UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
Commission File Number 1-12149
CONSOLIDATED FREIGHTWAYS CORPORATION
Incorporated in the State of Delaware
I.R.S. Employer Identification No. 77-0425334
175 Linfield Drive, Menlo Park, CA 94025
Telephone Number (650) 326-1700
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Sections 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No .
Number of shares of Common Stock, $.01 par value,
outstanding as of October 31, 1998: 21,600,580
CONSOLIDATED FREIGHTWAYS CORPORATION
FORM 10-Q
Quarter Ended September 30, 1998
_____________________________________________________________________
_____________________________________________________________________
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997 3
Statements of Consolidated Income -
Three and Nine Months Ended September 30, 1998
and 1997 5
Statements of Consolidated Cash Flows -
Nine Months Ended September 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 5. Stockholder Proposals 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
CONSOLIDATED FREIGHTWAYS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1998 1997
(Dollars in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 123,731 $ 107,721
Trade accounts receivable, net of allowances 327,583 310,601
Other receivables 8,445 10,300
Operating supplies, at lower of average
cost or market 8,543 8,741
Prepaid expenses 44,092 39,696
Deferred income taxes 13,408 16,554
Total Current Assets 525,802 493,613
PROPERTY, PLANT AND EQUIPMENT, at cost
Land 78,485 78,227
Buildings and improvements 343,871 342,413
Revenue equipment 559,153 559,610
Other equipment and leasehold improvements 120,546 116,390
1,102,055 1,096,640
Accumulated depreciation and amortization (742,319) (713,653)
359,736 382,987
OTHER ASSETS
Deposits and other assets 18,571 9,468
Deferred income taxes 16,609 11,728
35,180 21,196
TOTAL ASSETS $ 920,718 $ 897,796
The accompanying notes are an integral part of these statements.
CONSOLIDATED FREIGHTWAYS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1998 1997
(Dollars in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 74,505 $ 83,127
Accrued liabilities 226,037 212,644
Accrued claims costs 75,581 82,023
Federal and other income taxes 19,995 7,706
Total Current Liabilities 396,118 385,500
LONG-TERM LIABILITIES
Long-term debt 15,100 15,100
Accrued claims costs 107,711 112,173
Employee benefits 116,901 115,220
Other liabilities and deferred credits 34,251 26,356
Total Liabilities 670,081 654,349
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized
5,000,000 shares; issued none -- --
Common stock, $.01 par value; authorized
50,000,000 shares; issued 23,066,905
and 23,038,437 shares, respectively 231 230
Additional paid-in capital 71,485 71,461
Accumulated other comprehensive income (10,573) (6,572)
Retained earnings 202,294 178,573
Treasury stock (1,466,325 and 18,151 shares,
respectively) (12,800) (245)
Total Shareholders' Equity 250,637 243,447
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 920,718 $ 897,796
The accompanying notes are an integral part of these statements.
CONSOLIDATED FREIGHTWAYS CORPORATION
STATEMENTS OF CONSOLIDATED INCOME
(Dollars in thousands except per share amounts)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
REVENUES $ 571,231 $ 603,253 $ 1,668,720 $ 1,727,509
COSTS AND EXPENSES
Salaries, wages and benefits 369,116 389,874 1,079,802 1,126,354
Operating expenses 88,185 90,546 264,730 269,531
Purchased transportation 54,840 50,903 149,261 139,831
Operating taxes and licenses 16,450 18,462 50,768 55,060
Claims and insurance 13,175 15,623 39,316 46,983
Depreciation 12,068 13,505 37,140 40,197
553,834 578,913 1,621,017 1,677,956
OPERATING INCOME 17,397 24,340 47,703 49,553
OTHER INCOME (EXPENSE)
Investment income 1,428 597 3,843 1,028
Interest expense (980) (993) (2,947) (2,163)
Miscellaneous, net (279) (561) (1,157) (1,705)
169 (957) (261) (2,840)
Income before income taxes 17,566 23,383 47,442 46,713
Income taxes 8,335 11,600 23,721 24,758
NET INCOME $ 9,231 $ 11,783 $ 23,721 $ 21,955
Basic average shares outstanding 22,710,557 22,025,323 22,928,421 22,025,323
Diluted average shares outstanding 22,710,557 23,279,205 23,716,953 22,486,896
Basic Earnings per Share: $ 0.41 $ 0.53 $ 1.03 $ 1.00
Diluted Earnings per Share: $ 0.41 $ 0.51 $ 1.00 $ 0.98
<FN>
The accompanying notes are an integral part of these statements.
CONSOLIDATED FREIGHTWAYS CORPORATION
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
Nine Months Ended
September 30,
1998 1997
(Dollars in thousands)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD $ 107,721 $ 48,679
CASH FLOWS FROM OPERATING ACTIVITIES
Net income 23,721 21,955
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 38,470 41,507
Increase (decrease) in deferred income taxes (1,735) 3,464
(Gains) losses from property disposals, net 6 (850)
Changes in assets and liabilities:
Receivables (15,127) (61,039)
Prepaid expense (4,396) (4,426)
Accounts payable (8,622) (7,069)
Accrued liabilities 13,393 42,406
Accrued claims costs (10,904) (9,283)
Income taxes 12,289 17,204
Employee benefits 1,681 2,620
Other (5,175) 2,216
Net Cash Provided by Operating Activities 43,601 48,705
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (16,433) (19,266)
Proceeds from sales of property 1,397 2,858
Net Cash Used by Investing Activities (15,036) (16,408)
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of treasury stock (12,555) --
Net Cash Used by Financing Activities (12,555) --
Increase in Cash and Cash Equivalents 16,010 32,297
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 123,731 $ 80,976
The accompanying notes are an integral part of these statements.
CONSOLIDATED FREIGHTWAYS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying consolidated financial statements of
Consolidated Freightways Corporation and subsidiaries (the Company)
have been prepared by the Company, without audit by independent
public accountants, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management,
the consolidated financial statements include all normal recurring
adjustments necessary to present fairly the information required to
be set forth therein. Certain information and note disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted from these statements pursuant to such rules and regulations
and, accordingly, should be read in conjunction with the consolidated
financial statements included in the Company's 1997 Annual Report to
Shareholders.
There were no significant changes in the Company's commitments
and contingencies as previously described in the 1997 Annual Report
to Shareholders and related annual report to the Securities and
Exchange Commission on Form 10-K.
2. Credit Facility
On July 2, 1998 the Company amended its secured credit facility,
reducing the total facility from $225.0 million to $150.0 million.
Working capital borrowings are limited to $100.0 million while
letters of credit are limited to $150.0 million. The amendment
reduced the interest rate on borrowings and released all revenue
equipment previously encumbered under the original agreement.
Borrowings and letters of credit are secured primarily by eligible
accounts receivable. The amendment further provides for reduced
letter of credit and unused line fees, and less restrictive financial
covenants. As of September 30, 1998, the Company had no short-term
borrowings and $88.1 million of letters of credit outstanding under
this facility. The continued availability of funds under this credit
facility will require that the Company remain in compliance with
certain financial covenants. The Company is in compliance as of
September 30, 1998 and expects to be in compliance with these
covenants for the remainder of the year.
3. Earnings per Share
The following charts reconcile basic to diluted earnings per
share for the three and nine months ended September 30, 1998 and
1997:
(Dollars in thousands except per share amounts)
Weighted
Three Average Earnings
Months Ended Net Income Shares Per Share
September 30, 1998
Basic $ 9,231 22,710,557 $0.41
Dilutive effect
of restricted
stock -- -- --
Diluted $ 9,231 22,710,557 $0.41
September 30, 1997
Basic $11,783 22,025,323 $0.53
Dilutive effect
of restricted
stock -- 1,253,882 (0.02)
Diluted $11,783 23,279,205 $0.51
Weighted
Nine Average Earnings
Months Ended Net Income Shares Per Share
September 30, 1998
Basic $23,721 22,928,421 $1.03
Dilutive effect
of restricted
stock -- 788,532 (0.03)
Diluted $23,721 23,716,953 $1.00
September 30, 1997
Basic $21,955 22,025,323 $1.00
Dilutive effect
of restricted
stock -- 461,573 (0.02)
Diluted $21,955 22,486,896 $0.98
4. Comprehensive Income
The Company adopted the provisions of Statement of Financial
Accounting Standards No. 130, "Comprehensive Income" in the quarter
ended March 31, 1998. Comprehensive income for the three and nine
months ended September 30, 1998 and 1997 is as follows:
(Dollars in thousands)
Three Nine
Months Ended Months Ended
September 30, September 30,
1998 1997 1998 1997
Net Income $9,231 $11,783 $23,721 $ 21,955
Other Comprehensive Income (Loss):
Foreign currency translation
adjustments (1,711) 18 (4,001) (142)
Comprehensive Income $7,520 $11,801 $19,720 $21,813
5. Software Costs
The Company adopted the provisions of American Institute of
Certified Public Accountants Statement of Position 98-1 (SOP 98-1)
"Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use" in the quarter ended March 31, 1998. SOP 98-1
standardizes which costs related to computer software developed or
obtained for internal use are to be capitalized and those that are to
be expensed as incurred. Prior to adoption of this statement, the
Company capitalized only the costs of purchased software while costs
of internally developed software were expensed. The Company
capitalized $5.2 million and $10.0 million of purchased and
internally developed software costs in the three and nine months
ended September 30, 1998, respectively. These costs are included in
Other Assets on the Consolidated Balance Sheet.
6. Stock Compensation
As of September 30, 1998, there were 2,144,122 granted but
unissued shares remaining under the Company's Stock Option and
Incentive Plan. The shares vest in two installments as early as
December 16, 1998 and 1999, but are contingent upon the Company's
stock price achieving pre-determined increases over the price at the
time of grant in December 1996. If performance conditions are met,
approximately 1,072,000 shares of common stock will be issued to
employees in December 1998 and compensation expense will be
recognized based on the then market price of the stock. At September
30, 1998, the stock price was below the pre-determined level required
for vesting.
7. Recent Accounting Pronouncements
The American Institute of Certified Public Accountants issued
Statement of Position 98-5 "Reporting the Costs of Start Up
Activities." This statement requires that the costs of start-up
activities and organization costs be expensed as incurred. The
statement is effective for fiscal years beginning after December 15,
1998. Management does not expect that adoption of this standard will
have a material effect on the Company's financial position or results
of operations.
The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes
accounting and reporting standards for derivative instruments. It
requires that an organization recognize all derivatives as either
assets or liabilities on the balance sheet at fair value and
establishes the timing of recognition of the gain/loss based upon the
derivatives' intended use. This statement is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999.
Management does not expect that adoption of this standard will have a
material effect on the Company's financial position or results of
operations.
8. Contingencies
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 adverse effect on the Company's financial position or
results of operations.
CONSOLIDATED FREIGHTWAYS CORPORATION AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Revenues for the three and nine months ended September 30, 1998
decreased 5.3% and 3.4%, respectively, from the prior year on lower
year-over-year tonnage levels. Total and higher rated less-than-
truckload tonnage decreased 9.3% and 7.5%, respectively, for the
three month period and 8.5% and 6.5%, respectively, for the nine
month period. Yield management programs, diversion of freight due to
recent labor negotiations and softening industrial production that
began in the second quarter contributed to the lower tonnage levels.
Additionally, the prior year periods benefited from increased
business related to the two week work stoppage at United Parcel
Service (UPS) in August 1997. The higher-rated UPS business
generated approximately $11.0 million of additional revenue. The
decline in tonnage was partially offset by improved revenue yields.
Net revenue per hundred weight in the three and nine month periods
increased 4.3% and 5.6%, respectively, over the prior year as a
result of the 5.5% January rate increase and improved freight mix.
Excluding the benefit of the higher-rated UPS business in 1997,
revenue per hundred weight increased 5.6% and 6.0% for the three and
nine month periods, respectively.
Salaries, wages and benefits decreased 5.3% and 4.1% for the
three and nine month periods, respectively, due primarily to lower
business volumes and continued cost savings from workers'
compensation claims containment programs. Operating expenses
decreased 2.6% and 1.8%, respectively, due to lower business volumes,
lower fuel costs per gallon and a higher proportion of freight
transported via rail. These savings were mostly offset by $3.3
million of 3rd party expenses related to the Company's Year 2000
project and an 8.6% increase in repair and maintenance expense on the
Company's aging fleet during the nine month period. Purchased
transportation increased 7.7% and 6.7% in the three and nine month
periods, respectively, as the Company continued to maximize use of
lower cost rail services. Rail miles as a percentage of total inter-
city miles were 28.9% in the three month period and 27.6% in the nine
month period. The increase also reflects an approximately 2%
increase in rail cost per mile for the nine month period as well as
costs associated with the Company's growing PrimeTime Air Service.
The combination of lower business volumes and increased use of rail
services resulted in a 10.9% and 7.8% decrease in operating taxes and
licenses in the three and nine month periods, respectively. Claims
and insurance decreased 15.7% and 16.3%, respectively, due to lower
business volumes and continued improved claims experience over last
year. Depreciation continues to decline year-over-year as more of
the of Company's fleet becomes fully depreciated.
The above factors resulted in operating income of $17.4 million
in the three months ended September 30, 1998 compared with $24.3
million in the prior year. Operating income for the nine months
ended September 30, 1998 decreased $1.9 million to $47.7 million
while the operating ratio remained essentially flat. As noted above,
the prior year periods benefited from higher-rated business during
the two week work stoppage at UPS.
Other expense, net for the three and nine month periods improved
$1.1 million and $2.6 million, respectively, over the prior year due
to increased investment income on the Company's short-term
investments.
The Company's effective income tax rates differ from the
statutory Federal rate due to foreign taxes and non-deductible items.
Management will continue to focus on enhancing yields. In doing
so, management announced a 5.5% rate increase effective October 1,
1998 on non-contractual accounts. Management will also continue to
emphasize improving the freight mix by selling value-added services
such as the Company's PrimeTime Air and further elimination of
unprofitable freight from the system. In addition to yield
enhancement, management will focus on keeping expenses in line with
business volumes. As discussed in Footnote 6, the Company has a
restricted stock program. If performance conditions are met in
December 1998, approximately 1,072,000 shares of common stock will be
issued to employees, and compensation expense recognized based on the
then market price of the stock. At September 30, 1998, the stock
price was below the pre-determined level required for vesting.
YEAR 2000
Management has a formal plan in place through which it has
identified its operational and financial systems and applications
requiring either modification or replacement for Year 2000
compliance. Of these systems, the Company's on-line equipment and
freight tracking system is deemed most critical. Based upon an
assessment at September 30, 1998, testing and modification of IT
systems is approximately 40% complete while testing of non-IT
embedded systems is approximately 25% complete. Year-to-date expenses
related to Year 2000 modifications total $4.4 million and include
payroll and payroll related costs as well as the costs of external
consultants. In certain cases, management has opted to replace
rather than modify certain of its systems and applications. Costs
associated with the replacement of systems and applications will be
capitalized. As of September 30, 1998, $10.0 million has been
capitalized and includes software and payroll costs as well as costs
of external consultants. Management expects to spend an additional
$33 million to convert its internal systems for Year 2000 compliance.
Of this amount, it is expected that approximately $9 million will be
expensed and approximately $24 million will be capitalized. These
estimates may be revised based upon the results of continued testing.
Management expects that all Year 2000 system modifications and
replacements will be funded with cash from operations.
Management has engaged outside consultants as part of the
process of assessing its Year 2000 risks. Part of that assessment
includes 3rd party compliance readiness. Management has identified
and prioritized its critical customers and key suppliers of products
and services and is currently soliciting written responses to Year
2000 readiness questionnaires. Management will formulate contingency
plans as necessary based upon the results of those questionnaires.
Management anticipates having all of its internal systems Year
2000 compliant by mid-1999. However, failure to convert the
Company's on-line equipment and freight tracking system by the Year
2000 could result in the inability to manage the flow of equipment
and freight through the system efficiently, but would not preclude
the delivery of freight. Additionally, failure to convert financial
systems on a timely basis could result in a return to manual
processes resulting in delayed customer billings and vendor payments.
To the extent that the Company or its critical customers and key
suppliers fail to achieve Year 2000 compliance, there could be a
material adverse effect on the Company's business, results of
operations and financial position.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company had $123.7 million in cash
and cash equivalents. Net cash flow from operations for the nine
months ended September 30, 1998 was $43.6 million due primarily to
net income and depreciation and amortization. Management expects
cash flow from operations for 1998 will be sufficient for working
capital and capital expenditure requirements. Capital expenditures
for the nine months ended September 30, 1998 were $16.4 million
compared with $19.3 million in the same period last year.
Management expects capital expenditures to be approximately $26
million for the remainder of the year primarily for the purchase of
replacement trailers and additional terminal properties. It is
anticipated that those expenditures will be funded with cash from
operations. Management has entered into operating lease
arrangements under which approximately 540 new tractors will come on
line during the fourth quarter as replacements for older equipment.
During the quarter ended September 30, 1998, the Company repurchased
1,448,174 shares of its common stock for $12.6 million. Management
is authorized to repurchase up to $25.0 million of common stock.
As discussed in Footnote 2, the Company amended its secured
credit facility, reducing, among other things, the amount available
for working capital and letter of credit needs from $225.0 million to
$150.0 million. This decrease reflects the Company's improved
liquidity since its spin-off in December 1996. As of September 30,
1998, the Company had no short-term borrowings and $88.1 million of
letters of credit outstanding.
INFLATION
Significant increases in fuel prices, to the extent not offset
by increases in transportation rates, would have a material adverse
effect on the profitability of the Company. Historically, the
Company has responded to periods of sharply higher fuel prices by
implementing fuel surcharge programs or base rate increases, or both,
to recover additional costs. However, there can be no assurance that
the Company will be able to successfully implement such surcharges or
increases in response to increased fuel costs in the future.
OTHER
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 various Superfund
sites. Under CERCLA, PRP's are jointly and severally liable for all
site remediation and expenses. Based upon cost studies performed by
independent third parties, the Company believes its obligations with
respect to such sites would not have a material adverse effect on its
financial condition or results of operations.
Certain statements included or incorporated by reference herein
constitute "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, and are subject to a
number of risks and uncertainties. Any such forward-looking
statements included or incorporated by reference herein should not be
relied upon as predictions of future events. Certain such forward-
looking statements can be identified by the use of forward-looking
terminology such as "believes," "expects," "may," "will," "should,"
"seeks," "approximately," "intends," "plans," "pro forma,"
"estimates," or "anticipates" or the negative thereof or other
variations thereof or comparable terminology, or by discussions of
strategy, plans or intentions. Such forward-looking statements are
necessarily dependent on assumptions, data or methods that may be
incorrect or imprecise and they may be incapable of being realized.
In that regard, the following factors, among others, and in addition
to matters discussed elsewhere herein and in documents incorporated
by reference herein, could cause actual results and other matters to
differ materially from those in such forward-looking statements:
changes in general business and economic conditions; increases in
domestic and international competition and pricing pressure;
increases in fuel prices; uncertainty regarding the Company's ability
to improve results of operations; labor matters, including shortages
of drivers and increases in labor costs; changes in governmental
regulation; environmental and tax matters; increases in costs
associated with the conversion of financial and operational systems
and applications for Year 2000 compliance and failure to convert all
systems by the year 2000. As a result of the foregoing, no assurance
can be given as to future results of operations or financial
condition.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
As previously disclosed, 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 various
Superfund sites. Based upon cost studies performed by independent
third parties, the Company believes its obligations with respect to
such sites would not have a material adverse effect on its financial
condition or results of operations.
ITEM 5. Stockholder Proposals
Pursuant to the Company's bylaws, stockholders who wish to bring
matters to or propose nominees for director at the Company's 1999
annual meeting of stockholders must provide specified information to
the Company between February 10, 1999 and March 12, 1999 (unless such
matters are included in the Company's proxy statement pursuant to
Rule 14a-8 under the Securities Exchange Act of 1934, as amended).
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K
On August 20, 1998 the Company filed a Form 8-K to announce
that its board of directors authorized the repurchase of up to $25
million of the Company's common stock.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Company (Registrant) has duly
caused this Form 10-Q Quarterly Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Consolidated Freightways Corporation
(Registrant)
November 12, 1998 /s/David F. Morrison
David F. Morrison
Executive Vice President and
Chief Financial Officer
November 12, 1998 /s/Robert E. Wrightson
Robert E. Wrightson
Senior Vice President and
Controller