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, 2004
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
COMMISSION FILE NUMBER 1-5046
CNF Inc.
Incorporated in the State of Delaware
I.R.S. Employer Identification No. 94-1444798
3240 Hillview Avenue, Palo Alto, California 94304
Telephone Number (650) 494-2900
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes X No
--- ---
Number of shares of Common Stock, $.625 par value,
outstanding as of October 31, 2004: 51,671,787.
- 2 -
CNF INC.
FORM 10-Q
Quarter Ended September 30, 2004
_______________________________________________________________________________
_______________________________________________________________________________
INDEX
PART I.FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 2004 and December 31, 2003 3
Statements of Consolidated Operations -
Three and Nine Months Ended September 30, 2004 and 2003 5
Statements of Consolidated Cash Flows -
Nine Months Ended September 30, 2004 and 2003 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk 31
Item 4. Controls and Procedures 32
PART II.OTHER INFORMATION
Item 1. Legal Proceedings 33
Item 6. Exhibits and Reports on Form 8-K 34
Signatures 35
- 3 -
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
CNF INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 30,
2004 December 31,
ASSETS (Unaudited) 2003
----------- -----------
Current Assets
Cash and cash equivalents $ 639,059 $ 298,623
Trade accounts receivable, net 449,218 380,898
Other accounts receivable 19,776 66,112
Operating supplies, at lower of
average cost or market 15,680 9,468
Prepaid expenses 44,039 45,114
Deferred income taxes 50,268 50,631
Assets of discontinued
operations (Note 2) 528,935 478,388
----------- -----------
Total Current Assets 1,746,975 1,329,234
----------- -----------
Property, Plant and Equipment, at Cost
Land 148,809 147,713
Buildings and leasehold
improvements 615,265 591,797
Revenue equipment 653,379 593,830
Other equipment 212,893 210,374
----------- -----------
1,630,346 1,543,714
Accumulated depreciation and
amortization (775,830) (725,763)
----------- -----------
854,516 817,951
----------- -----------
Other Assets
Deferred charges and other
assets (Note 4) 47,918 122,208
Capitalized software, net 52,140 54,646
Assets of discontinued
operations (Note 2) 169,198 442,234
----------- -----------
269,256 619,088
----------- -----------
Total Assets $2,870,747 $2,766,273
=========== ===========
The accompanying notes are an integral part of these statements.
- 4 -
CNF INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share amounts)
September 30,
2004 December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited) 2003
----------- -----------
Current Liabilities
Accounts payable $ 231,021 $ 203,988
Accrued liabilities 277,143 200,932
Accrued claims costs 92,683 94,291
Current maturities of long-term
debt (Note 7) 112,727 14,055
Liabilities of discontinued
operations (Note 2) 322,108 308,884
----------- -----------
Total Current Liabilities 1,035,682 822,150
Long-Term Liabilities
Long-term debt and guarantees (Note 7) 602,520 554,981
Accrued claims costs 107,270 113,785
Employee benefits (Note 5) 144,468 176,129
Other liabilities and deferred credits 28,166 24,828
Deferred income taxes 61,185 50,370
Liabilities of discontinued
operations (Note 2) 198,077 205,222
----------- -----------
Total Liabilities 2,177,368 1,947,465
----------- -----------
Commitments and Contingencies (Note 8)
Shareholders' Equity
Preferred stock, no par value;
authorized 5,000,000 shares:
Series B, 8.5% cumulative,
convertible, $.01 stated value;
designated 1,100,000 shares;
issued 747,073 and 763,674
shares, respectively 7 8
Additional paid-in capital,
preferred stock 113,622 116,147
Deferred compensation,
Thrift and Stock Plan (51,272) (57,687)
----------- -----------
Total Preferred
Shareholders' Equity 62,357 58,468
----------- -----------
Common stock, $.625 par value;
authorized 100,000,000 shares;
issued 57,459,165 and 56,436,981
shares, respectively 35,912 35,273
Additional paid-in capital,
common stock 382,253 356,700
Retained earnings 394,173 570,751
Deferred compensation,
restricted stock (4,330) (6,188)
Cost of repurchased common stock
(6,379,599 and 6,459,732 shares,
respectively) (157,297) (159,273)
----------- -----------
650,711 797,263
Accumulated Other Comprehensive
Loss (Note 6) (19,689) (36,923)
----------- -----------
Total Common Shareholders'
Equity 631,022 760,340
----------- -----------
Total Shareholders' Equity 693,379 818,808
----------- -----------
Total Liabilities and
Shareholders' Equity $2,870,747 $2,766,273
=========== ===========
The accompanying notes are an integral part of these statements.
- 5 -
CNF INC.
STATEMENTS OF CONSOLIDATED OPERATIONS
(Unaudited)
(Dollars in thousands except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
REVENUES $ 973,619 $ 837,361 $2,744,921 $2,396,520
Costs and Expenses
Operating expenses (Note 4) 779,984 657,379 2,196,724 1,909,648
Selling, general and
administrative expenses 88,751 86,113 266,084 250,979
Depreciation 26,449 25,558 76,951 76,240
---------- ---------- ---------- ----------
895,184 769,050 2,539,759 2,236,867
---------- ---------- ---------- ----------
OPERATING INCOME 78,435 68,311 205,162 159,653
---------- ---------- ---------- ----------
Other Income (Expense)
Investment income 2,112 635 4,247 1,851
Interest expense (Note 7) (10,959) (7,134) (28,306) (21,925)
Miscellaneous, net (876) (933) (5,401) (2,110)
---------- ---------- ----------- -----------
(9,723) (7,432) (29,460) (22,184)
---------- ---------- ----------- -----------
Income from Continuing
Operations Before Taxes 68,712 60,879 175,702 137,469
Income Tax Provision 26,798 23,743 68,524 53,613
---------- ---------- ----------- -----------
INCOME FROM CONTINUING
OPERATIONS 41,914 37,136 107,178 83,856
---------- ---------- ----------- -----------
Discontinued Operations,
net of tax (Note 2)
Loss from Disposal (260,490) - (260,490) -
Income (Loss) from
Discontinued Operations 4,444 (10,315) 3,114 (20,711)
---------- ---------- ----------- -----------
(256,046) (10,315) (257,376) (20,711)
Net Income (Loss) (214,132) 26,821 (150,198) 63,145
Preferred Stock Dividends 2,075 2,030 6,119 6,125
---------- ---------- ----------- -----------
NET INCOME (LOSS)
APPLICABLE TO COMMON
SHAREHOLDERS $(216,207) $ 24,791 $ (156,317) $ 57,020
=========== =========== =========== ===========
Weighted-Average Common
Shares Outstanding
(Note 1)
Basic 50,670,398 49,549,338 50,150,987 49,480,305
Diluted 55,408,636 56,641,421 56,527,092 56,634,040
Earnings (Loss) per
Common Share (Note 1)
Basic
Net Income from
Continuing Operations $ 0.79 $ 0.71 $ 2.02 $ 1.57
Loss from Disposal,
net of tax (5.15) - (5.20) -
Income (Loss) from
Discontinued
Operations,
net of tax 0.09 (0.21) 0.06 (0.42)
---------- ---------- ----------- -----------
Net Income (Loss)
Applicable to
Common Shareholders $(4.27) $ 0.50 $(3.12) $ 1.15
========== ========== =========== ===========
Diluted
Net Income from
Continuing
Operations $ 0.72 $ 0.64 $ 1.83 $ 1.44
Loss from Disposal,
net of tax (4.70) - (4.61) -
Income (Loss) from
Discontinued
Operations,
net of tax 0.08 (0.18) 0.06 (0.36)
---------- ---------- ----------- -----------
Net Income (Loss)
Applicable to Common
Shareholders $(3.90) $ 0.46 $(2.72) $ 1.08
========== ========== =========== ===========
The accompanying notes are an integral part of these statements.
- 6 -
CNF INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
(Dollars in thousands)
Nine Months Ended
September 30,
-----------------------------
2004 2003
------------ -------------
Cash and Cash Equivalents,
Beginning of Period $ 298,623 $ 232,813
Operating Activities
Net income (loss) (150,198) 63,145
Adjustments to reconcile
net income (loss) to net cash provided
by operating activities:
Discontinued operations 257,376 20,711
Depreciation and amortization,
net of accretion 86,957 85,540
Increase in deferred income taxes 12,485 5,771
Amortization of deferred compensation 8,770 7,164
Provision for uncollectible accounts 3,894 3,532
Equity in earnings of Vector
joint venture (8,079) (15,358)
Loss on sales of property
and equipment, net 159 2,603
Loss from equity ventures - 3,716
Changes in assets and liabilities:
Receivables (58,512) (19,113)
Prepaid expenses 1,075 (3,913)
Accounts payable 29,064 (15,384)
Accrued liabilities, excluding
accrued incentive compensation 21,889 26,457
Accrued incentive compensation 54,322 (21,137)
Accrued claims costs (8,123) (19,558)
Income taxes 30,974 52,515
Employee benefits (36,610) (20,057)
Deferred charges and credits 71,561 24,653
Other (7,287) 6,562
------------ -------------
Net Cash Provided by
Operating Activities 309,717 187,849
------------ -------------
Investing Activities
Capital expenditures (110,111) (77,471)
Software expenditures (9,209) (10,732)
Proceeds from sales of
property and equipment, net 5,043 4,830
------------ -------------
Net Cash Used in Investing Activities (114,277) (83,373)
------------ -------------
Financing Activities
Net proceeds from issuance
of long-term debt 292,587 2,156
Net repayment of long-term
debt and guarantees (142,919) (12,143)
Proceeds from exercise
of stock options 25,074 2,702
Payments of common dividends (15,153) (14,876)
Payments of preferred dividends (9,941) (10,192)
------------ -------------
Net Cash Provided by (Used in)
Financing Activities 149,648 (32,353)
------------ -------------
Net Cash Provided by
Continuing Operations 345,088 72,123
------------ -------------
Net Cash Used in
Discontinued Operations (4,652) (9,604)
------------ -------------
Increase in Cash and Cash Equivalents 340,436 62,519
------------ -------------
Cash and Cash Equivalents, End of Period $ 639,059 $ 295,332
============ =============
Supplemental Disclosure
Cash Paid (Refunded)
for income taxes, net $ 24,824 $ (37,699)
Cash Paid for interest,
net of amounts capitalized 14,480 15,909
The accompanying notes are an integral part of these statements.
- 7 -
CNF INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Principal Accounting Policies
Basis of Presentation
Pursuant to the rules and regulations of the Securities and Exchange
Commission, the accompanying consolidated financial statements of CNF Inc.
and its wholly owned subsidiaries ("CNF") have been prepared by CNF, without
audit by independent public accountants. In the opinion of management, the
consolidated financial statements include all normal recurring adjustments
necessary to present fairly the information required to be set forth therein.
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted from these statements pursuant to
such rules and regulations and, accordingly, should be read in conjunction
with the consolidated financial statements included in CNF's 2003 Annual
Report on Form 10-K.
In the third quarter of 2004, CNF committed to sell Menlo Worldwide
Forwarding, Inc. and its subsidiaries and Menlo Worldwide Expedite!, Inc.
(hereinafter collectively referred to as "MWF"). As a result, MWF is
classified as held for sale and, for all periods presented, the results of
operations, net assets, and cash flows of the Menlo Worldwide Forwarding
("Forwarding") segment have been segregated and reported as discontinued
operations, as more fully discussed in Note 2, "Discontinued Operations." In
addition to MWF, the Forwarding segment also includes Emery Worldwide
Airlines, Inc. ("EWA"), a separate wholly owned subsidiary of CNF that is
reported in discontinued operations but is not classified as held for sale.
Earnings per Share ("EPS")
Basic EPS is computed by dividing reported earnings (loss) by the weighted-
average common shares outstanding. Diluted EPS is calculated as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in thousands ------------------------- -------------------------
except per share data) 2004 2003 2004 2003
------------ ------------ ------------ ------------
Numerator:
Continuing operations
(after preferred stock
dividends), as reported $ 39,839 $ 35,106 $ 101,059 $ 77,731
Add-backs:
Dividends on
Series B preferred
stock, net of
replacement funding 303 315 954 1,006
Interest expense on
convertible
subordinated
debentures, net of
trust dividend
income (Note 7) -- 954 1,590 2,862
------------ ------------ ------------ ------------
Continuing operations 40,142 36,375 103,603 81,599
------------ ------------ ------------ ------------
Discontinued operations (256,046) (10,315) (257,376) (20,711)
------------ ------------ ------------ ------------
Applicable to common
shareholders $ (215,904) $ 26,060 $ (153,773) $ 60,888
============ ============ ============ ============
Denominator:
Weighted-average common
shares outstanding 50,670,398 49,549,338 50,150,987 49,480,305
Stock options and
restricted stock 1,221,014 346,956 1,122,770 408,608
Series B preferred stock 3,517,224 3,620,127 3,517,224 3,620,127
Convertible subordinated
debentures (Note 7) -- 3,125,000 1,736,111 3,125,000
------------ ------------ ------------ ------------
55,408,636 56,641,421 56,527,092 56,634,040
------------ ------------ ------------ ------------
Earnings (Loss) per Diluted
Share:
Continuing operations $ 0.72 $ 0.64 $ 1.83 $ 1.44
------------ ------------ ------------ ------------
Discontinued operations (4.62) (0.18) (4.55) (0.36)
------------ ------------ ------------ ------------
Applicable to common
shareholders $ (3.90) $ 0.46 $ (2.72) $ 1.08
============ ============ ============ ============
- 8 -
For the three and nine months ended September 30, 2004, diluted shares
reflect the effect of CNF's redemption in June 2004 of its convertible
subordinated debentures, as more fully discussed in Note 7, "Debt."
Stock-Based Compensation
Officers and non-employee directors have been granted options under CNF's
stock option plans to purchase common stock of CNF at prices equal to the
market value of the stock on the date of grant. CNF accounts for stock-based
compensation utilizing the intrinsic value method in accordance with the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees." Accordingly, no compensation expense is
recognized for fixed option plans because the exercise prices of employee
stock options equal or exceed the market prices of the underlying stock on
the dates of grant.
The following table sets forth the effect on net income (loss) and earnings
(loss) per share if CNF had applied the fair-value based method and
recognition provisions of SFAS 123, " Accounting for Stock-Based
Compensation," to stock-based compensation:
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in thousands ------------------------- -------------------------
except per share data) 2004 2003 2004 2003
------------ ------------ ------------ ------------
Net income (loss), as
reported $ (216,207) $ 24,791 $ (156,317) $ 57,020
Additional compensation cost,
net of tax, that
would have been included
in net income (loss) if
the fair-value method
had been applied (2,364) (2,411) (6,297) (6,863)
------------ ------------ ------------ ------------
Adjusted net income (loss) as
if the fair-value
method had been
applied $ (218,571) $ 22,380 $ (162,614) $ 50,157
============ ============ ============ ============
Earnings (loss) per share:
Basic:
As reported $ (4.27) $ 0.50 $ (3.12) $ 1.15
============ ============ ============ ============
Adjusted $ (4.31) $ 0.45 $ (3.24) $ 1.01
============ ============ ============ ============
Diluted:
As reported $ (3.90) $ 0.46 $ (2.72) $ 1.08
============ ============ ============ ============
Adjusted $ (3.94) $ 0.42 $ (2.83) $ 0.95
============ ============ ============ ============
The effect of applying SFAS 123 may not be indicative of the future effect.
Foreign Currency
Adjustments resulting from translating foreign functional currency financial
statements into U.S. dollars are included in Accumulated Other Comprehensive
Loss in the Consolidated Balance Sheets. Transaction gains and losses that
arise from exchange rate fluctuations on transactions denominated in a
currency other than the local currency are included in results of operations.
CNF recognizes deferred taxes to reflect the effect of temporary differences
between tax and book accounting on the translation of foreign subsidiary
financial statements. Based on expectations in certain tax jurisdictions,
CNF re-evaluated its assumptions regarding the repatriation of foreign
earnings in the first quarter of 2004. CNF will no longer assume that past
and future earnings of foreign subsidiaries are indefinitely reinvested.
Accordingly, CNF in the first quarter of 2004 recorded a deferred tax asset
of $9.4 million to recognize the associated tax effect of the accumulated
foreign currency translation adjustment. The deferred tax asset is included
in Assets of Discontinued Operations in the Consolidated Balance Sheets as it
relates to the discontinued Forwarding segment. In the third quarter of
2004, the accumulated foreign currency translation adjustment associated with
the Forwarding segment was included in CNF's third-quarter impairment charge,
as more fully discussed in Note 2, "Discontinued Operations."
- 9 -
New Accounting Standards
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities: an Interpretation of ARB No. 51" ("FIN 46"). FIN
46 requires that all special-purpose entities be designated as either a
voting-interest entity or a variable-interest entity ("VIE"). A VIE is an
entity for which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for
the VIE to finance its activities without additional subordinated financial
support from other parties. A VIE is required to be consolidated by its
primary beneficiary if it does not effectively disperse risks among parties
involved. The primary beneficiary of a VIE is the party that absorbs a
majority of the VIE's expected losses or receives a majority of its expected
residual returns.
The implementation of FIN 46 was required for periods beginning after June
15, 2003. However, in October 2003, the FASB deferred the effective date for
applying FIN 46 to VIEs created before February 1, 2003 until the end of the
first interim period ending after December 15, 2003. In December 2003, the
FASB revised FIN 46 ("FIN 46R") to incorporate certain revisions, including
the requirement to disregard certain rights in determining whether an entity
is the primary beneficiary in a VIE. Under FIN 46R, CNF was not the primary
beneficiary of CNF Trust 1 (the "Trust"), a wholly owned subsidiary, and CNF
was therefore required to deconsolidate the Trust effective in the quarter
ended March 31, 2004. Accordingly, CNF's 5% convertible subordinated
debentures held by the Trust, which were redeemed by CNF on June 1, 2004,
were included in long-term debt at March 31, 2004, and prior periods were
restated to reflect adoption of FIN 46R, as more fully discussed in Note 7,
"Debt."
Reclassification
Certain amounts in the prior-period financial statements have been
reclassified to conform to the current-period presentation.
2. Discontinued Operations
Income (Loss) from Discontinued Operations
In the process of evaluating several strategic alternatives for Menlo
Worldwide's Forwarding segment, CNF was approached by United Parcel Service,
Inc. ("UPS") in the third quarter of 2004 with interest in acquiring MWF.
Decisions by CNF's management and its Board of Directors and the third-
quarter sale negotiations with UPS established CNF's commitment to sell MWF
as of September 30, 2004. Accordingly, CNF classified MWF as held for sale
and reported the Forwarding segment as discontinued operations. In the third
quarter of 2004, CNF recognized a $260.5 million impairment charge to write
down the recorded book value of MWF to its anticipated selling price, less
costs to sell, as required by SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets."
The impairment charge is based on the current agreement to sell MWF, as
described below under "Stock Sale Agreement with UPS," and primarily
represents the estimated write-down to the carrying value of MWF's goodwill
and long-lived assets, including MWF's accumulated foreign currency
translation adjustment, as well as estimated selling costs. CNF agreed to
accept less than the recorded book value of MWF due primarily to management's
current assessment of the risk and resource requirements associated with
other strategic alternatives related to MWF's operations. The impairment
charge is a deductible capital loss for tax purposes. However, since CNF
does not currently forecast any significant taxable capital gains in the tax
carry-forward period, it does not currently expect to recognize a tax
deduction for the capital loss. As a result, no tax benefit was recorded on
the impairment charge.
- 10 -
For all periods presented, the results of operations, net assets, and cash
flows of the Forwarding segment have been segregated and classified as
discontinued operations. Financial information for discontinued operations
is summarized below:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
(Dollars in thousands) 2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenues $ 558,231 $ 470,985 $1,582,996 $1,359,149
Income (Loss) from
Discontinued Operations
Income (loss)
before income taxes 7,285 (12,754) 5,104 (29,796)
Income tax (provision)
benefit (2,841) 2,439 (1,990) 9,085
------------ ------------ ------------ ------------
$ 4,444 $ (10,315) $ 3,114 $ (20,711)
============ ============ ============ ============
Loss from Disposal
Impairment Charge $ (260,490) $ -- $ (260,490) $ --
------------ ------------ ------------ ------------
As required by EITF 87-24, "Allocation of Interest to Discontinued
Operations," continuing operations has been allocated certain corporate
overhead charges that were previously allocated to the discontinued
Forwarding segment. These corporate overhead charges were $2.8 million and
$3.1 million in the third quarter of 2004 and 2003, respectively, and $11.0
million and $9.3 million in the first nine months of 2004 and 2003,
respectively. For all periods presented, the additional corporate overhead
charges were allocated to the Con-Way and Logistics reporting segments based
on segment revenue and capital employed.
Stock Sale Agreement with UPS
On October 5, 2004, CNF and Menlo Worldwide entered into a stock purchase
agreement with United Parcel Service of America, Inc. and United Parcel
Service, Inc. to acquire all of the issued and outstanding capital stock of
MWF. The agreement excludes certain assets and liabilities of MWF and
includes certain assets and liabilities of CNF or its subsidiaries related to
the business as presently conducted by Menlo Worldwide Forwarding. Among the
assets and liabilities so excluded are those related to EWA, as described
below, and the obligation related to MWF employees covered under CNF's
domestic pension, postretirement medical and long-term disability plans.
Under the agreement, CNF will be reimbursed for the actuarially determined
estimate of its obligation related to MWF employees covered under CNF's
postretirement medical plan. CNF will receive cash consideration of $150
million that is subject to certain adjustments, including adjustments for
cash held by MWF at closing and MWF's net working capital as of closing. In
addition, UPS will assume indebtedness associated with the MWF business,
including approximately $110 million of debt owed by MWF in connection with
the City of Dayton, Ohio, Special Facilities Revenue Refunding Bonds, certain
capital leases and other debt, other letters of credit, and overdraft
facilities. CNF will indemnify UPS against certain losses that UPS may incur
after the closing of the sale with certain limitations. Any losses related
to these indemnification obligations or any other costs, including any future
cash expenditures, related to the sale that have not been estimated and
recognized at this time will be disclosed in the future and recognized in
future periods when and if incurred. Subject to customary conditions,
including receipt of government regulatory approvals and consents, CNF
expects the sale to close during the fourth quarter of 2004.
Assets and Liabilities of Discontinued Operations
The assets and liabilities of the Forwarding segment are presented in the
Consolidated Balance Sheets under the captions "Assets (or Liabilities) of
Discontinued Operations." Assets of discontinued operations at September 30,
2004 and December 31, 2003 mostly consisted of cash of $40.6 million and
$22.8 million, respectively; receivables of $428.6 million and $403.3
million, respectively; and goodwill and long-lived assets of $169.2 million
and $442.2 million, respectively. Liabilities of discontinued operations at
those same dates primarily included accounts payable and accrued liabilities
of $309.1 million and $281.3 million, respectively, and long-term debt and
capital leases of $110.1 million and $110.2 million, respectively. As
described above, the sale agreement with UPS excludes certain assets and
liabilities of MWF, including but not limited to cash balances, as well as
the assets and liabilities of EWA, including the restructuring reserves
discussed below.
In connection with the cessation of its air carrier operations in 2001, EWA
terminated the employment of all of its pilots and crew members. Those
pilots and crew members are represented by the Air Line Pilots Association
("ALPA") union under a collective bargaining agreement. Subsequently, ALPA
filed a grievance on behalf of the pilots and crew members protesting the
- 11 -
cessation of EWA's air carrier operations and MWF's use of other air
carriers. The ALPA matters are the subject of litigation in U.S. District
Court and, depending on the outcome of that litigation, may be subject to
binding arbitration. Based on CNF's current evaluation, management believes
that it has provided for its estimated exposure related to the ALPA matters.
However, there can be no assurance in this regard as CNF cannot predict with
certainty the ultimate outcome of these matters.
Reserves related to the 2001 restructuring plan decreased to $34.1 million at
September 30, 2004 from $34.8 million at December 31, 2003, primarily due to
payments of restructuring-related obligations, partially offset by proceeds
from sales of aircraft equipment. Restructuring reserves at September 30,
2004 consisted primarily of CNF's estimated exposure related to the labor
matters described above, as well as other estimated remaining restructuring-
related obligations.
3. Reporting Segments
CNF discloses segment information in the manner in which the components are
organized for making operating decisions, assessing performance and
allocating resources. CNF's principal businesses consist of Con-Way
Transportation Services ("Con-Way") and Menlo Worldwide. For financial
reporting purposes, CNF is divided into four reporting segments. The
operating results of Con-Way are reported as one reporting segment while
Menlo Worldwide is divided into two reporting segments: Menlo Worldwide
Logistics ("Logistics"), and Menlo Worldwide Other, which consists of Vector,
a joint venture with GM. Also, certain corporate activities and the results
of Road Systems, a trailer manufacturer, are reported in the CNF Other
reporting segment.
In the third quarter of 2004, CNF committed to sell MWF. Accordingly, MWF is
classified as held for sale and, for all periods presented, the results of
operations, net assets, and cash flows of the Forwarding segment have been
segregated as discontinued operations and excluded from the reporting segment
financial data summarized below. Prior to the reclassification, the combined
operating results of MWF and a portion of the operations of EWA were reported
in continuing operations as the Forwarding segment. As required by
accounting rules, continuing operations has been allocated certain corporate
overhead charges that were previously allocated to the discontinued
Forwarding segment, as more fully discussed in Note 2, "Discontinued
Operations." Accordingly, reporting segment financial information presented
below reflects those reclassifications for all periods presented.
- 12 -
Financial Data
Management evaluates segment performance primarily based on revenue and
operating income (loss); therefore, other non-operating items, consisting
primarily of interest income or expense, are not reported in segment results.
Corporate expenses are generally allocated based on measurable services
provided to each segment or, for general corporate expenses, based on segment
revenue and capital employed. Inter-segment revenue and related operating
income have been eliminated to reconcile to consolidated revenue and
operating income.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
(Dollars in thousands) 2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenues
Con-Way Transportation
Services $ 684,775 $ 574,608 $1,936,224 $1,635,183
Menlo Worldwide Logistics 286,847 262,663 805,494 761,212
------------ ------------ ------------ ------------
971,622 837,271 2,741,718 2,396,395
CNF Other 1,997 90 3,203 125
------------ ------------ ------------ ------------
$ 973,619 $ 837,361 $2,744,921 $2,396,520
============ ============ ============ ============
Intersegment Revenue
Eliminations by Segment
Con-Way Transportation
Services $ 1,514 $ 1,199 $ 4,173 $ 1,434
Menlo Worldwide
Logistics -- -- -- 2,975
------------ ------------ ------------ ------------
1,514 1,199 4,173 4,409
CNF Other 7,524 5,810 20,188 16,546
------------ ------------ ------------ ------------
$ 9,038 $ 7,009 $ 24,361 $ 20,955
============ ============ ============ ============
Revenues before Intersegment
Eliminations
Con-Way Transportation
Services $ 686,289 $ 575,807 $1,940,397 $1,636,617
Menlo Worldwide
Logistics 286,847 262,663 805,494 764,187
------------ ------------ ------------ ------------
973,136 838,470 2,745,891 2,400,804
CNF Other 9,521 5,900 23,391 16,671
Intersegment Revenue
Eliminations (9,038) (7,009) (24,361) (20,955)
------------ ------------ ------------ ------------
$ 973,619 $ 837,361 $2,744,921 $2,396,520
============ ============ ============ ============
Operating Income (Loss)
Con-Way Transportation
Services $ 70,607 $ 53,909 $ 181,702 $ 129,213
Menlo Worldwide
Logistics 5,764 6,477 17,794 18,004
Other 2,699 8,810 8,079 15,358
------------ ------------ ------------ ------------
8,463 15,287 25,873 33,362
CNF Other (635) (885) (2,413) (2,922)
------------ ------------ ------------ ------------
$ 78,435 $ 68,311 $ 205,162 $ 159,653
============ ============ ============ ============
4.Investment in Unconsolidated Joint Venture
Vector SCM ("Vector") is a joint venture formed with General Motors ("GM") in
December 2000 for the purpose of providing logistics management services on a
global basis for GM, and ultimately for customers in addition to GM.
Although Menlo Worldwide, LLC ("MW") owns a majority interest in Vector, MW's
portion of Vector's operating results are reported in the Menlo Worldwide
Other reporting segment as an equity-method investment based on GM's ability
to control certain operating decisions. Vector is organized as a limited
liability company that has elected to be taxed as a partnership. Therefore,
the joint venture partners are responsible for income taxes applicable to
their share of Vector's taxable income. MW's portion of Vector's net income,
which is reported as a reduction of operating expenses in the accompanying
Statements of Consolidated Operations, does not include any provision for
income taxes that will be incurred by CNF. MW's undistributed earnings from
Vector at September 30, 2004 and December 31, 2003, before provision for
CNF's related parent income taxes, was $30.7 million and $22.6 million,
respectively.
- 13 -
Vector participates in CNF's centralized cash management system, and,
consequently, Vector's domestic trade accounts payable are paid by CNF and
settled through Vector's affiliate accounts with CNF. In addition, excess
cash balances in Vector's bank accounts, if any, are invested by CNF and
settled through affiliate accounts, which earn interest income based on a
rate earned by CNF's cash-equivalent investments. As a result of Vector's
excess cash invested by CNF, Vector's affiliate receivable from CNF as of
September 30, 2004 and December 31, 2003 was $25.9 million and $16.0 million,
respectively.
As required by the Vector Agreements, CNF provides Vector with a $20 million
line of credit for Vector's working capital and capital expenditure
requirements. Under the credit facility, which matures on December 13, 2005,
Vector may obtain loans with an annual interest rate based on the rate CNF
pays under its $385 million revolving credit facility. CNF provides a
portion of its $20 million credit commitment to Vector through CNF's
guarantee of $7.5 million of uncommitted local currency overdraft facilities
available to Vector by international banks. At September 30, 2004, there was
no balance outstanding under Vector's uncommitted local currency overdraft
facilities and no borrowings were directly payable to CNF. At December 31,
2003, Vector owed $5.8 million under the uncommitted local currency overdraft
facilities and no borrowings were directly payable to CNF.
CNF's capital transactions with Vector, including cash advances to and from
Vector under CNF's centralized cash management system and credit facility
described above, are reported as adjustments to MW's investment in Vector in
Deferred Charges and Other Assets in CNF's Consolidated Balance Sheets.
5. Employee Benefit Plans
Effective in 2004, CNF adopted the interim disclosure provisions of SFAS No.
132R, "Employers' Disclosure about Pensions and Other Post-retirement
Benefits, an Amendment of FASB Statements No. 87, 88 and 106 and a Revision
of FASB Statement No. 132." The revised statement requires the disclosure of
the components of the net periodic benefit expense recognized in interim
periods, which is summarized in the tables below.
Defined Benefit Pension Plans
---------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
(Dollars in thousands) 2004 2003 2004 2003
------------ ------------ ------------ ------------
Service cost - benefits
earned during the quarter $ 16,626 $ 10,966 $ 44,100 $ 32,897
Interest cost on benefit
obligation 12,900 12,495 41,197 37,484
Expected return on plan
assets
(16,958) (10,391) (44,760) (31,173)
Net amortization and
deferral 2,838 2,269 6,652 6,808
------------ ------------ ------------ ------------
Net periodic benefit
expense $ 15,406 $ 15,339 $ 47,189 $ 46,016
============ ============ ============ ============
CNF has contributed $90.8 million to its defined benefit pension plans in
2004, consisting of $40.2 million paid in the second quarter and $50.6
million of payments in the third quarter. No further funding payments are
expected for the remainder of 2004.
As reported above, net periodic pension plan expense for the third quarter of
2004 and 2003 includes expense of $2.9 million and $3.1 million,
respectively, that relates to pension plan participants of companies that are
now reported as discontinued operations, and for the first nine months of
2004 and 2003, the table above includes expense of $10.1 million and $9.2
million, respectively, for those participants.
- 14 -
Post-retirement Medical Plan
---------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
(Dollars in thousands) 2004 2003 2004 2003
------------ ------------ ------------ ------------
Service cost - benefits
earned during the quarter $ 164 $ 457 $ 1,201 $ 1,370
Interest cost on benefit
obligation 1,659 1,384 4,802 4,152
Net amortization and
deferral 113 66 262 197
------------ ------------ ------------ ------------
Net periodic benefit
expense $ 1,936 $ 1,907 $ 6,265 $ 5,719
============ ============ ============ ============
As reported above, net periodic post-retirement plan expense for the third
quarter of 2004 and 2003 includes $0.9 million that relates to post-
retirement plan participants of companies that are now reported as
discontinued operations, and for the first nine months of 2004 and 2003, the
table above includes expense of $3.7 million and $2.8 million, respectively,
for those participants.
In December 2003, the Medicare Prescription Drug Improvement and
Modernization Act of 2003 (the "Act") was enacted in the U.S. The Act
introduced a prescription drug benefit under Medicare, as well as a federal
subsidy to sponsors of retiree health benefit plans that provide a
prescription drug benefit that is at least actuarially equivalent to
Medicare's prescription drug benefit. In January and May 2004, the FASB
issued FASB Staff Position No. 106-1 and 106-2, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003" ("FSP 106-1" and "FSP 106-2").
Under FSP 106-2, CNF concluded that its post-retirement medical plan provided
an actuarially equivalent benefit and recognized the Act's effect
retrospectively to the date of enactment. CNF's adoption of FSP 106-2
resulted in a $4.9 million reduction to its projected post-retirement benefit
obligation, which will be recognized as a reduction to its net periodic post-
retirement benefit expense in future periods when costs are subsidized under
the Act. The effect of adoption of FSP 106-2 on CNF's financial condition,
results of operations and cash flows for the three and nine months ended
September 30, 2004 was not significant.
6. Comprehensive Income
Comprehensive income, which is a measure of all changes in equity except
those resulting from investments by owners and distributions to owners, was
as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
(Dollars in thousands) 2004 2003 2004 2003
------------ ------------ ------------ ------------
Net income (loss) $ (214,132) $ 26,821 $ (150,198) $ 63,145
Other comprehensive income
(loss):
Realized gain on
marketable securities -- -- (2,044) --
Change in fair value of
cash flow hedge -- 101 -- 295
Foreign currency
translation adjustment
(Note 1) 1,394 (2,231) 9,512 1,207
------------ ------------ ------------ ------------
1,394 (2,130) 7,468 1,502
------------ ------------ ------------ ------------
Comprehensive income (loss) $ (212,738) $ 24,691 $ (142,730) $ 64,647
============ ============ ============ ============
- 15 -
The following is a summary of the components of Accumulated Other
Comprehensive Loss, net of tax:
September 30, December 31,
(Dollars in thousands) 2004 2003
------------- -------------
Unrealized gain on marketable securities $ -- $ 2,044
Accumulated foreign currency translation (61) (19,339)
adjustments (Note 1)
Minimum pension liability adjustment (19,628) (19,628)
------------- -------------
Accumulated other comprehensive loss $ (19,689) $ (36,923)
============= =============
7. Debt
$385 Million Revolving Credit Facility
As more fully discussed in Note 2, "Discontinued Operations," CNF recognized
a $260.5 million impairment charge to write down the recorded book value of
MWF to its estimated selling price, less costs to sell. To remain in
compliance with certain financial covenants, CNF obtained an amendment to the
credit agreement for CNF's $385 million revolving credit facility.
Additionally, the credit agreement contains restrictions on the sale of
subsidiary guarantors and a threshold for the sale of assets. CNF has
obtained the necessary creditors' consent for the sale of MWF.
Convertible Subordinated Debentures
On June 1, 2004, CNF redeemed $128.9 million aggregate principal amount of
its 5% Convertible Subordinated Debentures due 2012 (the "Convertible
Debentures"). The Convertible Debentures were redeemable for cash 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. CNF Trust 1
(the "Trust"), a trust wholly owned by CNF, applied the proceeds from the
redemption of the Convertible Debentures to redeem CNF's $3.9 million
interest in the common stock of the Trust and $125 million of Term
Convertible Securities, Series A ("TECONS"), which the Trust issued to the
public in June 1997. In connection with the redemption of the Convertible
Debentures, CNF recognized $2.7 million of expenses in the second quarter of
2004 for an early redemption call premium and for the write-off of the
unamortized cost of issuing the Convertible Debentures.
Prior to their redemption in June 2004, the Convertible Debentures were
reported in long-term debt as the result of CNF's adoption in the first
quarter of 2004 of the revised FASB Interpretation No. 46 "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51" ("FIN 46R").
Under FIN 46R, CNF was not deemed to be the primary beneficiary of the Trust
and CNF was therefore required to deconsolidate the Trust effective in the
quarter ended March 31, 2004. Prior to adoption of FIN 46R, CNF reported the
TECONS as a mezzanine security with cash distributions reported as a non-
operating expense. Under FIN 46R, CNF's consolidated financial statements,
for all periods presented, reflect the deconsolidation of the Trust.
Accordingly, long-term debt and interest expense reflect the obligation and
interest cost, respectively, of the Convertible Debentures prior to their
redemption. Also, prior to redemption of the Convertible Debentures, CNF's
$3.9 million interest in the common securities of the Trust is reported as an
investment in Deferred Charges and Other Assets while dividend income on the
common securities are reported by CNF as non-operating income.
The TECONS, the Trust, and the Convertible Debentures are more fully
discussed in Note 9, "Preferred Securities of Subsidiary Trust," of Item 8,
"Financial Statements and Supplementary Data," in CNF's 2003 Annual Report on
Form 10-K.
Senior Debentures due 2034
On April 27, 2004, CNF issued $300 million of 6.70% Senior Debentures due
2034 in a private placement with exchange rights for proceeds of $292.6
million, net of a $7.4 million discount. In connection with the issuance of
the Senior Debentures, CNF capitalized $2.6 million of underwriting fees and
$0.3 million of related debt costs in the second quarter, which will be
amortized until maturity in 2034. CNF used a portion of the proceeds to
redeem $128.9 million of CNF's Convertible Debentures on June 1, 2004, as
discussed above. CNF intends to use the remaining proceeds to repurchase
from time to time or pay at maturity, $100 million of 7.35% Notes due in June
2005, and for working capital and general corporate purposes.
On July 27, 2004, CNF completed the exchange of registered senior debentures
(the "Senior Debentures") for the debentures issued in the private placement.
The Senior Debentures bear interest at the rate of 6.70% per year, payable
- 16 -
semi-annually on May 1 and November 1 of each year, beginning on November 1,
2004. CNF may redeem the Senior Debentures, in whole or in part, on not less
than 30 nor more than 60 days' notice, at a redemption price equal to the
greater of (1) the principal amount being redeemed, or (2) the sum of the
present values of the remaining scheduled payments of principal and interest
on the Senior Debentures being redeemed, discounted at the redemption date on
a semiannual basis at the Treasury rate payable on an equivalent debenture
plus 35 basis points. The Senior Debentures were issued under an indenture
that restricts CNF's ability, with certain exceptions, to incur debt secured
by liens.
Thrift and Stock Plan Notes
CNF guarantees the notes issued by CNF's Thrift and Stock Plan ("TASP"), as
more fully discussed in Note 6, "Debt and Other Financing Arrangements," of
Item 8, "Financial Statements and Supplementary Data," included in CNF's 2003
Annual Report on Form 10-K.
As of September 30, 2004, there was $27.7 million aggregate principal amount
of Series A TASP 6.00% notes outstanding and $62.0 million of Series B TASP
8.54% notes outstanding. Holders of the Series B notes issued by CNF's TASP
have the right to require CNF to repurchase those notes if, among other
things, both Moody's and Standard & Poor's have publicly rated CNF's long-
term senior debt at less than investment grade unless, within 45 days, CNF
shall have obtained, through a guarantee, letter of credit or other permitted
credit enhancement or otherwise, a credit rating for such notes of at least
"A" from Moody's or Standard & Poor's (or another nationally recognized
rating agency selected by the holders of such notes) and shall maintain a
rating on such notes of "A" or better thereafter.
Following CNF's issuance of debentures in April 2004, as described above,
Moody's and Standard & Poors affirmed their investment-grade ratings on CNF's
senior unsecured debt. Also, Moody's upgraded its outlook to "stable" from
"negative."
The Note and Guarantee Agreement with the holders of the Series A TASP 6.00%
notes contains a financial covenant restricting the sale or merger of any
significant subsidiary to a third party. CNF has obtained a waiver from the
holders of the 6.00% notes for the anticipated sale of MWF to remain in
compliance with certain financial covenants in that agreement.
8. Commitments and Contingencies
Spin-Off of CFC
On December 2, 1996, CNF completed the spin-off of Consolidated Freightways
Corporation ("CFC") to CNF's shareholders. CFC was, at the time of the spin-
off, and remains a party to certain multiemployer pension plans covering some
of its current and former employees. The cessation of its U.S. operations in
2002 will result in CFC's "complete withdrawal" (within the meaning of
applicable federal law) from these multiemployer plans, at which point it
will become obligated, under federal law, to pay its share of any unfunded
vested benefits under those plans.
It is possible that the trustees of CFC's multiemployer pension plans may
assert claims that CNF is liable for amounts owing to the plans as a result
of CFC's withdrawal from those plans and, if so, there can be no assurance
that those claims would not be material. CNF has received requests for
information regarding the spin-off of CFC from representatives from some of
the pension funds, and, in accordance with federal law, CNF has responded to
those requests.
Based on advice of legal counsel and its knowledge of the facts, CNF believes
that it would ultimately prevail if any such claims were made, although there
can be no assurance in this regard. CNF believes that the amount of those
claims, if asserted, could be material, and a judgment against CNF for all or
a significant part of these claims could have a material adverse effect on
CNF's financial condition, cash flow and results of operations.
Prior to the enactment in April 2004 of the Pension Funding Equity Act of
2004, if the multiemployer funds had asserted such claims against CNF, CNF
would have had a statutory obligation to make cash payments to the funds
prior to any arbitral or judicial decisions on the funds' determinations.
Under the facts related to the CFC withdrawals and the law in effect after
enactment of the Pension Funding Equity Act of 2004, CNF would no longer be
required to make such payments to the multiemployer funds unless and until
final decisions in arbitration proceedings, or in court, upheld the funds'
determinations.
As a result of the matters discussed above, CNF can provide no assurance that
matters relating to the spin-off of CFC and CFC's bankruptcy will not have a
material adverse effect on CNF's financial condition, cash flows or results
of operations.
- 17 -
Other
CNF is a defendant in various lawsuits incidental to its businesses. It is
the opinion of management that the ultimate outcome of these actions will not
have a material impact on CNF's financial condition, cash flows, or results
of operations.
- 18 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
Management's Discussion and Analysis of Financial Condition and Results of
Operations (referred to as "Management's Discussion and Analysis") is
intended to assist in the understanding and assessment of the principal
factors affecting the results of operations, liquidity and capital resources,
as well as the critical accounting policies of CNF and its subsidiaries.
This discussion and analysis should be read in conjunction with the
information included in CNF's 2003 Annual Report on Form 10-K.
CNF provides supply chain management services for commercial and industrial
shipments by land, air and sea throughout the world. CNF's principal
businesses consist of Con-Way and the Menlo Worldwide group of businesses.
However, for financial reporting purposes, CNF is divided into four reporting
segments. The operating results of Con-Way, primarily a provider of regional
less-than-truckload ("LTL") freight services, are reported as one reporting
segment while Menlo Worldwide is divided into two reporting segments:
Logistics, a provider of integrated contract logistics solutions; and Menlo
Worldwide Other, which consists of Vector, a joint venture with General
Motors ("GM") that serves as the lead logistics manager for GM. Also,
certain corporate activities and the results of Road Systems, a trailer
manufacturer, are reported in the separate CNF Other reporting segment.
CNF's operating results are generally expected to depend on the number and
weight of shipments transported, the prices received on those shipments, and
the mix of services provided to customers, as well as the fixed and variable
costs incurred by CNF in providing the services and the ability to manage
those costs under changing shipment levels. Con-Way primarily transports
shipments through freight service center networks while Logistics and Vector
manage the logistics functions of their customers and primarily utilize
third-party transportation providers for the movement of customer shipments.
In the third quarter of 2004, CNF committed to sell Menlo Worldwide
Forwarding, Inc. and its subsidiaries and Menlo Worldwide Expedite!, Inc.
(hereinafter collectively referred to as "MWF"). Accordingly, MWF is
classified as held for sale and, for all periods presented, the results of
operations, net assets, and cash flows of the Menlo Worldwide Forwarding
("Forwarding") segment have been segregated and reported as discontinued
operations, as required by SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." As more fully discussed below under "
Results of Operations Discontinued Operations," CNF announced on October 5,
2004 that it reached an agreement to sell MWF to United Parcel Service of
America, Inc. ("UPS") for $150 million, and the assumption of $110 million of
debt. Subject to customary regulatory approvals, CNF expects the sale to
close during the fourth quarter of 2004.
RESULTS OF OPERATIONS
OVERVIEW
CNF's net income from continuing operations (after preferred stock dividends)
in the third quarter of 2004 was $39.8 million ($0.72 per diluted share), a
13.5% increase over last year's third quarter. In the first nine months of
2004, net income from continuing operations rose 30.0% to $101.1 million
($1.83 per diluted share). CNF reported net losses applicable to common
shareholders in the third quarter and the first nine months of 2004, as
improved results from continuing operations were offset by losses from
discontinued operations, including a $260.5 million impairment charge in the
third quarter to write down the recorded book value of MWF to its anticipated
selling price, less costs to sell. Net income from continuing operations in
the third quarter and first nine months of 2004 improved over the same
periods last year due primarily to significantly higher operating income from
Con-Way, partially offset by lower operating income from Menlo Worldwide and
an increase in other net non-operating expenses.
- 19 -
The following table compares operating results (dollars in thousands, except
per share amounts):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenues $ 973,619 $ 837,361 $2,744,921 $2,396,520
Operating Income 78,435 68,311 205,162 159,653
Net Income (Loss)
Continuing Operations (1) 39,839 35,106 101,059 77,731
Discontinued Operations (256,046) (10,315) (257,376) (20,711)
------------ ------------ ------------ ------------
Applicable to Common
Shareholders $ (216,207) $ 24,791 $ (156,317) $ 57,020
Diluted Earnings (Loss) per
Share
Continuing Operations (1) $ 0.72 $ 0.64 $ 1.83 $ 1.44
Discontinued Operations (4.62) (0.18) (4.55) (0.36)
------------ ------------ ------------ ------------
Applicable to Common
Shareholders $ (3.90) $ 0.46 $ (2.72) $ 1.08
(1) After preferred stock dividends
CONTINUING OPERATIONS
CNF's revenue for the third quarter and first nine months of 2004 increased
16.3% and 14.5%, respectively, from the same periods last year, due to higher
revenue at all reporting segments, which benefited from improved economic
conditions. Operating income in 2004 rose 14.8% in the third quarter and
grew 28.5% in the first nine months, as significantly higher operating income
at Con-Way was partially offset by lower operating income at Menlo Worldwide.
The increase in Con-Way's operating income was due principally to the effect
of operating leverage on revenue growth. Con-Way's operating income in the
third quarter and first nine months of 2004 increased 31.0% and 40.6%,
respectively, on revenue growth of 19.2% and 18.4%, respectively. For the
periods presented, the Menlo Worldwide companies reported lower operating
income in 2004 due primarily to a decline in operating income from Vector,
and to a lesser degree, Logistics. Vector's third-quarter operating income
in 2004 fell $6.1 million to $2.7 million, while operating income in the
first nine months of 2004 declined $7.3 million to $8.1 million. Vector's
operating income in 2004 reflects the recognition of compensation in
accordance with agreements amended effective in the third quarter of 2003.
Except for the third quarter of 2003, which includes $3.5 million of
operating income from the transition to recognizing compensation under the
amended agreements, Vector's operating income in the prior year was
determined under the compensation principles of the original Vector
agreements, as more fully discussed under "Menlo Worldwide Other." In 2004,
Logistics reported an 11.0% decline in third-quarter operating income, and,
in the first nine months of the year, reported a 1.2% decrease in operating
income. Operating income from continuing operations, as presented in the
accompanying financial statements, includes CNF corporate expenses previously
allocated to the discontinued Forwarding segment, as more fully discussed
below under "Discontinued Operations."
Other net expense increased $2.3 million in the third quarter of 2004 and
$7.3 million in the first nine months of 2004 due primarily to increases in
interest expense, partially offset by higher interest income on cash-
equivalent investments and, for the nine-month period, an increase in other
net miscellaneous non-operating expenses. Interest expense in the third
quarter and first nine months of 2004 rose $3.8 million and $6.4 million,
respectively, due largely to the net effect of financing transactions,
including the issuance in May 2004 of 6.7% Senior Debentures and the
redemption in June 2004 of 5% Convertible Debentures, as more fully
discussed, in Note 7, "Debt" of Item 1, "Financial Statements." Other net
miscellaneous non-operating expenses in the third quarter of 2004 reflects a
$0.6 million decline in the fair value of corporate-owned life insurance
("COLI") policies that were terminated in the quarter, a $0.8 million decline
in foreign exchange gain, and a $0.7 million decline in the fair value of
freestanding interest rate swap derivatives, substantially offset by $1.5
million of third-quarter equity venture losses in the prior year. The nine-
month period in 2004 reflects $2.7 million of costs associated with the
redemption of the Convertible Debentures, a $2.1 million decline in COLI
value, a $1.3 million decline in foreign currency gain, and a $0.9 million
decline from interest rate swaps, partially offset by prior-year equity
venture losses of $3.7 million.
- 20 -
Con-Way Transportation Services Segment
The following table compares operating results (dollars in thousands),
operating margins, and the percentage increase in selected operating
statistics of the Con-Way reporting segment:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Summary of Operating Results
Revenues $ 684,775 $ 574,608 $1,936,224 $1,635,183
Operating Income 70,607 53,909 181,702 129,213
Operating Margin 10.3% 9.4% 9.4% 7.9%
2004 vs. 2003 2004 vs. 2003
------------- -------------
Selected Regional-Carrier
Operating Statistics
Revenue per day +17.8% +16.1%
Yield +3.5 +2.3
Weight per day:
Less-than-truckload +11.4 +11.8
Total +13.8 +13.5
Con-Way's revenue in the third quarter and first nine months of 2004 rose
19.2% and 18.4%, respectively, from the same periods in 2003 due to higher
revenue from Con-Way's regional carriers and continued growth from Con-Way's
asset-light businesses, which include Con-Way NOW, Con-Way Logistics, and
Con-Way Air Express. Revenue per day from the regional carriers in the third
quarter of 2004 rose 17.8% from the third quarter of 2003 on a 13.8% increase
in weight per day ("weight") and a 3.5% increase in revenue per hundredweight
("yield"). For the first nine months of 2004, revenue per day from the
regional carriers rose 16.1% from the same period last year on a 13.5%
increase in weight and a 2.3% increase in yield. Weight improvement in the
third quarter and first nine months of 2004 was due primarily to
comparatively better economic conditions in the U.S., and to a lesser extent,
continued consolidation of the LTL industry. Yield in the third quarter and
first nine months of 2004 reflects an increase in fuel surcharges, continued
growth in higher-rated interregional joint services, and higher rates.
Excluding fuel surcharges, yield in 2004 increased 0.1% and 0.4% from the
third quarter and first nine months of 2003, respectively. Yields in 2004
were adversely affected by a 5.2% and 4.2% increase in weight per shipment in
the third quarter and first nine months, respectively. Rates typically
decline when weight per shipment increases, as freight with a higher weight
per shipment typically has a lower transportation cost per unit of weight. In
the third quarter and first nine months of 2004, Con-Way's asset-light
businesses increased revenue by 37.1% and 59.9%, respectively, from the same
periods in 2003.
Con-Way's operating income in the third quarter and first nine months of 2004
increased 31.0% and 40.6%, respectively, due primarily to higher revenue from
the regional carriers, as well as revenue growth from Con-Way's asset-light
businesses, which reduced their collective net operating loss in the third
quarter and first nine months of 2004 by $1.5 million and $7.0 million,
respectively, over the same periods in 2003. The improvement in Con-Way's
operating margin in the third quarter and first nine months of 2004 reflects
operating leverage, as Con-Way's regional carrier service center network
accommodated additional shipments with proportionally smaller cost increases.
Operating income in the third quarter and first nine months of 2004 was
affected by employee costs, which rose 16.2% and 15.3%, respectively, due
primarily to increases in employee payroll and benefits. Employee payroll
grew 17.3% and 17.5% in the third quarter and first nine months of 2004,
respectively, due largely to increases in employee headcount and variable
compensation. Employee benefits expense in the same comparative periods
rose 14.2% and 10.5%, respectively, which reflects higher workers'
compensation costs, which increased due in part to increases in the unit cost
and volume of claims. As more fully discussed in Item 4, "Controls and
Procedures," workers' compensation costs in 2004 also include a third-quarter
entry to correct the cumulative under-recognition of expense on certain
prior-period claims, which had a $3.9 million adverse effect, net of
incentive compensation. Higher employee benefits expense in the first nine
months of 2004 was also due in part to an increase in payroll taxes and other
employee benefits. Certain corporate expenses previously allocated to the
discontinued Forwarding segment are reported in continuing operations, as
more fully discussed in Note 2 of Item 1, "Financial Statements." The
additional corporate overhead charge allocated to the Con-Way reporting
segment was $2.4 million and $2.7 million in the third quarter of 2004 and
2003, respectively, and was $9.6 million and $8.1 million in the first nine
months of 2004 and 2003, respectively.
- 21 -
In June 2004, Con-Way announced the formation of a new operating company,
Con-Way Truckload ("CTL"), that is scheduled to begin operations in the first
quarter of 2005. The new company will serve Con-Way's three regional LTL
carriers by providing linehaul service on full loads of LTL shipments moving
in transcontinental lanes and eventually offer the services to other
customers. The formation of CTL is expected to allow Con-Way to reduce
linehaul expense, and protect service with inter-company operations that
operate in tandem with current truckload vendors. CTL will utilize Con-Way's
existing infrastructure and administrative support services to minimize the
required investment. Con-Way's management expects the new company will allow
Con-Way to build a potential truckload revenue base by providing truckload
services to its customers, and does not expect that the new operation will
have a material effect on CNF's financial condition, results of operations or
cash flows as of and for the year ending December 31, 2004.
Menlo Worldwide
For financial reporting purposes, the Menlo Worldwide group is divided into
two reporting segments: Logistics and Menlo Worldwide Other. Vector SCM, a
joint venture with GM, is reported in the Menlo Worldwide Other segment as an
equity-method investment. In 2004, the Menlo Worldwide group of businesses
reported third-quarter operating income of $8.5 million and in the first nine
months of the year, reported operating income of $25.9 million.
Logistics Segment
The following table compares operating results (dollars in thousands) and
operating margins of the Logistics reporting segment:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Summary of Operating Results
Revenues $ 286,847 $ 262,663 $ 805,494 $ 761,212
Operating Income 5,764 6,477 17,794 18,004
Operating Margin 2.0% 2.5% 2.2% 2.4%
Logistics' revenue in the third quarter and first nine months of 2004
increased 9.2% and 5.8%, respectively, from the same periods in 2003, due
principally to increases in warehouse management services and carrier
management services, partially offset by lower revenue from contract carriage
services. Revenue from carrier management services in the third quarter and
first nine months of 2004 increased despite the loss of a significant
customer in the fourth quarter of 2003, a division of a large company that
terminated the logistics outsourcing arrangements at many of its divisions.
The customer accounted for 7.2% and 7.7% of Logistics' revenue in the third
quarter and first nine months of 2003, respectively, but was among Logistics'
lowest-margin accounts. Logistics' operating income in the third quarter and
first nine months of 2004 decreased 11.0% and 1.2%, respectively, reflecting
a reduction in margin on carrier management services due to the competitive
transportation pricing environment, the renegotiation of certain contracts
with existing customers, and a decrease in margins during the start-up phase
of new contracts. Certain corporate expenses previously allocated to the
discontinued Forwarding segment are reported in continuing operations, as
more fully discussed in Note 2 of Item 1, "Financial Statements." The
additional corporate overhead charge allocated to the Logistics reporting
segment was $0.4 million in the third quarter of both 2004 and 2003 and was
$1.4 million and $1.2 million in the first nine months of 2004 and 2003,
respectively.
Logistics' carrier-management revenue is attributable to contracts for which
Logistics manages the transportation of freight but subcontracts the actual
transportation and delivery of products to third parties, which Logistics
refers to as purchased transportation. Logistics' net revenue (revenue less
purchased transportation) in the third quarter of 2004 and 2003 was $79.4
million and $76.4 million, respectively. Logistics' net revenue in the first
nine months of 2004 and 2003 was $232.1 million and $226.9 million,
respectively.
Menlo Worldwide Other Segment
The Menlo Worldwide Other reporting segment consists of the results of
Vector, a joint venture formed with GM in December 2000 for the purpose of
providing logistics management services on a global basis for GM, and
ultimately for customers in addition to GM. Operating income reported by the
Menlo Worldwide Other segment in the third quarter of 2004 fell $6.1 million
to $2.7 million, while operating income in the first nine months of 2004
declined $7.3 million to $8.1 million. Vector's operating income in 2004
reflects the recognition of compensation in accordance with agreements
- 22 -
amended effective in the third quarter of 2003, as described below. Except
for the third quarter of 2003, which includes $3.5 million of operating
income from the transition to recognizing compensation under the amended
agreements, Vector's operating income in the prior year was determined under
the compensation principles of the original Vector agreements.
Prior to the amendments described below, agreements pertaining to Vector
(collectively, "Vector Agreements") provided that Vector would be compensated
by sharing in efficiency gains and cost savings achieved through the
implementation of Approved Business Cases ("ABCs") and other special projects
in GM's North America region and GM's three international regions. An ABC is
a project, developed with and approved by GM, aimed at reducing costs,
assuming operational responsibilities, and/or achieving operational changes.
In August 2003, the Vector Agreements were amended, primarily to expedite the
transition of logistics management services in the North America region from
GM to Vector. The amendments changed the compensation principles for GM's
North American logistics operations, revised the allocation of Vector's
profit between GM and Menlo Worldwide, LLC ("MW"), and modified the formula
for the valuation of Vector in the event that MW exercises its Put Right, as
described below.
The amendments to the Vector Agreements provide for Vector to be compensated
for its management of logistics for all of GM's North America operations
rather than through its sharing in efficiency gains and cost savings under
individual and separately approved ABCs in North America. In each year of a
five-year period retroactive to January 1, 2003, Vector will be compensated
with a management fee based on shipment volumes and can earn additional
compensation if certain performance criteria are achieved. In accordance
with GAAP, compensation under the volume-based management fee will be
recognized as vehicles are shipped while performance-based compensation will
not be recognized until specified levels of cost savings are achieved, which
will generally not be determinable until the fourth quarter of each contract
year. Vector will also be compensated by GM for its direct and
administrative costs in North America, subject to certain limitations.
The amended Vector Agreements also increase MW's allocation of profit and
loss from 80% to 85%. Although MW owns a majority equity interest, the
operating results of Vector are reported as an equity-method investment based
on GM's ability to control certain operating decisions.
Under the Vector Agreements, GM has the right to purchase MW's membership
interest in Vector ("Call Right") and MW has the right to require GM to
purchase MW's membership interest in Vector ("Put Right"). The Call Right
and Put Right are exercisable at the sole discretion of GM and MW,
respectively. Under the amended Vector Agreements, the amount payable by GM
to MW under the Put Right is based on a mutually agreed-upon estimated value
for MW's membership interest as of the contract amendment date and will
decline on a straight-line basis over an 8-year period beginning January 1,
2004. Exercise of MW's Put Right or GM's Call Right would result in MW
retaining commercialization contracts involving customers other than GM.
In each successive year covered by the amended Vector agreements, management
anticipates that performance-based compensation will represent a growing
percentage of compensation earned in GM's North America region. Management
believes that Vector's long-term profitability growth depends on its ability
to grow compensation earned from commercialization activities and from GM's
international regions and aftermarket parts-supply operations, which are
unaffected by the amended Vector Agreements.
CNF Other Segment
The CNF Other segment consists of the results of Road Systems and certain
corporate activities. A majority of the revenue from Road Systems was from
sales to Con-Way. The CNF Other third-quarter operating loss decreased to
$0.6 million in 2004 from $0.9 million in 2003, while the $2.4 million
operating loss in the first nine months of 2004 decreased from $2.9 million
in 2003. Operating results for the CNF Other segment were affected by the
sales of corporate properties, which resulted in a $0.7 million first-quarter
net loss in 2004 and a $1.1 million second-quarter net loss in 2003.
DISCONTINUED OPERATIONS
Income (Loss) from Discontinued Operations
In the process of evaluating several strategic alternatives for Menlo
Worldwide's Forwarding segment, CNF was approached by UPS in the third
quarter of 2004 with interest in acquiring MWF. Decisions by CNF's
management and its Board of Directors and the third-quarter sale negotiations
with UPS established CNF's commitment to sell MWF as of September 30, 2004.
- 23 -
Accordingly, CNF classified MWF as held for sale and reported the Forwarding
segment as discontinued operations. In the third quarter of 2004, CNF
recognized a $260.5 million impairment charge to write down the recorded book
value of MWF to its anticipated selling price, less costs to sell, as
required by SFAS 144, "Accounting for the Impairment or Disposal of Long-
Lived Assets."
The impairment charge is based on the current agreement to sell MWF, as
described below under "Stock Sale Agreement with UPS," and primarily
represents the estimated write-down to the carrying value of MWF's goodwill
and long-lived assets, including MWF's accumulated foreign currency
translation adjustment, as well as estimated selling costs. CNF agreed to
accept less than the recorded book value of MWF due primarily to management's
current assessment of the risk and resource requirements associated with
other strategic alternatives related to MWF's operations. The impairment
charge is a deductible capital loss for tax purposes. However, since CNF
does not currently forecast any significant taxable capital gains in the tax
carry-forward period, it does not currently expect to recognize a tax
deduction for the capital loss. As a result, no tax benefit was recorded on
the impairment charge.
For all periods presented, the results of operations, net assets, and cash
flows of the Forwarding segment have been segregated and classified as
discontinued operations. The operating results for discontinued operations
are summarized in Note 2, "Discontinued Operations" of Item 1, "Financial
Statements."
Stock Sale Agreement with UPS
On October 5, 2004, CNF and Menlo Worldwide entered into a stock purchase
agreement with United Parcel Service of America, Inc. and United Parcel
Service, Inc. to acquire all of the issued and outstanding capital stock of
MWF. The agreement excludes certain assets and liabilities of MWF and
includes certain assets and liabilities of CNF or its subsidiaries related to
the business as presently conducted by Menlo Worldwide Forwarding. Among the
assets and liabilities so excluded are those related to EWA, as described
below, and the obligation related to MWF employees covered under CNF's
domestic pension, postretirement medical and long-term disability plans.
Under the agreement, CNF will be reimbursed for the actuarially determined
estimate of its obligation related to MWF employees covered under CNF's
postretirement medical plan. CNF will receive cash consideration of $150
million that is subject to certain adjustments, including adjustments for
cash held by MWF at closing and MWF's net working capital as of closing. In
addition, UPS will assume indebtedness associated with the MWF business,
including approximately $110 million of debt owed by MWF in connection with
the City of Dayton, Ohio, Special Facilities Revenue Refunding Bonds, certain
capital leases and other debt, other letters of credit, and overdraft
facilities. CNF will indemnify UPS against certain losses that UPS may incur
after the closing of the sale with certain limitations. Any losses related
to these indemnification obligations or any other costs, including any future
cash expenditures, related to the sale cannot be estimated at this time and
will be disclosed in the future and recognized in future periods when and if
incurred. Subject to customary conditions, including receipt of government
regulatory approvals and consents, CNF expects the sale to close during the
fourth quarter of 2004. For additional details, refer to the stock sale
agreement filed as an exhibit to CNF's Form 8-K dated October 5, 2004.
Assets and Liabilities of Discontinued Operations
The assets and liabilities of the Forwarding segment are presented in the
Consolidated Balance Sheets under the captions "Assets (or Liabilities) of
Discontinued Operations," and described in more detail in Note 2 of Item 1,
"Financial Statements." As described above, the sale agreement with UPS
excludes certain assets and liabilities of MWF, including but not limited to
cash balances, as well as the assets and liabilities of EWA, including the
restructuring reserves discussed below.
In connection with the cessation of its air carrier operations in 2001, EWA
terminated the employment of all of its pilots and crew members. Those
pilots and crew members are represented by the Air Line Pilots Association
("ALPA") union under a collective bargaining agreement. Subsequently, ALPA
filed a grievance on behalf of the pilots and crew members protesting the
cessation of EWA's air carrier operations and MWF's use of other air
carriers. The ALPA matters are the subject of litigation in U.S. District
Court and, depending on the outcome of that litigation, may be subject to
binding arbitration. Based on CNF's current evaluation, management believes
that it has provided for its estimated exposure related to the ALPA matters.
However, there can be no assurance in this regard as CNF cannot predict with
certainty the ultimate outcome of these matters.
Reserves related to the 2001 restructuring plan decreased to $34.1 million at
September 30, 2004 from $34.8 million at December 31, 2003, primarily due to
payments of restructuring-related obligations, partially offset by proceeds
from sales of aircraft equipment. Restructuring reserves at September 30,
2004 consisted primarily of CNF's estimated exposure related to the labor
matters described above, as well as other estimated remaining restructuring-
related obligations.
- 24 -
LIQUIDITY AND CAPITAL RESOURCES
In the first nine months of 2004, cash and cash equivalents rose to $639.1
million at September 30, 2004, as $309.7 million provided by operating
activities and $149.6 million provided by financing activities significantly
exceeded $114.3 million used in investing activities. The excess cash flow
from operating and financing activities increased cash and cash equivalents
by $345.1 million. Cash provided by financing activities primarily reflects
net proceeds of $292.6 million received from the issuance of $300 million of
Senior Debentures in May 2004, partially offset by the redemption in June
2004 of $128.9 million of Convertible Debentures, as more fully discussed
below and in Note 7, "Debt" of Item 1, "Financial Statements." CNF's cash
flows are summarized in the table below.
Nine Months Ended
(Dollars in thousands) September 30,
-------------------------
2004 2003
------------ ------------
Operating Activities
Net income (loss) $ (150,198) $ 63,145
Discontinued operations 257,376 20,711
Non-cash adjustments (1) 104,186 92,968
------------ ------------
211,364 176,824
Changes in assets and liabilities
Receivables (58,512) (19,113)
Accounts payable and accrued liabilities,
excluding accrued incentive compensation 50,953 11,073
Accrued incentive compensation 54,322 (21,137)
Income taxes 30,974 52,515
Employee benefits (36,610) (20,057)
Deferred charges and credits 71,561 24,653
Other (14,335) (16,909)
------------ ------------
98,353 11,025
Net Cash Provided by Operating Activities 309,717 187,849
------------ ------------
Net Cash Used in Investing Activities (114,277) (83,373)
------------ ------------
Net Cash Provided by (Used in) Financing
Activities 149,648 (32,353)
------------ ------------
Net Cash Provided by Continuing Operations 345,088 72,123
Net Cash Used in Discontinued Operations (4,652) (9,604)
------------ ------------
Increase in Cash and Cash Equivalents $ 340,436 $ 62,519
============ ============
(1) "Non-cash adjustments" refer to depreciation, amortization, deferred
income taxes, provision for uncollectible accounts, equity in earnings of joint
venture, and non-cash gains and losses.
CONTINUING OPERATIONS
Cash flow from operations in the first nine months of 2004 was $309.7 million
compared to $187.8 million in 2003. In the first nine months of 2004, an
increase in receivables used $58.5 million while the collective increase in
accounts payable and accrued liabilities (excluding accrued incentive
compensation) provided $51.0 million. Accrued incentive compensation
increased by $54.3 million in the first nine months of 2004, while the same
period of the prior year reflects a $21.1 million reduction. Changes in
accrued incentive compensation reflect CNF's payment schedule for its
employee incentive plans, under which total incentive compensation earned in
an award year is paid to employees with a partial payment in December of the
award year and a final payment in February of the next award year. In the
first nine months of 2004, incentive compensation expense accruals exceeded
payments, while in the first nine months of last year, payments for incentive
compensation exceeded expense accruals. Changes in employee benefits in the
first nine months of 2004 and 2003 reflect the net effect of defined benefit
pension plan funding contributions of $90.8 million and $75.0 million,
respectively, as described below under "-Defined Benefit Pension Plans,"
partially offset by expense accruals for CNF's defined benefit plan
obligation.
In June and July of 2004, CNF fully liquidated its corporate-owned life
insurance policies based on the volatility and insufficiency of returns on
the investments. Prior to the liquidation, the cash-surrender value of the
policies was reported in Other Assets in CNF's Consolidated Balance Sheets.
The $54.5 million of cash payments for settlement of the investments were
received by CNF in the third quarter of 2004 and are reflected in the change
in deferred charges and credits in CNF's Consolidated Statement of Cash Flows
for the nine months ended September 30, 2004.
Investing activities in the first nine months of 2004 used $114.3 million, an
increase from $83.4 million used in the first nine months of last year, due
primarily to a net increase in capital expenditures of $32.6 million,
including an increase of $37.1 million at Con-Way, partially offset by
reductions at the Logistics and the Menlo Worldwide Other segments. In the
first nine months of last year, Con-Way invested $69.0 million, primarily for
revenue equipment. In 2004, CNF anticipates total capital and software
expenditures of approximately $200 million. The remaining planned capital
expenditures for 2004 primarily include approximately $65 million for the
acquisition of additional tractor and trailer equipment at Con-Way to
accommodate the increase in business levels.
Financing activities in the first nine months of 2004 provided cash of $149.6
million compared to cash used of $32.4 million in 2003. In April 2004, CNF
issued $300 million of 6.70% Senior Debentures due 2034 in a private
placement with exchange rights for net proceeds of $292.6 million. CNF used
a portion of the proceeds to redeem $128.9 million of CNF's Convertible
Debentures on June 1, 2004, as more fully discussed in Note 7, "Debt," of
Item 1, "Financial Statements." CNF expects the remaining portion of the
proceeds from issuance of the Senior Debentures to pay from time to time or
at maturity its $100 million of 7.35% Notes due in June 2005, and for working
capital and general corporate purposes. Financing activities in the first
nine months of 2004 and 2003 also reflect dividend payments and scheduled
principal payments for the Thrift and Stock Plan notes guaranteed by CNF.
CNF has a $385 million revolving credit facility that matures on July 3,
2006. The revolving credit facility is available for cash borrowings and for
the issuance of letters of credit up to $385 million. At September 30, 2004,
no borrowings were outstanding under the facility and $201.2 million of
letters of credit were outstanding, leaving $183.8 million of available
capacity for additional letters of credit or cash borrowings, subject to
compliance with financial covenants and other customary conditions to
borrowing. CNF had other uncommitted unsecured credit facilities totaling
$142.3 million at September 30, 2004, which are available to support letters
of credit, bank guarantees, and overdraft facilities; at that date, a total
of $105.8 million was outstanding under these facilities. Of the total
letters of credit outstanding at September 30, 2004, $230.7 million provided
collateral for CNF workers' compensation and vehicular self-insurance
programs.
As more fully discussed above under "Results of Operations - Discontinued
Operations," CNF recognized a $260.5 million charge to write down the
recorded book value of MWF to its estimated selling price, less costs to
sell. To remain in compliance with certain financial covenants, CNF obtained
an amendment to the credit agreement for CNF's $385 million revolving credit
facility. Additionally, the credit agreement contains restrictions on the
sale of subsidiary guarantors and a threshold for the sale of assets. CNF
has obtained the necessary creditors' consent for the sale of MWF. See
"Other Matters - Forward-Looking Statements" below, and Note 6, "Debt and
Other Financing Arrangements," in Item 8, "Financial Statements and
Supplementary Data," of CNF's 2003 Annual Report on Form 10-K for additional
information concerning CNF's $385 million credit facility and some of its
other debt instruments.
Defined Benefit Pension Plans
CNF periodically reviews the funding status of its defined benefit pension
plans for non-contractual employees, and makes contributions from time to
time as necessary in order to comply with the funding requirements of the
Employee Retirement Income Security Act ("ERISA"). Funding of CNF's defined
benefit pensions is based on ERISA-defined measurements rather than the
recognition and measurement criteria prescribed by accounting principles
generally accepted in the United States ("GAAP").
CNF has contributed $90.8 million to its defined benefit pension plans in
2004, consisting of $40.2 million paid in the second quarter and $50.6
million of payments in the third quarter. No further funding payments are
expected for the remainder of 2004. CNF also made defined benefit pension
plan contributions of $75.0 million in 2003, $76.2 million in 2002 and $13.1
million in 2001, but made no contributions from 1996 through 2000, due in
- 26 -
part to the high rate of return realized on plan assets and for the lack of
tax deductibility of funding during that period. There can be no assurance
that CNF will not be required to make further cash contributions, which could
be substantial, to its defined benefit pension plans in the future.
Contractual Cash Obligations
CNF's contractual cash obligations as of December 31, 2003 are summarized in
CNF's 2003 Annual Report on Form 10-K under Item 7, "Management's Discussion
and Analysis - Liquidity and Capital Resources - Contractual Cash
Obligations." In the first nine months of 2004, there have been no material
changes in the contractual cash obligations for CNF's continuing operations
outside the ordinary course of business, except for CNF's issuance of the
Senior Debentures in April 2004 and the redemption of its Convertible
Debentures in June 2004. These financing transactions, as well as the effect
of CNF's adoption of FIN 46R, are more fully discussed above and in Note 7,
"Debt," of Item 1, "Financial Statements."
The table below summarizes contractual cash obligations for CNF's continuing
operations as of September 30, 2004.
(Dollars in
thousands) Payments Due by Period
--------------------------------------------------
Remainder 2010 &
Total of 2004 2005 2006-2007 2008-2009 Thereafter
--------- --------- --------- ---------- --------- ----------
Long-Term
Debt and
Guarantees $ 691,809 $ 7 $ 112,730 $ 33,668 $ 45,404 $ 500,000
Operating
Leases 136,215 15,320 51,908 45,421 15,707 7,859
--------- --------- --------- ---------- --------- ----------
Total $ 828,024 $ 15,327 $ 164,638 $ 79,089 $ 61,111 $ 507,859
========= ========= ========= ========== ========= ==========
As presented above, contractual obligations on long-term debt and guarantees
represent principal payments while contractual obligations for operating
leases represent the payments under the lease arrangements. These
contractual cash obligations are reflected in the Consolidated Balance
Sheets, except for operating leases, which are disclosed as future
obligations under GAAP.
Other
CNF's debt-to-capital ratio increased to 50.8% at September 30, 2004 from
41.0% at December 31, 2003 due primarily to the net effect of the second-
quarter financing transactions described above and to the decline in retained
earnings resulting from the third quarter write-down of the recorded book
value of MWF, as discussed below and under "Management's Discussion and
Analysis-Discontinued Operations."
DISCONTINUED OPERATIONS
Sale Agreement with UPS
On October 5, 2004, CNF announced that it had reached an agreement to sell
MWF to UPS for $150 million in cash, which amount is subject to adjustment
for cash held by MWF at closing and the net capital of MWF as of closing. As
part of the sale agreement, UPS will assume approximately $110 million of
debt owed by MWF. This sale is subject to regulatory approvals and is
expected to close during the fourth quarter of 2004.
Spin-Off of CFC
On December 2, 1996, CNF completed the spin-off of Consolidated Freightways
Corporation ("CFC") to CNF's shareholders. CFC withdrew in 2002 from certain
multiemployer pension funds, thereby incurring withdrawal liabilities to such
funds. Prior to enactment in April 2004 of the Pension Funding Equity Act of
2004, if the multiemployer funds had asserted claims against CNF for such
liabilities, CNF would have had a statutory obligation to make cash payments
to the funds prior to any arbitral or judicial decisions on the funds'
determinations. Under the facts relating to the CFC withdrawals and the law
in effect after enactment of the Pension Funding Equity Act of 2004, CNF
would no longer be required to make such payments to the multiemployer funds
unless and until final decisions in arbitration proceedings, or in court,
upheld the funds' determination. Refer to Note 8, "Commitments and
Contingencies," of Item 1, "Financial Statements."
- 27 -
OTHER MATTERS
ESTIMATES AND CRITICAL ACCOUNTING POLICIES
CNF makes estimates and assumptions when preparing its financial statements
in conformity with accounting principles generally accepted in the United
States. These estimates and assumptions affect the amounts reported in the
accompanying financial statements and notes thereto. Actual results could
differ from those estimates. CNF's most critical accounting policies upon
which management bases estimates are described below.
Self-Insurance Reserves
CNF uses a combination of insurance and self-insurance programs to provide
for the potential liabilities for medical, casualty, liability, vehicular,
cargo and workers' compensation claims. Liabilities associated with the
risks that are retained by CNF are estimated, in part, by considering
historical claims experience, medical costs, demographic factors, severity
factors and other assumptions. The undiscounted estimated accruals for these
liabilities could be significantly affected if actual costs differ from these
assumptions and historical trends.
Income Taxes
In establishing its deferred income tax assets and liabilities, CNF makes
judgments and interpretations based on the enacted tax laws and published tax
guidance that are applicable to its operations. CNF records deferred tax
assets and liabilities and periodically evaluates the need for a valuation
allowance to reduce deferred tax assets to realizable amounts. The
likelihood of a material change in CNF's expected realization of these assets
is dependent on future taxable income, future capital gains, its ability to
use foreign tax credit carry forwards and carry backs, final U.S. and foreign
tax settlements, and the effectiveness of its tax planning strategies in the
various relevant jurisdictions. CNF is also subject to examination of its
income tax returns for multiple years by the IRS and other tax authorities.
CNF periodically assesses the likelihood of adverse outcomes resulting from
these examinations to determine the adequacy of its provision and related
accruals for income taxes.
Restructuring Reserves
Reserves related to EWA's 2001 restructuring plan were based on significant
estimates and assumptions made by management. Refer to "Results of
Operations-Discontinued Operations."
Uncollectible Accounts Receivable
CNF and its subsidiaries report accounts receivable at net realizable value
and provide an allowance for uncollectible accounts when collection is
considered doubtful. Con-Way provides for uncollectible accounts based on
various judgments and assumptions, including revenue levels, historical loss
experience, and composition of outstanding accounts receivable. Logistics,
based on the size and nature of its client base, performs a frequent and
periodic evaluation of its customers' creditworthiness and accounts
receivable portfolio and recognizes expense from uncollectible accounts when
losses are both probable and estimable.
Defined Benefit Pension Plans
CNF has defined benefit pension plans that cover non-contractual employees in
the United States. The amount recognized as pension expense and the accrued
pension liability depend upon a number of assumptions and factors, the most
significant being the discount rate used to measure the present value of
pension obligations, the assumed rate of return on plan assets, which are
both affected by economic conditions, market fluctuations, and rate of
compensation increase. CNF adjusts its discount rate periodically by taking
into account changes in high-quality corporate bond yields and the guidance
of its outside actuaries. CNF adjusts its assumed rate of return on plan
assets based on historic returns of the plan assets and current market
expectations.
CNF used a 6.75% discount rate for purposes of calculating its 2003 pension
expense, but used a 6.25% discount rate for calculating its 2003 year-end
pension liability and its 2004 pension expense, due primarily to declines in
high-quality corporate bond yields in 2003. By way of example, if all other
factors were held constant, a 0.5% decline in the discount rate would have an
- 28 -
estimated $6 million increase in 2004 annual pension expense. CNF used an
assumed rate of return on plan assets of 9.0% in 2003 and will assume the
same rate for 2004. Using year-end plan asset values, a 0.5% decline in the
assumed rate of return on plan assets would have an estimated $3 million
increase in 2004 annual pension expense.
The determination of CNF's accrued pension benefit cost includes an
unrecognized actuarial loss that results from the cumulative difference
between estimated and actual values for the year-end projected pension
benefit obligation and the fair value of plan assets. Under GAAP, any
portion of the unrecognized actuarial loss or gain that exceeds ten percent
of the greater of the projected benefit obligation or fair value of plan
assets must be amortized as an expense over the average service period for
employees, approximately thirteen years for CNF. Lower amortization of the
unrecognized actuarial loss decreases the annual pension expense in 2004 by
approximately $1 million from annual pension expense in 2003.
Goodwill and Other Long-Lived Assets
Consistent with SFAS 144, "Accounting for the Impairment or Disposal of Long-
Lived Assets," CNF performs an impairment analysis of long-lived assets
(other than goodwill or intangible assets) whenever circumstances indicate
that the carrying amount may not be recoverable. Under SFAS 142, "Goodwill
and Other Intangible Assets," CNF tests the recoverability of goodwill on an
annual basis in the fourth quarter and between annual tests in certain
circumstances. CNF utilized a third-party independent valuation consultant
to perform the impairment test of goodwill associated with the Forwarding
reporting segment as of December 31, 2003. Based on the annual impairment
test in the fourth quarter of 2003, which assumed improving cash flows, CNF
was not required to record a charge for goodwill impairment.
As more fully discussed above under "Results of Operations - Discontinued
Operations," CNF committed to sell MWF in the third quarter of 2004 and
recognized a $260.5 million impairment charge to write down the recorded book
value of MWF to its anticipated selling price, less costs to sell. The
impairment charge is based on a current agreement to sell MWF and represents
the estimated write-down to the carrying value of MWF's goodwill and long-
lived assets, including MWF's accumulated foreign currency translation
adjustment, as well as estimated selling costs. CNF agreed to accept less
than the recorded book value of MWF due primarily to management's current
assessment of the risk and resource requirements associated with other
strategic alternatives related to MWF's operations.
In assessing the recoverability of long-lived assets, CNF must make various
assumptions regarding estimated future cash flows and other factors in
determining the fair values of the respective assets. If these estimates or
their related assumptions change in the future, CNF may be required to record
impairment charges for long-lived assets in future periods. Any such
resulting impairment charges could have a material adverse effect on CNF's
financial condition or results of operations.
CYCLICALITY AND SEASONALITY
CNF's businesses operate in industries that are affected directly by general
economic conditions and seasonal fluctuations, 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 December, January and February usually
have the lowest business levels.
BUSINESS INTERRUPTION
CNF and its subsidiaries rely on CNF Service Company for the performance of
shared administrative and technology services in the conduct of their
businesses. CNF's centralized computer facilities and its administrative and
technology employees are located at the Administrative and Technology
("AdTech") Center in Portland, Oregon. Although CNF maintains backup systems
and has disaster recovery processes and procedures in place, a sustained
interruption in the operation of these facilities, whether due to terrorist
activities, earthquakes, floods or otherwise, could have a material adverse
effect on CNF's financial condition, cash flows, and results of operations.
HOMELAND SECURITY
CNF is subject to compliance with cargo security and transportation
regulations issued by the Transportation Security Administration and by the
Department of Homeland Security. CNF is not able to accurately predict how
new governmental regulation will affect the transportation industry.
However, CNF believes that any additional security measures that may be
required by future regulations could result in additional costs and could
have an adverse effect on its ability to serve customers and on its financial
condition, cash flows and results of operations.
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EMPLOYEES
Most of the workforce of CNF and its subsidiaries is not affiliated with
labor unions. Consequently, CNF believes that the operations of its
subsidiaries have significant advantages over comparable unionized
competitors (particularly in the trucking industry) in providing reliable and
cost-competitive customer services, including greater efficiency and
flexibility. There can be no assurance that CNF's subsidiaries will be able
to maintain their current advantages over certain of their competitors.
NEW ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities: an Interpretation of ARB No. 51" ("FIN 46"). FIN
46 requires that all special-purpose entities be designated as either a
voting-interest entity or a variable-interest entity ("VIE"). A VIE is an
entity for which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for
the VIE to finance its activities without additional subordinated financial
support from other parties. A VIE is required to be consolidated by its
primary beneficiary if it does not effectively disperse risks among parties
involved. The primary beneficiary of a VIE is the party that absorbs a
majority of the VIE's expected losses or receives a majority of its expected
residual returns.
The implementation of FIN 46 was required for periods beginning after June
15, 2003. However, in October 2003, the FASB deferred the effective date for
applying FIN 46 to VIEs created before February 1, 2003 until the end of the
first interim period ending after December 15, 2003. In December 2003, the
FASB revised FIN 46 ("FIN 46R") to incorporate certain revisions, including
the requirement to disregard certain rights in determining whether an entity
is the primary beneficiary in a VIE. Under FIN 46R, CNF was not the primary
beneficiary of CNF Trust 1 (the "Trust"), a wholly owned subsidiary, and CNF
was therefore required to deconsolidate the Trust effective in the quarter
ended March 31, 2004. Accordingly, CNF's 5% Convertible Debentures held by
the Trust, which were redeemed by CNF on June 1, 2004, were included in long-
term debt at March 31, 2004, and prior periods were restated to reflect
adoption of FIN 46R, as more fully discussed in Note 7, "Debt" of Item 1,
"Financial Statements."
FORWARD-LOOKING STATEMENTS
Certain statements included herein constitute "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, and are subject to a number of risks and uncertainties, and should
not be relied upon as predictions of future events. All statements other
than statements of historical fact are forward-looking statements, including
any projections of earnings, revenues, weight, yield, volumes, income or
other financial or operating items, any statements of the plans, strategies,
expectations or objectives of CNF or its management for future operations or
other future items, including the expected closing date of, and other
statements regarding the sale of MWF, any statements concerning proposed new
products or services, any statements regarding CNF's estimated future
contributions to pension plans, any statements as to the adequacy of
reserves, any statements regarding the outcome of any claims that may be
brought against CNF by CFC's multi-employer pension plans or any statements
regarding future economic conditions or performance, any statements regarding
the outcome of legal and other claims and proceedings against CNF; any
statements of estimates or belief and any statements or assumptions
underlying the foregoing.
Certain such forward-looking statements can be identified by the use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"should," "seeks," "approximately," "intends," "plans," "estimates" or
"anticipates" or the negative of those terms or other variations of those
terms or comparable terminology or by discussions of strategy, plans or
intentions. Such forward-looking statements are necessarily dependent on
assumptions, data and methods that may be incorrect or imprecise and there
can be no assurance that they will be realized. In that regard, the
following factors, among others and in addition to the matters discussed
elsewhere in this document and other reports and documents filed by CNF with
the Securities
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and Exchange Commission, could cause actual results and other matters to
differ materially from those discussed in such forward-looking statements:
* changes in general business and economic conditions, including the
global economy;
* the creditworthiness of CNF's customers and their ability to pay for
services rendered;
* increasing competition and pricing pressure;
* changes in fuel prices;
* the effects of the cessation of EWA's air carrier operations; the
possibility of additional unusual charges and other costs and expenses
relating to Forwarding's operations;
* the possibility that CNF may, from time to time, be required to record
impairment charges for long-lived assets;
* the possibility of defaults under CNF's $385 million credit agreement
and other debt instruments, including defaults resulting from additional
unusual charges or from any costs or expenses that CNF may incur, and
the possibility that CNF may be required to repay certain indebtedness
in the event that the ratings assigned to its long-term senior debt by
credit rating agencies are reduced;
* labor matters, including the grievance by furloughed pilots and crew
members, renegotiations of labor contracts, labor organizing activities,
work stoppages or strikes; enforcement of and changes in governmental
regulations, including the effects of new regulations issued by the
Department of Homeland Security;
* environmental and tax matters;
* the February 2000 crash of an EWA aircraft and related litigation;
* matters relating to CNF's 1996 spin-off of CFC, including the
possibility that CFC's multi-employer pension plans may assert claims
against CNF, that CNF may not prevail in those proceedings and may not
have the financial resources necessary to satisfy amounts payable to
those plans, and matters relating to CNF's defined benefit pension
plans;
* matters relating to the pending sale of MWF, including the resulting
disruption to normal business activities (including CNF's efforts to
timely comply with Section 404 of the Sarbanes-Oxley Act of 2002).
As a result of the foregoing, no assurance can be given as to future
financial condition, cash flows, or results of operations. See Note 8,
"Commitments and Contingencies" in Item 1, "Financial Statements."
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
CNF is exposed to a variety of market risks, including the effects of
interest rates, commodity prices, foreign currency exchange rates and credit
risk. CNF enters into derivative financial instruments only in circumstances
that warrant the hedge of an underlying asset, liability or future cash flow
against exposure to some form of interest rate, commodity or currency-related
risk. Additionally, the designated hedges should have high correlation to
the underlying exposure such that fluctuations in the value of the
derivatives offset reciprocal changes in the underlying exposure.
CNF held two freestanding interest rate swap derivatives at September 30,
2004 that were initially entered into as cash flow hedges to mitigate the
effects of interest rate volatility on floating-rate lease payments. In
connection with EWA's 2001 restructuring plan, hedge accounting was
discontinued for these interest rate swaps when EWA settled floating-rate
operating leases hedged with the interest rate swaps. At September 30, 2004,
CNF had not entered into any material derivative contracts to hedge exposure
to commodity prices or foreign currency.
CNF is subject to the effect of interest rate fluctuations in the fair value
of its long-term debt, as summarized in Item 8, "Financial Statements and
Supplementary Data," under Note 6, "Debt and Other Financing Arrangements,"
of CNF's 2003 Annual Report on Form 10-K. In April 2004, CNF issued $300
million of 6.70% Senior Debentures in a private placement with exchange
rights for net proceeds of $292.6 million. CNF used a portion of the
proceeds to redeem $128.9 million of CNF's Convertible Debentures on June 1,
2004, as more fully discussed in Note 7, "Debt" of Item 1, "Financial
Statements." Given a hypothetical 10% change in interest rates, the increase
in fair value of CNF's long-term debt and guarantees at September 30, 2004
would be approximately $36 million.
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ITEM 4. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures.
CNF's management, with the participation of CNF's Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of CNF's disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-
15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) as of the end of the period covered by this report. Based on such
evaluation, CNF's Chief Executive Officer and Chief Financial Officer have
concluded that, after giving effect to the changes discussed in paragraph (b)
below, CNF's disclosure controls and procedures are effective as of the end
of such period.
(b) Internal Control Over Financial Reporting.
During the fiscal quarter to which this report relates, CNF's management
identified a significant deficiency, as defined under Public Company
Accounting Oversight Board ("PCAOB") Auditing Standard No. 2, in internal
controls over the accounting for certain self-insured workers' compensation
and vehicular claims. CNF has corrected the deficiency by redesigning the
policies and procedures over account reconciliations for these self-insured
claims. Except for this identified redesign of internal control, there have
not been any changes in CNF's internal control over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
during the fiscal quarter to which this report relates that have materially
affected, or are reasonably likely to materially affect, CNF's internal
control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Certain legal proceedings of CNF are also discussed in Note 2, "Discontinued
Operations," and Note 8, "Commitments and Contingencies," of Part 1, Item 1,
"Financial Statements."
In September 2003, CNF received notice from the United States Attorney's
Office for the District of Columbia that EWA is being considered for possible
civil action under the False Claims Act for allegedly submitting false
invoices to the USPS for payment under the Priority Mail contract. EWA has
entered into a tolling agreement with the government in order to give the
parties more time to investigate the allegations. EWA is in the process of
conducting its own investigation of the allegations and as a result CNF is
currently unable to predict the outcome of this matter. Under the False
Claims Act, the government would be entitled to recover treble damages, plus
penalties, if a court was to ultimately conclude that EWA knowingly submitted
false invoices to the USPS.
On February 16, 2000, a DC-8 cargo aircraft operated by EWA personnel crashed
shortly after take-off from Mather Field, near Sacramento, California. The
crew of three was killed. The National Transportation Safety Board
subsequently determined that the probable cause of the crash was the
disconnection of the right elevator control tab due to improper maintenance,
but was not able to determine whether the maintenance errors occurred during
the most recent heavy maintenance "D" check by an outside vendor or during
subsequent maintenance of the aircraft. Menlo Worldwide Forwarding, Inc.
("MWF, Inc."), EWA and CNF Inc. have been named as defendants in wrongful
death lawsuits brought by the families of the three deceased crew members,
seeking compensatory and punitive damages. MWF, Inc., EWA and CNF Inc. also
may be subject to other claims and proceedings relating to the crash, which
could include other private lawsuits seeking monetary damages and
governmental proceedings. Although MWF, Inc., EWA and CNF Inc. maintain
insurance that is intended to cover claims that may arise in connection with
an airplane crash, there can be no assurance that the insurance will in fact
be adequate to cover all possible types of claims. In particular, any claims
for punitive damages or any sanctions resulting from possible governmental
proceedings would not be covered by insurance.
EWA, MWF, Inc., Menlo Worldwide, LLC and CNF Inc. are named as defendants in
a lawsuit filed in state court in California by approximately 140 former EWA
pilots and crew members. The lawsuit alleges wrongful termination in
connection with the termination of EWA's air carrier operations, and seeks
$500 million and certain other unspecified damages. CNF believes that the
lawsuit's claims are without merit, and intends to vigorously defend the
lawsuit.
In 2003, CNF became aware of information that Emery Transnational, a
Philippines-based joint venture in which MWF, Inc. may be deemed to be a
controlling partner, may have made certain payments in violation of the
Foreign Corrupt Practices Act. CNF promptly notified the Department of
Justice and the Securities and Exchange Commission of this matter, and MWF,
Inc. instituted policies and procedures in the Philippines designed to
prevent such payments from being made in the future. In addition, CNF
conducted an internal investigation of approximately 40 other MWF, Inc.
international locations and has shared the results of the investigation with
the SEC. The investigation revealed that Menlo Worldwide Forwarding
(Thailand) Limited, a Thailand-based joint venture, also may have made
certain payments in violation of the Foreign Corrupt Practices Act. MWF,
Inc. has made certain personnel changes and is instituting policies and
procedures in Thailand designed to prevent such payments from being made in
the future.
Certain current and former officers of CNF, EWA and MWF, Inc. and certain
current and former directors of CNF have been named as defendants in a
purported shareholder derivative suit filed in September 2003 in California
Superior Court for the County of San Mateo. The complaint alleges breach of
fiduciary duty, gross mismanagement, waste and abuse of control relating to
the management, control and operation of EWA and MWF, Inc. CNF is named only
as a nominal defendant and no relief is sought against it. CNF maintains
insurance for the benefit of its officers and directors, and the applicable
insurance carriers have been notified of the claims asserted in the lawsuit.
On November 5, 2004, the Court granted preliminary approval to a settlement
negotiated by the parties, and ordered that notice be given to the
shareholders that a hearing to consider final approval of the settlement is
scheduled for February 2005.
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ITEM 6. Exhibits
4 Amendment No 5 dated October 21, 2004 to the $385 Million
Credit Agreement
31 Certification of Officers pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32 Certification of Officers pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company (Registrant) has duly caused this Form 10-Q
Quarterly Report to be signed on its behalf by the undersigned, thereunto
duly authorized.
CNF Inc.
(Registrant)
November 8, 2004 /s/Chutta Ratnathicam
--------------------------
Chutta Ratnathicam
Senior Vice President and
Chief Financial Officer