EXHIBIT 13
PAGE 18
Financial Review and Management Discussion
The Company's total operating income in 1998 of $290.5
million exceeded 1997 results by 9.7% and was a record for
the third consecutive year. The increased operating income
was the result of significantly higher income from Con-Way
Transportation Services, increased income from Menlo
Logistics and a reduced loss from the Other segment, which
consists mostly of the operations under the Priority Mail
contract with the U.S. Postal Service. These improvements
were partially offset by significantly lower operating
income from Emery Worldwide. The Company's operating income
for 1997 was a record $264.9 million, which represented a
37.9% increase over 1996. Aided by a strong economy in 1997,
the increase resulted primarily from significant operating
income improvements from Con-Way, Emery and Menlo,
offsetting losses in the Other segment from the start-up
phase of the Priority Mail operations.
Total Company revenues for 1998, a record at $4.94 billion,
increased 15.8% over 1997. The increase was largely due to
higher revenues from Con-Way, significantly higher revenue
growth from Menlo, and higher revenues from the Other
segment, as a result of full operations following completion
of the start-up phase of the Priority Mail contract.
Partially offsetting these increases was a small decline in
revenues from Emery Worldwide. Total Company revenues for
1997, previously a record at $4.27 billion, increased 16.5%
over the previous record achieved in 1996. The most
significant revenue increases in 1997 came from Emery, Con-
Way and Menlo.
Operating results for 1996 reflect the results of
Consolidated Freightways Corporation (CFC) as a discontinued
operation. CFC was the Company's former long-haul, less-than-
truckload (LTL) carrier, which was spun off to shareholders
on December 2, 1996.
Con-Way Transportation Services
Revenues for Con-Way in 1998 were another record at $1.68
billion, a 14.3% increase over 1997, reflecting the combined
improvement from both higher tonnage levels and higher
revenue per hundredweight. Total Con-Way regional carrier
tonnage in 1998 increased 6.2% and LTL tonnage increased
6.6% over 1997. The volume improvements resulted from
continued market share gains in previously expanded regions
and growth from its premium service mix. Average revenue per
hundredweight was up approximately 10% over 1997, reflecting
increased joint-service business and continued success of
its premium service offerings. Also as a result of increased
tonnage and revenue per hundredweight, Con-Way's 1997
revenues increased 14.0% 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
higher rates, as average revenue per hundredweight was up
about 5% compared to 1996.
Operating income for Con-Way in 1998 increased 40.6% to
$206.9 million compared with 1997, a $59.8 million
improvement. Operating income throughout 1998 exceeded $50
million each quarter and was in part due to the continued
expansion of more profitable premium services. As in the
prior year, productivity improvements that contributed to
the higher operating income included more efficient
utilization of the freight system's capacity, increased load
factors, freight handling efficiencies, growth from joint-
service business, and some benefit from lower fuel costs.
Con-Way reported a significant increase in operating income
in 1997 of 45.6% above 1996. Factors contributing to this
increase included higher revenues from the more profitable
premium services and similar productivity improvements
described for 1998.
Emery Worldwide
Emery revenues for 1998 decreased 2.1% from 1997 due
primarily to lower domestic and international airfreight
revenues, partially offset by revenue growth from other
transportation services, including the Express Mail contract
with the U.S. Postal Service. Total domestic revenues in
1998 were down only 2.3% from 1997 despite a sharper decline
of 9.6% in domestic airfreight revenues reflecting higher
revenues from other transportation services. Domestic
airfreight tonnage in 1998 declined 8.2% from 1997.
International airfreight revenues were down 5.0% on a
tonnage decline of 0.8%. Domestic airfreight revenue per
pound in 1998 was relatively unchanged from the prior year
with international revenue per pound down 3.4% from 1997.
Emery revenues for 1997 increased 14.3% over 1996. In 1997,
international airfreight revenues increased 16.0% and
domestic revenue was up 12.5%. Tonnage increases in 1997 for
the same international and domestic services were 13.7% and
9.8%, respectively.
PAGE 19
Domestic airfreight volume in 1998 declined primarily from
decreased demand from certain industries serviced by Emery,
increased ground-based competition, and implementation of
Emery's yield management program designed to re-price or
eliminate certain low margin business. The prior year also
included approximately $30 million of revenue attributed to
the two-week strike at a major parcel carrier in August
1997. International airfreight volumes in 1998 were down
from 1997 due primarily to adverse economic conditions in
the international markets served by Emery.
Partially as a result of the lower revenue levels, and
compounded by higher incremental costs of service
initiatives, operating income in 1998 for Emery declined
43.6% from 1997. Service initiatives aimed at improving
service levels to facilitate changes to Emery's domestic
premium service mix required some incremental cost
increases. These included costs from enhanced short-term
airlift capacity and other freight handling processes. The
impact, when combined with lower revenues, resulted in a
more dramatic decrease in margins. The comparatively lower
fuel costs in 1998 were essentially mitigated by fuel
surcharges realized in 1997. Emery's operating income for
1997 increased to a record $114.0 million, a 45.3% increase
over 1996. The improved results reflected the benefits of
revenue growth, combined with limited benefits from premium
service mix, the parcel carrier strike and continued cost
control strategies.
Emery's management strategies will focus on restoring
revenue levels with emphasis on the preferred service mix,
which includes higher margin guaranteed service. Programs
are also in place to control costs commensurate with revenue
levels that include efforts to balance short-term airlift
capacity necessary to attain required service levels.
Expansion plans will also focus on developing existing
international business with the non-asset based operations
that have lower capital requirements so costs can be
adjusted more closely with changes in revenue levels. In an
effort to increase the share of international business to
total revenues, management will convert more agent locations
to owned operations and enhance marketing efforts. Continued
technology projects also play a key roll in developing the
premium services in both the domestic and international
markets.
Menlo Logistics
Menlo operating results were previously reported as a part
of the Other segment, but now are reported as an independent
segment following the adoption of SFAS 131, "Disclosures
about Segments of an Enterprise and Related Information."
Menlo revenues in 1998 of $586.8 million increased 28.7%
from 1997 partially as a result of the addition of new
contracts secured earlier in 1998 with several large
customers. Also contributing to the revenue growth in 1998
was an increase in revenues from existing contracts entered
into prior to this year. Menlo revenues in 1997 increased
26.9% over 1996.
Operating income in 1998 was $19.5 million, up 13.3% from
the prior year. The increased operating income was driven by
revenue growth and in part by improved margins from maturing
contracts. Partially offsetting the increased income from
existing contracts were costs of implementing several new
contracts secured in the first half of 1998. In 1997, Menlo
reported a 57.3% increase in operating income to reach $17.2
million. The 1997 increase partially resulted from an
increased mix of integrated solution projects that produced
higher margins than in 1996.
Other Operations
The Other segment consists primarily of the operations under
the Priority Mail contract with the U.S. Postal Service, and
includes Road Systems and VantageParts. The 1998 revenue
increase was due primarily to Priority Mail revenues that
increased to $410.8 million from $51.6 million in 1997. The
third quarter of 1998 was the first quarter in which the
full system of 10 Priority Mail Processing Centers was
complete and operational. The Company is seeking cost
recoveries from the USPS for expenses incurred in connection
with system modifications required by the USPS for the 1998
holiday operations. The claim seeks reimbursement for excess
costs incurred plus profit thereon. Included in 1998
revenues were unbilled revenues for this claim filed with
the USPS to recover a portion of the costs incurred in
connection with modifications for holiday operations. The
Priority Mail contract, which was signed in April 1997 and
PAGE 20
was in its start-up phase that same year, provided revenues
beginning only in the fourth quarter of 1997.
The operating loss for the Other segment in 1998 was
primarily due to losses incurred by the Priority Mail
operations. However, the Priority Mail contract loss of $3.0
million decreased 77.0% from the prior year as the 1997 loss
of $13.0 million included higher cost levels during the
start-up phase of operations. The loss incurred in 1998 was
primarily due to costs during completion of the start-up
phase in the first quarter of 1998 and the costs of
maintaining service levels and making required system
modifications for the holiday season in December, 1998. The
Other segment operating loss in 1997 was down $15.2 million
from operating income in 1996 as a result of losses incurred
during the 1997 start-up phase of the Priority Mail
contract.
Other Income (Expense)
Other expense for 1998 was down 6.8% compared to 1997
primarily due to lower interest expense resulting from
reduced interest rates following the refinancing in both
1998 and 1997 of certain debt obligations. Also contributing
to the lower interest expense in 1998 were lower average
short-term borrowings partially offset by dividend
requirements on preferred securities of a subsidiary trust
(TECONS) issued in June 1997. Other expense in 1997
decreased 4.4% from 1996 primarily as a result of lower
interest expense after the repayment of short-term
borrowings with proceeds from the issuance of the TECONS.
Income Taxes
The effective tax rate for 1998 was 44.5% compared to a rate
of 45.5% for 1997 and 1996. The decline in the effective tax
rate was primarily attributable to the implementation of
certain tax planning strategies and fewer non-deductible
items. The effective tax rate of 45.5% for 1997 and 1996
reflects comparable levels of non-deductible items and taxes
incurred in other jurisdictions.
Net Income
The 1998 net income available to common shareholders was
$130.8 million, a 15.8% increase compared with $113.0
million in 1997. The increased net income was attributable
to the combination of higher operating income, lower other
expenses and a lower effective tax rate. Higher operating
income in 1997 contributed to net income available to common
shareholders that increased 57.8% over 1996, which was
adversely impacted by a $52.6 million loss from discontinued
operations.
Liquidity and Capital Resources
During 1998, net capital and technology expenditure
requirements of $303.2 million exceeded cash flow from
operating activities of $266.8 million. Additionally,
dividend payments used $30.3 million in cash. To fund these
requirements, cash and cash equivalents declined $23.7
million and short-term borrowings increased $43.0 million.
Comparing 1998 to 1997, cash flow from operations declined
$21.4 million, as higher payments for current and other
liabilities more than offset increased cash from net income.
Receivables grew proportionately with business levels in
both years, while growth in operating liabilities slowed in
1998. Cash flow from operations in 1997 increased $71.9
million over 1996 primarily due to higher net income and
depreciation and amortization.
Investing activities for 1998 used $54.9 million more cash
than in 1997, reflecting a $25.3 million increase in capital
expenditures and a $40.4 million increase in expenditures
for purchased and internally developed software. The capital
expenditure increase primarily came from Emery and was
partially offset by lower capital expenditures for the
Priority Mail operations than in 1997. The increased
expenditures for software were for significant technology
projects to develop operating, finance and administrative
systems. Capital expenditures in 1997 increased $41.5
million compared to 1996 primarily due to expenditures
required for the Priority Mail contract.
Financing activities provided $37.1 million more cash in
1998 than in 1997, mostly reflecting the increase in short-
term borrowings. In 1997, proceeds from the issuance of the
TECONS and exercise of stock options
PAGE 21
were substantially offset by the repayment of borrowings.
Dividend payments were only slightly higher in 1998 than
in 1997 and 1996.
At December 31, 1998, the Company had borrowings of $28.0
million under its $350 million unsecured credit facility and
another $15.0 million under $95 million of other uncommitted
lines of credit.
The $350 million facility is also available for issuance of
letters of credit. Under that facility, outstanding letters
of credit totaled $66.6 million at December 31, 1998, which
left available capacity of $255.4 million. In addition, the
Company had available capacity of $80.0 million under the
other uncommitted lines of credit. Under several other
unsecured facilities, $51.5 million of letters of credit
were outstanding at December 31, 1998.
On October 1, 1998, the Company redeemed $46 million of
Series A revenue bonds used as partial financing of a
sorting facility in Dayton, Ohio. These redeemed bonds, with
an effective interest rate of 8% and due in October 2009,
were replaced with $46 million of Series A refinancing bonds
due in February 2018 with an interest rate of 5.625%.
The aggregate principal amount of the Company's unsecured
91/8% Notes is repayable on August 15, 1999. The Company has
the ability and intent to refinance the outstanding
principal on a long-term basis. Refer to Note 4 of the Notes
to Consolidated Financial Statements.
The Company filed a shelf registration statement with the
Securities and Exchange Commission in June 1998 that covers
$250 million of debt and equity securities for future
issuance with terms to be decided when and if issued.
The Company's ratio of total debt to capital decreased to
36.4% at December 31, 1998, from 37.9% at December 31, 1997,
primarily due to higher shareholders' equity from net
income. The current ratio was 1.2 to 1 at December 31, 1998,
compared to 1.3 to 1 at December 31, 1997.
Cyclicality and Seasonality
The Company operates 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.
Operations under the Priority Mail contract peak in December
primarily due to higher shipping demand related to the
holiday season.
Market Risk
The Company's policy is to enter into derivative financial
instruments only in circumstances that warrant the hedge of
an underlying asset or liability against exposure to some
form of market, interest rate or currency-related risk. This
policy also prohibits entering into derivative instruments
for trading purposes.
In certain situations, the Company used derivative financial
instruments to mitigate potential volatility in interest
rates. At December 31, 1998, these derivatives consisted of
plain vanilla interest rate swaps with high correlation to
the underlying exposure such that fluctuations in the value
of the derivatives offset reciprocal changes in the
underlying exposure. The underlying exposure consists
primarily of equipment lease obligations with variable
interest rate components that are adjusted quarterly. At
December 31, 1998, the Company estimates that the net
payments under the swaps given a hypothetical adverse change
of 10% in market interest rates would not have a material
effect on the Company's consolidated financial position or
results of operations.
The Company may also be exposed to the effect of interest
rate fluctuations on the fair value of the Company's long-
term debt and capital lease obligations, as described in
Notes 4 and 5 of the Notes to Consolidated Financial
Statements. The change in the fair value of the Company's
long-term obligations given a hypothetical 10% change in
interest rates would be approximately $15 million at
December 31, 1998.
At December 31, 1998, the Company had not entered into any
derivatives to hedge its foreign currency exchange exposure.
The Company may from time to time enter into fuel purchase
contracts to hedge the market exposure to fuel prices.
However, no material contracts were entered into at December
31, 1998.
Accounting Standards
In March 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-1, "Accounting
for the Costs of Computer
PAGE 22
Software Developed or Obtained for Internal Use"
(SOP 98-1). SOP 98-1, which provides for the
capitalization of the costs of internal-use software if
certain criteria are met, is effective for fiscal years
beginning after December 15, 1998. As provided by SOP 98-1,
the Company elected to adopt the pronouncement early and has
applied the new provisions prospectively as of January 1,
1998. Prior to adoption of SOP 98-1, it was the Company's
policy to capitalize purchased software costs and to expense
all internally developed internal-use software costs. For
the year ended December 31, 1998, costs of $35.9 million
were capitalized as internally developed internal-use
software.
In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133). SFAS 133 establishes accounting and
reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an
asset or liability measured at its fair value and that
changes in fair value be recognized currently in earnings
unless specific hedge accounting criteria are met.
Qualifying hedges allow a derivative's gains and losses to
offset related results on the hedged item in the income
statement. SFAS 133 is effective for fiscal years beginning
after June 15, 1999. Management does not expect the adoption
of SFAS 133 to have a material impact on the Company's
consolidated financial position or results of operations and
plans to adopt the statement in the first quarter of 2000.
YEAR 2000
Renovation of all business-critical IT Systems is scheduled
to be substantially complete by the end of the second
quarter of 1999. Validation, which is currently in process
for its systems and software applications, is scheduled for
completion by the end of the third quarter of 1999.
Like many other companies, an issue affecting the Company is
the ability of its computer systems and software to process
the year 2000 (Y2K or Year 2000). To ensure that the
Company's systems are Year 2000 compliant, a team of
Information Technology professionals began preparing for the
Y2K issue in 1996. In 1997, the Company formed a Steering
Committee composed of senior executives to address
compliance issues. The Y2K team developed, and the Steering
Committee approved, a Company-wide initiative to address
issues associated with the Year 2000. Company management has
designated the Y2K project as the highest priority of the
Company's Information Technology Department.
The Company's Y2K compliance efforts are focused on business-
critical items. Systems and software are considered
"business-critical" if a failure would either have a
material adverse impact on the Company's business, financial
condition or results of operations or involve a safety
exposure to employees or customers.
State of Readiness - The Company has identified distinct
categories for its Y2K compliance efforts: (1) Information
Technology (IT) Systems, (2) Non-IT Systems, and (3) IT and
Non-IT Systems of third parties with which the Company has
major relationships. The Company intends to fix or replace
non-compliant software and systems through a process that
involves taking inventory of its systems, assessing risks
and impact, correcting non-compliant systems through
renovation or replacement, and validating compliance through
testing. The Company intends to commit the resources
necessary to bring the project to scheduled completion.
IT Systems - IT Systems include mainframes, mid-range
computers and servers, networks and workstations, related
operating systems and application software. The Company has
inventoried and assessed all business-critical IT Systems.
Renovation efforts are in progress or are substantially
complete, depending on the system or software. The following
percentages of system and software renovations were achieved
as of December 31, 1998. Mainframe hardware has been fully
renovated. Certain peripheral mainframe hardware is
approximately 95% renovated. Mainframe operating systems and
mainframe applications software are approximately 85% and
45% renovated, respectively. Mid-range computers and servers
are estimated to be 55% renovated while approximately 30% of
related operating systems and application software programs
have been renovated. Network hardware (excluding servers)
and computer workstations are approximately 90% renovated
and an estimated 20% of the related operating systems and
application software programs have been renovated.
Non-IT Systems - Non-IT Systems include operating equipment,
security systems, and other equipment that may contain
microcontrollers with
PAGE 23
embedded technology. Certain IT Systems may also
include embedded technology. The Company has contacted
all business-critical operating and support
facilities to identify the extent of its embedded technology
and has received responses from approximately 80% of those
surveyed locations. The Company is assessing these results
and, when embedded technology is determined to exist, the
Company is surveying the vendor or manufacturer of the
embedded technology or the affected equipment or system to
identify risks related to the Year 2000. Approximately 60%
of the embedded technology the Company is aware of has been
confirmed as Y2K compliant. The Company's remaining systems
are being assessed and, if necessary, will be replaced if
determined to be non-compliant. These systems are expected
to be Y2K compliant by the end of the second quarter of 1999
and to be validated by the end of the third quarter of 1999.
Third Party Systems - In addition to its own IT and Non-IT
Systems, the Company is also reliant upon system
capabilities of third parties (including, among others,
customers, vendors, domestic and international government
agencies, and U.S. and international airports). The Company
believes these third party risks are inherent in the
industry and not specific to the Company.
The Company has initiated communications with third parties
with whom the Company has material business relationships to
determine the extent to which the Company's systems are
vulnerable to those third parties' failure to make necessary
changes related to Y2K issues. The intent of these inquiries
through questionnaires and interviews is to ascertain the
level of readiness of the identified third parties.
Essentially all of the Company's critical vendors have been
contacted and approximately 95% have responded to the
surveys. If a vendor is determined to be non-compliant, the
Company is working to identify a Y2K-compliant vendor as a
replacement. In an effort to mitigate risks related to the
system capabilities of certain customers, the Company plans
to provide Y2K-compliant software upgrades to its tracking
and tracing software and other proprietary software utilized
by its customers.
The International Air Transport Association and the Air
Transport Association of America are involved in global and
industry-wide studies aimed at assessing the Y2K compliance
status of airports and other U.S. and international
government agencies. As a member of these associations,
Emery Worldwide is analyzing the results of these studies as
they become available.
Costs to Address Y2K Compliance - Since 1996, the Company has
expensed approximately $22 million on Y2K compliance and
expects that approximately $18 million of additional Y2K
compliance costs will be expensed through December 31, 1999.
All Y2K costs have been and are expected to be funded from
operations. In 1998, the Company capitalized $15.5 million
of purchased software costs and $35.9 million of internally
developed software costs. A portion of the capitalized
software costs was for new financial and administrative
systems that are Y2K compliant. These systems have replaced
or are expected to replace certain non-compliant systems.
Risks - While the Company believes its efforts to address the
Year 2000 issue will be successful in avoiding any material
adverse effect on the Company's operations or financial
condition, it recognizes that failing to resolve Year 2000
issues on a timely basis would, in a most reasonably likely
worst case scenario, significantly limit its ability to
provide its services for a period of time, especially if
such failure is coupled with a third-party failure. As a
result, there can be no assurance that this matter will not
have a material adverse effect on the Company.
Contingency Plans - The Company is establishing a Y2K
contingency plan to evaluate business disruption scenarios,
coordinate the establishment of Y2K contingency plans, and
identify and implement preemptive strategies. Detailed
contingency plans for critical business processes are
scheduled to be formulated by the end of the second quarter
of 1999 and, if necessary, would undergo modification should
there be any changes in the status of the Company's Y2K
renovation efforts.
SUBSEQUENT EVENT
In January, 1999, the Company settled a lawsuit. The net
proceeds to the Company from the settlement are expected to
be approximately $16 million, and will be recognized as a
gain in the first quarter of 1999.
PAGE 24
CNF TRANSPORTATION INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
(Dollars in thousands)
1998 1997
ASSETS
Current Assets
Cash and cash equivalents $ 73,897 $ 97,617
Trade accounts receivable, net of allowance (Note 1) 810,550 703,785
Other accounts receivable 51,865 32,067
Operating supplies, at lower of average cost or market 41,764 36,580
Prepaid expenses 32,741 35,682
Deferred income taxes (Note 6) 89,544 103,656
Total Current Assets 1,100,361 1,009,387
Property, Plant and Equipment, at Cost
Land 114,146 109,768
Buildings and leasehold improvements 468,123 403,350
Revenue equipment 714,195 685,618
Other equipment 425,476 297,960
1,721,940 1,496,696
Accumulated depreciation and amortization (737,464) (616,854)
984,476 879,842
Other Assets
Restricted funds 2,655 10,601
Deferred charges and other assets 125,972 102,005
Capitalized software, net (Note 1) 64,285 18,867
Unamortized aircraft maintenance, net (Note 1) 143,349 123,352
Goodwill (Note 1) 268,314 277,442
604,575 532,267
Total Assets $ 2,689,412 $ 2,421,496
<FN>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements
PAGE 25
CNF TRANSPORTATION INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
(Dollars in thousands except per share data)
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
Current Liabilities
Accounts payable $ 285,832 $ 268,064
Accrued liabilities (Note 3) 446,171 423,237
Accrued claims costs 114,880 99,848
Current maturities of long-term debt and capital leases (Notes 4 and 5) 5,259 4,875
Short-term borrowings (Note 4) 43,000 -
Federal and other income taxes (Note 6) 12,340 10,114
Total Current Liabilities 907,482 806,138
Long-Term Liabilities
Long-term debt and guarantees (Note 4) 356,905 362,671
Long-term obligations under capital leases (Note 5) 110,730 110,817
Accrued claims costs 58,388 55,030
Employee benefits (Note 9) 183,416 141,351
Other liabilities and deferred credits 55,268 72,428
Deferred income taxes (Note 6) 115,868 89,958
Total Liabilities 1,788,057 1,638,393
Commitments and Contingencies (Notes 4, 5 and 13)
Company-Obligated Mandatorily Redeemable Preferred Securities
of Subsidiary Trust Holding Solely Convertible Debentures of
the Company (Note 7) 125,000 125,000
Shareholders' Equity (Note 8)
Preferred stock, no par value; authorized 5,000,000 shares:
Series B, 8.5% cumulative, convertible, $.01 stated value; designated
1,100,000 shares; issued 854,191 and 865,602 respectively 9 9
Additional paid-in capital, preferred stock 129,914 131,649
Deferred compensation (Note 10) (94,836) (101,819)
Total Preferred Shareholders' Equity 35,087 29,839
Common stock, $.625 par value; authorized 100,000,000 shares;
issued 54,797,707 and 54,370,182 shares, respectively 34,249 33,981
Additional paid-in capital, common stock 314,440 302,256
Retained earnings 584,991 473,250
Deferred compensation, restricted stock (Note 11) (4,599) (2,528)
Cost of repurchased common stock
(6,922,285 and 6,977,848 shares, respectively) (170,678) (172,048)
758,403 634,911
Accumulated foreign currency translation adjustments (9,140) (6,647)
Minimum pension liability adjustment (7,995) -
Accumulated other comprehensive loss (17,135) (6,647)
Total Common Shareholders' Equity 741,268 628,264
Total Shareholders' Equity 776,355 658,103
Total Liabilities and Shareholders' Equity $ 2,689,412 $ 2,421,496
<FN>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
PAGE 26
CNF TRANSPORTATION INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
YEARS ENDED DECEMBER 31
(Dollars in thousands except per share data)
1998 1997 1996
REVENUES $ 4,941,490 $ 4,266,801 $ 3,662,183
Costs and Expenses
Operating expenses 3,878,640 3,333,721 2,918,682
Selling, general and administrative expenses 627,637 557,117 463,930
Depreciation 144,695 111,096 87,423
4,650,972 4,001,934 3,470,035
OPERATING INCOME 290,518 264,867 192,148
Other Income (Expense)
Investment income 327 1,378 52
Interest expense (32,627) (39,553) (39,766)
Dividend requirement on preferred securities of
subsidiary trust (Note 7) (6,250) (3,471) -
Miscellaneous, net (1,557) (1,407) (5,302)
(40,107) (43,053) (45,016)
Income from continuing operations before income tax 250,411 221,814 147,132
Income taxes (Note 6) 111,433 100,925 66,951
INCOME FROM CONTINUING OPERATIONS 138,978 120,889 80,181
Loss from discontinued operations, net of income
tax benefits (Note 2) - - (36,386)
Loss from discontinuance, net of income tax benefits - - (16,247)
- - (52,633)
Net income 138,978 120,889 27,548
Preferred stock dividends 8,169 7,886 8,592
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 130,809 $ 113,003 $ 18,956
Average Shares Outstanding (Note 1)
Basic 47,659,745 46,236,688 44,041,159
Diluted 55,514,318 53,077,468 49,531,101
Earnings Per Share (Note 1)
Basic
Income from continuing operations $ 2.74 $ 2.44 $ 1.63
Loss from discontinued operations - - (0.83)
Loss from discontinuance - - (0.37)
Net income $ 2.74 $ 2.44 $ 0.43
Diluted
Income from continuing operations $ 2.45 $ 2.19 $ 1.48
Loss from discontinued operations - - (0.73)
Loss from discontinuance - - (0.33)
Net income $ 2.45 $ 2.19 $ 0.42
<FN>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
PAGE 27
CNF TRANSPORTATION INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
YEARS ENDED DECEMBER 31
(Dollars in thousands)
1998 1997 1996
Cash and Cash Equivalents, Beginning of Year $ 97,617 $ 82,094 $ 59,787
Operating Activities
Net income 138,978 120,889 27,548
Adjustments to reconcile net income to net cash provided
by operating activities:
Discontinued operations - - 52,633
Depreciation and amortization 163,382 123,391 95,746
Increase (decrease) in deferred income taxes 40,022 31,840 (6,705)
Amortization of deferred compensation 9,764 7,132 6,403
Losses (gains) from property disposals, net (1,309) 927 (1,577)
Changes in assets and liabilities:
Receivables (126,563) (144,193) (30,006)
Prepaid expenses 2,941 (4,433) (2,933)
Accounts payable 17,768 57,663 27,308
Accrued liabilities 30,584 52,582 36,074
Accrued incentive compensation (7,650) 21,158 9,366
Accrued claims costs 18,390 9,626 11,616
Income taxes 2,226 17,564 18,040
Employee benefits 34,070 25,881 (14,565)
Deferred charges and credits (40,937) (25,783) (16,552)
Other (14,873) (6,034) 3,893
Net Cash Provided by Operating Activities 266,793 288,210 216,289
Investing Activities
Capital expenditures (267,668) (242,343) (200,835)
Software expenditures (51,415) (11,022) (10,815)
Proceeds from sales of property 15,836 5,043 7,689
Net Cash Used by Investing Activities (303,247) (248,322) (203,961)
Financing Activities
Proceeds from issuance of long-term debt 46,000 1,997 -
Repayment of long-term debt and capital lease obligations (51,469) (4,020) (2,436)
Proceeds from (repayment of) net short-term borrowings 43,000 (155,000) 105,000
Proceeds from issuance of subsidiary preferred securities,
net of costs of issuance - 121,431 -
Proceeds from exercise of stock options 5,483 41,500 1,887
Payments of common dividends (19,068) (18,497) (17,604)
Payments of preferred dividends (11,212) (11,776) (11,935)
Net Cash Provided (Used) by Financing Activities 12,734 (24,365) 74,912
Net Cash Provided (Used) by Continuing Operations (23,720) 15,523 87,240
Net Cash Used by Discontinued Operations - - (64,933)
Increase (Decrease) in Cash and Cash Equivalents (23,720) 15,523 22,307
Cash and Cash Equivalents, End of Year $ 73,897 $ 97,617 $ 82,094
Supplemental Disclosure
Cash paid for income taxes, net of refunds $ 67,955 $ 38,568 $ 13,822
Cash paid for interest, net of amounts capitalized 33,141 47,948 36,047
<FN>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
PAGE 28
CNF TRANSPORTATION INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
(Dollars in thousands except per share data)
Preferred Stock Series B Common Stock Additional
Number of Number of Paid-in Deferred
Shares Amount Shares Amount Capital Compensation
Balance, December 31, 1995 954,412 $ 10 51,451,490 $ 32,157 $ 384,852 $ (114,896)
Net income - - - - - -
Other comprehensive income:
Foreign currency translation adjustment - - - - - -
Comprehensive income - - - - - -
Exercise of stock options including
tax benefits of $1,565 - - 138,027 86 3,778 -
Issuance of restricted stock - - 6,310 4 158 (162)
Recognition of deferred compensation - - - - - 6,403
Repurchased common stock
issued for conversion of preferred stock (79,221) (1) - - (12,801) -
Common dividends declared ($.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) - - - - - -
Balance, December 31, 1996 875,191 9 51,595,827 32,247 375,987 (108,655)
Net income - - - - - -
Other comprehensive loss:
Foreign currency translation adjustment - - - - - -
Comprehensive income - - - - - -
Exercise of stock options including
tax benefits of $16,612 - - 2,688,824 1,681 56,431 -
Issuance of restricted stock - - 85,531 53 2,771 (2,824)
Recognition of deferred compensation - - - - - 7,132
Repurchased common stock issued
for conversion of preferred stock (9,589) - - - (1,284) -
Common dividends declared ($.40 per share) - - - - - -
Series B, Preferred dividends ($12.93 per
share) net of tax benefits of $3,389 - - - - - -
Balance, December 31, 1997 865,602 9 54,370,182 33,981 433,905 (104,347)
Net income - - - - - -
Other comprehensive loss:
Foreign currency translation adjustment - - - - - -
Minimum pension liability adjustment (Note 9) - - - - - -
Comprehensive income - - - - - -
Exercise of stock options including
tax benefits of $2,576 - - 321,079 201 7,858 -
Issuance of restricted stock, net
of forfeitures - - 106,446 67 3,935 (4,852)
Issuance of employee stock awards - - - - 13 -
Recognition of deferred compensation - - - - - 9,764
Repurchased common stock issued
for conversion of preferred stock (11,411) - - (1,357) -
Common dividends declared ($.40 per share) - - - - - -
Series B, Preferred dividends ($12.93 per
share) net of tax benefits of $2,982 - - - - - -
Balance, December 31, 1998 854,191 $ 9 54,797,707 $ 34,249 $ 444,354 $ (99,435)
<FN>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
PAGE 29
Cost of Accumulated
Repurchased Other
Retained Common Comprehensive Comprehensive
Earnings Stock Income (Loss) Income
Balance, December 31, 1995 $ 608,399 $ (186,134) $ (2,028)
Net income 27,548 - - $ 27,548
Other comprehensive income:
Foreign currency translation adjustment - - 736 736
Comprehensive income - - - $ 28,284
Exercise of stock options including
tax benefits of $1,565 - - -
Issuance of restricted stock - - -
Recognition of deferred compensation - - -
Repurchased common stock
issued for conversion of preferred stock - 12,802 -
Common dividends declared ($.40 per share) (17,604) - -
Series B, Preferred dividends ($12.93 per
share) net of tax benefits of $3,696 (8,592) - -
Distribution of investment in CFC (Note 2) (231,007) - 4,571
Balance, December 31, 1996 378,744 (173,332) 3,279
Net income 120,889 - - $ 120,889
Other comprehensive loss:
Foreign currency translation adjustment - - (9,926) (9,926)
Comprehensive income - - - $ 110,963
Exercise of stock options including
tax benefits of $16,612 - - -
Issuance of restricted stock - - -
Recognition of deferred compensation - - -
Repurchased common stock issued
for conversion of preferred stock - 1,284 -
Common dividends declared ($.40 per share) (18,497) - -
Series B, Preferred dividends ($12.93 per
share) net of tax benefits of $3,389 (7,886) - -
Balance, December 31, 1997 473,250 (172,048) (6,647)
Net income 138,978 - - $ 138,978
Other comprehensive loss:
Foreign currency translation adjustment - - (2,493) (2,493)
Minimum pension liability adjustment (Note 9) - - (7,995) (7,995)
Comprehensive income - - - $ 128,490
Exercise of stock options including
tax benefits of $2,576 - - -
Issuance of restricted stock, net
of forfeitures - - -
Issuance of employee stock awards - 13 -
Recognition of deferred compensation - - -
Repurchased common stock issued
for conversion of preferred stock - 1,357 -
Common dividends declared ($.40 per share) (19,068) - -
Series B, Preferred dividends ($12.93 per
share) net of tax benefits of $2,982 (8,169) - -
Balance, December 31, 1998 $ 584,991 $ (170,678) $ (17,135)
PAGE 30
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 four
business segments: Con-Way Transportation Services, Emery
Worldwide, Menlo Logistics, and Other. Con-Way provides
regional one- and two-day LTL freight trucking and full-
service truckload freight delivery throughout the U.S.,
Canada and Mexico, and expedited and guaranteed ground
transportation. In 1998, Con-Way introduced integrated
supply chain services to provide logistics solutions to
targeted customers. Emery provides expedited and deferred
domestic and international air cargo services, ocean
delivery, and customs brokerage. Domestically, Emery relies
primarily on its dedicated aircraft and ground fleet to
provide its services. Internationally, Emery acts
principally as a freight forwarder. Menlo is a full-service
contract logistics company that specializes in developing
and managing complex distribution networks. The Other
operations consist primarily of the Priority Mail contract
with the U.S. Postal Service, and include Road Systems, a
trailer manufacturer, and VantageParts, a wholesale
distributor of truck parts and supplies.
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.
Revenue from long-term contracts is recognized in accordance
with contractual terms as services are provided. Under
certain long-term contracts, there are provisions for price
re-determinations that give rise to unbilled revenue.
Unbilled revenue representing contract change orders or
claims is included in revenue only when the amounts are
determinable and realization is probable. When adjustments
in contract revenue are determined, any changes from prior
estimates are reflected in earnings in the current period.
The amount of unbilled revenue recognized at December 31,
1998 was approximately $11 million.
Cash Equivalents: Short-term interest-bearing instruments
with maturities of three months or less at the date of
purchase are considered cash equivalents.
Trade Accounts Receivable, Net: Trade accounts receivable
are net of allowances of $21,098,000 and $20,155,000 at
December 31, 1998 and 1997, respectively.
Property, Plant and Equipment: Property, plant and equipment
are depreciated on a straight-line basis over their
estimated useful lives, which are generally 25 years for
buildings and improvements, 10 years or less for aircraft, 5
to 10 years for tractor and trailer equipment and 3 to 10
years for most other equipment. Leasehold improvements are
amortized over the shorter of the terms of the respective
leases or the useful lives of the assets.
Expenditures for equipment maintenance and repairs, except
for aircraft, are charged to operating expenses as incurred;
betterments are capitalized. Gains (losses) on sales of
equipment are recorded in operating expenses.
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
PAGE 31
Company has recorded unamortized maintenance of $198,973,000
and $180,198,000 at December 31, 1998 and 1997,
respectively. Under certain of the Company's aircraft lease
agreements, the Company is expected to return the aircraft
with a stipulated number of hours remaining on the aircraft
and engines until the next scheduled maintenance. The
Company has recorded $55,624,000 and $56,846,000 at December
31, 1998 and 1997, 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.
Capitalized Software: Capitalized Software, net, consists of
costs to purchase and develop software. In March 1998, the
American Institute of Certified Public Accountants issued
Statement of Position 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use"
(SOP 98-1). SOP 98-1, which provides for the capitalization
of the costs of internal-use software if certain criteria
are met, is effective for fiscal years beginning after
December 15, 1998. As provided by SOP 98-1, the Company
elected to adopt the pronouncement early and has applied the
new provisions prospectively as of January 1, 1998. Prior to
adoption of SOP 98-1, it was the Company's policy to
capitalize purchased software costs and to expense all
internally developed internal-use software costs. For the
year ended December 31, 1998, costs of $35.9 million ($0.42
per share basic and $0.36 per share diluted) were
capitalized as internally developed internal-use software
and are included in Capitalized Software, net, in the
Consolidated Balance Sheets. Amortization of capitalized
software is computed on an item-by-item basis over a period
of 3 to 7 years, depending on the life of the software.
Goodwill: Goodwill, net, which represents the costs in
excess of net assets of businesses acquired, is capitalized
and amortized on a straight-line basis up to a 40-year
period. Impairment is periodically reviewed based on a
comparison of estimated, undiscounted cash flows from the
underlying segment to the related investment. In the event
goodwill is not considered recoverable, an amount equal to
the excess of 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, 1998 and 1997 was $95,194,000 and $86,053,000,
respectively.
Income Taxes: The Company follows the liability method of
accounting for income taxes.
Accrued Claims Costs: The Company provides for the uninsured
costs of medical, casualty, liability, vehicular, cargo and
workers' compensation claims. Such costs are estimated each
year based on historical claims and unfiled claims relating
to operations conducted through December 31. The actual
costs may vary from estimates based on trends of losses for
filed claims and claims estimated to be incurred but not
filed. The long-term portion of accrued claims costs relate
primarily to workers' compensation and vehicular claims that
are payable over several years.
Foreign Currency Translation: Adjustments resulting from
translating foreign functional currency financial statements
into U.S. dollars are included in the Foreign Currency
Translation Adjustment in the Statements of Consolidated
Shareholders' Equity.
Earnings Per Share: Basic and diluted earnings per share
(EPS) are calculated in accordance with SFAS 128, "Earnings
Per Share." Basic EPS is computed by dividing reported Net
Income Available to Common
PAGE 32
Shareholders by the weighted-
average shares outstanding. Diluted EPS from continuing
operations is calculated as follows:
(Dollars in thousands except per share data)
1998 1997 1996
Earnings:
Net income available to
common shareholders $130,809 $113,003 $71,589
Add-backs:
Dividends on Series B preferred stock,
net of replacement funding 1,274 1,231 1,769
Dividends on preferred securities of
subsidiary trust, net of tax 3,816 2,118 -
$135,899 $116,352 $73,358
Shares:
Weighted-average
shares outstanding 47,659,745 46,236,688 44,041,159
Stock option and restricted
stock dilution 708,042 1,029,415 1,021,417
Series B preferred stock 4,021,531 4,075,254 4,468,525
Preferred securities of
subsidiary trust 3,125,000 1,736,111 -
55,514,318 53,077,468 49,531,101
Diluted earnings per share $2.45 $2.19 $1.48
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. CFC was the Company's
former long-haul, LTL segment, comprising CF MotorFreight, a
domestic LTL motor carrier and its Canadian operations. 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.
The accompanying consolidated financial statements have been
restated to report the discontinued operations of CFC
separately from continuing operations of the Company. CFC
revenues from discontinued operations totaled $1.98 billion
for the year ended December 31, 1996. A loss from
discontinued operations of $36.4 million for the year ended
December 31, 1996 is reported net of income tax benefits of
$11.9 million. 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 consisted of the following as of
December 31:
(Dollars in thousands) 1998 1997
Other accrued liabilities $163,227 $169,572
Holiday and vacation pay 59,237 52,263
Purchased transportation 33,616 40,732
Taxes other than income taxes 56,840 36,794
Wages and salaries 40,550 28,173
Estimated revenue adjustments 39,799 34,637
Interest 18,315 18,829
Incentive compensation 34,587 42,237
Total accrued liabilities $446,171 $423,237
PAGE 33
4. Debt and Guarantees
As of December 31, long-term debt and guarantees consisted
of the
following:
(Dollars in thousands) 1998 1997
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 (interest payable quarterly) 4,800 4,800
TASP Notes guaranteed, 8.42% to 9.04% due
through 2009 (interest payable semi-annually) 139,600 143,800
Other debt - 1,179
362,105 367,484
Less current maturities (5,200) (4,813)
Total long-term debt and guarantees $356,905 $362,671
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, 1998, the Company had $28.0
million of short-term borrowings and $66.6 million of
letters of credit outstanding under this agreement. Under
$95.0 million of other uncommitted lines of credit, the
Company had $15.0 million of short-term borrowings at
December 31, 1998. The weighted-average interest rate of
short-term borrowings outstanding at December 31, 1998 was
7.1%. There were no short-term borrowings at December 31,
1997.
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 aggregate principal amount of the Company's unsecured
91/8% Notes is repayable on August 15, 1999. The Company has
the ability to refinance the outstanding principal on a long-
term basis and it is therefore included in Long-term Debt
and Guarantees in the Consolidated Balance Sheet as of
December 31, 1998.
The Company guarantees the restructured and non-restructured
notes issued by the Company's Thrift and Stock Plan. Holders
of both the restructured and non-restructured notes have the
right to require the Company to purchase the notes, in whole
or in part, on July 1, 1999. The Company has the ability to
refinance the outstanding principal of $139.6 million on a
long-term basis and it is therefore included in Long-term
Debt and Guarantees in the Consolidated Balance Sheet as of
December 31, 1998.
Of the $139.6 million TASP Notes, $110.5 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 $29.1 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 Company's consolidated interest expense as presented on
the Statements of Consolidated Income is net of interest
capitalized of $2,342,000 in 1998, $2,077,000 in 1997 and
$2,092,000 in 1996.
The aggregate annual maturities and sinking fund
requirements of Long-Term Debt and Guarantees for the next
five years ending December 31 are $122,905,000 in 1999,
$6,400,000 in 2000, $7,500,000 in 2001, $8,700,000 in 2002,
and $10,100,000 in 2003.
5. Leases
The Company and its subsidiaries are obligated under various
non-cancelable leases. The principal capital lease covers a
sorting facility in Dayton, Ohio (the Hub). The Hub is
financed by City of Dayton, Ohio revenue bonds. On October
1, 1998, the Company redeemed $46 million of the Series A
revenue bonds. These redeemed bonds, with an effective
interest rate of 8% and due in October 2009, were replaced
with $46 million of Series A refinancing bonds due in
February 2018 with an interest rate of
PAGE 34
5.625%. The remaining $62 million are due in 2009
and bear rates of interest between 6.05%
and 6.20%, and have various call provisions.
Included in property, plant and equipment is $36,136,000 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, 1998, are as follows:
(Dollars in thousands)
Year ending December 31: Capital Leases Operating
Leases
1999 $6,819 $182,738
2000 6,819 133,464
2001 6,819 89,817
2002 6,819 60,705
2003 6,819 40,940
Thereafter (through 2018) 173,046 72,125
Total minimum lease payments 207,141 $579,789
Amount representing interest (96,352)
Present value of minimum lease payments 110,789
Current maturities of obligations under
capital leases (59)
Long-term obligations
under capital leases $110,730
Certain operating leases contain financial covenants equal to or
less restrictive than covenants on debt. Certain operating leases also
contain provisions that allow the Company to extend the leases for
various renewal periods.
Rental expense for operating leases is comprised of the
following:
(Dollars in thousands) 1998 1997 1996
Minimum rentals $232,008 $203,521 $178,781
Sublease rentals (4,001) (5,087) (2,355)
Amortization of deferred gains (4,012) (4,487) (4,487)
$223,995 $193,947 $171,939
6. Income Taxes
The components of pretax income and income taxes are as
follows:
(Dollars in thousands) 1998 1997 1996
Pretax income
U.S. corporations $240,838 $206,055 $137,918
Foreign corporations 9,573 15,759 9,214
Total pretax income $250,411 $221,814 $147,132
Income taxes
Current
U.S. federal $59,429 $49,187 $57,397
State and local 7,829 12,109 6,430
Foreign 4,153 7,789 5,762
71,411 69,085 69,589
Deferred
U.S. federal 37,284 31,162 (2,903)
State and local 2,738 678 265
40,022 31,840 (2,638)
Total income taxes $111,433 $100,925 $ 66,951
PAGE 35
The components of deferred tax assets and liabilities at
December 31, relate to the following:
(Dollars in thousands) 1998 1997
Deferred tax assets
Reserves for accrued claims costs $44,400 $39,969
Reserves for post retirement health benefits 39,452 34,732
Other reserves not currently deductible 45,904 62,217
Reserves for employee benefits 66,916 49,118
196,672 186,036
Deferred tax liabilities
Depreciation and amortization 194,691 159,912
Unearned revenue 4,601 2,853
Other 23,704 9,573
222,996 172,338
Net deferred tax asset (liability) $(26,324) $13,698
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:
1998 1997 1996
U.S. statutory tax rate 35.0% 35.0% 35.0%
State income taxes (net of
federal income tax benefit) 3.8 4.3 4.4
Foreign taxes in excess of
U.S. statutory rate .9 1.0 1.7
Non-deductible operating expenses 1.1 1.2 1.8
Amortization of goodwill 1.2 1.4 2.2
Foreign tax credits, net (1.6) (1.1) -
Other, net 4.1 3.7 0.4
Effective income tax rate 44.5% 45.5% 45.5%
The cumulative undistributed earnings of the Company's
foreign subsidiaries (approximately $25.2 million at
December 31, 1998), 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 $2.5 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 items 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 which 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.
PAGE 36
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. There can be no assurance, however, that this
matter will not have a material adverse effect on the
Company.
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, 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
Series B Preferred Stock - In 1989, the Board of Directors
designated a series of 1,100,000 preferred shares as Series
B Cumulative Convertible Preferred Stock, $.01 stated value,
which is held by the CNF Thrift and Stock Plan (TASP). The
Series B preferred stock is convertible into common stock,
as described in Note 10, 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.
PAGE 37
Comprehensive Income - In 1998, the Company adopted SFAS 130,
"Reporting Comprehensive Income." which requires companies
to report a measure of all changes in equity except those
resulting from investment by owners and distribution to
owners, in a financial statement for the period in which
they are recognized. The Company has elected to disclose
Comprehensive Income in the Statements of Consolidated
Shareholders' Equity. Prior years have been restated to
conform to the requirements of SFAS 130.
9. Employee Benefit Plans
In 1998, the Company adopted SFAS 132, "Employers'
Disclosures about Pensions and Other Postretirement
Benefits." SFAS 132 supercedes the disclosure requirements
of SFAS 87, "Employers' Accounting for Pensions" and SFAS
106, "Employers Accounting for Postretirement Benefits Other
than Pensions." SFAS 132 only addresses disclosure and does
not address measurement or recognition. Disclosures for the
prior year have been restated.
Pension Plans The Company has a non-contributory defined
benefit pension plan (the Plan) covering non-contractual
employees in the United States. The Company's annual pension
provision and contributions are based on an independent
actuarial computation. Although it is the Company's funding
policy to contribute the minimum required tax-deductible
contribution for the year, it may increase its contribution
above the minimum if appropriate to its tax and cash
position and the Plan's funded status. Benefits under the
Plan are based on a career average final five-year pay
formula. Approximately 94% of the Plan assets are invested
in publicly traded stocks and bonds. The remainder is
invested in temporary cash investments, real estate funds
and investment capital funds.
The following sets forth the change in funded status and the
determination of the accrued benefit cost included in
Employee Benefits in the Consolidated Balance Sheets at
December 31:
(Dollars in thousands) 1998 1997
Change in benefit obligation:
Projected benefit obligation at beginning of year $330,658 $252,090
Service cost - benefits earned during the year 30,497 23,664
Interest cost on projected benefit obligation 25,338 21,818
Actuarial loss 10,712 39,192
Benefits paid (6,338) (6,106)
Projected benefit obligation at end of year 390,867 330,658
Change in plan assets:
Fair value of plan assets at beginning of year 312,818 271,669
Actual return on plan assets 46,136 46,577
Transfers from defined contribution plan 1,934 678
Benefits paid (6,338) (6,106)
Fair value of plan assets at end of year 354,550 312,818
Funded status (36,317) (17,840)
Unrecognized actuarial gain (26,745) (18,772)
Unrecognized prior service costs 7,816 9,000
Unrecognized net asset at transition (5,646) (6,775)
Accrued benefit cost $(60,892) $(34,387)
Weighted-average assumptions as of December 31:
Discount rate 7.00% 7.25%
Expected long-term rate of return on assets 9.50% 9.50%
Rate of compensation increase 5.00% 5.00%
PAGE 38
Net pension cost includes the following:
(Dollars in thousands) 1998 1997 1996
Service cost - benefits earned
during the year $ 30,497 $ 23,664 $ 22,544
Interest cost on projected benefit obligation 25,338 21,818 18,214
Expected return on plan assets (29,386) (25,511) (20,465)
Net amortization and deferral 56 (200) (88)
Net pension cost $ 26,505 $ 19,771 $ 20,205
The Company also has a supplemental retirement program that
provides additional benefits for compensation excluded from
the basic Plan. The annual provision for these programs is
based on independent actuarial computations using
assumptions consistent with the Plan. At December 31, 1998
and 1997, the accrued benefit cost was $14,174,000 and
$11,915,000, respectively, and the net periodic pension cost
was $4,036,000 in 1998, $2,462,000 in 1997 and $2,274,000 in
1996.
Also included in Employee Benefits in the Balance Sheet at
December 31, 1998, was the minimum pension liability for the
unfunded supplemental program. The non-cash adjustment for
the minimum pension liability of $10,370,000 was offset by
an intangible asset of $2,375,000 and a $7,995,000 reduction
of comprehensive income.
Post Retirement Plans - The Company has a retiree health plan
that provides benefits to all non-contractual employees at
least 55 years of age with 10 years or more of service. The
retiree health plan limits benefits for participants who
were not eligible to retire before January 1, 1993, to a
defined dollar amount based on age and years of service and
does not provide employer-subsidized retiree health care
benefits for employees hired on or after January 1, 1993.
The following sets forth the change in accumulated benefit
obligation and the determination of the accrued benefit cost
included in Employee Benefits in the Consolidated Balance
Sheets at December 31:
(Dollars in thousands) 1998 1997
Change in benefit obligation:
Accumulated benefit obligation at
beginning of year $79,898 $71,704
Service cost - benefits earned during
the year 2,228 2,043
Interest cost on accumulated
benefit obligation 6,046 5,697
Benefit payments (3,966) (3,752)
Actuarial loss 5,741 4,206
Accumulated benefit obligation
at end of year 89,947 79,898
Unrecognized net actuarial gain 2,177 7,918
Unrecognized prior service benefit 389 444
Accrued benefit cost $92,513 $88,260
Assumptions as of December 31:
Weighted-average discount rate 7.00% 7.25%
Average health care cost trend rate
First year 5.5% 6.5%
Declining to (Year 1999) 5.5% 5.5%
Net periodic post retirement benefit cost includes the
following:
(Dollars in thousands) 1998 1997 1996
Service cost - benefits earned
during the year $2,228 $2,043 $2,422
Interest cost on accumulated
benefit obligation 6,046 5,697 5,256
Net amortization and deferral (55) (244) (131)
Net periodic post retirement benefit cost $8,219 $7,496 $7,547
PAGE 39
A one-percentage-point change in assumed health care cost
trend rates would change the aggregate service and interest
cost by $210,000 and the accumulated benefit obligation by
approximately $3,200,000.
Other Compensation Plans - The Company and each of its
subsidiaries have adopted various plans relating to the
achievement of specific goals to provide incentive
compensation for designated employees. Total compensation
earned by salaried participants of those plans was
$34,929,000, $51,900,000 and $23,210,000 in 1998, 1997 and
1996, respectively, and by hourly participants was
$36,500,000, $38,100,000 and $12,200,000 in 1998, 1997 and
1996, 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. In 1989, the
TASP borrowed $150,000,000 to purchase 986,259 shares of the
Company's Series B Cumulative Convertible Preferred Stock.
This stock is only issuable to the TASP trustee. The TASP
satisfies the Company's contribution requirement by matching
up to 50% of the first 3% percent of a participant's basic
compensation. Company contributions to the TASP were
$10,491,000 in 1998, $9,921,000 in 1997 and $8,589,000 in
1996, in the form of common and preferred stock.
The Series B Preferred Stock earns a dividend of $12.93 per
share and is used to repay the TASP debt. Any shortfall is
paid in cash by the Company. Dividends on these preferred
shares are deductible for income tax purposes and,
accordingly, are reflected net of their tax benefits in the
Statements of Consolidated Income. Allocation of preferred
stock to participants' accounts is based upon the ratio of
the current year's principal and interest payments to the
total TASP debt. Since the Company guarantees the debt, it
is reflected in Long-term Debt and Guarantees in the
Consolidated Balance Sheets. The TASP guarantees are reduced
as principal is paid.
Each share of preferred stock is convertible into common
stock, upon an employee ceasing participation in the plan,
at a rate generally equal to that number of shares of common
stock that could be purchased for $152.10, but not less than
the minimum conversion rate of 4.71 shares of common stock
for each share of Series B preferred stock.
Deferred compensation expense is recognized as the preferred
shares are allocated to participants and is equivalent to
the cost of the preferred shares allocated and the TASP
interest expense for the year, reduced by the dividends paid
to the TASP. During 1998, 1997 and 1996, $6,983,000,
$6,649,000 and $6,250,000, respectively, of deferred
compensation expense was recognized.
At December 31, 1998, the TASP owned 854,191 shares of
Series B preferred stock, of which 236,247 shares have been
allocated to employees. At December 31, 1998, the Company
has reserved, authorized and unissued common stock adequate
to satisfy the conversion feature of the Series B preferred
stock.
11. Stock-Based Compensation
Stock Options - Officers and non-employee directors have been
granted options under the Company's stock option plans to
purchase common stock of the Company at prices equal to the
market value of the stock on the date of grant. Options
granted prior to June 30, 1998 generally are exercisable one
year from the date of grant. Stock option grants awarded
subsequent to June 30, 1998 vest ratably over four years
following the grant date. The options generally expire 10
years from the dates of grant.
The Company applies Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees." Had
compensation cost for the Company's stock-based compensation
plans been determined in accordance with SFAS 123,
"Accounting for Stock-Based Compensation," pro forma net
income from continuing operations as reported net of
preferred dividends would have been $123.6 million, $109.3
million, and $68.6 million for the years 1998, 1997 and
1996, respectively. Diluted earnings per share would have
been $2.32, $2.12 and $1.42 per share for the years 1998,
1997 and 1996, 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
1998, 1997 and 1996 was
PAGE 40
$17.22, $12.28 and $8.54 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, 4.8%-5.9%;
expected life, 5.9 years; dividend yield, 1.1%; and
volatility, 45.0%.
The following is a summary of stock option data:
Number of Wtd. Avg.
Options Exercise
Price
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
Granted 711,350 38.29
Exercised (321,079) 17.07
Expired or canceled (46,850) 38.24
Outstanding at December 31, 1998 2,931,019 $24.60
Options exercisable as of December 31:
1998 2,194,975 $20.66
1997 2,051,347 17.35
1996 4,366,040 16.26
The following is a summary of the stock options outstanding
and exercisable at December 31, 1998:
Outstanding Options Exercisable Options
Range of Number Remaining Wtd. Avg. Number Wtd. Avg.
Exercise of Life in Exercise of Exercise
Prices Options Years Price Options Price
$11.08-$16.26 624,244 4.1 $13.55 565,033 $13.30
18.05- 22.75 1,166,775 6.5 19.38 1,166,775 19.38
29.63- 43.63 1,140,000 9.3 35.98 463,167 32.88
Restricted Stock: Under terms of the Company's stock-based
compensation plans, shares of the Company's common stock are
awarded to executive officers and, to a lesser extent,
directors. Restrictions on the shares generally expire one-
third per year dependent on the achievement of certain
market prices of the Company's common stock. Shares are
valued at the market price of the Company's common stock at
the date of award.
The following table summarizes information about restricted
stock awards for the years ended December 31:
1998 1997 1996
Wtd. Wtd. Wtd.
Avg. Avg. Avg.
Fair Fair Fair
Shares Value Shares Value Shares Value
Awarded 112,113 $38.51 85,531 $33.02 6,310 $25.67
Forfeited 5,667 34.41 - - - -
Total compensation expense recognized for restricted stock
in 1998, 1997 and 1996 was $2,781,000, $483,000, and
$153,000, respectively.
At December 31, 1998, the Company had 1,084,500 common
shares available for the grant of stock options, restricted
stock, or other stock-based incentive compensation.
PAGE 41
12. Financial Instruments
The Company has several interest rate swap agreements,
including certain swaps entered into in 1998. These
agreements, which expire through 2005, effectively convert
$156.3 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, but the Company does
not anticipate any loss due to the creditworthiness of its
swap 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) 1998 1997
Carrying Fair Carrying Fair
Amount Value Amount Value
Receivable (payable) for
interest rate swaps $ - $ 700 $ - $ (900)
Short-term borrowings 43,000 43,000 - -
Long-term debt 362,105 385,000 367,484 396,000
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 $13.5 million of letters of credit and $22.0
million of real property collateral.
In addition to letters of credit outstanding under its $350
million unsecured credit facility, the Company at December
31, 1998 had $51.5 million of letters of credit outstanding
under several other unsecured letter of credit facilities.
The Company has entered into an 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,
which expires December 2, 1999, 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, 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 (the IRS) has proposed
adjustments that would require Emery Worldwide to pay
substantial additional aviation excise taxes for the period
from January 1, 1990 through September 30, 1995. The Company
has filed protests contesting these proposed adjustments and
is engaged in discussions with the administrative conference
division (Appeals Office) of the IRS.
The Company believes that there is legal authority to
support the manner in which it has calculated and paid the
aviation excise taxes and, accordingly, the Company intends
to continue to vigorously challenge the proposed
adjustments. Nevertheless, the Company is unable to predict
the ultimate outcome of this matter. As a result, there can
be no assurance that the Company will not have to pay a
substantial amount of additional aviation excise taxes for
the 1990 through 1995 tax period. In addition, it is
possible that the IRS may seek to increase the amount of the
aviation excise tax payable by Emery Worldwide for periods
subsequent to September 30, 1995. As a result, there can be
no assurance that this matter will not have a material
adverse effect on the Company.
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
PAGE 42
investigating the Company's involvement at such sites,
the Company has either agreed to de minimis
settlements or, based upon cost studies
performed by independent third parties, 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.
In addition to the matters discussed above, the Company and
its subsidiaries are defendants in various lawsuits
incidental to their businesses. It is the opinion of
management that the ultimate outcome of these actions will
not have a material impact on the Company's financial
position or results of operations.
14. Subsequent Event
In January 1999, the Company settled a lawsuit. The net
proceeds to the Company from the settlement are expected to
be approximately $16 million and will be recognized as a
gain in the first quarter of 1999.
15. Segment Reporting
In the fourth quarter of 1998, the Company adopted SFAS 131,
"Disclosures about Segments of an Enterprise and Related
Information." SFAS 131 changes the method of disclosing
segment information to the manner in which the Company's
chief operating decision maker organizes the components for
making operating decisions, assessing performance and
allocating resources. The Company has organized the segments
based on the type of transportation services provided, which
are described in Note 1. As required by SFAS 131, all prior
years' segment data has been restated.
The Company accounts for its segments under the same
policies as described in the principal accounting policies
footnote. Intersegment revenues and related earnings have
been eliminated to reconcile to consolidated revenue and
operating income. Management evaluates segment performance
primarily based on revenue and operating income; therefore,
other items included in pretax income, consisting primarily
of interest income or expense, are not reported in segment
results. Operating income is net of all corporate expenses,
which are allocated based on measurable services provided
each segment or for general corporate expenses allocated on
a revenue and capital basis.
Identifiable corporate assets consist primarily of deferred
charges and other assets, property and equipment and
deferred taxes. Certain corporate assets that are used to
provide shared data processing and other administrative
services are not allocated to individual segments.
For geographic information, revenues are allocated between
the United States and international, depending on whether
the shipments are between locations within the United States
or between locations where one or both are outside the
United States. Long-lived assets outside the United States
were immaterial for all periods presented.
Geographic Information
(Dollars in thousands) 1998 1997 1996
Revenues
United States $3,963,862 $3,275,173 $2,805,135
Canada 154,899 158,884 134,484
North America 4,118,761 3,434,057 2,939,619
International 822,729 832,744 722,564
Total $4,941,490 $4,266,801 $3,662,183
PAGE 43
OPERATING SEGMENTS
Adjustments, Con-Way
Eliminations Transportation Emery Menlo
(Dollars in thousands) Consolidated and the Parent Services Worldwide Logistics Other
Year Ended December 31, 1998
Revenues $ 4,941,490 $ (103,292) $1,710,345 $2,232,815 $ 598,750 $502,872
Inter-company eliminations - 103,292 (26,354) (29,341) (11,915) (35,682)
Net revenues 4,941,490 - 1,683,991 2,203,474 586,835 467,190
Operating income (loss) 290,518 - 206,945 64,299 19,459 (185)
Depreciation and amortization 163,382 6,601 77,269 55,025 6,138 18,349
Capital expenditures 267,668 6,052 102,290 101,935 7,115 50,276
Identifiable assets 2,689,412 196,980 825,615 1,278,228 125,728 262,861
Year Ended December 31, 1997 (a)
Revenues 4,266,801 (100,712) 1,480,364 2,278,755 473,379 135,015
Inter-company eliminations - 100,712 (7,176) (29,161) (17,487) (46,888)
Net revenues 4,266,801 - 1,473,188 2,249,594 455,892 88,127
Operating income (loss) 264,867 - 147,155 113,963 17,178 (13,429)
Depreciation and amortization 123,391 6,262 65,560 45,483 4,331 1,755
Capital expenditures 242,343 2,896 109,328 58,795 11,504 59,820
Identifiable assets 2,421,496 166,840 736,449 1,320,411 171,144 26,652
Year Ended December 31, 1996 (a)
Revenues 3,662,183 (209,696) 1,430,629 1,982,238 372,100 86,912
Inter-company eliminations - 209,696 (138,547) (14,180) (12,723) (44,246)
Net revenues 3,662,183 - 1,292,082 1,968,058 359,377 42,666
Operating income 192,148 - 101,049 78,415 10,918 1,766
Depreciation and amortization 95,746 2,746 52,707 37,288 2,402 603
Capital expenditures 200,835 434 146,377 46,939 3,427 3,658
Identifiable assets 2,081,866 172,969 687,821 1,137,631 59,491 23,954
<FN>
(a) Prior years have been retated for the adoption of SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information."
PAGE 44
16. Quarterly Financial Data (Unaudited)
(Dollars in thousands
except per share data)
March 31 June 30 September 30 December 31
1998 - Quarter Ended
Revenues $1,089,866 $1,199,654 $1,282,510 $1,369,460
Operating income 44,805 84,003 89,043 72,667(a)
Income before income
taxes 34,077 74,533 79,227 62,574
Income taxes 15,164 33,167 35,257 27,845
Net income 18,913 41,366 43,970 34,729
Net income available
to common shareholders 16,906 39,326 41,939 32,638
Per share:
Basic earnings 0.36 0.83 0.88 0.68
Diluted earnings 0.33 0.73 0.78 0.61
Market price range $34.81-$49.94 $35.00-$44.50 $26.81-$47.94 $21.63-$38.94
Common dividends paid 0.10 0.10 0.10 0.10
March 31 June 30 September 30 December 31
1997 - Quarter Ended
Revenues $ 942,628 $1,002,563 $1,127,362 $1,194,248
Operating income 50,367 66,867 81,847 65,786(b)
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:
Basic earnings 0.44 0.61 0.81 0.58
Diluted earnings 0.40 0.55 0.70 0.51
Market price range $20.25-$28.13 $26.38-$36.38 $32.13-$45.38 $37.06-$50.88
Common dividends paid 0.10 0.10 0.10 0.10
<FN>
(a) Includes $5.1 million of income ($.06 per share basic
and $.05 per share diluted) for the recovery of a portion of
costs charged in 1997 from the discontinuance of the rail
container service and certain other unusual items.
(b) Includes $5.0 million charge ($.06 per share basic and
$.05 per share diluted) for costs related to the
discontinuance of the rail container service.
PAGE 45
Management Report on Responsibility
for Financial Reporting
The management of CNF Transportation Inc. has prepared the
accompanying financial statements and is responsible for
their integrity. The statements were prepared in accordance
with generally accepted accounting principles, after giving
consideration to materiality, and are based on management's
best estimates and judgments. The other financial
information in the annual report is consistent with the
financial statements.
Management has established and maintains a system of
internal control. Limitations exist in any control structure
based on the recognition that the cost of such system should
not exceed the benefits derived. Management believes its
control system provides reasonable assurance as to the
integrity and reliability of the financial statements, the
protection of assets from unauthorized use or disposition,
and the prevention and detection of fraudulent financial
reporting. The system of internal control is documented by
written policies and procedures that are communicated to
employees. The Company's internal audit staff independently
assesses the adequacy and the effectiveness of the internal
controls which are also tested by the Company's independent
public accountants.
The Board of Directors, through its audit committee
consisting of five independent directors, is responsible for
engaging the independent accountants and assuring that
management fulfills its responsibilities in the preparation
of the financial statements. The Company's financial
statements have been audited by Arthur Andersen LLP,
independent public accountants. Both the internal auditors
and Arthur Andersen LLP have access
to the audit committee without the presence of management to
discuss internal accounting controls, auditing and financial
reporting matters.
/s/Gregory L. Quesnel
Gregory L. Quesnel
President and Chief Executive Officer
/s/Chutta Ratnathicam
Chutta Ratnathicam
Senior Vice President and Chief Financial Officer
/s/Gary D. Taliaferro
Gary D. Taliaferro
Controller
Report of Independent
Public Accountants
To the Shareholders and Board of Directors of CNF
Transportation Inc.
We have audited the accompanying consolidated balance sheets
of CNF Transportation Inc. (a Delaware Corporation) and
subsidiaries as of December 31, 1998 and 1997, and the
related statements of consolidated income, cash flows and
shareholders' equity for each of the three years in the
period ended December 31, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years
in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
As explained in Note 1 to the consolidated financial
statements, effective January 1, 1998, the Company changed
its method of accounting for the costs of internal use
software to reflect the adoption of Statement of Position 98-
1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use."
/s/Arthur Andersen LLP
San Francisco, California
January 22, 1999
PAGE 46
CNF Transportation Inc.
Five Year Financial Summary
(Dollars in thousands except per share data) 1998 1997 1996 1995 1994
SUMMARY OF OPERATIONS
Revenues (a) $ 4,941,490 $ 4,266,801 $ 3,662,183 $ 3,290,077 $ 2,799,935
Con-Way Transportation Services 1,683,991 1,473,188 1,292,082 1,152,164 1,018,544
Emery Worldwide 2,203,474 2,249,594 1,968,058 1,766,301 1,567,854
Menlo Logistics 586,835 455,892 359,377 287,652 167,655
Other 467,190 88,127 42,666 83,960 45,882
Operating income (loss) (a) 290,518 264,867 192,148 186,687 189,977
Con-Way Transportation Services 206,945 147,155 101,049 96,573 111,220
Emery Worldwide 64,299 113,963 78,415 81,734 77,616
Menlo Logistics 19,459 17,178 10,918 6,325 (1,909)
Other (185) (13,429) 1,766 2,055 3,050
Interest expense 32,627 39,553 39,766 33,407 27,065
Net income from continuing operations before
income taxes 250,411 221,814 147,132 152,942 165,129
Income taxes 111,433 100,925 66,951 66,723 69,304
Income from continuing operations (b) 130,809 113,003 71,589 75,420 76,762
Loss from discontinued operations (c) - - (52,633) (28,854) (37,442)
Net Income available to common shareholders 130,809 113,003 18,956 46,566 35,710 (d)
PER SHARE
Net income from continuing operations, basic $ 2.74 $ 2.44 $ 1.63 $ 1.79 $ 2.12 (d)
Loss from discontinued operations: (c) - - (1.20) (0.68) (1.03)(d)
Net income available to
common shareholders, basic 2.74 2.44 0.43 1.11 1.09 (d)
Net income from continuing operations, diluted 2.45 2.19 1.48 1.64 1.81
Dividends paid on common stock 0.40 0.40 0.40 0.40 -
Common shareholders' equity 15.48 13.26 10.86 15.76 14.58
STATISTICS
Total Assets $2,689,412 $ 2,421,496 $ 2,081,866 $ 2,084,958 $ 1,833,742
Long-term obligations 467,635 473,488 477,201 480,410 382,757
Capital expenditures 267,668 242,343 200,835 167,253 149,808
Effective income tax rate 44.5% 45.5% 45.5% 43.6% 42.0%
Basic average shares 47,659,745 46,236,688 44,041,159 42,067,842 36,183,020
Market price range $21.63-$49.94 $20.25-$50.88 $17.25-$29.38 $20.25-$27.88 $18.00-$29.25
Number of shareholders 9,870 15,560 16,090 15,980 16,015
Number of regular full-time employees 33,700 26,300 25,100 21,400 18,500
<FN>
(a) Prior years have been restated for the adoption of SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information."
(b) Includes preferred stock dividends.
(c) Reflects the results of CFC as described in Note 2 of the Notes to the Consolidated Financial Statements.
(d) Continuing operations include $3.6 million extraordinary charge ($.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.