EXHIBIT 13
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<PAGE 18>
CNF Transportation Inc.
1997 Annual Report
Financial Review and Management Discussion
The Company's total operating income for 1997 was a
record $264.9 million, representing a 37.9% increase over
1996. Aided by a strong economy, the increase resulted
primarily from significant operating income improvements
from the Con-Way Transportation Services (CTS) and Emery
segments and from Menlo Logistics, which is reported in the
Other segment. Additionally, management believes that
marketing strategies emphasizing a more profitable service
mix, optimization of existing transportation systems,
incentive plans based on operating margins and cost
reduction strategies contributed to the operating margin
improvement. Partially offsetting the improved 1997 results
were losses, primarily in the fourth quarter, from the start-
up phase of the Priority Mail contract awarded April 1997.
The Company's 1996 operating income was $192.1 million,
representing a 2.9% increase over 1995 and came primarily
from higher operating income at CTS and the Other segment,
despite severe weather conditions at the start of 1996 and
higher fuel prices.
Total Company revenues for 1997, also a record at $4.27
billion, increased 16.5% over the previous record achieved
in 1996. Significant increases came from Emery, Menlo and
the CTS regional carriers, which make up most of the CTS
segment. A minor revenue increase from the Priority Mail
contract, which occurred primarily in the fourth quarter,
was reported among the three reporting segments based on the
service provided. The Company's revenues in 1996 increased
11.3% over 1995, reflecting increased revenues at all three
of the Company's segments.
Operating results for 1996 and 1995 reflect the results of
Consolidated Freightways Corporation, the Company's former
long-haul, less-than-truckload (LTL) carrier, which was spun
off to shareholders on December 2, 1996, as a discontinued
operation.
Con-Way Transportation Services
Due to an increase in tonnage levels and revenue per hundred-
weight, CTS's 1997 revenues increased 14.0% to another
record compared to 1996. Total regional carrier tonnage for
1997 was 9.3% above 1996 with LTL tonnage up 9.7%. Adding to
these volume increases were generally higher rates, as average
revenue per hundred-weight was up about 5 percent compared
to 1996. The increased rates were partially attributed to
marketing of the premium service mix and the expansion into joint
services among CTS regional carriers. The volume increases
were attributed in part to the strong economic conditions,
demand for premium regional service, increased business from
prior years' geographic expansions and market share gains.
CTS revenues for 1996 increased 12.1% over 1995 on a tonnage
increase of 7.8% with LTL tonnage up 5.9%. Revenues for the
first quarter of 1996 were adversely affected by severe
winter weather.
CTS reported a significant increase in operating income,
45.6% above 1996. Several factors contributed to this
increase, including higher revenues from premium, more
profitable services and more efficient utilization of
capacity in the expanded regions. Also contributing were
increased density and load factor throughout the system.
Partially offsetting these improvements was a $5.0 million
charge for costs from the discontinuance
of a rail container service. CTS's operating margin
increased significantly in 1997 to 10.0% from 7.8% in 1996.
Operating income at CTS in 1996 increased 4.6% over 1995.
While the first half of 1996 was affected by costs of winter
storms and higher fuel costs, results improved steadily in
the third and fourth quarters.
Emery Worldwide
Emery revenues for 1997 increased 15.5% over 1996, exceeding
$2 billion for the first time. International commercial
revenues increased 16.0% and domestic revenue was up 12.5%.
Tonnage increases for the same international and domestic
services were 13.7% and 9.8%, respectively, indicating
relatively stable average annual rates compared with last
year for the respective markets. Emery's 1996 revenues
increased 11.4% over 1995, brought about by both domestic
and international revenue growth.
Emery's operating income for 1997 increased to a record
$109.3 million, a 39.4% increase over 1996.
The improved results reflect the benefits of the revenue
growth, especially international, combined with limited
benefits from the mix of premium services, the
implementation of geographic zone-based rates in North
America, benefits from the UPS strike, and continued cost
control strategies. These increases to operating income more
than offset higher
<PAGE 19>
information systems costs in 1997. Operating income was
4.1% lower in 1996 compared to 1995, partially due to higher
fuel costs and costs of developing information systems.
Emery's results of operations for the first two months of
1998 have been adversely affected by less than planned
revenues. Emery management has efforts under way to improve
operating efficiencies and capacity. These efforts include a
redesign and upgrade of the freight sortation center located
at the Dayton Hub to provide approximately 30% greater
capacity, which is estimated to be completed in the year
2000 at a cost of approximately $56 million. In addition,
Emery is seeking to improve operating efficiency with recent
openings of new international distribution centers for Latin
America and Asia and plans to add up to five wide-body
aircraft to the fleet.
On April 23, 1997, Emery Worldwide Airlines (EWA), a
subsidiary of the Company, was awarded a multi-year contract
with the U.S. Postal Service (USPS) to provide Priority Mail
sortation and transportation. The USPS has indicated that
the Company could receive revenues of approximately $1.7
billion over the initial term of the contract. However, the
foregoing amount is subject to a number of uncertainties and
assumptions, and there can be no assurance that the revenues
realized by the Company will not be less than this amount.
The initial term of the contract ends in February 2002,
although the contract may be renewed by the USPS for two
successive three-year terms.
The Priority Mail contract calls for the Company to obtain,
equip and fully staff ten Priority Mail processing centers
in major metropolitan areas along the eastern seaboard. Five
of the processing centers were fully operational by November
15, 1997, and the remaining five
are scheduled to be fully operational by the end of the
second quarter of 1998. The first five processing centers
were operational within the prescribed time frame. The
Company must pay liquidated damages if the remaining centers
are not operational on time.
As of December 31, 1997, the Company had incurred $64.2
million of an estimated $120 million of capital expenditures
associated with the new contract. Also, the Company expects
to capitalize approximately $25 million for other associated
contract costs, of which approximately $20 million was
capitalized as of December 31, 1997.
Other Operations
The Other reporting segment consists primarily of the
commercial operations of Menlo Logistics, Road Systems,
VantageParts and the sortation operations of the Priority
Mail contract. Revenues in 1997 increased 29.7% over the
prior year primarily due to a 26.9% increase in revenues
from Menlo. The remaining increase was due primarily to
revenues in the fourth quarter of 1997 from the sortation
operation of the Priority Mail contract.
Operating income for the Other segment was down 34.0% from
1996 as a result of losses incurred by the sortation
operations during the start-up phase of the Priority Mail
contract. However, Menlo's commercial operations reported a
71.4% increase in operating income for the year to reach
$17.2 million. Menlo's improvement partially resulted from
an increased mix of integrated solution projects that
produced higher margins than 1996 and 1995, when the share
of carrier management services was higher.
Other Income (Expense)
Other expense in 1997 decreased 4.4% from 1996.
Interest expense remained fairly constant in 1997 and 1996
as a result of similar levels of short-term borrowings in
the second half of 1996 and the first half of 1997. Short-
term borrowings were paid off in June 1997 with proceeds
from the issuance of the preferred securities of the
subsidiary trust (TECONS). The TECONS resulted in increased
expenses for the dividend requirement that were partially
offset by income from temporarily invested proceeds. Other
expense in 1996 increased 33.4% from 1995 as a result of
interest expense on increased short-term borrowings and
losses from write-offs and sales of non-operating assets.
Income Taxes
The effective tax rate of 45.5%, the same for both 1997 and
1996, reflecting comparable levels of non-deductible items
and taxes incurred in other jurisdictions. The 1996 rate,
compared to a tax rate of 43.6% in 1995, was attributable to
a higher proportion of other non-deductible items.
<PAGE 20>
Net Income
Net income from continuing operations of $113.0 million for
1997, including the preferred dividends, was 57.8% above
1996 as a result of the significant increase in operating
income. Net income available to common shareholders in 1997
was up $94.0 million over the prior year due to both the
increased net income from continuing operations and the
$52.6 million loss from discontinued operations in 1996. Net
income from continuing operations for 1996 decreased 5.1%
from 1995 as a result of the increase in other expense and
the higher effective tax rate. Dividends on preferred stock
of the Company in 1996 decreased 20.4% from 1995 due to the
absence of dividends from the Series C preferred stock that
converted to common stock in March 1995.
Liquidity and Capital Resources
In 1997, the Company's cash and cash equivalents increased
$15.5 million to $97.6 million. Cash was provided primarily
by cash flow from operations of $276.7 million, net proceeds
of $121.4 million from issuance of the TECONS and $41.5
million from the proceeds of exercised stock options. Cash
provided by these sources was used primarily to fund capital
expenditures of $242.3 million, net debt repayments of
$157.0 million and dividend payments of $29.8 million.
Cash flow from operations in 1997 increased $70.9 million
over 1996. The increase was primarily due to higher net
income, depreciation and amortization and deferred income
taxes. The combined change in the working capital accounts
and remaining items in operating activities used $7.5
million of cash in 1997 whereas the net change in the same
items in the prior year provided $31.8 million.
Capital expenditures of $242.3 million for the year ended
1997 increased $41.5 million compared to 1996 with a large
portion of the 1997 increase coming in the fourth quarter.
Of the capital expenditures for the year ended 1997, $64.2
million related to the new Priority Mail contract. The
remaining capital expenditures of the estimated $120 million
for the Priority Mail contract are expected to occur in the
first half of 1998.
Proceeds from the exercise of stock options in 1997 provided
$41.5 million compared with $1.9 million in 1996. Payments
of preferred and common dividends were $29.8 million and
$29.9 million for the years 1997 and 1996, respectively.
During 1997, the Company reduced debt by $157.0 million
including full repayment of $155.0 million borrowed under
unsecured lines of credit. In the prior year, borrowings
under the unsecured lines of credit increased $105 million
and repayments of debt totaled $2.4 million. The net debt
repayments in 1997 were funded primarily from operating cash
flow and net proceeds of $121.4 million from the issuance of
the TECONS, which were applied to temporarily reduce debt
pending application of such proceeds to pay costs associated
with the Priority Mail contract.
In December 1997, the Company, through its air freight
subsidiaries, entered into an agreement to deliver Series A
City of Dayton, Ohio refinancing bonds with a rate of
5.625%. The $46 million in bonds will bear this rate when
delivered on October 1, 1998 and will become due in 2018.
The Company's ratio of total debt to total capital decreased
to 37.9% at December 31, 1997, from 55.6% at December 31,
1996. The improvement resulted primarily from the issuance
of the TECONS, repayment of short-term borrowings, net
income and exercises of stock options. The current ratio was
1.3 to 1 at December 31, 1997, compared to 1.0 to 1 at
December 31, 1996.
At December 31, 1997, letters of credit of $104.8 million
were outstanding under the Company's $350 million unsecured
credit facility, leaving $245.2 million available for
additional borrowings and letters of credit. Under several
other unsecured letter of credit facilities, the Company had
outstanding letters of credit of $68.3 million at December
31, 1997, leaving $16.7 million available. In addition,
the Company had available $75.0 million of capacity under
other short-term uncommitted borrowing lines, none of which
was drawn.
Other Items
The Company is currently replacing or modifying certain
information systems to address year 2000 issues, but is
unable to predict with certainty the total costs of
addressing these issues. However, the Company currently
estimates that expenditures for year 2000 compliance will
total approximately $28 million. These costs represent
expenditures in addition to normal systems replacement and
maintenance.
<PAGE 21>
Management Report on Responsibility for Financial
Reporting
The management of CNF Transportation Inc. has prepared the
accompanying financial statements and is responsible for
their integrity. The statements were prepared in accordance
with generally accepted accounting principles, after giving
consideration to materiality, and are based on management's
best estimates and judgments. The other financial
information in the annual report is consistent with the
financial statements.
Management has established and maintains a system of
internal control. Limitations exist in any control structure
based on the recognition that the cost of such system should
not exceed the benefits derived. Management believes
its control system provides reasonable assurance as to the
integrity and reliability of the financial statements, the
protection of assets from unauthorized use or disposition,
and the prevention and detection of fraudulent financial
reporting. The system of internal control is documented by
written policies and procedures that are communicated to
employees. The Company's internal audit staff independently
assesses the adequacy and the effectiveness of the internal
controls which are also tested by the Company's independent
public accountants.
The Board of Directors, through its audit committee
consisting of five independent directors, is responsible for
engaging the independent accountants and assuring that
management fulfills its responsibilities in the preparation
of the financial statements. The Company's financial
statements have been audited by Arthur Andersen LLP,
independent public accountants. Both the internal auditors
and Arthur Andersen LLP have access to the audit committee
without the presence of management to discuss internal
accounting controls, auditing and financial reporting
matters.
/s/Donald E. Moffitt,
Chairman and Chief Executive Officer
/s/Chutta Ratnathicam
Senior Vice President and Chief Financial Officer
/s/Gary D. Taliaferro
Vice President and Controller
Report of Independent Public Accountants
To the Shareholders and Board of Directors of CNF
Transportation Inc.
We have audited the accompanying consolidated balance sheets
of CNF Transportation Inc. (a Delaware Corporation) and
subsidiaries as of December 31, 1997 and 1996, and the
related statements of consolidated income, cash flows and
shareholders' equity for each
of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial
position of CNF Transportation Inc. and subsidiaries as of
December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/S/Arthur Andersen LLP
San Francisco, California
January 23, 1998
<PAGE 22>
Consolidated Balance Sheets
<CAPTIONS>
December 31
(Dollars in thousands) 1997 1996
Assets
Current Assets
Cash and cash equivalents $ 97,617 $ 82,094
Trade accounts receivable, net of allowance (Note 1) 703,785 542,381
Other accounts receivable 32,067 49,278
Operating supplies, at lower of average cost or market 36,580 32,916
Prepaid expenses 35,682 31,249
Deferred income taxes (Note 6) 103,656 77,977
Total Current Assets 1,009,387 815,895
Property, Plant and Equipment, at Cost
Land 109,768 104,314
Buildings and improvements 301,245 265,655
Revenue equipment 685,618 586,720
Other equipment and leasehold improvements 400,065 302,679
1,496,696 1,259,368
Accumulated depreciation and amortization (616,854) (506,719)
879,842 752,649
Other Assets
Restricted funds 10,601 12,685
Deposits and other assets 120,872 95,144
Unamortized aircraft maintenance, net (Note 1) 123,352 119,927
Costs in excess of net assets of businesses acquired,
net of accumulated amortization (Note 1) 277,442 285,566
532,267 513,322
Total Assets $2,421,496 $2,081,866
<FN>
The accompanying notes are an integral part of these statements.
<PAGE 23>
Consolidated Balance Sheets
<CAPTIONS>
December 31
(Dollars in thousands) 1997 1996
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $ 268,064 $ 210,902
Accrued liabilities (Note 3) 423,237 349,497
Accrued claims costs 99,848 87,340
Current maturities of long-term debt and capital leases
(Notes 4 and 5) 4,875 3,185
Short-term borrowings (Note 4) - 155,000
Federal and other income taxes (Note 6) 10,114 9,162
Total Current Liabilities 806,138 815,086
Long-Term Liabilities
Long-term debt and guarantees (Note 4) 362,671 366,305
Long-term obligations under capital leases (Note 5) 110,817 110,896
Accrued claims costs 55,030 57,912
Employee benefits (Note 9) 141,351 115,470
Other liabilities and deferred credits 72,428 75,479
Deferred income taxes (Note 6) 89,958 32,439
Total Liabilities 1,638,393 1,573,587
Commitments and Contingencies (Notes 4, 5 and 13)
Company-Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trust Holding Solely
Convertible Debentures of the Company (Note 7) 125,000 -
Shareholders' Equity (Note 8)
Preferred stock, no par value; authorized 5,000,000 shares:
Series B, 8.5% cumulative, convertible, $.01 stated
value; designated 1,100,000 shares; issued 865,602
and 875,191 shares, respectively 9 9
Additional paid-in capital, preferred stock 131,649 133,108
Deferred compensation (Note 10) (101,819) (108,468)
Total Preferred Shareholders' Equity 29,839 24,649
Common stock, $.625 par value; authorized 100,000,000
shares; issued 54,370,182 and 51,595,827 shares,
respectively 33,981 32,247
Additional paid-in capital, common stock 302,256 242,879
Deferred compensation, restricted stock (Note 11) (2,528) (187)
Cumulative translation adjustment (6,647) 3,279
Retained earnings 473,250 378,744
Cost of repurchased common stock
(6,977,848 and 7,029,917 shares, respectively) (172,048) (173,332)
Total Common Shareholders' Equity 628,264 483,630
Total Shareholders' Equity 658,103 508,279
Total Liabilities and Shareholders' Equity $2,421,496 $2,081,866
<FN>
The accompanying notes are an integral part of these statements.
<PAGE 24>
Statements of Consolidated Income
<CAPTIONS>
Years ended December 31
(Dollars in thousands except per share data) 1997 1996 1995
Revenues $4,266,801 $3,662,183 $3,290,077
Costs and Expenses
Operating expenses 3,333,721 2,918,682 2,641,756
Selling and administrative expenses 557,117 463,930 391,682
Depreciation 111,096 87,423 69,952
4,001,934 3,470,035 3,103,390
Operating Income 264,867 192,148 186,687
Other Income (Expense)
Investment income 1,378 52 85
Interest expense (39,553) (39,766) (33,407)
Dividend requirement on preferred securities
of subsidiary trust (Note 7) (3,471) - -
Miscellaneous, net (1,407) (5,302) (423)
(43,053) (45,016) (33,745)
Income from continuing operations before income taxes 221,814 147,132 152,942
Income taxes (Note 6) 100,925 66,951 66,723
Income from Continuing Operations 120,889 80,181 86,219
Losses from discontinued operations, net of income
tax benefits (Note 2) - (36,386) (28,854)
Loss from discontinuance, net of income tax
benefits (Note 2) - (16,247) -
- (52,633) (28,854)
Net income 120,889 27,548 57,365
Preferred stock dividends 7,886 8,592 10,799
Net Income Available to Common Shareholders $ 113,003 $ 18,956 $ 46,566
Basic shares (Note 1) 46,236,688 44,041,159 42,067,842
Diluted shares (Note 1) 53,077,468 49,531,101 48,531,501
Basic Earnings Per Share (Note 1)
Income from continuing operations $2.44 $1.63 $1.79
Losses from discontinued operations - (0.83) (0.68)
Loss from discontinuance - (0.37) -
Net income $2.44 $0.43 $1.11
Diluted Earnings Per Share (Note 1)
Income from continuing operations $2.19 $1.48 $1.64
Losses from discontinued operations - (0.73) (0.60)
Loss from discontinuance - (0.33) -
Net income $2.19 $0.42 $1.04
<FN>
The accompanying notes are an integral part of these statements.
<PAGE 25>
Statements of Consolidated Cash Flows
Years ended December 31
(Dollars in thousands) 1997 1996 1995
Cash and Cash Equivalents, Beginning of Year $ 82,094 $ 59,787 $ 72,595
Cash Flows from Operating Activities
Net income 120,889 27,548 57,365
Adjustments to reconcile income to net cash provided by
operating activities:
Discontinued operations - 52,633 28,854
Depreciation and amortization 123,391 95,746 79,625
Increase (decrease) in deferred income taxes
31,840 (6,705) 14,288
Amortization of deferred compensation 7,132 6,403 6,050
Losses (gains) from property disposals, net 927 (1,577) (145)
Changes in assets and liabilities:
Receivables (144,193) (30,006) (114,855)
Accounts payable 57,162 27,661 9,942
Accrued liabilities 52,582 36,074 31,470
Accrued incentive compensation 21,158 9,366 (30,413)
Accrued claims costs 9,626 11,616 9,625
Income taxes 17,564 18,040 7,454
Employee benefits 25,881 (14,565) 32,793
Deferred charges and credits (36,805) (27,367) (48,762)
Other (10,467) 960 7,832
Net Cash Provided by Operating Activities 276,687 205,827 91,123
Cash Flows from Investing Activities
Capital expenditures (242,343) (200,835) (167,253)
Proceeds from sales of property 5,043 7,689 5,361
Net Cash Used by Investing Activities (237,300) (193,146) (161,892)
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt 1,997 - 98,890
Repayment of long-term debt and capital lease obligations (4,020) (2,436) (2,537)
Proceeds from (repayment of) net short-term borrowings (155,000) 105,000 50,000
Proceeds from issuance of subsidiary preferred securities,
net of costs of issuance 121,431 - -
Proceeds from exercise of stock options 41,500 1,887 10,460
Redemption of preferred stock purchase rights - - (435)
Payments of common dividends (18,497) (17,604) (16,688)
Payments of preferred dividends (11,275) (12,288) (14,626)
Net Cash Provided (Used) by Financing Activities (23,864) 74,559 125,064
Net Cash Provided by Continuing Operations 15,523 87,240 54,295
Net Cash Used by Discontinued Operations - (64,933) (67,103)
Increase (Decrease) in Cash and Cash Equivalents 15,523 22,307 (12,808)
Cash and Cash Equivalents, End of Year $ 97,617 $ 82,094 $ 59,787
Supplemental Disclosure
Cash paid for income taxes, net of refunds $ 38,568 $ 13,822 $ 25,956
Cash paid for interest, net of amounts capitalized $ 47,948 $ 36,047 $ 22,916
<FN>
The accompanying notes are an integral part of these statements.
<PAGE 26>
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
(Dollars in thousands except per share data)
<CAPTIONS>
Preferred Stock Series B Preferred Stock Series C Common Stock
Number of Number of Number of
Shares Amount Shares Amount Shares Amount
Balance, December 31, 1994 962,748 $ 10 690,000 $ 7 43,955,510 $ 27,472
Exercise of stock options including tax
benefits of $1,122 - - - - 583,143 364
Conversion of Series C Preferred stock
to Common stock - - (690,000) (7) 6,900,000 4,313
Issuance of restricted stock - - - - 12,837 8
Recognition of deferred compensation - - - - - -
Redemption of preferred stock purchase
rights - - - - - -
Repurchased common stock issued for
conversion of preferred stock (8,336) - - - - -
Net income - - - - - -
Common dividends declared ($.30 per share) - - - - - -
Series B, Preferred dividends ($12.93
per share) net of tax benefits of $3,827 - - - - - -
Series C, Preferred dividends
($3.20 per share) - - - - - -
Translation adjustment - - - - - -
Balance, December 31, 1995 954,412 10 - - 51,451,490 32,157
Exercise of stock options including tax
benefits of $1,565 - - - - 138,027 86
Issuance of restricted stock - - - - 6,310 4
Recognition of deferred compensation - - - - - -
Repurchased common stock issued for
conversion of preferred stock (79,221) (1) - - - -
Net income - - - - - -
Common dividends declared ($.40 per share) - - - - - -
Series B, Preferred dividends ($12.93 per
share) net of tax benefits of $3,696 - - - - - -
Distribution of investment in CFC (Note 2) - - - - - -
Translation adjustment - - - - - -
Balance, December 31, 1996 875,191 9 - - 51,595,827 32,247
Exercise of stock options including tax
benefits of $16,612 - - - - 2,688,824 1,681
Issuance of restricted stock - - - - 85,531 53
Recognition of deferred compensation - - - - - -
Repurchased common stock issued for
conversion of preferred stock (9,589) - - - - -
Net income - - - - - -
Common dividends declared ($.40 per share) - - - - - -
Series B, Preferred dividends ($12.93 per
share) net of tax benefits of $3,389 - - - - - -
Translation adjustment - - - - - -
Balance, December 31, 1997 865,602 $ 9 - $ - 54,370,182 $ 33,981
<FN>
The accompanying notes are an integral part of these financial statements
</FN>
<PAGE 27>
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
(Dollars in thousands except per share data)
<CAPTIONS>
Cost of
Additional Cumulative Repurchased
Paid-in Translation Retained Common Deferred
Capital Adjustment Earnings Stock Compensation Total
Balance, December 31, 1994 $ 380,493 $ (1,170) $ 574,885 $ (187,422) $ (120,646) $ 673,629
Exercise of stock options including tax
benefits of $1,122 10,096 - - - - 10,460
Conversion of Series C Preferred stock
to Common stock (4,306) - - - - -
Issuance of restricted stock 292 - - - (300) -
Recognition of deferred compensation - - - - 6,050 6,050
Redemption of preferred stock purchase
rights (435) - - - - (435)
Repurchased common stock issued for
conversion of preferred stock (1,288) - - 1,288 - -
Net income - - 57,365 - - 57,365
Common dividends declared ($.30 per share) - - (13,052) - - (13,052)
Series B, Preferred dividends ($12.93
per share) net of tax benefits of $3,827 - - (8,592) - - (8,592)
Series C, Preferred dividends
($3.20 per share) - - (2,207) - - (2,207)
Translation adjustment - (858) - - - (858)
Balance, December 31, 1995 384,852 (2,028) 608,399 (186,134) (114,896) 722,360
Exercise of stock options including tax
benefits of $1,565 3,778 - - - - 3,864
Issuance of restricted stock 158 - - - (162) -
Recognition of deferred compensation - - - - 6,403 6,403
Repurchased common stock issued for
conversion of preferred stock (12,801) - - 12,802 - -
Net income - - 27,548 - - 27,548
Common dividends declared ($.40 per share) - - (17,604) - - (17,604)
Series B, Preferred dividends ($12.93 per
share) net of tax benefits of $3,696 - - (8,592) - - (8,592)
Distribution of investment in CFC (Note 2) - 4,571 (231,007) - - (226,436)
Translation adjustment - 736 - - - 736
Balance, December 31, 1996 375,987 3,279 378,744 (173,332) (108,655) 508,279
Exercise of stock options including tax
benefits of $16,612 56,431 - - - - 58,112
Issuance of restricted stock 2,771 - - - (2,824) -
Recognition of deferred compensation - - - - 7,132 7,132
Repurchased common stock issued for
conversion of preferred stock (1,284) - - 1,284 - -
Net income - - 120,889 - - 120,889
Common dividends declared ($.40 per share) - - (18,497) - - (18,497)
Series B, Preferred dividends ($12.93 per
share) net of tax benefits of $3,389 - - (7,886) - - (7,886)
Translation adjustment - (9,926) - - - (9,926)
Balance, December 31, 1997 $ 433,905 $ (6,647) $ 473,250 $ (172,048) $ (104,347) $ 658,103
<FN>
The accompanying notes are an integral part of these financial statements
</FN>
<PAGE 28>
Notes to Consolidated Financial Statements
1. Principal Accounting Policies
Basis of Presentation and Principles of Consolidation: The
consolidated financial statements include the accounts of
CNF Transportation Inc. (the Company or CNF) and
its wholly owned subsidiaries. On December 2, 1996, the
Company (formerly Consolidated Freightways, Inc.) completed
the spin-off of Consolidated Freightways
Corporation (CFC) as described in Note 2. CFC has been
reflected as discontinued operations in the consolidated
financial statements and, unless otherwise stated, is
excluded from the accompanying notes.
The continuing operations of the Company encompass three
business segments: Con-Way Transportation Services (CTS), a
regional trucking and full-service truckload company; Emery
Worldwide (Emery), an international air freight company; and
Other, which is comprised of Menlo Logistics (Menlo), a full-
service contract logistics company; Road Systems, a trailer
manufacturer; and VantageParts, a wholesale distributor of
truck parts and supplies; and the sortation operations of
the Priority Mail contract.
CTS provides regional one- and two-day LTL freight trucking,
full-service truckload freight delivery utilizing highway
over-the-road and rail resources for transcontinental, inter-
regional and regional transportation, throughout the U.S.
and international services for Canada and Mexico. Emery
provides expedited and deferred domestic and international
air cargo services through a freight system designed for the
movement of parcels and packages of all sizes and weights,
and also provides ocean delivery and customs brokerage.
Menlo, the primary business in the Other segment, provides
full-service contract logistics using advanced management
systems to cost-effectively integrate and simplify complex
logistics operations, including transportation, storage and
distribution, shipment tracking and invoicing.
Recognition of Revenues: Transportation freight charges are
recognized as revenue when freight is received for shipment.
The estimated costs of performing the total transportation
service are then accrued. This revenue recognition method
does not result in a material difference from in-transit or
completed service methods of recognition. Revenues from
certain long-term contracts are recognized in accordance
with contractual terms as services are provided.
Cash and Cash Equivalents: The Company considers highly
liquid investments with original maturities of three months
or fewer to be cash equivalents.
Trade Accounts Receivable, Net: Trade accounts receivable
are net of allowances of $20,155,000 and $18,712,000 at
December 31, 1997 and 1996, respectively.
Property, Plant and Equipment: Property, plant and equipment
are depreciated on a straight-line basis over their
estimated useful lives, which are generally 25 years for
buildings and improvements, 10 years or fewer for aircraft,
5 to 10 years for tractor and trailer equipment and 3 to 10
years for most other equipment. Leasehold improvements are
amortized over the shorter of the terms of the respective
leases or the useful lives of the assets.
Expenditures for equipment maintenance and repairs, except
for aircraft, are charged to operating expenses as incurred;
betterments are capitalized. Gains (losses) on sales of
equipment are recorded in operating expenses.
The costs to perform required maintenance inspections of
engines and aircraft frames for leased and owned aircraft
are capitalized and amortized to expense over the shorter of
the period until the next scheduled maintenance or the
remaining term of the lease agreement. Accordingly, the
Company has recorded unamortized maintenance of $175,460,000
and $169,035,000 at December 31, 1997 and 1996,
respectively. Under the Company's various aircraft lease
agreements, the Company is expected to return the aircraft
with a stipulated number of hours remaining on the aircraft
and engines until the next scheduled maintenance. The
Company has recorded $52,108,000 and $49,108,000 at December
31, 1997 and 1996, respectively, to accrue for this
obligation and any estimated unusable maintenance at the
date of lease return or other disposal. The net amount,
which represents the difference between maintenance
performed currently and that required or remaining at the
expiration of the lease or other disposal, is classified as
Unamortized Aircraft Maintenance, net, in the Consolidated
Balance Sheets.
Costs in Excess of Net Assets of Businesses Acquired: The
costs in excess of net assets of businesses acquired
(goodwill) are capitalized and amortized on a straight-line
basis up to a 40-year period. Impairment is periodically
reviewed based on a comparison of estimated, undiscounted
cash flows from the underlying segment to the related
<PAGE 29>
investment. In the event goodwill is not considered
recoverable, an amount equal to the excess of carrying
amount of goodwill less the estimated discounted cash flows
from the segment will be charged against goodwill with a
corresponding expense to the income statement. Based on this
review, management does not believe goodwill is impaired.
Accumulated amortization at December 31, 1997 and 1996 was
$86,053,000 and $76,961,000, respectively.
Income Taxes: The Company follows the liability method of
accounting for income taxes.
Accrued Claims Costs: The Company provides for the uninsured
costs of medical, casualty, liability, vehicular, cargo and
workers' compensation claims. Such costs are estimated each
year based on historical claims and unfiled claims relating
to operations conducted through December 31. The actual
costs may vary from estimates based on trends of losses for
filed claims and claims estimated to be incurred but not
filed. The long-term portion of accrued claims costs relates
primarily to workers' compensation claims which are payable
over several years.
Foreign Currency Translation: Adjustments
resulting from translating foreign functional currency
financial statements into U.S. dollars are included in the
Cumulative Translation Adjustment in the Statements of
Consolidated Shareholders' Equity.
Earnings Per Share: Effective December 31, 1997,
the Company adopted SFAS 128, "Earnings Per Share".
SFAS 128 prescribes new calculations for Basic and Diluted
Earnings Per Share (EPS), which replace the former
calculations for Primary and Fully Diluted EPS. Basic EPS is
computed by dividing reported earnings available to common
shareholders by the weighted average shares outstanding; no
dilution for any potentially dilutive securities is
included. Diluted EPS is calculated differently than the
Fully Diluted EPS calculation under the old rules. When
applying the treasury stock method for Diluted EPS to
compute dilution for options, SFAS 128 requires use of the
average share price for the period, rather than the greater
of the average share price or end-of-period share price.
Prior period EPS data has been restated. Diluted EPS from
continuing operations is calculated as follows:
(Dollars in thousands
except per share data) 1997 1996 1995
Earnings:
Net income from
continuing operations $113,003 $71,589 $75,420
Add-backs:
Dividends on preferred
stock, net of
replacement funding 1,231 1,769 4,056
Dividends on preferred
securities of
subsidiary trust,
net of tax 2,118 - -
$116,352 $73,358 $79,476
Shares:
Weighted average
shares outstanding 46,236,688 44,041,159 42,067,842
Stock option and
restricted stock
dilution 1,029,415 1,021,417 895,739
Series B and C
preferred stock 4,075,254 4,468,525 5,567,920
Subsidiary trust
preferred securities 1,736,111 - -
53,077,468 49,531,101 48,531,501
Diluted Earnings
Per Share $2.19 $1.48 $1.64
Estimates: Management makes estimates and assumptions when
preparing the financial statements in conformity with
generally accepted accounting principles. These estimates
and assumptions affect the amounts reported in the
accompanying financial statements and notes thereto. Actual
results could differ from those estimates.
Reclassification: Certain amounts in prior years' financial
statements have been reclassified to conform to the current
year presentation.
2. Business Divestitures
On December 2, 1996, the Company completed a tax-free
distribution (the Spin-off) to the Company's shareholders of
all the outstanding shares of CFC. The Company's
shareholders received one share of CFC common stock for
every two shares of the Company's common stock owned on
November 15, 1996.
<PAGE 30>
The accompanying consolidated financial statements have been
restated to report the discontinued operations of CFC
separately from continuing operations of the Company. The
December 31, 1996 Consolidated Balance Sheet reflects a non-
cash reduction to Retained Earnings of $231,007,000 and a
($4,571,000) adjustment to Cumulative Translation Adjustment
to recognize the book value of net assets distributed. The
Statements of Consolidated Income include the following
operating results for the discontinued operations presented
as a single classification, net of tax:
(Dollars in thousands) 1996 1995
Revenues $1,982,544 $2,106,529
Operating loss (48,942) (42,786)
Loss before income tax benefits (48,236) (42,069)
Income tax benefits (11,850) (13,215)
Losses from discontinued operations (36,386) (28,854)
The Company incurred costs in connection with
the Spin-off, including legal and advisory fees, costs of
relocating administrative, data processing and other
operating locations, severance, and other transaction costs.
These costs are reported net of $7.0 million of income tax
benefits in the Statements of Consolidated Income as Loss
from Discontinuance in 1996.
3. Accrued Liabilities
Accrued liabilities consist of the following as of
December 31:
(Dollars in thousands) 1997 1996
Other accrued liabilities $169,572 $130,365
Accrued holiday and vacation pay 52,263 44,922
Purchased transportation 40,732 43,328
Accrued taxes other than income taxes 36,794 33,826
Wages and salaries 28,173 24,841
Estimated revenue adjustments 34,637 23,912
Accrued interest 18,829 27,224
Accrued incentive compensation 42,237 21,079
Total accrued liabilities $423,237 $349,497
4. Debt and Guarantees
As of December 31, long-term debt and guarantees
consisted of the following:
(Dollars in thousands) 1997 1996
91/8% Notes Due 1999
(interest payable semi-annually) $117,705 $117,705
7.35% Notes due 2005
(interest payable semi-annually) 100,000 100,000
6.14% Industrial Revenue
Bonds due 2014 4,800 4,800
Other debt 1,179 20
TASP Notes guaranteed, 8.42%
to 9.04%, due through 2009 143,800 146,900
367,484 369,425
Less current maturities (4,813) (3,120)
Total long-term debt and guarantees $362,671 $366,305
The 91/8% notes due in 1999 and the 7.35% notes due in 2005
contain certain covenants limiting the incurrence of
additional liens.
The Company has a $350 million unsecured credit facility to
provide for letter of credit and working capital needs.
Borrowings under the agreement, which expires in 2001, bear
interest at a rate based upon select indices plus a margin
dependent on the Company's credit rating. The agreement
contains various restrictive covenants that limit the
incurrence of additional indebtedness and require the
Company to maintain minimum amounts of net worth and fixed
charge coverage. At December 31, 1997, the Company had no
short-term borrowings and $104.8 million of letters of
credit outstanding under this agreement. Short-term
borrowings of $155 million were outstanding at December 31,
1996.
Under several other unsecured letter of credit facilities,
the Company had outstanding letters of credit of $68.3
million at December 31, 1997.
Of the $143.8 million TASP Notes, $113.1 million are subject
to redemption at the option of the holders should a certain
designated event occur or ratings by both Moody's and S&P of
senior unsecured indebtedness decline below investment
grade. The remaining $30.7 million of the notes contain
financial covenants including a common dividend restriction
equal to $10.0 million plus one-half of the Company's
earnings since inception of the agreement.
The aggregate annual maturities and sinking fund
requirements of long-term debt for each of the next five
<PAGE 31>
years ending December 31 are: 1998, $4,813,000; 1999,
$123,471,000; 2000, $6,400,000; 2001, $7,500,000; and 2002,
$8,700,000.
The Company's interest expense as presented in the
Statements of Consolidated Income is net of capitalized
interest of $2,077,000 in 1997, $2,092,000 in 1996 and
$731,000 in 1995.
5. Leases
The Company and its subsidiaries are obligated under various
non-cancelable leases.The principal capital lease, which
expires in 2018, covers a sorting facility in Dayton, Ohio
(the Hub). The Hub is financed by City of Dayton, Ohio,
revenue bonds. Of the total bonds,
$46 million bear an effective rate of 8%. In 1997, the
Company entered into an agreement to deliver Series A
refinancing bonds. These bonds, when delivered on October 1,
1998, will bear an interest rate of 5.625%. The remaining
$62 million bear rates of interest between 6.05% and 6.20%.
The bonds, due through 2018, have various call provisions
and are secured by the underlying assets of the lease,
certain other Emery assets and irrevocable letters of
credit. Included in property, plant and equipment is
$38,978,000 of equipment and leasehold improvements, net,
related to the Hub.
Future minimum lease payments under all leases with initial
or remaining non-cancelable lease terms in excess of one
year, at December 31, 1997, are as follows:
Capital Operating
(Dollars in thousands) Leases Leases
Year ending December 31
1998 $ 9,454 $164,403
1999 8,099 121,881
2000 8,187 80,419
2001 8,286 50,086
2002 8,394 37,249
Thereafter (through 2018) 145,031 57,697
Total minimum lease payments 187,451 $511,735
Less amount representing interest (76,572)
Present value of
minimum lease payments 110,879
Less current maturities of
obligations under capital leases (62)
Long-term obligations
under capital leases $110,817
Certain operating leases contain financial covenants equal
to or less restrictive than covenants on debt.
The Company is negotiating various agreements that will
result in new operating leases that are expected to reduce
the lease payments and extend the terms of six existing
aircraft leases.
Rental expense for operating leases is comprised of the
following:
(Dollars in thousands) 1997 1996 1995
Minimum rentals $203,521 $178,781 $174,951
Less:
Sublease rentals (5,087) (2,355) (4,505)
Amortization of
deferred gains (4,487) (4,487) (1,785)
$193,947 $171,939 $168,661
6. Income Taxes
The components of pretax income and income taxes are as
follows:
(Dollars in thousands) 1997 1996 1995
Pretax income
U.S. corporations $206,055 $137,918 $146,042
Foreign corporations 15,759 9,214 6,900
Total pretax income $221,814 $147,132 $152,942
Income taxes
Current
U.S. federal $ 49,187 $ 57,397 $ 39,666
State and local 12,109 6,430 7,979
Foreign 7,789 5,762 4,790
69,085 69,589 52,435
Deferred taxes (benefits)
U.S. federal 31,162 (2,903) 12,147
State and local 678 265 2,141
31,840 (2,638) 14,288
Total income taxes $100,925 $ 66,951 $ 66,723
<PAGE 32>
The components of deferred tax assets and liabilities at
December 31, relate to the following:
(Dollars in thousands) 1997 1996
Deferred tax assets
Reserves for accrued
claims costs $ 39,969 $ 28,001
Reserves for post retirement
health benefits 34,732 35,743
Other reserves
not currently deductible 62,011 47,496
Reserves for employee benefits 49,118 42,308
Alternative minimum
tax credit carryovers 206 18,065
186,036 171,613
Deferred tax liabilities
Depreciation 159,912 120,440
Unearned revenue 2,853 2,939
Other 9,573 2,696
172,338 126,075
Net deferred tax asset $ 13,698 $ 45,538
Deferred tax assets and liabilities in the Consolidated
Balance Sheets are classified based on the related asset or
liability creating the deferred tax. Deferred taxes not
related to a specific asset or liability are classified
based on the estimated period of reversal. Although
realization is not assured, management believes it more
likely than not that all deferred tax assets will be
realized.
Income taxes vary from the amounts calculated by applying
the U.S. statutory income tax rate to the pretax income as
set forth in the following reconciliation:
1997 1996 1995
U.S. statutory tax rate 35.0% 35.0% 35.0%
State income taxes (net of
federal income tax benefit) 4.3 4.4 5.0
Foreign taxes in excess of
U.S. statutory rate 1.0 1.7 1.6
Non-deductible operating
expenses 1.2 1.8 1.5
Amortization of costs in
excess of net assets of
businesses acquired 1.4 2.2 2.1
Foreign tax credits, net (1.1) - (0.3)
Other, net 3.7 0.4 (1.3)
Effective income tax rate 45.5% 45.5% 43.6%
The cumulative undistributed earnings of the Company's
foreign subsidiaries (approximately $23.7 million at
December 31, 1997), which if remitted are subject to
withholding tax, have been reinvested indefinitely in the
respective foreign subsidiaries' operations unless it
becomes advantageous for tax or foreign exchange reasons to
remit these earnings. Therefore, no withholding or U.S.
taxes have been provided. The amount of withholding tax that
would be payable on remittance of the undistributed earnings
would approximate $1.9 million.
The Company is currently under examination by the Internal
Revenue Service (IRS) for tax years 1987 through 1996.
Except for the effect, if any, of the item discussed in the
paragraph below, it is the opinion of management that any
adjustments related to the examination for these years would
not have a material impact on the Company's financial
position or results of operations. In addition, as part of
the Spin-off, the Company and CFC entered into a Tax Sharing
Agreement that provides a mechanism for the allocation of
any additional tax liability and related interest that arise
due to adjustments from the IRS for years prior to the Spin-
off.
The IRS has proposed a substantial adjustment for tax years
1987 through 1990 based on the IRS position that certain
aircraft maintenance costs should have been capitalized
rather than expensed for federal income tax purposes. In
addition, the Company believes it is likely that the IRS
will propose an additional adjustment, based on the same IRS
position with respect to aircraft maintenance costs, for
subsequent tax years. The Company believes that its practice
of expensing these types of maintenance costs is consistent
with industry practice. However, if this issue is determined
adversely to the Company, there can be no assurance that the
Company will not have to pay substantial additional tax. The
Company is unable to predict the ultimate outcome of this
matter and intends to vigorously contest the proposed
adjustment.
7. Preferred Securities of Subsidiary Trust
On June 11, 1997, CNF Trust I (the Trust), a Delaware
business trust wholly owned by the Company, issued 2,500,000
of its $2.50 Term Convertible Securities,
<PAGE 33>
Series A TECONS to the public for gross proceeds of
$125 million. The combined proceeds from the issuance
of the TECONS and the issuance to the Company of the
common securities of the Trust were invested by the
Trust in $128.9 million aggregate principal
amount of 5% convertible subordinated debentures due June 1,
2012 (the Debentures) issued by the Company. The Debentures
are the sole assets of the Trust.
Holders of the TECONS are entitled to receive cumulative
cash distributions at an annual rate of $2.50 per TECONS
(equivalent to a rate of 5% per annum of the stated
liquidation amount of $50 per TECONS). The Company has
guaranteed, on a subordinated basis, distributions and other
payments due on the TECONS, to the extent the Trust has
funds available therefor and subject to certain other
limitations (the Guarantee). The Guarantee, when taken
together with the obligations of the Company under the
Debentures, the Indenture pursuant to which the Debentures
were issued, and the Amended and Restated Declaration of
Trust of the Trust (including its obligations to pay costs,
fees, expenses, debts and other obligations of the Trust
[other than with respect to the TECONS and the common
securities of the Trust]), provide a full and unconditional
guarantee of amounts due on the TECONS.
The Debentures are redeemable for cash, at the option of the
Company, in whole or in part, on or after June 1, 2000, at a
price equal to 103.125% of the principal amount, declining
annually to par if redeemed on or after June 1, 2005, plus
accrued and unpaid interest. In certain circumstances
relating to federal income tax matters, the Debentures may
be redeemed by the Company at 100% of the principal plus
accrued and unpaid interest. Upon any redemption of the
Debentures, a like aggregate liquidation amount of TECONS
will be redeemed. The TECONS do not have a stated maturity
date, although they are subject to mandatory redemption upon
maturity of the Debentures on June 1, 2012, or upon earlier
redemption.
Each TECONS is convertible at any time prior to the close of
business on June 1, 2012, at the option of the holder into
shares of the Company's common stock at a conversion rate of
1.25 shares of the Company's common stock for each TECONS,
subject to adjustment in certain circumstances.
8. Shareholders' Equity
In 1989, the Board of Directors designated a series of
1,100,000 preferred shares as Series B Cumulative
Convertible Preferred Stock, $.01 stated value, which is
held by the CNF Thrift and Stock Plan (TASP). The Series B
preferred stock is convertible into common stock, as
described in Note 10, at the rate of 4.71 shares for each
share of preferred stock subject to antidilution adjustments
in certain circumstances. Holders of the Series B preferred
stock are entitled to vote with the common stock and are
entitled to a number of votes in such circumstances equal to
the product of (a) 1.3 multiplied by (b) the number of
shares of common stock into which the Series B preferred
stock is convertible on the record date of such vote.
Holders of the Series B preferred stock are also entitled to
vote separately as a class on certain other matters. The
TASP trustee is required to vote the allocated shares based
upon instructions from the participants; unallocated shares
are voted in proportion to the voting instructions received
from the participants with allocated shares.
9. Employee Benefit Plans
The Company has a non-contributory defined benefit pension
plan (the Plan) covering non-contractual employees in the
United States. The Company's annual pension provision and
contributions are based on an independent actuarial
computation. Although it is the Company's funding policy to
contribute the minimum required tax-deductible contribution
for the year, it may increase its contribution above the
minimum if appropriate to its tax and cash position and the
plan's funded status. Benefits under the Plan are based on a
career average final five-year pay formula. Approximately 82% of
the Plan assets are invested in publicly traded stocks and
bonds. The remainder is invested in temporary cash
investments, real estate funds and investment capital funds.
<PAGE 34>
The following sets forth the pension liabilities included in
Employee Benefits in the Consolidated Balance Sheets at
December 31:
(Dollars in thousands) 1997 1996
Accumulated benefit obligation,
including vested benefits of
$221,978 in 1997 and
$169,714 in 1996 $(247,120) $(187,041)
Effect of projected
future compensation levels (83,538) (65,049)
Projected benefit obligation (330,658) (252,090)
Plan assets at market value 312,818 271,669
Plan assets over (under)
projected benefit obligation (17,840) 19,579
Unrecognized prior service costs 9,000 10,183
Unrecognized net gain (18,772) (36,473)
Unrecognized net asset at transition (6,775) (7,905)
Plan liability $ (34,387) $ (14,616)
Weighted average discount rate 7.25% 7.75%
Expected long-term rate of
return on assets 9.5% 9.5%
Rate of increase in future
compensation levels 5.0% 5.0%
Net pension cost includes the following:
(Dollars in thousands) 1997 1996 1995
Cost of benefits earned
during the year $ 23,664 $ 22,544 $ 15,651
Interest cost on projected
benefit obligation 21,818 18,214 15,702
Actual gain arising from
plan assets (46,634) (36,002) (46,575)
Net amortization
and deferral 20,923 15,449 29,223
Net pension cost $ 19,771 $ 20,205 $ 14,001
The Company's Plan includes programs to provide additional
benefits for compensation excluded from the basic Plan. The
annual provision for these programs is based on independent
actuarial computations using assumptions consistent with the
Plan. Obligations in these supplemental programs up to the
Spin-off date for participants now employed by CFC have been
retained by the Company. At December 31, 1997 and 1996, the
total pension liability was $15,915,000 and $12,480,000,
respectively, and the total pension cost was $2,462,000 in
1997, $2,274,000 in 1996 and $1,837,000 in 1995.
The Company has a retiree health plan that provides benefits
to all non-contractual employees at least 55 years of age
with 10 years or more of service. The retiree health plan
limits benefits for participants who were not eligible to
retire before January 1, 1993, to a defined dollar amount
based on age and years of service and does not provide
employer-subsidized retiree health care benefits for
employees hired on or after January 1, 1993.
The following sets forth the total post retirement benefit
liability included in Employee Benefits in the Consolidated
Balance Sheets at December 31:
(Dollars in thousands) 1997 1996
Accumulated post retirement
benefit obligation
Retirees and other inactives $43,319 $38,789
Participants eligible to retire 15,974 13,581
Other active participants 20,605 19,334
79,898 71,704
Unrecognized prior service costs 444 499
Unrecognized valuation gain 7,918 12,313
Accrued post retirement benefit cost $88,260 $84,516
Weighted average discount rate 7.25% 7.75%
Average health care cost trend rate
First year 6.5% 8.0%
Declining to (year 1999) 5.5% 6.0%
Net periodic post retirement benefit cost includes the
following components:
(Dollars in thousands) 1997 1996 1995
Cost of benefits earned
during the year $2,043 $2,422 $1,960
Interest cost on accumulated
post retirement obligation 5,697 5,256 5,301
Net amortization and deferral (244) (131) (719)
Net periodic post retirement
benefit cost $7,496 $7,547 $6,542
The increase in the accumulated post retirement benefit
obligation and the aggregate service and interest cost,
given a 1% increase in the health care cost trend rate
assumption, would be approximately 5% and 4%, respectively.
<PAGE 35>
The Company and each of its subsidiaries have adopted
various plans relating to the achievement of specific goals
to provide incentive-based compensation for designated
employees. Total compensation earned by salaried
participants of those plans was $51,900,000, $23,210,000 and
$17,300,000 in 1997, 1996 and 1995, respectively, and by
hourly participants was $38,100,000, $12,200,000 and
$9,100,000 in 1997, 1996 and 1995, respectively.
10. Thrift and Stock Plan
The Company sponsors the CNF Thrift and Stock Plan (TASP), a
voluntary defined contribution plan with a leveraged ESOP
feature, for non-contractual U.S. employees. The TASP
satisfies the Company's contribution requirement by matching
up to 50% of the first 3% of a participant's basic
compensation. In 1989, the TASP borrowed $150,000,000 to
purchase 986,259 shares of the Company's Series B Cumulative
Convertible Preferred Stock. This stock is only issuable to
the TASP trustee. Company contributions were $9,921,000 in
1997, $8,589,000 in 1996 and $7,227,000 in 1995, in the form
of common and preferred stock.
The Series B Preferred Stock earns a dividend of $12.93 per
share and is used to repay the TASP debt. Any shortfall is
paid in cash by the Company. Dividends on these preferred
shares are deductible for income tax purposes and,
accordingly, are reflected net of their tax benefits in the
Statements of Consolidated Income. Allocation of preferred
stock to participants' accounts is based upon the ratio of
the current year's principal and interest payments to the
total TASP debt. Since the debt is guaranteed by the
Company, it is reflected in Long-term Debt and Guarantees in
the Consolidated Balance Sheets. The TASP guarantees are
reduced as principal is paid.
Each share of preferred stock is convertible into common
stock, upon an employee ceasing participation in the plan,
at a rate generally equal to that number of shares of common
stock that could be purchased for $152.10, but not less than
the minimum conversion rate of 4.71 shares of common stock
for each share of Series B Preferred Stock.
Deferred compensation expense is recognized as the preferred
shares are allocated to participants and is equivalent to
the cost of the preferred shares allocated and the TASP
interest expense for the year, reduced by the dividends paid
to the TASP. During 1997, 1996 and 1995, $6,649,000,
$6,250,000 and $5,918,000, respectively, of deferred
compensation expense was recognized.
At December 31, 1997, the TASP owned 865,602 shares of
Series B Preferred Stock, of which 198,798 shares were
allocated to employees. At December 31, 1997, the Company
had reserved, authorized and unissued common stock adequate
to satisfy the conversion feature of the Series B Preferred
Stock.
11. Stock Option and Restricted Stock Plans
Officers and non-employee directors have been granted
options under the Company's stock option plans to purchase
common stock of the Company at prices equal to the market
value of the stock on the date of grant. Outstanding options
become fully exercisable one year after the date of grant;
any unexercised options expire after 10 years.
In 1995, the Financial Accounting Standards Board issued
SFAS 123, "Accounting for Stock-Based Compensation".
Adoption of SFAS 123 is optional, and the Company does not
intend to change its accounting for stock-based
compensation. Had the Company adopted this statement in
1995, pro forma net income from continuing operations as
reported net of preferred dividends would have been $109.3
million, $68.6 million, and $74.0 million for the years
1997, 1996 and 1995, respectively. Basic earnings per share
would have been $2.36, $1.56 and $1.76 per share for the
years 1997, 1996 and 1995, respectively. These pro forma
effects of applying SFAS 123 are not indicative of future
amounts. The weighted-average grant-date fair value of
options granted in 1997, 1996 and 1995 were $12.28, $8.54
and $8.37 per share, respectively. The following assumptions
were used with the Black-Scholes options pricing model to
calculate the option values: risk-free weighted average
rate, 6.1%-6.8%; expected life, 6 years; dividend yield,
1.2%; and volatility, 30.0%.
<PAGE 36>
Following is a summary of stock option data:
Number of Wtd. Avg.
Options Exercise Price
Outstanding at December 31, 1994 3,778,428 $18.02
Granted 647,500 23.61
Exercised (583,143) 16.01
Expired or canceled (84,590) 26.48
Outstanding at December 31, 1995 3,758,195 19.11
Granted 537,500 21.53
Exercised (138,027) 14.30
Expired or canceled (24,319) 27.10
Adjustment for Spin-off 773,139 -
Outstanding at December 31, 1996 4,906,488 16.46
Granted 492,500 32.47
Exercised (2,688,824) 15.42
Expired or canceled (122,566) 26.77
Outstanding at December 31, 1997 2,587,598 $20.12
The following is a summary of the stock options outstanding
and exercisable at December 31, 1997:
Outstanding Options Exercisable Options
Range of Number Remaining Wtd. Avg. Number Wtd.Avg.
Exercise of Life Exercise of Exercise
Prices Options (Years) Price Options Price
$10.98-$16.26 746,823 4.9 $13.19 687,612 $12.95
$18.05-$22.94 1,339,801 7.5 $19.38 1,339,801 $19.38
$27.66-$43.63 500,974 9.3 $32.50 23,934 $30.44
In 1997, the Company's shareholders approved a stock
compensation plan for certain executives of the Company.
Restricted stock awarded under the plan generally vests one-
third per year dependent on the achievement of certain
market prices of the Company's stock. During 1997, 79,500
shares were issued with a weighted-average grant-date fair
value of $33.80.
At December 31, 1997, the Company had 1,640,500 common
shares reserved for the grant of stock options, restricted
stock, or other equity-based incentive compensation.
12. Financial Instruments
The Company has entered into interest rate swap agreements that
expire in 1999. These agreements effectively convert $36 million of
variable rate lease obligations to fixed rate obligations. Interest
rate differentials to be paid or received are recognized over the
life of each agreement as adjustments to operating expense. The
Company is exposed to credit loss on the interest rate swaps in the
event of non-performance by counter parties, but the Company does
not anticipate non-performance by any of these counter parties. The
fair values of the interest rate swaps, as presented below, reflect
the estimated amounts that the Company would receive or pay to
terminate the contracts at the reported date.
The following table presents the carrying amounts and estimated
fair values of the Company's financial instruments at December 31:
(Dollars in thousands) 1997 1996
Carrying Fair Carrying Fair
Amount Value Amount Value
Payables for
interest swaps $ - $ 900 $ - $1,351
Short-term borrowings - - 155,000 155,000
Long-term debt 367,484 396,000 369,425 400,000
Capital leases 110,879 125,000 110,961 119,000
13. Contingencies and Other Commitments
In connection with the Spin-off, the Company agreed to
indemnify certain states, insurance companies and sureties against
the failure of CFC to pay certain worker's compensation and public
liability claims that were pending as of September 30, 1996. In
some cases, these indemnities are supported by letters of credit
under which the Company is liable to the issuing bank and by bonds
issued by surety companies. In order to secure CFC's obligation to
reimburse and indemnify the Company against liability with respect
to these claims, CFC has provided the Company with approximately $30
million of letters of credit and $50 million of real property
collateral.
<PAGE 37>
The Company has entered into a Transition Services Agreement to
provide CFC with certain information systems, data processing and
other administrative services and will administer CFC's retirement
and benefits plans. The agreement has a three-year term although
CFC may terminate any or all services with six months notice. The
Company may terminate all services other than the telecommunications
and data processing services at any time after the first anniversary
of the agreement, with six months notice. Services performed by the
Company under the agreement shall be paid by CFC on an arm's-length
negotiated basis.
The Internal Revenue Service has notified a subsidiary of the
Company of proposed adjustments in aviation transportation excise
tax caused by a difference in methods used to calculate the tax.
The Company intends to vigorously defend against the proposed
adjustments. Although the Company is unable to predict the ultimate
outcome, it is the opinion of management that this action will not
have a material impact on the Company's financial position or
results of operations.
The Company has received notices from the Environmental
Protection Agency and others that it has been identified as a
potentially responsible party (PRP) under the Comprehensive
Environmental Response Compensation and Liability Act (CERCLA) or
other Federal and state environmental statutes at several hazardous
waste sites. Under CERCLA, PRPs are jointly and severally liable
for all site remediation and expenses. After investigating the
Company's involvement at such sites, based upon cost studies
performed by independent third parties, the Company believes its
obligations with respect to such sites would not have a material
adverse effect on the Company's financial position or results of
operations.
The Company and its subsidiaries are defendants in various
lawsuits incidental to their businesses. It is the opinion of
management that the ultimate outcome of these actions will not have
a material impact on the Company's financial position or results of
operations.
14. Industry Group Analysis and Foreign Operations
In June 1997, the Financial Accounting Standards Board issued
SFAS 131, "Disclosures about Segments of an Enterprise and Related
Information". SFAS 131 changes the method of disclosure of segment
information to the manner in which management organizes the segments
for making operating decisions and assessing performance. SFAS 131
is required to be adopted for year-end 1998. The Company's
currently-reported segment data is also the basis upon which
management makes decisions and evaluates performance. Accordingly,
adoption of SFAS 131 will not materially alter the current reporting
format of industry and geographic segments.
The following analyses are by geographic and industry group.
Revenues and expenses are allocated between North America and
international, depending on whether the shipments are between
locations within North America or between locations where one or
both are outside North America. Operating income is net of general
corporate expenses, a portion of which have been allocated to
subsidiaries on a revenue and capital basis. Financial results of the
Priority Mail contract are included in each or the reported segments
depending on the service provided. Intersegment revenues and related
earnings have been eliminated. The identifiable assets of the
parent consist principally of cash, cash equivalents and deposits.
<CAPTIONS>
GEOGRAPHIC GROUP INFORMATION
(Dollars in thousands)
Consolidated North American International
Year Ended December 31, 1997
Revenues $ 4,266,801 $ 3,364,304 $ 902,497
Operating income 264,867 201,328 63,539
Identifiable assets 2,421,496 2,365,416 56,080
Year Ended December 31, 1996
Revenues $ 3,662,183 $ 2,898,091 $ 764,092
Operating income 192,148 151,575 40,573
Identifiable assets 2,081,866 2,032,085 49,781
Year Ended December 31, 1995
Revenues $ 3,290,077 $ 2,601,193 $ 688,884
Operating income 186,687 151,379 35,308
Identifiable assets(a) 1,825,850 1,787,960 37,890
<FN>
(a) Excludes net assets of discontinued operations.
<PAGE 38>
<CAPTIONS>
INDUSTRY GROUP INFORMATION
(Dollars in thousands)
Industry Group
Adjustments, Con-Way
Eliminations and Transportation Emery
Consolidated the Parent Services Worldwide Other
Year Ended December 31, 1997
Revenues $ 4,266,801 $ 1,473,188 $ 2,272,075 $ 521,538
Operating expenses 3,333,721 1,072,522 1,788,941 472,258
Selling and administrative expenses 557,117 188,971 334,201 33,945
Depreciation 111,096 64,540 39,599 6,957
Operating income 264,867 $ 147,155 $ 109,334 $ 8,378
Other expense (43,053)
Income before income taxes $ 221,814
Capital expenditures $ 242,343 $ 2,896 $ 109,328 $ 62,689 $ 67,430
Identifiable assets $ 2,421,496 $ 176,816 $ 727,597 $ 1,318,982 $ 198,101
Year Ended December 31, 1996
Revenues $ 3,662,183 $ 1,292,082 $ 1,968,058 $ 402,043
Operating expenses 2,918,682 973,341 1,586,855 358,486
Selling and administrative expenses 463,930 165,291 270,834 27,805
Depreciation 87,423 52,401 31,954 3,068
Operating income 192,148 $ 101,049 $ 78,415 $ 12,684
Other expense (45,016)
Income before income taxes $ 147,132
Capital expenditures $ 200,835 $ 434 $ 146,377 $ 46,939 $ 7,085
Identifiable assets $ 2,081,866 $ 172,969 $ 687,821 $ 1,137,631 $ 83,445
Year Ended December 31, 1995
Revenues $ 3,290,077 $ 1,152,164 $ 1,766,301 $ 371,612
Operating expenses 2,641,756 876,505 1,422,872 342,379
Selling and administrative expenses 391,682 138,329 234,223 19,130
Depreciation 69,952 40,757 27,472 1,723
Operating income 186,687 $ 96,573 $ 81,734 $ 8,380
Other expense (33,745)
Income before income taxes $ 152,942
Capital expenditures $ 167,253 $ (4,242) $ 136,546 $ 32,197 $ 2,752
Identifiable assets(a) $ 1,825,850 $ 106,080 $ 562,449 $ 1,082,507 $ 74,814
<FN>
(a) Excludes net assets of discontinued operations.
</FN>
<PAGE 39>
Note 15: Quarterly Financial Data (Unaudited)
(Dollars in thousands except per share data)
<CAPTIONS>
1997 - Quarter Ended March 31 June 30 September 30 December 31
Revenues $ 942,628 $ 1,002,563 $ 1,127,362 $ 1,194,248
Operating income 50,367 66,867 81,847 65,786(c)
Income before income taxes 40,172 55,027 72,743 53,872
Income taxes 18,228 25,038 33,098 24,561
Net income 21,944 29,989 39,645 29,311
Net income available to common
shareholders 20,005 28,018 37,694 27,286
Per share:(a)
Basic income 0.44 0.61 0.81 0.58
Diluted income 0.40 0.55 0.70 0.51
Market price range $28.13-$20.25 $36.38-$26.38 $45.38-$32.13 $50.88-$37.06
Common dividends paid 0.10 0.10 0.10 0.10
1996 - Quarter Ended March 31 June 30 September 30 December 31
Revenues $ 847,873 $ 894,336 $ 935,790 $ 984,184
Operating income 35,214 52,657 54,416 49,861
Income from continuing operations
before income taxes 25,683 41,323 42,065 38,061
Income taxes 12,020 17,605 18,766 18,560
Income from continuing operations 13,663 23,718 23,299 19,501
Loss from discontinued operations
net of tax benefits(b) (13,383) (10,062) (3,445) (25,743)(d)
Net income (loss) applicable to common
shareholders (1,854) 11,473 17,713 (8,376)
Per share:(a)
Basic income (loss):
Continuing operations 0.26 0.49 0.48 0.39
Discontinued operations(b) (0.30) (0.23) (0.08) (0.58)(d)
Net income (loss) (0.04) 0.26 0.40 (0.19)
Diluted Income (loss):
Continuing operations 0.24 0.45 0.44 0.36
Discontinued operations(b) (0.27) (0.21) (0.07) (0.52)(d)
Net income (loss) (0.03) 0.24 0.37 (0.16)
Market price range $29.38-$21.00 $26.25-$21.13 $24.50-$17.25 $26.00-$21.50
Common dividends paid 0.10 0.10 0.10 0.10
<FN>
(a) All periods have been restated to conform to the presentation required by SFAS 123, "Earnings Per Share."
(b) Reflects the results of CFC as described in Note 2 of the Notes to the Consolidated Financial Statements.
(c) Includes $5.0 million charge ($.06 per share basic and $.05 per share diluted) for costs associated with
the discontinuance of a rail container service.
(d) Includes $16.2 million for loss on discontinuance, net of tax benefits ($0.37 per share basic and $0.33
per share diluted).
</FN>
<PAGE 40>
<CAPTIONS>
CNF Transportation Inc.
Five Year Financial Summary
(Dollars in thousands except per share data) 1997 1996 1995 1994 1993
SUMMARY OF OPERATIONS
Revenues 4,266,801 3,662,183 3,290,077 2,799,935 2,163,631
Con-Way Transportation Services 1,473,188 1,292,082 1,152,164 1,018,544 818,301
Emery Worldwide 2,272,075 1,968,058 1,766,301 1,567,854 1,261,273
Other 521,538 402,043 371,612 213,537 84,057
Operating income 264,867 192,148 186,687 189,977 90,754
Con-Way Transportation Services 147,155 101,049 96,573 111,220 71,854
Emery Worldwide 109,334 78,415 81,734 77,616 16,591
Other 8,378 12,684 8,380 1,141 2,309
Investment income 1,378 52 85 1,708 5,127
Interest expense 39,553 39,766 33,407 27,065 29,890
Income from continuing operations before
income taxes 221,814 147,132 152,942 165,129 66,202
Income taxes 100,925 66,951 66,723 69,304 28,736
Net income from continuing operations (a) 113,003 71,589 75,420 76,762 18,499
Discontinued operations: (b)
Income (loss) from discontinued operations,
net of income taxes (benefits) - (36,386) (28,854) (37,442)(d) 13,108
Loss from discontinuance,
net of income tax benefits - (16,247) - - -
Income (loss) from discontinued operations(b) - (52,633) (28,854) (37,442) 13,108
Net Income available to common shareholders 113,003 18,956 46,566 35,710 (d) 31,607
PER SHARE
Income from continuing operations, basic (c) $ 2.44 $ 1.63 $ 1.79 $ 2.12 (d) $ 0.52
Discontinued operations: (b)(c)
Income (loss) from discontinued operations,
net of income taxes (benefits) - (0.83) (0.68) (1.03)(d) 0.37
Loss from discontinuance,
net of tax benefits - (0.37) - - -
Net income available to
common shareholders, basic (c) 2.44 0.43 1.11 1.09 (d) 0.89
Income from continuing operations, diluted(c) 2.19 1.48 1.64 1.81 0.46
Dividends paid on common stock 0.40 0.40 0.40 - -
Common shareholders' equity 13.26 10.86 15.76 14.58 13.65
OTHER DATA
Total assets 2,421,496 2,081,866 2,084,958 1,833,742 1,728,874
Capital expenditures 242,343 200,835 167,253 149,808 151,815
Effective income tax rate 45.5% 45.5% 43.6% 42.0% 43.4%
Basic average shares 46,236,688 44,041,159 42,067,842 36,183,020 35,444,175
Market price range $50.88-$20.25 $29.38-$17.25 $27.88-$20.25 $29.25-$18.00 $24.00-$13.63
Number of shareholders 15,560 16,090 15,980 16,015 15,785
Number of regular full-time employees 26,300 25,100 21,400 18,500 17,000
<FN>
(a) Includes preferred stock dividends.
(b) Reflects the results of CFC as described in Note 2 of the Notes to the Consolidated Financial Statements.
(c) Prior years have been restated to conform to the presentation required by SFAS 128, "Earnings Per Share."
(d) Continuing operations include a $3.6 million extraordinary charge ($.10 per share basic and $.07 per share diluted), and
discontinued operations $1.9 million ($.05 per share basic and $.04 per share diluted), net of related tax benefits, for
the write-off of intrastate operating rights.
</FN>