &
Poor's (or another nationally recognized rating agency selected by the
holders of such notes) and shall maintain a rating on such notes of "A" or
better thereafter. As of March 31, 2002, $62.0 million in aggregate
principal amount of these TASP notes was outstanding. CNF's long-term
senior debt is currently rated "Baa3" by Moody's with a negative outlook
and "BBB-" by Standard & Poor's with a stable outlook; "Baa3" is the lowest
investment grade rating from Moody's and "BBB-" is the lowest investment
grade rating from Standard & Poor's. As a result, any further decrease in
CNF's long-term senior debt ratings by both of these credit rating agencies
would give the holders of TASP notes the right to require CNF to repurchase
those notes unless CNF was able to obtain appropriate credit enhancement as
described above, and there can be no assurance that CNF would be able to do
so. The occurrence of any event or condition requiring CNF to repay these
TASP notes could likely have a material adverse effect on CNF's financial
condition, cash flows, and results of operations.
In the event that CNF is required to repay any borrowings or other
indebtedness before its scheduled maturity date or to replace any letters
of credit before their scheduled expiry date, whether upon a default under
its revolving credit facility, as a result of a reduction in the credit
ratings on its long-term debt or otherwise, or to make payment to the
lessors as a result of default under aircraft leases, there can be no
assurance that CNF would have sufficient funds to do so or be able to
arrange financing for those purposes. Accordingly, any of these events
could have a material adverse effect on CNF's financial condition, cash
flows, and results of operations.
EWA is currently seeking to reach agreement with lessors of many of its
aircraft in order to terminate the leases prior to their scheduled
expiration dates. However, CNF can provide no assurance that EWA will be
able to enter into any such agreements with the lessors. If EWA negotiates
for the early termination of one or more of these aircraft leases, EWA will
substantially accelerate the timing of scheduled cash payments to the
lessors.
At March 31, 2002, CNF had $407.6 million in cash and cash equivalents
available to meet its cash needs, including payment of amounts due under or
in connection with aircraft leases. In addition, CNF intends to use
borrowings and letters of credit issued under its $385 million credit
facility to meet cash needs subject to compliance with financial covenants
and satisfaction of customary conditions precedent. However, there can be
no assurance that CNF will be able to comply with these financial covenants
or meet these conditions precedent and any inability of CNF to obtain
additional borrowings or letters of credit under this credit facility could
have a material adverse effect on its financial condition, cash flows, and
results of operations.
PAGE 26
Other
In general, CNF expects its future liquidity to be affected by the timing
and amount of cash flows related to restructuring charge reserves, long-
term debt and guarantees, capital and operating leases, and the preferred
securities of a subsidiary trust, which are in part discussed above and in
Note 3, "Restructuring Charges," and Note 7, "Preferred Securities of
Subsidiary Trust."
CNF's ratio of total debt to capital decreased to 41.9% at March 31, 2002
from 43.4% at December 31, 2001 due primarily to net income and the
repayment of debt and capital lease obligations in the first quarter of
2002.
Discontinued Operations
As described above under "Results of Operations-Discontinued 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 to the Consolidated
Financial Statements, in 2001 EWA received payments from the USPS related
to the discontinued Priority Mail operations. In January 2001, EWA received
a $60 million provisional payment toward reimbursable termination costs, as
provided under the Termination Agreement signed by EWA and the USPS in
November 2000. In September 2001, EWA received a $305 million payment from
the USPS, including $235 million to settle all non-termination claims under
the Priority Mail contract, as described above under "Results of
Operations-Discontinued Operations."
CYCLICALITY AND SEASONALITY
===========================
CNF's 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
===========
CNF is exposed to a variety of market risks, including the effects of
interest rates, commodity prices, foreign currency exchange rates and
credit risk. CNF's 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.
CNF is subject to the effect of interest rate fluctuations in the fair
value of its long-term debt and capital lease obligations, as summarized in
Notes 5 and 6 to the Consolidated Financial Statements included in CNF's
2001 Annual Report to Shareholders. As described in Note 8 to the
Consolidated Financial Statements, CNF uses interest rate swaps to mitigate
the impact of interest rate volatility on cash flows related to operating
lease payments and on the fair value of its fixed-rate long-term debt. At
March 31, 2002, CNF had not entered into any derivative contracts to hedge
foreign currency exchange exposure.
ACCOUNTING STANDARDS
====================
Effective January 1, 2002, CNF adopted SFAS 142, "Goodwill and Other
Intangible Assets." SFAS 142 specifies that goodwill and some intangible
assets will no longer be amortized but instead will be subject to periodic
impairment testing. Pursuant to SFAS 142, CNF has evaluated whether its
goodwill is impaired and has determined that, as of January 1, 2002, CNF
was not required to make an adjustment to the carrying value of the assets.
In accordance with SFAS 142, CNF ceased annual goodwill amortization of
approximately $10 million associated with the Emery Forwarding segment.
PAGE 27
In June 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations," which will be effective for CNF on January 1, 2003. SFAS 143
addresses the financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. CNF is in the process of evaluating the financial
statement impact of adoption of SFAS 143.
In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which supercedes SFAS 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of." SFAS 144 also supercedes the accounting and reporting
provisions of APB No. 30, "Reporting the Effects of Disposal of a Segment
of a Business," for the disposal of a segment of a business. CNF adopted
SFAS 144 effective January 1, 2002 with no material financial statement
impact.
FORWARD-LOOKING STATEMENTS
==========================
Certain statements included herein constitute "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934,
as amended, and are subject to a number of risks and uncertainties, and
should not be relied upon as predictions of future events. All statements
other than statements of historical fact are forward-looking statements,
including any projections of earnings, revenues, weight, volumes, income
or other financial or operating items, any statements of the plans,
strategies, expectations or objectives of CNF or management for future
operations or other future items, any statements concerning proposed new
products or services, any statements regarding future economic conditions or
performance, any statements of estimates or belief and any statements or
assumptions underlying the foregoing. Certain such forward-looking statements
can be identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," "seeks," "approximately," "intends,"
"plans," "estimates" or "anticipates" or the negative of those terms or other
variations of those terms or comparable terminology or by discussions of
strategy, plans or intentions. Such forward-looking statements are necessarily
dependent on assumptions, data and methods that may be incorrect or imprecise
and there can be no assurance that they will be realized. In that regard,
the following factors, among others and in addition to the matters discussed
elsewhere in this document and in CNF's 2001 Annual Report on Form 10-K and
other reports and documents filed by CNF with the Securities and Exchange
Commission, could cause actual results and other matters to differ materially
from those discussed in such forward-looking statements: changes in general
business and economic conditions, including the slowdown in the global economy;
the creditworthiness of CNF's customers and their ability to pay for services
rendered; increasing competition and pricing pressure; changes in fuel prices;
the effects of the cessation of EWA's air carrier operations, including the
expense of using aircraft operated by other air carriers in Emery's North
PAGE 28
American operations while also bearing the cash costs of EWA's grounded
aircraft fleet, the possibility of substantial cash payments in connection
with the early termination of or defaults under aircraft leases, the
possibility of additional unusual charges and other costs and expenses relating
to Emery's operations, existing defaults and possibility of future defaults
under aircraft leases, and the possibility of future loss of business due to
publicity surrounding the grounding of EWA's fleet of aircraft; the possibility
of defaults under CNF's $385 million credit agreement and other debt
instruments and aircraft leases, including defaults resulting from additional
unusual charges or CNF's failure to perform in accordance with management's
expectations, and the possibility that CNF may be required to pledge collateral
to secure some of its indebtedness or to repay other indebtedness in the event
that the ratings assigned to its long-term senior debt by credit rating
agencies are reduced; the requirement that EWA surrender its air carrier
certificate no later than December 4, 2002, which could potentially result in
defaults under aircraft leases requiring substantial cash payments to the
lessors, defaults under CNF's $385 million credit agreement and the reduction
in the ratings assigned to CNF's long term senior debt by credit rating
agencies; uncertainties regarding EWA's ability to recover all termination
costs relating to the termination of its former Priority Mail contract with the
USPS; uncertainties regarding EWA's ability to recover all termination costs
and other claims relating to the termination of its former Express Mail
contract with the USPS; labor matters, including the grievance by furloughed
pilots and crewmembers, renegotiations of labor contracts and the risk of work
stoppages or strikes; enforcement of and changes in governmental regulations;
environmental and tax matters (including claims made by the Internal Revenue
Service with respect to aircraft maintenance tax matters); the Department of
Transportation, FAA and Department of Justice investigation relating to Emery
Worldwide's handling of hazardous materials; the February 2000 crash of an EWA
aircraft and related investigation and litigation; and matters relating to
CNF's 1996 spin-off of Consolidated Freightways. As a result of the foregoing,
no assurance can be given as to future financial condition, cash flows, or
results of operations.
PAGE 29
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
As previously reported, CNF has been designated a potentially responsible
party (PRP) by the EPA with respect to the disposal of hazardous substances
at various sites. CNF expects its share of the clean-up costs will not
have a material adverse effect on its financial condition, cash flows, or
results of operations.
The Department of Transportation, through its Office of Inspector General,
and the FAA have been conducting an investigation relating to the handling
of so-called hazardous materials by Emery. The Department of Justice has
joined in the investigation and is seeking to obtain additional information
through the grand jury process. The investigation is ongoing and Emery is
cooperating fully. CNF is unable to predict the outcome of this
investigation.
EWA has received subpoenas issued by federal grand juries in Massachusetts
and the District of Columbia, and the USPS Inspector General for documents
relating to the Priority Mail contract. EWA has provided, and is continuing
to provide, the documents.
On February 16, 2000, a DC-8 cargo aircraft operated by EWA personnel
crashed shortly after take-off from Mather Field, near Sacramento,
California. The crew of three was killed. The cause of the crash has not
been conclusively determined. The National Transportation Safety Board
(NTSB) is conducting an investigation. A NTSB hearing regarding the crash
commenced on May 9 and 10, 2002, and is currently in recess. EWA is currently
unable to predict the outcome of this investigation or the effect it may have
on Emery or CNF.
Emery, EWA and CNF have been named as defendants in wrongful death lawsuits
brought by the families of the three deceased crew members, seeking
compensatory and punitive damages. Emery, EWA and CNF also may be subject
to other claims and proceedings relating to the crash, which could include
other private lawsuits seeking monetary damages and governmental
proceedings. Although Emery, EWA and CNF maintain insurance that is
intended to cover claims that may arise in connection with an airplane
crash, there can be no assurance that the insurance will in fact be
adequate to cover all possible types of claims. In particular, any claims
for punitive damages or any sanctions resulting from possible governmental
proceedings would not be covered by insurance.
As a result of EWA's suspension of its air carrier operations on August 13,
2001, EWA furloughed approximately 400 pilots and crewmembers. Those pilots
and crewmembers are represented by the Air Line Pilots Association (ALPA)
union under a collective bargaining agreement and ALPA filed a grievance on
their behalf protesting the furlough. The grievance sought pay during the
course of the suspension. CNF is currently involved in arbitration with
respect to this claim. On December 5, 2001, EWA announced that it would
cease operating as an air carrier, and in connection therewith terminated
the employment of all pilots and crewmembers, bringing the total number of
terminated employees in 2001 to 800. In addition, ALPA has filed a grievance
on behalf of the pilots and crewmembers protesting the cessation of EWA's air
carrier operations and Emery's use of other air carriers. Some aspects of the
ALPA matters may be subject to binding arbitration. Based on CNF's current
evaluation, management has addressed its estimated exposure related to the
ALPA matters. However, CNF cannot predict with certainty the ultimate outcome
of these matters.
EWA has been named as a defendant in a lawsuit and arbitration proceeding
brought by a subcontractor that operated aircraft under EWA's former
Express Mail contract with the USPS. The USPS terminated the Express Mail
contract "for convenience" on August 26, 2001. The subcontractor is seeking
$28.5 million and other unspecified damages in connection with such
termination. EWA believes it is entitled to and intends to seek recovery
from the USPS of any termination costs to which the subcontractor may be
entitled.
PAGE 30
As described in Note 9, "Commitments and Contingencies," CNF is subject to
certain legal and administrative proceedings with the IRS and the FAA.
There can be no assurance that these proceedings will not have a material
adverse effect on CNF's financial condition, cash flows, or results of
operations.
PAGE 31
ITEM 4. Submission of Matters to a Vote of Security Holders
At the Annual Shareholders Meeting held April 23, 2002, the following
proposals were presented with the indicated voting results:
For the purpose of electing members of the Board of Directors, the votes
representing shares of Common and Preferred stock were cast as follows:
Nominee For Against
-------------------- ---------- ---------
Donald E. Moffitt 46,949,674 1,281,285
Michael J. Murray 46,055,441 2,171,852
Robert D. Rogers 47,306,941 920,352
William J. Schroeder 46,049,441 2,177,852
The following directors did not stand for election and continued in office
as directors after the Annual Shareholders Meeting: Robert Alpert, Richard
A. Clarke, Margaret G. Gill, Robert Jaunich II, W. Keith Kennedy, Jr.,
Gregory L. Quesnel, and Robert P. Wayman. Richard B. Madden, a board
member since 1992, retired from the board on April 29, 2002.
The appointment of Arthur Andersen LLP as independent public accountants
for the year 2002 was approved by the following vote: For 42,072,826;
Against 5,280,091; Abstain 874,376.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99(a) Computation of Ratios of Earnings to Fixed Charges
--For the three months ended March 31, 2002 and 2001,
the ratios of earnings to fixed charges were 3.1x and
2.0x, respectively.
(b) Computation of Ratios of Earnings to Combined Fixed
Charges - For the three months ended March 31, 2002
and 2001, the ratios of earnings to combined fixed
charges and preferred stock dividends were 2.9x and
1.9x, respectively.
(b)Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
March 31, 2002.
PAGE 32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company (Registrant) has duly caused this Form
10-Q Quarterly Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CNF Inc.
----------------------
(Registrant)
May 14, 2002 /s/Chutta Rathnathicam
----------------------
Chutta Rathnathicam
Senior Vice President and
Chief Financial Officer