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 September 30, 2003
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 X No
---- ----
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes X No
---- ----
Number of shares of Common Stock, $.625 par value,
outstanding as of October 31, 2003: 49,723,765
CNF INC.
FORM 10-Q
Quarter Ended September 30, 2003
_______________________________________________________________________
_______________________________________________________________________
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 2003 and December 31, 2002 3
Statements of Consolidated Income -
Three and Nine Months Ended September 30, 2003 and 2002 5
Statements of Consolidated Cash Flows -
Nine Months Ended September 30, 2003 and 2002 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 4. Controls and Procedures 31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 6. Exhibits and Reports on Form 8-K 34
Signatures 35
PAGE 3
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
CNF INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 30,
2003 December 31,
(Unaudited) 2002
------------- ------------
ASSETS
Current Assets
Cash and cash equivalents $ 326,286 $ 270,404
Trade accounts receivable, net 766,587 716,037
Other accounts receivable 72,947 129,535
Operating supplies, at lower of average
cost or market 17,684 19,612
Prepaid expenses 47,275 43,885
Deferred income taxes 77,471 89,015
------------- ------------
Total Current Assets 1,308,250 1,268,488
------------- ------------
Property, Plant and Equipment, at Cost
Land 161,678 162,767
Buildings and leasehold improvements 781,745 769,536
Revenue equipment 636,981 609,631
Other equipment 374,499 377,110
------------- ------------
1,954,903 1,919,044
Accumulated depreciation and amortization (964,298) (903,690)
------------- ------------
990,605 1,015,354
------------- ------------
Other Assets
Deferred charges and other assets 117,097 133,411
Capitalized software, net 71,860 75,674
Goodwill 240,624 240,593
Deferred income taxes - 6,241
------------- ------------
429,581 455,919
------------- ------------
Total Assets $ 2,728,436 $ 2,739,761
============= ============
The accompanying notes are an integral part of these statements.
PAGE 4
CNF INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share amounts)
September 30,
2003 December 31,
(Unaudited) 2002
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 361,623 $ 356,605
Accrued liabilities (Note 5) 333,719 334,758
Accrued claims costs 128,498 141,632
Accrued aircraft leases and return
provision (Note 6) - 27,770
Current maturities of long-term debt and
capital leases 14,210 12,289
------------- ------------
Total Current Liabilities 838,050 873,054
Long-Term Liabilities
Long-term debt and guarantees (Note 4) 431,886 447,234
Long-term obligations under capital leases 110,414 110,376
Accrued claims costs 116,465 128,447
Employee benefits 265,805 294,541
Other liabilities and deferred credits 52,067 43,111
Deferred income taxes 17,200 -
------------- ------------
Total Liabilities 1,831,887 1,896,763
------------- ------------
Commitments and Contingencies (Note 10)
Company-Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary
Trust Holding Solely Convertible
Debentures of the Company (Note 8) 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 768,930 and 784,007
shares, respectively 8 8
Additional paid-in capital, preferred stock 116,946 119,239
Deferred compensation, Thrift and Stock Plan (59,709) (65,723)
------------- ------------
Total Preferred Shareholders' Equity 57,245 53,524
------------- ------------
Common stock, $.625 par value; authorized
100,000,000 shares; issued 56,167,320 and
56,046,790 shares, respectively 35,105 35,029
Additional paid-in capital, common stock 347,928 345,054
Retained earnings 548,960 506,816
Deferred compensation, restricted stock (2,434) (3,710)
Cost of repurchased common stock (6,484,486
and 6,563,868 shares, respectively) (159,883) (161,841)
------------- ------------
769,676 721,348
Accumulated Other Comprehensive Loss (Note 7) (55,372) (56,874)
------------- ------------
Total Common Shareholders' Equity 714,304 664,474
------------- ------------
Total Shareholders' Equity 771,549 717,998
------------- ------------
Total Liabilities and Shareholders' Equity $2,728,436 $2,739,761
============= ============
The accompanying notes are an integral part of these statements.
PAGE 5
CNF INC.
STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
(Dollars in thousands except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
REVENUES $ 1,306,372 $ 1,230,147 $ 3,749,518 $ 3,483,494
Costs and Expenses
Operating expenses 1,091,296 1,030,236 3,147,003 2,903,608
Selling, general and
administrative expenses 124,568 121,612 366,911 345,833
Depreciation 33,450 34,774 100,178 106,255
------------ ------------ ------------ ------------
1,249,314 1,186,622 3,614,092 3,355,696
------------ ------------ ------------ ------------
OPERATING INCOME 57,058 43,525 135,426 127,798
------------ ------------ ------------ ------------
Other Income (Expense)
Investment income 635 1,221 1,851 4,506
Interest expense (Note 9) (7,274) (5,813) (22,297) (17,336)
Dividend requirement on preferred
securities of subsidiary trust
(Note 8) (1,563) (1,563) (4,689) (4,689)
Miscellaneous, net (731) (3,527) (2,618) (7,330)
------------ ------------ ------------ ------------
(8,933) (9,682) (27,753) (24,849)
------------ ------------ ------------ ------------
Income Before Taxes 48,125 33,843 107,673 102,949
Income Tax Benefit (Provision) (21,304) 11,801 (44,528) (15,150)
------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS 26,821 45,644 63,145 87,799
Loss from Discontinuance, net of
tax (Note 5) - (10,139) - (10,139)
------------ ------------ ------------ ------------
Net Income 26,821 35,505 63,145 77,660
Preferred Stock Dividends 2,030 2,002 6,125 6,050
------------ ------------ ------------ ------------
NET INCOME AVAILABLE TO COMMON
SHAREHOLDERS $ 24,791 $ 33,503 $ 57,020 $ 71,610
============ ============ ============ ============
Weighted-Average Common Shares
Outstanding (Note 1)
Basic 49,549,338 49,226,241 49,480,305 49,077,089
Diluted 56,641,421 56,755,010 56,634,040 56,700,280
Earnings per Common Share (Note 1)
Basic
Net Income from Continuing
Operations $ 0.50 $ 0.89 $ 1.15 $ 1.67
Loss from Discontinuance,
net of tax - (0.21) - (0.21)
------------ ------------ ------------ ------------
Net Income Available to Common
Shareholders $ 0.50 $ 0.68 $ 1.15 $ 1.46
============ ============ ============ ============
Diluted
Net Income from Continuing
Operations $ 0.46 $ 0.79 $ 1.08 $ 1.51
Loss from Discontinuance,
net of tax - (0.18) - (0.18)
------------ ------------ ------------ ------------
Net Income Available to Common
Shareholders $ 0.46 $ 0.61 $ 1.08 $ 1.33
============ ============ ============ ============
The accompanying notes are an integral part of these statements.
PAGE 6
CNF INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Dollars in thousands)
Nine Months Ended
September 30,
----------------------------
2003 2002
------------ ------------
Cash and Cash Equivalents, Beginning of Period $ 270,404 $ 400,763
Operating Activities
Net income 63,145 77,660
Adjustments to reconcile net income to net cash
provided by operating activities:
Discontinued operations, net of tax - 10,139
Depreciation and amortization, net of accretion 112,573 120,833
Increase in deferred income taxes 34,797 82,057
Amortization of deferred compensation 7,164 6,513
Provision for uncollectible accounts 10,258 11,921
Equity in earnings of joint venture (15,358) (13,267)
Loss (Gain) on sales of property and
equipment, net 1,135 (12,713)
Loss from equity ventures 3,716 918
Changes in assets and liabilities:
Receivables (577) (93,172)
Prepaid expenses (3,390) 4,313
Accounts payable 7,640 15,971
Accrued incentive compensation (30,989) 61,552
Accrued liabilities, excluding accrued
incentive compensation 33,896 18,619
Accrued claims costs (25,116) 5,714
Income taxes - (21,501)
Employee benefits (30,936) (47,555)
Accrued aircraft leases and return provision (26,269) (189,840)
Deferred charges and credits 28,321 8,879
Other 6,650 2,163
------------ ------------
Net Cash Provided by Operating Activities 176,660 49,204
------------ ------------
Investing Activities
Capital expenditures (84,135) (67,416)
Software expenditures (10,872) (10,354)
Proceeds from sales of property and
equipment, net 7,388 12,017
------------ ------------
Net Cash Used in Investing Activities (87,619) (65,753)
------------ ------------
Financing Activities
Net repayment of long-term debt, guarantees
and capital leases (10,104) (30,951)
Proceeds from exercise of stock options 2,702 5,500
Payments of common dividends (14,876) (14,728)
Payments of preferred dividends (10,192) (10,484)
------------ ------------
Net Cash Used in Financing Activities (32,470) (50,663)
------------ ------------
Net Cash Provided by (Used in) Continuing
Operations 56,571 (67,212)
------------ ------------
Net Cash Provided by (Used in) Discontinued
Operations (689) 4,699
------------ ------------
Increase (Decrease) in Cash and Cash Equivalents 55,882 (62,513)
------------ ------------
Cash and Cash Equivalents, End of Period $ 326,286 $ 338,250
============ ============
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
Pursuant to the rules and regulations of the Securities and Exchange
Commission, 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. 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 2002 Annual Report
on Form 10-K.
Earnings per Share
Basic earnings per common share ("EPS") from continuing operations is
computed by dividing reported net income from continuing operations
(after deduction of preferred stock dividends) by the weighted-average
common shares outstanding. The calculation of diluted EPS is
calculated as follows:
(Dollars in thousands except Three Months Ended Nine Months Ended
per share data) September 30, September 30,
---------------------- ----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Earnings:
Net income from continuing
operations $ 24,791 $ 43,642 $ 57,020 $ 81,749
Add-backs:
Dividends on preferred
stock, net of
replacement funding 315 278 1,006 871
Dividends on preferred
securities of subsidiary
trust, net of tax 954 954 2,862 2,862
---------- ---------- ---------- ----------
$ 26,060 $ 44,874 $ 60,888 $ 85,482
========== ========== ========== ==========
Shares:
Weighted-average common
shares outstanding 49,549,338 49,226,241 49,480,305 49,077,089
Stock options 346,956 627,607 408,608 722,029
Series B preferred stock 3,620,127 3,776,162 3,620,127 3,776,162
Preferred securities of
subsidiary trust 3,125,000 3,125,000 3,125,000 3,125,000
---------- ---------- ---------- ----------
56,641,421 56,755,010 56,634,040 56,700,280
========== ========== ========== ==========
Diluted earnings per share
from continuing operations $ 0.46 $ 0.79 $ 1.08 $ 1.51
========== ========== ========== ==========
Stock-Based Compensation
Officers and non-employee directors have been granted options under
CNF's stock option plans to purchase common stock of CNF at prices
equal to the market value of the stock on the date of grant. CNF
accounts for stock-based compensation utilizing the intrinsic value
method in accordance with the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees."
Accordingly, no compensation expense is recognized for fixed option
plans because the exercise prices of employee stock options equal or
exceed the market prices of the underlying stock on the dates of grant.
PAGE 8
The following table sets forth the effect on net income and earnings
per share from continuing operations if CNF had applied the fair-value
based method and recognition provisions of SFAS 123, " Accounting for
Stock-Based Compensation," to stock-based compensation:
(Dollars in thousands, Three months ended Nine months ended
except per share data) September 30, September 30,
---------------------- ----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net income from continuing
operations, as reported $ 24,791 $ 43,642 $ 57,020 $ 81,749
Additional compensation cost,
net of tax, that would have
been included in net income
if the fair-value method
had been applied (2,411) (2,186) (6,863) (6,265)
---------- ---------- ---------- ----------
Pro forma net income from
continuing operations as if
the fair-value method had
been applied $ 22,380 $ 41,456 $ 50,157 $ 75,484
========== ========== ========== ==========
Earnings per share from
continuing operations:
Basic:
As reported $ 0.50 $ 0.89 $ 1.15 $ 1.67
========== ========== ========== ==========
Pro Forma $ 0.45 $ 0.84 $ 1.01 $ 1.54
========== ========== ========== ==========
Diluted:
As reported $ 0.46 $ 0.79 $ 1.08 $ 1.51
========== ========== ========== ==========
Pro Forma $ 0.42 $ 0.75 $ 0.95 $ 1.40
========== ========== ========== ==========
These pro-forma effects of applying SFAS 123 may not be indicative of
future amounts.
New Accounting Standards
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" ("FIN 45"). During the
quarter ended December 31, 2002, CNF adopted the disclosure provisions
of FIN 45, which require increased disclosure of guarantees, including
those for which likelihood of payment is remote. FIN 45 also requires
that, upon issuance of a guarantee, the guarantor must recognize a
liability for the fair value of the obligation it assumes under that
guarantee. The initial recognition and measurement provisions of FIN
45 are to be applied on a prospective basis to guarantees issued or
modified after December 31, 2002. CNF adopted FIN 45 with no material
impact.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities: an Interpretation of ARB No. 51" ("FIN
46"). FIN 46 addresses consolidation by business enterprises of
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk
for the entity to finance its activities without additional
subordinated financial support from other parties. Variable interest
entities are required to be consolidated by their primary beneficiaries
if they do not effectively disperse risks among parties involved. The
primary beneficiary of a variable interest entity is the party that
absorbs a majority of the entity's expected losses or receives a
majority of its expected residual returns. The consolidation
requirements of FIN 46 apply immediately to variable interest entities
created or modified after January 31, 2003 and apply to existing
entities in the first fiscal year or interim period ending after
December 15, 2003. Certain new disclosure requirements apply to all
financial statements issued after January 31, 2003. CNF has adopted
the currently applicable provisions of FIN 46 with no material impact.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity" ("SFAS 150"). SFAS 150 establishes classification standards
for financial instruments with characteristics of liabilities, equity,
or both. CNF adopted SFAS 150 effective July 1, 2003 with no impact.
PAGE 9
Reclassification
Certain amounts in the prior-period financial statements have been
reclassified to conform to the current-period presentation.
2. Reporting Segments
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. CNF's
principal businesses consist of Con-Way Transportation Services ("Con-
Way") and Menlo Worldwide. For financial reporting purposes, CNF is
divided into five reporting segments. The operating results of Con-Way
are reported as one reporting segment while Menlo Worldwide is divided
into three reporting segments: Menlo Worldwide Forwarding, Menlo
Worldwide Logistics ("Logistics"), and Menlo Worldwide Other. Also,
certain corporate activities and the results of Road Systems, a trailer
manufacturer, are reported in the CNF Other reporting segment.
In an effort to bring services offered by the Menlo Worldwide group of
businesses under a single brand identity, Menlo Worldwide announced in
February 2003 a plan to change the name of its forwarding segment from
Emery Forwarding to Menlo Worldwide Forwarding ("Forwarding"). The
Forwarding segment consists of the combined operating results of Menlo
Worldwide Forwarding, Inc. (formerly Emery Air Freight Corporation) and
its subsidiaries, Menlo Worldwide Expedite!, Inc. and a portion of the
operations of Emery Worldwide Airlines, Inc. ("EWA"), which ceased air
carrier operations in December 2001. In March 2003, Emery Air Freight
Corporation changed its name to Menlo Worldwide Forwarding, Inc.
("MWF").
PAGE 10
Financial Data
Inter-segment revenue and related operating income have been
eliminated to reconcile to consolidated revenue and operating income.
Management evaluates segment performance primarily based on revenue
and operating income (loss); therefore, other non-operating items,
consisting primarily of interest income or expense, are not reported
in segment results. Corporate expenses are generally allocated based
on measurable services provided to each segment or, for general
corporate expenses, based on segment revenue and capital.
(Dollars in thousands) Three months ended Nine months ended
September 30, September 30,
----------------------- -----------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Revenues
Con-Way Transportation
Services $ 574,571 $ 527,689 $1,635,125 $1,486,388
Menlo Worldwide
Forwarding 469,048 446,797 1,357,091 1,281,345
Logistics 262,663 255,022 757,177 713,142
----------- ----------- ----------- -----------
731,711 701,819 2,114,268 1,994,487
CNF Other 90 639 125 2,619
----------- ----------- ----------- -----------
$1,306,372 $1,230,147 $3,749,518 $3,483,494
=========== =========== =========== ===========
Inter-segment Revenue
Eliminations by Segment
Con-Way Transportation
Services $ 1,236 $ 115 $ 1,492 $ 312
Menlo Worldwide
Forwarding 1,938 54 2,058 151
Logistics -- 3,335 2,975 10,208
----------- ----------- ----------- -----------
1,938 3,389 5,033 10,359
CNF Other 5,810 2,634 16,546 7,349
----------- ----------- ----------- -----------
$ 8,984 $ 6,138 $ 23,071 $ 18,020
=========== =========== =========== ===========
Revenues before Inter-
segment Eliminations
Con-Way Transportation
Services $ 575,807 $ 527,804 $1,636,617 $1,486,700
Menlo Worldwide
Forwarding 470,986 446,851 1,359,149 1,281,496
Logistics 262,663 258,357 760,152 723,350
----------- ----------- ----------- -----------
733,649 705,208 2,119,301 2,004,846
CNF Other 5,900 3,273 16,671 9,968
Inter-segment Revenue
Eliminations (8,984) (6,138) (23,071) (18,020)
----------- ----------- ----------- -----------
$1,306,372 $1,230,147 $3,749,518 $3,483,494
=========== =========== =========== ===========
Operating Income (Loss)
Con-Way Transportation
Services $ 56,565 $ 41,618 $ 137,332 $ 110,454
Menlo Worldwide
Forwarding (14,304) (4,979) (33,553) (16,600)
Logistics 6,872 8,371 19,211 23,183
Other 8,810 2,638 15,358 13,267
----------- ----------- ----------- -----------
1,378 6,030 1,016 19,850
CNF Other (885) (4,123) (2,922) (2,506)
----------- ----------- ----------- -----------
$ 57,058 $ 43,525 $ 135,426 $ 127,798
========== ========== ========== ==========
PAGE 11
Special Items
CNF's results from continuing operations included various items that
affected the period-to-period comparisons of the reported operating
income (loss) of its reporting segments that CNF has identified as
"special" items in the periods presented. Items were identified as
such by CNF's management based in part on their materiality to the
relevant reporting segment.
(Dollars in thousands) Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Con-Way Transportation
Services -
Net gain from the sale
of a property $ -- $ -- $ -- $ 8,675
Menlo Worldwide -
Forwarding -
Net gains from payments
under the Air
Transportation Safety
and System
Stabilization Act -- -- 7,230 9,895
Loss for the resolution
of a hazardous
materials violation case (6,500) -- (6,500) --
Logistics -
Net gain from a
contract termination -- -- -- 1,850
CNF Other -
Loss from uncollectible
non-trade receivables -- (3,595) -- (3,595)
Net gain from the sale
of a property -- -- -- 2,367
Terrorist Attacks
In response to the September 11, 2001 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
other financial assistance. In March 2002, Forwarding received an
$11.9 million payment under the Act, resulting in the recognition of a
$9.9 million first-quarter net gain in 2002. In March 2003, Forwarding
received a final payment of $7.5 million, resulting in a $7.2 million
first-quarter net gain in 2003.
3. Investment in Unconsolidated Joint Venture
Vector SCM (Vector) is a joint venture formed with General Motors
("GM") in December 2000 for the purpose of providing logistics
management services on a global basis, at present for GM, but
ultimately for customers in addition to GM. Although CNF owns a
majority interest in Vector, the operating results of Vector are
reported as an equity-method investment based on GM's ability to
control certain operating decisions. Vector is organized as a limited
liability company that has elected to be taxed as a partnership.
Therefore, the joint venture partners are responsible for income taxes
applicable to their share of Vector's taxable income. CNF's portion of
Vector's net income, which is reported as a reduction of operating
expenses in the accompanying Statements of Consolidated Income, does
not include any provision for income taxes that will be incurred by
CNF. At September 30, 2003, CNF's undistributed earnings from Vector,
before provision for CNF's related parent income taxes, was $23.6
million.
Vector participates in CNF's centralized cash management system, and,
consequently, Vector's domestic trade accounts payable are paid by CNF
and settled through Vector's affiliate accounts with CNF. In addition,
excess cash balances in Vector's bank accounts, if any, are invested by
CNF and settled through affiliate accounts. As a result of Vector's
excess cash invested by CNF, Vector's affiliate receivable from CNF as
of September 30, 2003 was $12.3 million, which earned interest income
based on a rate earned by CNF's invested cash equivalents.
PAGE 12
As required by the Vector Agreements, CNF provides Vector with a $20
million line of credit for Vector's working capital and capital
expenditure requirements. Under the credit facility, which matures on
December 13, 2005, Vector may obtain loans with an annual interest rate
based on the rate CNF pays under its $385 million revolving credit
facility. CNF provides a portion of its $20 million credit commitment
to Vector through CNF's guarantee of $7.5 million of uncommitted local
currency overdraft facilities available to Vector by international
banks.
At September 30, 2003, $4.8 million was outstanding under Vector's
uncommitted local currency overdraft facilities and no borrowings were
directly payable to CNF. At December 31, 2002, Vector owed $2.5
million under the uncommitted local currency overdraft facilities and
owed $2.4 million to CNF under the line of credit with CNF.
CNF's capital transactions with Vector, including cash advances to and
from Vector under CNF's centralized cash management system and credit
facility described above, are reported as adjustments to CNF's
investment in Vector in Deferred Charges and Other Assets in the
Consolidated Balance Sheets.
4. Debt
In August 2003, debt agreements for CNF's $385 million revolving credit
facility and the 6.00% Thrift and Stock Plan (TASP) notes guaranteed by
CNF were amended to exclude the effect of certain items from the
calculation of financial covenants. Under the amendment to CNF's $385
million revolving credit facility, the requirements for specified
levels of consolidated net worth, fixed-charge coverage and the ratio
of consolidated debt to net worth were amended to exclude any effect of
goodwill impairment charges and minimum pension liability adjustments.
Under the amendment to the 6.00% TASP notes guaranteed by CNF, the
requirements for specified levels of consolidated net worth and fixed-
charge coverage were amended to exclude any effect of goodwill
impairment charges and minimum pension liability adjustments.
For additional information concerning debt instruments, including CNF's
$385 million revolving credit facility and the 6.00% TASP notes
guaranteed by CNF, refer to Note 5, "Debt and Other Financing
Arrangements," in Item 8, "Financial Statements and Supplementary
Data," included in CNF's 2002 Annual Report on Form 10-K.
5. Discontinued Operations
Priority Mail Contract
As a result of the termination of the Priority Mail contract described
below, the results of operations, and cash flows of the Priority Mail
operations have been segregated and classified as discontinued
operations. On November 3, 2000, 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"). As described below, all
claims relating to amounts owed to EWA under the Priority Mail contract
were fully settled in connection with payments from the USPS to EWA in
2002 and 2001.
Under the terms of the Termination Agreement, the USPS agreed to
reimburse EWA for Priority Mail contract termination costs. On January
7, 2001, the USPS paid EWA $60.0 million toward the termination costs
and on July 3, 2002, the USPS paid EWA $6.0 million to fully settle
EWA's Priority Mail contract termination costs, which resulted in a
2002 third-quarter gain from discontinuance of $2.9 million, net of
$1.8 million of income taxes.
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 $235.0 million payment
from the USPS on September 28, 2001 to settle all non-termination
claims under the Priority Mail contract as well as a $70.0 million
provisional payment for termination costs related to the separate
Express Mail contract with the USPS. 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 was
unaffected by the Settlement Agreement. As a result of the payment
under the Settlement Agreement, unbilled revenue under the contract 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.
PAGE 13
Net current liabilities of the discontinued Priority Mail operations of
$2.5 million and $3.2 million at September 30, 2003 and December 31,
2002, respectively, were included in Accrued Liabilities in the
Consolidated Balance Sheets.
Spin-Off of CFC
On December 2, 1996, CNF completed the spin-off of Consolidated
Freightways Corporation ("CFC") to CNF's shareholders. CNF recognized
2002 third-quarter and fourth-quarter losses from discontinuance of
$13.0 million (net of $8.3 million of income taxes) and $2.3 million
(net of $1.4 million of income taxes), respectively, in connection with
the bankruptcy of CFC in September 2002. For further detailed
discussion of this matter, see Note 10, "Commitments and
Contingencies," and Item 2, "Management's Discussion and Analysis -
Liquidity and Capital Resources - Discontinued Operations - Spin-Off of
CFC."
6. Restructuring Plan
In June 2001, Forwarding 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 primarily due to a slowing domestic economy and loss of
EWA's contracts with the USPS to transport Express Mail and Priority
Mail. The $340.5 million second-quarter restructuring charge in 2001
consisted primarily of non-cash impairment charges of $278.0 million
and $62.5 million of estimated future cash expenditures related
primarily to the return to lessors of certain aircraft leased to EWA.
Based on issues identified during inspections conducted by the Federal
Aviation Administration ("FAA"), on August 13, 2001, EWA was required
to suspend its air carrier operations as part of an interim settlement
agreement with the FAA. As a result, EWA furloughed approximately 400
pilots and crewmembers and Forwarding made arrangements to continue its
service to customers by utilizing aircraft operated by several other
air carriers. Primarily in response to the FAA action and a worsening
global economic downturn, Forwarding re-evaluated its restructuring
plan. On December 5, 2001, CNF announced that Forwarding (formerly
known as "Emery" or "Emery Forwarding") in 2002 would become part of
CNF's new Menlo Worldwide group of supply chain services providers and
in North America would utilize aircraft operated by other air carriers
instead of EWA operating its own fleet of aircraft, and that EWA would
permanently cease air carrier operations. In connection with the
revised restructuring plan, in the fourth quarter of 2001 Forwarding
recognized additional restructuring charges of $311.7 million,
including $305.6 million for the planned disposal of leased aircraft,
cessation of EWA's remaining operations, and other costs, and $6.1
million for employee separation costs for 157 of Forwarding's non-pilot
employees.
In connection with CNF's announcement of the cessation of EWA's air
carrier operations on December 5, 2001, EWA terminated the employment
of all of its pilots and crewmembers, bringing the total number of
terminated employees in 2001 to 800. Those pilots and crewmembers are
represented by the Air Line Pilots Association ("ALPA") union under a
collective bargaining agreement. Subsequently, ALPA filed a grievance
on behalf of the pilots and crewmembers protesting the cessation of
EWA's air carrier operations and Forwarding'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 believes
that it has provided for its estimated exposure related to the ALPA
matters. However, there can be no assurance in this regard as CNF
cannot predict with certainty the ultimate outcome of these matters.
Following the fourth-quarter restructuring charge in 2001, Forwarding's
cash flows have reflected the cost of having other air carriers provide
service to Forwarding's North American customers as well as lease
payments and other costs associated with Forwarding's restructuring
plan; however, Forwarding's operating expenses have reflected the cost
of aircraft operated by other carriers but have not included scheduled
rental payments and return costs or other restructuring-related
payments, as these expenses were accrued in connection with the
restructuring charges.
Forwarding's restructuring reserves for aircraft and other costs
declined to $37.2 million at September 30, 2003 from $67.7 million at
December 31, 2002 primarily due to aircraft lease and return costs.
None of the 37 aircraft that were grounded in connection with
Forwarding's restructuring plan remained under lease as of September
30, 2003. Restructuring reserves at September 30, 2003 consisted
primarily of CNF's estimated exposure related to labor matters in
arbitration, as described above, as well as other estimated remaining
restructuring-related obligations.
The restructuring charges recognized during 2001 reflect CNF's estimate
of the costs of terminating EWA's air carrier operations and
restructuring Forwarding'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 that difference would be
recognized as additional expense or income in the period when and if
that determination can be made.
PAGE 14
7. Comprehensive Income
Comprehensive income, which is a measure of all changes in equity
except those resulting from investments by owners and distributions to
owners, was as follows:
(Dollars in thousands) Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net income $ 26,821 $ 35,505 $ 63,145 $ 77,660
Other comprehensive income
(loss):
Change in fair value of
cash flow hedge (Note 9) 101 (16) 295 1,064
Foreign currency
translation adjustment (2,231) 472 1,207 3,587
---------- ---------- ---------- ----------
(2,130) 456 1,502 4,651
---------- ---------- ---------- ----------
Comprehensive income $ 24,691 $ 35,961 $ 64,647 $ 82,311
========== ========== ========== ==========
The following is a summary of the components of Accumulated Other
Comprehensive Loss:
September 30, December 31,
(Dollars in thousands) 2003 2002
----------- ------------
Accumulated change in fair value of
cash flow hedge (Note 9) $ (99) $ (394)
Accumulated foreign currency
translation adjustments (24,641) (25,848)
Minimum pension liability adjustment (30,632) (30,632)
----------- ------------
Accumulated other comprehensive loss $ (55,372) $ (56,874)
=========== ============
8. 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.
PAGE 15
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.
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.
9. 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 gain or loss 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 enters 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.
At September 30, 2003, CNF held three interest rate swap derivatives
that were initially entered into as cash flow hedges to mitigate the
effects of interest rate volatility on floating-rate operating lease
payments. CNF's only interest rate swap derivative to qualify for
hedge accounting under SFAS 133 as of September 30, 2003 expired in
October 2003 with the scheduled termination of the hedged floating-rate
operating lease. In connection with the restructuring plan described
above, hedge accounting was discontinued for the remaining two interest
rate swap derivatives when EWA settled floating-rate operating leases
hedged with the interest rate swaps. For periods subsequent to
December 31, 2002, increases in the estimated fair value of these
freestanding interest rate swap derivatives were reported as increases
in Other Assets in the Consolidated Balance Sheets and as non-operating
income of $0.6 million and $0.8 million in the third quarter and first
nine months of 2003, respectively.
Prior to their termination in December 2002, CNF had designated four
interest rate swap derivatives as fair value hedges to mitigate the
effects of interest rate volatility on the fair value of fixed-rate
long-term debt. Immediately prior to CNF receiving cash payments in
settlement of the interest rate swaps, the $39.8 million estimated fair
value of these derivative instruments was reported in Other Assets in
CNF's Consolidated Balance Sheets with an offsetting fair-value
adjustment to the carrying amount of the hedged fixed-rate long-term
debt. Consistent with SFAS 133, the $39.8 million cumulative
adjustment of the carrying amount of long-term debt will be accreted to
future earnings using the effective interest rate method until the debt
is extinguished, at which time any unamortized fair-value adjustment
would be fully recognized in earnings. Absent the terminated fair
value hedges, the long-term debt will cease to be adjusted for
fluctuations in fair value attributable to changes in interest rate
risk.
PAGE 16
10. Commitments and Contingencies
Spin-Off of CFC
On December 2, 1996, CNF completed the spin-off of CFC to CNF's
shareholders. 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 workers' 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 and surety
bonds under which CNF is liable to the issuing bank or the surety
company.
In September 2002, CFC filed for bankruptcy and ceased most U.S.
operations. Following the commencement of its bankruptcy proceeding,
CFC ceased making payments with respect to these workers' compensation
and public liability claims. CNF was required to take over payment of
some of these claims, and expects that demands for payment will likely
be made against it with respect to the remaining claims. CNF estimates
the aggregate amount of all of these claims, plus other costs, to be
$25.0 million. As a result, CNF accrued additional reserves in 2002,
primarily in Accrued Claims Costs in the Consolidated Balance Sheets,
and recognized 2002 third-quarter and fourth-quarter losses from
discontinuance of $13.0 million (net of $8.3 million of income taxes)
and $2.3 million (net of $1.4 million of income taxes), respectively.
CNF intends to seek reimbursement from CFC in its bankruptcy proceeding
of amounts that CNF pays in respect of all of these claims, although
there can be no assurance that CNF will be successful in recovering all
or any portion of such payments.
In addition, CFC was, at the time of the spin-off, and remains a party
to certain multiemployer pension plans covering some of its current and
former employees. The cessation of its U.S. operations will result in
CFC's "complete withdrawal" (within the meaning of applicable federal
law) from these multiemployer plans, at which point it will become
obligated, under federal law, to pay its share of any unfunded vested
benefits under those plans. It is possible that the trustees of CFC's
multiemployer pension plans may assert claims that CNF is liable for
amounts owing to the plans as a result of CFC's withdrawal from those
plans and, if so, there can be no assurance that those claims would not
be material. For further detailed discussion of this matter, see Item
2, "Management's Discussion and Analysis - Liquidity and Capital
Resources - Discontinued Operations - Spin-Off of CFC."
As a result of the matters discussed above and in Item 2, under
"Management's Discussion and Analysis," CNF can provide no assurance
that matters relating to the spin-off of CFC and CFC's bankruptcy will
not have a material adverse effect on CNF's financial condition, cash
flows or results of operations.
Other
Forwarding's third-quarter operating results in 2003 included a $6.5
million charge for the resolution of matters resulting from an
investigation by the Department of Transportation and the FAA into the
handling of so-called hazardous materials by MWF and EWA. As a
condition of the resolution, MWF is required to develop and implement a
hazardous materials compliance program to detect and prevent future
violations. For a five-year period, MWF is required to engage an
approved third-party auditor to assess whether its hazardous materials
operation is consistently in compliance with all applicable laws.
CNF is a defendant in various 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
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results
of Operations (referred to as Management's Discussion and Analysis) is
intended to assist in the understanding and assessment of the principal
factors affecting the results of operations, liquidity and capital
resources, as well as the critical accounting policies of CNF and its
subsidiaries. This discussion and analysis should be read in
conjunction with Note 2, "Reporting Segments," in the accompanying
Notes to Consolidated Financial Statements, as well as the information
included in CNF's 2002 Annual Report on Form 10-K.
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
CNF's third-quarter net income available to common shareholders of
$24.8 million ($0.46 per diluted share) in 2003 declined from $33.5
million ($0.61 per diluted share) in 2002 and net income available to
common shareholders of $57.0 million ($1.08 per diluted share) in the
first nine months of 2003 fell from $71.6 million ($1.33 per diluted
share) in the first nine months of last year. As described below under
"Discontinued Operations", net income available to common shareholders
in the third quarter and first nine months of last year included a
$10.1 million after-tax net loss ($0.18 per diluted share) from
discontinued operations.
Third-quarter net income from continuing operations (Income from
continuing operations after preferred stock dividends) in 2003 declined
to $24.8 million ($0.46 per diluted share) from $43.6 million ($0.79
per diluted share) and net income from continuing operations in the
first nine months of 2003 fell to $57.0 million ($1.08 per diluted
share) from $81.7 million ($1.51 per diluted share) in the same period
last year. CNF's net income from continuing operations declined in the
comparative three- and nine-month periods in 2003 despite higher
revenue and operating income, primarily due to a $25.0 million reversal
of accrued taxes recognized in the third quarter of last year upon the
settlement of tax matters.
CNF's results from continuing operations included various items that
affected the period-to-period comparisons of the reported operating
income (loss) of its reporting segments that CNF has identified as
"special" items in the periods presented. Items were identified as
such by CNF's management based in part on their materiality to the
relevant reporting segment.
(Dollars in thousands) Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Con-Way Transportation
Services -
Net gain from the sale
of a property $ -- $ -- $ -- $ 8,675
Menlo Worldwide -
Forwarding -
Net gains from payments
under the Air
Transportation Safety
and System
Stabilization Act -- -- 7,230 9,895
Loss for the resolution
of a hazardous
materials violation case (6,500) -- (6,500) --
Logistics -
Net gain from a
contract termination -- -- -- 1,850
CNF Other -
Loss from uncollectible
non-trade receivables -- (3,595) -- (3,595)
Net gain from the sale
of a property -- -- -- 2,367
PAGE 18
CONTINUING OPERATIONS
CNF's revenue in the third quarter increased 6.2% over last year's
third quarter to $1.3 billion and revenue for the first nine months of
2003 grew 7.6% to $3.7 billion over the prior-year nine-month period,
primarily due to higher revenue from both Con-Way and the Menlo
Worldwide companies. CNF's third-quarter operating income in 2003 of
$57.1 million rose 31.1% over last year while operating income of
$135.4 million in the first nine months of 2003 improved 6.0% over the
first nine months of last year, primarily due to higher revenue.
Operating income in the third quarter of 2003 included a charge of $6.5
million ($0.11 per diluted share) for the resolution of a hazardous
materials violation case while last year's third quarter included a
$3.6 million loss ($0.04 per diluted share) from the business failure
of Consolidated Freightways Corporation ("CFC"). The net effect of
special items in the first nine months of 2003 increased operating
income by $0.7 million but decreased diluted earnings per share by
$0.04 due in part to the third-quarter hazardous materials resolution
charge, which was not deductible for tax purposes. The comparability
of operating income in the nine-month period was also affected by a net
operating gain of $19.2 million ($0.21 per diluted share) from special
items in the prior year, as summarized in the table above.
Other net expense in the third quarter of 2003 decreased to $8.9
million from $9.7 million in the prior-year third quarter and increased
to $27.8 million in the first nine months of 2003 from $24.8 million in
the first nine months of 2002. The third quarter and first nine months
of 2003, when compared to the same periods of last year, benefited from
changes in the cash-surrender value of corporate-owned life insurance
policies and was adversely affected by higher interest expense on long-
term debt, declines in investment income on lower cash-equivalent
investments, and higher losses from equity ventures entered into in
prior years. CNF recognized gains of $0.7 million and $2.8 million in
the third quarter and first nine months of 2003, respectively, and
losses of $3.0 million and $4.3 million in the same periods of 2002,
respectively, from changes in the cash-surrender value of the corporate-
owned life insurance policies. Increases in interest expense in the
third quarter and first nine months of 2003 were primarily due to the
settlement of interest rate swaps in December 2002, which effectively
converted long-term debt from fixed-rate to floating-rate prior to
their termination, as more fully discussed in Note 9, "Derivative
Instruments and Hedging Activities," included in the accompanying Notes
to Consolidated Financial Statements. CNF recognized equity venture
losses of $1.5 million and $3.7 million in the third quarter and first
nine months of 2003, respectively, and $0.2 million and $0.9 million in
the third quarter and first nine months of 2002, respectively.
The effective tax provision rate of 44.3% and 41.4% in the third
quarter and first nine months of 2003, respectively, reflects the non-
deductibility of the hazardous materials resolution charge. The
effective tax benefit rate of 34.9% in last year's third quarter and
the effective tax provision rate of 14.7% in the first nine months of
last year were primarily the result of the $25.0 million reversal of
accrued taxes recognized in the third quarter of 2002 upon settlement
of tax matters.
CON-WAY TRANSPORTATION SERVICES
Con-Way's revenue in the third quarter and first nine months of 2003
grew 8.9% and 10.0%, respectively, from the same periods in 2002
primarily due to increases in revenue from Con-Way's regional less-than-
truckload ("LTL") carriers and to revenue growth from Con-Way's asset-
light businesses, as described below. Regional-carrier revenue per day
in the third quarter and first nine months of 2003 increased 7.0% and
8.1%, respectively, over the same periods in 2002, primarily due to
improvements in revenue per hundredweight ("yield") of 4.7% and 7.1%,
respectively, as well as tonnage increases of 2.2% and 1.0%,
respectively. Yield improvements in the third quarter and first nine
months of 2003 reflect rate increases, higher fuel surcharges and
continued growth of interregional joint services, which typically
command higher rates on longer lengths of haul. Excluding fuel
surcharges, yield in the third quarter and first nine months of 2003
increased 3.4% and 4.4% over the respective prior-year periods. In
2003, Con-Way's asset-light businesses, including Con-Way NOW, Con-Way
Logistics, and Con-Way Air Express, increased revenue in the third
quarter and first nine months by 79% and 70%, respectively. Con-Way
defines "asset-light" businesses as those that require a comparatively
smaller capital investment than its LTL operations.
Con-Way's third-quarter operating income in 2003 increased 35.9% from
2002 to $56.6 million and operating income for the first nine months of
2003 increased 24.3% from last year to $137.3 million. Higher
operating income in the third quarter and first nine months of 2003 was
primarily due to higher revenue from the regional carriers as well as
revenue growth from Con-Way's asset-light businesses, which reduced
their net operating losses in 2003 by 50.1% in the third quarter and
20.3% in the nine-month period. Employee costs in the third quarter
and first nine months of 2003, which increased 4.5% and 5.1% from the
respective prior-year periods, declined as a percentage of Con-Way's
revenue. Operating income in the first nine months of 2003 was
adversely affected by higher first-quarter winter weather-related costs
while the first nine months of the prior year benefited from an $8.7
million first-quarter net gain from the sale of an excess property.
PAGE 19
MENLO WORLDWIDE
For financial reporting purposes, the Menlo Worldwide group, which was
formed effective January 1, 2002, is divided into three reporting
segments: Forwarding, Logistics, and Menlo Worldwide Other. Vector
SCM, a joint venture with General Motors, is reported in the Menlo
Worldwide Other segment as an equity-method investment. The Menlo
Worldwide group of businesses in 2003 reported third-quarter revenue of
$731.7 million, a 4.3% increase over last year, while revenue of $2.1
billion in the first nine months of 2003 improved 6.0% over the first
nine months of last year. Menlo Worldwide reported third-quarter
operating income of $1.4 million in 2003 compared to $6.0 million in
2002, and operating income of $1.0 million in the first nine months of
2003 compared to operating income of $19.9 million in the first nine
months of last year.
Forwarding
Forwarding's revenue in the third quarter and first nine months of 2003
rose 5.0% and 5.9% over the same periods of 2002, respectively,
primarily due to an increase in international airfreight revenue,
partially offset by a decline in North American airfreight revenue.
Third-quarter 2003 international airfreight revenue per day, including
fuel surcharges, increased 14.1% over the same period last year due to
an increase of 16.2% in average international pounds per day
("weight"), partially offset by a decrease in international revenue per
pound ("yield") of 1.8%, while international airfreight revenue per day
in the first nine months of 2003 increased 16.0% on an 11.5% increase
in weight and a 4.0% improvement in yield. The increase in
international weight in the third quarter and first nine months of 2003
was primarily the result of improved business levels in Asian and
European markets, while the improvement in the first nine months of
2003 was also favorably impacted by an increase in war-related military
business in the first quarter. International yield in the same
comparative periods of 2003 benefited from higher fuel surcharges.
Excluding fuel surcharges, international yield in 2003 decreased 3.2%
in the third quarter and increased 1.8% in the first nine months.
North American airfreight revenue per day, including fuel surcharges,
declined 9.4% and 9.5% in the third quarter and first nine months of
2003, respectively, from the same periods in 2002 primarily due to
declines in yield of 7.8% and 8.8%, respectively, and declines in
weight of 1.8% and 0.8%, respectively. Lower North American weight and
yield the third quarter and first nine months of 2003 was primarily the
result of Forwarding's efforts to increase second-day and deferred-
delivery services, as well as a decline in the demand for next-day
delivery services, which contributed to a higher percentage of lower-
yield second-day and deferred delivery services. North American yield
in the third quarter and first nine months of 2003 benefited from an
increase in fuel surcharges compared to the same periods in 2002.
Excluding fuel surcharges, North American yield in the third quarter
and first nine months of 2003 declined 9.5% and 12.5%, respectively.
Forwarding's third-quarter operating loss in 2003 increased to $14.3
million from $5.0 million in 2002. The third-quarter 2003 operating
loss included a $6.5 million charge for the resolution of a hazardous
materials violations case. Forwarding's operating loss of $33.6
million in the first nine months of 2003 increased from $16.6 million
in the same period of 2002. Forwarding's operating loss in the first
nine months of 2003 included the net effect of the hazardous materials
resolution charge and a $7.2 million first-quarter net gain from a
payment under the Air Transportation Safety and System Stabilization
Act (the "Act"), while the operating loss in the first nine months of
2002 included a $9.9 million first-quarter net gain under the Act.
Forwarding's operating losses in the third quarter and first nine
months of 2003, excluding the special items described above, increased
over the same prior-year periods primarily due to declines in North
American airfreight revenue and higher costs for expansion in
international markets. For the comparative nine-month period,
Forwarding's operating loss in 2003 was adversely affected by lower
operating margins on international revenue and an increase in winter
weather-related costs in the first quarter.
PAGE 20
Restructuring Plan
In June 2001, Forwarding 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 primarily due to a slowing domestic economy and loss of
EWA's contracts with the USPS to transport Express Mail and Priority
Mail. The $340.5 million second-quarter restructuring charge in 2001
consisted primarily of non-cash impairment charges of $278.0 million
and $62.5 million of estimated future cash expenditures related
primarily to the return to lessors of certain aircraft leased to EWA.
Based on issues identified during inspections conducted by the Federal
Aviation Administration ("FAA"), on August 13, 2001, EWA was required
to suspend its air carrier operations as part of an interim settlement
agreement with the FAA. As a result, EWA furloughed approximately 400
pilots and crewmembers and Forwarding made arrangements to continue its
service to customers by utilizing aircraft operated by several other
air carriers. Primarily in response to the FAA action and a worsening
global economic downturn, Forwarding re-evaluated its restructuring
plan. On December 5, 2001, CNF announced that Forwarding (formerly
known as "Emery" or "Emery Forwarding") in 2002 would become part of
CNF's new Menlo Worldwide group of supply chain services providers and
in North America would utilize aircraft operated by other air carriers
instead of EWA operating its own fleet of aircraft, and that EWA would
permanently cease air carrier operations. In connection with the
revised restructuring plan, in the fourth quarter of 2001 Forwarding
recognized additional restructuring charges of $311.7 million,
including $305.6 million for the planned disposal of leased aircraft,
cessation of EWA's remaining operations, and other costs, and $6.1
million for employee separation costs for 157 of Forwarding's non-pilot
employees.
In connection with CNF's announcement of the cessation of EWA's air
carrier operations on December 5, 2001, EWA terminated the employment
of all of its pilots and crewmembers, bringing the total number of
terminated employees in 2001 to 800. Those pilots and crewmembers are
represented by the Air Line Pilots Association ("ALPA") union under a
collective bargaining agreement. Subsequently, ALPA filed a grievance
on behalf of the pilots and crewmembers protesting the cessation of
EWA's air carrier operations and Forwarding'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 believes
that it has provided for its estimated exposure related to the ALPA
matters. However, there can be no assurance in this regard as CNF
cannot predict with certainty the ultimate outcome of these matters.
Following the fourth-quarter restructuring charge in 2001, Forwarding's
cash flows have reflected the cost of having other air carriers provide
service to Forwarding's North American customers as well as lease
payments and other costs associated with Forwarding's restructuring
plan; however, Forwarding's operating expenses have reflected the cost
of aircraft operated by other carriers but have not included scheduled
rental payments and return costs or other restructuring-related
payments, as these expenses were accrued in connection with the
restructuring charges.
Forwarding's restructuring reserves for aircraft and other costs
declined to $37.2 million at September 30, 2003 from $67.7 million at
December 31, 2002 primarily due to aircraft lease and return costs.
None of the 37 aircraft that were grounded in connection with
Forwarding's restructuring plan remained under lease as of September
30, 2003. Restructuring reserves at September 30, 2003 consisted
primarily of CNF's estimated exposure related to labor matters in
arbitration, as described above, as well as other estimated remaining
restructuring-related obligations.
The restructuring charges recognized during 2001 reflect CNF's estimate
of the costs of terminating EWA's air carrier operations and
restructuring Forwarding'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 that difference would be
recognized as additional expense or income in the period when and if
that determination can be made.
Terrorist Attacks
In response to the September 11, 2001 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
other financial assistance. In March 2002, Forwarding received an
$11.9 million payment under the Act, resulting in the recognition of a
$9.9 million first-quarter net gain in 2002. In March 2003, Forwarding
received a final payment of $7.5 million, resulting in a $7.2 million
first-quarter net gain in 2003.
Forwarding is not able to accurately quantify how the events of
September 11, or any subsequent terrorist activities, will affect the
global economy, governmental regulation, the air transportation
industry, Forwarding's costs of providing airfreight services and the
demand for Forwarding's airfreight services. However, Forwarding
believes that any additional security measures that may be required by
future regulations could result in additional costs and could have an
adverse effect on its operations and service.
PAGE 21
Outlook
Management will continue Forwarding's focus on increasing the revenue
and operating margins of its variable-cost-based international
operations. In North America, management is continuing its efforts to
align its costs with revenues, which have decreased primarily due to
declines in the demand for next-day heavy air freight delivery
services. This decline in revenue caused Forwarding's losses to
increase further. Management continues to pursue a variety of
alternatives to address the issue.
Logistics
Logistics' revenue of $262.7 million in the third quarter of 2003
increased 3.0% over the prior-year third quarter and revenue of $757.2
million in the first nine months of 2003 grew 6.2% over the first nine
months of last year. Higher third-quarter revenue was primarily due to
growth in carrier management services, partially offset by lower
revenue from warehousing services, contract carriage and consulting
fees. Increased revenue in the first nine months of 2003 was primarily
due to higher revenue from carrier management and warehousing services,
partially offset by a decline in revenue from contract carriage and
consulting fees.
A portion of Logistics' revenue is attributable to contracts for which
Logistics manages the transportation of freight but subcontracts the
actual transportation and delivery of products to third parties.
Logistics refers to this as purchased transportation. Logistics' net
revenue (revenue less purchased transportation) was $73.7 million and
$217.2 million in the third quarter and first nine months of 2003,
respectively, compared to $77.3 million and $209.3 million in 2002 in
the respective periods last year.
Logistics' third-quarter operating income of $6.9 million in 2003 fell
from $8.4 million in the prior-year third quarter and operating income
of $19.2 million in the first nine months of 2003 declined from $23.2
million for the same period last year. The prior year included a first-
quarter $1.9 million net gain from the early termination of a contract.
Excluding the prior-year contract termination gain, lower operating
income in the comparative periods of 2003 primarily reflects an
increase in lower-margin carrier management services and a decline in
higher-margin consulting fee revenue as well as higher administrative
expenses, which were primarily attributable to expansion in
international markets and higher amortization related to logistics
management software placed in service in the second quarter of 2002.
Menlo Worldwide Other
The Menlo Worldwide Other reporting segment consists of the results of
Vector SCM (Vector), a joint venture formed with General Motors ("GM")
in December 2000 for the purpose of providing logistics management
services on a global basis, at present for GM, but ultimately for
customers in addition to GM. Agreements pertaining to Vector
(collectively, "Vector Agreements") provided that Vector would be
compensated by sharing in efficiency gains and cost savings achieved
through the implementation of Approved Business Cases ("ABCs") and
other special projects in GM's North American region and GM's three
international regions. An ABC is a project, developed with and
approved by GM, aimed at reducing costs, assuming operational
responsibilities, and/or achievement of operational changes.
In August 2003, the Vector Agreements were amended, primarily to
expedite the transition of logistics services in the North American
region from GM to Vector. The amendments change the compensation
principles for GM's North American logistics operations, revise the
allocation of Vector's profit between GM and CNF, and modify the
formula for the valuation of Vector in the event that CNF exercises its
Put Right, as described below.
PAGE 22
The amendments to the Vector Agreements provide that Vector be
compensated for its management of logistics for all of GM's North
American operations rather than by sharing in efficiency gains and cost
savings achieved under individual and separately approved ABCs in North
America. In each year of a five-year period retroactive to January 1,
2003, Vector will be compensated with a management fee for logistics
services provided in the North American region and can earn additional
compensation by sharing in efficiency gains and cost savings achieved
in North America. Vector will be compensated by GM for its direct and
general and administrative costs in North America, subject to certain
limitations. At the present time, Vector's compensation for management
of logistics services for GM's international regions and aftermarket
parts supply operations will continue to be determined through the
implementation of separately approved ABC's and special projects.
The amended Vector Agreements also reduce GM's allocation of profit and
loss from 20% to 15%. Although CNF owns a majority equity interest,
the operating results of Vector are reported as an equity-method
investment based on GM's ability to control certain operating
decisions.
Under the Vector Agreements, GM has the right to purchase CNF's
membership interest in Vector ("Call Right") and CNF has the right to
require GM to purchase CNF's membership interest in Vector ("Put
Right"). The Call Right and Put Right are exercisable at the sole
discretion of GM and CNF, respectively. Prior to amendment of the
Vector Agreements, exercise of the Call Right or Put Right required GM
to pay CNF for the full value of CNF's membership interest in Vector,
as determined by approved appraisers using a predetermined valuation
formula. Under the amended Vector Agreements, the amount payable by GM
to CNF under the Put Right is based on a mutually agreed-upon estimated
value for CNF's membership interest as of the contract amendment date
and will decline on a straight-line basis over an 8-year period
beginning January 1, 2004. Exercise of CNF's Put Right or GM's Call
Right would result in retaining future commercialization contracts
involving customers other than GM.
The Menlo Worldwide Other segment reported third-quarter operating
income of $8.8 million in 2003 compared to $2.6 million in 2002 while
operating income in the first nine months of 2003 improved to $15.4
million in 2003 from $13.3 million last year. The third quarter of
2003 included $3.5 million of operating income resulting from Vector's
transition to recognizing compensation in accordance with the amended
Vector Agreements. Operating income of the Menlo Worldwide Other
segment in the first half of last year included substantially all of
Vector's net income for that period (rather than CNF's pro-rata portion
of that net income), because CNF was contractually entitled to
substantially all of Vector's net income to the extent of Vector's
cumulative losses because, under the contract, all of Vector's losses
in prior periods were allocated to CNF. During the second quarter of
2002, CNF's allocated cumulative losses from the Vector joint venture
had been recouped through allocated net income. As a result, GM began
sharing in Vector's net income in the third quarter of 2002.
Vector's strategy is to continue providing exceptional logistics
management services to GM while increasing efforts to commercialize
Vector's business to customers other than GM. As a result of these
efforts, management intends to increase the percentage of compensation
derived from commercialization activities, as well as from GM's
international regions and aftermarket parts supply operations.
CNF Other
The CNF Other segment consists of the results of Road Systems and
certain corporate activities. The CNF Other third-quarter operating
loss decreased to $0.9 million in 2003 from $4.1 million in 2002 and
the $2.9 million operating loss in the first nine months of 2003
increased slightly from an operating loss of $2.5 million in the first
nine months of last year. Operating results in 2003 included a $1.1
million second-quarter loss from the sale of an excess property while
last year included a $2.4 million first-quarter net gain from the sale
of excess corporate properties and a $3.6 million third-quarter loss
from the business failure of CFC.
DISCONTINUED OPERATIONS
Priority Mail Contract
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"). All claims relating to amounts owed to EWA under the
Priority Mail contract were fully settled in connection with payments
from the USPS to EWA in 2002 and 2001, including a $6.0 million payment
in July 2002 that fully settled EWA's Priority Mail contract
termination costs and resulted in a 2002 third-quarter gain from
discontinuance of $2.9 million, net of $1.8 million of income taxes.
Refer to Note 5, "Discontinued Operations," included in the
accompanying Notes to Consolidated Financial Statements.
PAGE 23
Spin-Off of CFC
As more fully discussed below under "Liquidity and Capital Resources -
Discontinued Operations - Spin-off of CFC," CNF recognized 2002 third-
quarter and fourth-quarter losses from discontinuance of $13.0 million
(net of $8.3 million of income taxes) and $2.3 million (net of $1.4
million of income taxes), respectively, in connection with the
bankruptcy of CFC in September 2002.
PAGE 24
LIQUIDITY AND CAPITAL RESOURCES
In the first nine months of 2003, cash from operating activities
provided $176.7 million, which was used primarily to fund $87.6 million
in investing activities and $32.5 million consumed by financing
activities. The excess cash flow from operations increased cash and
cash equivalents from $270.4 million at December 31, 2002 to $326.3
million at September 30, 2003.
Continuing Operations
Cash from operating activities of $176.7 million in the first nine
months of 2003 increased from $49.2 million of cash provided by
operating activities in the first nine months of last year. The nine-
month period of the current year reflects $26.3 million of
restructuring-related aircraft lease payments and return costs, as
described above under "Results of Operations - Menlo Worldwide -
Forwarding - Restructuring Plan," while the prior-year nine-month
period included $189.8 million of payments for that same purpose.
Cash from operating activities in the first nine months of 2003 was
provided primarily by net income before non-cash adjustments of $217.4
million, partially offset by $40.8 million used in the net change of
assets and liabilities. "Non-cash adjustments" refer to depreciation,
amortization, deferred income taxes, provision for uncollectible
accounts, equity in earnings of joint venture, and non-cash gains and
losses. In the first nine months of 2003, the decline in Employee
Benefits included $75.0 million of cash used for defined benefit
pension plan contributions, as described below under "- Defined Benefit
Pension Plan," less benefit plan accruals. Cash flow from accrued
liabilities for the nine-month period in 2003 consisted of the net
effect of a $31.0 million decline in accrued incentive compensation and
$33.9 million provided by changes in other accrued liabilities.
Receivables reflect an increase in Trade Accounts Receivable, partially
offset by a decline in Other Accounts Receivable, which includes
proceeds from $41.3 million from second-quarter income tax refunds.
Investing activities in the first nine months of 2003 used $87.6
million compared to $65.8 million used in the first nine months of the
prior year. Capital expenditures of $84.1 million in the first nine
months of 2003 rose from $67.4 million in the same period of 2002,
primarily due to a $15.4 million increase in capital expenditures at
Con-Way, which reflects the acquisition of revenue equipment. Cash
used in financing activities in the first nine months of 2003 declined
to $32.5 million from $50.7 million used in the same period of 2002,
primarily due to capital lease payments on aircraft in the first nine
months of last year.
CNF has a $385 million revolving credit facility that matures on July
3, 2006. The revolving credit facility is available for cash
borrowings and for the issuance of letters of credit up to $385
million. At September 30, 2003, no borrowings were outstanding under
the facility and $226.8 million of letters of credit were outstanding,
leaving $158.2 million of available capacity for additional letters of
credit or cash borrowings, subject to compliance with financial
covenants and other customary conditions to borrowing. CNF had other
uncommitted unsecured credit facilities totaling $91.1 million at
September 30, 2003, which are available to support letters of credit,
bank guarantees, and overdraft facilities; at that date, a total of
$75.5 million was outstanding under these facilities. Of the total
letters of credit outstanding at September 30, 2003, $220.1 million
provided collateral for CNF workers' compensation and vehicular self-
insurance programs. See "Other Matters - Forward-Looking Statements"
below, Note 4 to the Consolidated Financial Statements, and Note 5,
"Debt and Other Financing Arrangements," in Item 8, "Financial
Statements and Supplementary Data," included in CNF's 2002 Annual
Report on Form 10-K for additional information concerning CNF's $385
million credit facility and some of its other debt instruments,
including certain rights and remedies available to the lenders, which
could have a material adverse effect on CNF. In particular, in the
event that CNF's long-term senior debt is rated at less than investment
grade by both Standard & Poor's and Moody's, holders of certain
indebtedness would be entitled to require CNF to repurchase that
indebtedness and CNF would be required to pledge collateral securing
its $385 million revolving credit facility and may be required to
pledge collateral securing certain other indebtedness.
Discontinued Operations
Spin-Off of CFC
On December 2, 1996, CNF completed the spin-off of CFC to CNF's
shareholders. 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 workers' 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 and surety
bonds under which CNF is liable to the issuing bank or the surety
company.
PAGE 25
In September 2002, CFC filed for bankruptcy and ceased most U.S.
operations. Following the commencement of its bankruptcy proceeding,
CFC ceased making payments with respect to these workers' compensation
and public liability claims. CNF was required to take over payment of
some of these claims, and expects that demands for payment will likely
be made against it with respect to the remaining claims. CNF estimates
the aggregate amount of all of these claims, plus other costs, to be
$25.0 million. As a result, CNF accrued additional reserves in 2002,
primarily in accrued claims costs in the Consolidated Balance Sheets,
and recognized 2002 third-quarter and fourth-quarter losses from
discontinuance of $13.0 million (net of $8.3 million of income taxes)
and $2.3 million (net of $1.4 million of income taxes), respectively.
CNF intends to seek reimbursement from CFC in its bankruptcy proceeding
of amounts that CNF pays in respect of all of these claims, although
there can be no assurance that CNF will be successful in recovering all
or any portion of such payments.
In addition, CFC was, at the time of the spin-off, and remains a party
to certain multiemployer pension plans covering some of its current and
former employees. The cessation of its U.S. operations will result in
CFC's "complete withdrawal" (within the meaning of applicable federal
law) from these multiemployer plans, at which point it will become
obligated, under federal law, to pay its share of any unfunded vested
benefits under those plans.
It is possible that the trustees of CFC's multiemployer pension plans
may assert claims that CNF is liable for amounts owing to the plans as
a result of CFC's withdrawal from those plans and, if so, there can be
no assurance that those claims would not be material. CNF has received
requests for information regarding the spin-off of CFC from
representatives from some of the pension funds, and, in accordance with
federal law, CNF has responded to those requests. Under federal law,
representatives of CFC's multiemployer plans are entitled to request
such information to assist them in determining whether they believe any
basis exists for asserting a claim against CNF.
Based on advice of legal counsel and its knowledge of the facts, CNF
believes that it would ultimately prevail if any such claims were made,
although there can be no assurance in this regard. CNF believes that
the amount of those claims, if asserted, could be material, and a
judgment against CNF for all or a significant part of these claims
could have a material adverse effect on CNF's financial condition, cash
flow and results of operations.
If such claims were made, CNF, unless relieved of the obligation
through appropriate legal proceedings, would be required under federal
law to make periodic cash payments to the multiemployer plans asserting
claims against CNF, in an aggregate amount of up to the full amount of
those claims. However, under federal law, the claims would initially
be decided through arbitration and, upon a final decision by the
arbitrator in favor of CNF, the plan trustees would be required to
promptly refund those payments, with interest. While the length of
time required to reach a final decision in any such arbitration cannot
be predicted with certainty, CNF believes that such a decision could be
reached within twelve to eighteen months from receipt of claims from
the plans, although there can be no assurance in this regard.
CNF currently estimates that the net amount of quarterly payments
(after deductibility for tax purposes) could range from $20 million to
$25 million (based on certain assumptions), although the actual amount
could be greater or less than this estimate. Based on CNF's current
financial condition and management's projections of CNF's estimated
future financial condition, cash flows and results of operations, as
well as a number of other estimates and assumptions, CNF believes that
it would have sufficient financial resources to make these periodic
payments if it were required to do so. However, there can be no
assurance in that regard, and accordingly any requirement to make these
periodic payments could have a material adverse effect on CNF's
financial condition and cash flows.
As a result of the foregoing, there can be no assurance that matters
relating to the spin-off of CFC and CFC's bankruptcy will not have a
material adverse effect on CNF's financial condition, cash flows or
results of operations, including potentially triggering downgrades of
debt instruments or events of default under credit agreements. See
"Other Matters - Forward-Looking Statements" and Note 5, "Debt and
Other Financing Arrangements," in Item 8, "Financial Statements and
Supplementary Data," included in CNF's 2002 Annual Report on Form 10-K.
PAGE 26
Priority Mail Contract
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 5, "Discontinued Operations," included in the accompanying
Notes to Consolidated Financial Statements, EWA in July 2002 received a
$6.0 million payment to fully settle EWA's Priority Mail contract
termination costs.
Defined Benefit Pension Plan
CNF periodically reviews the funding status of its defined benefit
pension plan for non-contractual employees, and makes contributions
from time to time as necessary in order to comply with the funding
requirements of the Employee Retirement Income Security Act ("ERISA").
Funding of CNF's defined benefit pension is based on ERISA-defined
measurements rather than the recognition and measurement criteria
prescribed by GAAP. CNF contributed a total of $75 million of cash in
2003, consisting of a $25 million payment in the second quarter and $50
million of payments in the third quarter. There can be no assurance
that CNF will not be required to make further cash contributions, which
could be substantial, to its defined benefit pension plan in the
future. CNF made defined benefit pension plan contributions of $76.2
million in 2002 and $13.1 million in 2001, but made no contributions
from 1996 through 2000, due in part to the high rate of return realized
on plan assets during that period.
GAAP requires recognition of a minimum pension liability adjustment, as
described below in " - Other Matters - Estimates and Critical
Accounting Policies - Defined Benefit Pension Plan." An increase in
future minimum pension liability adjustments would further reduce
shareholders' equity. As a result of the foregoing, there can be no
assurance that matters related to CNF's defined benefit pension plans
will not have a material adverse effect on CNF's financial condition,
cash flows or results of operations. As described in Note 4 of the
Notes to Consolidated Financial Statements, debt agreements for CNF's
$385 million revolving credit facility and the 6.00% TASP notes
guaranteed by CNF were amended in August 2003 to exclude the effect of
any minimum pension liability adjustments from the calculation of
financial covenants.
Other
In general, CNF expects its future liquidity to be affected by the
timing and amount of cash flows related to capital expenditures,
pension plan funding requirements, restructuring charge reserves,
repayment of long-term debt and guarantees, capital and operating
leases and the preferred securities of a subsidiary trust. For
further discussion, see Note 4 to the Consolidated Financial Statements
and Item 8, "Financial Statements and Supplementary Data," under Note
5, "Debt and Other Financing Arrangements," and Note 6, "Leases,"
included in CNF's 2002 Annual Report on Form 10-K.
CNF's ratio of total debt to capital decreased to 38.3% at September
30, 2003 from 40.3% at December 31, 2002 primarily due to net income
and the repayment of debt in the first nine months of 2003.
OTHER MATTERS
ESTIMATES AND CRITICAL ACCOUNTING POLICIES
CNF makes estimates and assumptions when preparing its financial
statements in conformity with accounting principles generally accepted
in the United States. These estimates and assumptions affect the
amounts reported in the accompanying financial statements and notes
thereto. Actual results could differ from those estimates. CNF's most
critical accounting policies upon which management bases estimates are
those relating to self-insurance reserves, income taxes, restructuring
reserves, uncollectible accounts receivable, defined benefit pension
plan costs and goodwill and other long-lived assets.
Self-Insurance Reserves
CNF uses a combination of insurance and self-insurance mechanisms to
provide for the potential liabilities for medical, casualty, liability,
vehicular, cargo and workers' compensation claims. Liabilities
associated with the risks that are retained by CNF are estimated, in
part, by considering historical claims experience, medical costs,
demographic factors, severity factors and other assumptions. The
estimated accruals for these liabilities could be significantly
affected if actual costs differ from these assumptions and historical
trends.
PAGE 27
Income Taxes
In establishing its deferred income tax assets and liabilities, CNF
makes judgments and interpretations based on the enacted tax laws and
published tax guidance that are applicable to its operations. CNF
records deferred tax assets and liabilities and periodically evaluates
the need for valuation allowances to reduce deferred tax assets to
realizable amounts. The likelihood of a material change in CNF's
expected realization of these assets is dependent on future taxable
income, its ability to use foreign tax credit carry forwards and carry
backs, final U.S. and foreign tax settlements, and the effectiveness of
its tax planning strategies in the various relevant jurisdictions. CNF
is also subject to examination of its income tax returns for multiple
years by the IRS and other tax authorities. CNF periodically assesses
the likelihood of adverse outcomes resulting from these examinations to
determine the adequacy of its provision and related accruals for income
taxes.
Restructuring Reserves
The restructuring charges recognized in 2001 were based on significant
estimates and assumptions made by management. Refer to the "Menlo
Worldwide - Forwarding - Restructuring Plan" section under "Results of
Operations" above for a description of the significant assumptions
used.
Uncollectible Accounts Receivable
CNF and its subsidiaries report accounts receivable at net realizable
value and provide an allowance for uncollectible accounts when
collection is considered doubtful. Con-Way and Forwarding provide for
uncollectible accounts based on various judgments and assumptions,
including revenue levels, historical loss experience, and composition
of outstanding accounts receivable. Logistics, based on the size and
nature of its client base, performs a frequent and periodic evaluation
of its customers' creditworthiness and accounts receivable portfolio
and recognizes expense from uncollectible accounts when losses are both
probable and estimable.
Defined Benefit Pension Plan
CNF has a defined benefit pension plan that covers non-contractual
employees in the United States. The amount recognized as pension
expense and the accrued pension liability depend upon a number of
assumptions and factors, the most significant being the discount rate
used to measure the present value of pension obligations and the
assumed rate of return on plan assets, which are both affected by
economic conditions and market fluctuations. CNF adjusts its discount
rate periodically by taking into account a number of factors, including
changes in high-quality corporate bond yields and the advice of its
outside actuaries. CNF adjusts its assumed rate of return on plan
assets based on historic returns of the plan assets since inception of
the plan.
CNF used a 7.25% discount rate for purposes of calculating its 2002
pension expense, but used a 6.75% discount rate for calculating its
2002 year-end pension liability and its 2003 pension expense, primarily
due to declines in high-quality corporate bond yields in 2002. By way
of example, if all other factors were held constant, a 0.5% decline in
the discount rate would have an estimated $4 million increase in 2003
annual pension expense. CNF used an assumed rate of return on plan
assets of 9.5% in 2002, but reduced its assumed rate of return on plan
assets for 2003 to 9.0%, based on declines in equity markets in 2002.
Using year-end plan asset values, a 0.5% decline in the assumed rate of
return of plan assets would have an estimated $2 million increase in
2003 annual pension expense.
The determination of CNF's accrued pension benefit cost includes an
unrecognized actuarial loss that results from the cumulative difference
between estimated and actual values for the year-end projected pension
benefit obligation and the fair value of plan assets. Under accounting
principles generally accepted in the United States ("GAAP"), any
portion of the unrecognized actuarial loss or gain that exceeds ten
percent of the greater of the projected benefit obligation or fair
value of plan assets must be amortized as an expense over the average
service period for employees, approximately thirteen years for CNF.
Amortization of the unrecognized actuarial loss increases the annual
pension expense in 2003 by approximately $6 million over annual pension
expense in 2002.
PAGE 28
The accumulated benefit obligation of CNF's defined benefit pension
plan exceeded the fair value of plan assets as of December 31, 2002,
primarily due to declines in the discount rate and the rate of return
on plan assets in 2002, as described above. In accordance with GAAP,
CNF's Consolidated Balance Sheets as of September 30, 2003 and December
31, 2002 reflects accumulated minimum pension liability adjustments,
including $56.9 million in the Employee Benefits pension liability
related to CNF's qualified and non-qualified defined benefit pension
plans, a $6.7 million intangible pension asset in Other Assets, and a
$30.6 million net-of-tax accumulated other comprehensive loss in
shareholders' equity. If all other factors were held constant, a 0.5%
decline in the discount rate would increase the net-of-tax minimum
pension liability adjustment by approximately $35 million. Under
GAAP, CNF's accumulated minimum pension liability adjustments as of
December 31, 2002 and September 30, 2003 remain unchanged until the
effects of remeasurement are reported in CNF's financial statements for
the period ending December 31, 2003.
Goodwill and Other Long-Lived Assets
Effective January 1, 2002, CNF adopted SFAS 142, "Goodwill and Other
Intangible Assets." SFAS 142 specifies that goodwill and indefinite-
lived intangible assets will no longer be amortized but instead will be
subject to an annual impairment test. In accordance with the
provisions of SFAS 142, CNF ceased goodwill amortization associated
with the Forwarding reporting segment. Based on an impairment test as
of December 31, 2002, CNF was not required to record a charge for
goodwill impairment. CNF will perform a fourth-quarter goodwill
impairment test on an annual basis and between annual tests in certain
circumstances.
Consistent with SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," CNF performs an impairment analysis of long-lived
assets (other than goodwill or intangible assets) whenever
circumstances indicate that the carrying amount may not be recoverable.
In assessing the recoverability of goodwill and other long-lived
assets, CNF must make various assumptions regarding estimated future
cash flows and other factors in determining the fair values of the
respective assets. If these estimates or their related assumptions
change in the future, Forwarding may be required to record impairment
charges for goodwill or other long-lived assets in future periods. Any
such resulting impairment charges could have a material adverse effect
on CNF's financial condition or results of operations, including
potentially triggering downgrades of debt instruments. See "- Forward-
Looking Statements" below, Note 4 to the Consolidated Financial
Statements, and Note 5, "Debt and Other Financing Arrangements," in
Item 8, "Financial Statements and Supplementary Data," included in
CNF's 2002 Annual Report on Form 10-K.
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 enters 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 interest rate,
commodity 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 Item 8, "Financial Statements and Supplementary Data,"
under Note 5, "Debt and Other Financing Arrangements," and Note 6,
"Leases," included in CNF's 2002 Annual Report on Form 10-K. CNF uses
interest rate swaps to mitigate the impact of interest rate volatility
on cash flows related to operating lease payments, and prior to their
termination in December 2002, CNF used interest rate swaps to mitigate
the impact of interest rate volatility on the fair value of its fixed-
rate long-term debt, as described more fully in Note 9, "Derivative
Instruments and Hedging Activities," included in the accompanying Notes
to Consolidated Financial Statements. At September 30, 2003, CNF had
not entered into any material derivative contracts to hedge exposure to
commodity prices or foreign currency.
PAGE 29
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 air
freight 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.
BUSINESS INTERRUPTION
Although the operations of CNF's subsidiaries are largely
decentralized, Forwarding maintains a major hub operation at the Dayton
International Airport in Dayton, Ohio. While CNF currently maintains
property and business interruption insurance covering Forwarding's
operations at the Dayton hub, its insurance policies contain limits for
certain causes of loss, including but not limited to earthquake and
flood. Such policies do not insure against property loss or business
interruption resulting from a terrorist act. Accordingly, there can be
no assurance that this insurance coverage will be sufficient. As a
result, a major property loss or sustained interruption in the business
operations at the Dayton hub, whether due to terrorist activities or
otherwise, could have a material adverse effect on CNF's financial
condition, cash flows, and results of operations.
In addition, CNF and its subsidiaries rely on its Administrative and
Technology ("AdTech") Center in Portland, Oregon for the performance of
shared administrative and technology services in the conduct of their
businesses. CNF's centralized computer facilities and its
administrative and technology employees are located at the AdTech
Center campus. Although CNF maintains backup systems and has disaster
recovery processes and procedures in place, a sustained interruption in
the operation of these facilities, whether due to terrorist activities,
earthquakes, floods or otherwise, could have a material adverse effect
on CNF's financial condition, cash flows, and results of operations.
HOMELAND SECURITY
Since 2001, CNF has been subject to compliance with cargo security and
transportation regulations issued by the Transportation Security
Administration. Beginning in 2002, CNF has been subject to regulations
issued by the Department of Homeland Security. CNF is not able to
accurately predict how recent events will affect governmental
regulation and the transportation industry. However, CNF believes that
any additional security measures that may be required by future
regulations could result in additional costs and could have an adverse
effect on its ability to serve customers and on its financial
condition, cash flows and results of operations.
EMPLOYEES
Most of the workforce of CNF and its subsidiaries is not affiliated
with labor unions. Consequently, CNF believes that the operations of
its subsidiaries have significant advantages over comparable unionized
competitors (particularly in the trucking industry) in providing
reliable and cost-competitive customer services, including greater
efficiency and flexibility. There can be no assurance that CNF's
subsidiaries will be able to maintain their current advantages over
certain of their competitors.
ACCOUNTING STANDARDS
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" ("FIN 45"). During the
quarter ended December 31, 2002, CNF adopted the disclosure provisions
of FIN 45, which require increased disclosure of guarantees, including
those for which likelihood of payment is remote. FIN 45 also requires
that, upon issuance of a guarantee, the guarantor must recognize a
liability for the fair value of the obligation it assumes under that
guarantee. The initial recognition and measurement provisions of FIN
45 are to be applied on a prospective basis to guarantees issued or
modified after December 31, 2002. CNF adopted FIN 45 with no material
impact.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities: an Interpretation of ARB No. 51" ("FIN
46"). FIN 46 addresses consolidation by business enterprises of
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk
for the entity to finance its activities without additional
subordinated financial support from other parties. Variable interest
entities are required to be consolidated by their primary beneficiaries
if they do not effectively disperse risks among parties involved. The
primary beneficiary of a variable interest entity is the party that
absorbs a majority of the entity's expected losses or receives a
majority of its expected residual returns. The consolidation
requirements of FIN 46 apply immediately to variable interest entities
created or modified after January 31, 2003 and apply to existing
entities in the first fiscal year or interim period ending after
December 15, 2003. Certain new disclosure requirements apply to all
financial statements issued after January 31, 2003. CNF has adopted
the currently applicable provisions of FIN 46 with no material impact.
PAGE 30
In May 2003, the FASB issued SFAS 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity" ("SFAS 150"). SFAS 150 establishes classification standards
for financial instruments with characteristics of liabilities, equity,
or both. CNF adopted SFAS 150 effective July 1, 2003 with no 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, yield, 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 CNF's estimated future contributions
to pension plans, any statements as to the adequacy of reserves, any
statements regarding the outcome of any claims that may be brought
against CNF by CFC's multi-employer pension plans or regarding the
amount of any periodic cash payments that CNF may be required to make
while those claims are pending or CNF's ability to make those periodic
payments, any statements regarding future economic conditions or
performance, any statements regarding the outcome of legal and other
claims and proceedings against CNF; 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 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
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; the possibility of additional unusual
charges and other costs and expenses relating to Forwarding's
operations; the possibility that CNF may, from time to time, be
required to record impairment charges for goodwill and other long-lived
assets; the possibility of defaults under CNF's $385 million credit
agreement and other debt instruments, including defaults resulting from
additional unusual charges or from any costs or expenses that CNF may
incur in connection with CFC's bankruptcy proceedings or any claims
that may be asserted by CFC's multi-employer pension plans, or from any
additional minimum pension liability adjustments that CNF may be
required to record in respect of its defined benefit pension plan, 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; labor matters, including the grievance by
furloughed pilots and crewmembers, renegotiations of labor contracts,
labor organizing activities, work stoppages or strikes; enforcement of
and changes in governmental regulations, including the effects of new
regulations issued by the Department of Homeland Security;
environmental and tax matters; the February 2000 crash of an EWA
aircraft and related investigation and litigation; and matters relating
to CNF's 1996 spin-off of CFC, including the possibility that CFC's
multi-employer pension plans may assert claims against CNF, that CNF
may be required to make periodic cash payments while those claims are
pending, and that CNF may not prevail in those proceedings and may not
have the financial resources necessary to satisfy amounts payable to
those plans; and matters relating to CNF's defined benefit pension
plans, including the possibility that CNF may be required to record
additional minimum pension liability adjustments if the market value of
plan assets declines further. As a result of the foregoing, no
assurance can be given as to future financial condition, cash flows, or
results of operations. See Note 10, "Commitments and Contingencies"
included in the accompanying Notes to Consolidated Financial
Statements.
PAGE 31
ITEM 4. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures. CNF's management, with the
participation of CNF's Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of CNF's disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-
15(e) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) as of the end of the period covered by this report.
Based on such evaluation, CNF's Chief Executive Officer and Chief
Financial Officer have concluded that, as of the end of such period,
CNF's disclosure controls and procedures are effective.
(b) Internal Control Over Financial Reporting. There have not been any
changes in CNF's internal control over financial reporting (as such
term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect,
CNF's internal control over financial reporting.
PAGE 32
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.
In 2001, EWA 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
cooperated fully and provided the documents requested in those
subpoenas. In September 2003, CNF received notice from the United
States Attorney's Office for the District of Columbia that EWA is being
considered for possible civil action under the False Claims Act for
allegedly submitting false invoices to the USPS for payment under the
Priority Mail contract. EWA has entered into a tolling agreement with
the government in order to give the parties more time to investigate
the allegations. At this point, the government has not shared with EWA
evidentiary support it claims to have underlying the allegations. EWA
is in the early stages of conducting its own investigation of the
allegations and as a result CNF is currently unable to predict the
outcome of this matter. Under the False Claims Act, the government
would be entitled to recover treble damages, plus penalties, if a court
was to ultimately conclude that EWA knowingly submitted false invoices
to the USPS.
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 National Transportation
Safety Board (NTSB) subsequently determined that the probable cause of
the crash was the disconnection of the right elevator control tab due
to improper maintenance, but was not able to determine whether the
maintenance errors occurred during the most recent heavy maintenance
"D" check by an outside vendor or during subsequent maintenance of the
aircraft. MWF, EWA and CNF Inc. have been named as defendants in
wrongful death lawsuits brought by the families of the three deceased
crewmembers, seeking compensatory and punitive damages. MWF, EWA and
CNF Inc. 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 MWF, EWA and
CNF Inc. 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.
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. Subsequently, ALPA filed a grievance on
behalf of the pilots and crewmembers protesting the cessation of EWA's
air carrier operations and Forwarding's use of other air carriers. The
ALPA matters are the subject of litigation in U.S. District Court and,
depending on the outcome of that litigation, may be subject to binding
arbitration. Based on CNF's current evaluation, management believes
that it has provided for its estimated exposure related to the ALPA
matters. However, CNF cannot predict with certainty the ultimate
outcome of these matters.
EWA, MWF, Menlo Worldwide, LLC, CNF Inc. and certain individuals have
been named as defendants in a lawsuit filed in state court in
California by approximately 140 former EWA pilots and crewmembers. The
lawsuit alleges wrongful termination in connection with the
suspension and subsequent cessation of EWA's air carrier operations,
and seeks $500 million and certain other unspecified damages. CNF
believes that the lawsuit's claims are without merit, and intends to
vigorously defend the lawsuit.
CNF has become aware of information that Emery Transnational, a
Philippines-based joint venture in which MWF may be deemed to be a
controlling partner, may be in violation of the Foreign Corrupt
Practices Act. CNF is conducting an internal investigation and has
notified the Department of Justice and the Securities and Exchange
Commission of this matter. CNF will share the results of its internal
investigation, when completed, with the appropriate regulatory
agencies, and will fully cooperate with any investigations that may be
conducted by such regulatory agencies.
Certain current and former officers of CNF, EWA and Forwarding and all
of CNF's current directors have been named as defendants in a purported
shareholder derivative suit filed in September 2003 in California
Superior Court for the County of San Mateo. The complaint alleges
breach of fiduciary duty, gross mismanagement, waste and abuse of
control relating to the management, control and operation of EWA and
Forwarding. CNF is named only as a nominal defendant and no relief is
sought against it. CNF maintains insurance for the benefit of its
officers and directors, and the applicable insurance carriers have been
notified of the claims asserted in the lawsuit.
PAGE 33
A lawsuit was filed in Federal District Court for the Northern District
of California by certain participants in CFC's defined benefit pension
plan, naming as defendants CFC, CFC's fiduciary committee, and certain
former CFC employees individually, and also naming as defendants CNF
Inc., CNF Service Company and various other CNF entities, certain
individuals and Towers Perrin. The lawsuit alleges breach of ERISA
fiduciary duties in connection with the spin-off of assets and
liabilities from CNF's defined benefit plan to CFC's defined benefit
plan as part of CNF's 1996 spin-off of CFC, and seeks class action
status on behalf of all affected participants. CNF believes that the
lawsuit is without merit and intends to vigorously defend against the
action.
PAGE 34
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31 Certification of Officers pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32 Certification of Officers pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
On September 30, 2003, CNF filed a current report on
Form 8-K to file under Item 5 CNF's press release
announcing the resolution of an investigation into
violations of the Hazardous Materials Transportation
Act.
On October 20, 2003, CNF filed a current report on Form
8-K to furnish under Item 12 CNF's press release
presenting CNF's third-quarter results.
PAGE 35
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)
November 12, 2003 /s/Chutta Ratnathicam
-------------------------
Chutta Ratnathicam
Senior Vice President and
Chief Financial Officer