UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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 April 30, 1999: 22,626,654
CONSOLIDATED FREIGHTWAYS CORPORATION
FORM 10-Q
Quarter Ended March 31, 1999
_____________________________________________________________________
_____________________________________________________________________
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 1999 and December 31, 1998 3
Statements of Consolidated Income -
Three Months Ended March 31, 1999 and 1998 5
Statements of Consolidated Cash Flows -
Three Months Ended March 31, 1999 and 1998 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 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
March 31, December 31,
1999 1998
(Dollars in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 120,159 $ 123,081
Trade accounts receivable, net of allowances 306,493 292,463
Other receivables 5,600 9,195
Operating supplies, at lower of average
cost or market 8,189 7,561
Prepaid expenses 44,539 40,335
Deferred income taxes 6,806 6,806
Total Current Assets 491,786 479,441
PROPERTY, PLANT AND EQUIPMENT, at cost
Land 85,091 78,218
Buildings and improvements 348,600 343,492
Revenue equipment 551,568 562,624
Other equipment and leasehold improvements 124,520 123,404
1,109,779 1,107,738
Accumulated depreciation and amortization (744,575) (746,966)
365,204 360,772
OTHER ASSETS
Deposits and other assets 47,134 32,199
Deferred income taxes 19,167 17,978
66,301 50,177
TOTAL ASSETS $ 923,291 $ 890,390
The accompanying notes are an integral part of these statements.
CONSOLIDATED FREIGHTWAYS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1999 1998
(Dollars in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 90,461 $ 84,861
Accrued liabilities 202,161 187,528
Accrued claims costs 73,191 72,942
Federal and other income taxes 18,250 14,173
Total Current Liabilities 384,063 359,504
LONG-TERM LIABILITIES
Long-term debt 15,100 15,100
Accrued claims costs 103,047 103,574
Employee benefits 119,385 117,236
Other liabilities and deferred credits 27,513 28,258
Total Liabilities 649,108 623,672
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 23,090,740
and 23,066,905 shares, respectively 231 231
Additional paid-in capital 77,416 77,303
Accumulated other comprehensive income (11,083) (11,565)
Retained earnings 211,670 204,919
Treasury stock (464,086 and 477,686 shares,
respectively) (4,051) (4,170)
Total Shareholders' Equity 274,183 266,718
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 923,291 $ 890,390
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
March 31,
1999 1998
REVENUES $ 558,208 $ 545,648
COSTS AND EXPENSES
Salaries, wages and benefits 358,400 353,571
Operating expenses 91,580 88,320
Purchased transportation 51,772 45,936
Operating taxes and licenses 17,042 17,103
Claims and insurance 13,898 13,284
Depreciation 12,324 12,634
545,016 530,848
OPERATING INCOME 13,192 14,800
OTHER INCOME (EXPENSE)
Investment income 818 952
Interest expense (1,032) (995)
Miscellaneous, net (359) (438)
(573) (481)
Income before income taxes 12,619 14,319
Income taxes 5,868 7,302
NET INCOME $ 6,751 $ 7,017
Basic average shares outstanding 22,607,703 23,029,695
Diluted average shares outstanding 22,607,703 24,118,668
Basic Earnings per Share: $ 0.30 $ 0.30
Diluted Earnings per Share: $ 0.30 $ 0.29
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED FREIGHTWAYS CORPORATION
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
Three Months Ended
March 31,
1999 1998
(Dollars in thousands)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD $ 123,081 $ 107,721
CASH FLOWS FROM OPERATING ACTIVITIES
Net income 6,751 7,017
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 13,350 13,079
Decrease in deferred income taxes (1,189) (1,660)
Gains from property disposals, net (38) (6)
Issuance of common stock under restricted stock plan 230 -
Changes in assets and liabilities:
Receivables (10,435) 6,637
Prepaid expenses (4,204) (8,160)
Accounts payable 5,600 (5,023)
Accrued liabilities 14,633 12,966
Accrued claims costs (278) (1,143)
Income taxes 4,077 7,043
Employee benefits 2,149 426
Other (17,838) (797)
Net Cash Provided by Operating Activities 12,808 30,379
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (16,624) (3,960)
Proceeds from sales of property 894 162
Net Cash Used by Investing Activities (15,730) (3,798)
Increase (decrease) in Cash and Cash Equivalents (2,922) 26,581
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 120,159 $ 134,302
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 1998 Annual Report to
Shareholders.
There were no significant changes in the Company's commitments
and contingencies as previously described in the 1998 Annual Report
to Shareholders and related annual report to the Securities and
Exchange Commission on Form 10-K.
2. Segment and Geographic Information
The Company operates in a single industry segment, primarily
providing less-than-truckload transportation and supply chain
management services throughout the United States, Canada and Mexico,
and international freight services between the United States and more
than 80 countries. The following information sets forth revenues and
long-lived assets by geographic location. Revenues are attributed to
geographic location based upon the location of the customer. No one
customer provides 10% or more of total revenues.
Geographic Information
(Dollars in thousands)
March 31, 1999 March 31, 1998
Long- Long-
Lived Lived
Revenues Assets Revenues Assets
United States $529,421 $334,916 $515,716 $349,475
Canada 28,787 30,288 29,932 24,926
Total $558,208 $365,204 $545,648 $374,401
3. Stock Compensation
As of March 31, 1999 there were approximately 1,077,000 granted
but unissued shares remaining under the Company's Stock Option and
Incentive Plan. The shares vest as early as December 16, 1999, but
are contingent upon the Company's stock price achieving a 60%
increase over the price at the time of grant in December 1996 to
$11.96 per share. If performance conditions are met, those shares
will be issued to employees in December 1999 and compensation expense
will be recognized based on the then market price of the stock. At
March 31, 1999, the stock price was below the pre-determined level
required for vesting.
4. Earnings per Share
The following chart reconciles basic to diluted earnings per
share for the three months ended March 31, 1999 and 1998. There was
no dilutive effect from the restricted stock in the quarter ended
March 31, 1999 as discussed in Footnote 3.
(Dollars in thousands except per share amounts)
Weighted
Three Average Earnings
Months Ended Net Income Shares Per Share
March 31, 1999
Basic $ 6,751 22,607,703 $0.30
Dilutive effect
of restricted
stock -- -- --
Diluted $ 6,751 22,607,703 $0.30
March 31, 1998
Basic $ 7,017 23,029,695 $0.30
Dilutive effect
of restricted
stock -- 1,088,973 (0.01)
Diluted $ 7,017 24,118,668 $0.29
5. Comprehensive Income
Comprehensive income for the three months ended March 31, 1999
and 1998 is as follows:
(Dollars in thousands)
Three Months Ended
March 31,
1999 1998
Net Income $6,751 $ 7,017
Other Comprehensive Income (Loss):
Foreign currency translation
adjustments 482 (12)
Comprehensive Income $7,233 $ 7,005
6. Contingencies
The Company and its subsidiaries are involved 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.
The Company's former parent, CNF Transportation Inc., is engaged
in disputes with the Internal Revenue Service over the amount and
timing of certain tax deductions reported by the former parent in tax
years prior to the spin-off of the Company. These disputes arise from
tax positions first taken by the former parent in the mid-1980's. The
former parent, which is contesting the IRS's positions, has made
certain advance payments to the IRS which would be applied against
any ultimate liability.
Under a tax sharing agreement entered into by the former parent
and the Company at the time of the spin-off, the Company could be
obligated to reimburse the former parent for a portion of any
additional taxes and interest which relate to the Company's business
prior to the spin-off. The amount and timing of such payments, if
any, is dependent on the ultimate resolution of the former parent's
disputes with the IRS and the determination of the nature and extent
of the Company's obligations under the tax sharing arrangement. The
Company has established certain reserves both at the time of and
subsequent to the spin-off with respect to the foregoing.
In March 1999, the 10th Circuit Court of Appeals ruled against
an appealing taxpayer in a multi-employer pension plan tax matter
involving facts similar to those underlying one of the principal
disputes between the former parent and the IRS and relating to the
Company's business prior to the spin-off. Given this recent
decision, and the uncertainties surrounding the amount and timing of
any obligations of the Company under the tax sharing agreement, there
can be no assurance that the amount or timing of any liability of the
Company to the former parent will not have a material adverse effect
on the Company's results of operations or financial position.
The Company has received notices from the Environmental
Protection Agency (EPA) 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 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 quarter ended March 31, 1999 increased 2.3%
over the prior year despite lower tonnage levels. Total and less-
than-truckload tonnage decreased 2.5% and 1.6%, respectively, due
primarily to severe winter weather conditions, erosion of the
Company's core long-haul market from increased competition from
regional carriers and changing distribution patterns, and continued
yield management. The decrease in tonnage was offset by a 4.6%
increase in net revenue per hundred weight due to a 5.5% rate
increase on non-contractual accounts in October 1998 and a 60.0%
increase in the Company's higher-yielding PrimeTime service.
Salaries, wages and benefits increased 1.4% over the prior year
due primarily to decreased efficiencies related to severe winter
weather and $3.2 million related to the Teamster signing bonus,
partially offset by lower incentive compensation expense and
increased savings from workers' compensation claims containment
programs. Operating expenses increased 3.7% due primarily to higher
than anticipated costs associated with transitioning information
technology services from the former parent to a third party, costs
associated with the Company's Year 2000 project and increased repair
and maintenance costs on the Company's aging fleet. These expenses
were partially offset by a 21.8% year-over-year decrease in the
average fuel cost per gallon. Purchased transportation increased
12.7% over the prior year due to the use of owner-operators for
certain new truckload operations, costs associated with the Company's
growing PrimeTime service and increased rail costs. Although rail
miles as a percentage of total inter-city miles decreased only
slightly to 26.2% from 26.8% in the previous year, total rail costs
increased due to a 3.0% increase in rail cost per mile. Operating
taxes and licenses decreased 0.4% due to a decrease in fuel taxes.
Claims and insurance expense increased 4.6% due to higher claims
experience year-over-year. Depreciation decreased 2.5% due to a
higher proportion of fully depreciated equipment.
The above factors resulted in a $1.6 million decrease in
operating income to $13.2 million. The operating ratio increased to
97.6% compared with 97.3% last year.
Other expense, net, increased 19.1% due to decreased investment
income on the Company's short-term investments. Short-term
investments decreased as funds were used for capital expenditure
purposes.
The Company's effective income tax rates differ from the
statutory Federal rate due primarily to foreign and state taxes and
non-deductible items.
Faced with erosion of its core long-haul market due to increased
competition from regional carriers and changing distribution
patterns, the Company is investing in its infrastructure to become
more competitive in the shorter length of haul markets. A new 2-day
service was successfully introduced in 1998 in certain eastern lanes
and the Company is expanding this service offering during 1999. The
Company will also continue to aggressively sell its PrimeTime
services and develop other services tailored to customer needs.
Combined with continued yield enhancements and aggressive cost
controls, the above should help offset salary, wage and benefit
increases of $15.0 million and amortization of $4.5 million related
to the replacement of certain operational and financial systems for
Year 2000 compliance.
As discussed in Footnote 3, the Company has a restricted stock
program. If performance conditions are met in December 1999,
approximately 1,077,000 shares of common stock will be issued to
employees, and compensation expense recognized based on the then
market price of the stock. At March 31, 1999, the stock price was
below the pre-determined level required for vesting.
In April 1999, the Company experienced a significant increase in
fuel costs as the average cost per gallon increased 25.4% over the
first quarter. The Company has the option of implementing a fuel
surcharge when the average cost per gallon of on-highway diesel fuel
exceeds $1.10, as determined from the Energy Information
Administration of the Department of Energy's publication of weekly
retail on-highway diesel prices. However, there can be no assurance
that the Company will be able to successfully implement such
surcharges in response to increased fuel costs in the future.
As discussed in more detail in Footnote 6, the Company is party
to a tax sharing agreement with its former parent. In March 1999,
the 10th Circuit Court of Appeals ruled against an appealing taxpayer
in a multi-employer pension plan tax matter involving facts similar
to those underlying one of the principal disputes between the former
parent and the IRS and relating to the Company's business prior to
the spin-off. Given this recent decision, and the uncertainties
surrounding the amount and timing of any obligations of the Company
under the tax sharing agreement, there can be no assurance that the
amount or timing of any liability of the Company to the former parent
will not have a material adverse effect on the Company's results of
operations or financial position.
RISK FACTORS
The Company is subject to market risks related to changes in
interest rates and foreign currency exchange rates, primarily the
Canadian dollar. Management believes that the impact on the
Company's financial position, results of operations and cash flows
from fluctuations in interest rates and foreign currency exchange
rates would not be material. Consequently, management does not
currently use derivative instruments to manage these risks; however,
it may do so in the future.
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 March 31, 1999, testing and modification of IT systems
is approximately 76% complete while testing of non-IT embedded
systems is approximately 54% complete. Expenses related to Year 2000
modifications totaled $874,000 for the quarter ended March 31, 1999
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 are
capitalized. As of March 31, 1999, $20.9 million has been
capitalized and includes hardware, software and payroll costs as well
as costs of external consultants. Management expects to spend an
additional $15 million to replace and/or convert its internal systems
for Year 2000 compliance. Of this amount, it is expected that
approximately $4 million will be expensed and approximately $11
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 October 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 March 31, 1999, the Company had $120.2 million in cash and
cash equivalents. Net cash flow from operations for the three months
ended March 31, 1999 was $12.8 million due primarily to net income
and depreciation and amortization. Management expects cash flow from
operations for 1999 will be sufficient for working capital
requirements. Capital expenditures for the three
months ended March 31, 1999 were $16.6 million compared with $4.0
million in the same period last year. Management expects capital
expenditures to be approximately $104 million for the remainder of
the year primarily for the purchase of replacement revenue equipment
and upgrades to terminal properties. It is anticipated that those
expenditures will be funded with existing cash balances and cash from
operations, supplemented by financing arrangements if necessary.
The Company has a secured credit facility under which it has
$150.0 million available for working capital and letter of credit
needs. As of March 31, 1999, the Company had no short-term
borrowings and $74.6 million of letters of credit outstanding.
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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financial Data Schedule
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)
May 12, 1999 /s/David F. Morrison
David F. Morrison
Executive Vice President
and Chief Financial Officer
May 12, 1999 /s/Robert E. Wrightson
Robert E. Wrightson
Senior Vice President and
Controller