e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
|
|
|
þ
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the fiscal year ended
December 31, 2005
|
or
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the Transition Period
From
to
|
Commission file number 1-5046
CNF INC.
(Exact name of registrant as
specified in its charter)
|
|
|
Delaware
|
|
94-1444798
|
(State or other jurisdiction
of
incorporation or organization)
|
|
(I.R.S. Employer
Identification No.)
|
|
|
|
2855 Campus Drive,
Suite 300, San Mateo, CA
(Address of principal
executive offices)
|
|
94403
(Zip Code)
|
Registrants telephone number, including area code:
(650) 378-5200
Securities Registered Pursuant to Section 12(b) of the
Act:
|
|
|
Title of Each Class
|
|
Name of Each Exchange on Which
Registered
|
|
Common Stock ($.625 par value)
|
|
New York Stock Exchange
|
Securities Registered Pursuant to Section 12(g) of the
Act:
87/8% Notes Due
2010
(Title of class)
6.70% Senior Debentures due 2034
(Title of class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yesþ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Sections 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer.
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
Aggregate market value of voting stock held by persons other
than Directors, Officers and those shareholders holding more
than 5% of the outstanding voting stock, based upon the closing
price per share on June 30, 2005: $1,691,279,820
Number of shares of Common Stock outstanding as of
January 31, 2006: 52,215,570
DOCUMENTS
INCORPORATED BY REFERENCE
Part III
Proxy Statement for CNFs Annual Meeting of Shareholders to
be held on April 18, 2006 (only those portions referenced
specifically herein are incorporated in this
Form 10-K).
CNF
INC.
FORM 10-K
Year Ended December 31, 2005
INDEX
2
CNF
INC.
FORM 10-K
Year Ended December 31, 2005
PART I
Legal
Organization
CNF Inc. was incorporated in Delaware in 1958, and in 2001,
changed its name from CNF Transportation Inc. to CNF Inc. CNF
Inc. and its subsidiaries (CNF or the
Company) provide transportation and supply chain
management services for a wide range of manufacturing,
industrial, and retail customers.
At December 31, 2005, CNF owned 100% of the capital stock
of Con-Way Transportation Services, Inc., Con-Way Supply Chain
Services, LLC, Menlo Worldwide, LLC, and other less significant
wholly owned subsidiaries. Con-Way Supply Chain Services, LLC
wholly owned Con-Way NOW, Inc., Con-Way Truckload Services, LLC,
and Con-Way Global Solutions, Inc. (also known as Con-Way Air
Express). At December 31, 2005, Menlo Worldwide, LLC
(MW) wholly owned Menlo Logistics, Inc. (also known
as Menlo Worldwide Logistics or MWL) and owned a
majority interest in the Vector SCM joint venture with General
Motors. In December 2004, CNF completed the sale of Menlo
Worldwide Forwarding, Inc. and its subsidiaries and Menlo
Worldwide Expedite!, Inc. (previously wholly owned subsidiaries
of MW and hereinafter collectively referred to as
MWF) to United Parcel Service, Inc.
(UPS), as more fully discussed in Note 2,
Discontinued Operations, of Item 8,
Financial Statements and Supplementary Data.
In January 2006, CNF announced a proposal to change its name
from CNF Inc. to Con-way Inc. The
proposed corporate name change marks the launch of an integrated
strategy to bring the Companys operations under a single
master brand and value identity. If shareholders approve the
name change at the Annual Meeting of Shareholders on
April 18, 2006, the first stage will be a phased
re-branding of the operations of Con-Way
Transportation Services, Inc. and its subsidiaries under a
single graphic identity and a new Con-Way logo. Later phases of
the re-branding initiative will involve the Companys Menlo
Worldwide Logistics subsidiary. Company management and the Board
of Directors believe that the corporate name change and the
re-branding initiative will create a single brand for accurate
market identity, clarity and customer understanding, thereby
enabling the Company to compete more effectively in the markets
it serves.
Reporting
Segments
Information on reporting segments is presented in the manner in
which components are organized for making operating decisions,
assessing performance, and allocating resources, which may be
different than the manner in which components are organized for
legal purposes, as described above. Accordingly, for financial
reporting purposes, CNF is divided into three segments.
Con-Way Transportation Services reporting segment
(Con-Way). Includes the combined
operating results of Con-Way Transportation Services, Inc. and
its subsidiaries and affiliated supply chain services companies.
Con-Way provides regional next-day, second-day, and
transcontinental freight trucking throughout the U.S., Canada,
Puerto Rico, and Mexico, as well as expedited transportation,
freight forwarding, and truckload brokerage services.
Menlo Worldwide reporting segment. Includes
the operating results of Menlo Worldwide Logistics
(Logistics) and Vector SCM, LLC
(Vector), a company jointly owned by MW and General
Motors (GM). Logistics develops contract logistics
solutions, including the management of complex distribution
networks and supply chain engineering and consulting. Vector
serves as the lead logistics manager for GM and provides
logistics services to other customers to a lesser degree.
CNF Other reporting segment. Includes the
operating results of Road Systems, Inc., a trailer manufacturer,
and certain corporate activities.
3
For financial information concerning CNFs geographic and
reporting segment operating results, refer to Item 8,
Financial Statements and Supplementary Data, under
Note 12, Segment Reporting.
Information
Available on Website
CNF makes available, free of charge, on its website at
www.cnf.com, under the headings Investor
Relations/Annual Report, Proxy and Other SEC Filings,
copies of its annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
and current reports on
Form 8-K,
and any amendments to those reports, in each case as soon as
reasonably practicable after such reports are electronically
filed with or furnished to the Securities and Exchange
Commission.
In addition, CNF makes available, free of charge, on its website
at www.cnf.com, under the headings Investor
Relations/Corporate Governance, current copies of the
following documents: (i) the charters of the Audit,
Compensation, and Director Affairs Committees of its Board of
Directors; (ii) its Corporate Governance Guidelines;
(iii) its Code of Ethics for Chief Executive and Senior
Financial Officers; (iv) its Code of Business Conduct and
Ethics for Directors; and (v) its Code of Ethics for
employees. Copies of these documents are also available in print
to shareholders upon request, addressed to the Corporate
Secretary at 2855 Campus Drive, Suite, 300, San Mateo,
California 94403.
None of the information on CNFs website shall be deemed to
be a part of this report.
Regulatory
Certifications
In 2005, CNF filed the written affirmations and Chief Executive
Officer certifications required by Section 303A.12(a) of
the New York Stock Exchange NYSE Listing Manual,
Rule 503(k)(5)(D) and Rule 5.3(m) of the Pacific
Exchange Listing Manual and Section 302 of the
Sarbanes-Oxley
Act.
Con-Way
Transportation Services
Con-Way
Regional Carriers
Con-Ways primary business units are regional
less-than-truckload
(LTL) motor carriers that operate a combined network
of freight service centers to provide market coverage in North
America. The regional carriers provide industry-leading
day-definite delivery service to manufacturing, industrial, and
retail customers, and consist of Con-Way Western Express
(CWX), which serves 13 Western states,
including Hawaii and Alaska; Con-Way Central Express
(CCX), which serves 25 central and eastern states;
Con-Way Southern Express (CSE), which serves 12
southeastern states, the District of Columbia and Puerto Rico;
Con-Way Canada Express, which serves 10 Canadian provinces; and
Con-Way Mexico, which began operations in July 2005 to
facilitate the movement of cross-border freight as well as
between points in Mexico. In 2005, the regional carriers
accounted for 95.3% of Con-Ways revenue.
Typically, LTL carriers transport shipments weighing between 100
and 15,000 pounds from multiple shippers utilizing a network of
freight service centers combined with a fleet of linehaul and
pickup-and-delivery
tractors and trailers. Freight is picked up from customers and
consolidated for shipment at the originating service center. The
freight is then loaded into trailers and transferred to the
destination service center providing service to the delivery
area. From the destination service center, the freight is
delivered to the customer.
Con-Way
Supply Chain Services Group
In addition to the regional LTL carriers, Con-Way operates a
supply chain services group of businesses, which includes
Con-Way NOW, Con-Way Air Express, and Con-Way Truckload
(CTL). CTL began operations in January 2005.
Con-Way NOW specializes in time-definite shipments, such as
replacement parts, medical equipment, and other urgent
shipments, where expedited delivery is critical, with delivery
service in 48 states and parts of Canada. Con-Way NOW also
operates a truckload brokerage operation under the name of
Con-Way Full Load. Con-Way Air Express (CAX) is a
freight forwarder that arranges freight shipments using
transportation provided by other
4
operators, including commercial airlines, dedicated air
operators, for-hire truckload and LTL operators, and cartage
companies. Through an agency network and connections with other
Con-Way companies, CAX provides full-service coverage in the
U.S., Canada, and Puerto Rico. CTL serves Con-Ways three
regional LTL carriers by providing linehaul service on full
loads of LTL shipments moving in transcontinental lanes and also
offers the services to other customers. The formation of CTL was
intended to reduce linehaul expense and protect service with
inter-company operations that operate in tandem with current
truckload vendors. CTL utilizes Con-Ways existing
infrastructure and administrative support services to minimize
the required investment. In the fourth quarter of 2005, CTL
began operating in regional truckload lanes to complement the
transcontinental offering. As the truckload business grows,
Con-Way expects to more than double the size of the CTL tractor
fleet in 2006 as part of CNFs capital expenditure plan.
Competition
The trucking, truck brokerage, and freight forwarding industry
segments are intensely competitive. Principal competitors of
Con-Way include regional and national LTL companies. Competition
in the trucking industry segment is based on freight rates,
service, reliability, transit times and scope of operations.
Menlo
Worldwide
Effective January 1, 2002, CNF formed Menlo Worldwide by
combining its Logistics and Vector SCM units with its Forwarding
segment, which was sold in December 2004. The formation of Menlo
Worldwide was intended to address a trend among businesses to
outsource the management of increasingly complex supply chain
and logistics services to lower costs, reduce inventories and
increase speed, flexibility and efficiency. The MW companies
were aligned to meet this demand by combining extensive
proprietary information systems and value-added supply chain
management services including transportation, warehouse, and
inventory management on a global scale.
Menlo
Worldwide Logistics
Since the formation of Logistics in 1990, the third-party
logistics segment has grown significantly as the outsourcing of
distribution and other non-core functions has become more
commonplace and businesses increasingly evaluate overall
logistics costs. The ability to access information through
computer networks also increases the value of capturing
real-time logistics information to track inventories, shipments,
and deliveries.
Logistics specializes in developing and managing complex
national and global supply and distribution networks, including
primarily transportation management and contract warehousing.
Transportation management refers to the management of
asset-based carriers and third-party transportation providers
for customers inbound/outbound supply chain needs through
the use of
state-of-the-art
logistics management systems to consolidate, book and track
shipments. Contract warehousing refers to the optimization of
warehouse operations for customers using technology and
warehouse management systems to reduce inventory carrying costs
and supply chain cycle times. For several customers,
contract-warehousing operations include light assembly or
kitting operations. Logistics ability to link these
systems with its customers internal enterprise resource
planning systems is intended to provide customers with improved
visibility to their supply chains. Compensation from
Logistics customers takes different forms, including
cost-plus, gain-sharing, transaction, fixed-dollar, and
consulting fees.
Historically, Logistics has provided these services using a
customer- or project-based approach, which included
customer-specific transportation management, single-client
warehouses, and single-customer technological solutions. As the
market place drives efficiency, Logistics is transitioning to a
shared-resource, process-based approach to leverage a
centralized transportation management group, utilize more
multi-client warehouses, and create technological solutions that
benefit multiple customers. This approach is expected to
leverage Logistics resources to provide scaleable supply
chain and logistics services to a growing number of
middle-market customers. Logistics started the transition to a
shared-resource, process-based approach in 2005, when it
segmented its business based on customer type. The new
industry-focused groups leverage the capabilities of personnel,
systems and solutions throughout the organization to give
customers expertise in their specific automotive, high-tech, and
consumer products sectors.
5
Logistics client base doubled to approximately 200
customers at December 31, 2005 from December 31, 2004,
due primarily to the integration of Con-Way Logistics, as
described below. Although Logistics client base includes a
growing number of middle-market companies, Logistics
primary customers are Fortune 200 businesses. Four customers
collectively accounted for 50.5% of the revenue reported for the
Logistics reporting segment in 2005, and each had a
Standard & Poors investment-grade credit rating.
In 2005, Logistics largest customer accounted for 4.9% of
the consolidated revenue of CNF. The loss of significant revenue
from any of Logistics major customers by termination of
the customer relationship for any reason, including the business
failure of the customer, could have an adverse effect on
Logistics results of operations.
Con-Way
Logistics Integration
In the second quarter of 2005, Logistics integrated into its
operations the Con-Way Logistics business, which was previously
reported in the Con-Way reporting segment. The integration of
the two businesses is intended to provide an enterprise solution
offering for Logistics customers that want to use Con-Way
as a primary transportation provider in addition to those
customers that want a vendor-neutral transportation solution.
The integration also expands Con-Way Logistics
multi-client warehousing service model to Logistics larger
warehouse network.
Competition
The third-party logistics segment is intensely competitive.
Competition for larger projects is generally based on the
ability to rapidly implement technology-based transportation and
logistics solutions, while competition for projects with
middle-market customers is more influenced by price. Competitors
in the logistics segment are numerous and include domestic and
foreign logistics companies, the logistics arms of integrated
transportation companies, and contract manufacturers. However,
Logistics primarily competes against a limited number of major
competitors that have resources sufficient to provide services
under large logistics contracts.
Menlo
Worldwide Vector
In December 2000, CNF and GM formed the Vector SCM (supply chain
management) joint venture for the purpose of providing logistics
management services on a global basis for GM, and for customers
in addition to GM. Although MW owns a majority interest in
Vector, MWs portion of Vectors operating results are
reported in the Menlo Worldwide reporting segment as an
equity-method investment based on GMs ability to control
certain operating decisions. Vector was established to reduce
GMs supply chain costs and improve GMs supply chain
management by bringing increased speed, visibility, flexibility,
and reliability to GMs global supply chain, including
shipment of parts to manufacturing plants and vehicles to
dealers.
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
GMs North America region and three international regions.
An ABC is a project, developed with and approved by GM, aimed at
reducing costs, assuming operational responsibilities,
and/or
achievement of operational changes.
In August 2003, the Vector Agreements were amended, primarily to
expedite the transition of logistics services in the North
America region from GM to Vector. The amendments changed the
compensation principles for GMs North American logistics
operations, revised the allocation of Vectors profit
between GM and MW, and modified the formula for the valuation of
Vector in the event that MW exercises its Put Right. Effective
January 1, 2005, for the 2005 calendar year, all of the
ABCs for GMs European region were amended to compensate
Vector with cost reimbursement and a management fee based on
vehicle production volumes, rather than through separately
approved ABCs. Refer to Item 7, Managements
Discussion and Analysis, under Results of
Operations Menlo
Worldwide Vector. Also refer to
Note 3, Investment in Unconsolidated Joint
Venture, in Item 8, Financial Statements and
Supplementary Data.
CNF
Other
The CNF Other reporting segment includes the operating results
of Road Systems, Inc. and certain corporate activities. A
majority of the revenue from Road Systems is from sales to other
CNF subsidiaries.
6
Discontinued
Operations
Menlo
Worldwide Forwarding
On December 19, 2004, CNF completed the sale of MWF to UPS,
as more fully discussed in Note 2, Discontinued
Operations, of Item 8, Financial Statements and
Supplementary Data.
Priority
Mail Contract
On November 3, 2000, Emery Worldwide Airlines, Inc.
(EWA), a subsidiary of CNF, and the U.S. Postal
Service (USPS) announced an agreement to terminate
their contract for the transportation and sortation of Priority
Mail (the Priority Mail contract). Claims relating
to amounts owed to EWA under the Priority Mail contract were
settled in connection with payments from the USPS to EWA in 2002
and 2001. Refer to Note 2, Discontinued
Operations, of Item 8, Financial Statements and
Supplementary Data, and Note 11, Commitments
and Contingencies.
Spin-Off
of CFC
On December 2, 1996, CNF completed the spin-off of
Consolidated Freightways Corporation (CFC) to
CNFs shareholders. Refer to Note 11,
Commitments and Contingencies, in Item 8,
Financial Statements and Supplementary Data.
General
Employees
At December 31, 2005, CNF had approximately 21,800 regular
full-time employees. The approximate number of regular full-time
employees by segment was as follows: Con-Way, 18,000; Menlo
Worldwide Logistics, 2,700; CNF Other, 1,100. The 1,100
employees included in the CNF Other segment consist primarily of
technology, executive, and administrative positions that support
CNFs operating subsidiaries.
Cyclicality
and Seasonality
CNFs operating results are affected, in large part, by
conditions in the cyclical markets of its customers and on the
U.S. and global economies. Demand for transportation services
fluctuates in response to overall economic conditions. Any
sustained weakness in demand or continued downturn or
uncertainty in the economy generally would have an adverse
effect on CNFs businesses.
CNFs operating results are also affected by seasonal
fluctuations that affect demand for transportation services. In
the trucking industry for a typical year, the months of
September, October, and November usually have the highest
business levels while the months of December, January and
February usually have the lowest business levels.
Price
and Availability of Fuel
As more fully discussed in Item 1A, Risk
Factors, CNF is exposed to the effects of changes in the
availability and price of diesel fuel.
Regulation
Ground
Transportation
The motor carrier industry is subject to federal regulation by
the Federal Motor Carrier Safety Administration
(FMCSA), the Pipeline and Hazardous Materials Safety
Agency (PHMSA), and the Surface Transportation Board
(STB), which are units of the U.S. Department
of Transportation (DOT). The FMCSA promulgates and
enforces comprehensive trucking safety regulations and performs
certain functions relating to such matters as motor carrier
registration, cargo and liability insurance, extension of credit
to motor carrier customers, and leasing of
7
equipment by motor carriers from owner-operators. The PHMSA
promulgates and enforces regulations regarding the
transportation of hazardous materials. The STB has authority to
resolve certain types of pricing disputes and authorize certain
types of intercarrier agreements.
At the state level, federal preemption of economic regulation
does not prevent the states from regulating motor vehicle safety
on their highways. In addition, federal law allows all states to
impose insurance requirements on motor carriers conducting
business within their borders, and empowers most states to
require motor carriers conducting interstate operations through
their territory to make annual filings verifying that they hold
appropriate registrations from FMCSA. Motor carriers also must
pay state fuel taxes and vehicle registration fees, which
normally are apportioned on the basis of mileage operated in
each state.
In April of 2003, the FMCSA issued a final rule to change the
regulations governing hours of service (HOS) for
commercial truck drivers. The rule increased the total
consecutive off-duty hours a driver must take prior to driving
in interstate commerce and reduced the total daily consecutive
driving and on-duty hours allowed. In July of 2004, the United
States Court of Appeals for the District of Columbia voided the
HOS rules that were issued by the FMCSA. However, the United
States Congress extended the existing HOS rules until September
2005. In October of 2005, a final rule issued by FMCSA became
effective. The new rule changed the way that drivers utilizing
sleeper berths may split their off-duty time, raising concern
that the efficiency of sleeper-team truckload operations similar
to those utilized by Con-Way Truckload may be adversely affected.
The same advocacy groups that challenged the 2003 FMCSA HOS
rules may mount another challenge to the rules which became
effective in October 2005. Given the uncertainty in the status
of the HOS rules, CNF cannot predict whether the current rules
will remain intact or whether the rules as finally adopted will
materially affect its operations.
Environmental
CNF is subject to laws and regulations that (i) govern
activities or operations that may have adverse environmental
effects such as discharges to air and water, as well as handling
and disposal practices for solid and hazardous waste, and
(ii) impose liability for the costs of cleaning up, and
certain damages resulting from sites of past spills, disposals,
or other releases of hazardous materials. Environmental
liabilities relating to CNFs properties may be imposed
regardless of whether CNF leases or owns the properties in
question and regardless of whether such environmental conditions
were created by CNF or by a prior owner or tenant, and also may
be imposed with respect to properties that CNF may have owned or
leased in the past. CNF has provided for its estimate of
remediation costs at these sites.
CNFs operations involve the storage, handling, and use of
diesel fuel and other hazardous substances. In particular, CNF
is subject to environmental laws and regulations dealing with
fuel storage tanks and the transportation of hazardous materials
laws.
CNF has been designated a Potentially Responsible Party by the
EPA with respect to the disposal of hazardous substances at
various sites. CNF expects that its share of the
clean-up
costs will not have a material adverse effect on CNFs
financial condition, cash flows, or results of operations.
Homeland
Security
CNF is subject to compliance with cargo security and
transportation regulations issued by the Transportation Security
Administration (TSA) and by the Department of
Homeland Security (DHS), including regulation by the
Bureau of Customs and Border Protection (CBP).
CNF believes that it will be able to comply with potential TSA,
DHS, and CBP rules, which will require additional security
measures impacting the transportation of both domestic and
international shipments.
Con-Ways regional carriers, as well as certain other
subsidiaries, are approved by the CBP to participate in the
voluntary Customs-Trade Partnership Against Terrorism program
(C-TPAT). The C-TPAT program was designed in 2002 to
provide a process to facilitate the efficient release of goods
and provide resolution of any outstanding issues affecting CBP
processing of cross-border shipments. As participants of C-TPAT,
these subsidiaries have
8
developed security measures that continue to evolve along with
the C-TPAT program requirements. These subsidiary C-TPAT
security plans have been reviewed and certified by the CBP.
C-TPAT does not provide a sector category for third-party
logistics companies; as a result, Logistics cannot obtain C-TPAT
certification. To address this issue, Logistics has voluntarily
adopted C-TPAT Importer requirements into its
security plan, which incorporates regulatory DHS requirements,
and also voluntarily participates in non-regulatory DHS programs
that secure customer and international supply chains against
terrorism and theft.
Con-Way Air Express has been approved by TSA as an Independent
Air Carrier (IAC), and has developed security
measures that have been reviewed and certified by the TSA.
Logistics became a certified IAC and incorporated TSA security
regulatory requirements into its IAC security plan.
Business
Interruption
CNF and its subsidiaries rely on CNFs Administrative and
Technology (Adtech) Center, a centralized
shared-service facility in Portland, Oregon, for the performance
of shared administrative and technology services in the conduct
of their businesses. CNFs computer facilities and its
administrative and technology employees are located at the
AdTech Center. 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 CNFs financial
condition, results of operations, and cash flows.
Customer
Concentration
Menlo Worldwide and many of its competitors in the third-party
logistics segments are subject to risk related to customer
concentration because of the relative importance of their
largest customers and the increased ability of those customers
to influence pricing and other contract terms. Although Menlo
Worldwide continues to broaden and diversify its customer base,
a significant portion of its revenue and operating results are
derived from a relatively small number of customers, as more
fully discussed in Item 1, Business.
Consequently, a significant loss of business from, or adverse
performance by, any of Menlo Worldwides major customers,
particularly GM, may have a material adverse effect on
CNFs financial condition, results of operations, and cash
flows. Similarly, the renegotiation of Menlo Worldwides
major customer contracts may also have an adverse effect on CNF.
Cyclicality
CNFs operating results are affected, in large part, by
conditions in the cyclical markets of its customers and on the
U.S. and global economies. Demand for transportation services
fluctuates in response to overall economic conditions. Any
sustained weakness in demand or continued downturn or
uncertainty in the economy generally would have an adverse
effect on CNFs businesses.
Employees
The workforce of CNF and its subsidiaries is not affiliated with
labor unions. CNF believes that the non-unionized operations of
its subsidiaries have advantages over comparable unionized
competitors in providing reliable and cost-competitive customer
services, including greater efficiency and flexibility. There
can be no assurance that CNFs subsidiaries will be able to
maintain their non-unionized status.
CNF hires drivers primarily for its
Con-Way
business segment. There is significant competition for qualified
drivers in the transportation industry. As a result of driver
shortages,
Con-Way may
be required to increase driver compensation, utilize
lower-quality
drivers or face difficulty meeting customer demands, all of
which could adversely affect CNFs results of operations.
Employee
Benefit Costs
CNF maintains health and welfare plans and a defined benefit
pension plan, and provides certain other benefits to its
employees. In recent years, health care costs have risen
dramatically, and lower interest rates and returns on
9
plan assets have increased the expense of, and funding
requirements for, CNFs defined benefit pension plan. In
addition, the U.S. Congress is considering legislation that
may affect the ongoing cost and funding of the defined benefit
pension plan. As a result, CNF is unable to predict the effect
of continuing to provide these benefits to employees on
CNFs financial condition, results of operations, and cash
flows.
Government
Regulation
CNF is subject to compliance with many laws and regulations that
apply to its business activities. These include regulations
relating to hours of service for its drivers, and cargo security
and transportation regulations issued by the Department of
Homeland Security and the Department of Transportation. CNF is
not able to accurately predict how new governmental laws and
regulations, or changes to existing laws and regulations, will
affect the transportation industry generally, or CNF in
particular. Although government regulation that affects CNF and
its competitors may simply result in higher costs that can be
passed on to customers with no adverse consequences, there can
be no assurance that this will be the case. As a result, CNF
believes that any additional security and other measures that
may be required by future laws and regulations or changes to
existing laws and regulations could result in additional costs
and could have an adverse effect on its ability to serve
customers and on its financial condition, results of operations,
and cash flows.
Price and
Availability of Fuel
CNF is exposed to the effects of changes in the availability and
price of diesel fuel. Generally, fuel can be obtained from
various sources and in the desired quantities. However, an
inability to obtain fuel due to fuel shortages or any other
reason could have a material adverse effect on CNF. CNF and its
subsidiaries (primarily
Con-Way) are
subject to the risk of price fluctuations. Like other LTL
carriers, Con-Way assesses many of its customers with a fuel
surcharge. The fuel surcharge is a part of
Con-Ways
overall rate structure for customers and is intended to
compensate
Con-Way for
the adverse effects of higher fuel costs. As fuel prices have
risen, the fuel surcharge has increased
Con-Ways
yields and revenue, and
Con-Way has
more than recovered higher fuel costs and fuel-related increases
in purchased transportation. At times, in the interest of its
customers,
Con-Way has
temporarily capped the fuel surcharge at a fixed percentage.
Following a sharp increase in fuel costs in the aftermath of
hurricanes in the U.S.,
Con-Way
imposed a temporary cap on its fuel surcharge in 2005 that was
in effect from August 29 through October 24. CNF
cannot predict the future movement of fuel prices,
Con-Ways
ability to recover higher fuel costs through fuel surcharges, or
the effect that changes in fuel surcharges may have on
Con-Ways
overall rate structure.
Con-Ways
operating income would likely be adversely affected by a rapid
and significant decline in fuel prices as lower fuel surcharges
would reduce
Con-Ways
yield and revenue. Whether fuel prices increase, decrease, or
remain constant,
Con-Ways
operating income may be adversely affected if competitive
pressures limited
Con-Ways
ability to assess its fuel surcharges.
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
CNF believes that its facilities are suitable and adequate, that
they are being appropriately utilized, and that they have
sufficient capacity to meet current operational needs.
Management continuously reviews anticipated requirements for
facilities and may acquire additional facilities
and/or
dispose of existing facilities as appropriate. Due largely to
growth in tonnage, CNF anticipates capital expenditures of
approximately $395 million (including software
expenditures) in 2006. The capital expenditures consist
primarily of $127 million related to land and buildings,
including approximately $27 million for improvements, and
$141 million for the acquisition of additional tractor and
trailer equipment for
Con-Ways
regional carriers.
Con-Ways
truckload business expects to add $67 million of additional
tractor and trailer equipment.
Con-Way
Transportation Services
As of December 31, 2005,
Con-Ways
regional carriers operated 343 freight service centers, of which
150 were owned and 193 were leased. The service centers, which
are strategically located to cover the geographic areas served
by Con-Way,
represent physical buildings and real property with dock,
office,
and/or shop
space. These
10
facilities do not include
meet-and-turn
points, which generally represent small owned or leased real
property with no physical structures. The total number of
trucks, tractors, and trailers utilized by the
Con-Way
regional carriers at December 31, 2005 was approximately
30,900.
At December 31, 2005, Con-Way Air Express operated 13
leased warehouse and service center facilities.
At December 31, 2005,
Con-Way
Truckload operated approximately 531 tractors and trailers.
Menlo
Worldwide Logistics
As of December 31, 2005, Logistics operated 55 warehouses
in North America, of which 38 were leased by Logistics and 17
were leased or owned by clients of Logistics. Internationally,
Logistics operated an additional 25 warehouses, of which 20 were
leased by Logistics and 5 were leased or owned by clients.
At December 31, 2005, Logistics operated approximately 68
trucks, tractors, and trailers.
CNF
Other
Principal properties of the CNF Other segment included
CNFs leased executive offices in San Mateo,
California, and its owned Administrative and Technology Center
in Portland, Oregon. Road Systems owned manufacturing
facility is in Searcy, Arkansas.
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
Certain legal proceedings of CNF are also discussed in
Item 1, Business, under
Regulation Environmental, and in
Note 2, Discontinued Operations, and
Note 11, Commitments and Contingencies, of
Item 8, Financial Statements and Supplementary
Data.
In 2002, EWA, MWF, Inc., MW and CNF Inc. were 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 EWAs air carrier operations, and seeks
$500 million and certain other unspecified damages. CNF
believes that the lawsuits claims are without merit, and
is vigorously defending the lawsuit.
In 2003, prior to the sale of MWF to UPS, 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. CNF was subsequently advised by the
Department of Justice that it is not pursuing an investigation
of this matter. CNF conducted an internal investigation of
approximately 40 other MWF, Inc. international locations and has
shared the results of the internal investigation with the SEC.
The internal 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. made certain personnel changes
and instituted policies and procedures in Thailand designed to
prevent such payments from being made in the future. In December
2004, CNF completed the sale of its air freight forwarding
business (including the stock of MWF, Inc., Emery Transnational
and Menlo Worldwide Forwarding (Thailand) Limited) to an
affiliate of UPS. In connection with that sale, CNF agreed to
indemnify UPS for certain losses resulting from violations of
the Foreign Corrupt Practices Act. CNF is currently unable to
predict whether it will be required to make payments under the
indemnity.
|
|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF STOCKHOLDERS
|
CNF did not submit any matter to a vote of security holders
during the fourth quarter of the fiscal year covered by this
Annual Report.
11
EXECUTIVE
OFFICERS OF THE REGISTRANT
The Executive Officers of CNF, their ages at December 31,
2005, and their applicable business experience are as follows:
Douglas W. Stotlar, 45, President and Chief Executive Officer of
CNF. Mr. Stotlar was named to his current position in April
2005. He previously served as President and Chief Executive
Officer of Con-Way Transportation Services and Senior Vice
President of CNF, a position he held since December 2004. Prior
to this, he served as Executive Vice President and Chief
Operating Officer of
Con-Way, a
position he held since June 2002. From 1999 to 2002, he was
Executive Vice President of Operations for
Con-Way.
Prior to joining
Con-Ways
corporate office, Mr. Stotlar served as Vice President and
General Manager of
Con-Way NOW.
Mr. Stotlar joined the
Con-Way
organization in 1985 as a Freight Operations Supervisor for
Con-Way
Central Express. He subsequently advanced to management posts in
Columbus, Ohio, and Fort Wayne, Indiana, where he was named
Regional Manager. Mr. Stotlar earned his bachelors
degree in transportation and logistics from Ohio State
University.
Kevin C. Schick, 54, Senior Vice President and Chief Financial
Officer of CNF. Mr. Schick was named to his current
position in March 2005. He previously served as Vice President
and Controller of
Con-Way
Transportation Services, a position he held since 1989.
Mr. Schick joined the
Con-Way
organization in 1983 as Controller for
Con-Way
Central Express. Mr. Schick earned his bachelors
degree in Finance from Marquette University and a masters
degree in business administration from Northwestern University.
Jennifer W. Pileggi, 41, Senior Vice President, General Counsel
and Corporate Secretary of CNF. Ms. Pileggi was named to
her current position in December 2004. Ms. Pileggi joined
CNFs subsidiary Menlo Logistics in 1996 as Corporate
Counsel and was promoted to Vice President in 1999. She was
promoted to Vice President and Corporate Counsel of Menlo
Worldwide in 2003. Ms. Pileggi is a graduate of Yale
University and New York University School of Law, where she
achieved a juris doctorate degree. Ms. Pileggi is a member
of the American Bar Association and the California State Bar
Association.
David S. McClimon, 50, President of
Con-Way
Transportation Services, Inc. and Senior Vice President of CNF.
Mr. McClimon was named to his current position in June
2005. He previously served as President and Chief Executive
Officer of two of
Con-Ways
regional trucking companies:
Con-Way
Central Express from 2002 to 2005, and
Con-Way
Western Express from 2000 to 2002. He was Vice President of
Sales for
Con-Way
Central Express from 1997 to 2000. Prior to this, he was Vice
President of National Sales for
Con-Way
Transportation Services from 1993 to 1997. Mr. McClimon
joined the
Con-Way
organization in 1983 as a day-one employee of
Con-Way
Central Express and subsequently was promoted to a variety of
sales and operations positions. Mr. McClimon earned his
bachelors degree in marketing from Miami University in
Ohio.
John G. Labrie, 39, President of Con-Way Supply Chain Solutions
and Vice President of CNF. Mr. Labrie was named to his
current position in June 2005. He previously served as Executive
Vice President of Operations for
Con-Way
Transportation Services, a position he held since January 2005.
Prior to this, he served as President and Chief Executive
Officer for
Con-Way
Western Express, a position he held since June 2002. From May
1998 to June 2002, he was Vice President of Operations for
Con-Way Western Express. He joined the
Con-Way
organization in 1990 as a sales account manager. Mr. Labrie
earned his bachelors degree in Finance from Central
Michigan University. He holds a masters degree in business
administration from Indiana Wesleyan University.
Robert L. Bianco Jr., 41, President of Menlo Worldwide and Vice
President of CNF. Mr. Bianco was named to his current
position in June 2005. He previously served as President of
Menlo Logistics, a position he held since December 2001. He
joined the CNF organization in 1989 as a management trainee and
joined Menlo in 1992 as a logistics manager. He subsequently
advanced to Vice President of Operations for Menlo Logistics in
1997. He is a graduate of the University of California at
Santa Barbara and earned a masters degree from the
University of San Francisco.
Jackie Barretta, 44, Vice President and Chief Information
Officer of CNF. Ms. Barretta was named to her current
position in February 2005. She previously served as Vice
President of Information Services for
Con-Way
Transportation Services, a position she held since August 2000.
Prior to this, she served as Director of Information Services, a
position she held since 1997. She joined
Con-Way as a
systems analyst in 1996. Ms. Barretta earned her
bachelors degree in Computer Science from the University
of North Carolina.
12
Mark C. Thickpenny, 53, Vice President and Treasurer of CNF.
Mr. Thickpenny joined CNF in 1995 as Treasury Manager. In
1997, he was named Director and Assistant Treasurer, and in 2000
was promoted to Vice President and Treasurer.
Mr. Thickpenny holds a bachelors degree in business
administration from the University of Notre Dame and a
masters degree in business administration from the
University of Chicago Graduate School of Business.
Kevin S. Coel, 47, Vice President and Corporate Controller of
CNF. Mr. Coel joined CNF in 1990 as CNFs Corporate
Accounting Manager. In 2000, he was named Corporate Controller,
and in 2002, was promoted to Vice President. Mr. Coel holds
a bachelors degree in economics from the University of
California at Davis and a masters degree in business
administration from San Jose State University.
Mr. Coel is also a member of the American Institute of CPAs.
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder
Matters, and Issuer Purchases of Equity Securities
|
CNFs common stock is listed for trading on the New York
Stock Exchange (NYSE) under the symbol
CNF.
See Item 8, Financial Statements and Supplementary
Data under Note 13, Quarterly Financial
Data, for the range of common stock prices as reported on
the NYSE and common stock dividends paid for each of the
quarters in 2005 and 2004. At January 31, 2006, CNF had
7,196 common shareholders of record.
The following table provides a summary of share repurchases made
by CNF during the quarter ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
of Shares
|
|
|
Dollar Value of
|
|
|
|
|
|
|
|
|
|
Purchased as
|
|
|
Shares that
|
|
|
|
|
|
|
|
|
|
Part of
|
|
|
May Yet Be
|
|
|
|
Total Number
|
|
|
|
|
|
Publicly
|
|
|
Purchased
|
|
|
|
of Shares
|
|
|
Average Price
|
|
|
Announced
|
|
|
Under the
|
|
|
|
Purchased[1]
|
|
|
Paid per Share
|
|
|
Program[1]
|
|
|
Program[1]
|
|
|
October 1,
2005 October 31, 2005
|
|
|
128,000
|
|
|
$
|
53.34
|
|
|
|
128,000
|
|
|
$
|
181,610,884
|
|
November 1,
2005 November 30, 2005
|
|
|
289,000
|
|
|
|
57.53
|
|
|
|
289,000
|
|
|
|
164,985,621
|
|
December 1,
2005 December 31, 2005
|
|
|
248,900
|
|
|
|
56.40
|
|
|
|
248,900
|
|
|
|
150,947,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
665,900
|
|
|
$
|
56.30
|
|
|
|
665,900
|
|
|
$
|
150,947,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] In January 2005, CNFs Board of Directors authorized a
two-year stock repurchase program providing for the repurchase
of up to $300 million in common stock in open market
purchases and privately negotiated transactions.
13
|
|
Item 6.
|
Selected
Financial Data
|
CNF
Inc.
Five-Year Financial Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
(Dollars in thousands except per
share data)
|
|
|
SUMMARY OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Con-Way Transportation Services
|
|
$
|
2,816,647
|
|
|
$
|
2,532,201
|
|
|
$
|
2,163,668
|
|
|
$
|
1,981,918
|
|
|
$
|
1,891,769
|
|
Menlo Worldwide Logistics
|
|
|
1,339,674
|
|
|
|
1,174,831
|
|
|
|
1,063,011
|
|
|
|
1,008,588
|
|
|
|
948,312
|
|
CNF Other
|
|
|
13,269
|
|
|
|
5,347
|
|
|
|
287
|
|
|
|
2,841
|
|
|
|
7,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,169,590
|
|
|
$
|
3,712,379
|
|
|
$
|
3,226,966
|
|
|
$
|
2,993,347
|
|
|
$
|
2,847,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss) [a]
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Con-Way Transportation Services
|
|
$
|
331,104
|
|
|
$
|
247,169
|
|
|
$
|
189,106
|
|
|
$
|
142,756
|
[c]
|
|
$
|
155,951
|
|
Menlo Worldwide Logistics
|
|
|
26,672
|
|
|
|
22,718
|
|
|
|
17,481
|
|
|
|
22,768
|
|
|
|
(29,902
|
)
|
Vector
|
|
|
20,257
|
|
|
|
18,253
|
|
|
|
20,718
|
|
|
|
18,188
|
|
|
|
(9,415
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,929
|
|
|
|
40,971
|
|
|
|
38,199
|
|
|
|
40,956
|
|
|
|
(39,317
|
)
|
CNF Other
|
|
|
(3,095
|
)
|
|
|
(3,973
|
)
|
|
|
(2,357
|
)
|
|
|
(3,369
|
)
|
|
|
(2,540
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
374,938
|
|
|
|
284,167
|
|
|
|
224,948
|
|
|
|
180,343
|
|
|
|
114,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of segments to
consolidated amount:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax related to Vector, an
equity-method investment
|
|
|
(4,196
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
370,742
|
|
|
$
|
284,167
|
|
|
$
|
224,948
|
|
|
$
|
180,343
|
|
|
$
|
114,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization, net
of Accretion
|
|
$
|
123,762
|
|
|
$
|
115,096
|
|
|
$
|
113,417
|
|
|
$
|
117,084
|
|
|
$
|
123,743
|
|
Interest Expense
|
|
|
37,501
|
|
|
|
39,695
|
|
|
|
29,597
|
|
|
|
22,825
|
|
|
|
27,009
|
|
Income from Continuing Operations
Before Taxes
|
|
|
351,121
|
|
|
|
246,823
|
|
|
|
197,517
|
|
|
|
152,328
|
|
|
|
85,007
|
|
Income Tax Provision
|
|
|
121,873
|
[b]
|
|
|
96,378
|
|
|
|
77,032
|
|
|
|
38,234
|
[d]
|
|
|
32,124
|
|
Net Income from Continuing
Operations
|
|
|
221,520
|
|
|
|
142,206
|
|
|
|
112,246
|
|
|
|
105,844
|
|
|
|
44,600
|
|
Gain (Loss) from Disposal, net of
tax
|
|
|
(6,219
|
)
|
|
|
(278,749
|
)
|
|
|
|
|
|
|
(12,398
|
)
|
|
|
38,975
|
|
Income (Loss) from Discontinued
Operations, net of tax [a]
|
|
|
|
|
|
|
12,415
|
|
|
|
(28,461
|
)
|
|
|
115
|
|
|
|
(486,449
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Applicable to
Common Shareholders
|
|
$
|
215,301
|
|
|
$
|
(124,128
|
)
|
|
$
|
83,785
|
|
|
$
|
93,561
|
|
|
$
|
(402,874
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) PER COMMON
SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income from Continuing
Operations
|
|
$
|
4.24
|
|
|
$
|
2.82
|
|
|
$
|
2.27
|
|
|
$
|
2.15
|
|
|
$
|
0.91
|
|
Gain (Loss) from Disposal, net of
tax
|
|
|
(0.11
|
)
|
|
|
(5.53
|
)
|
|
|
|
|
|
|
(0.25
|
)
|
|
|
0.80
|
|
Income (Loss) from Discontinued
Operations, net of tax
|
|
|
|
|
|
|
0.25
|
|
|
|
(0.58
|
)
|
|
|
|
|
|
|
(9.97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Applicable to
Common Shareholders
|
|
$
|
4.13
|
|
|
$
|
(2.46
|
)
|
|
$
|
1.69
|
|
|
$
|
1.90
|
|
|
$
|
(8.26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
(Dollars in thousands except per
share data)
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income from Continuing
Operations
|
|
$
|
3.96
|
|
|
$
|
2.57
|
|
|
$
|
2.07
|
|
|
$
|
1.96
|
|
|
$
|
0.87
|
|
Gain (Loss) from Disposal, net of
tax
|
|
|
(0.11
|
)
|
|
|
(4.94
|
)
|
|
|
|
|
|
|
(0.22
|
)
|
|
|
0.74
|
|
Income (Loss) from Discontinued
Operations, net of tax
|
|
|
|
|
|
|
0.22
|
|
|
|
(0.50
|
)
|
|
|
|
|
|
|
(9.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Applicable to
Common Shareholders
|
|
$
|
3.85
|
|
|
$
|
(2.15
|
)
|
|
$
|
1.57
|
|
|
$
|
1.74
|
|
|
$
|
(7.57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common dividends per share
|
|
$
|
0.40
|
|
|
$
|
0.40
|
|
|
$
|
0.40
|
|
|
$
|
0.40
|
|
|
$
|
0.40
|
|
Common shareholders equity
per share
|
|
$
|
16.34
|
|
|
$
|
13.68
|
|
|
$
|
15.21
|
|
|
$
|
13.43
|
|
|
$
|
12.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STATISTICS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,480,572
|
|
|
$
|
2,496,401
|
|
|
$
|
2,773,640
|
|
|
$
|
2,786,874
|
|
|
$
|
2,953,622
|
|
Long-term obligations
|
|
|
581,469
|
|
|
|
601,344
|
|
|
|
554,981
|
|
|
|
571,299
|
|
|
|
560,121
|
|
Capital expenditures
|
|
|
210,186
|
|
|
|
151,460
|
|
|
|
127,763
|
|
|
|
75,831
|
|
|
|
168,279
|
|
Effective tax provision rate
|
|
|
34.7
|
%
|
|
|
39.0
|
%
|
|
|
39.0
|
%
|
|
|
25.1
|
%
|
|
|
37.8
|
%
|
Basic average shares
|
|
|
52,192,539
|
|
|
|
50,455,006
|
|
|
|
49,537,945
|
|
|
|
49,139,134
|
|
|
|
48,752,480
|
|
Market price range
|
|
$
|
41.38-$59.79
|
|
|
$
|
30.50-$50.96
|
|
|
$
|
24.44-$35.77
|
|
|
$
|
27.36-$38.28
|
|
|
$
|
21.05-$39.88
|
|
Number of shareholders at
December 31
|
|
|
7,204
|
|
|
|
7,435
|
|
|
|
8,006
|
|
|
|
8,131
|
|
|
|
8,561
|
|
Approximate number of regular
full-time employees
|
|
|
21,800
|
|
|
|
20,700
|
|
|
|
20,000
|
|
|
|
19,600
|
|
|
|
18,800
|
|
CNFs results from continuing operations included various
income or loss items that affected the comparability of the
reported operating income (loss) of its reporting segments.
Other materially significant items affecting the comparability
of net income from continuing operations in the years reported
above are described in the notes below and in Item 7,
Managements Discussion and Analysis.
|
|
[a] |
As more fully discussed in Note 2, Discontinued
Operations, in Item 8, Financial Statements and
Supplementary Data, continuing operations has been
allocated general corporate overhead charges that were
previously allocated to the discontinued Forwarding segment.
These corporate overhead charges were allocated from
discontinued operations to the Con-Way and Logistics reporting
segments based on segment revenue and capital employed.
|
|
|
[b] |
Includes tax benefits of $7.8 million from the reversal of
accrued taxes related to the settlement with the IRS of previous
tax filings.
|
|
|
[c] |
Includes an $8.7 million first-quarter net gain,
$5.3 million after tax, ($0.09 per diluted share) from
the sale of a property.
|
|
|
[d] |
Includes a $14.0 million third-quarter ($0.25 per
diluted share) reversal of accrued taxes related to the
settlement with the IRS of aircraft maintenance issues.
|
15
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Introduction
Managements Discussion and Analysis of Financial Condition
and Results of Operations (referred to as
Managements Discussion and Analysis) is
intended to assist in a historical and prospective understanding
of CNFs results of operations, financial condition, and
cash flows, including a discussion and analysis of the following:
|
|
|
|
|
Overview of Business
|
|
|
|
Results of Operations and Related Information
|
|
|
|
Liquidity and Capital Resources
|
|
|
|
Estimates and Critical Accounting Policies
|
|
|
|
Other Matters
|
Overview
of Business
CNF provides transportation, logistics, and supply chain
management services for a wide range of manufacturing,
industrial, and retail customers. For financial reporting
purposes, CNF is divided into three reporting segments:
Con-Way
Transportation Services
(Con-Way),
primarily a provider of regional
less-than-truckload
(LTL) freight services; Menlo Worldwide, a provider
of contract logistics solutions; and CNF Other, which includes
certain corporate activities and Road Systems, a trailer
manufacturer. Menlo Worldwide consists of the operating results
of Menlo Worldwide Logistics (Logistics) and Vector
SCM, a joint venture with GM that is accounted for as an
equity-method investment.
CNFs 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 a freight service center
network while Logistics and Vector manage the logistics
functions of their customers and primarily utilize third-party
transportation providers for the movement of customer shipments.
As more fully discussed under Results of
Operations Discontinued Operations, CNF
and Menlo Worldwide, LLC (MW) in 2004 sold MWF to
UPS. Accordingly, the results of operations, net liabilities,
and cash flows of the Forwarding segment have been segregated
and reported as discontinued operations, except where otherwise
noted.
16
Results
of Operations
The table below summarizes CNFs consolidated operating
results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in thousands, except
per share amounts)
|
|
|
Net Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations(1)(2)
|
|
$
|
221,520
|
|
|
$
|
142,206
|
|
|
$
|
112,246
|
|
Discontinued Operations(2)
|
|
|
(6,219
|
)
|
|
|
(266,334
|
)
|
|
|
(28,461
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Applicable to Common Shareholders
|
|
$
|
215,301
|
|
|
$
|
(124,128
|
)
|
|
$
|
83,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings (Loss) per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations
|
|
$
|
3.96
|
|
|
$
|
2.57
|
|
|
$
|
2.07
|
|
Discontinued Operations
|
|
|
(0.11
|
)
|
|
|
(4.72
|
)
|
|
|
(0.50
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Applicable to Common Shareholders
|
|
$
|
3.85
|
|
|
$
|
(2.15
|
)
|
|
$
|
1.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
After preferred stock dividends |
|
(2) |
|
As required by EITF 87-24, Allocation of Interest to
Discontinued Operations, for periods prior to the
disposition of MWF in 2004, continuing operations has been
allocated general corporate overhead charges that were
previously allocated to the discontinued Forwarding segment.
These corporate overhead charges of $16.9 million in 2004,
and $14.0 million in 2003 were allocated from discontinued
operations to Con-Way and Logistics based on segment revenue and
capital employed. |
CNFs net income from continuing operations (after
preferred stock dividends) grew 55.8% to $221.5 million
($3.96 per diluted share) in 2005 from $142.2 million
($2.57 per diluted share) in 2004 due to improved operating
results from all CNF reporting segments. In 2005, CNFs net
income available to common shareholders of $215.3 million
($3.85 per diluted share) improved significantly over a net
loss in the prior year, due primarily to last years
$276.3 million loss from the disposition of MWF. As more
fully discussed below under Results of
Operations Discontinued Operations, in
the periods presented, discontinued operations related to the
sale of MWF, the shut-down of EWA and its terminated Priority
Mail contract with the USPS, and the spin-off of CFC.
CNFs net income from continuing operations (after
preferred stock dividends) in 2004 rose 26.7% to
$142.2 million ($2.57 per diluted share). Net income
from continuing operations was offset by a $266.3 million
net loss ($4.72 per diluted share) from discontinued
operations, which primarily reflects the loss from the
disposition of MWF. The resulting net loss applicable to common
shareholders in 2004 was $124.1 million ($2.15 per
diluted share).
17
Continuing
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in thousands)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Con-Way Transportation Services
|
|
$
|
2,816,647
|
|
|
$
|
2,532,201
|
|
|
$
|
2,163,668
|
|
Menlo Worldwide Logistics
|
|
|
1,339,674
|
|
|
|
1,174,831
|
|
|
|
1,063,011
|
|
CNF Other
|
|
|
13,269
|
|
|
|
5,347
|
|
|
|
287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,169,590
|
|
|
$
|
3,712,379
|
|
|
$
|
3,226,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Con-Way Transportation Services
|
|
$
|
331,104
|
|
|
$
|
247,169
|
|
|
$
|
189,106
|
|
Menlo Worldwide
|
|
|
|
|
|
|
|
|
|
|
|
|
Logistics
|
|
|
26,672
|
|
|
|
22,718
|
|
|
|
17,481
|
|
Vector
|
|
|
20,257
|
|
|
|
18,253
|
|
|
|
20,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,929
|
|
|
|
40,971
|
|
|
|
38,199
|
|
CNF Other
|
|
|
(3,095
|
)
|
|
|
(3,973
|
)
|
|
|
(2,357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
374,938
|
|
|
|
284,167
|
|
|
|
224,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of segments to
consolidated amount:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax related to Vector, an
equity-method investment
|
|
|
(4,196
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
370,742
|
|
|
$
|
284,167
|
|
|
$
|
224,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overview 2005
Compared to 2004
In 2005, CNFs revenue increased 12.3% to
$4.2 billion, due to higher revenue at all reporting
segments. Consolidated operating income in 2005 rose 30.5% on
significantly higher operating income from Con-Way and improved
results from Menlo Worldwide. Con-Ways operating income
increased 34.0% due largely to revenue growth of 11.2% and
improved regional-carrier operating margins. Con-Ways
revenue increase in 2005 reflects regional-carrier tonnage
growth and yield improvement on increased fuel surcharges while
higher operating income reflects improved margins. Improved
operating margins at Con-Way primarily reflect revenue growth,
productivity gains, and a decline in employee costs as a
percentage of revenue, due largely to lower incentive
compensation that resulted from variations in operating income
and other performance factors relative to incentive plan
targets. Menlo Worldwides operating income in 2005
increased 14.5% on improved results at Logistics and higher
income from Vectors foreign operations. Logistics
operating income increased 17.4% on revenue growth of 14.0% and
reported segment income from Vector increased 11.0% to
$20.3 million.
Other net expense in 2005 decreased $17.7 million to
$19.6 million, due primarily to increases in investment
income, which rose $15.2 million on increased average cash
equivalents and marketable securities. Increased investment
income also reflects higher interest rates earned by cash
equivalents and marketable securities in 2005. Interest expense
decreased $2.2 million in 2005 due largely to the net
effect on interest from financing transactions, including the
$100.0 million repayment in June 2005 of the 7.35% Notes,
the $128.9 million redemption in June 2004 of
5% Convertible Debentures, and the $292.6 million net
issuance in April 2004 of 6.7% Senior Debentures. Other net
miscellaneous non-operating expenses in 2005 primarily reflects
$2.7 million of costs in 2004 associated with the
redemption of the Convertible Debentures, partially off set by a
$2.5 million increase in foreign exchange losses in 2005.
CNFs effective tax rate of 34.7% declined from 39.0% in
2004. The lower rate in 2005 reflects reversals of accrued
income taxes of $7.8 million, which related to an IRS
settlement of issues related to tax years prior to 2002.
Excluding the effect of the reversals of accrued taxes, the
lower effective tax rate in 2005 was due primarily to an
increase in tax-exempt interest income, increased foreign tax
credits, and the effect of the GAAP classification of income on
Vectors increasing foreign income. As more fully discussed
in Note 3, Investment in Unconsolidated
18
Joint Venture, of Item 8, Financial Statements
and Supplementary Data, MWs portion of
U.S. federal income taxes on Vectors domestic income
is reported in CNFs tax provision. CNFs foreign tax
credits related to Vectors foreign income are also
reflected in CNFs tax provision. However, under GAAP,
MWs portion of Vectors foreign income taxes on its
foreign income is reported as a component of equity-method
income and is not a component of CNFs tax provision.
Overview 2004
Compared to 2003
In 2004, CNFs revenue increased 15.0% to
$3.7 billion, due to higher revenue at all reporting
segments, which benefited from improved economic conditions.
Consolidated operating income in 2004 rose 26.3%, on
significantly higher operating income from Con-Way and improved
operating results from Menlo Worldwide. The increase in
Con-Ways operating income was due principally to the
effect of improved margins on revenue growth, as Con-Ways
operating income in 2004 increased 30.7% on revenue growth of
17.0%. Menlo Worldwides operating income increased 7.3% on
improvement from Logistics, partially offset by a decline in
operating income from Vector. Logistics reported a 30.0%
increase in operating income on a 10.5% growth in revenue while
Vectors operating income in 2004 fell $2.5 million to
$18.3 million.
In 2004, other net expense increased $9.9 million to
$37.3 million, due primarily to increases in interest
expense and other net non-operating expenses, partially offset
by higher interest income on marketable securities. Interest
expense in 2004 rose $10.1 million due largely to the net
effect of financing transactions in 2004, as described above.
Other net miscellaneous non-operating expenses in 2004 reflects
a $4.3 million decline in the income from corporate-owned
life insurance policies that were terminated in the third
quarter of 2004, $2.7 million of costs associated with the
redemption of the Convertible Debentures, and a
$1.3 million decline in foreign exchange gain, partially
offset by prior-year equity venture losses of $3.7 million.
Con-Way
Transportation Services
The table below compares operating results (dollars in
thousands), operating margins, and the percentage increase in
selected operating statistics of the Con-Way reporting segment
for the years ended December 31.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Summary of Operating Results
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,816,647
|
|
|
$
|
2,532,201
|
|
|
$
|
2,163,668
|
|
Operating Income
|
|
|
331,104
|
|
|
|
247,169
|
|
|
|
189,106
|
|
Operating Margin
|
|
|
11.8
|
%
|
|
|
9.8
|
%
|
|
|
8.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
2005 vs. 2004
|
|
|
2004 vs. 2003
|
|
|
Selected Regional-Carrier
Operating Statistics
|
|
|
|
|
|
|
|
|
Revenue per day
|
|
|
+12.4
|
%
|
|
|
+16.0
|
%
|
Weight per day (weight)
|
|
|
+7.9
|
|
|
|
+12.5
|
|
Revenue per hundredweight
(yield)
|
|
|
+4.2
|
|
|
|
+3.1
|
|
Weight per shipment
|
|
|
+3.6
|
|
|
|
+4.3
|
|
In 2005, Con-Ways revenue rose 11.2% due to higher revenue
from Con-Ways regional carriers and continued growth from
the Con-Way supply chain services group, which includes Con-Way
NOW, Con-Way Air Express, and Con-Way Truckload. Revenue per day
from the regional carriers rose 12.4% from 2004 on a 7.9%
increase in weight and a 4.2% increase in yield. Yield increases
in 2005 primarily reflect an increase in fuel surcharges,
continued growth in higher-rated interregional services, and
general rate increases, partially offset by growth in
lower-yielding lower-cost shipments, as more fully discussed
below. Like other LTL carriers, Con-Way assesses many of its
customers with a fuel surcharge. The fuel surcharge is part of
Con-Ways overall rate structure for customers and is
intended to compensate Con-Way for the adverse effects of higher
fuel costs. As fuel prices have risen, the fuel surcharge has
increased Con-Ways yield and revenue. At times, in the
interest of its customers, Con-Way has temporarily capped the
fuel surcharge at a fixed percentage. Following a sharp increase
in fuel costs in the aftermath of hurricanes in the U.S.,
Con-Way imposed a temporary cap on its fuel surcharge in 2005
that was in
19
effect from August 29 through October 24. Excluding fuel
surcharges, yields in 2005 were unchanged compared to 2004.
Yields in 2005 were adversely affected by a 3.6% increase in
weight per shipment, which was largely driven by a spot-quote
program that contributed to an increase in the number of
shipments in excess of 10,000 pounds. The spot-quote program was
developed to place lower-yielding large shipments into empty
linehaul leg segments without requiring additional capacity.
Commensurate with the lower transportation cost per unit of
weight, spot-quote and other lower-cost higher-weight shipments
generally have lower yields.
Con-Ways operating income in 2005 increased 34.0%, due
largely to improved margins, which primarily reflect revenue
growth, productivity gains, and a decline in employee costs as a
percentage of revenue. In 2005, fuel and purchased
transportation costs increased 64.2% and 19.3%, respectively.
However, higher fuel costs and fuel-related increases in
purchased transportation costs were more than recovered through
fuel surcharges, as discussed above and more fully discussed in
Item 1A, Risk Factors Price and
Availability of Fuel. Employee costs in 2005 increased
5.0%, but declined as a percentage of revenue. Employee costs in
2005 reflect increases in base compensation and employee
benefits, partially offset by lower incentive compensation. Base
compensation rose 9.5%, due primarily to headcount increases
attributable to higher business volumes, and to a lesser extent,
wage and salary rate increases. Incentive compensation in 2005
declined by $27.7 million or 34.7% based on variations in
operating income and other performance factors relative to
incentive plan targets. Employee benefits expense increased
2.6%, as an increase in health and welfare costs, due largely to
growth in headcount, was partially offset by a decline in
workers compensation expense. Lower workers
compensation expense in 2005 was largely due to improved claims
experience and a third-quarter entry in 2004 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.
In 2004, Con-Ways revenue rose 17.0% due to higher revenue
from Con-Ways regional carriers and continued growth from
Con-Ways supply chain services group of businesses.
Revenue per day from the regional carriers rose 16.0% from 2003
on increases in weight and yield. In 2004, management believes
that growth in weight transported was due primarily to
comparatively better economic conditions and market share gains.
Yield improvement in 2004 was achieved primarily through higher
fuel surcharges and general rate increases, partially offset by
growth in lower-yielding business from the spot-quote program.
Excluding fuel surcharges, yield in 2004 rose 0.3%.
Con-Ways operating income in 2004 increased 30.7% on
improved margins from the regional carriers as well as improved
results from Con-Ways supply chain services, which reduced
their collective net operating loss in 2004 by $5.5 million
from 2003. Certain corporate expenses previously allocated to
the discontinued Forwarding segment are reported in continuing
operations, as more fully discussed in Note 2
Discontinued Operations, of Item 8,
Financial Statements and Supplementary Data. The
additional corporate overhead charge allocated to the Con-Way
reporting segment was $14.8 million in 2004 and
$12.2 million in 2003.
Menlo
Worldwide
The Menlo Worldwide reporting segment consists of the operating
results of Logistics and Vector. Menlo Worldwide in 2005
reported operating income of $46.9 million, an increase of
14.5% over last year. Although MW owns a majority equity
interest, the operating results of Vector are reported as an
equity-method investment based on GMs ability to control
certain operating decisions. Accordingly, CNFs
Consolidated Statements of Operations do not include any revenue
from Vector and only MWs proportionate share of the net
income from Vector is reported as a reduction of operating
expenses.
The table below compares operating results (dollars in
thousands) and operating margins of the Menlo Worldwide
reporting segment for the years ended December 31. The
table summarizes Logistics net revenues (revenues less
transportation expenses) as well as gross revenues.
Logistics management believes that net revenues
20
are a meaningful measure of the relative importance of its
principal services since total revenues earned on most
carrier-management services include the third-party
carriers charges to Logistics for carrying the shipments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Summary of Operating Results
|
|
|
|
|
|
|
|
|
|
|
|
|
Logistics
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,339,674
|
|
|
$
|
1,174,831
|
|
|
$
|
1,063,011
|
|
Purchased Transportation
|
|
|
(972,266
|
)
|
|
|
(829,882
|
)
|
|
|
(746,375
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues
|
|
|
367,408
|
|
|
|
344,949
|
|
|
|
316,636
|
|
Operating Income
|
|
|
26,672
|
|
|
|
22,718
|
|
|
|
17,481
|
|
Operating Margin on Revenues
|
|
|
2.0
|
%
|
|
|
1.9
|
%
|
|
|
1.6
|
%
|
Operating Margin on Net Revenues
|
|
|
7.3
|
%
|
|
|
6.6
|
%
|
|
|
5.5
|
%
|
Vector
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
$
|
20,257
|
|
|
$
|
18,253
|
|
|
$
|
20,718
|
|
Menlo
Worldwide Logistics
Logistics revenue in 2005 increased 14.0% over 2004, due
to increases in carrier-management and warehouse-management
services. In 2005, revenue from carrier-management services
increased 15.9%, while revenue from warehouse-management
services rose 7.6%. 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 2005 increased 6.5%.
In 2005, Logistics operating income increased 17.4% due
primarily to revenue growth and improved margins on
warehouse-management services, partially offset by a decline in
margins on carrier-management services. Margins on
warehouse-management and carrier-management services were
positively affected by lower employee costs, which were due
primarily to declines in health and welfare costs, workers
compensation, and incentive compensation. Incentive compensation
in 2005 declined by $1.0 million or 13.7% based on
variations in operating income and other performance measures
relative to incentive plan targets. In 2005, margins on
carrier-management services were adversely affected by higher
purchased transportation costs. In 2005, purchased
transportation costs grew 17.2% due to increased business levels
and fuel-related increases in carrier rates. Management will
seek to improve carrier-management margins by evaluating
customer contracts and renegotiating certain lower-margin
contracts. Management is intending to increase the number of
customers being served by Logistics centralized
transportation-management group, which is expected to increase
operating margins by reducing administrative costs.
Beginning in the second quarter of 2005, Logistics integrated
into its operations the Con-Way Logistics business, which was
previously reported in the Con-Way reporting segment.
Accordingly, the operating results of Con-Way Logistics are
reported with Menlo Worldwide Logistics and prior periods have
been reclassified to conform to the current-period presentation.
The integration of the two businesses is intended to provide an
enterprise solution offering for Logistics customers that
want to use Con-Way as a primary transportation provider in
addition to those customers who want a vendor-neutral
transportation solution. The integration also expands Con-Way
Logistics multi-client warehousing service model to
Logistics larger warehouse network.
In 2004, Logistics revenue rose 10.5% over 2003, due
principally to an increase in carrier-management and
warehouse-management services. Operating income in 2004 improved
30.0% to $22.7 million, due primarily to revenue growth.
Significantly higher revenue at the former Con-Way Logistics
operations contributed to a $4.3 million reduction in the
operating loss related to those operations. Operating margins in
2004 were adversely affected by the competitive transportation
pricing environment, the renegotiation of certain contracts with
existing customers, a decrease in margins during the
start-up
phase of new contracts, and to higher employee costs. Operating
income in 2003 was adversely affected by $3.1 million of
contract termination costs. Certain corporate expenses
previously allocated to the discontinued Forwarding segment are
reported in continuing operations, as more fully discussed in
Note 2, Discontinued Operations, of
Item 8, Financial Statements and Supplementary
21
Data. The additional corporate overhead charge allocated
to the Logistics reporting segment was $2.1 million in 2004
and $1.8 million in 2003.
Menlo
Worldwide Vector
Operating
Results
In 2005, segment income reported from MWs equity
investment in Vector increased to $20.3 million from
$18.3 million in 2004. Higher reported segment income from
Vector was due primarily to higher income earned in GMs
international regions, partially offset by a decline in income
from GMs North America region. Improved income in
GMs international regions was substantially due to a
$9.7 million increase in volume-based compensation, which
resulted from increased business levels and the revised
compensation rates in GMs European region, as described
below. Higher income from the international regions was
partially offset by lower income from GMs North America
region, which reflects a $1.7 million reduction in
volume-based compensation and a $6.8 million decline in
performance-based compensation, as defined below. Income
reported from MWs equity investment in Vector declined to
$18.3 million in 2004 from $20.7 million in 2003 as a
$9.0 million decline in volume-based income from North
America was partially offset by increases in performance-based
income of $4.4 million and $2.5 million in the North
America and international regions, respectively.
North
America
In August 2003, the Vector Agreements were amended, primarily to
expedite the transition of logistics services in the North
America region from GM to Vector. Prior to the 2003 amendment,
agreements pertaining to Vector 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 GMs North
America region and GMs 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.
Under the amended Vector Agreements, Vector is compensated for
its management of logistics for all of GMs North America
operations rather than through its sharing in efficiency gains
and cost savings under individual ABCs. In each year of a
five-year period from January 1, 2003, Vector will be
compensated with a management fee based on shipment volumes
(volume-based compensation) and, beginning in 2004,
can earn additional compensation if certain performance criteria
are achieved (performance-based compensation). In
accordance with GAAP, compensation under the volume-based
management fee is recognized as vehicles are shipped while
performance-based compensation is recognized on the achievement
of specified levels of cost savings, 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. For other special projects in GMs North
America region, Vector is compensated under ABCs. CNF expects a
declining amount of compensation from the management fee in each
successive year covered under the amended Vector agreements for
North America. Except for special projects compensated under
ABCs, Vectors North America region did not earn
performance-based compensation in 2005, based primarily on
current-year increases in fuel and other transportation costs
that prevented the attainment of performance criteria in 2005.
CNF believes that similar external market conditions will also
prevent the attainment of performance criteria in 2006.
International
Compensation earned from GMs European region in 2005
increased $7.7 million due primarily to increased business
levels and an amendment to the ABCs for GMs European
region. Effective January 1, 2005, for the 2005 calendar
year, all of the ABCs for GMs European region were amended
to compensate Vector with cost reimbursement and a management
fee based on vehicle production volumes, rather than through the
separately approved ABCs. An agreement has been reached with GM
to transition the management of defined logistics activities to
Vector under a similar cost reimbursement and volume-based
management fee structure for 2006 and 2007. The compensation
principles for GMs Latin America and Asia/Pacific regions
are unaffected by the amendments in the European region.
22
Call
Right and Put Right
Under the Vector Agreements, GM has the right to purchase
MWs membership interest in Vector (Call Right)
and MW has the right to require GM to purchase MWs
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 MWs 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 MWs Put
Right or GMs Call Right would result in MW retaining any
commercialization contracts involving customers other than GM.
CNF
Other
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 segment
reported operating losses of $3.1 million in 2005 and
$4.0 million in 2004. The net loss in 2005 primarily
reflects a $2.2 million loss resulting from an insurance
settlement, while 2004 was affected by corporate insurance
activities and sales of corporate properties. The
$2.4 million operating loss in 2003 primarily includes a
net loss from the sale of corporate properties.
Discontinued
Operations
Discontinued operations in the periods presented relate to the
sale of MWF, to the shut-down of EWA and its terminated Priority
Mail contract with the USPS, and to the spin-off of CFC. The
results of operations, net liabilities, and cash flows of
discontinued operations have been segregated from continuing
operations, except where otherwise noted. The operating results
and net liabilities of discontinued operations are summarized in
Note 2, Discontinued Operations, of
Item 8, Financial Statements and Supplementary
Data.
MWF
Impairment
Charge
On October 5, 2004, CNF and MW entered into a stock
purchase agreement with UPS to sell all of the issued and
outstanding capital stock of MWF. CNF completed the sale on
December 19, 2004, as more fully discussed below. Although
the stock purchase agreement was entered into on October 5,
2004, decisions by CNFs management and its Board of
Directors and the third-quarter sale negotiations with UPS
established CNFs commitment to sell MWF as of
September 30, 2004. In the process of evaluating several
strategic alternatives for Menlo Worldwides Forwarding
segment, CNF was approached by UPS in the third quarter of 2004
with interest in acquiring MWF. Accordingly, in the third
quarter of 2004, CNF classified MWF as held for sale 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 was based on the
agreement to sell MWF, as described below, and primarily
represents the estimated write-down to the fair value of
MWFs goodwill and long-lived assets, including MWFs
accumulated foreign currency translation adjustment, as well as
estimated selling costs.
Stock
Purchase Agreement
The stock purchase agreement excludes certain assets and
liabilities of MWF and includes certain assets and liabilities
of CNF or its subsidiaries related to the business conducted by
MWF. Among the assets and liabilities so excluded are those
related to EWA, and the obligation related to MWF employees
covered under CNFs domestic pension, postretirement
medical and long-term disability plans. Under the agreement, UPS
agreed to pay to CNF an amount equal to MWFs cash position
as of December 31, 2004, and to pay the estimated present
value of CNFs retained obligations related to MWF
employees covered under CNFs long-term disability and
postretirement medical plans, as agreed to by the parties. Under
the stock purchase agreement, CNF has agreed to a three-year
non-compete covenant that, subject to certain exceptions, will
limit CNFs annual air freight and ocean forwarding
and/or
customs brokerage revenues to $175 million through
CNFs 2007 fiscal year. CNF has also agreed to 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
23
to the sale that have not been estimated and recognized at this
time will be recognized in future periods as an additional loss
from disposal when and if incurred. For additional details,
refer to the stock purchase agreement filed as an exhibit to
CNFs
Form 8-K
dated October 5, 2004 and the amendment to the stock
purchase agreement filed as an exhibit to CNFs
Form 8-K
dated December 21, 2004.
Disposition
of MWF
Upon completion of the sale of MWF on December 19, 2004,
CNF received cash consideration of $150 million, subject to
certain post-closing adjustments, including adjustments for cash
held by MWF at closing and MWFs net working capital as of
closing. In connection with the sale, CNF in 2004 recognized a
fourth-quarter loss from disposal of $15.8 million (net of
a $3.6 million tax benefit), as the adjusted carrying value
of MWF exceeded the cash consideration, including amounts
received at closing and expected to be received in the future.
The third-quarter impairment charge and the fourth-quarter loss
from disposal resulted in total sale-related charges of
$276.3 million in 2004. Following settlement of the MWF
cash balance in March 2005, CNF received cash of
$29.4 million and recognized an additional first-quarter
net loss from disposal of $9.8 million, primarily to
recognize the difference between the actual cash received and
CNFs estimate of the cash position at December 31,
2004, and to accrue additional estimated transaction costs. In
the remainder of 2005, CNF reported an $11.0 million net
gain from additional adjustments in its estimated disposition
loss, including a $9.0 million third-quarter net gain to
recognize an increase in its estimate of deferred tax assets
associated with employee benefit obligations retained by CNF, as
more fully discussed below under Excluded
Assets and Liabilities.
CNFs disposal of MWF generated a capital loss for tax
purposes. Under current tax law, capital losses can only be used
to offset capital gains. Since CNF did not forecast any
significant taxable capital gains in the five-year tax
carryforward period, the $40.8 million cumulative
disposal-related tax benefit at December 31, 2004 was fully
offset by a valuation allowance of an equal amount. In 2005, the
cumulative disposal-related tax benefit and the associated
valuation allowance declined to $30.0 million at
December 31, 2005 due primarily to the third-quarter
sale-related proceeds received from UPS and revisions to the tax
effect of sale-related estimates, partially offset by the
first-quarter disposal-related capital loss.
Excluded
Assets and Liabilities
As described above, the stock purchase agreement excludes, and
CNF has retained, the obligations related to MWF employees
covered under certain CNF-sponsored employee benefit plans,
including domestic pension, postretirement medical, and
long-term disability plans that cover the noncontractual
employees and former employees of both continuing operations as
well as the discontinued Forwarding segment (collectively, the
CNF Benefit Plans). Under the stock purchase
agreement, UPS agreed to pay to CNF the estimated present value
of CNFs retained obligations related to MWF employees
covered under CNFs long-term disability and postretirement
medical plans (the Reimbursable Plans). Accordingly,
CNF in December 2004 recorded in Other Accounts Receivable a
receivable for its estimate of the present value of the retained
obligations of the Reimbursable Plans. Under an agreement
reached in August 2005, UPS paid $79.0 million to CNF for
the agreed-upon estimated present value of the retained
obligations of the Reimbursable Plans. The carrying value of
these obligations at December 31, 2005 was substantially
equal to the cash reimbursement from UPS and the present value
estimated by a third-party actuary as of CNFs annual
November 30 actuarial measurement date. Based on CNFs
intention to retain the obligation related to employees of MWF
and EWA covered by the CNF Benefit Plans, the obligation is
included in Employee Benefits of continuing operations in
CNFs Consolidated Balance Sheets at December 31, 2005
and 2004. The stock purchase agreement also excludes, and CNF
has retained, the net prepaid benefit cost related to certain
pension plans that cover only the former employees of the
discontinued Forwarding segment (the Forwarding
Plans). In CNFs Consolidated Balance Sheets, the
prepaid benefit cost related to the Forwarding Plans was
reported in Assets of Discontinued Operations at
December 31, 2004 and, based on CNFs decision to
retain these obligations and the completion of sale-related
adjustments in 2005, was reclassified to Employee Benefits of
continuing operations at December 31, 2005. Future changes
in the carrying value of the retained obligations of the CNF
Benefit Plans and the prepaid benefit cost of the Forwarding
Plans will be recognized in future periods as income or loss of
continuing operations.
24
EWA
The results of EWA relate to the cessation of its air-carrier
operations in 2001 and to the termination of its Priority Mail
contract with the USPS in 2000. In 2005, EWA recognized net
losses of $9.0 million, due primarily to increases in the
estimated exposure for litigation and restructuring-related
obligations. EWAs estimated loss reserves increased to
$34.1 million at December 31, 2005 from
$33.8 million at December 31, 2004 due primarily to
the losses described above, partially offset by the cash
settlement of restructuring-related obligations. EWAs
remaining loss reserves at December 31, 2005 were reported
in Liabilities of Discontinued Operations and consisted mostly
of CNFs estimated exposure related to the labor matters
described below, and other litigation-related losses, as more
fully discussed in Note 11, Commitments and
Contingencies, of Item 8, Financial Statements
and Supplementary Data.
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 EWAs air-carrier operations and
MWFs 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 CNFs 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.
Liquidity
and Capital Resources
Cash and cash equivalents rose to $514.3 million at
December 31, 2005 from $346.9 million at
December 31, 2004, as $217.6 million of cash provided
by operating activities and $179.3 million provided by
investing activities exceeded $216.4 million used in
financing activities. Cash provided by investing activities
primarily reflects the net effect of a $284.0 million
decrease in short-term marketable securities,
$210.2 million of capital expenditures and
$108.4 million in payments received from UPS in connection
with the sale of MWF. The decline in short-term marketable
securities brought the balance of those liquid investments to
$202.4 million at December 31, 2005. Cash used in
financing activities primarily reflects common stock repurchases
of $149.1 million and debt repayment of $112.7 million.
25
CNFs cash flows are summarized in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in thousands)
|
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
223,029
|
|
|
$
|
(115,889
|
)
|
|
$
|
92,024
|
|
Discontinued operations
|
|
|
6,219
|
|
|
|
266,334
|
|
|
|
28,461
|
|
Non-cash adjustments(1)
|
|
|
138,939
|
|
|
|
138,106
|
|
|
|
140,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
368,187
|
|
|
|
288,551
|
|
|
|
260,924
|
|
Changes in assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(124,322
|
)
|
|
|
(34,870
|
)
|
|
|
(12,373
|
)
|
Accounts payable and accrued
liabilities, excluding accrued incentive compensation
|
|
|
29,460
|
|
|
|
43,289
|
|
|
|
(11,309
|
)
|
Accrued incentive compensation
|
|
|
(20,077
|
)
|
|
|
29,367
|
|
|
|
(27,876
|
)
|
Income taxes
|
|
|
20,166
|
|
|
|
22,009
|
|
|
|
28,267
|
|
Employee benefits
|
|
|
(78,597
|
)
|
|
|
(24,658
|
)
|
|
|
(4,178
|
)
|
Deferred charges and credits
|
|
|
27,496
|
|
|
|
67,081
|
|
|
|
17,415
|
|
Other
|
|
|
(4,757
|
)
|
|
|
(11,144
|
)
|
|
|
(24,693
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(150,631
|
)
|
|
|
91,074
|
|
|
|
(34,747
|
)
|
Net Cash Provided by Operating
Activities
|
|
|
217,556
|
|
|
|
379,625
|
|
|
|
226,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by (Used in)
Investing Activities
|
|
|
179,269
|
|
|
|
(224,273
|
)
|
|
|
(303,436
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by (Used in)
Financing Activities
|
|
|
(216,429
|
)
|
|
|
175,479
|
|
|
|
(33,639
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by (Used in)
Continuing Operations
|
|
|
180,396
|
|
|
|
330,831
|
|
|
|
(110,898
|
)
|
Net Cash Provided by (Used in)
Discontinued Operations
|
|
|
(12,959
|
)
|
|
|
(22,117
|
)
|
|
|
7,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in Cash and
Cash Equivalents
|
|
$
|
167,437
|
|
|
$
|
308,714
|
|
|
$
|
(103,630
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Non-cash adjustments refer to depreciation,
amortization, deferred income taxes, provision for uncollectible
accounts, equity in earnings of joint venture, and other
non-cash gains and losses. |
Continuing
Operations
Operating
Activities
Cash flow from operating activities in 2005 was
$217.6 million, a $162.1 million decrease from 2004,
as an increase in net income before
non-cash
items was more than offset by the net use of cash due to changes
in assets and liabilities. Receivables in 2005 used
$124.3 million on higher revenue and by an increase in the
average collection period for Logistics receivables that
was due in part to longer
customer-negotiated
payment terms and processing delays. The net use of cash from
the decline in employee benefit liabilities for the years
presented reflects the effect of defined benefit pension plan
funding contributions of $126.5 million in 2005,
$90.8 million in 2004 and $75.0 million in 2003, as
described below under Defined Benefit
Pension Plans, partially offset by expense accruals for
CNFs defined benefit plan obligations. Accrued incentive
compensation decreased $20.1 million in 2005, while 2004
reflects a $29.4 million increase. In 2005 and 2004,
expense accruals for incentive compensation were
$68.6 million and $102.3 million, respectively, while
incentive compensation payments in those years were
$88.7 million and $72.9 million, respectively. Cash
provided by changes in deferred charges and credits declined to
$27.5 million in 2005 from $67.1 million provided in
2004 due primarily to $54.5 million of cash payments
received in 2004 in connection with the liquidation of
corporate-owned
life insurance policies. In all years presented, cash provided
by deferred charges and credits reflect variations in CNFs
affiliate payable to Vector, which is more fully discussed in
Note 3, Investment in Unconsolidated Joint
Venture, in Item 8, Financial Statements and
Supplementary Data.
26
Operating cash flow in 2004 increased from 2003 by
$153.4 million to $379.6 million. Higher operating
cash flow in 2004 was due in part to an increase in net income
before non-cash items, which in 2004 included a
$276.3 million non-cash net loss from the disposal of MWF,
and to asset and liability changes related to the liquidation of
corporate-owned life insurance policies, accounts payable, and
incentive compensation, partially offset by pension funding
payments. Accrued incentive compensation increased in 2004 but
declined in 2003 based on the timing of expense accruals and
payments.
Investing
Activities
Investing activities in 2005 provided $179.3 million
compared to $224.3 million used in 2004. CNF received
payments from UPS of $108.4 million in 2005 and
$150.0 million in 2004, as more fully discussed below under
Discontinued Operations. In all periods
presented, investing activities also reflect fluctuations in
short-term marketable securities and capital expenditures.
Investments in marketable securities decreased in 2005 by
$284.0 million, primarily from the first-quarter conversion
of auction-rate securities into cash and cash equivalents, while
in 2004 and 2003, investments in marketable securities increased
by $225.9 million and $169.4 million, respectively.
Capital expenditures in 2005 increased $58.7 million from
2004 due substantially to expenditures at Con-Way, which
increased to $197.6 million from $144.0 million in
2004 due largely to increased tractor and trailer acquisitions.
Capital expenditures in 2004 increased $23.7 million from
2003, also due to increases at Con-Way.
Financing
Activities
Financing activities used cash of $216.4 million in 2005
and provided cash of $175.5 million in 2004. In 2005, cash
used in financing activities included $149.1 million used
for the repurchase of common stock under CNFs repurchase
program described below. Financing activities in 2005 reflect
the repayment at maturity on June 1 of the
$100 million 7.35% Notes, while 2004 reflects the
$292.6 million net issuance of 6.7% Senior Debentures
and the $128.9 million redemption of 5% Convertible
Debentures. Financing activities in all periods presented also
reflect dividend payments and scheduled principal payments for
the Thrift and Stock Plan notes guaranteed by CNF. Cash provided
by the exercise of stock options increased to $76.1 million
in 2005 from $56.1 million in 2004, and $6.4 million
in 2003 due primarily to an increase in the market price for
CNFs common stock.
In January 2005, the Board of Directors authorized the
repurchase of up to $300 million in CNFs common stock
from time to time during a two-year period in open-market
purchases and privately negotiated transactions. In 2005, CNF
used $149.1 million for the repurchase of common stock and
currently estimates it will repurchase approximately
$150 million of CNFs common stock in 2006.
CNF has a $400 million revolving credit facility that
matures on March 11, 2010. The $400 million revolving
facility, which CNF entered into in March 2005, replaced a
$385 million revolving credit facility. The revolving
credit facility is available for cash borrowings and for the
issuance of letters of credit up to $400 million. At
December 31, 2005 and 2004, no borrowings were outstanding
under CNFs revolving credit facility and, at
December 31, 2005, $215.1 million of letters of credit
were outstanding, leaving $184.9 million of available
capacity for additional letters of credit or cash borrowings,
subject to compliance with financial covenants and other
customary conditions to borrowing. The total letters of credit
outstanding at December 31, 2005 provided collateral for
CNFs self-insurance programs. CNF had other uncommitted
unsecured credit facilities totaling $35.0 million at
December 31, 2005, which are available to support letters
of credit, bank guarantees, and overdraft facilities; at that
date, a total of $15.7 million of letters of credit was
outstanding under these facilities. See Other
Matters Forward-Looking Statements below,
and Note 5, Debt and Other Financing
Arrangements, in Item 8, Financial Statements
and Supplementary Data, for additional information
concerning CNFs $400 million credit facility and some
of its other debt instruments.
Defined
Benefit Pension Plans
As more fully discussed below under Estimates and Critical
Accounting Policies Defined Benefit Pension
Plans, CNF periodically reviews the funded status of its
defined benefit pension plans for non-contractual employees, and
makes contributions from time to time as necessary to comply
with the funding requirements of the Employee Retirement Income
Security Act (ERISA). In determining the amount and
timing of its pension
27
contributions, CNF considers both the ERISA- and GAAP-based
measurements of funded status as well as the tax deductibility
of contributions. CNF contributed $126.5 million to its
defined benefit pension plans in 2005 and currently estimates it
will contribute $75 million in 2006. CNF made defined
benefit pension plan contributions of $90.8 million in 2004
and $75.0 million in 2003.
Contractual
Cash Obligations
The table below summarizes contractual cash obligations for CNF
as of December 31, 2005. Some of the amounts in the table
are based on managements estimates and assumptions about
these obligations, including their duration, the possibility of
renewal, and other factors. Because of these estimates and
assumptions, the actual future payments may vary from those
reflected in the table. These contractual cash obligations are
reflected in the Consolidated Balance Sheets, except for
operating leases, purchase obligations, and interest on
long-term debt and guarantees, which are disclosed as future
obligations under GAAP.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 &
|
|
|
|
Total
|
|
|
2006
|
|
|
2007-2008
|
|
|
2009-2010
|
|
|
Thereafter
|
|
|
|
(Dollars in thousands)
|
|
|
Long-Term Debt and Guarantees(1)
|
|
$
|
1,246,181
|
|
|
$
|
58,788
|
|
|
$
|
124,548
|
|
|
$
|
290,495
|
|
|
$
|
772,350
|
|
Operating Leases
|
|
|
148,057
|
|
|
|
52,841
|
|
|
|
62,017
|
|
|
|
23,762
|
|
|
|
9,437
|
|
Purchase Obligations
|
|
|
18,096
|
|
|
|
18,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,412,334
|
|
|
$
|
129,725
|
|
|
$
|
186,565
|
|
|
$
|
314,257
|
|
|
$
|
781,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
A portion of the interest payable in 2006 is reflected in the
Consolidated Balance Sheets. Refer to Note 4, Accrued
Liabilities, of Item 8, Financial Statements
and Supplementary Data. |
As presented above, contractual obligations on long-term debt
and guarantees represent principal and interest payments while
contractual obligations for operating leases represent the
payments under the lease arrangements. The purchase obligations
represent non-cancelable agreements to purchase equipment for
Con-Ways operations. Certain liabilities, including those
related to pension and postretirement benefit plans and
self-insurance accruals, are reported in CNFs Consolidated
Balance Sheets but not reflected in the table above due to the
absence of stated maturities. As described above, CNF currently
estimates that it will contribute $75 million to its
defined benefit pension plan in 2006, which is subject to
variation based on changes in interest rates and asset returns.
As described above under Continuing
Operations, letters of credit of $215.1 million were
outstanding at December 31, 2005. These letters of credit
are generally required under self-insurance programs and do not
represent additional liabilities as the underlying
self-insurance accruals are already reflected on CNFs
Consolidated Balance Sheets.
In accordance with GAAP, CNFs operating leases are not
included in CNFs Consolidated Balance Sheets. CNFs
operating leases were determined to provide economic benefits
preferable to ownership based primarily on after-tax cash flows,
financial and operating flexibility, and the effect on
CNFs capitalization. Under certain operating leases,
Con-Way guarantees the residual value of tractors and trailers
at the end of the lease term. At December 31, 2005, the
residual value guaranteed under these lease agreements was
$4.1 million. CNF recognizes a liability for any shortfall
between the residual value guarantee and the equipments
estimated fair value, which fluctuates depending on market
conditions.
In 2006, CNF anticipates capital expenditures of approximately
$395 million (including software expenditures), an increase
from $218.6 million in 2005. The increased level of capital
expenditures consist primarily of $127 million related to
land and buildings, including approximately $27 million for
improvements, and $141 million for the acquisition of
additional tractor and trailer equipment for Con-Ways
regional carriers. Con-Ways truckload business expects to
add $67 million of additional tractor and trailer
equipment. Subsequent to December 31, 2005, Con-Way entered
into additional agreements to acquire $91.8 million of
revenue equipment for delivery in 2006.
28
For further discussion, see Note 5, Debt and Other
Financing Arrangements, and Note 6,
Leases, included in Item 8, Financial
Statements and Supplementary Data.
Other
CNFs ratio of total debt to capital decreased to 39.6% at
December 31, 2005 from 47.9% at December 31, 2004, due
primarily to the increase in retained earnings resulting from
net income earned in 2005 and the repayment in June of the
$100 million 7.35% notes.
On February 1, 2006, Standard & Poors raised
its rating on CNFs senior unsecured debt to
BBB from BBB-. In addition, Fitch
Ratings initiated coverage of CNF on January 25, 2006 with
a rating of BBB. Both agencies reported the rating
outlook for CNF as stable.
Discontinued
Operations
On December 19, 2004, CNF completed the sale of MWF to UPS
for $150 million in cash, subject to adjustment for cash
held by MWF at closing and the net working capital of MWF as of
closing. In March 2005, CNF received $29.4 million from UPS
for the reimbursable cash held by MWF at closing, with no
adjustment for net working capital. UPS agreed to pay to CNF an
amount equal to CNFs retained obligations related to MWF
employees covered under CNFs long-term disability and
postretirement medical plans. Accordingly, CNF in December 2004
recorded in Other Accounts Receivable a receivable for its
estimate of the present value of these employee benefit
obligations. Under agreement reached in August 2005, UPS paid
$79.0 million to CNF for the agreed-upon present value of
the employee benefit obligations retained by CNF. The payments
from UPS are more fully discussed above under Results of
Operations Discontinued Operations, and
are reported as sale-related proceeds under investing activities
in CNFs Statements of Consolidated Cash Flows.
Estimates
and Critical Accounting Policies
The preparation of financial statements in accordance with
accounting principles generally accepted in the
U.S. requires management to adopt accounting policies and
make significant judgments and estimates. In many cases, there
are alternative policies or estimation techniques that could be
used. CNF maintains a process to evaluate the appropriateness of
its accounting policies and estimation techniques, including
discussion with and review by the Audit Committee of its Board
of Directors and its independent auditors. Accounting policies
and estimates may require adjustment based on changing facts and
circumstances and actual results could differ from estimates.
The policies and estimates discussed below include those that
are most critical to the financial statements.
Self-Insurance
Accruals
CNF uses a combination of insurance and self-insurance programs
to provide for the costs of medical, casualty, liability,
vehicular, cargo, and workers compensation claims. In the
measurement of these costs, CNF considers historical claims
experience, medical costs, demographic and severity factors, and
other assumptions. Self-insurance accruals are developed based
on the estimated, undiscounted cost of claims, including those
claims incurred but not reported as of the balance sheet date.
The long-term portion of self-insurance accruals relates
primarily to workers compensation and vehicular claims
that are payable over several years. The actual costs may vary
from estimates.
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 CNFs expected realization of these
assets is dependent on future taxable income, future capital
gains, its ability to use foreign tax credit carryforwards and
carrybacks, 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
29
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.
Disposition
and Restructuring Estimates
As more fully discussed under Results of
Operations Discontinued Operations,
CNFs management made significant estimates and assumptions
in connection with the disposition of MWF in 2004. Actual
results could differ from estimates, which could affect related
amounts reported in the financial statements.
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 reasonably estimable.
Defined
Benefit Pension Plans
CNF has defined benefit pension plans that cover employees and
former 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 and the expected rate of
return on plan assets. CNF assesses its plan assumptions for the
discount rate, expected rate of return on plan assets, and other
significant assumptions on a continuous basis, but concludes on
those assumptions at the actuarial plan measurement date in
November of each year. CNFs most significant assumptions
used in determining pension expense for the periods presented
and for 2006 are summarized below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in thousands)
|
|
|
Weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.00
|
%
|
|
|
6.25
|
%
|
|
|
6.25
|
%
|
|
|
6.75
|
%
|
Expected long-term rate of return
on plan assets
|
|
|
8.50
|
%
|
|
|
8.50
|
%
|
|
|
9.00
|
%
|
|
|
9.00
|
%
|
CNF adjusts its discount rate periodically by taking into
account changes in high-quality corporate bond yields and the
guidance of its outside actuaries. In determining the
appropriate discount rate, CNF in 2004 began utilizing a bond
model that incorporates expected cash flows of plan obligations.
The bond model uses a selected portfolio of Moodys
Aa-or-better
rated bonds with cash flows and maturities that match the
projected benefit payments of CNFs pension plans.
CNFs discount rate is equal to the yield on the portfolio
of bonds, which will typically exceed the Moodys Aa
corporate bond index due to the long duration of expected
benefit payments from CNFs plan. If all other factors were
held constant, a 0.25% decline in the discount rate would result
in an estimated $7 million increase in 2006 annual pension
expense.
CNF adjusts its expected rate of return on plan assets based on
current market expectations and historical returns. The rate of
return is based on an expected
20-year
return on the current asset allocation and the effect of
actively managing the plan, net of fees and expenses. Using
year-end plan asset values, a 0.25% decline in the expected rate
of return on plan assets would result in an estimated
$2 million increase in 2006 annual pension expense.
Differences between the expected and actual rate of return on
plan assets
and/or
changes in the discount rate may result in cumulative
unrecognized actuarial losses. These unrecognized actuarial
losses primarily reflect the declining discount rate and lower
market returns in recent years. Although these amounts may be
recovered in future periods through actuarial gains, any portion
of the unrecognized actuarial loss outside of a corridor amount
must be amortized and recognized as expense over the average
service period for employees. Amortization of the unrecognized
actuarial loss in 2005 declined $4 million from 2004, due
primarily to a reduction in the difference between expected and
actual returns on plan assets in 2004. In its determination of
the plan obligation at
30
December 31, 2005 and of pension expense in 2006, CNF
revised its mortality assumption for plan participants from one
based on 1983 U.S. census data to one based on 2000
U.S. census data, which results in a longer-life assumption
for plan participants.
CNF expects its defined benefit pension expense in 2006 will
exceed expense in 2005 by approximately $6 million based on
increases in service cost, interest cost, and amortization of
the unrecognized actuarial loss, partially offset by a higher
expected return on plan assets. The increase in service cost is
due in part to the effect in 2006 of revised mortality
assumptions while the increase in interest cost is due to the
lower discount rate that increases the plan obligation. Despite
unchanged expectations on the long-term rate of return on plan
assets, CNF expects an increase in the return on plan assets in
2006 based on plan contributions that increase plan assets.
Amortization of the unrecognized actuarial loss in 2006 will
increase $4 million from 2005, based primarily on the
higher unrecognized actuarial loss at December 31, 2005.
Under assumptions applied at the 2005 measurement date, the
accumulated benefit obligation of certain CNF pension plans
exceeded the fair value of plan assets. Accordingly, CNF
recorded a minimum pension liability adjustment in Accumulated
Other Comprehensive Loss of Shareholders Equity to
recognize the shortfall between the fair value of the assets and
the accumulated benefit obligation of these plans. At
December 31, 2005, the cumulative additional minimum
pension liability increased to $36.2 million (net of
$23.1 million of tax benefits) from $14.7 million (net
of $9.4 million of tax benefits) at December 31, 2004,
due primarily to the remeasurement of the accumulated benefit
obligation at a lower discount rate.
CNF periodically reviews the funded status of its defined
benefit pension plans for non-contractual employees, and makes
contributions from time to time as necessary to comply with the
funding requirements of the Employee Retirement Income Security
Act (ERISA). In determining the amount and timing of
its pension contributions, CNF considers both the ERISA- and
GAAP-based measurements of funded status as well as the tax
deductibility of contributions. CNF contributed
$126.5 million to its defined benefit pension plans in 2005
and currently estimates it will contribute $75 million in
2006, which is subject to variation based on changes in interest
rates and asset returns. CNF made defined benefit pension plan
contributions of $90.8 million in 2004 and
$75.0 million in 2003.
Property,
Plant and Equipment and Other Long-Lived Assets
In accounting for property, plant, and equipment, CNF makes
estimates about the expected useful lives and the expected
residual values of the assets, and the potential for impairment
based on the fair values of the assets and the cash flows
generated by these assets.
The depreciation of property, plant, and equipment over their
estimated useful lives and the determination of any salvage
value requires management to make judgments about future events.
CNF periodically evaluates whether changes to estimated useful
lives or salvage values are necessary to ensure these estimates
accurately reflect the economic use of the assets. CNFs
periodic evaluation may result in changes in the estimated lives
and/or
salvage values used to depreciate its assets, which can affect
the amount of periodic depreciation expense recognized and,
ultimately, the gain or loss on the disposal of the asset.
CNF performs an impairment analysis of long-lived assets
whenever circumstances indicate that the carrying amount may not
be recoverable. For assets that are to be held and used, an
impairment charge is recognized when the estimated undiscounted
cash flows associated with the asset or group of assets is less
than carrying value. If impairment exists, a charge is
recognized for the difference between the carrying value and the
fair value. Fair values are determined using quoted market
values, discounted cash flows, or external appraisals, as
applicable. Assets held for disposal are carried at the lower of
carrying value or estimated net realizable value.
Other
Matters
New
Accounting Standards
In December 2004, the FASB issued SFAS No. 123R,
Share-Based Payment (SFAS 123R), a
revision of SFAS 123 that supersedes APB 25 and its
related implementation guidance. SFAS 123R eliminates the
alternative to use APB 25s intrinsic-value method of
accounting that was provided in SFAS 123 as originally
issued, and
31
requires companies to recognize the cost of employee services
received in exchange for awards of equity instruments based on
the grant-date fair value of those awards (with limited
exceptions) over the period during which an employee is required
to provide service in exchange for the award.
SFAS 123R also amends FASB Statement No. 95,
Statement of Cash Flows, to require that the
benefits associated with the tax deductions in excess of
recognized compensation cost be reported as financing cash
flows, rather than as a reduction of taxes paid. This
requirement will reduce net operating cash flows and increase
net financing cash flows in periods after the effective date.
The effective date of SFAS 123R is as of the beginning of
the first interim or annual reporting period of the first fiscal
year beginning on or after June 15, 2005, which for CNF is
the first quarter of 2006. In the adoption of SFAS 123R,
CNF has concluded that it will continue its use of the
Black-Scholes model for estimating the fair value of stock
option grants and will apply the modified prospective transition
method to all past share-based awards outstanding and unvested
as of the effective adoption date of January 1, 2006. Under
the modified prospective transition method, CNF will recognize
the associated expense over the remaining vesting period based
on the fair values previously determined and disclosed as part
of the pro-forma disclosures presented in Note 1,
Principal Accounting Policies, in Item 8,
Financial Statements and Supplementary Data. The
estimated annual compensation expense related to these unvested
stock options in 2006 is approximately $0.07 per diluted
common share. However, the calculation of total compensation
expense for share-based awards after the effective date of
SFAS 123R cannot be known at this time as it is affected by
the number of future shares awarded, and it may be different
from the calculation of pro-forma compensation expense under
SFAS 123.
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, any statements
concerning proposed new products or services, any statements
regarding CNFs 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 CFCs 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 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 CNFs customers and their ability
to pay for services rendered;
|
|
|
|
increasing competition and pricing pressure;
|
|
|
|
changes in fuel prices or fuel surcharges;
|
|
|
|
the effects of the cessation of EWAs air carrier
operations;
|
|
|
|
the possibility that CNF may, from time to time, be required to
record impairment charges for long-lived assets;
|
32
|
|
|
|
|
the possibility of defaults under CNFs $400 million
credit agreement and other debt instruments, 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 EWA pilots
and crew members, 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;
|
|
|
|
matters relating to CNFs 1996 spin-off of CFC, including
the possibility that CFCs 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;
|
|
|
|
matters relating to the sale of MWF, including CNFs
obligation to indemnify UPS for certain losses in connection
with the sale; and
|
|
|
|
matters relating to CNFs defined benefit pension plans.
|
As a result of the foregoing, no assurance can be given as to
future financial condition, results of operations, or cash
flows. See Note 11, Commitments and
Contingencies in Item 8, Financial Statements
and Supplementary Data.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
CNF is exposed to a variety of market risks, including the
effects of interest rates, fuel prices, and foreign currency
exchange rates. 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.
Interest
Rates
CNF is subject to the effect of interest rate fluctuations on
the fair value of its long-term debt. Based on the fixed
interest rates and maturities of its long-term debt,
fluctuations in market interest rates would not significantly
affect operating results or cash flows, but may have a material
effect on the fair value of long-term debt. The table below
summarizes the carrying value of CNFs fixed-rate long-term
debt, the estimated fair value, and the effect of a 10%
hypothetical change in interest rates on the estimated fair
value. The estimated fair value is calculated as the net present
value of principal and interest payments discounted at interest
rates offered for debt with similar terms and maturities.
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Carrying value
|
|
$
|
596,502
|
|
|
$
|
714,071
|
|
Estimated fair value
|
|
|
630,000
|
|
|
|
760,000
|
|
Change in estimated fair value
given a hypothetical 10% change in interest rates
|
|
|
30,000
|
|
|
|
30,000
|
|
As more fully discussed in Note 5, Debt and Other
Financing Arrangements, in Item 8, Financial
Statements and Supplementary Data, CNF in December 2002
terminated four interest rate swap derivatives designated as
fair value hedges of fixed-rate long-term debt. Except for the
effect of these terminated interest rate swaps, derivative
financial instruments did not have a material effect on
CNFs financial condition, results of operations, or cash
flows.
33
Fuel
CNF is exposed to the effects of changes in the availability and
price of diesel fuel. Generally, fuel can be obtained from
various sources and in the desired quantities. However, an
inability to obtain fuel due to fuel shortages or any other
reason could have a material adverse effect on CNF. CNF and its
subsidiaries (primarily Con-Way) are subject to the risk of
price fluctuations. Like other LTL carriers, Con-Way assesses
many of its customers with a fuel surcharge. The fuel surcharge
is a part of Con-Ways overall rate structure for customers
and is intended to compensate Con-Way for the adverse effects of
higher fuel costs. As fuel prices have risen, the fuel surcharge
has increased Con-Ways yields and revenue, and Con-Way has
more than recovered higher fuel costs and fuel-related increases
in purchased transportation. At times, in the interest of its
customers, Con-Way has temporarily capped the fuel surcharge at
a fixed percentage. Following a sharp increase in fuel costs in
the aftermath of hurricanes in the U.S., Con-Way imposed a
temporary cap on its fuel surcharge in 2005 that was in effect
from August 29 through October 24. CNF cannot predict the
future movement of fuel prices, Con-Ways ability to
recover higher fuel costs through fuel surcharges, or the effect
that changes in fuel surcharges may have on Con-Ways
overall rate structure. Con-Ways operating income would
likely be adversely affected by a rapid and significant decline
in fuel prices as lower fuel surcharges would reduce
Con-Ways yield and revenue. Whether fuel prices increase,
decrease, or remain constant, Con-Ways operating income
may be adversely affected if competitive pressures limited
Con-Ways ability to assess its fuel surcharges.
Foreign
Currency
The assets and liabilities of CNFs foreign subsidiaries
are denominated in foreign currencies, which create exposure to
changes in foreign currency exchange rates. However, the market
risk related to foreign currency exchange rates is not material
to CNFs financial condition, results of operations, or
cash flows.
34
Report
of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders CNF Inc.:
We have audited the accompanying consolidated balance sheets of
CNF Inc. and subsidiaries as of December 31, 2005 and 2004,
and the related consolidated statements of operations,
shareholders equity and cash flows for each of the years
in the three-year period ended December 31, 2005. These
consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of CNF Inc. and subsidiaries as of December 31,
2005 and 2004, and the results of their operations and their
cash flows for each of the years in the three-year period ended
December 31, 2005, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of CNF Inc.s internal control over financial
reporting as of December 31, 2005, based on criteria
established in Internal
Control Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated March 13, 2006,
expressed an unqualified opinion on managements assessment
of, and the effective operation of, internal control over
financial reporting.
Portland, Oregon
March 13, 2006
35
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
CNF
Inc.
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Assets
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
(Note 1)
|
|
$
|
514,334
|
|
|
$
|
346,897
|
|
Marketable securities (Note 1)
|
|
|
202,350
|
|
|
|
486,300
|
|
Trade accounts receivable, net
(Note 1)
|
|
|
548,896
|
|
|
|
425,783
|
|
Other accounts receivable
(Notes 1 and 2)
|
|
|
42,529
|
|
|
|
134,577
|
|
Operating supplies, at lower of
average cost or market
|
|
|
19,069
|
|
|
|
16,665
|
|
Prepaid expenses
|
|
|
53,916
|
|
|
|
48,092
|
|
Deferred income taxes (Note 7)
|
|
|
49,812
|
|
|
|
51,453
|
|
Assets of discontinued operations
(Note 2)
|
|
|
13,141
|
|
|
|
5,128
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
1,444,047
|
|
|
|
1,514,895
|
|
|
|
|
|
|
|
|
|
|
Property, Plant, and Equipment, at
cost
|
|
|
|
|
|
|
|
|
Land
|
|
|
150,413
|
|
|
|
142,857
|
|
Buildings and leasehold improvements
|
|
|
649,941
|
|
|
|
618,698
|
|
Revenue equipment
|
|
|
778,958
|
|
|
|
677,499
|
|
Other equipment
|
|
|
219,545
|
|
|
|
210,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,798,857
|
|
|
|
1,649,156
|
|
Accumulated depreciation and
amortization
|
|
|
(847,315
|
)
|
|
|
(789,835
|
)
|
|
|
|
|
|
|
|
|
|
Net Property and Equipment
|
|
|
951,542
|
|
|
|
859,321
|
|
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
|
|
|
|
|
|
Deferred charges and other assets
(Note 3)
|
|
|
40,691
|
|
|
|
56,618
|
|
Capitalized software, net
(Note 1)
|
|
|
44,292
|
|
|
|
50,347
|
|
Assets of discontinued operations
(Note 2)
|
|
|
|
|
|
|
15,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84,983
|
|
|
|
122,185
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
2,480,572
|
|
|
$
|
2,496,401
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
36
CNF
Inc.
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands
|
|
|
|
except per share data)
|
|
|
Liabilities and Shareholders
Equity
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
276,097
|
|
|
$
|
252,867
|
|
Accrued liabilities (Note 4)
|
|
|
214,883
|
|
|
|
226,437
|
|
Self-insurance accruals
(Note 1)
|
|
|
91,354
|
|
|
|
86,095
|
|
Current maturities of long-term
debt (Note 5)
|
|
|
15,033
|
|
|
|
112,727
|
|
Liabilities of discontinued
operations (Note 2)
|
|
|
34,129
|
|
|
|
34,705
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
631,496
|
|
|
|
712,831
|
|
Long-Term Liabilities
|
|
|
|
|
|
|
|
|
Long-term debt and guarantees
(Note 5)
|
|
|
581,469
|
|
|
|
601,344
|
|
Self-insurance accruals
(Note 1)
|
|
|
102,416
|
|
|
|
102,512
|
|
Employee benefits (Note 9)
|
|
|
212,824
|
|
|
|
245,989
|
|
Other liabilities and deferred
credits
|
|
|
18,714
|
|
|
|
20,296
|
|
Deferred income taxes (Note 7)
|
|
|
22,735
|
|
|
|
29,200
|
|
Liabilities of discontinued
operations (Note 2)
|
|
|
|
|
|
|
6,862
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
1,569,654
|
|
|
|
1,719,034
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
(Notes 2, 5, 6 and 11)
|
|
|
|
|
|
|
|
|
Shareholders Equity
(Note 8)
|
|
|
|
|
|
|
|
|
Preferred stock, no par value;
authorized 5,000,000 shares:
|
|
|
|
|
|
|
|
|
Series B, 8.5% cumulative,
convertible, $.01 stated value; designated
1,100,000 shares; issued 641,359 and 742,995 shares,
respectively
|
|
|
6
|
|
|
|
7
|
|
Additional paid-in capital,
preferred stock
|
|
|
97,544
|
|
|
|
113,002
|
|
Deferred compensation, Thrift and
Stock Plan (Note 9)
|
|
|
(40,628
|
)
|
|
|
(49,117
|
)
|
|
|
|
|
|
|
|
|
|
Total Preferred Shareholders
Equity
|
|
|
56,922
|
|
|
|
63,892
|
|
|
|
|
|
|
|
|
|
|
Common stock, $.625 par value;
authorized 100,000,000 shares; issued 61,204,263 and
58,544,254 shares, respectively
|
|
|
38,253
|
|
|
|
36,590
|
|
Additional paid-in capital, common
stock
|
|
|
528,743
|
|
|
|
429,134
|
|
Retained earnings
|
|
|
620,565
|
|
|
|
426,300
|
|
Deferred compensation, restricted
stock (Note 10)
|
|
|
(3,078
|
)
|
|
|
(5,744
|
)
|
Cost of repurchased common stock
(8,928,008 and 6,364,868 shares, respectively)
|
|
|
(293,380
|
)
|
|
|
(157,069
|
)
|
|
|
|
|
|
|
|
|
|
Total Common Shareholders
Equity
|
|
|
891,103
|
|
|
|
729,211
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive
Loss (Note 8)
|
|
|
(37,107
|
)
|
|
|
(15,736
|
)
|
|
|
|
|
|
|
|
|
|
Total Shareholders Equity
|
|
|
910,918
|
|
|
|
777,367
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Shareholders Equity
|
|
$
|
2,480,572
|
|
|
$
|
2,496,401
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
37
CNF
Inc.
Statements of Consolidated Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in thousands except per
share data)
|
|
|
Revenues
|
|
$
|
4,169,590
|
|
|
$
|
3,712,379
|
|
|
$
|
3,226,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses (Note 3)
|
|
|
3,349,972
|
|
|
|
3,014,143
|
|
|
|
2,606,230
|
|
Selling, general and administrative
expenses
|
|
|
335,671
|
|
|
|
311,644
|
|
|
|
294,744
|
|
Depreciation
|
|
|
113,205
|
|
|
|
102,425
|
|
|
|
101,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,798,848
|
|
|
|
3,428,212
|
|
|
|
3,002,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
370,742
|
|
|
|
284,167
|
|
|
|
224,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
22,730
|
|
|
|
7,485
|
|
|
|
2,527
|
|
Interest expense
|
|
|
(37,501
|
)
|
|
|
(39,695
|
)
|
|
|
(29,597
|
)
|
Miscellaneous, net
|
|
|
(4,850
|
)
|
|
|
(5,134
|
)
|
|
|
(361
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,621
|
)
|
|
|
(37,344
|
)
|
|
|
(27,431
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations
Before Income Tax Provision
|
|
|
351,121
|
|
|
|
246,823
|
|
|
|
197,517
|
|
Income Tax Provision (Note 7)
|
|
|
121,873
|
|
|
|
96,378
|
|
|
|
77,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations
|
|
|
229,248
|
|
|
|
150,445
|
|
|
|
120,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations, net of tax
(Note 2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Disposal
|
|
|
(6,219
|
)
|
|
|
(278,749
|
)
|
|
|
|
|
Income (Loss) from Discontinued
Operations
|
|
|
|
|
|
|
12,415
|
|
|
|
(28,461
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,219
|
)
|
|
|
(266,334
|
)
|
|
|
(28,461
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
|
223,029
|
|
|
|
(115,889
|
)
|
|
|
92,024
|
|
Preferred Stock Dividends
|
|
|
7,728
|
|
|
|
8,239
|
|
|
|
8,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Applicable to
Common Shareholders
|
|
$
|
215,301
|
|
|
$
|
(124,128
|
)
|
|
$
|
83,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Common
Shares Outstanding (Note 1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
52,192,539
|
|
|
|
50,455,006
|
|
|
|
49,537,945
|
|
Diluted
|
|
|
56,213,049
|
|
|
|
56,452,629
|
|
|
|
56,725,667
|
|
Earnings (Loss) Per Common Share
(Note 1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Net Income from Continuing
Operations
|
|
$
|
4.24
|
|
|
$
|
2.82
|
|
|
$
|
2.27
|
|
Loss from Disposal, net of tax
|
|
|
(0.11
|
)
|
|
|
(5.53
|
)
|
|
|
|
|
Income (Loss) from Discontinued
Operations, net of tax
|
|
|
|
|
|
|
0.25
|
|
|
|
(0.58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Applicable to
Common Shareholders
|
|
$
|
4.13
|
|
|
$
|
(2.46
|
)
|
|
$
|
1.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Net Income from Continuing
Operations
|
|
$
|
3.96
|
|
|
$
|
2.57
|
|
|
$
|
2.07
|
|
Loss from Disposal, net of tax
|
|
|
(0.11
|
)
|
|
|
(4.94
|
)
|
|
|
|
|
Income (Loss) from Discontinued
Operations, net of tax
|
|
|
|
|
|
|
0.22
|
|
|
|
(0.50
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Applicable to
Common Shareholders
|
|
$
|
3.85
|
|
|
$
|
(2.15
|
)
|
|
$
|
1.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
38
CNF
Inc.
Statements
of Consolidated Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in thousands)
|
|
|
Cash and Cash Equivalents,
Beginning of Year
|
|
$
|
346,897
|
|
|
$
|
38,183
|
|
|
$
|
141,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
223,029
|
|
|
|
(115,889
|
)
|
|
|
92,024
|
|
Adjustments to reconcile net income
(loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net of tax
|
|
|
6,219
|
|
|
|
266,334
|
|
|
|
28,461
|
|
Depreciation and amortization, net
of accretion
|
|
|
123,762
|
|
|
|
115,096
|
|
|
|
113,417
|
|
Increase in deferred income taxes
|
|
|
16,543
|
|
|
|
22,528
|
|
|
|
27,052
|
|
Amortization of deferred
compensation
|
|
|
10,520
|
|
|
|
13,244
|
|
|
|
9,376
|
|
Provision for uncollectible accounts
|
|
|
4,814
|
|
|
|
5,103
|
|
|
|
5,425
|
|
Equity in earnings of joint venture
|
|
|
(16,061
|
)
|
|
|
(18,253
|
)
|
|
|
(20,718
|
)
|
Loss (Gain) on sales of property
and equipment, net
|
|
|
(639
|
)
|
|
|
88
|
|
|
|
2,182
|
|
Loss from equity ventures
|
|
|
|
|
|
|
300
|
|
|
|
3,705
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(124,322
|
)
|
|
|
(34,870
|
)
|
|
|
(12,373
|
)
|
Prepaid expenses
|
|
|
(5,824
|
)
|
|
|
(2,978
|
)
|
|
|
(10,472
|
)
|
Accounts payable
|
|
|
27,414
|
|
|
|
42,372
|
|
|
|
(18,812
|
)
|
Accrued incentive compensation
|
|
|
(20,077
|
)
|
|
|
29,367
|
|
|
|
(27,876
|
)
|
Accrued liabilities, excluding
accrued incentive compensation
|
|
|
2,046
|
|
|
|
917
|
|
|
|
7,503
|
|
Self-insurance accruals
|
|
|
3,861
|
|
|
|
(2,956
|
)
|
|
|
(25,654
|
)
|
Income taxes
|
|
|
20,166
|
|
|
|
22,009
|
|
|
|
28,267
|
|
Employee benefits
|
|
|
(78,597
|
)
|
|
|
(24,658
|
)
|
|
|
(4,178
|
)
|
Deferred charges and credits
|
|
|
27,496
|
|
|
|
67,081
|
|
|
|
17,415
|
|
Other
|
|
|
(2,794
|
)
|
|
|
(5,210
|
)
|
|
|
11,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Operating
Activities
|
|
|
217,556
|
|
|
|
379,625
|
|
|
|
226,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(210,186
|
)
|
|
|
(151,460
|
)
|
|
|
(127,763
|
)
|
Software expenditures
|
|
|
(8,377
|
)
|
|
|
(10,960
|
)
|
|
|
(12,442
|
)
|
Proceeds from sales of property and
equipment, net
|
|
|
5,516
|
|
|
|
14,007
|
|
|
|
6,209
|
|
Proceeds from sale of discontinued
operations
|
|
|
108,366
|
|
|
|
150,000
|
|
|
|
|
|
Net decrease (increase) in
marketable securities
|
|
|
283,950
|
|
|
|
(225,860
|
)
|
|
|
(169,440
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by (Used in)
Investing Activities
|
|
|
179,269
|
|
|
|
(224,273
|
)
|
|
|
(303,436
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of
long-term debt
|
|
|
|
|
|
|
292,587
|
|
|
|
2,156
|
|
Repayment of long-term debt and
guarantees
|
|
|
(112,730
|
)
|
|
|
(142,925
|
)
|
|
|
(12,142
|
)
|
Proceeds from exercise of stock
options
|
|
|
76,054
|
|
|
|
56,081
|
|
|
|
6,389
|
|
Payments of common dividends
|
|
|
(21,036
|
)
|
|
|
(20,323
|
)
|
|
|
(19,850
|
)
|
Payments of preferred dividends
|
|
|
(9,664
|
)
|
|
|
(9,941
|
)
|
|
|
(10,192
|
)
|
Repurchases of common stock
|
|
|
(149,053
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by (Used in)
Financing Activities
|
|
|
(216,429
|
)
|
|
|
175,479
|
|
|
|
(33,639
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by (Used in)
Continuing Operations
|
|
|
180,396
|
|
|
|
330,831
|
|
|
|
(110,898
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations
(Revised See Note 1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by (Used in)
Operating Activities
|
|
|
(12,959
|
)
|
|
|
(17,417
|
)
|
|
|
5,151
|
|
Net Cash Provided by (Used In)
Investing Activities
|
|
|
|
|
|
|
(4,538
|
)
|
|
|
7,074
|
|
Net Cash Used in Financing
Activities
|
|
|
|
|
|
|
(162
|
)
|
|
|
(4,957
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by (Used in)
Discontinued Operations
|
|
|
(12,959
|
)
|
|
|
(22,117
|
)
|
|
|
7,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in Cash and
Cash Equivalents
|
|
|
167,437
|
|
|
|
308,714
|
|
|
|
(103,630
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, End of
Year
|
|
$
|
514,334
|
|
|
$
|
346,897
|
|
|
$
|
38,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Paid (Refunded) for income
taxes, net
|
|
$
|
80,893
|
|
|
$
|
59,797
|
|
|
$
|
(14,548
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Paid for interest of
continuing operations, net of amounts capitalized
|
|
$
|
46,987
|
|
|
$
|
37,267
|
|
|
$
|
29,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
39
CNF
INC.
STATEMENTS OF CONSOLIDATED SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Preferred Stock
Series B
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Repurchased
|
|
|
Other
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Paid-in
|
|
|
Deferred
|
|
|
Retained
|
|
|
Common
|
|
|
Comprehensive
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Earnings
|
|
|
Stock
|
|
|
Income (Loss)
|
|
|
Income (Loss)
|
|
|
|
(Dollars in thousands except per
share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2002
|
|
|
784,007
|
|
|
$
|
8
|
|
|
|
56,046,790
|
|
|
$
|
35,029
|
|
|
$
|
464,293
|
|
|
$
|
(69,433
|
)
|
|
$
|
506,816
|
|
|
$
|
(161,841
|
)
|
|
$
|
(56,874
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92,024
|
|
|
|
|
|
|
|
|
|
|
$
|
92,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on marketable
securities, net of deferred tax of $1,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,044
|
|
|
|
2,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustment (Note 1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,509
|
|
|
|
6,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of cash flow
hedges, net of deferred tax of $252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
394
|
|
|
|
394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability
adjustment, net of deferred tax of $7,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,004
|
|
|
|
11,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
111,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options,
including tax benefits of $1,120
|
|
|
|
|
|
|
|
|
|
|
276,206
|
|
|
|
172
|
|
|
|
7,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
113,985
|
|
|
|
72
|
|
|
|
3,752
|
|
|
|
(2,478
|
)
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TASP deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchased common stock issued for
conversion of preferred stock
|
|
|
(20,333
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,534
|
)
|
|
|
|
|
|
|
|
|
|
|
2,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common dividends declared
($.40 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,850
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B, Preferred dividends
($12.93 per share), net of tax benefits of $1,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,239
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2003
|
|
|
763,674
|
|
|
|
8
|
|
|
|
56,436,981
|
|
|
|
35,273
|
|
|
|
472,847
|
|
|
|
(63,875
|
)
|
|
|
570,751
|
|
|
|
(159,273
|
)
|
|
|
(36,923
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(115,889
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(115,889
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on marketable
securities, net of deferred tax of $1,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,044
|
)
|
|
|
(2,044
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustment (Note 1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,283
|
|
|
|
18,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability
adjustment, net of deferred tax of $3,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,948
|
|
|
|
4,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(94,702
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options,
including tax benefits of $12,647
|
|
|
|
|
|
|
|
|
|
|
2,080,380
|
|
|
|
1,300
|
|
|
|
67,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
26,893
|
|
|
|
17
|
|
|
|
4,262
|
|
|
|
444
|
|
|
|
|
|
|
|
(198
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TASP deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchased common stock issued for
conversion of preferred stock
|
|
|
(20,679
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,402
|
)
|
|
|
|
|
|
|
|
|
|
|
2,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common dividends declared
($.40 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,323
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B, Preferred dividends
($12.93 per share), net of tax benefits of $1,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,239
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2004
|
|
|
742,995
|
|
|
|
7
|
|
|
|
58,544,254
|
|
|
|
36,590
|
|
|
|
542,136
|
|
|
|
(54,861
|
)
|
|
|
426,300
|
|
|
|
(157,069
|
)
|
|
|
(15,736
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
223,029
|
|
|
|
|
|
|
|
|
|
|
$
|
223,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustment (Note 1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124
|
|
|
|
124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability
adjustment, net of deferred tax of $13,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,495
|
)
|
|
|
(21,495
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
201,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options,
including tax benefits of $22,490
|
|
|
|
|
|
|
|
|
|
|
2,688,272
|
|
|
|
1,680
|
|
|
|
96,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
(28,263
|
)
|
|
|
(17
|
)
|
|
|
62
|
|
|
|
2,666
|
|
|
|
|
|
|
|
(33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TASP deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchased common stock issued for
conversion of preferred stock
|
|
|
(101,636
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
(12,775
|
)
|
|
|
|
|
|
|
|
|
|
|
12,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock repurchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(149,053
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common dividends declared
($.40 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,036
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B, Preferred dividends
($12.93 per share), net of tax benefits of $1,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,728
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2005
|
|
|
641,359
|
|
|
$
|
6
|
|
|
|
61,204,263
|
|
|
$
|
38,253
|
|
|
$
|
626,287
|
|
|
$
|
(43,706
|
)
|
|
$
|
620,565
|
|
|
$
|
(293,380
|
)
|
|
$
|
(37,107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
40
CNF
Inc.
Notes to Consolidated Financial Statements
|
|
1.
|
Principal
Accounting Policies
|
Organization: CNF Inc. and its subsidiaries
provide transportation, logistics, and supply chain management
services for a wide range of manufacturing, industrial, and
retail customers. For financial reporting purposes, CNF is
divided into three reporting segments: Con-Way, Menlo Worldwide,
and CNF Other.
Con-Way provides regional next-day, second-day, and
transcontinental freight trucking throughout the U.S., Canada,
Puerto Rico and Mexico, as well as expedited transportation,
freight forwarding, and truckload brokerage services.
Menlo Worldwide includes the operating results of Logistics and
Vector. Logistics develops contract logistics solutions,
including the management of complex distribution networks and
supply chain engineering and consulting. Vector serves as the
lead logistics manager for GM and provides logistics services to
other customers to a lesser degree.
The CNF Other reporting segment includes the operating results
of Road Systems, a trailer manufacturer, and certain corporate
activities.
In December 2004, CNF completed the sale of MWF. As a
result, for all periods presented, the results of operations,
net liabilities, and cash flows of the Forwarding segment have
been segregated and reported as discontinued operations, as more
fully discussed in Note 2, Discontinued
Operations.
Principles of Consolidation: The consolidated
financial statements include the accounts of CNF Inc. and its
subsidiaries (CNF). All significant intercompany
accounts and transactions have been eliminated.
Recognition of Revenues: Freight
transportation revenue is recognized upon delivery of a
shipment. Delivery costs are accrued as incurred. For shipments
in transit, revenue and related delivery costs are recognized
based on the estimated percentage of service completed at the
balance sheet date. Estimates for future billing adjustments to
revenue are recognized at the time of shipment for certain
discounts and billing corrections.
Revenue from logistics contracts is recognized in accordance
with contractual terms as services are provided. Revenue is
recorded on a gross basis, without deducting third-party
purchased transportation costs, on contracts for which Logistics
acts as a principal with substantial risks and rewards of
ownership. Revenue is recorded on a net basis, after deducting
purchased transportation costs, on contracts for which Logistics
acts as an agent without substantial risks and rewards of
ownership.
Cash Equivalents and Marketable
Securities: Cash and cash equivalents consist of
short-term interest-bearing instruments with maturities of three
months or less at the date of purchase. At December 31,
2005 and 2004, cash-equivalent investments of $496,800,000 and
$287,995,000, respectively, consisted primarily of commercial
paper and certificates of deposit. The carrying amount of these
cash-equivalent securities approximates fair value.
Marketable securities consist primarily of short-term
available-for-sale auction-rate securities and variable-rate
demand notes. Auction-rate securities and variable-rate demand
notes have contractual maturities of greater than three months
at the date of purchase; however, the securities have interest
or dividend rates that reset every 7 to 35 days and can
generally be liquidated quickly. Realized and unrealized gains
and losses on auction-rate securities and variable-rate demand
notes were not material for the periods presented, and there
were no material differences between the estimated fair values
and the carrying values of the securities as of the dates
presented.
Trade Accounts Receivable, Net: 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 reasonably
41
estimable. Trade accounts receivable are net of allowances of
$7,056,000 and $6,616,000 at December 31, 2005 and 2004,
respectively.
Property, Plant and Equipment: Property, plant
and equipment are depreciated primarily on a straight-line basis
over their estimated useful lives, which are generally
25 years for buildings and improvements, 5 to 12 years
for revenue equipment, and 3 to 10 years for most other
equipment. Leasehold improvements are amortized over the shorter
of the terms of the respective leases or the useful lives of the
assets.
Expenditures for equipment maintenance and repairs are charged
to operating expenses as incurred; betterments are capitalized.
Gains (losses) on sales of equipment and property are recorded
in operating expenses.
Capitalized Software: Capitalized software,
net, consists of certain direct internal and external costs
associated with the development of internal-use software.
Amortization of capitalized software is computed on an
item-by-item
basis over a period of 3 to 10 years, depending on the
estimated useful life of the software. Amortization expense
related to capitalized software was $14,432,000 in 2005,
$15,259,000 in 2004, and $15,666,000 in 2003. Accumulated
amortization at December 31, 2005 and 2004 was $85,575,000
and $71,503,000, respectively.
Goodwill and Long-Lived Assets: CNF performs
an impairment analysis of long-lived assets whenever
circumstances indicate that the carrying amount may not be
recoverable. For assets that are to be held and used, an
impairment charge is recognized when the estimated undiscounted
cash flows associated with the asset or group of assets is less
than carrying value. If impairment exists, a charge is
recognized for the difference between the carrying value and the
fair value. Fair values are determined using quoted market
values, discounted cash flows, or external appraisals, as
applicable. Assets held for disposal are carried at the lower of
carrying value or estimated net realizable value.
Prior to the write-down of goodwill described below, CNF tested
the recoverability of goodwill on an annual basis in the fourth
quarter and between annual tests in certain circumstances. CNF
utilized a third-party valuation consultant to perform the
impairment test of goodwill associated with the Forwarding
reporting segment as of December 31, 2003 based on a
fair-value approach. 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 in Note 2, 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 was
based on an agreement to sell MWF and represented the estimated
write-down to the carrying value of MWFs goodwill and
long-lived assets, including MWFs 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 managements assessment of the risk
and resource requirements associated with other strategic
alternatives related to MWFs operations.
Income Taxes: Deferred income taxes are
provided for the tax effect of temporary differences between the
tax basis of assets and liabilities and their reported amounts
in the financial statements. CNF uses the liability method to
account for income taxes, which requires deferred taxes to be
recorded at the statutory rate to be in effect when the taxes
are paid. At December 31, 2005 and 2004, income tax
receivables of $31.5 million and $26.6 million,
respectively, were included in Other Accounts Receivable in
CNFs Consolidated Balance Sheets.
Self-Insurance Accruals: CNF uses a
combination of insurance and self-insurance programs to provide
for the costs of medical, casualty, liability, vehicular, cargo,
and workers compensation claims. In the measurement of
these costs, CNF considers historical claims experience, medical
costs, demographic and severity factors, and other assumptions.
Self-insurance accruals are developed based on the estimated,
undiscounted cost of claims, including those claims incurred but
not reported as of the balance sheet date. The long-term portion
of self-insurance accruals relates primarily to workers
compensation and vehicular claims that are payable over several
years. The actual costs may vary from estimates.
CNF participates in a reinsurance pool to reinsure a portion of
its workers compensation and vehicular liabilities. Each
participant in the pool cedes claims to the pool and assumes an
equivalent amount of claims. Reinsurance does not relieve CNF of
its liabilities under the original policy. However, in the
opinion of
42
management, potential exposure to CNF for non-payment is
minimal. At December 31, 2005 and 2004, CNF had recorded a
liability related to assumed claims of $18.7 million and
$24.1 million, respectively, and had recorded a receivable
from the reinsurance pool of $14.0 million and
$16.6 million, respectively. CNF recognized operating
income of $1.6 million in 2005 and operating expense of
$0.6 million and $4.1 million in 2004 and 2003,
respectively, in connection with its participation in the
reinsurance pool.
Foreign Currency Translation: Adjustments
resulting from translating foreign functional currency financial
statements into U.S. dollars are included in the Foreign
Currency Translation Adjustment in the Statements of
Consolidated Shareholders Equity. 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.
Earnings (Loss) Per Share (EPS): Basic EPS for
continuing operations is computed by dividing reported net
income (loss) from continuing operations (after preferred stock
dividends) by the weighted-average common shares outstanding.
Diluted EPS is calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in thousands except per
share data)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations (after
preferred stock dividends), as reported
|
|
$
|
221,520
|
|
|
$
|
142,206
|
|
|
$
|
112,246
|
|
Add-backs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on Series B
preferred stock, net of replacement funding
|
|
|
1,156
|
|
|
|
1,337
|
|
|
|
1,379
|
|
Interest expense on convertible
subordinated debentures, net of trust dividend income
|
|
|
|
|
|
|
1,590
|
|
|
|
3,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
222,676
|
|
|
|
145,133
|
|
|
|
117,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
|
(6,219
|
)
|
|
|
(266,334
|
)
|
|
|
(28,461
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Applicable to common shareholders
|
|
$
|
216,457
|
|
|
$
|
(121,201
|
)
|
|
$
|
88,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares
outstanding
|
|
|
52,192,539
|
|
|
|
50,455,006
|
|
|
|
49,537,945
|
|
Stock options and restricted stock
|
|
|
1,000,988
|
|
|
|
1,197,519
|
|
|
|
467,340
|
|
Series B preferred stock
|
|
|
3,019,522
|
|
|
|
3,498,021
|
|
|
|
3,595,382
|
|
Convertible subordinated debentures
|
|
|
|
|
|
|
1,302,083
|
|
|
|
3,125,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,213,049
|
|
|
|
56,452,629
|
|
|
|
56,725,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) per Diluted Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
3.96
|
|
|
$
|
2.57
|
|
|
$
|
2.07
|
|
Discontinued operations
|
|
|
(0.11
|
)
|
|
|
(4.72
|
)
|
|
|
(0.50
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Applicable to common shareholders
|
|
$
|
3.85
|
|
|
$
|
(2.15
|
)
|
|
$
|
1.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2004, diluted shares reflect the effect of CNFs
redemption in June 2004 of its convertible subordinated
debentures.
Derivative Instruments and Hedging
Activities: CNF is exposed to a variety of market
risks, including the effects of interest rates, commodity
prices, and foreign currency exchange rates. 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 the 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. As more fully discussed in Note 5, Debt and
Other Financing Arrangements, CNF in December 2002
terminated four interest rate swap derivatives designated as
fair value hedges of fixed-rate long-term debt. Except
43
for the effect of these terminated interest rate swaps,
derivative financial instruments did not have a material effect
on CNFs financial condition, results of operations, or
cash flows.
Stock-Based Compensation: As described in
Note 10, Stock-Based Compensation, employees
and non-employee directors have been granted options under
CNFs 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
(APB 25). Accordingly, no compensation expense
is recognized for fixed-option plans because the exercise prices
of employee stock options equal the market prices of the
underlying stock on the dates of grant.
The table below 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. For purposes of this pro-forma
disclosure, the value of the options is estimated using a
Black-Scholes option pricing model and amortized ratably over
the vesting periods. The actual value ultimately realized by the
employee may be significantly different because the estimated
value is determined as of the grant date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in thousands, except
per share data)
|
|
|
Net income (loss) applicable to
common shareholders, as reported
|
|
$
|
215,301
|
|
|
$
|
(124,128
|
)
|
|
$
|
83,785
|
|
Stock-based compensation cost
included in reported income, net of related tax effects
|
|
|
1,239
|
|
|
|
2,852
|
|
|
|
817
|
|
Additional compensation cost, net
of tax, that would have been included in net income (loss) if
the fair-value method had been applied
|
|
|
(5,931
|
)
|
|
|
(11,476
|
)
|
|
|
(9,631
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) as if
the fair-value method had been applied
|
|
$
|
210,609
|
|
|
$
|
(132,752
|
)
|
|
$
|
74,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
4.13
|
|
|
$
|
(2.46
|
)
|
|
$
|
1.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$
|
4.04
|
|
|
$
|
(2.63
|
)
|
|
$
|
1.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
3.85
|
|
|
$
|
(2.15
|
)
|
|
$
|
1.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$
|
3.77
|
|
|
$
|
(2.30
|
)
|
|
$
|
1.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Accounting Standards: In December 2004,
the FASB issued SFAS No. 123R, Share-Based
Payment (SFAS 123R), a revision of
SFAS 123 that supersedes APB 25 and its related
implementation guidance. SFAS 123R eliminates the
alternative to use APB 25s intrinsic value method of
accounting that was provided in SFAS 123 as originally
issued, and requires companies to recognize the cost of employee
services received in exchange for awards of equity instruments
based on the grant-date fair value of those awards (with limited
exceptions) over the period during which an employee is required
to provide service in exchange for the award.
SFAS 123R also amends FASB Statement No. 95,
Statement of Cash Flows, to require that the
benefits associated with the tax deductions in excess of
recognized compensation cost be reported as financing cash
flows, rather than as a reduction of taxes paid. This
requirement will reduce net operating cash flows and increase
net financing cash flows in periods after the effective date.
The effective date of SFAS 123R is as of the beginning of
the first interim or annual reporting period of the first fiscal
year beginning on or after June 15, 2005, which for CNF is
the first quarter of 2006. In the adoption of
44
SFAS 123R, CNF has concluded that it will continue its use
of the Black-Scholes model for estimating the fair value of
stock options granted and will apply the modified prospective
transition method to all past share-based awards outstanding and
unvested as of the effective adoption date of January 1,
2006. Under the modified prospective transition method, CNF will
recognize the associated expense over the remaining vesting
period based on the fair values previously determined and
disclosed as part of the pro-forma disclosures presented above.
The estimated annual compensation expense related to these
unvested stock options in 2006 is approximately $0.07 per
diluted common share. However, the calculation of total
compensation expense for share-based awards after the effective
date of SFAS 123R cannot be known at this time as it is
affected by the number of future shares awarded, and it may be
different from the calculation of pro-forma compensation expense
under SFAS 123, as presented in the table above.
Estimates: Management makes estimates and
assumptions when preparing the financial statements in
conformity with accounting principles generally accepted in the
U.S. These estimates and assumptions affect the amounts
reported in the accompanying financial statements and notes.
Changes in estimates are recognized in accordance with the
accounting rules for the estimate, which is typically in the
period when new information becomes available. It is reasonably
possible that actual results could materially differ from
estimates, including those related to accounts receivable
allowances, impairment of goodwill and long-lived assets,
depreciation, income tax liabilities, self-insurance accruals,
pension plan obligations, contingencies, and assets and
liabilities recognized in connection with restructurings and
dispositions.
Reclassification and Revisions: Certain
amounts in the prior-period financial statements have been
reclassified or revised to conform to the current-period
presentation.
In 2005, for all periods presented, CNF has separately disclosed
the operating, investing, and financing portions of the cash
flows attributable to its discontinued operations, which in
prior periods were reported as a single amount.
In 2005, for all periods presented, CNF has reclassified certain
costs from selling, general, and administrative expenses to
operating expenses. For 2004 and 2003, costs of
$60.5 million and $56.8 million that were reported in
prior periods as selling, general, and administrative expenses
are more appropriately classified in the accompanying financial
statements as operating expenses.
In 2005, the classification of variable-rate demand notes in the
2004 financial statements was revised to conform to the
current-period presentation. Previously, investments in
variable-rate demand notes were recorded in cash and cash
equivalents rather than marketable securities, based on
provisions that allowed CNF to quickly liquidate those
securities. However, based on remaining contractual maturities
that exceed three months, CNF in 2005 classified these
investments as short-term marketable securities. In CNFs
Consolidated Balance Sheets at December 31, 2005,
$81.3 million of variable-rate demand notes were classified
as short-term marketable securities, and at December 31,
2004, the revised classification of these securities decreased
cash and cash equivalents by $40.0 million and increased
marketable securities in an equal amount. In CNFs
Consolidated Cash Flows for 2004, the revised classification
increased the net cash used in investing activities by
$40.0 million, while 2003 was not affected.
|
|
2.
|
Discontinued
Operations
|
Discontinued operations in the periods presented relate to the
sale of MWF, to the shut-down of EWA and its terminated Priority
Mail contract with the U.S. Postal Service
(USPS), and to the spin-off of Consolidated
Freightways Corporation (CFC). The results of
operations, net liabilities, and cash flows of discontinued
operations have been segregated from continuing operations,
except where otherwise noted.
As required by EITF 87-24, Allocation of Interest to
Discontinued Operations, for periods prior to the
disposition of MWF in 2004, continuing operations has been
allocated general corporate overhead charges that were
previously allocated to the discontinued Forwarding segment.
These corporate overhead charges of $16.9 million in 2004
and $14.0 million in 2003 were allocated from discontinued
operations to Con-Way and Logistics based on segment revenue and
capital employed.
45
Results of discontinued operations are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in thousands)
|
|
|
Menlo Worldwide Forwarding
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
2,189,791
|
|
|
$
|
1,886,048
|
|
Income (Loss) from Discontinued
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
|
|
|
|
1,501
|
|
|
|
(41,501
|
)
|
Income tax benefit
|
|
|
|
|
|
|
10,914
|
|
|
|
13,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
12,415
|
|
|
$
|
(28,461
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Disposal, net
of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
Menlo Worldwide Forwarding
|
|
$
|
1,247
|
|
|
$
|
(276,309
|
)
|
|
$
|
|
|
CFC
|
|
|
1,560
|
|
|
|
(2,440
|
)
|
|
|
|
|
EWA
|
|
|
(9,026
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(6,219
|
)
|
|
$
|
(278,749
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The assets and liabilities of discontinued operations, which are
presented in the Consolidated Balance Sheets under the captions
Assets (or Liabilities) of Discontinued Operations,
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
$
|
13,141
|
|
|
$
|
5,128
|
|
Prepaid employee benefits and
long-lived assets
|
|
|
|
|
|
|
15,220
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
13,141
|
|
|
|
20,348
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued
liabilities
|
|
|
34,129
|
|
|
|
34,705
|
|
Long-term liabilities
|
|
|
|
|
|
|
6,862
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
34,129
|
|
|
|
41,567
|
|
|
|
|
|
|
|
|
|
|
Net Liabilities
|
|
$
|
20,988
|
|
|
$
|
21,219
|
|
|
|
|
|
|
|
|
|
|
Impairment
Charge
On October 5, 2004, CNF and Menlo Worldwide, LLC
(MW) entered into a stock purchase agreement with
UPS to sell all of the issued and outstanding capital stock of
MWF. CNF completed the sale on December 19, 2004, as more
fully discussed below. Although the stock purchase agreement was
entered into on October 5, 2004, decisions by CNFs
management and its Board of Directors and the third-quarter sale
negotiations with UPS established CNFs commitment to sell
MWF as of September 30, 2004. In the process of evaluating
several strategic alternatives for Menlo Worldwides
Forwarding segment, CNF was approached by UPS in the third
quarter of 2004 with interest in acquiring MWF. Accordingly, in
the third quarter of 2004, CNF classified MWF as held for sale
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 was based on
the agreement to sell MWF, as described below, and primarily
represents the estimated write-down to the fair value of
MWFs goodwill and long-lived assets, including MWFs
accumulated foreign currency translation adjustment, as well as
estimated selling costs.
46
Stock
Purchase Agreement
The stock purchase agreement excludes certain assets and
liabilities of MWF and includes certain assets and liabilities
of CNF or its subsidiaries related to the business conducted by
MWF. Among the assets and liabilities so excluded are those
related to EWA, and the obligation related to MWF employees
covered under CNFs domestic pension, postretirement
medical and long-term disability plans. Under the agreement, UPS
agreed to pay to CNF an amount equal to MWFs cash position
as of December 31, 2004, and to pay the estimated present
value of CNFs retained obligations related to MWF
employees covered under CNFs long-term disability and
postretirement medical plans, as agreed to by the parties. Under
the stock purchase agreement, CNF has agreed to a three-year
non-compete covenant that, subject to certain exceptions, will
limit CNFs annual air freight and ocean forwarding
and/or
customs brokerage revenues to $175 million through
CNFs 2007 fiscal year. CNF has also agreed to 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 recognized in
future periods as an additional loss from disposal when and if
incurred.
Disposition
of MWF
Upon completion of the sale of MWF on December 19, 2004,
CNF received cash consideration of $150 million, subject to
certain post-closing adjustments, including adjustments for cash
held by MWF at closing and MWFs net working capital as of
closing. In connection with the sale, CNF in 2004 recognized a
fourth-quarter loss from disposal of $15.8 million (net of
a $3.6 million tax benefit), as the adjusted carrying value
of MWF exceeded the cash consideration, including amounts
received at closing and expected to be received in the future.
The third-quarter impairment charge and the fourth-quarter loss
from disposal resulted in total sale-related charges of
$276.3 million in 2004. Following settlement of the MWF
cash balance in March 2005, CNF received cash of
$29.4 million and recognized an additional first-quarter
net loss from disposal of $9.8 million, primarily to
recognize the difference between the actual cash received and
CNFs estimate of the cash position at December 31,
2004, and to accrue additional estimated transaction costs. In
the remainder of 2005, CNF reported an $11.0 million net
gain from additional adjustments in its estimated disposition
loss, including a $9.0 million third-quarter net gain to
recognize an increase in its estimate of deferred tax assets
associated with employee benefit obligations retained by CNF, as
more fully discussed below under Excluded
Assets and Liabilities.
CNFs disposal of MWF generated a capital loss for tax
purposes. Under current tax law, capital losses can only be used
to offset capital gains. Since CNF did not forecast any
significant taxable capital gains in the five-year tax
carryforward period, the $40.8 million cumulative
disposal-related tax benefit at December 31, 2004 was fully
offset by a valuation allowance of an equal amount. In 2005, the
cumulative disposal-related tax benefit and the associated
valuation allowance declined to $30.0 million at
December 31, 2005 due primarily to the third-quarter
sale-related proceeds received from UPS and revisions to the tax
effect of sale-related estimates, partially offset by the
first-quarter disposal-related capital loss.
Excluded
Assets and Liabilities
As described above, the stock purchase agreement excludes, and
CNF has retained, the obligations related to MWF employees
covered under certain CNF-sponsored employee benefit plans,
including domestic pension, postretirement medical, and
long-term disability plans that cover the noncontractual
employees and former employees of both continuing operations as
well as the discontinued Forwarding segment (collectively, the
CNF Benefit Plans). Under the stock purchase
agreement, UPS agreed to pay to CNF the estimated present value
of CNFs retained obligations related to MWF employees
covered under CNFs long-term disability and postretirement
medical plans (the Reimbursable Plans). Accordingly,
CNF in December 2004 recorded in Other Accounts Receivable a
receivable for its estimate of the present value of the retained
obligations of the Reimbursable Plans. Under an agreement
reached in August 2005, UPS paid $79.0 million to CNF for
the agreed-upon estimated present value of the retained
obligations of the Reimbursable Plans. The carrying value of
these obligations at December 31, 2005 was substantially
equal to the cash reimbursement from UPS and the present value
estimated by a third-party actuary as of CNFs annual
November 30 actuarial measurement date. Based on CNFs
intention to retain the obligation related to employees of MWF
and EWA covered by the CNF Benefit Plans,
47
the obligation is included in Employee Benefits of continuing
operations in CNFs Consolidated Balance Sheets at
December 31, 2005 and 2004. The stock purchase agreement
also excludes, and CNF has retained, the net prepaid benefit
cost related to certain pension plans that cover only the former
employees of the discontinued Forwarding segment (the
Forwarding Plans). In CNFs Consolidated
Balance Sheets, the prepaid benefit cost related to the
Forwarding Plans was reported in Assets of Discontinued
Operations at December 31, 2004 and, based on CNFs
decision to retain these obligations and the completion of
sale-related adjustments in 2005, was reclassified to Employee
Benefits of continuing operations at December 31, 2005.
Future changes in the carrying value of the retained obligations
of the CNF Benefit Plans and the prepaid benefit cost of the
Forwarding Plans will be recognized in future periods as income
or loss of continuing operations.
EWA
The results of EWA relate to the cessation of its air-carrier
operations in 2001 and to the termination of its Priority Mail
contract with the USPS in 2000. In 2005, EWA recognized net
losses of $9.0 million, due primarily to increases in the
estimated exposure for litigation and restructuring-related
obligations. EWAs estimated loss reserves increased to
$34.1 million at December 31, 2005 from
$33.8 million at December 31, 2004 due primarily to
the losses described above, partially offset by the cash
settlement of restructuring-related obligations. EWAs
remaining loss reserves at December 31, 2005 were reported
in Liabilities of Discontinued Operations and consisted mostly
of CNFs estimated exposure related to the labor matters
described below, and other litigation-related losses, as more
fully discussed in Note 11, Commitments and
Contingencies.
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 EWAs air-carrier operations and
MWFs 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 CNFs 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.
|
|
3.
|
Investment
in Unconsolidated Joint Venture
|
Vector is a joint venture formed with GM in December 2000 for
the purpose of providing logistics management services on a
global basis for GM, and for customers in addition to GM.
Although MW owns a majority interest in Vector, MWs
portion of Vectors operating results are reported in the
Menlo Worldwide reporting segment as an equity-method investment
based on GMs ability to control certain operating
decisions. Vector is organized as a limited liability company
that has elected to be taxed as a partnership. In the U.S., the
joint venture partners are responsible for income taxes
applicable to their share of Vectors U.S. federal
taxable income. Accordingly, MWs portion of U.S federal
income taxes on Vectors domestic income is reported in
CNFs tax provision. CNFs foreign tax credits related
to Vectors foreign income are also reflected in CNFs
tax provision. In foreign tax jurisdictions, Vector, rather than
the joint venture partners, is responsible for income taxes on
its foreign income. In accordance with GAAP, MWs portion
of Vectors income taxes on its foreign income is reported
in operating income as a component of equity-method income
rather than in CNFs tax provision. MWs portion of
Vectors net income, which is reported as a reduction of
operating expenses in the accompanying Statements of
Consolidated Operations, does not include any provision for
U.S. federal income taxes on income earned by CNF, but does
include a $4.2 million provision in 2005 for MWs
portion of Vectors income taxes on foreign income.
MWs undistributed earnings from Vector at
December 31, 2005 and 2004, before provision for CNFs
related parent income taxes, were $23.6 million and
$27.2 million, respectively.
Vector participates in CNFs centralized cash management
system, and, consequently, Vectors domestic trade accounts
payable are paid by CNF and settled through Vectors
affiliate accounts with CNF. In addition, excess cash balances
in Vectors bank accounts, if any, are invested by CNF and
settled through affiliate accounts, which earn interest income
based on a rate earned by CNFs cash-equivalent investments
and marketable securities. As a result of Vectors excess
cash invested by CNF, CNFs payable to Vector as of
December 31, 2005 and 2004 was $22.0 million and
$15.5 million, respectively.
48
As required by the Vector Agreements, CNF provides Vector with a
line of credit for Vectors working capital and capital
expenditure requirements. Under the credit facility, Vector may
obtain loans with an annual interest rate based on the rate CNF
pays under its $400 million revolving credit facility. At
its maturity on December 13, 2005, a $20 million line
of credit was replaced with a $10 million line of credit
that matures on December 13, 2008. At December 31,
2005, CNF provided a portion of its $10 million credit
commitment to Vector through CNFs guarantee of
$1.8 million of uncommitted local currency overdraft
facilities available to Vector by international banks. At
December 31, 2005 and 2004, there was no balance
outstanding under Vectors uncommitted local currency
overdraft facilities and no borrowings were directly payable to
CNF.
In 2005 and 2004, Vector approved cash distributions to GM and
MW. Vectors affiliate receivable from CNF and MWs
undistributed earnings from Vector at December 31, 2005 and
2004 were reduced by MWs share of these distributions
($19.7 million in 2005 and $13.7 million in 2004).
CNFs capital transactions with Vector, including cash
advances to and from Vector under CNFs centralized cash
management system and credit facility described above, are
reported as adjustments to MWs investment in Vector in
Deferred Charges and Other Assets in CNFs Consolidated
Balance Sheets.
Accrued liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Holiday and vacation pay
|
|
$
|
56,883
|
|
|
$
|
55,739
|
|
Incentive compensation
|
|
|
33,723
|
|
|
|
53,800
|
|
Wages and salaries
|
|
|
31,379
|
|
|
|
24,719
|
|
Employee benefits
|
|
|
28,397
|
|
|
|
24,491
|
|
Taxes other than income taxes
|
|
|
23,574
|
|
|
|
20,102
|
|
Estimated revenue adjustments
|
|
|
8,439
|
|
|
|
8,753
|
|
Accrued interest
|
|
|
6,253
|
|
|
|
6,865
|
|
Other accrued liabilities
|
|
|
26,235
|
|
|
|
31,968
|
|
|
|
|
|
|
|
|
|
|
Total accrued liabilities
|
|
$
|
214,883
|
|
|
$
|
226,437
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Debt
and Other Financing Arrangements
|
Long-term debt and guarantees consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
7.35% Notes due 2005
(interest payable semi-annually)
|
|
|
|
|
|
$
|
100,000
|
|
Mortgage note payable, 7.63%, due
2008 (interest payable monthly)
|
|
$
|
2,072
|
|
|
|
2,102
|
|
TASP Notes guaranteed, 6.00% to
8.54%, due through 2009 (interest payable semi-annually)
|
|
|
77,000
|
|
|
|
89,700
|
|
87/8% Notes
due 2010 (interest payable semi-annually), net of discount and
including fair market value adjustment
|
|
|
224,712
|
|
|
|
229,632
|
|
6.70% Senior Debentures due
2034 (interest payable semi-annually), net of discount
|
|
|
292,718
|
|
|
|
292,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
596,502
|
|
|
|
714,071
|
|
Less current maturities
|
|
|
(15,033
|
)
|
|
|
(112,727
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term debt and guarantees
|
|
$
|
581,469
|
|
|
$
|
601,344
|
|
|
|
|
|
|
|
|
|
|
49
Revolving Credit Facility: CNF has a
$400 million revolving credit facility that matures on
March 11, 2010. The $400 million revolving facility,
which CNF entered into in March 2005, replaced a
$385 million revolving credit facility. The revolving
credit facility is available for cash borrowings and for the
issuance of letters of credit up to $400 million. At
December 31, 2005 and 2004, no borrowings were outstanding
under CNFs revolving credit facility and, at
December 31, 2005, $215.1 million of letters of credit
were outstanding, leaving $184.9 million of available
capacity for additional letters of credit or cash borrowings,
subject to compliance with financial covenants and other
customary conditions to borrowing. The total letters of credit
outstanding at December 31, 2005 provided collateral for
CNFs self-insurance programs. Borrowings under the
agreement bear interest at a rate based upon the lead
banks base rate or eurodollar rate plus a margin dependent
on either CNFs senior debt credit ratings or a ratio of
net debt (i.e., indebtedness net of cash, cash
equivalents and certain marketable securities) to earnings
before interest, taxes and depreciation/amortization. The credit
facility fee ranges from 0.10% to 0.25% applied to the total
facility of $400 million based on CNFs current credit
ratings. The revolving facility is guaranteed by certain of
CNFs material domestic subsidiaries and contains two
financial covenants: (i) a leverage ratio and (ii) a
fixed-charge coverage ratio. There are also various restrictive
covenants, including limitations on (i) the incurrence of
liens, (ii) consolidations, mergers and asset sales, and
(iii) the incurrence of additional subsidiary indebtedness.
Other Uncommitted Credit Facilities: CNF had
other uncommitted unsecured credit facilities totaling
$35.0 million at December 31, 2005, which are
available to support letters of credit, bank guarantees, and
overdraft facilities; at that date, a total of
$15.7 million of letters of credit was outstanding under
these facilities.
Senior Debentures due 2034: The Senior
Debentures bear interest at the rate of 6.70% per year,
payable semi-annually on May 1 and November 1 of each
year. 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 CNFs ability, with certain exceptions, to incur
debt secured by liens. Including amortization of a discount
recognized upon issuance, interest expense on the
6.70% Senior Debentures Due 2034 will be recognized at an
annual effective interest rate of 6.90%.
Thrift and Stock Plan Notes: CNF guarantees
the notes issued by CNFs Thrift and Stock Plan
(TASP). As of December 31, 2005, there was
$15.0 million aggregate principal amount of Series A
TASP notes outstanding, bearing interest at an annual rate of
6.00% and maturing on January 1, 2006, and
$62.0 million aggregate principal amount of Series B
TASP notes outstanding, bearing interest at an annual rate of
8.54% and maturing on January 1, 2009. On January 3,
2006 the remaining $15.0 million Series A TASP notes
were repaid.
Holders of the Series B notes issued by CNFs TASP
have the right to require CNF to repurchase those notes if,
among other things, both Moodys and Standard &
Poors have publicly rated CNFs 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 Moodys or
Standard & Poors (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. At December 31, 2005, CNFs senior
unsecured debt was rated as investment grade by both
Moodys (Baa3) and Standard and Poors (BBB-). On
February 1, 2006, Standard and Poors raised
CNFs senior unsecured debt rating to BBB from
BBB-.
87/8% Notes Due
2010: The $200 million aggregate principal
amount of
87/8%
Notes contain certain covenants limiting the incurrence of
additional liens. Prior to their termination in December 2002,
CNF had designated four interest rate swap derivatives as fair
value hedges to mitigate the effects of interest rate volatility
on the fair value of CNFs
87/8% Notes.
Accordingly, until December 2002, changes in the value of these
interest rate swap derivatives were recognized in earnings and
offset by changes in the fair value of the hedged fixed-rate
debt. At the termination date, the $39.8 million estimated
fair value of these fair value hedges was offset by an equal
increase to the carrying amount of the hedged fixed-rate
long-term debt. The $39.8 million cumulative adjustment of
the carrying amount of the
87/8% Notes
will be accreted to future earnings at the effective interest
rate until the debt is extinguished, at which time any
unamortized fair-value adjustment would be fully recognized in
earnings. Absent the terminated fair value hedges, the
87/8% Notes
will cease to be adjusted for fluctuations in fair value
50
attributable to changes in interest rate risk. Including
accretion of the fair-value adjustment and amortization of a
discount recognized upon issuance, interest expense on the
87/8% Notes Due
2010 will be recognized at an annual effective interest rate of
5.6%.
Mortgage Note Payable: Con-Ways
mortgage note payable, due in 2008, is secured by real property.
7.35% Notes: CNF used a portion of the
proceeds from the Senior Debentures to repay the
$100 million 7.35% Notes at maturity on June 1,
2005.
CNFs consolidated interest expense as presented on the
Statements of Consolidated Operations is net of capitalized
interest of $136,000 in 2005, $173,000 in 2004, and $241,000 in
2003. The aggregate annual maturities and sinking fund
requirements of Long-Term Debt and Guarantees for the next five
years ending December 31 are $15,033,000 in 2006,
$18,635,000 in 2007, $22,704,000 in 2008, $22,700,000 in 2009,
and $200,000,000 in 2010.
As of December 31, 2005 and 2004, the estimated fair value
of long-term debt was $630 million and $760 million,
respectively. Fair values were estimated based on current rates
offered for debt with similar terms and maturities.
CNF and its subsidiaries are obligated under non-cancelable
operating leases for certain facilities, equipment, and
vehicles. Future minimum lease payments with initial or
remaining non-cancelable lease terms in excess of one year, at
December 31, 2005, were as follows:
|
|
|
|
|
|
|
Operating Leases
|
|
|
|
(Dollars in thousands)
|
|
|
Year ending December 31:
|
|
|
|
|
2006
|
|
$
|
52,841
|
|
2007
|
|
|
37,935
|
|
2008
|
|
|
24,082
|
|
2009
|
|
|
14,280
|
|
2010
|
|
|
9,482
|
|
Thereafter (through 2013)
|
|
|
9,437
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
148,057
|
|
|
|
|
|
|
Certain leases contain restrictive covenants, including a
limitation on the incurrence of additional indebtedness and the
requirement for specified levels of consolidated net worth.
Certain leases also contain provisions that allow CNF to extend
the leases for various renewal periods.
Under certain operating leases, Con-Way guarantees the residual
value of tractors and trailers at the end of the lease term. At
December 31, 2005, the residual value guaranteed under
these lease agreements was $4.1 million. CNF recognizes a
liability for any shortfall between the residual value guarantee
and the equipments fair value, which fluctuates depending
on market conditions.
Rental expense for operating leases comprised the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in thousands)
|
|
|
Minimum rentals
|
|
$
|
87,173
|
|
|
$
|
89,696
|
|
|
$
|
90,966
|
|
Sublease rentals
|
|
|
(3,261
|
)
|
|
|
(3,899
|
)
|
|
|
(4,680
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
83,912
|
|
|
$
|
85,797
|
|
|
$
|
86,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
The components of the provision for income taxes were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in thousands)
|
|
|
Current provision
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
95,040
|
|
|
$
|
57,129
|
|
|
$
|
37,474
|
|
State and local
|
|
|
9,255
|
|
|
|
13,574
|
|
|
|
10,255
|
|
Foreign
|
|
|
2,379
|
|
|
|
1,957
|
|
|
|
1,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106,674
|
|
|
|
72,660
|
|
|
|
49,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred provision
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
9,135
|
|
|
|
24,392
|
|
|
|
25,821
|
|
State and local
|
|
|
4,179
|
|
|
|
335
|
|
|
|
2,475
|
|
Foreign
|
|
|
1,885
|
|
|
|
(1,009
|
)
|
|
|
(627
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,199
|
|
|
|
23,718
|
|
|
|
27,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
121,873
|
|
|
$
|
96,378
|
|
|
$
|
77,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes have been provided for foreign operations based
upon the various tax laws and rates of the countries in which
operations are conducted.
Income tax provision varied from the amounts calculated by
applying the U.S. statutory income tax rate to the pretax
income as set forth in the following reconciliation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Federal statutory tax provision
rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State income tax provision, net of
federal income tax benefit
|
|
|
2.9
|
|
|
|
4.1
|
|
|
|
4.0
|
|
Foreign taxes in excess of
U.S. statutory rate
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
0.1
|
|
Non-deductible operating expenses
|
|
|
|
|
|
|
0.9
|
|
|
|
(0.3
|
)
|
Foreign tax credits, net
|
|
|
(0.8
|
)
|
|
|
(0.2
|
)
|
|
|
|
|
IRS Settlement
|
|
|
(2.2
|
)
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
(0.4
|
)
|
|
|
(0.9
|
)
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax provision rate
|
|
|
34.7
|
%
|
|
|
39.0
|
%
|
|
|
39.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2005, CNF entered into a settlement agreement with the IRS,
pursuant to which the parties settled various issues related to
an audit of the years 1999 through 2001. CNF reversed through
tax provision the related tax liabilities previously recognized
for these issues, resulting in a $7.8 million tax benefit
in 2005.
52
The components of deferred tax assets and liabilities related to
the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Employee benefits
|
|
$
|
111,895
|
|
|
$
|
105,213
|
|
Self-insurance accruals
|
|
|
48,857
|
|
|
|
62,983
|
|
Capital loss carryforwards
|
|
|
29,966
|
|
|
|
40,793
|
|
Operating loss carryforwards
|
|
|
6,263
|
|
|
|
5,048
|
|
Credit carryforwards
|
|
|
3,181
|
|
|
|
|
|
Other
|
|
|
7,034
|
|
|
|
7,682
|
|
Valuation allowance
|
|
|
(36,274
|
)
|
|
|
(41,796
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
170,922
|
|
|
|
179,923
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Property, plant, and equipment
|
|
|
129,431
|
|
|
|
137,548
|
|
Revenue
|
|
|
7,722
|
|
|
|
6,070
|
|
Other
|
|
|
6,692
|
|
|
|
14,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
143,845
|
|
|
|
157,670
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
27,077
|
|
|
$
|
22,253
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets and liabilities in the Consolidated Balance
Sheets are classified based on the related asset or liability
creating the deferred tax. Deferred taxes not related to a
specific asset or liability are classified based on the
estimated period of reversal. Although realization is not
assured, deferred tax assets are recognized when management
believes it more likely than not that they will be realized.
Deferred tax assets are reduced by a valuation allowance if,
based on available evidence, it is more likely than not that
some or all of the deferred tax assets will not be realized.
As more fully discussed in Note 2, Discontinued
Operations, CNFs disposal of MWF generated a capital
loss for tax purposes. Under current tax law, capital losses can
only be used to offset capital gains. Since CNF did not forecast
any significant taxable capital gains in the five-year tax
carryforward period, the $40.8 million cumulative
disposal-related tax benefit at December 31, 2004 was fully
offset by a valuation allowance of an equal amount. In 2005, the
cumulative disposal-related tax benefit and the associated
valuation allowance declined to $30.0 million at
December 31, 2005 due primarily to the third-quarter
sale-related proceeds received from UPS and revisions to the tax
effect of sale-related estimates, partially offset by the
first-quarter disposal-related capital loss.
CNF has operating loss and tax credit carryforwards that are
available to reduce state and foreign income taxes in future
years. At December 31, 2005, CNF has provided
$6.3 million in valuation allowance based on current
uncertainty over whether CNF will generate sufficient state and
foreign taxable income to fully utilize these tax credits and
operating losses.
The cumulative undistributed earnings of CNFs foreign
subsidiaries (approximately $22.8 million at
December 31, 2005), which if remitted are subject to
withholding tax, have been indefinitely reinvested in the
respective foreign subsidiaries operations unless it
becomes advantageous for tax or foreign exchange reasons to
remit these earnings. Therefore, no withholding or
U.S. taxes have been provided on this amount. The amount of
withholding tax that would be payable on remittance of the
undistributed earnings would approximate $1.1 million.
Series B Preferred Stock: In 1989, the
Board of Directors designated a series of 1,100,000 preferred
shares as Series B Cumulative Convertible Preferred Stock,
$.01 stated value, which is held by the CNF Thrift and
Stock Plan (TASP). The Series B preferred stock
is convertible into common stock, as described in Note 9,
Benefit Plans, at the rate of 4.71 shares for
each share of preferred stock subject to antidilution
adjustments in certain circumstances
53
and ranks senior to CNFs common stock. Holders of the
Series B preferred stock are entitled to vote with the
common stock and are entitled to a number of votes in such
circumstances equal to the product of (a) 1.3 multiplied by
(b) the number of shares of common stock into which the
Series B preferred stock is convertible on the record date
of such vote. Holders of the Series B preferred stock are
also entitled to vote separately as a class on certain other
matters. The TASP trustee is required to vote the allocated
shares based upon instructions from the participants;
unallocated shares are voted in proportion to the voting
instructions received from the participants with allocated
shares.
Accumulated Other Comprehensive Income
(Loss): CNF reports all changes in equity except
those resulting from investment by owners and distribution to
owners as Comprehensive Income (Loss) in the Statements of
Consolidated Shareholders Equity. The following is a
summary of the components of Accumulated Other Comprehensive
Loss:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Accumulated foreign currency
translation adjustments (Note 1)
|
|
$
|
(932
|
)
|
|
$
|
(1,056
|
)
|
Minimum pension liability
adjustment, net of deferred tax benefit of $23,128 and $9,386 at
December 31, 2005 and 2004 respectively (Note 9)
|
|
|
(36,175
|
)
|
|
|
(14,680
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive
loss
|
|
$
|
(37,107
|
)
|
|
$
|
(15,736
|
)
|
|
|
|
|
|
|
|
|
|
Common Stock Repurchase Program: In January
2005, CNFs Board of Directors authorized a two-year stock
repurchase program providing for the repurchase of up to
$300 million in common stock in open market purchases and
privately negotiated transactions. As of December 31, 2005,
CNF repurchased a total of 3,055,000 shares at a cost of
$149.1 million. CNF generally expects the remaining
purchases to be made ratably throughout the remainder of the
program.
9. Benefit
Plans
Employees of CNF and its subsidiaries in the U.S. are
covered under several defined benefit pension plans and a
postretirement medical plan (the Postretirement
Plan). The pension plans consist of a plan that covers the
non-contractual employees and former employees of both
continuing and discontinued operations (the Retirement
Plan) and certain pension plans that cover only the former
employees of the discontinued Forwarding segment (the
Forwarding Plans). As more fully discussed in
Note 2, Discontinued Operations, CNF completed
the sale of MWF in December 2004 and retained the obligations
related to the MWF employees covered under the Retirement Plan
and the Postretirement Plan as well as the net prepaid benefit
cost related to the Forwarding Plans. In connection with the
sale of MWF, benefits were curtailed for certain former
employees covered under the Retirement Plan and the
Postretirement Plan, and accordingly, the effects of the
curtailment, when material, are reported in the presentations
below.
Retirement Plan: Benefits under the Retirement
Plan are generally based on an employees five highest
consecutive amounts of annual compensation earned during the ten
years immediately prior to retirement. CNFs annual pension
expense and contributions are based on actuarial computations at
the actuarial plan measurement date in November of each year.
CNFs funding policy is to evaluate its tax and cash
position and the Retirement Plans funded status to
maximize the tax deductibility of its contributions for the
year. CNF currently estimates it will contribute
$75 million to the Retirement Plan in 2006, which is
subject to variation based on changes in interest rates and
asset returns.
Assets of the Retirement Plan are managed to long-term strategic
allocation targets. Those targets are developed by analyzing a
variety of diversified asset class combinations in conjunction
with the projected liability, costs, and liability duration of
the Retirement Plan. Asset allocation studies are generally
conducted every 3 to 5 years and the targets are reviewed
to determine if adjustments are required. Once allocation
percentages are established, the portfolio is periodically
rebalanced to those targets. The Retirement Plan seeks to
mitigate investment risk by investing across and within asset
classes. The Retirement Plan does not use market timing
strategies nor does it currently use financial derivative
instruments to manage risk, except as described below.
54
Generally, the Retirement Plans investment managers are
prohibited from short selling, trading on margin, trading
warrants or other options, except when acquired as a result of
the purchase of another security, or in the case of options,
when sold as part of a covered position. The Retirement Plan is
further prohibited from trading commodities but may trade
financial futures and options when specifically approved by
CNFs Benefits Administrative Committee, or its designated
representative.
The Retirement Plans assumption of 8.5% for the overall
expected long-term rate of return in 2006 was developed using
return, risk (defined as standard deviation), and correlation
expectations. The return expectations are created using
long-term historical returns and current market expectations for
forecasts of inflation, interest rates and economic growth.
The weighted-average asset allocations of the Retirement Plan
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Target Allocation
|
|
|
Asset Category:
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Equity
|
|
|
56
|
%
|
|
|
62
|
%
|
|
|
60
|
%
|
International Equity
|
|
|
16
|
%
|
|
|
17
|
%
|
|
|
15
|
%
|
Fixed Income
|
|
|
21
|
%
|
|
|
18
|
%
|
|
|
18
|
%
|
Real Estate
|
|
|
6
|
%
|
|
|
2
|
%
|
|
|
7
|
%
|
Other
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
In CNFs Consolidated Balance Sheets, the obligation
related to employees of MWF and EWA covered by the Retirement
Plan is included in Employee Benefits of continuing operations
at December 31, 2005 and 2004, based on CNFs
intention to retain the plan following the sale of MWF. In
CNFs Statements of Consolidated Operations, the benefit
expense associated with employees covered under the Retirement
Plan is reported in continuing operations except for the
estimated portion of benefit expense that relates to employees
of MWF and EWA, which is reported as discontinued operations.
However, all future changes in the carrying value of obligation
related to the Retirement Plan will be recognized in future
periods as income or loss of continuing operations.
The following sets forth the changes in the projected benefit
obligation and the determination of the prepaid (accrued)
benefit cost for the CNF Retirement Plan at December 31:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Accumulated benefit obligation
|
|
$
|
888,073
|
|
|
$
|
755,908
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
Projected benefit obligation at
beginning of year
|
|
$
|
863,111
|
|
|
$
|
797,992
|
|
Service
cost benefits earned during the year
|
|
|
50,527
|
|
|
|
56,198
|
|
Interest cost on projected benefit
obligation
|
|
|
54,284
|
|
|
|
49,817
|
|
Actuarial loss
|
|
|
100,614
|
|
|
|
25,235
|
|
Benefits paid
|
|
|
(24,823
|
)
|
|
|
(19,231
|
)
|
Curtailment sale
of MWF
|
|
|
|
|
|
|
(46,900
|
)
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at
end of year
|
|
$
|
1,043,713
|
|
|
$
|
863,111
|
|
|
|
|
|
|
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at
beginning of year
|
|
$
|
684,821
|
|
|
$
|
548,426
|
|
Actual return on plan assets
|
|
|
77,531
|
|
|
|
65,626
|
|
CNF contributions
|
|
|
126,500
|
|
|
|
90,000
|
|
Benefits paid
|
|
|
(24,823
|
)
|
|
|
(19,231
|
)
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end
of year
|
|
$
|
864,029
|
|
|
$
|
684,821
|
|
|
|
|
|
|
|
|
|
|
Funded status of the plans
|
|
$
|
(179,684
|
)
|
|
$
|
(178,290
|
)
|
Unrecognized actuarial loss
|
|
|
183,296
|
|
|
|
102,473
|
|
Unrecognized prior service costs
|
|
|
2,039
|
|
|
|
2,961
|
|
|
|
|
|
|
|
|
|
|
Prepaid (accrued) benefit cost
|
|
$
|
5,651
|
|
|
$
|
(72,856
|
)
|
|
|
|
|
|
|
|
|
|
Weighted-average assumptions as of
December 31:
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.00
|
%
|
|
|
6.25
|
%
|
Expected long-term rate of return
on plan assets
|
|
|
8.50
|
%
|
|
|
8.50
|
%
|
Rate of compensation increase
|
|
|
4.30
|
%
|
|
|
4.00
|
%
|
Net periodic pension expense for the years ended
December 31 includes the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in thousands)
|
|
|
Service
cost benefits earned during the year
|
|
$
|
50,527
|
|
|
$
|
56,198
|
|
|
$
|
43,602
|
|
Interest cost on benefit obligation
|
|
|
54,284
|
|
|
|
49,817
|
|
|
|
47,054
|
|
Expected return on plan assets
|
|
|
(60,467
|
)
|
|
|
(52,701
|
)
|
|
|
(37,642
|
)
|
Net amortization and deferral
|
|
|
3,649
|
|
|
|
7,414
|
|
|
|
7,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension expense
|
|
$
|
47,993
|
|
|
$
|
60,728
|
|
|
$
|
60,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.25
|
%
|
|
|
6.25
|
%
|
|
|
6.75
|
%
|
Expected long-term rate of return
on plan assets
|
|
|
8.50
|
%
|
|
|
9.00
|
%
|
|
|
9.00
|
%
|
Rate of compensation increase
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
In the presentation above, benefit expense related to
discontinued operations was immaterial for 2005 and was
$10,662,000 and $11,213,000 in 2004 and 2003, respectively.
Expected benefit payments, which reflect expected future
service, as appropriate, are summarized below. These estimates
are based on assumptions about future events. Actual benefit
payments may vary from these estimates.
|
|
|
|
|
|
|
Benefit Payments
|
|
|
|
(Dollars in thousands)
|
|
|
Year ending December 31:
|
|
|
|
|
2006
|
|
$
|
23,109
|
|
2007
|
|
|
25,107
|
|
2008
|
|
|
27,650
|
|
2009
|
|
|
30,861
|
|
2010
|
|
|
34,651
|
|
2011-2015
|
|
|
257,565
|
|
Forwarding Plans: As described above, the
Forwarding Plans include only the employees of the discontinued
Forwarding segment. The cessation of EWAs operations in
2001 and the sale of MWF in 2004 resulted in a
56
partial termination of the Forwarding Plans, and as a result,
all participants became fully vested and no additional benefits
accrue under these plans.
At December 31, 2005 and 2004, the projected benefit
obligation related to the Forwarding Plans was $53,563,000 and
$50,244,000, respectively, and the prepaid benefit cost was
$19,557,000 and $18,697,000, respectively. The prepaid benefit
cost related to the Forwarding Plans was reported in Assets of
Discontinued Operations at December 31, 2004 and, based on
CNFs decision to retain these obligations and the
completion of sale-related adjustments in 2005, was reclassified
to Employee Benefits of continuing operations at
December 31, 2005. In CNFs Statements of Consolidated
Operations, the immaterial benefit expense associated with the
Forwarding Plans was reported as discontinued operations.
However, all future changes in the carrying value of the prepaid
benefit cost related to the Forwarding Plans will be recognized
in future periods as income or loss of continuing operations.
Supplemental Pension Plan: CNF also has an
unfunded nonqualified supplemental retirement program (the
Supplemental Pension Plan) that provides additional
benefits for compensation excluded from the basic Retirement
Plan. The benefit expense for these programs is based on
actuarial computations using assumptions consistent with the
Retirement Plan. At December 31, 2005 and 2004, the
projected benefit obligation related to the Supplemental Pension
Plan was $67,161,000 and $56,926,000, respectively, and the
accrued benefit cost reported in Employee Benefits in the
Consolidated Balance Sheets was $35,337,000 and $32,704,000,
respectively.
Like the Retirement Plan and the Postretirement Plan, the
Supplemental Pension Plan covers employees and former employees
of both continuing and discontinued operations. In CNFs
Consolidated Statements of Operations, the benefit expense of
the Supplemental Pension Plan that relates to employees of
continuing operations was $5,819,000 in 2005, $5,736,000 in
2004, and $4,701,000 in 2003. Benefit expense of $693,000,
$928,000, and $766,000 in 2005, 2004, and 2003, respectively,
relates to employees of discontinued operations and has been
segregated as discontinued operations.
Minimum Pension Liability Adjustment: For
certain pension plans, the accumulated benefit obligation
exceeded the fair value of related plan assets as of the
actuarial measurement dates in 2005 and 2004. Accordingly, CNF
recorded minimum pension liability adjustments in Accumulated
Other Comprehensive Loss of Shareholders Equity to
recognize the shortfall between the fair value of the assets and
the accumulated benefit obligation of these plans at
December 31, 2005 and 2004. Due primarily to the
remeasurement of the accumulated benefit obligation at a lower
discount rate in 2005, the
net-of-tax
accumulated additional minimum pension liability adjustment
increased $21,495,000. CNFs Consolidated Balance Sheets
included the following accumulated minimum pension liability
adjustments:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Intangible asset reported in Other
Assets
|
|
$
|
3,849
|
|
|
$
|
2,270
|
|
Pension liability adjustment
reported in Employee Benefits
|
|
|
63,152
|
|
|
|
26,336
|
|
Accumulated other comprehensive
loss reported in Shareholders Equity, net of tax
|
|
|
36,175
|
|
|
|
14,680
|
|
Postretirement Medical Plan: CNFs
Postretirement Plan provides benefits to certain non-contractual
employees at least 55 years of age with 10 years or
more of service. The Postretirement Plan limits benefits for
participants who were not eligible to retire before
January 1, 1993, to a defined dollar amount based on age
and years of service and does not provide employer-subsidized
retiree medical benefits for employees hired on or after
January 1, 1993.
57
The following sets forth the changes in the projected benefit
obligation and the determination of the accrued benefit cost for
the Postretirement Plan at December 31:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
Projected and accumulated benefit
obligation at beginning of year
|
|
$
|
113,869
|
|
|
$
|
76,690
|
|
Service
cost benefits earned during the year
|
|
|
1,515
|
|
|
|
1,308
|
|
Interest cost on projected benefit
obligation
|
|
|
6,351
|
|
|
|
5,231
|
|
Actuarial loss
|
|
|
24,135
|
|
|
|
35,891
|
|
Participant contributions
|
|
|
1,905
|
|
|
|
1,558
|
|
Curtailment sale
of MWF
|
|
|
1,460
|
|
|
|
|
|
Benefits paid
|
|
|
(9,959
|
)
|
|
|
(6,809
|
)
|
|
|
|
|
|
|
|
|
|
Projected and accumulated benefit
obligation at end of year
|
|
$
|
139,276
|
|
|
$
|
113,869
|
|
|
|
|
|
|
|
|
|
|
Funded status of the plan
|
|
$
|
(139,276
|
)
|
|
$
|
(113,869
|
)
|
Unrecognized actuarial loss
|
|
|
48,369
|
|
|
|
37,160
|
|
Unrecognized prior service costs
|
|
|
(197
|
)
|
|
|
758
|
|
|
|
|
|
|
|
|
|
|
Accrued benefit cost
|
|
$
|
(91,104
|
)
|
|
$
|
(75,951
|
)
|
|
|
|
|
|
|
|
|
|
Discount rate assumption as of
December 31
|
|
|
5.75
|
%
|
|
|
6.00
|
%
|
Net periodic benefit expense for the years ended
December 31 includes the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in thousands)
|
|
|
Service
cost benefits earned during the year
|
|
$
|
1,515
|
|
|
$
|
1,308
|
|
|
$
|
1,826
|
|
Interest cost on benefit obligation
|
|
|
6,351
|
|
|
|
5,231
|
|
|
|
5,536
|
|
Net amortization and deferral
|
|
|
2,184
|
|
|
|
285
|
|
|
|
262
|
|
Curtailment loss
|
|
|
1,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net benefit expense
|
|
$
|
11,057
|
|
|
$
|
6,824
|
|
|
$
|
7,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate assumption at
December 31:
|
|
|
6.00
|
%
|
|
|
6.25
|
%
|
|
|
6.75
|
%
|
In the presentation above, benefit expense of $4,331,000,
$3,602,000, and $3,804,000 in 2005, 2004, and 2003,
respectively, relates to discontinued operations. As described
above, these amounts have been segregated as discontinued
operations in CNFs Consolidated Statements of Operations.
Expected benefit payments, which reflect expected future
service, as appropriate, are summarized below. These estimates
are based on assumptions about future events. Actual benefit
payments may vary from these estimates.
|
|
|
|
|
|
|
Benefit Payments
|
|
|
|
(Dollars in thousands)
|
|
|
Year ending December 31:
|
|
|
|
|
2006
|
|
$
|
7,982
|
|
2007
|
|
|
8,423
|
|
2008
|
|
|
8,930
|
|
2009
|
|
|
9,502
|
|
2010
|
|
|
10,178
|
|
2011-2015
|
|
|
56,042
|
|
58
The assumed health care cost trend rates used to determine the
projected benefit obligation of the Postretirement Plan are as
follows:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
Health care cost trend rate
assumed for next year
|
|
|
10.25
|
%
|
|
|
11.50
|
%
|
Rate to which the cost trend rate
is assumed to decline (the ultimate trend rate)
|
|
|
5.50
|
%
|
|
|
5.50
|
%
|
Year that the rate reaches the
ultimate trend rate
|
|
|
2013
|
|
|
|
2013
|
|
Assumed health care cost trends have a significant effect on the
amounts reported for CNFs postretirement benefits. A
one-percentage-point change in assumed health care cost trend
rates would change the aggregate service and interest cost by
approximately $400,000 and the accumulated and projected benefit
obligation by approximately $7,000,000.
Thrift and Stock Plan: CNF sponsors the CNF
Thrift and Stock Plan (TASP), a voluntary defined
contribution plan with a leveraged ESOP feature, for
non-contractual U.S. employees. In 1989, the TASP borrowed
$150,000,000 to purchase 986,259 shares of CNFs
Series B Cumulative Convertible Preferred Stock, which is
only issuable to the TASP trustee. CNF contributes common and
preferred stock to the TASP equal to 50% of participant
contributions, up to 1.5% of a TASP participants base
compensation. CNF recognized expense of $13,840,000 in 2005,
$12,576,000 in 2004, and $11,277,000 in 2003 for its matching
contributions.
The Series B Preferred Stock earns a dividend of
$12.93 per share and is used to repay the TASP debt. Any
shortfall is paid in cash by CNF. Dividends on these preferred
shares are deductible for income tax purposes and, accordingly,
are reflected net of their tax benefits in the Statements of
Consolidated Operations. Allocation of preferred stock to
participants accounts is based upon the ratio of the
current years principal and interest payments to the total
TASP debt. Since CNF guarantees the debt, it is reflected in
Long-term Debt and Guarantees in the Consolidated Balance
Sheets. The TASP guarantees are reduced as principal is paid.
Each share of preferred stock is convertible into common stock,
upon an employee ceasing participation in the plan or upon
election by the employee, at a rate generally equal to that
number of shares of common stock that could be purchased for
$152.10, but not less than the minimum conversion rate of
4.71 shares of common stock for each share of Series B
preferred stock.
Deferred compensation expense is recognized as the preferred
shares are allocated to participants and is equivalent to the
cost of the preferred shares allocated. Deferred compensation
expense of $8,489,000, $8,570,000, and $8,036,000 was recognized
in 2005, 2004, and 2003, respectively.
At December 31, 2005, the TASP owned 641,359 shares of
Series B preferred stock, of which 377,762 shares have
been allocated to employees. At December 31, 2005, the
estimated fair value of the 263,597 unallocated shares was
$69,360,000. At December 31, 2005, CNF has reserved
authorized and unissued common stock adequate to satisfy the
conversion feature of the Series B preferred stock.
Other Compensation Plans: CNF and each of its
subsidiaries have adopted various plans relating to the
achievement of specific goals to provide incentive compensation
for designated employees. Total compensation earned by salaried
participants of those plans was $38,793,000 in 2005, $57,515,000
in 2004, and $23,445,000 in 2003, and by hourly participants was
$29,815,000 in 2005, $44,806,000 in 2004, and $21,847,000 in
2003.
|
|
10.
|
Stock-Based
Compensation
|
Stock Options: Officers and non-employee
directors have been granted options under CNFs stock
option plans to purchase common stock of CNF at prices equal to
the market value of the stock on the date of grant. Stock option
grants generally vest ratably over one to four years from the
grant date and generally expire 10 years from the dates 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, rather
than the fair-value provisions of SFAS 123,
Accounting for Stock-Based Compensation. Refer to
Note 1,
59
Principal Accounting Policies Stock-Based
Compensation, for a presentation of pro forma net income
(loss) and earnings (loss) per share under SFAS 123 as well
as a description of the effect of adoption of SFAS 123R,
Share-Based Payment, effective January 1, 2006.
The fair value of each option grant is estimated using the
Black-Scholes option pricing model. The following is a summary
of the weighted-average assumptions used and the calculated
weighted-average fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Estimated fair value
|
|
$
|
18.17
|
|
|
$
|
16.07
|
|
|
$
|
14.65
|
|
Risk-free interest rate
|
|
|
3.8
|
%
|
|
|
3.5
|
%
|
|
|
3.4
|
%
|
Expected life (years)
|
|
|
5.53
|
|
|
|
5.76
|
|
|
|
5.93
|
|
Expected volatility
|
|
|
42
|
%
|
|
|
45
|
%
|
|
|
48
|
%
|
Expected dividend yield
|
|
|
1.18
|
%
|
|
|
1.18
|
%
|
|
|
1.20
|
%
|
The following is a summary of stock option data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wtd. Avg. Exercise
|
|
|
|
Number of Options
|
|
|
Price
|
|
|
Outstanding at December 31,
2002
|
|
|
6,121,791
|
|
|
$
|
27.84
|
|
Granted
|
|
|
455,876
|
|
|
|
32.90
|
|
Exercised
|
|
|
(276,206
|
)
|
|
|
23.13
|
|
Expired or canceled
|
|
|
(177,032
|
)
|
|
|
30.17
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2003
|
|
|
6,124,429
|
|
|
$
|
28.34
|
|
Granted
|
|
|
116,800
|
|
|
|
38.43
|
|
Exercised
|
|
|
(2,080,380
|
)
|
|
|
26.96
|
|
Expired or canceled
|
|
|
(37,472
|
)
|
|
|
29.87
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2004
|
|
|
4,123,377
|
|
|
$
|
29.30
|
|
Granted
|
|
|
416,373
|
|
|
|
45.67
|
|
Exercised
|
|
|
(2,688,272
|
)
|
|
|
28.29
|
|
Expired or canceled
|
|
|
(121,928
|
)
|
|
|
36.78
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2005
|
|
|
1,729,550
|
|
|
$
|
34.29
|
|
|
|
|
|
|
|
|
|
|
Options exercisable as of
December 31:
|
|
|
|
|
|
|
|
|
2005
|
|
|
928,078
|
|
|
$
|
30.80
|
|
2004
|
|
|
2,711,199
|
|
|
$
|
29.23
|
|
2003
|
|
|
3,055,314
|
|
|
$
|
28.58
|
|
The following is a summary of the stock options outstanding and
exercisable at December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options
|
|
|
Exercisable Options
|
|
|
|
|
|
|
Average
|
|
|
Wtd. Avg.
|
|
|
|
|
|
Wtd. Avg.
|
|
Range of Exercise
|
|
Number of
|
|
|
Remaining
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
Prices
|
|
Options
|
|
|
Life in Years
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
$18.05 - $27.06
|
|
|
387,840
|
|
|
|
5.3
|
|
|
$
|
25.51
|
|
|
|
320,765
|
|
|
$
|
25.59
|
|
$28.30 - $35.03
|
|
|
816,988
|
|
|
|
6.5
|
|
|
|
32.16
|
|
|
|
470,964
|
|
|
|
32.06
|
|
$35.50 - $51.72
|
|
|
524,722
|
|
|
|
7.6
|
|
|
|
44.09
|
|
|
|
136,349
|
|
|
|
38.67
|
|
Restricted Stock: Under terms of CNFs
stock-based compensation plans, unvested shares of CNFs
common stock are awarded to selected executive officers and are
awarded annually to directors. The shares generally vest ratably
over one to four years from the grant date. Shares are valued at
the market price of CNFs common stock at the date of award.
60
The table below summarizes information about restricted stock
awards for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
Wtd. Avg.
|
|
|
|
|
|
Wtd. Avg.
|
|
|
|
|
|
Wtd. Avg.
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Awarded
|
|
|
57,737
|
|
|
$
|
43.91
|
|
|
|
94,727
|
|
|
$
|
44.13
|
|
|
|
129,321
|
|
|
$
|
32.82
|
|
Forfeited
|
|
|
86,000
|
|
|
|
36.00
|
|
|
|
67,834
|
|
|
|
35.33
|
|
|
|
15,336
|
|
|
|
27.80
|
|
Compensation expense recognized for restricted stock was
$2,031,000 in 2005, $4,675,000 in 2004, and $1,340,000 in 2003.
In 2004, compensation expense included $1,431,000 for shares
that vested upon the achievement of certain performance
criteria. At December 31, 2005, all restricted stock awards
outstanding vest upon completion of the service period with no
performance criteria and are therefore accounted for under
grant-date fixed-price accounting.
At December 31, 2005, CNF had 3,599,838 common shares
available for the grant of stock options, restricted stock, or
other stock-based compensation.
|
|
11.
|
Commitments
and Contingencies
|
Spin-Off
of CFC
On December 2, 1996, CNF completed the spin-off of
Consolidated Freightways Corporation (CFC) to
CNFs shareholders. CFC was, at the time of the spin-off, a
party to certain multiemployer pension plans covering some of
its current and former employees. The cessation of its
U.S. operations in 2002 resulted in CFCs
complete withdrawal (within the meaning of
applicable federal law) from these multiemployer plans, at which
point it became obligated, under federal law, to pay its share
of any unfunded vested benefits under those plans.
It is possible that the trustees of CFCs multiemployer
pension plans may assert claims that CNF is liable for amounts
owing to the plans as a result of CFCs 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.
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
CNFs financial condition, results of operations, and cash
flows.
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 will not
have a material adverse effect on CNFs financial
condition, results of operations, and cash flows.
Purchase
Commitments
At December 31, 2005, Con-Way was obligated under purchase
commitments to acquire $18.1 million of revenue equipment
for delivery in 2006. Subsequent to December 31, 2005,
Con-Way entered into additional agreements to acquire
$91.8 million of revenue equipment also to be delivered in
2006.
Other
In February 2002, a lawsuit was filed against EWA in the
District Court for the Southern District of Ohio, alleging
violations of the Worker Adjustment and Retraining Notification
Act (the WARN Act) in connection with employee
layoffs and ultimate terminations due to the August 2001
grounding of EWAs airline operations and
61
the shutdown of the airline operations in December 2001. The
court subsequently certified the lawsuit as a class action on
behalf of affected employees laid off between August 11 and
August 15, 2001. The WARN Act generally requires employers
to give
60-days
notice, or
60-days pay
and benefits in lieu of notice, of any shutdown of operations or
mass layoff at a site of employment. The estimated range for
potential loss on this matter is zero to approximately
$8 million. CNF intends to continue to vigorously defend
the lawsuit.
In September 2003, CNF received notice from the
U.S. Attorneys 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
subsequently entered into a tolling agreement with the
government in order to give the parties more time to investigate
the allegations. In November 2004, CNF representatives met with
the government to discuss the governments allegations, and
at that time received certain information relating to the
governments investigation. In addition, CNF, on behalf of
EWA, conducted its own investigation into the allegations. Under
the False Claims Act, the government would be entitled to
recover treble damages, plus penalties, if a court were to
ultimately conclude that EWA knowingly submitted false invoices
to the USPS. Based on CNFs current evaluation, management
believes that it has provided for its estimated exposure related
to the allegations. However, there can be no assurance in this
regard as CNF cannot predict with certainty the outcome of this
matter.
CNF is a defendant in various other 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
CNFs financial condition, results of operations, or cash
flows.
12. Segment
Reporting
CNF discloses segment information in the manner in which the
components are organized for making operating decisions,
assessing performance, and allocating resources. Refer to
Note 1, Principal Accounting
Policies Organization, for a description
of CNFs reportable segments.
In December 2004, CNF sold MWF. As a result, for all
periods presented, the results of operations, net liabilities,
and cash flows of MWF 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.
In April 2005, Con-Way Logistics was integrated with Logistics.
As a result, for the periods presented, the operating results of
Con-Way Logistics have been reclassified to conform to the
current-period presentation.
Financial
Data
Management evaluates segment performance primarily based on
revenue and operating income (loss), except for Vector, which is
evaluated based on MWs proportionate share of
Vectors income before taxes. Accordingly, interest
expense, investment income, and other non-operating items 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 or capital employed. Identifiable corporate
assets consist primarily of cash and cash equivalents, deferred
charges and other assets, property and equipment, and deferred
taxes. Certain corporate assets that are used to provide shared
data processing and other administrative services are not
allocated to individual segments. Inter-segment revenue and
related operating income have been eliminated to reconcile to
consolidated revenue and operating income. Transactions within
and between segments are generally made at cost, with the
exception of the inter-segment revenue of CNF Other, which is
intended to reflect the fair value of the trailers manufactured
by Road Systems and sold to Con-Way.
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December
31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in thousands)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Con-Way Transportation Services
|
|
$
|
2,816,647
|
|
|
$
|
2,532,201
|
|
|
$
|
2,163,668
|
|
Menlo Worldwide Logistics
|
|
|
1,339,674
|
|
|
|
1,174,831
|
|
|
|
1,063,011
|
|
CNF Other
|
|
|
13,269
|
|
|
|
5,347
|
|
|
|
287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,169,590
|
|
|
$
|
3,712,379
|
|
|
$
|
3,226,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inter-segment Revenue Eliminations
|
|
|
|
|
|
|
|
|
|
|
|
|
Con-Way Transportation Services
|
|
$
|
82,339
|
|
|
$
|
52,130
|
|
|
$
|
33,011
|
|
Menlo Worldwide Logistics
|
|
|
|
|
|
|
278
|
|
|
|
3,309
|
|
CNF Other
|
|
|
52,672
|
|
|
|
29,450
|
|
|
|
21,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
135,011
|
|
|
$
|
81,858
|
|
|
$
|
58,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues before Inter-segment
Eliminations
|
|
|
|
|
|
|
|
|
|
|
|
|
Con-Way Transportation Services
|
|
$
|
2,898,986
|
|
|
$
|
2,584,331
|
|
|
$
|
2,196,679
|
|
Menlo Worldwide Logistics
|
|
|
1,339,674
|
|
|
|
1,175,109
|
|
|
|
1,066,320
|
|
CNF Other
|
|
|
65,941
|
|
|
|
34,797
|
|
|
|
22,011
|
|
Inter-segment Revenue Eliminations
|
|
|
(135,011
|
)
|
|
|
(81,858
|
)
|
|
|
(58,044
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,169,590
|
|
|
$
|
3,712,379
|
|
|
$
|
3,226,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Con-Way Transportation Services
|
|
$
|
331,104
|
|
|
$
|
247,169
|
|
|
$
|
189,106
|
|
Menlo Worldwide
|
|
|
|
|
|
|
|
|
|
|
|
|
Logistics
|
|
|
26,672
|
|
|
|
22,718
|
|
|
|
17,481
|
|
Vector
|
|
|
20,257
|
|
|
|
18,253
|
|
|
|
20,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,929
|
|
|
|
40,971
|
|
|
|
38,199
|
|
CNF Other
|
|
|
(3,095
|
)
|
|
|
(3,973
|
)
|
|
|
(2,357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
374,938
|
|
|
$
|
284,167
|
|
|
$
|
224,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of segments to
consolidated amount:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax related to Vector, an
equity-method investment (Note 3)
|
|
|
(4,196
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
370,742
|
|
|
$
|
284,167
|
|
|
$
|
224,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization, net
of Accretion
|
|
|
|
|
|
|
|
|
|
|
|
|
Con-Way Transportation Services
|
|
$
|
107,534
|
|
|
$
|
96,685
|
|
|
$
|
92,922
|
|
Menlo Worldwide
|
|
|
|
|
|
|
|
|
|
|
|
|
Logistics
|
|
|
8,623
|
|
|
|
7,843
|
|
|
|
8,659
|
|
Other
|
|
|
4
|
|
|
|
4,117
|
|
|
|
5,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,627
|
|
|
|
11,960
|
|
|
|
14,026
|
|
CNF Other
|
|
|
7,601
|
|
|
|
6,451
|
|
|
|
6,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
123,762
|
|
|
$
|
115,096
|
|
|
$
|
113,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December
31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in thousands)
|
|
|
Capital Expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
Con-Way Transportation Services
|
|
$
|
197,589
|
|
|
$
|
144,031
|
|
|
$
|
117,875
|
|
Menlo Worldwide
|
|
|
|
|
|
|
|
|
|
|
|
|
Logistics
|
|
|
9,798
|
|
|
|
5,135
|
|
|
|
6,329
|
|
Other
|
|
|
|
|
|
|
948
|
|
|
|
2,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,798
|
|
|
|
6,083
|
|
|
|
9,144
|
|
CNF Other
|
|
|
2,799
|
|
|
|
1,346
|
|
|
|
744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
210,186
|
|
|
$
|
151,460
|
|
|
$
|
127,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Con-Way Transportation Services
|
|
$
|
1,295,654
|
|
|
$
|
1,160,808
|
|
|
$
|
1,074,939
|
|
Menlo Worldwide
|
|
|
|
|
|
|
|
|
|
|
|
|
Logistics
|
|
|
302,969
|
|
|
|
219,160
|
|
|
|
190,917
|
|
Other
|
|
|
12,255
|
|
|
|
21,872
|
|
|
|
29,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
315,224
|
|
|
|
241,032
|
|
|
|
220,172
|
|
CNF Other
|
|
|
856,553
|
|
|
|
1,074,213
|
|
|
|
543,517
|
|
Assets of discontinued operations
|
|
|
13,141
|
|
|
|
20,348
|
|
|
|
935,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,480,572
|
|
|
$
|
2,496,401
|
|
|
$
|
2,773,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic
Data
For geographic reporting, approximately 50 percent of
freight transportation revenues are allocated between the origin
and destination service centers. Revenues for contract services
are allocated to the country in which the services are
performed. Long-lived assets outside of the United States were
immaterial for all periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December
31,
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
4,021,147
|
|
|
$
|
3,604,685
|
|
|
$
|
3,142,446
|
|
|
|
|
|
Canada
|
|
|
63,395
|
|
|
|
51,993
|
|
|
|
44,201
|
|
|
|
|
|
Other
|
|
|
85,048
|
|
|
|
55,701
|
|
|
|
40,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,169,590
|
|
|
$
|
3,712,379
|
|
|
$
|
3,226,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
CNF INC.
AND SUBSIDIARIES
Quarterly
Financial Data
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 Quarter
Ended
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
(Dollars in thousands except per
share data)
|
|
Revenues
|
|
$
|
947,683
|
|
|
$
|
1,033,875
|
|
|
$
|
1,099,151
|
|
|
$
|
1,088,881
|
|
Operating Income
|
|
|
73,256
|
|
|
|
103,560
|
|
|
|
103,033
|
|
|
|
90,893
|
|
Income from Continuing Operations
Before Income Tax Provision
|
|
|
65,813
|
|
|
|
97,395
|
|
|
|
99,543
|
|
|
|
88,370
|
|
Income Tax Provision
|
|
|
24,962
|
|
|
|
29,239
|
[a]
|
|
|
35,070
|
|
|
|
32,602
|
|
Net Income from Continuing
Operations (after preferred stock dividends)
|
|
|
38,862
|
|
|
|
66,120
|
|
|
|
62,657
|
|
|
|
53,881
|
|
Gain (Loss) from Disposal, net of
tax
|
|
|
(9,776
|
)
|
|
|
2,951
|
|
|
|
3,335
|
|
|
|
(2,729
|
)
|
Net Income Applicable to Common
Shareholders
|
|
$
|
29,086
|
|
|
$
|
69,071
|
|
|
$
|
65,992
|
|
|
$
|
51,152
|
|
Earnings (Loss) Per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income from Continuing
Operations
|
|
$
|
0.74
|
|
|
$
|
1.27
|
|
|
$
|
1.20
|
|
|
$
|
1.03
|
|
Gain (Loss) from Disposal, net of
tax
|
|
|
(0.18
|
)
|
|
|
0.05
|
|
|
|
0.07
|
|
|
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Applicable to Common
Shareholders
|
|
$
|
0.56
|
|
|
$
|
1.32
|
|
|
$
|
1.27
|
|
|
$
|
0.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income from Continuing
Operations
|
|
$
|
0.69
|
|
|
$
|
1.19
|
|
|
$
|
1.12
|
|
|
$
|
0.97
|
|
Gain (Loss) from Disposal, net of
tax
|
|
|
(0.17
|
)
|
|
|
0.05
|
|
|
|
0.06
|
|
|
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Applicable to Common
Shareholders
|
|
$
|
0.52
|
|
|
$
|
1.24
|
|
|
$
|
1.18
|
|
|
$
|
0.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market price range
|
|
$
|
43.39-$50.51
|
|
|
$
|
41.38-$47.53
|
|
|
$
|
44.49-$53.43
|
|
|
$
|
49.85-$59.79
|
|
Common dividends (paid quarterly)
|
|
|
0.10
|
|
|
|
0.10
|
|
|
|
0.10
|
|
|
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 Quarter
Ended
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
(Dollars in thousands except per
share data)
|
|
|
Revenues
|
|
$
|
846,920
|
|
|
$
|
924,382
|
|
|
$
|
973,619
|
|
|
$
|
967,458
|
|
Operating Income
|
|
|
55,448
|
|
|
|
71,279
|
|
|
|
78,435
|
|
|
|
79,005
|
|
Income from Continuing Operations
Before Income Tax Provision
|
|
|
48,271
|
|
|
|
58,719
|
|
|
|
68,712
|
|
|
|
71,121
|
|
Income Tax Provision
|
|
|
18,826
|
|
|
|
22,900
|
|
|
|
26,798
|
|
|
|
27,854
|
|
Net Income from Continuing
Operations (after preferred stock dividends)
|
|
|
27,423
|
|
|
|
33,797
|
|
|
|
39,839
|
|
|
|
41,147
|
|
Loss from Disposal, net of tax
|
|
|
|
|
|
|
|
|
|
|
(260,490
|
)
|
|
|
(18,259
|
)
|
Income (Loss) from Discontinued
Operations, net of tax
|
|
|
(3,016
|
)
|
|
|
1,686
|
|
|
|
4,444
|
|
|
|
9,301
|
|
Net Income (Loss) Applicable to
Common Shareholders
|
|
$
|
24,407
|
|
|
$
|
35,483
|
|
|
$
|
(216,207
|
)
|
|
$
|
32,189
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 Quarter
Ended
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
(Dollars in thousands except per
share data)
|
|
|
Earnings (Loss) Per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income from Continuing
Operations
|
|
$
|
0.55
|
|
|
$
|
0.67
|
|
|
$
|
0.79
|
|
|
$
|
0.80
|
|
Loss from Disposal, net of tax
|
|
|
|
|
|
|
|
|
|
|
(5.15
|
)
|
|
|
(0.35
|
)
|
Income (Loss) from Discontinued
Operations, net of tax
|
|
|
(0.06
|
)
|
|
|
0.04
|
|
|
|
0.09
|
|
|
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Applicable to
Common Shareholders
|
|
$
|
0.49
|
|
|
$
|
0.71
|
|
|
$
|
(4.27
|
)
|
|
$
|
0.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income from Continuing
Operations
|
|
$
|
0.50
|
|
|
$
|
0.61
|
|
|
$
|
0.72
|
|
|
$
|
0.74
|
|
Loss from Disposal, net of tax
|
|
|
|
|
|
|
|
|
|
|
(4.70
|
)
|
|
|
(0.33
|
)
|
Income (Loss) from Discontinued
Operations, net of tax
|
|
|
(0.05
|
)
|
|
|
0.03
|
|
|
|
0.08
|
|
|
|
0.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Applicable to
Common Shareholders
|
|
$
|
0.45
|
|
|
$
|
0.64
|
|
|
$
|
(3.90
|
)
|
|
$
|
0.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market price range
|
|
$
|
30.50-$35.84
|
|
|
$
|
33.55-$42.57
|
|
|
$
|
38.66-$43.01
|
|
|
$
|
41.67-$50.96
|
|
Common dividends (paid quarterly)
|
|
|
0.10
|
|
|
|
0.10
|
|
|
|
0.10
|
|
|
|
0.10
|
|
CNFs results from continuing operations included various
income or loss items that affected the comparability of the
reported operating income (loss) of its reporting segments.
Other materially significant items affecting the comparability
of net income from continuing operations in the periods reported
above are described in the note below and in Item 7,
Managements Discussion and Analysis.
|
|
|
[a] |
|
Includes tax benefits of $7.0 million from the reversal of
accrued taxes related to the settlement with the IRS of previous
tax filings |
66
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
(a) Disclosure Controls and Procedures.
CNFs management, with the participation of CNFs
Chief Executive Officer and Chief Financial Officer, has
evaluated the effectiveness of CNFs 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,
CNFs Chief Executive Officer and Chief Financial Officer
have concluded that CNFs disclosure controls and
procedures are effective as of the end of such period.
(b) Internal Control Over Financial Reporting.
There have not been any changes in CNFs 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, CNFs internal
control over financial reporting.
(c) Managements Report on Internal Control Over
Financial Reporting
Management is responsible for establishing and maintaining
adequate internal control over the companys financial
reporting, as such term is defined in Exchange Act
Rules 13a-15(f).
Management followed the internal control integrated framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) to establish, document,
test, and maintain a system of internal control over the
financial reporting processes. Managements assessment is
that as of the end of fiscal-year 2005, there is effective
internal control over financial reporting.
KPMG LLP, the independent registered public accounting firm that
audited the companys financial statements included in the
annual report, has issued an attestation report on
managements assessment of the companys internal
control over financial reporting.
67
Report
of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
CNF Inc.:
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control Over
Financial Reporting, that CNF Inc. maintained effective internal
control over financial reporting as of December 31, 2005,
based on criteria established in Internal
Control Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). CNF Inc.s management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an
opinion on managements assessment and an opinion on the
effectiveness of the Companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that CNF Inc.
maintained effective internal control over financial reporting
as of December 31, 2005, is fairly stated, in all material
respects, based on criteria established in Internal
Control Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Also, in our opinion, CNF Inc. maintained, in
all material respects, effective internal control over financial
reporting as of December 31, 2005, based on criteria
established in Internal
Control Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of CNF Inc. and subsidiaries as of
December 31, 2005 and 2004, and the related consolidated
statements of operations, shareholders equity and cash
flows for each of the years in the three-year period ended
December 31, 2005, and our report dated March 13, 2006
expressed an unqualified opinion on those consolidated financial
statements.
Portland, Oregon
March 13, 2006
68
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
None.
PART III
Information for Items 10 through 14 of Part III
of this Report appears in the Proxy Statement for CNFs
Annual Meeting of Shareholders to be held on April 18, 2006
(the 2006 Proxy Statement), as indicated below.
For the limited purpose of providing the information required by
these items, the 2006 Proxy Statement is incorporated
herein by reference.
|
|
ITEM 10.
|
DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
|
Information regarding members of CNFs Board of Directors
is presented under the caption Election of Directors
in the 2006 Proxy Statement and is incorporated herein by
reference. Information regarding CNFs audit committee
financial expert is presented in the 2006 Proxy Statement
under the caption Information about the Board of Directors
and Certain Board Committees Standing
Committees Audit Committee and is
incorporated herein by reference. Information regarding
executive officers of CNF is included above in Part I under
the caption Executive Officers of the Registrant.
The information required by Item 405 of
Regulation S-K
is presented in the 2006 Proxy Statement under the caption
Compliance with Section 16 of the Exchange Act
and is incorporated herein by reference.
The information required by Item 406 of
Regulation S-K
is presented in the 2006 Proxy Statement under the caption
Information about the Board of Directors and Certain Board
Committees Code of Ethics; Corporate Governance
Guidelines and is incorporated herein by reference.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
Information regarding executive compensation is presented under
the caption Compensation of Executive Officers in
the 2006 Proxy Statement and is incorporated herein by reference.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
Information regarding security ownership of certain beneficial
owners and management is presented under the caption
Principal Shareholders and information regarding
securities authorized for issuance under equity compensation
plans is presented under the caption Equity Plan
Compensation Information in the 2006 Proxy Statement and
is incorporated herein by reference.
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|
Not applicable.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
Information regarding principal accounting fees and services is
presented under the caption Ratification of Auditors
in the 2006 Proxy Statement and is incorporated herein by
reference.
PART IV
|
|
ITEM 15.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
|
|
(a) 1. |
FINANCIAL STATEMENTS:
Report of Independent Registered Public Accounting Firm by
KPMG LLP dated March 13, 2006
Consolidated Balance Sheets at December 31, 2005 and
2004
Statements of Consolidated Operations for the years ended
December 31, 2005, 2004 and 2003
|
69
Statements of Consolidated Cash Flows for the years ended
December 31, 2005, 2004 and 2003
Statements of Consolidated Shareholders Equity for the
years ended December 31, 2005, 2004 and 2003
Notes to Consolidated Financial Statements
|
|
|
|
2.
|
FINANCIAL STATEMENT SCHEDULE
Report of Independent Auditors on Financial Statement
Schedule
Schedule II Valuation and Qualifying
Accounts
|
|
|
3.
|
EXHIBITS
Exhibits are being filed in connection with this Report and are
incorporated herein by reference. The Exhibit Index on
pages 75 through 77 is incorporated herein by reference.
|
70
Report
of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
CNF Inc.:
Under date of March 13, 2006, we reported on the
consolidated balance sheets of CNF Inc. and subsidiaries as of
December 31, 2005 and 2004, and the related consolidated
statements of operations, shareholders equity and cash
flows for each of the years in the three-year period ended
December 31, 2005, which are included in this
Form 10-K
for the year ended December 31, 2005. In connection with
our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial
statement schedule in this
Form 10-K
for the years ended December 31, 2005, 2004 and 2003. This
financial statement schedule is the responsibility of the
Companys management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG LLP
Portland, Oregon
March 13, 2006
71
Schedule II
CNF Inc.
Valuation and Qualifying Accounts
Three Years Ended December 31, 2005
Description
Allowance for uncollectible accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
|
(2)
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to costs
|
|
|
Charged to
|
|
|
Deductions
|
|
|
Balance at end
|
|
|
|
beginning of period
|
|
|
and expenses
|
|
|
other accounts
|
|
|
(a)
|
|
|
of period
|
|
|
|
(Dollars in thousands)
|
|
|
2005
|
|
$
|
6,616
|
|
|
$
|
4,814
|
|
|
$
|
803
|
|
|
$
|
(5,177
|
)
|
|
$
|
7,056
|
|
2004
|
|
|
10,958
|
|
|
|
5,103
|
|
|
|
203
|
|
|
|
(9,648
|
)
|
|
|
6,616
|
|
2003
|
|
|
12,046
|
|
|
|
5,425
|
|
|
|
|
|
|
|
(6,513
|
)
|
|
|
10,958
|
|
|
|
|
(a) |
|
Accounts written off net of recoveries. |
72
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
|
|
|
CNF INC.
(Registrant)
|
|
|
|
March 13, 2006
|
|
/s/ Douglas W.
Stotlar
Douglas
W. Stotlar
President and Chief Executive Officer
|
|
|
|
March 13, 2006
|
|
/s/ Kevin C. Schick
Kevin
C. Schick
Senior Vice President and Chief Financial Officer
|
|
|
|
March 13, 2006
|
|
/s/ Kevin S. Coel
Kevin
S. Coel
Vice President and Controller
|
73
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
March 13, 2006
|
|
/s/ W. Keith
Kennedy, Jr.
W.
Keith Kennedy, Jr.,
Chairman of the Board
|
|
|
|
March 13, 2006
|
|
/s/ Douglas W.
Stotlar
Douglas
W. Stotlar, Director
|
|
|
|
March 13, 2006
|
|
John
J. Anton, Director
|
|
|
|
March 13, 2006
|
|
/s/ William R.
Corbin
William
R. Corbin, Director
|
|
|
|
March 13, 2006
|
|
/s/ Margaret G. Gill
Margaret
G. Gill, Director
|
|
|
|
March 13, 2006
|
|
Robert
Jaunich II, Director
|
|
|
|
March 13, 2006
|
|
/s/ Henry H.
Mauz, Jr.
Henry
H. Mauz, Jr., Director
|
|
|
|
March 13, 2006
|
|
/s/ Michael J.
Murray
Michael
J. Murray, Director
|
|
|
|
March 13, 2006
|
|
/s/ John C. Pope
John
C. Pope, Director
|
|
|
|
March 13, 2006
|
|
/s/ Robert D. Rogers
Robert
D. Rogers, Director
|
|
|
|
March 13, 2006
|
|
/s/ William J.
Schroeder
William
J. Schroeder, Director
|
|
|
|
March 13, 2006
|
|
/s/ Peter W. Stott
Peter
W. Stott, Director
|
|
|
|
March 13, 2006
|
|
/s/ Robert P. Wayman
Robert
P. Wayman, Director
|
|
|
|
March 13, 2006
|
|
/s/ Chelsea C.
White III
Chelsea
C. White III, Director
|
74
INDEX TO
EXHIBITS
ITEM 15(3)
|
|
|
|
|
|
|
Exhibit No.
|
|
|
|
|
|
|
(3)
|
|
|
Articles of incorporation and
by-laws:
|
|
3
|
.1
|
|
|
|
CNF Inc. Certificate of
Incorporation, as amended (Exhibit 3.1 to CNFs
Form 10-K
for the year ended December 31, 2002*).
|
|
3
|
.2
|
|
|
|
CNF Inc. Bylaws, as amended
April 25, 2005 (Exhibit 3.1 to CNFs Report on
Form 8-K
filed on April 28, 2005*).
|
|
(4)
|
|
|
Instruments defining the rights of
security holders, including debentures:
|
|
4
|
.1
|
|
|
|
Certificate of Designations of the
Series B Cumulative Convertible Preferred Stock
(Exhibit 4.1 as filed on Form SE dated May 25,
1989*).
|
|
4
|
.2
|
|
|
|
Form of Indenture between CNF
Transportation Inc. and Bank One Trust Company, National
Association (Exhibit 4(d) (i) to CNFs
Form 8-K
dated March 3, 2000*).
|
|
4
|
.3
|
|
|
|
Form of Security for
87/8% Notes
due 2010 issued by CNF Transportation Inc. (Exhibit 4(i) to
CNFs
Form 8-K
dated March 3, 2000*).
|
|
4
|
.4
|
|
|
|
Supplemental Indenture No. 1
dated as of April 30, 2004 to Indenture dated as of
March 8, 2000 between CNF Inc. as issuer and The Bank of
New York, N.A. as successor trustee, relating to 6.70% Senior
Debentures due 2034 (filed as Exhibit 4.2 to
Form S-4
dated June 4, 2004*).
|
|
4
|
.5
|
|
|
|
Form of Global 6.70% Senior
Debentures due 2034 (included in Exhibit 4.2 to
Form S-4
dated June 4, 2004*).
|
|
4
|
.6
|
|
|
|
$400 million Credit Agreement
dated March 11, 2005 among CNF and various financial
institutions (Exhibit 4.9 to CNFs
Form 10-K
for the year ended December 31, 2004*).
|
|
4
|
.7
|
|
|
|
Subsidiary Guaranty Agreement
dated as of March 11, 2005, made by Con-Way Transportation
Services, Inc., Menlo Worldwide, LLC and Menlo Logistics Inc. in
favor of the banks referred to in 4.6 (Exhibit 4.10 to
CNFs
Form 10-K
for the year ended December 31, 2004*).
|
|
Instruments defining the rights of
security holders of long-term debt of CNF Inc., and its
subsidiaries for which financial statements are required to be
filed with this
Form 10-K,
of which the total amount of securities authorized under each
such instrument is less than 10% of the total assets of CNF Inc.
and its subsidiaries on a consolidated basis, have not been
filed as exhibits to this
Form 10-K.
CNF agrees to furnish a copy of each applicable instrument to
the Securities and Exchange Commission upon request.
|
|
|
|
|
|
|
(10)
|
|
|
Material contracts:
|
|
10
|
.1
|
|
|
|
Distribution Agreement between
Consolidated Freightways, Inc., and Consolidated Freightways
Corporation dated November 25, 1996 (Exhibit 10.34 to
CNFs
Form 10-K
for the year ended December 31, 1996*).
|
|
10
|
.2
|
|
|
|
Employee Benefit Matters Agreement
by and between Consolidated Freightways, Inc. and Consolidated
Freightways Corporation dated December 2, 1996
(Exhibit 10.33 to CNFs
form 10-K
for the year ended December 31, 1996*#).
|
|
10
|
.3
|
|
|
|
Transition Services Agreement
between CNF Service Company, Inc. and Consolidated Freightways
Corporation dated December 2, 1996 (Exhibit to CNFs
Form 10-K
for the year ended December 31, 1996*).
|
|
10
|
.4
|
|
|
|
Tax Sharing Agreement between
Consolidated Freightways, Inc., and Consolidated Freightways
Corporation dated December 2, 1996 (Exhibit to CNFs
Form 10-K
for the year ended December 31, 1996*).
|
|
10
|
.5
|
|
|
|
Stock Purchase Agreement between
CNF Inc. and Menlo Worldwide, LLC and United Parcel Service
dated October 5, 2004 (Exhibit 99.1 to CNFs
Form 8-K
dated October 6, 2004*).
|
|
10
|
.6
|
|
|
|
Amendment No. 1 dated
December 17, 2004 to the Stock Purchase Agreement between
CNF Inc. and Menlo Worldwide, LLC and United Parcel Service
dated October 5, 2004 (Exhibit 99.1 to CNFs
Form 8-K
dated December 21, 2004*).
|
75
|
|
|
|
|
|
|
Exhibit No.
|
|
|
|
|
|
|
10
|
.7
|
|
|
|
Transition Services Agreement
between CNF Inc and Menlo Worldwide, LLC and United Parcel
Service date October 5, 2004 (Exhibit 99.1 to
CNFs
Form 8-K
dated October 6, 2004*).
|
|
10
|
.8
|
|
|
|
Summary of Certain Compensation
Arrangements (Exhibit 10.3 to CNFs
Form 10-Q
for the quarter ended March 31, 2005*#).
|
|
10
|
.9
|
|
|
|
Summary of Certain Compensation
Arrangements.#
|
|
10
|
.10
|
|
|
|
Summary of Material Executive
Employee Agreements (Item 1.01 to CNFs Report on
Form 8-K
filed on June 6, 2005*#).
|
|
10
|
.11
|
|
|
|
1997 Equity and Incentive Plan
(2006 Amendment and Restatement) (Exhibit 99.7 to
CNFs Report on
Form 8-K
filed on December 6, 2005*#).
|
|
10
|
.12
|
|
|
|
CNF Inc. Value Management Plan
(2006 Amendment and Restatement) (Exhibit 99.8 to
CNFs Report on
Form 8-K
filed on December 6, 2005*#).
|
|
10
|
.13
|
|
|
|
CNF Inc. Summary of Incentive
Compensation plans for 2006.#
|
|
10
|
.14
|
|
|
|
Restricted Stock Award Agreement
between CNF Inc. and Douglas W. Stotlar dated December 17,
2004 (Exhibit 10.75 to CNFs
Form 10-K
for the year ended December 31, 2004*#).
|
|
10
|
.15
|
|
|
|
Stock Option Agreement between CNF
Inc. and Douglas W. Stotlar dated December 17, 2004
(Exhibit 10.76 to CNFs
Form 10-K
for the year ended December 31, 2004*#).
|
|
10
|
.16
|
|
|
|
Form of Stock Option Agreement
(Exhibit 99.10 to CNFs Report on
Form 8-K
filed on December 6, 2005*#).
|
|
10
|
.17
|
|
|
|
Form of Restricted Stock Award
Agreement (Exhibit 99.11 to CNFs Report on
Form 8-K
filed on December 6, 2005*#).
|
|
10
|
.18
|
|
|
|
Supplemental Retirement Plan dated
January 1, 1990 (Exhibit 10.31 to CNFs
Form 10-K
for the year ended December 31, 1993*#).
|
|
10
|
.19
|
|
|
|
Supplemental Excess Retirement
Plan dated January 1, 2005 (Exhibit 99.4 to CNFs
Form 8-K
dated December 8, 2004*#).
|
|
10
|
.20
|
|
|
|
CNF Inc. Deferred Compensation
Plan for Executives 1998 Restatement (Exhibit 10.20 to
CNFs
Form 10-K
for the year ended December 31, 1997*#).
|
|
10
|
.21
|
|
|
|
Amendment No. 1 dated
June 28, 1999, to the Deferred Compensation Plan for
Executives 1998 Restatement (Exhibit 10.30 to CNFs
Form 10-K
for the year ended December 31, 2002*#).
|
|
10
|
.22
|
|
|
|
Amendment No. 2 dated
August 21, 2000, to the Deferred Compensation Plan for
Executives 1998 Restatement (Exhibit 10.31 to CNFs
Form 10-K
for the year ended December 31, 2002*#).
|
|
10
|
.23
|
|
|
|
Amendment No. 3 dated
January 29, 2001, to the Deferred Compensation Plan for
Executives 1998 Restatement (Exhibit 10.32 to CNFs
Form 10-K
for the year ended December 31, 2002*#).
|
|
10
|
.24
|
|
|
|
Amendment No. 4 dated
May 14, 2001, to the Deferred Compensation Plan for
Executives 1998 Restatement (Exhibit 10.33 to CNFs
Form 10-K
for the year ended December 31, 2002*#).
|
|
10
|
.25
|
|
|
|
Amendment No. 5 dated
December 4, 2001 to the Deferred Compensation Plan for
Executives 1998 Restatement (Exhibit 10.34 to CNFs
Form 10-K
for the year ended December 31, 2002*#).
|
|
10
|
.26
|
|
|
|
2005 Deferred Compensation Plan
for Executives, as amended (Exhibit 99.9 to CNFs
Report on
Form 8-K
filed on December 6, 2005*#).
|
|
10
|
.27
|
|
|
|
CNF Inc. Nonqualified Executive
Benefit Plans Trust Agreement 2004 Restatement dated as of
December 30, 2004 between CNF Inc. and Wachovia Bank, NA
(Exhibit 10.5 to CNFs
Form 10-Q
dated May 10, 2005*#).
|
|
10
|
.28
|
|
|
|
Form of CNF Inc. Tier I
Severance Agreement (Exhibit 99.1 to CNFs Report on
Form 8-K
filed on December 6, 2005*#).
|
76
|
|
|
|
|
|
|
Exhibit No.
|
|
|
|
|
|
|
10
|
.29
|
|
|
|
Form of Subsidiary Tier I
Severance Agreement (Exhibit 99.2 to CNFs Report on
Form 8-K
filed on December 6, 2005*#).
|
|
10
|
.30
|
|
|
|
Form of CNF Inc. Tier II
Severance Agreement (Exhibit 99.3 to CNFs Report on
Form 8-K
filed on December 6, 2005*#).
|
|
10
|
.31
|
|
|
|
Form of Subsidiary Tier II
Severance Agreement (Exhibit 99.4 to CNFs Report on
Form 8-K
filed on December 6, 2005*#).
|
|
10
|
.32
|
|
|
|
Form of Tier II Vector SCM,
LLC Agreement (Exhibit 99.5 to CNFs Report on
Form 8-K
filed on December 6, 2005*#).
|
|
10
|
.33
|
|
|
|
Amended and Restated Executive
Severance Plan (Exhibit 99.6 to CNFs Report on
Form 8-K
filed on December 6, 2005*#).
|
|
10
|
.34
|
|
|
|
CNF Inc. 2003 Equity Incentive
Plan for Non-Employee Directors(Exhibit 10.2 to CNFs
Form 10-Q
for the quarter ended March 31, 2005*#).
|
|
10
|
.35
|
|
|
|
Form of Restricted Stock Award
Agreement for directors of CNF (Exhibit 99.1 to CNFs
Form 8-K
dated April 28, 2005*#).
|
|
10
|
.36
|
|
|
|
CNF Inc. Deferred Compensation
Plan for Directors 1998 Restatement (Exhibit 10.34 to
CNFs
Form 10-K
for the year ended December 31, 1997*#).
|
|
10
|
.37
|
|
|
|
2005 Deferred Compensation Plan
for Non-Employee Directors effective January 1, 2005
(Exhibit 99.2 to CNFs
Form 8-K
dated December 8, 2004*#).
|
|
10
|
.38
|
|
|
|
CNF Inc. Nonqualified Director
Benefit Plans Trust Agreement 2004 Restatement dated as of
December 30, 2004 between CNF Inc. and Wachovia Bank, NA
(Exhibit 10.6 to CNFs
Form 10-Q
dated May 10, 2005*#).
|
|
10
|
.39
|
|
|
|
Directors
24-Hour
Accidental Death and Dismemberment Plan (Exhibit 10.32 to
CNFs
Form 10-K
for the year ended December 31, 1993*#).
|
|
10
|
.40
|
|
|
|
Directors Business Travel
Insurance Plan (Exhibit 10.36 to CNFs
Form 10-K
for the year ended December 31, 1993*#).
|
|
10
|
.41
|
|
|
|
[Emery Air Freight Plan for
Retirees, effective October 31, 1987 (Exhibit 4.23 to
the Emery Air Freight Corporation Quarterly Report on
Form 10-Q
dated November 16, 1987*#).]
|
|
(12)
|
|
|
Computation of ratios of earnings
to fixed charges.
|
|
(21)
|
|
|
Significant Subsidiaries of CNF.
|
|
(23)
|
|
|
Consent of Independent Registered
Public Accounting Firm.
|
|
(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.
|
|
(99)
|
|
|
Additional documents:
|
|
99
|
.1
|
|
|
|
CNF Inc. 2005 Notice of Annual
Meeting and Proxy Statement filed on Form DEF 14A. (Only
those portions referenced herein are incorporated in this
Form 10-K.
Other portions are not required and, therefore, are not
filed as a part of this
Form 10-K.
*).
|
|
99
|
.2
|
|
|
|
Note Agreement dated as of
July 17, 1989, between the ESOP, Consolidated Freightways,
Inc. and the Note Purchasers named therein.
(Exhibit 28.1 as filed on Form SE dated July 21,
1989*).
|
|
99
|
.3
|
|
|
|
Guarantee and Agreement dated as
of July 17, 1989, delivered by Consolidated Freightways,
Inc. (Exhibit 28.2 as filed on Form SE dated
July 21, 1989*).
|
Footnotes
to Exhibit Index
|
|
|
* |
|
Previously filed with the Securities and Exchange Commission and
incorporated herein by reference. |
|
# |
|
Designates a contract or compensation plan for Management or
Directors. |
77