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Conway Inc 10-K 2008
Form 10-K
Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-K

 

 

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2007

or

 

¨ 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

Con-way 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     94403  
(Address of principal executive offices)     (Zip Code)  

Registrant’s 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:

8 7/8% Notes due 2010

7.25% Senior Notes due 2018

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.     Yes x No ¨

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 ¨ No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes x No ¨

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 registrant's 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. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

¨ Yes x No

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 29, 2007: $1,634,069,665

Number of shares of Common Stock outstanding as of January 31, 2008: 45,349,546

DOCUMENTS INCORPORATED BY REFERENCE

Part III

Proxy Statement for Con-way's Annual Meeting of Shareholders to be held on April 22, 2008 (only those portions referenced specifically herein are incorporated in this Form 10-K).

 

 

 


Table of Contents

Con-way Inc.

FORM 10-K

Year Ended December 31, 2007

INDEX

Item

   PART I    Page

1.

  

Business

   3

1A.

  

Risk Factors

   9

1B.

  

Unresolved Staff Comments

   12

2.

  

Properties

   12

3.

  

Legal Proceedings

   13

4.

  

Submission of Matters to a Vote of Security Holders

   14
  

Executive Officers of the Registrant

   14
   PART II   

5.

  

Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

   16

6.

  

Selected Financial Data

   18

7.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   19

7A.

  

Quantitative and Qualitative Disclosures About Market Risk

   38

8.

  

Financial Statements and Supplementary Data

   41

9.

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

   86

9A.

  

Controls and Procedures

   86

9B.

  

Other Information

   86
   PART III   

10.

  

Directors, Executive Officers and Corporate Governance

   87

11.

  

Executive Compensation

   87

12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

   87

13.

  

Certain Relationships and Related Transactions, and Director Independence

   87

14.

  

Principal Accountant Fees and Services

   87
   PART IV   

15.

  

Exhibits and Financial Statement Schedules

   88

 


Table of Contents

Con-way Inc.

FORM 10-K

Year Ended December 31, 2007

PART I

 

I TEM 1. BUSINESS

Overview

Con-way Inc. and its subsidiaries (“Con-way” or “the Company”) provide transportation, logistics and supply-chain management services for a wide range of manufacturing, industrial and retail customers. Con-way’s principal business units operate in regional and transcontinental less-than-truckload and full-truckload freight transportation, contract logistics and supply-chain management, truckload brokerage, and trailer manufacturing.

Con-way Inc. was incorporated in Delaware in 1958, and in 2006, changed its name from “CNF Inc.” to “Con-way Inc.” Company management and the Board of Directors believe that the corporate name change and the re-branding initiative results in a better understanding of the Company’s core businesses, operating strengths, corporate culture and values, thereby enabling the Company to compete more effectively in the markets it serves.

Information Available on Website

Con-way makes available, free of charge, on its website at “www.con-way.com,” under the headings “Investor Relations/Annual Reports & 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, Con-way makes available, free of charge, on its website at “www.con-way.com,” under the headings “Investor Relations/Corporate Governance,” current copies of the following documents: (1) the charters of the Audit, Compensation, and Director Affairs Committees of its Board of Directors; (2) its Corporate Governance Guidelines; (3) its Code of Ethics for Chief Executive and Senior Financial Officers; (4) its Code of Business Conduct and Ethics for Directors; and (5) 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 Con-way’s website shall be deemed to be a part of this report.

Regulatory Certifications

In 2007, Con-way filed the written affirmations and Chief Executive Officer certifications required by Section 303A.12 of the NYSE Listing Manual and Section 302 of the Sarbanes-Oxley Act.

Reporting Segments

For financial reporting purposes, Con-way is divided into five reporting segments: Freight, Logistics, Truckload, Vector, and Other. For financial information concerning Con-way’s geographic and reporting-segment operating results, refer to Note 14, “Segment Reporting,” of Item 8, “Financial Statements and Supplementary Data.”

Freight

The Freight segment primarily consists of the operating results of the Con-way Freight business unit. Con-way Freight is a less-than-truckload (“LTL”) motor carrier that utilizes a network of freight service centers

 

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to provide regional, inter-regional, and transcontinental less-than-truckload freight services throughout North America. The business unit provides day-definite delivery service to manufacturing, industrial, and retail customers.

LTL carriers transport shipments 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. Typically, LTL shipments weigh between 100 and 15,000 pounds. Con-way Freight’s average weight per shipment is approximately 1,150 pounds.

In August 2007, Con-way Freight began an operational restructuring that combines its three regional operating companies into one centralized operation to improve the customer experience and streamline its processes. The reorganization into a centralized entity is intended to improve customer service and efficiency through uniform new pricing and operational processes, implementation of best practices, and fostering of innovation.

In July 2006, Con-way sold the expedited-shipping portion of the former Con-way Expedite and Brokerage business. The remaining truckload-brokerage portion of that business was integrated with Menlo Logistics in January 2007, as more fully discussed below.

Results of Con-way Truckload were previously reported in the Freight segment. In connection with the truckload acquisition discussed below, a new Truckload segment was created. Accordingly, the operating results of Con-way Truckload are reported in the Truckload segment and prior periods have been reclassified to conform to the current presentation.

Competition

The LTL trucking environment is intensely competitive. Principal competitors of Con-way Freight include regional and national LTL companies, some of which are subsidiaries of global, integrated transportation service providers. Competition is based on freight rates, service, reliability, transit times and scope of operations.

Logistics

The Logistics segment consists of the operating results of the subsidiaries of Menlo Worldwide, LLC (“MW”), including Menlo Worldwide Logistics and its subsidiaries (collectively, “Menlo Logistics”). Menlo Logistics develops contract-logistics solutions, including the management of complex distribution networks and supply-chain engineering and consulting, and also provides domestic brokerage services. The term “supply chain” generally refers to a strategically designed process that directs the movement of materials and related information from the acquisition of raw materials to the delivery of products to the end-user.

The global supply-chain and logistics-services market has grown significantly since the formation of Menlo Logistics, Inc. in 1990, based on the complexity of customers’ supply chains and the need for innovative solutions. The outsourcing of distribution has become more commonplace as businesses increasingly evaluate overall logistics costs. The ability to access information through computer networks increases the value of capturing real-time logistics information to track inventories, shipments, and deliveries.

Menlo Logistics’ supply-chain management offerings are primarily related to transportation-management and contract-warehousing services. Transportation management refers to the management of asset-based carriers and third-party transportation providers for customers' inbound and outbound supply-chain needs through the use of logistics management systems to consolidate, book and track shipments. Contract warehousing refers to the optimization and operation of warehouse operations for customers using technology and warehouse-management

 

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systems to reduce inventory carrying costs and supply-chain cycle times. For several customers, contract-warehousing operations include light assembly or kitting operations. Menlo 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 Menlo Logistics’ customers takes different forms, including cost-plus, gain-sharing, transactional, fixed-dollar, and consulting-fee arrangements.

Menlo Logistics provides its services using a customer- or project-based approach when the supply-chain solution requires customer-specific transportation management, single-client warehouses, and/or single-customer technological solutions. However, Menlo Logistics increasingly utilizes a shared-resource, process-based approach that leverages a centralized transportation-management group, uses multi-client warehouses, and creates technological solutions to benefit multiple customers. This approach allows Menlo Logistics to provide scalable services to a growing number of customers. Menlo Logistics began growing its shared-resource, process-based approach in 2005, when it segmented its business based on customer type. The industry-focused groups leverage the capabilities of personnel, systems and solutions throughout the organization to give customers expertise in specific automotive, high-tech, government, and consumer-products sectors.

Although Menlo Logistics’ client base includes a growing number of customers, four customers collectively accounted for 45.6% of the revenue reported for the Logistics reporting segment in 2007, and each had a Standard & Poor's investment-grade credit rating. In 2007, Menlo Logistics’ largest customer accounted for 4.8% of the consolidated revenue of Con-way.

Expansion in Asia

On September 5, 2007, MW acquired the outstanding common shares of Cougar Holdings Pte Ltd., and its primary subsidiary, Cougar Express Logistics (collectively, “Cougar Logistics”). Cougar Logistics is a warehousing, logistics, distribution-management and freight-forwarding company headquartered in Singapore. Cougar provides services to a client base in Asia of nearly 200 global businesses with personnel, facilities and operations in 12 locations in Singapore, Malaysia and Thailand.

On October 18, 2007, MW acquired the outstanding common shares of Chic Holdings, Ltd. and its wholly owned subsidiaries, Shanghai Chic Logistics Co. Ltd. and Shanghai Chic Supply Chain Management Co. Ltd. (collectively, “Chic Logistics”). Chic Logistics is a well-established provider of logistics and transportation-management services in China and maintains a network with operating sites in 78 cities.

The acquisitions expand Menlo Logistics’ operations in the important Asia-Pacific region and position Menlo Logistics to capitalize on growth in China’s domestic economy.

Integration of Former Freight Segment Businesses

In recent years, Menlo Logistics has integrated into its operations two supply-chain management businesses that were previously reported in the Freight reporting segment. In the second quarter of 2005, Logistics integrated the former Con-Way Logistics business and, in January 2007, Logistics integrated the truckload-brokerage business.

The integration of Con-Way Logistics expanded its multi-client warehousing service model to Menlo Logistics’ larger warehouse network. The integration of the truckload-brokerage business expanded logistics-services opportunities through access to truckload-brokerage customers and leveraged the shared expertise of the logistics and truckload-brokerage professionals.

Competition

Competitors in the contract-logistics market are numerous and include domestic and foreign logistics companies, the logistics arms of integrated transportation companies, and contract manufacturers. However,

 

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Menlo Logistics primarily competes against a limited number of major competitors that have resources sufficient to provide services under large logistics contracts. 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.

Truckload

The Truckload segment consists of the combined operating results of the Con-way Truckload business unit and the recently acquired Contract Freighters, Inc. business unit. On August 23, 2007, Con-way acquired the outstanding common shares of Transportation Resources, Inc. (“TRI”), the holding company for Contract Freighters, Inc. and other affiliated companies (collectively, “CFI”). The combined businesses provide asset-based long-haul full-truckload services throughout North America.

The acquisition of CFI creates growth opportunities and an expanded service portfolio. In particular, CFI offers “through-trailer” service into and out of Mexico through all major gateways in Texas, Arizona and California. This service, which eliminates the need for transfer and/or storage fees at the border, translates into faster delivery, reduced transportation costs and better product protection and security for customers doing business internationally. This service typically involves equipment-interchange operations with various Mexican motor carriers. For a shipment with an origin or destination in Mexico, CFI provides transportation for the domestic portion of the freight move, and the Mexican carrier provides the pick-up, linehaul and delivery services within Mexico.

Con-way Truckload and CFI offer dry-van transportation services using a fleet of long-haul tractors and trailers. The carriers provide point-to-point service using single drivers as well as two-person driver teams over long-haul routes, with each trailer containing only one customer’s goods. This origin-to-destination freight movement limits intermediate handling and is not dependent on the same network of locations utilized by LTL carriers.

Con-way in September 2007 integrated the Con-way Truckload business unit with the CFI business unit and in January 2008 changed the name of the CFI business unit to Con-way Truckload.

Competition

The truckload market is fragmented with numerous carriers of varying sizes. Principal competitors of Con-way Truckload and CFI include other truckload carriers, logistics providers, railroads, private fleets, and to a lesser extent, LTL carriers. Competition is based on freight rates, service, reliability, transit times, and driver and equipment availability.

Vector

Vector SCM, LLC (“Vector”) was a joint venture formed with General Motors (“GM”) in December 2000 for the purpose of providing logistics management services on a global basis for GM, and for customers in addition to GM. Although Con-way owned a majority interest in Vector, Con-way’s portion of Vector’s operating results were reported as an equity-method investment based on GM’s ability to control certain operating decisions.

In June 2006, GM exercised its right to purchase Con-way’s membership interest in Vector. In December 2006, an independent financial advisor established a fair value for Vector, and accordingly, Con-way recognized a $41.0 million sale-related gain in December 2006, as more fully discussed in Note 5, “Sale of Unconsolidated Joint Venture,” of Item 8, “Financial Statements and Supplementary Data.”

Other

The Other reporting segment consists of the operating results of Road Systems, a trailer manufacturer, and certain corporate activities for which the related income or expense has not been allocated to other reporting

 

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segments, including results related to corporate re-insurance activities and corporate properties. Road Systems primarily manufactures and refurbishes trailers for Con-way Freight.

Discontinued Operations

Discontinued operations affecting the periods presented in Con-way’s consolidated financial information reported in Item 8, “Financial Statements and Supplementary Data,” relate to (1) the closure of the freight forwarding business known as Con-way Forwarding in 2006, (2) the sale of Menlo Worldwide Forwarding, Inc. and its subsidiaries and Menlo Worldwide Expedite!, Inc. (collectively “MWF”) in 2004, (3) the shut-down of Emery Worldwide Airlines, Inc. (“EWA”) in 2001 and the termination of its Priority Mail contract with the U.S. Postal Service (“USPS”) in 2000, and (4) the spin-off of Consolidated Freightways Corporation (“CFC”) in 1996.

For more information, refer to Note 4, “Discontinued Operations,” and Note 13, “Commitments and Contingencies,” of Item 8, “Financial Statements and Supplementary Data.”

General

Employees

At December 31, 2007, Con-way had approximately 27,100 regular full-time employees. The approximate number of regular full-time employees by segment was as follows: Freight, 17,700; Logistics, 4,700; Truckload, 3,600; and Other, 1,100. The 1,100 employees included in the Other segment consist primarily of executive, technology, and administrative positions that support Con-way’s operating subsidiaries.

Cyclicality and Seasonality

Con-way’s operations are affected, in large part, by conditions in the cyclical markets of its customers and on the U.S. and global economies, as more fully discussed in Item 1A, “Risk Factors.”

Con-way’s operating results are also affected by seasonal fluctuations that change demand for transportation services. In the Freight segment 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. In the Truckload segment for a typical year, the months of September and October usually have the highest business levels while the months of December, January and February usually have the lowest business levels.

Price and Availability of Fuel

Con-way is exposed to the effects of changes in the price and availability of diesel fuel, as more fully discussed in Item 1A, “Risk Factors.”

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 equipment by motor carriers from owner-operators. The PHMSA promulgates and

 

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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.

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 October 2005, 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. Many advocacy groups have challenged the rule. Given the uncertainty in the status of the HOS rules, Con-way cannot predict whether the current rules will remain intact or whether the rules as finally adopted will materially affect its operations.

Environmental

Con-way’s operations involve the storage, handling, and use of diesel fuel and other hazardous substances. Con-way is subject to laws and regulations that (1) govern activities or operations that may have adverse environmental effects such as discharges to air and water, and the handling and disposal practices for solid and hazardous waste, and (2) 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 Con-way’s properties may be imposed regardless of whether Con-way leases or owns the properties in question and regardless of whether such environmental conditions were created by Con-way or by a prior owner or tenant, and also may be imposed with respect to properties that Con-way may have owned or leased in the past. Con-way has provided for its estimate of remediation costs at these sites.

Homeland Security

Con-way 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”). Con-way believes that it will be able to comply with potential TSA, DHS, and CBP rules that will require additional security measures affecting the transportation of both domestic and international shipments.

Con-way Freight and Con-way Truckload 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 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 logistics companies; as a result, Menlo Logistics cannot obtain C-TPAT certification. To address this issue, Menlo Logistics has voluntarily adopted C-TPAT "Importer" requirements into its security plan, which incorporates regulatory DHS requirements. Menlo Logistics also voluntarily participates in non-regulatory DHS programs that secure customer and international supply chains against terrorism and theft.

Menlo Worldwide Logistics Government Services, LLC (“MWLGS”), a subsidiary of Menlo Logistics, Inc., has been approved by the TSA as an Indirect Air Carrier (“IAC”), and has developed security measures that have been reviewed and certified by the TSA. The TSA is expected to release new IAC rules in the near future.

 

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Con-way cannot predict the effect the new rules might have on its IAC operations but does not believe that the rules as finally adopted will materially affect its operations.

 

ITEM 1A. RISK FACTORS

From time to time, Con-way makes “forward-looking statements” in an effort to inform its shareholders and the public about its businesses. Forward-looking statements generally relate to future events, anticipated results, or operational aspects. These statements are not predictions or guarantees of future performance, circumstances, or events as they are based on the facts and circumstances known to Con-way as of the date the statements are made. Item 7, “Management’s Discussion and Analysis – Forward-Looking Statements,” identifies the type of statements that are forward-looking. Various factors may cause actual results to differ materially from those discussed in such forward-looking statements.

Described below are those factors that Con-way considers to be most significant to its businesses. Although Con-way believes it has identified and discussed below the primary risks affecting its businesses, there may be additional factors that are not presently known or that are not currently believed to be significant that may adversely affect Con-way’s future financial condition, results of operations, or cash flows.

Business Interruption

Con-way and its business units rely on a centralized shared-service facility for the performance of shared administrative and technology services in the conduct of their businesses. Con-way’s computer facilities and its administrative and technology employees are located at the shared-service facility.

Con-way is dependent on its automated systems and technology to operate its businesses and to increase employee productivity. Although Con-way 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, transition to upgraded or replacement technology, or any other reason, could have a material adverse effect on Con-way.

Customer Concentration

Menlo Logistics and many of its competitors in the logistics-industry segment 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 Logistics 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 Logistics’ major customers, may have a material adverse effect on Con-way’s financial condition, results of operations, and cash flows. Similarly, the renegotiation of major customer contracts may also have an adverse effect on Con-way.

Cyclicality

Con-way’s operating results are affected, in large part, by conditions in the cyclical markets of its customers and on the U.S. and global economies. While economic conditions affect most companies, the transportation industry is cyclical and susceptible to trends in economic activity. When individuals and companies purchase and produce fewer goods, Con-way’s businesses transport fewer goods. In addition, Con-way’s business units in the Freight and Truckload reporting segments are capital-intensive and Con-way Freight has a relatively high fixed-cost structure that is difficult to adjust to match shifting volume levels. Accordingly, any sustained weakness in demand or continued downturn or uncertainty in the economy generally would have an adverse effect on Con-way.

 

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Employees

The workforce of Con-way and its subsidiaries is not affiliated with labor unions. Con-way believes that the non-unionized operations of its business units 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 Con-way’s business units will be able to maintain their non-unionized status.

Con-way hires drivers primarily for business units in its Freight and Truckload reporting segments. There is significant competition for qualified drivers in the transportation industry. As a result of driver shortages, these business units may be required to increase driver compensation and benefits, or face difficulty meeting customer demands, all of which could adversely affect Con-way.

Employee Benefit Costs

Con-way maintains health-care plans, defined benefit pension plans, and defined contribution retirement plans and also provides certain other benefits to its employees. In recent years, health-care costs have risen dramatically. Lower interest rates and/or lower returns on plan assets may cause increases in the expense of, and funding requirements for, Con-way’s defined benefit pension plans. Con-way amended its retirement benefit plans in 2006 and the resulting plan changes are generally expected to decrease the future financial-statement effect associated with the defined benefit pension plans and to increase the future financial-statement effect associated with the defined contribution retirement plans. Despite the changes to the retirement benefit plans, Con-way remains subject to volatility associated with interest rates, returns on plan assets, and funding requirements. As a result, Con-way is unable to predict the effect of continuing to provide these benefits to employees.

Government Regulation

Con-way is subject to compliance with many laws and regulations that apply to its business activities. These include regulations related to driver hours-of-service limitations, stricter cargo-security requirements, tax laws, and environmental matters. Con-way 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 Con-way in particular. Although government regulation that affects Con-way and its competitors may simply result in higher costs that can be passed to customers with no adverse consequences, there can be no assurance that this will be the case. As a result, Con-way believes that any additional 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 Con-way.

Capital Intensity

Con-way’s primary businesses are capital-intensive. Con-way’s business units in the Freight and Truckload reporting segments make significant investments in revenue equipment and the Con-way Freight business unit also makes significant investments in freight service centers. The amount and timing of capital investments depend on various factors, including anticipated volume levels, and the price and availability of appropriate-use property for service centers and newly manufactured tractors and diesel engines, which are subject to restrictive Environmental Protection Agency engine-design requirements. If anticipated service-center and/or fleet requirements differ materially from actual requirements, Con-way’s capital-intensive business units may have too much or too little capacity. Con-way attempts to mitigate the risk associated with too much or too little revenue equipment capacity by adjusting capital expenditures and by utilizing short-term equipment rentals in order to match capacity with business volumes. Con-way’s investments in revenue equipment and freight service centers depend on its ability to generate cash flow from operations and its access to debt and equity capital markets. A decline in the availability of these funding sources could adversely affect Con-way.

 

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Price and Availability of Fuel

Con-way is subject to risk associated with fuel purchases. The availability and price of diesel fuel are subject to political, economic, and market factors that are outside of Con-way’s control. Historically, Con-way has had the ability to obtain fuel from various sources and in the desired quantities. However, an inability to obtain fuel in the future could have a material adverse effect on Con-way. Con-way’s business units in the Freight, Truckload and Logistics reporting segments are subject to the risk of fuel price fluctuations. Con-way’s business units in the Freight and Truckload reporting segments have fuel-surcharge revenue programs in place with a majority of customers, and its Menlo Logistics business unit has terms in most of its customer contracts that allow recognition of fuel-surcharge revenue designed to eliminate the adverse effect of rising fuel prices on purchased transportation. Increases in fuel costs, if not offset by base freight rate increases, fuel surcharges or other cost-recovery mechanisms, may have an adverse effect on Con-way’s results of operations.

Con-way’s fuel-surcharge revenue programs have helped to mitigate and, in some instances, eliminate the adverse effect of rising fuel prices. However, there can be no assurance that its fuel-surcharge programs will continue to be effective. Competitive pressures or other events may limit the ability of Con-way to assess its fuel surcharges. At times, in the interest of its customers, Con-way Freight has temporarily capped the fuel surcharge at a fixed percentage. In addition, Con-way Truckload may incur fuel costs that cannot be recovered because those costs are incurred in connection with engines being idled during cold or warm weather and empty or out-of-route miles that cannot be billed to customers.

As fuel prices have risen, the fuel surcharge has increased Con-way Freight’s yield and revenues, and the business unit has more than recovered higher fuel costs and fuel-related increases in purchased transportation. However, because the fuel surcharge program is part of the overall rate structure for Con-way Freight, increases in fuel surcharges often adversely affect the base freight rates that Con-way Freight can otherwise charge to customers. Con-way Freight’s operating income may be adversely affected by a decline in fuel prices as lower fuel surcharges would reduce its yield and revenue unless the reduction was offset by increases in base freight rates and other accessorial charges. Whether fuel prices increase, decrease, or remain constant, Con-way Freight’s operating income may be adversely affected if market pressures limited Con-way Freight’s ability to assess its fuel surcharges. Con-way cannot predict future fuel prices, Con-way Freight’s ability to recover higher fuel costs through fuel surcharges, or the effect that changes in fuel surcharges may have on Con-way Freight’s overall rate structure.

Integration of Acquisitions

Con-way’s strategy for long-term growth and profitability depends in part on its ability to realize the expected benefits associated with acquisitions. The degree of success of the acquisitions will depend, in part, on Con-way’s ability to realize the anticipated cost savings and growth opportunities from integrating acquired businesses with Con-way’s existing businesses. Con-way’s success in realizing these benefits and the timing of this realization depends upon the successful integration of operations.

The integration process may be complex, costly and time-consuming. The difficulties of integrating the operations of acquired businesses include, among others: unanticipated issues in integrating information, communications and other systems; retaining customers and key employees; consolidating corporate and administrative infrastructures; the diversion of management’s attention from ongoing business concerns; the effect on internal controls and compliance with the regulatory requirements under the Sarbanes-Oxley Act of 2002; and unanticipated issues, expenses and liabilities.

Con-way may not accomplish its integration plans smoothly or successfully. The diversion of the attention of management from its current operations to the integration effort and any difficulties encountered in combining operations could prevent Con-way from realizing the full benefits anticipated to result from the acquisitions and could adversely affect Con-way.

 

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Other Factors

In addition to the risks identified above, Con-way’s annual and quarterly operating results are affected by a number of business, economic, regulatory and competitive factors, including:

 

   

increasing competition and pricing pressure;

 

   

the creditworthiness of Con-way’s customers and their ability to pay for services rendered;

 

   

the effect of litigation, including the allegation that Con-way engaged in price-fixing of fuel surcharges in violation of Federal antitrust laws, and the alleged violations of the Worker Adjustment and Retraining Notification Act in connection with employee layoffs and ultimate terminations due to the August 2001 grounding of EWA’s airline operations;

 

   

the possibility that Con-way may, from time to time, be required to record impairment charges for goodwill, intangible assets, and other long-lived assets;

 

   

the possibility of defaults under Con-way’s $400 million revolving credit agreement and other debt instruments, and the possibility that Con-way 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 grievances and related litigation by furloughed EWA pilots and crew members, labor-organizing activities, work stoppages or strikes;

 

   

matters relating to Con-way’s 1996 spin-off of CFC, including the possibility that CFC’s multi-employer pension plans may assert claims against Con-way, that Con-way may not prevail in those proceedings and that Con-way may not have the financial resources necessary to satisfy amounts payable to those plans; and

 

   

matters relating to the sale of MWF, including Con-way’s obligation to indemnify UPS for certain losses in connection with the sale.

 

ITEM 1B. UNRESOLVED S TAFF COMMENTS

None.

 

ITEM 2. PROPERTIES

Con-way 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.

Freight

At December 31, 2007, Con-way Freight operated 340 freight service centers, of which 157 were owned and 183 were leased. The service centers are strategically located to cover the geographic areas served by Con-way Freight and represent physical buildings and real property with dock, office, and/or shop space. These 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 Con-way Freight at December 31, 2007 was approximately 34,400. The headquarters for Con-way Freight are located in Ann Arbor, Michigan.

Logistics

At December 31, 2007, Menlo Logistics operated 64 warehouses in North America, of which 37 were leased by Menlo Logistics and 27 were leased or owned by clients of Menlo Logistics. Outside of North America, Menlo Logistics operated an additional 66 warehouses, of which two were owned and 53 were leased by Menlo

 

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Logistics, and 11 were leased or owned by clients. At December 31, 2007, Menlo Logistics owned and operated 278 trucks, tractors, and trailers. The headquarters for Menlo Logistics are located in San Mateo, California.

Truckload

At December 31, 2007, the Truckload business units operated five owned terminals that are strategically located to provide customers with efficient service. All five terminals have bulk fuel and tractor and trailer parking. Two terminals are equipped with wash bay facilities and two terminals have maintenance facilities. In addition to the five owned terminals, the Truckload business units also utilize various drop yards for temporary trailer storage throughout the United States. At December 31, 2007, the Truckload business units owned and operated approximately 2,600 tractors and 8,100 trailers. The headquarters for the Truckload business units are located in Joplin, Missouri.

Other

Principal properties of the Other segment included Con-way's leased executive offices in San Mateo, California, and its owned shared-services center in Portland, Oregon. Road Systems owns and operates a manufacturing facility in Searcy, Arkansas.

 

ITEM 3. LEGAL PROCEEDINGS

Con-way, along with other companies engaged in the LTL trucking business, was named as a defendant in a purported class-action lawsuit filed on July 30, 2007 in the United States District Court for the Southern District of California. The named plaintiffs, Farm Water Technological Services Inc. d/b/a Water Tech. and C.B.J.T. d/b/a Agricultural Supply, allege that the defendants have conspired to fix fuel surcharges for LTL shipments in violation of Federal antitrust laws and are seeking treble damages, injunctive relief, attorneys’ fees and costs. After this lawsuit was filed, approximately 50 similar lawsuits were filed by other plaintiffs in various federal district courts, naming as defendants Con-way or Con-way Freight (or both), as well as other companies engaged in the LTL trucking business. In December 2007, these cases were consolidated for litigation in the Federal District Court for the Northern District of Georgia in Atlanta.

In 2003, prior to the sale of MWF to UPS, Con-way 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. Con-way 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. Con-way was subsequently advised by the Department of Justice that it is not pursuing an investigation of this matter. Con-way 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, Con-way 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, Con-way agreed to indemnify UPS for certain losses resulting from violations of the Foreign Corrupt Practices Act. Con-way is currently unable to predict whether it will be required to make payments under the indemnity or whether the SEC will impose fines or other penalties directly on Con-way as a result of the actions of Emery Transnational.

Certain legal proceedings of Con-way are also discussed in Note 4, “Discontinued Operations,” and Note 13, “Commitments and Contingencies,” of Item 8, “Financial Statements and Supplementary Data.”

 

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Con-way did not submit any matter to a vote of security holders during the fourth quarter of the fiscal year covered by this Annual Report.

EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of Con-way, their ages at December 31, 2007, and their applicable business experience are as follows:

Douglas W. Stotlar, 47, president and chief executive officer of Con-way. Mr. Stotlar was named to his current position in April 2005. He previously served as president and chief executive officer of Con-way Freight and Transportation and senior vice president of Con-way, a position he held since December 2004. Prior to this, he served as executive vice president and chief operating officer of Con-way Freight and Transportation, a position he held since June 2002. From 1999 to 2002, he was executive vice president of operations for Con-way Freight and Transportation. Prior to joining Con-way Freight and Transportation’s corporate office, Mr. Stotlar served as vice president and general manager of Con-way’s expediting business. Mr. Stotlar joined the Con-way Freight and Transportation organization in 1985 as a freight operations supervisor for Con-way Freight-Central. He subsequently advanced to management posts in Columbus, Ohio, and Fort Wayne, Indiana, where he was named regional manager. Mr. Stotlar earned his bachelor’s degree in transportation and logistics from The Ohio State University.

Kevin C. Schick, 56, senior vice president and chief financial officer of Con-way. Mr. Schick was named to his current position in March 2005. He previously served as vice president and controller of Con-way Freight and Transportation, a position he held since 1989. Mr. Schick joined the Con-way Freight and Transportation organization in 1983 as controller for Con-way Freight-Central. Mr. Schick earned his bachelor’s degree in finance from Marquette University and a master’s degree in business administration from Northwestern University.

Jennifer W. Pileggi, 43, senior vice president, general counsel and corporate secretary of Con-way. Ms. Pileggi was named to her current position in December 2004. Ms. Pileggi joined Con-way’s subsidiary Menlo Logistics, Inc. 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.

Robert L. Bianco Jr., 43, president of Menlo Worldwide and senior vice president of Con-way. Mr. Bianco was named to his current position in June 2005. He previously served as president of Menlo Logistics, Inc., a position he held since December 2001. He joined the Con-way organization in 1989 as a management trainee and joined Menlo Logistics, Inc. in 1992 as a logistics manager. He subsequently advanced to vice president of operations for Menlo Logistics, Inc. in 1997. He earned a bachelor’s degree in history from the University of California at Santa Barbara, and a master’s degree from the University of San Francisco.

John G. Labrie, 41, president of Con-way Freight and senior vice president of Con-way. Prior to being named president of Con-way Freight in July 2007, Mr. Labrie was senior vice president of strategy and enterprise operations for Con-way. He previously served as executive vice president of operations for Con-way Freight and Transportation, a position he held since January 2005. Prior to this, he served as president and chief executive officer for Con-way Freight-Western, a position he held since June 2002. From May 1998 to June 2002, he was vice president of operations for Con-way Freight-Western. He joined the Con-way Freight and Transportation organization in 1990 as a sales account manager. Mr. Labrie earned his bachelor’s degree in finance from Central Michigan University. He holds a master’s degree in business administration from Indiana Wesleyan University.

Herbert J. Schmidt, 52, president of CFI and senior vice president of Con-way. Mr. Schmidt was named president of CFI in 2000. After joining CFI in 1984, he gained experience in the positions of vice president of

 

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administration, vice president of safety, senior vice president of operations, and senior vice president of sales and marketing. Mr. Schmidt began his career in the transportation industry with United Parcel Service in operations and industrial engineering. Mr. Schmidt graduated from Missouri Southern State University with a bachelor’s degree in political science.

Jackie Barretta, 46, vice president and chief information officer of Con-way. Ms. Barretta was named to her current position in February 2005. She previously served as vice president of information services for Con-way Freight and Transportation, 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 Freight and Transportation as a systems analyst in 1996. Ms. Barretta earned her bachelor’s degree in computer science from the University of North Carolina.

Kevin S. Coel, 49, vice president and corporate controller of Con-way. Mr. Coel joined Con-way in 1990 as Con-way’s corporate accounting manager. In 2000, he was named corporate controller, and in 2002, was promoted to vice president. Mr. Coel holds a bachelor’s degree in economics from the University of California at Davis and a master's degree in business administration from San Jose State University. Mr. Coel is also a member of the American Institute of CPAs.

Mark C. Thickpenny, 55, vice president and treasurer of Con-way. Mr. Thickpenny joined Con-way 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 bachelor’s degree in business administration from the University of Notre Dame and a master’s degree in business administration from the University of Chicago Graduate School of Business.

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

Con-way’s common stock is listed for trading on the New York Stock Exchange (“NYSE”) under the symbol “CNW.”

See Note 15, “Quarterly Financial Data,” of Item 8, “Financial Statements and Supplementary Data” for the range of common stock prices as reported on the NYSE and common stock dividends paid for each of the quarters in 2007 and 2006. At January 31, 2008, Con-way had 7,405 common shareholders of record.

In April 2006, the Board of Directors authorized the repurchase of up to $400 million in Con-way's common stock through open-market and privately negotiated transactions from time to time in such amounts as management deemed appropriate through June 30, 2007. Under the program, which concluded on June 29, 2007, Con-way repurchased common stock of $399.5 million.

Performance Graph

The following performance graph compares Con-way’s stockholder return (assuming reinvestment of dividends) for the fiscal year-ends from 2002 through 2007, with the S&P Midcap 400 and the Dow Jones Transportation Average.

 

LOGO

 

     Cumulative Total Return
     12/31/02    12/31/03    12/31/04    12/31/05    12/31/06    12/31/07

Con-way Inc.

   $ 100.0    $ 103.3    $ 154.2    $ 173.4    $ 137.7    $ 131.0

S&P Midcap 400

   $ 100.0    $ 135.6    $ 157.8    $ 177.6    $ 195.8    $ 211.2

DJ Transportation Average

   $ 100.0    $ 131.8    $ 168.3    $ 187.8    $ 206.1    $ 209.0

 

* Assumes $100 invested on December 31, 2002 in Con-way Inc., S&P Midcap 400 Index, and the Dow Jones Transportation Average and dividends were reinvested.

 

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Securities Authorized for Issuance under Equity Compensation Plans

The following table provides information as of December 31, 2007, regarding compensation plans under which securities of Con-way are authorized for issuance.

Equity Compensation Plan Information

 

Plan category

   Number of securities
to be issued upon exercise
of outstanding options,
warrants and rights

(a)
   Weighted-average exercise
price of outstanding options,
warrants and rights

(b)
   Number of securities
remaining available for
future issuance under equity
compensation plans
(excluding securities reflected
in column (a))

(c)
        

Equity compensation plans approved by security holders

   1,885,571    $41.74    5,451,220

Equity compensation plans not approved by security holders

   —      —      —  
              

Total

   1,885,571    $41.74    5,451,220
              

 

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ITEM 6. SELECTED FINANCIAL DATA

The following table includes selected financial and operating data for Con-way as of and for the five years ended December 31, 2007. This information should be read in conjunction with Item 7, “Management’s Discussion and Analysis,” and Item 8, “Financial Statements and Supplementary Data.”

Con-way Inc.

Five-Year Financial Summary

 

     2007 [a]    2006    2005    2004     2003
     (Dollars in thousands except per share data)

Operating Results

             

Revenues

   $ 4,387,363    $ 4,221,478    $ 4,115,575    $ 3,658,564     $ 3,186,797

Operating Income [b]

     264,453      401,828      370,946      284,332       231,927

Income from Continuing Operations Before Income Tax Provision

     242,646      392,309      352,356      248,775       205,982

Net Income from Continuing Operations Available to Common Shareholders [c]

     146,815      265,177      222,647      143,432       117,572

Net Income (Loss) Applicable to Common Shareholders [c] [d]

     145,952      258,978      214,034      (126,094 )     83,785

Per Common Share

             

Basic Earnings (Loss)

             

Net Income from Continuing Operations

   $ 3.24    $ 5.42    $ 4.27    $ 2.84     $ 2.37

Net Income (Loss) Applicable to Common Shareholders

     3.22      5.29      4.10      (2.50 )     1.69

Diluted Earnings (Loss)

             

Net Income from Continuing Operations

     3.06      5.09      3.98      2.59       2.16

Net Income (Loss) Applicable to Common Shareholders

     3.04      4.98      3.83      (2.18 )     1.57

Cash Dividends

     0.40      0.40      0.40      0.40       0.40

Common Shareholders’ Equity

     18.68      14.65      16.09      13.46       15.02

Market Price

             

High

     57.81      61.87      59.79      50.96       35.77

Low

     38.05      42.09      41.38      30.50       24.44

Weighted-Average Common Shares Outstanding

             

Basic

     45,318,740      48,962,382      52,192,539      50,455,006       49,537,945

Diluted

     48,327,784      52,280,341      56,213,049      56,452,629       56,725,667

Financial Position

             

Total assets

   $ 3,017,680    $ 2,301,889    $ 2,459,618    $ 2,477,524     $ 2,757,987

Long-term debt and guarantees

     955,722      557,723      581,469      601,344       554,981

Other Data at Year-End

             

Number of shareholders

     7,410      7,041      7,204      7,435       8,006

Approximate number of regular full-time employees

     27,100      21,800      21,700      20,600       19,900

 

[a] Effective August 23, 2007, Con-way acquired Contract Freighters, Inc. and affiliated companies (collectively, “CFI”). Under purchase-method accounting, CFI’s operating results are included only for periods subsequent to the acquisition.

 

[b] The comparability of Con-way’s consolidated operating income was affected by the following:

Accounting events:

 

   

Effective January 1, 2006, Con-way adopted SFAS 123R under the modified-prospective method. Prior-period financial statements have not been adjusted.

 

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Unusual income or expense:

 

   

Restructuring charges of $13.2 million in 2007, related to a reorganization initiative at Con-way Freight.

 

   

Gain of $6.2 million in 2006 from the sale of assets related to Con-way Expedite.

 

   

Gain of $41.0 million in 2006 from the sale of Con-way’s membership interest in Vector.

 

[c] The comparability of Con-way’s tax provision and net income was affected by the following:

 

   

Tax benefits of $12.1 million in 2006 related to the settlement with the IRS of previous tax filings.

 

   

Tax benefits of $17.7 million in 2006 from the utilization of capital-loss carryforwards that offset tax of $2.9 million on the sale of Con-way Expedite and $14.8 million on the sale of Con-way’s membership interest in Vector.

 

   

Tax benefits of $7.8 million in 2005 related to the settlement with the IRS of previous tax filings.

 

[d] Results in 2004 include a $276.3 million loss from discontinued operations related to the sale of MWF.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

Management’s Discussion and Analysis of Financial Condition and Results of Operations (referred to as “Management’s Discussion and Analysis”) is intended to assist in a historical and prospective understanding of Con-way’s financial condition, results of operations, and cash flows, including a discussion and analysis of the following:

 

   

Overview of Business

 

   

Results of Operations

 

   

Liquidity and Capital Resources

 

   

Critical Accounting Policies and Estimates

 

   

Forward-Looking Statements

Overview of Business

Con-way provides transportation, logistics and supply-chain management services for a wide range of manufacturing, industrial and retail customers. Con-way’s principal business units operate in regional and transcontinental less-than-truckload and full-truckload freight transportation, contract logistics and supply-chain management, truckload brokerage, and trailer manufacturing. For financial reporting purposes, Con-way is divided into five reporting segments: Freight, Logistics, Truckload, Vector and Other.

Con-way’s primary business-unit results generally depend on the number, weight and distance of shipments transported, the prices received on those shipments or services, and the mix of services provided to customers, as well as the fixed and variable costs incurred by Con-way in providing the services and the ability to manage those costs under changing circumstances.

Con-way Freight transports shipments utilizing a network of freight service centers combined with a fleet of company-operated line-haul and pickup-and-delivery tractors and trailers. CFI and Con-way Truckload transport shipments using a fleet of long-haul tractors and trailers. Menlo Logistics manages the logistics functions of its customers and primarily utilizes third-party transportation providers for the movement of customer shipments.

 

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Results of Operations

The overview below provides a high-level summary of Con-way’s results from continuing operations for the periods presented and is intended to provide context for the remainder of the discussion on reporting segments. Refer to “Reporting Segment Review” below for more complete and detailed discussion and analysis.

Continuing Operations

 

     2007     2006     2005  
     (Dollars in thousands except per share amounts)  

Revenues

   $ 4,387,363     $ 4,221,478     $ 4,115,575  
                        

Operating income

   $ 264,453     $ 401,828     $ 370,946  

Other expense

     21,807       9,519       18,590  
                        

Income from continuing operations before income tax provision

     242,646       392,309       352,356  

Income tax provision

     88,871       119,978       121,981  
                        

Income from continuing operations

     153,775       272,331       230,375  

Preferred stock dividends

     6,960       7,154       7,728  
                        

Net income from continuing operations available to common shareholders

   $ 146,815     $ 265,177     $ 222,647  
                        

Diluted earnings per share

   $ 3.06     $ 5.09     $ 3.98  

Operating margin

     6.0 %     9.5 %     9.0 %

Effective tax rate

     36.6 %     30.6 %     34.6 %

Overview—2007 Compared to 2006

Con-way’s consolidated revenue of $4.4 billion in 2007 increased 3.9% from $4.2 billion in 2006 due primarily to the acquisition of CFI on August 23, 2007 and to a 1.8% increase at Freight, partially offset by a 4.3% decline at Logistics. Excluding the acquisition of CFI, Con-way’s 2007 revenues were essentially flat compared to 2006. Revenues at the Freight segment in 2007 reflect increases at Con-way Freight that more than offset declines due to the sale of the expedited-shipping portion of its former Con-way Expedite and Brokerage business in July 2006 and to the transfer of the remaining truckload-brokerage operations out of Con-way Freight and into Menlo Logistics in January 2007. Lower revenues at Logistics reflect a decline in revenue from carrier-management services partially offset by an increase in revenue from warehouse-management services.

In 2007, Con-way’s consolidated operating income decreased 34.2% due largely to lower operating income from the Freight reporting segment and from Vector. Operating income at Freight decreased 26.8% due primarily to a higher-volume, lower-yield mix of revenue and to higher employee costs. Lower operating income from Vector reflects its sale, which was recognized in December 2006, as more fully discussed in Note 5, “Sale of Unconsolidated Joint Venture,” of Item 8, “Financial Statements and Supplementary Data.” In 2007, operating income included a $2.7 million loss for the write-off of a receivable related to the Vector sale, while 2006 operating income from Vector was $52.6 million, including a $41.0 million gain from the sale of Con-way’s membership interest in Vector.

In connection with the re-branding initiative, Con-way in 2007 recognized expense of $14.3 million compared to $1.7 million in 2006. Under Con-way’s re-branding initiative announced in April 2006, Con-way has recognized expense of $16.0 million and estimates that it will recognize additional re-branding expenses of $10 million in 2008 and $2 million in 2009. Total estimated expenses of $28 million for the re-branding initiative consist primarily of the costs to convert Con-way Freight’s tractors and trailers to the new Con-way graphic identity. Estimated re-branding expenses in 2008 and 2009 include $4 million for the conversion of CFI trailers to the Con-way Truckload brand.

 

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As more fully discussed in Note 3, “Restructuring Activities,” of Item 8, “Financial Statements and Supplementary Data,” in 2007, Con-way incurred $14.7 million in expenses related to its reorganization initiative at Con-way Freight and to the closure of the Con-way Truckload general office following the acquisition of CFI.

Non-operating expense increased $12.3 million in 2007 due primarily to an $8.6 million increase in interest expense and a $5.8 million decline in investment income, partially offset by a $1.7 million increase in foreign exchange gains. Variations in interest expense and interest income were due in part to the acquisition of CFI on August 23, 2007, which was financed with existing cash resources and proceeds from new debt financing.

Con-way’s effective tax rate in 2007 was 36.6% compared to 30.6% in 2006. The tax provision in 2006 benefited from the utilization of capital-loss carryforwards, which offset tax of $2.9 million on the sale of Con-way Expedite and $14.8 million on the sale of Con-way’s membership interest in Vector. In addition, Con-way’s effective tax rate in 2006 reflects the effect of $12.1 million in net tax credits that were primarily related to the settlement with the IRS of previous tax filings.

Con-way’s net income from continuing operations available to common shareholders in 2007 decreased 44.6%, reflecting lower operating income, higher non-operating expense, and an increase in the effective tax rate. In the same period, Con-way’s diluted earnings per share from continuing operations decreased 39.9%, as lower net income was partially offset by the accretive effect of Con-way’s share repurchase program, which concluded on June 29, 2007. Primarily as the result of share repurchases, Con-way's average diluted shares outstanding declined to 48.3 million shares in 2007 from 52.3 million shares in 2006.

Overview—2006 Compared to 2005

In 2006, Con-way’s revenue increased 2.6% to $4.2 billion due primarily to higher revenue from Freight and Logistics. Revenue at Freight increased 3.3% and reflects Con-way Freight’s pricing initiatives that emphasized higher yields, which grew 4.4%. The focus on yield adversely affected tonnage in a market of slowing demand for freight transportation, resulting in a weight-per-day decline of 0.5%. Revenue from Logistics increased 1.2% due primarily to growth in warehouse-management services.

Consolidated operating income in 2006 increased 8.3% from 2005 due to gains of $47.3 million related to the sale of Con-way’s membership interest in Vector and to the sale of Con-way Expedite. Excluding the gains, consolidated operating income declined 4.4% due largely to lower operating income from Freight and Vector, and to a lesser extent, Truckload and Logistics. Consolidated operating income in 2006 was adversely affected by a decline in costs reimbursed by UPS under a transition-services agreement. Following the sale of MWF to UPS, a portion of Con-way’s corporate administrative costs in 2005 were charged to UPS under a transition-services agreement. In 2005, Con-way was reimbursed by UPS for $11.3 million of costs, while no costs were reimbursed by UPS in 2006. Also, in 2006, Con-way began recognizing expense related to employee stock-option awards. In 2006, Con-way recognized additional share-based compensation expense of $5.8 million in connection with the adoption of SFAS 123R effective January 1, 2006.

Non-operating expense in 2006 decreased $9.1 million due primarily to a reduction in interest expense, an increase in investment income, and foreign exchange gains. Interest expense decreased $3.3 million in 2006 due largely to the $100.0 million repayment in June 2005 of the 7.35% Notes. Investment income increased $2.1 million on higher interest rates earned on cash-equivalent investments and marketable securities, partially offset by lower average balances of interest-earning financial instruments. In 2006, non-operating expense reflects positive variations in foreign exchange transactions, which improved comparative operating results by $3.3 million.

Con-way’s effective tax rate of 30.6% in 2006 declined from 34.6% in 2005 as the tax provision in 2006 benefited from the utilization of capital-loss carryforwards and the effect of net tax credits, as discussed above. Con-way’s effective tax rate in 2005 reflects the effect of $7.8 million in net tax credits that were primarily related to the settlement with the IRS of previous tax filings.

 

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In 2006, Con-way’s net income from continuing operations available to common shareholders increased 19.1%, reflecting increased operating income, lower non-operating expense, and a decrease in the effective tax rate. In the same period, Con-way’s diluted earnings per share from continuing operations increased 27.9% due to higher net income and the accretive effect of Con-way’s share repurchase program. Primarily as the result of share repurchases, Con-way's average diluted shares outstanding declined to 52.3 million shares in 2006 from 56.2 million shares in 2005.

Reporting Segment Review

Freight

The table below compares operating results, operating margins, and the percentage change in selected operating statistics of the Freight reporting segment for the years ended December 31:

 

     2007     2006     2005  
     (Dollars in thousands)  

Summary of Operating Results

      

Revenues

   $ 2,904,543     $ 2,852,909     $ 2,762,020  

Operating Income

     235,060       321,204       327,834  

Operating Margin

     8.1 %     11.3 %     11.9 %
     2007 vs.
2006
    2006 vs.
2005
       

Selected Con-way Freight Operating Statistics

      

Revenue per day

     +2.8 %     +3.9 %  

Weight per day

     +3.3       –0.5    

Revenue per hundredweight (“yield”)

     –0.5       +4.4    

Shipments per day (“volume”)

     +4.5       –1.2    

Weight per shipment

     –1.2       +0.7    

2007 Compared to 2006

In 2007, Freight’s revenue increased 1.8%, reflecting increases at Con-way Freight that more than offset declines due to the sale of the expedited-shipping portion of its former Con-way Expedite and Brokerage business in July 2006 and to the transfer of the remaining truckload-brokerage operations out of Con-way Freight and into Menlo Logistics in January 2007. Revenue per day for Con-way Freight increased 2.8% on a 3.3% increase in weight per day, partially offset by a 0.5% decline in yield. The 3.3% increase in weight per day was achieved through a 4.5% increase in shipments per day, partially offset by a 1.2% decline in weight per shipment. The increase in weight per day and volume of freight transported was achieved despite an increasingly price-sensitive and competitive freight market, due in part to targeted sales initiatives. These initiatives contributed to improvement in growth trends for weight transported as weight per day increased 5.1% and 6.1% in the third and fourth quarter of 2007, respectively, when compared to the same prior-year periods. For the same comparative periods, yields declined 2.8% in the third quarter and increased 3.4% in the fourth quarter.

Yields declined in 2007 due primarily to lower pricing associated with new business generated under Con-way’s sales initiatives and to an increasingly price-sensitive and competitive freight market that required defensive pricing for certain customer relationships, partially offset by the effect of higher fuel-surcharge revenue. Excluding fuel surcharges, yields in 2007 decreased 1.2%. In 2007, Con-way’s recent sales initiatives contributed to increased business levels from large customers who typically command lower rates on a higher quantity of freight. Like other LTL carriers, Con-way Freight assesses many of its customers with a fuel surcharge. The fuel surcharge is intended to compensate Con-way Freight for the adverse effects of higher fuel costs and fuel-related increases in purchased transportation. Fuel surcharges are only one part of Con-way Freight’s overall rate structure, and the total price that Con-way Freight receives from customers for its services is governed by market forces, as more fully discussed under Item 1A, “Risk Factors.” In 2007, Con-way Freight’s fuel-surcharge revenue increased to 13.5% of LTL revenue from 12.9% in 2006.

 

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Freight’s operating income in 2007 decreased 26.8% due primarily to a higher-volume, lower-yield mix of revenue that required increased freight handling. Due largely to the change in the mix of revenue, employee costs in 2007 increased 6.7% from the same period in 2006. Base compensation rose 7.1%, reflecting additional freight-handling requirements, wage and salary rate increases, and an increase in driver count during the period in response to increases in actual and anticipated freight volumes. Higher base compensation also includes employee-separation costs incurred in connection with Con-way Freight’s operational restructuring, as more fully discussed below. Employee benefits expense increased 5.1% in 2007 due primarily to increased costs for compensated absences, which were due in part to a conversion from a sick-pay benefit to a paid-time-off benefit, which included $10.4 million of non-recurring expense in the first year of the plan. Incentive compensation increased $10.0 million or 31.4% based on variations in revenue, operating income, and cargo loss and damage claims relative to incentive-plan targets.

In 2007, expenses for fuel, oil and fuel taxes increased 10.2% from 2006 due to higher average diesel fuel prices and to increases in driver miles. During the same comparative periods, purchased transportation expense decreased 5.8% due to lower transportation requirements following the sale of the expedited-shipping portion of the former Con-way Expedite and Brokerage business and to the transfer of the remaining truckload-brokerage operations into Menlo Logistics that more than offset increases at Con-way Freight.

Operating income was also negatively affected by increases in vehicular self-insurance expense and costs incurred under Con-way’s re-branding initiative and its operational restructuring, which combined three regional operating companies into one centralized operation. Vehicular self-insurance expense increased 24.2% in 2007, due primarily to an $8.0 million loss related to a significant claim in the second quarter of 2007. Under Con-way’s re-branding initiative announced in April 2006, Con-way Freight incurred $14.3 million of costs in 2007 compared to $0.5 million in 2006. The re-branding costs in 2007 were for expenses related primarily to the conversion of tractors and trailers to the new Con-way graphic identity and to new uniforms. As more fully discussed in Note 3, “Restructuring Activities,” of Item 8, “Financial Statements and Supplementary Data,” Con-way Freight incurred $13.2 million in expense related to its operational restructuring announced in August 2007.

Comparative operating results for the Freight segment reflect the sale of the expedited-shipping portion of its former Con-way Expedite and Brokerage business in July 2006. In connection with the sale, Con-way recognized a $6.2 million gain in 2006.

2006 Compared to 2005

In 2006, Freight’s revenue rose 3.3% due to revenue increases from Con-way Freight that were partially offset by declines due to the sale in July 2006 of the expedited-shipping portion of its former Con-way Expedite and Brokerage business. Revenue per day from Con-way Freight grew 3.9% on a 4.4% increase in yield and a 0.5% decrease in weight per day. Both yield and weight per day were affected by Con-way Freight’s pricing initiatives that emphasized higher yields. The yield focus adversely affected tonnage in a market of slowing demand for freight transportation, particularly in the third and fourth quarter of 2006. Excluding fuel surcharges, yields in 2006 increased 2.0%. In 2006, Con-way Freight’s fuel-surcharge revenue increased to 12.9% of LTL revenue from 10.8% in 2005.

Operating income for the Freight reporting segment in 2006 decreased 2.0% from 2005. Excluding the $6.2 million gain recognized in connection with the sale of Con-way Expedite, operating income from the Freight reporting segment declined 3.9% when compared to the prior-year period. Operating income in 2006 was adversely affected by higher depreciation, maintenance and self-insurance costs. Depreciation expense increased 10.4% in 2006 due to planned investments in service centers and tractor and trailer acquisitions. Maintenance costs increased 6.8% due to technology requirements relating to the repair and maintenance of newer equipment and to costs related to maintaining trailers over a longer estimated useful life. Other operating costs, which include costs for cargo claims and vehicular insurance, increased 8.0% in 2006. A $3.7 million increase in advertising expense reflects customer-focused advertising and employee-focused events, a portion of which

 

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support Con-way’s re-branding initiative. Expenses for fuel, oil and fuel taxes increased 11.6% in 2006 and were adversely affected by an increase in average diesel fuel prices. Employee costs increased 1.4% but declined as a percentage of revenue as increased costs for health-care and pension benefits were partially offset by lower incentive compensation, which declined by $19.6 million based on variations in operating income and other performance measures relative to incentive plan targets.

Logistics

The table below compares operating results and operating margins of the Logistics reporting segment. The table summarizes Menlo Logistics’ revenues as well as net revenues (revenues less purchased transportation expenses). Carrier-management revenue is attributable to contracts for which Menlo Logistics manages the transportation of freight but subcontracts the actual transportation and delivery of products to third parties, which Menlo Logistics refers to as purchased transportation. Menlo Logistics’ management places emphasis on net revenues as a meaningful measure of the relative importance of its principal services since revenues earned on most carrier-management services include the third-party carriers’ charges to Menlo Logistics for transporting the shipments.

 

     2007     2006     2005  
     (Dollars in thousands)  

Summary of Operating Results

      

Revenues

   $ 1,297,056     $ 1,355,301     $ 1,339,674  

Purchased Transportation

     (851,366 )     (963,044 )     (972,266 )
                        

Net Revenues

     445,690       392,257       367,408  

Operating Income

   $ 25,599     $ 25,649     $ 26,672  

Operating Margin on Revenues

     2.0 %     1.9 %     2.0 %

Operating Margin on Net Revenues

     5.7 %     6.5 %     7.3 %

2007 Compared to 2006

Logistics’ revenue in 2007 decreased 4.3% due to a 9.8% decrease in carrier-management services partially offset by an 11.8% increase in warehouse-management services. Logistics’ net revenue in 2007 increased 13.6% and reflects increases in net revenue from both warehouse-management and carrier-management services. In 2007, purchased transportation costs decreased 11.6%, due primarily to decreases in carrier-management volumes and lower carrier rates.

Logistics’ operating income in 2007 was essentially flat as higher net revenue from carrier-management and warehouse-management services was almost equally offset by increases in employee costs, allocated corporate costs, and from higher expenses for rent and self-insurance. Employee costs increased 16.5% in 2007 reflecting increases in base compensation and employee benefits. Base compensation rose 14.2% due primarily to growth in headcount and, to a lesser extent, wage and salary rate increases. Employee benefits expense increased 25.4% due principally from higher health-care benefits, which were affected by a large first-quarter claim. Increased employee benefits expenses also reflect higher costs for retirement benefits.

Corporate administrative costs allocated to the Logistics segment in 2007 increased by $11.5 million due primarily to the allocation of costs associated with corporate information-technology personnel who were retained by Con-way following the sale of Vector to GM in December 2006. The associated costs of these employees were allocated to Vector prior to its sale, but were allocated to Logistics subsequent to the sale. The retained employees are utilized in providing information-technology services to GM for which Logistics was compensated, as more fully discussed in Note 5, “Sale of Unconsolidated Joint Venture,” of Item 8, “Financial Statements and Supplementary Data.” The retained employees are also utilized to provide services on other Menlo Logistics’ information-technology initiatives.

 

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Rent expense increased 18.0% in 2007 as a result of warehouse customer space requirements and facilities expansion with existing customers as well as rent expense related to acquisitions. Other operating costs, including costs for cargo claims and vehicular insurance, increased 15.5%, due primarily to claims incurred in the fourth quarter of 2007.

In addition, 2007 operating income reflects a decline in costs incurred during a Department of Defense contract-bid process, as more fully discussed below. Costs incurred in connection with the contract decreased to $0.2 million in 2007 from $1.3 million in 2006.

In August 2007, at the conclusion of a lengthy preparation and selection process, the Department of Defense (“DOD”) selected MWLGS as the primary contractor for the Defense Transportation Coordination Initiative (“DTCI”), a logistics program directed by the DOD to streamline and improve domestic transportation and distribution operations. Under the contract, Menlo Logistics will be responsible for deploying and operating an integrated logistics solution for shipment planning, shipment execution and overall transportation management for DOD shipments moving into and among DOD facilities in the contiguous United States. The contract, which has a potential seven-year life, has a three-year base period with an estimated $525 million in transportation expenditures. Implementation of the initiative, which is expected to be rolled out in three phases over a 25-month period, was delayed briefly by a protest filed by a competitor; however, the protest was subsequently withdrawn in October 2007. Con-way has determined that revenue from this contract will be reported on a net basis, after deducting purchased transportation costs. The contract did not have a material effect on Logistics’ revenue or operating income in 2007.

As more fully discussed in Note 2, “Acquisitions,” of Item 8, “Financial Statements and Supplementary Data,” MW acquired Cougar Logistics on September 5, 2007, and on October 18, 2007, acquired Chic Logistics. The acquisitions did not have a material effect on Logistics’ revenues or operating income in the periods presented.

2006 Compared to 2005

Logistics’ revenue in 2006 increased 1.2% due to a 4.5% increase in warehouse-management services, and a 0.3% increase in carrier-management services. Growth in carrier-management revenue was slowed by management’s decision to terminate in May 2006 a low-margin carrier-management contract that accounted for 2.9% of Logistics’ annual segment revenues in 2005. Net revenue in 2006 increased 6.8% due to the 1.2% increase in revenue and a 0.9% reduction in purchased transportation expense.

Logistics’ operating income in 2006 decreased 3.8% from the same period of last year, due primarily to higher employee costs and purchased labor, which collectively increased 12.0% in 2006. Employee costs increased 9.2% and reflect increases in base compensation, employee benefits and incentive compensation. Base compensation in 2006 increased 5.8% due primarily to growth in headcount and wage and salary rate increases. Employee benefits expense increased 16.2% primarily from an increase in the cost of health-care benefits and other employee benefit costs. Incentive compensation in 2006 increased by $2.6 million or 40.0% based on variations in operating income, working capital and other performance measures relative to incentive plan targets. Purchased labor costs increased 20.0% due to new warehouse-management projects. Expenses for supplies increased 39.8%, reflecting volume increases related to certain warehouse-management customers. Expenses for outside services increased 14.1% due primarily to $1.3 million of costs related to a bid for the DTCI contract, as described above.

 

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Truckload

Following the acquisition of CFI, the operating results of CFI are reported with the operating results of the Con-way Truckload business unit in the Truckload reporting segment. Accordingly, the Truckload reporting segment includes the results of the Con-way Truckload business unit for all periods presented, but only includes the operating results of CFI from August 23, 2007 through December 31, 2007.

 

     2007     2006    2005
     (Dollars in thousands)

Summary of Truckload Segment Operating Results

       

Revenues

       

CFI

   $ 169,760     $ —      $ —  

Con-way Truckload

     2,914       7,145      612
                     

Total

   $ 172,674     $ 7,145    $ 612
                     

Operating Income (Loss)

       

CFI

   $ 18,770     $ —      $ —  

Con-way Truckload

     (9,967 )     2,267      3,474
                     

Total

   $ 8,803     $ 2,267    $ 3,474
                     

Increased revenue at the Truckload reporting segment was substantially due to the acquisition of CFI. In all periods presented, segment revenue is reported after the elimination of revenue recognized for truckload services provided by CFI and Con-way Truckload to Con-way Freight and Menlo Logistics. Accordingly, CFI revenue in 2007 is reported net of $40.3 million of inter-segment revenue. Con-way Truckload revenue is reported net of inter-segment revenue of $46.7 million in 2007, $71.1 million in 2006, and $31.8 million in 2005.

Operating results for the Truckload segment also reflect the acquisition of CFI. Subsequent to its acquisition on August 23, 2007, CFI reported operating income of $18.8 million. In 2007, operating income from CFI was partially offset by losses reported by Con-way Truckload, which were due in part to lower operating results following Con-way’s announcement of the CFI acquisition on July 13, 2007 and to $1.5 million of third-quarter costs incurred in the integration of the Con-way Truckload business unit with the CFI business unit, as more fully discussed in Note 3, “Restructuring Activities,” of Item 8, “Financial Statements and Supplementary Data.”

The acquisition of CFI is more fully discussed in Note 2, “Acquisitions,” of Item 8, “Financial Statements and Supplementary Data.”

Vector

In December 2006, Con-way recognized the sale to GM of Con-way’s membership interest in Vector. The sale of Vector did not qualify as a discontinued operation due to its classification as an equity-method investment, and accordingly, Vector’s income or losses are reported in net income from continuing operations. In 2007, segment results reported from Con-way’s equity investment in Vector included a $2.7 million loss compared to income of $52.6 million in 2006 and $16.1 million in 2005. In 2007, the loss was due to the write-off of a receivable related to the Vector sale, while 2006 operating income from Vector included a $41.0 million gain from the sale of Con-way’s membership interest in Vector.

Vector’s operating results and Con-way’s sale of its membership interest in Vector is more fully discussed in Note 5, “Sale of Unconsolidated Joint Venture,” of Item 8, “Financial Statements and Supplementary Data.”

Other

The Other reporting segment consists of the operating results of Road Systems, a trailer manufacturer, and certain corporate activities for which the related income or expense has not been allocated to other reporting

 

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segments. Operating losses related to corporate properties in 2007 reflect increased expenses for environmental remediation at unused corporate properties. The table below summarizes the operating results for the Other reporting segment for the years ended December 31:

 

     2007     2006     2005  
     (Dollars in thousands)  

Revenues

      

Road Systems

   $ 13,090     $ 6,123     $ 13,269  
                        

Operating Income (Loss)

      

Road Systems

   $ 667     $ 1,215     $ 664  

Unallocated corporate operating income (loss)

      

Re-insurance activities

     (480 )     (705 )     1,203  

Corporate properties

     (2,538 )     (1,382 )     (1,695 )

Insurance settlement

     —         —         (2,200 )

Sales of non-operating assets

     —         1,260       —    

Other

     41       (279 )     (1,067 )
                        
   $ (2,310 )   $ 109     $ (3,095 )
                        

Discontinued Operations

Net income available to common shareholders in the periods presented includes the results of discontinued operations, which related to the closure of Con-way Forwarding, the sale of MWF, the shut-down of EWA and its terminated Priority Mail contract with the USPS, and to the spin-off of CFC, as more fully discussed in Note 4, “Discontinued Operations,” of Item 8, “Financial Statements and Supplementary Data.” The table below summarizes results of discontinued operations for the years ended December 31:

 

     2007     2006     2005  
     (Dollars in thousands except
per share amounts)
 

Discontinued Operations, net of tax

      

Loss from Discontinued Operations

   $ —       $ (1,929 )   $ (2,394 )

Loss from Disposal

     (863 )     (4,270 )     (6,219 )
                        
   $ (863 )   $ (6,199 )   $ (8,613 )
                        

Loss per share—Diluted

      

Loss from Discontinued Operations

   $ —       $ (0.03 )   $ (0.04 )

Loss from Disposal

     (0.02 )     (0.08 )     (0.11 )
                        
   $ (0.02 )   $ (0.11 )   $ (0.15 )
                        

 

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Liquidity and Capital Resources

Cash and cash equivalents declined to $176.3 million at December 31, 2007 from $260.0 million at December 31, 2006, as $757.2 million used in investing activities exceeded $373.9 million provided by operating activities and $295.2 million provided by financing activities. Cash used in investing activities primarily reflects $839.8 million used in the acquisitions of CFI, Cougar Logistics and Chic Logistics, while cash provided by financing activities primarily reflects the proceeds received from the issuance of 7.25% Senior Notes. Con-way’s cash flows are summarized in the table below.

 

     2007     2006     2005  
     (Dollars in thousands)  

Operating Activities

      

Net income

   $ 152,912     $ 266,132     $ 221,762  

Discontinued operations

     863       6,199       8,613  

Non-cash adjustments (1)

     222,928       109,693       138,211  
                        

Net income before non-cash items

     376,703       382,024       368,586  

Changes in assets and liabilities

     (2,830 )     51,676       (147,248 )

Net Cash Provided by Operating Activities

     373,873       433,700       221,338  
                        

Net Cash Provided by (Used in) Investing Activities

     (757,166 )     (274,160 )     177,980  
                        

Net Cash Provided by (Used in) Financing Activities

     295,239       (378,489 )     (216,429 )
                        

Net Cash Provided by (Used in) Continuing Operations

     (88,054 )     (218,949 )     182,889  

Net Cash Provided by (Used in) Discontinued Operations

     4,313       (35,287 )     (15,195 )
                        

Increase (Decrease) in Cash and Cash Equivalents

   $ (83,741 )   $ (254,236 )   $ 167,694  
                        

 

(1) “Non-cash adjustments” refer to depreciation, amortization, deferred income taxes, provision for uncollectible accounts, loss or income from equity-method investment, and other non-cash income and expenses.

Continuing Operations

Operating Activities

Cash flow from operating activities in 2007 was $373.9 million, a $59.8 million decrease from 2006, due to a decrease in net income before non-cash items and a net use of cash due to changes in assets and liabilities, primarily receivables. In 2007, receivables used $5.8 million, compared to $86.4 million provided in 2006. The significant cash provided by receivables in 2006 was primarily related to Logistics’ receivables, which declined from the preceding year due to a decrease in the average collection period. Cash provided by income taxes increased to $23.4 million in 2007 from $14.8 million in the same prior-year period, due primarily to tax refunds received in March 2007. The use of cash from the decline in employee benefit liabilities for the years presented reflects the net effect of defined benefit pension plan funding contributions of $12.7 million in 2007, $75.0 million in 2006, and $126.5 million in 2005, partially offset by expense accruals related to Con-way’s benefit plans. Under benefit plan amendments that were effective on January 1, 2007, an increase in the obligation for Con-way’s defined contribution retirement plan was largely offset by a decline in the obligation related to Con-way’s defined benefit pension plans, as more fully discussed in Note 11, “Employee Benefit Plans,” of Item 8, “Financial Statements and Supplementary Data.” In 2007, deferred charges and credits used cash of $2.4 million compared to $12.2 million provided in 2006, primarily due to the sale of Con-way’s membership interest in Vector. In 2006, cash provided by deferred charges and credits reflects variations in Con-way’s affiliate payable to Vector.

Cash flow from operating activities in 2006 was $433.7 million, a $212.4 million increase from 2005, due to an increase in net income before non-cash items and cash provided by changes in assets and liabilities, primarily

 

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receivables. In 2006, receivables provided $86.4 million, primarily due to improvement in the average collection period for Logistics’ receivables. In 2005, receivables used $124.2 million on higher revenue and an increase in the average collection period for Logistics’ receivables, which was due in part to longer customer-negotiated payment terms and to processing delays. The decline in accrued incentive compensation used $4.4 million in 2006, while 2005 used $20.0 million. In 2006 and 2005, expense accruals for incentive compensation were $50.0 million and $68.3 million, respectively, while incentive compensation payments in those periods were $54.4 million and $88.3 million, respectively. In 2006 and 2005, cash provided by deferred charges and credits reflects fluctuations in Con-way’s affiliate payable to Vector.

Investing Activities

Investing activities used cash of $757.2 million in 2007 compared to $274.2 million used in 2006 due primarily to $752.3 million used to purchase CFI, $28.6 million used to purchase Cougar Logistics and $59.0 million used to purchase Chic Logistics, as more fully discussed in Note 2, “Acquisitions,” of Item 8, “Financial Statements and Supplementary Data.” The acquisition-related investing activities in 2007 were partially offset by a decline in capital expenditures, proceeds received in 2007 from the sale of Con-way’s membership interest in Vector, an increase in the cash provided from the conversion of marketable securities, and an increase in proceeds from the sale of properties and equipment.

Capital expenditures in 2007 decreased $159.8 million from 2006 due primarily to fewer tractor and trailer expenditures at the Freight and Truckload segments. Capital expenditures in 2006 increased $87.7 million from 2005, due primarily to an above-average number of tractors acquired in advance of new governmental emission standards.

Proceeds from the sale of businesses were $51.9 million in 2007 compared to $8.0 million in 2006. In 2007, Con-way received $51.9 million in proceeds from the sale of Con-way’s membership interest in Vector, while the same period of 2006 includes $8.0 million in proceeds received from the sale of the expedited-shipping portion of the former Con-way Expedite and Brokerage business. In 2005, Con-way received payments of $108.4 million in connection with the sale of MWF to UPS.

In all periods presented, investing activities reflect fluctuations in short-term marketable securities. Cash provided by changes in marketable securities increased $136.7 million in 2007, primarily due to the conversion in August 2007 of marketable securities to partially fund the acquisition of CFI. Investments in marketable securities in 2005 provided $284.0 million, primarily due to the conversion of auction-rate securities into cash and cash equivalents. At December 31, 2007, marketable securities included $20.0 million of auction-rate securities that were subsequently sold in January 2008, as more fully discussed in Note 1, “Principal Accounting Policies” of Item 8, “Financial Statements and Supplementary Data.”

Proceeds from the sale of properties and equipment were $27.8 million in 2007, $8.1 million in 2006 and $5.5 million in 2005. The increase in 2007 was due primarily from the sale of tractors and trailers at the Truckload segment and reflects the shorter service life of equipment utilized by CFI.

Financing Activities

Financing activities provided cash of $295.2 million in 2007 and used $378.5 million in 2006. In August 2007, Con-way entered into a bridge-loan facility and borrowed $425 million to partially fund the acquisition of CFI. In December 2007, Con-way issued $425 million of 7.25% Senior Notes due 2018 and used the net proceeds and cash on hand to repay the amounts outstanding under the bridge-loan facility. Common stock repurchases of $89.9 million in 2007, $350.2 million in 2006 and $149.1 million in 2005 were made under repurchase programs authorized by Con-way’s Board of Directors and no additional repurchases will be made under the programs. The significant increase in stock repurchases in 2006 was attributable to the repurchase in May 2006 of 3.75 million shares in two significant privately negotiated transactions. Financing activities in 2005

 

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reflect the repayment at maturity on June 1 of the $100 million 7.35% Notes. Financing activities in all periods presented also reflect proceeds from the exercise of stock options, dividend payments and scheduled principal payments for notes related to Con-way’s defined contribution retirement plan.

Con-way has a $400 million revolving credit facility that matures on September 30, 2011. The revolving credit facility is available for cash borrowings and for the issuance of letters of credit up to $400 million. At December 31, 2007, no borrowings were outstanding under Con-way’s revolving credit facility; however, $213.3 million of letters of credit were outstanding, with $186.7 million of available capacity for additional letters of credit or cash borrowings. Con-way had other uncommitted unsecured credit facilities totaling $48.0 million at December 31, 2007, which are available to support letters of credit, bank guarantees, and overdraft facilities; at that date, a total of $16.6 million was outstanding under these facilities.

In connection with MW’s acquisition of Cougar Logistics, MW assumed short-term borrowings, which were outstanding under unsecured credit facilities. On December 31, 2007, $4.8 million of short-term borrowings and $7.7 million of bank guarantees, letters of credit and overdraft facilities were outstanding, leaving $12.2 million of available capacity.

See Note 7, “Debt and Other Financing Arrangements,” of Item 8, “Financial Statements and Supplementary Data,” for additional information concerning Con-way’s $400 million credit facility and its other debt instruments.

Contractual Cash Obligations

The table below summarizes contractual cash obligations for Con-way as of December 31, 2007. Some of the amounts in the table are based on management’s 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. Certain liabilities, including those related to self-insurance accruals, are reported in Con-way’s consolidated balance sheets but not reflected in the table below due to the absence of stated due dates.

 

          Payments Due by Period
     Total    2008    2009-2010    2011-2012    2013 &
Thereafter
     (Dollars in thousands)

Long-term debt and guarantees

   $ 1,862,233    $ 80,502    $ 353,286    $ 101,826    $ 1,326,619

Operating leases

     201,212      62,673      83,947      36,029      18,563

Purchase obligations

     145,608      145,608      —        —        —  

Employee benefit plan payments

     143,807      12,419      26,040      28,093      77,255
                                  

Total

   $ 2,352,860    $ 301,202    $ 463,273    $ 165,948    $ 1,422,437
                                  

As presented above, contractual obligations on long-term debt and guarantees represent principal and interest payments. The amounts representing principal and a portion of interest payable in 2008 are reported in the consolidated balance sheets.

Contractual obligations for operating leases represent the payments under the lease arrangements. In accordance with accounting principles generally accepted in the U.S. (“GAAP”), future operating lease payments are not included in Con-way’s consolidated balance sheets.

At December 31, 2007, Con-way had entered into purchase commitments to acquire $75.4 million of revenue equipment for delivery in 2008. In addition, Con-way entered into fuel purchase commitments with certain diesel fuel vendors. Under these commitments, Con-way has agreed to purchase, at market prices, a specified volume of fuel to be delivered ratably over the contract period, which expires in July 2008. Con-way

 

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estimates that it will purchase approximately $70.2 million of diesel fuel under these commitments, which represent only a portion of Con-way’s fuel needs during the contract period.

The employee benefit plan payments in the table represent estimated payments under Con-way’s non-qualified defined benefit pension plans and postretirement medical plan through December 31, 2017. Expected benefit payments for Con-way’s qualified defined benefit pension plans are not included in the table, as these plans are funded. Currently, Con-way does not expect to contribute to its qualified defined benefit pension plans in 2008; however, this could change based on changes in interest rates and asset returns.

In 2008, Con-way anticipates capital and software expenditures of approximately $300 million, primarily for the acquisition of additional tractor and trailer equipment, land, and development of new and existing facilities. Con-way’s actual 2008 capital expenditures may differ from the estimated amount, depending on factors such as availability and timing of delivery of equipment, the availability of land in desired locations for new facilities, and the timing of obtaining permits, environmental studies and other approvals necessary for the development of new and existing facilities. Except for the purchase commitments described above, the planned expenditures do not represent contractual obligations at December 31, 2007.

The contractual obligations reported above exclude Con-way’s liability of $15.2 million for unrecognized tax benefits. In the next 12 months, it is reasonably possible that the total of unrecognized tax benefits will decrease in the range of $1.0 to $1.3 million due to settlement agreements Con-way expects to reach with various states.

As described above under “Financing Activities,” letters of credit of $213.3 million were outstanding at December 31, 2007. 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 included in Con-way’s consolidated balance sheets.

For further discussion, see Note 7, “Debt and Other Financing Arrangements,” Note 8, “Leases,” and Note 9, “Income Taxes,” of Item 8, “Financial Statements and Supplementary Data.”

Other

At December 31, 2007, Con-way’s senior unsecured debt was rated as investment grade by Standard and Poor’s (BBB), Fitch Ratings (BBB), and Moody’s (Baa3).

Con-way believes that its working capital requirements and capital expenditure plans in 2008 will be adequately met with various sources of liquidity and capital, including Con-way’s cash and cash equivalents, marketable securities, cash flow from operations, credit facilities and access to capital markets.

Discontinued Operations

Discontinued operations in the periods presented relate to the closure of Con-way Forwarding, the sale of MWF, the shut-down of EWA and its terminated Priority Mail contract with the USPS, and to the spin off of CFC. Except as described below, the cash flows from discontinued operations have been segregated from continuing operations and reported separately as discontinued operations.

As more fully discussed above under “Continuing Operations – Investing Activities,” sales-related amounts received from UPS in 2005 are reported as proceeds in investing activities. See Note 4, “Discontinued Operations—MWF,” of Item 8, “Financial Statements and Supplementary Data,” for a description of the sale of MWF, including a discussion of cash payments received from UPS.

 

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Critical Accounting Policies and Estimates

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. Con-way 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. Con-way believes that the accounting policies that are most judgmental and material to the financial statements are those related to the following:

 

   

Defined Benefit Pension Plans

 

   

Self-Insurance Accruals

 

   

Income Taxes

 

   

Revenue Recognition

 

   

Property, Plant and Equipment and Other Long-Lived Assets

 

   

Acquisitions

 

   

Disposition and Restructuring Activities

Defined Benefit Pension Plans

In the periods presented, employees of Con-way and its subsidiaries in the U.S. were covered under several retirement benefit plans, including several qualified and non-qualified defined benefit pension plans and defined contribution retirement plans. In October 2006, Con-way’s Board of Directors approved changes to Con-way’s retirement benefits plans that are intended to preserve the retirement benefits earned by existing employees under Con-way’s primary qualified defined benefit pension plan (the “Primary DB Plan”) and its primary non-qualified supplemental defined benefit pension plan (the “Supplemental DB Plan”), while expanding benefits earned under its primary defined contribution plan (the “Primary DC Plan”) and a new supplemental defined contribution plan (the “Supplemental DC Plan”). The major provisions of the plan amendments were effective on January 1, 2007 and are more fully discussed in Note 11, “Employee Benefit Plans,” of Item 8, “Financial Statements and Supplementary Data.” Beginning in 2007, these provisions increase expense related to the Primary DC Plan and eliminate the future service cost associated with the Primary DB Plan and the Supplemental DB Plan.

Significant assumptions

The amount recognized as pension expense and the accrued pension liability for Con-way’s defined benefit pension plans 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 for the funded qualified plans. Con-way assesses its plan assumptions for the discount rate, expected rate of return on plan assets, and other significant assumptions on a periodic basis, but concludes on those assumptions at the actuarial plan measurement date. Con-way’s most significant assumptions used in determining pension expense for the periods presented and for 2008 are summarized below.

 

         2008             2007             2006             2005      

Weighted-average assumptions:

        

Discount rate on plan obligations

   6.60 %   5.95 %   6.00 %   6.25 %

Expected long-term rate of return on plan assets

   8.50 %   8.50 %   8.50 %   8.50 %

Discount Rate. In determining the appropriate discount rate, Con-way is assisted by actuaries who calculate the yield on a theoretical portfolio of high-grade corporate bonds (rated Aa or better by Moody’s rating service)

 

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with cash flows that match Con-way’s expected benefit payments in future years. Con-way’s discount rate is equal to the yield on the portfolio of bonds, which will typically exceed the Moody’s Aa corporate bond index due to the long duration of expected benefit payments from Con-way’s plans. If all other factors were held constant, a 0.25% decrease (increase) in the discount rate would result in an estimated $44 million increase (decrease) in the cumulative unrecognized actuarial loss at December 31, 2007, and the related loss or credit would be amortized to future-period earnings as described below.

Rate of Return on Plan Assets. For its qualified funded defined benefit pension plans, Con-way 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% decrease (increase) in the expected rate of return on plan assets would result in an estimated $3 million decrease (increase) in 2008 annual pension income.

Actuarial gains and losses

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 gains or losses. For Con-way’s defined benefit pension plans, unrecognized actuarial losses at December 31, 2007 were $53.2 million compared to unrecognized actuarial losses at December 31, 2006 of $196.0 million. The decline in these amounts primarily reflects an increase in the discount rate at December 31, 2007. Any portion of the unrecognized actuarial gain (loss) outside of a corridor amount must be amortized and recognized as income over the average service period for employees.

Adoption of SFAS 158

Effective January 1, 2007, Con-way adopted the measurement-date provisions of SFAS 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of SFAS 87, 88, 106, and 132R,” as more fully discussed in Note 11, “Employee Benefit Plans,” of Item 8, “Financial Statements and Supplementary Data.” The measurement-date provisions of SFAS 158 require employers to measure plan assets and obligations as of the end of the fiscal year. Accordingly, Con-way changed its measurement date to December 31 from November 30 for all of its defined benefit pension plans. Under the transition provisions of SFAS 158, Con-way recognized a $21.3 million decrease in plan-related liabilities, an $8.3 million decline in related deferred tax assets, and a $13.0 million increase in shareholders’ equity. The beginning-of-period increase to shareholders’ equity consisted of a $2.6 million decline in retained earnings to recognize service cost for December 2006 and a $15.6 million decline in accumulated other comprehensive loss to recognize the effect of an increase in the plan-related discount rate.

The effect of adoption of SFAS 158’s measurement-date provisions to Con-way’s financial statements for 2007 was primarily the result of an increase in the discount rate (used to measure plan-related obligations) to 5.95% at December 31, 2006 from 5.85% at November 30, 2006. This increase in the discount rate reduced Con-way’s estimated plan obligation, as described above, and also increased annual pension income in 2007 by $7.7 million.

Effect on operating results

Plan amendments effective January 1, 2007 resulted in the elimination of substantially all of the future service cost for the Primary DB Plan and the Supplemental DB Plan, and no material service cost is recognized under Con-way’s other defined benefit pension plans. Accordingly, the post-amendment effect of the defined benefit pension plans on Con-way’s operating results consist primarily of the net effect of the interest cost on plan obligations for the qualified and non-qualified defined benefit pension plans and the expected return on plan assets for the funded qualified defined benefit pension plans. In 2008, Con-way estimates that the defined benefit pension plans will result in annual income of $24.7 million based primarily on an expected return on plan assets

 

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that exceeds the interest cost on the plan obligations. Also, in 2008, Con-way estimates that the amendment-related elimination of service cost on the Primary DB Plan and the Supplemental DB Plan will be offset, in whole or in part, with higher company contributions to the Primary DC Plan.

For its defined benefit pension plans, Con-way recognized annual income of $24.8 million in 2007 compared to annual expense of $66.1 million in 2006, which primarily reflects a decline in service cost as a result of the amendments.

Funding

Con-way periodically reviews the funded status of its qualified defined benefit pension plans 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, Con-way considers both the ERISA- and GAAP-based measurements of funded status as well as the tax deductibility of contributions. Con-way made contributions of $12.7 million and $75.0 million to its defined benefit pension plans in 2007 and 2006, respectively, and in 2008, does not expect to make any contributions. Con-way’s estimates of its defined benefit plan contributions are subject to variation based on changes in interest rates and asset returns.

Con-way’s funding practice for its defined benefit pension plans is unchanged by recent plan amendments. Con-way expects to make additional future contributions to the defined benefit pension plans, only if needed, as it expects that the plan changes will reduce funding of the Primary DB Plan that otherwise would have been required without the plan amendments. However, Con- way believes that the decline in funding requirements for the Primary DB Plan will, in whole or in part, be offset by higher contributions to the Primary DC Plan.

Self-Insurance Accruals

Con-way uses a combination of purchased insurance and self-insurance programs to provide for the costs of medical, casualty, liability, vehicular, cargo and workers’ compensation claims. The long-term portion of self-insurance accruals relates primarily to workers’ compensation and vehicular claims that are expected to be payable over several years. Con-way periodically evaluates the level of insurance coverage and adjusts insurance levels based on risk tolerance and premium expense.

The measurement and classification of self-insured costs requires the consideration of historical cost experience, demographic and severity factors, and judgments about the current and expected levels of cost per claim and retention levels. These methods provide estimates of undiscounted liability associated with claims incurred as of the balance sheet date, including claims not reported. Con-way believes its actuarial methods are appropriate for measuring these highly judgmental self-insurance accruals. However, the use of any estimation method is sensitive to the assumptions and factors described above, based on the magnitude of claims and the length of time from incurrence of the claims to ultimate settlement. Accordingly, changes in these assumptions and factors can materially affect actual costs paid to settle the claims and those amounts may be different than estimates.

Income Taxes

In establishing its deferred income tax assets and liabilities, Con-way makes judgments and interpretations based on the enacted tax laws and published tax guidance that are applicable to its operations. Con-way 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 Con-way’s expected realization of these assets is dependent on future taxable income, future capital gains, its ability to use tax loss and credit carryforwards and carrybacks, final U.S. and foreign tax settlements, and the effectiveness of its tax-planning strategies in the various relevant jurisdictions.

 

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Effective on January 1, 2007, Con-way adopted the provisions of FIN 48, “Accounting for Uncertainty in Income Taxes,” as more fully discussed in Note 9, “Income Taxes,” of Item 8, “Financial Statements and Supplementary Data.” Con-way assesses its income tax positions and records tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances, and information available at the reporting date. For those positions where it is more likely than not that a tax benefit will be sustained, Con-way has recorded the largest amount of tax benefit with a greater-than-50-percent likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements.

Revenue Recognition

Con-way Freight allocates revenue between reporting periods based on relative transit time in each period and recognizes expense as incurred. Business units in the Truckload segment recognize revenue and related direct costs when the shipment is delivered. Con-way’s business unit in the Logistics segment recognizes revenue in accordance with contractual terms as services are provided.

Critical revenue-related policies and estimates for Con-way’s business units in the Freight and Truckload segments include those related to revenue adjustments, uncollectible accounts receivable, and in-transit shipments. Critical revenue-related policies and estimates for the Logistics segment include those related to uncollectible accounts receivable and gross- or net-basis revenue recognition. Con-way believes that its revenue recognition policies are appropriate and that its use of revenue-related estimates and judgments provide a reasonable approximation of the actual revenue earned.

Estimated revenue adjustments

Generally, the pricing assessed by companies in the transportation industry is subject to subsequent adjustment due to several factors, including weight and freight classification verifications, or pricing discounts. Revenue adjustments are estimated based on revenue levels and historical experience.

Uncollectible accounts receivable

Con-way’s business units in the Freight and Truckload segments report accounts receivable at net realizable value and provide an allowance for uncollectible accounts when collection is considered doubtful. Estimates for uncollectible accounts are based on various judgments and assumptions, including revenue levels, historical loss experience, and the aging of outstanding accounts receivable.

The Logistics segment, based on the size and nature of the client base, performs a periodic evaluation of its customers’ creditworthiness and accounts receivable portfolio and recognizes expense from uncollectible accounts when losses are both probable and reasonably estimable.

In-transit revenue

At the end of the accounting period, Con-way Freight estimates the amount of revenue earned on shipments in transit based on actual shipments picked up from customers, the scheduled day of delivery, and the expected completion time for delivery.

Gross- or net-basis revenue recognition

Revenue for the Logistics segment is recorded on a gross basis, without deducting third-party purchased transportation costs, on transactions for which Logistics acts as a principal. Revenue is recorded on a net basis, after deducting purchased transportation costs, on transactions for which it acts as an agent. Determining whether revenue should be reported on a gross or net basis is based on an assessment of whether Logistics is acting as the principal or the agent in the transaction and involves judgment based on the terms of the arrangement.

 

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Property, Plant and Equipment and Other Long-Lived Assets

In accounting for property, plant, and equipment, Con-way 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 require management to make judgments about future events. Con-way 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. Con-way’s 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.

Con-way 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.

Acquisitions

Con-way’s accounting for acquisitions requires various judgments and estimates, including but not limited to, purchase-method accounting estimates related to the fair value of assets acquired and liabilities assumed and the estimated useful lives of acquired property and equipment, internal-use software, and identifiable intangible assets. Estimates of the fair value of assets acquired are based on various valuation techniques, with a market-based approach applied to acquired property and equipment, a cost- or income-based approach applied to identifiable intangible assets and a cost-based approach applied to internal-use software. Generally, all other assets acquired and liabilities assumed have been recorded at carrying value, which approximates fair value.

The excess of the acquired entity’s purchase price over the amounts assigned to assets acquired (including identified intangible assets) and liabilities assumed is recorded as goodwill. Goodwill is not amortized but is tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The assessment requires the comparison of the fair value of a reporting unit to the carrying value of its net assets, including allocated goodwill. If the carrying value of the reporting unit exceeds its fair value, Con-way must then compare the implied fair value of reporting-unit goodwill with the carrying amount of that goodwill. If the carrying amount of reporting-unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.

The amounts that Con-way has recorded for goodwill and other identifiable intangible assets represent fair values, which were primarily determined by an income-based valuation approach. The estimates and assumptions used in the initial valuation of goodwill and identifiable intangible assets include, but are not limited to: the future expected cash flows from sales, customer contracts, and trademarks; growth opportunities; the retention of key employees; and integration costs. These estimates and assumptions may be incomplete or inaccurate because unanticipated events and circumstances may occur. If estimates and assumptions used to initially value goodwill and identifiable intangible assets prove to be inaccurate, ongoing reviews of the carrying values of such goodwill and intangible assets, as discussed above, may result in an impairment loss in the period in which Con-way identifies the impairment. Changes in assumptions and estimates related to acquisitions could have a material effect on Con-way’s financial condition or results of operations.

 

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Disposition and Restructuring Estimates

As more fully discussed in Note 4, “Discontinued Operations,” and Note 3, “Restructuring Activities,” of Item 8, “Financial Statements and Supplementary Data,” Con-way’s management made significant estimates and assumptions in connection with the disposition of MWF, EWA, and Con-way Forwarding and with the restructuring of business units in the Freight and Truckload reporting segments. Actual results could differ from estimates and could affect related amounts reported in the financial statements.

New Accounting Standards

Refer to Note 1, “Principal Accounting Policies,” of Item 8, “Financial Statements and Supplementary Data” for a discussion of recently issued accounting standards that Con-way has not yet adopted.

 

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 Con-way’s management for future operations or other future items;

 

   

any statements concerning proposed new products or services;

 

   

any statements regarding Con-way’s estimated future contributions to pension plans;

 

   

any statements as to the adequacy of reserves;

 

   

any statements regarding the outcome of any claims that may be brought against Con-way by CFC’s multi-employer pension plans;

 

   

any statements regarding future economic conditions or performance;

 

   

any statements regarding the outcome of legal and other claims and proceedings against Con-way;

 

   

any statements regarding strategic acquisitions; and

 

   

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, certain important factors, among others and in addition to the matters discussed elsewhere in this document and other reports and documents filed by Con-way with the Securities and Exchange Commission, could cause actual results and other matters to differ materially from those discussed in such forward-looking statements. A detailed description of certain of these risk factors is included in Item 1A, “Risk Factors.”

 

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ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Con-way is exposed to a variety of market risks, including the effects of interest rates, fuel prices, and foreign currency exchange rates.

Con-way 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.

As more fully discussed in Note 7, “Debt and Other Financing Arrangements,” of Item 8, “Financial Statements and Supplementary Data,” Con-way 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 in the periods presented did not have a material effect on Con-way’s financial condition, results of operations, or cash flows.

Interest Rates

Con-way 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 Con-way’s 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 Con-way’s 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
     2007    2006
     (Dollars in thousands)

Carrying value

   $ 978,426    $ 576,358

Estimated fair value

     1,050,000      600,000

Change in estimated fair value given a hypothetical 10% change in interest rates

     50,000      30,000

Con-way invests in cash-equivalent investments and marketable securities that earn investment income. Con-way’s investment income was $19.0 million in 2007, $24.8 million in 2006, and $22.7 million in 2005. The potential change in annual investment income resulting from a hypothetical 10% change to variable interest rates would range from approximately $2 million to approximately $3 million for the periods presented.

Fuel

Con-way is exposed to the effects of changes in the price and availability of diesel fuel, as more fully discussed in Item 1A, “Risk Factors.”

Foreign Currency

The assets and liabilities of Con-way’s foreign subsidiaries are denominated in foreign currencies, which create exposure to changes in foreign currency exchange rates. Con-way does not currently use derivative financial instruments to manage foreign currency risk.

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Con-way Inc.:

We have audited the accompanying consolidated balance sheets of Con-way Inc. and subsidiaries (the Company) as of December 31, 2007 and 2006, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2007. We also have audited the Company’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting 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 and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company's 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 company's 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 company's 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.

Con-way acquired CFI on August 23, 2007, Cougar Logistics on September 5, 2007 and Chic Logistics on October 18, 2007 (the Acquisitions) and management excluded the Acquisitions from its assessment of the effectiveness of Con-way’s internal control over financial reporting as of December 31, 2007. The Acquisitions represent 34.7% of Con-way’s total assets and 4.3% of Con-way’s revenues as reported in the consolidated financial statements for the year ended December 31, 2007. Our audit of internal control over financial reporting of Con-way Inc. also excluded an evaluation of the internal control over financial reporting of the Acquisitions.

 

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In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Con-way Inc. and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

As discussed in Note 11 to the consolidated financial statements, the Company adopted the recognition and disclosure provisions as of December 31, 2006 and adopted measurement date provisions as of January 1, 2007 of Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.

/S/ KPMG LLP

Portland, Oregon

February 27, 2008

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Con-way Inc.

Consolidated Balance Sheets

 

     December 31,  
     2007     2006  
     (Dollars in thousands)  

Assets

    

Current Assets

    

Cash and cash equivalents

   $ 176,298     $ 260,039  

Marketable securities

     30,016       184,525  

Trade accounts receivable, net

     503,940       439,727  

Other accounts receivable

     42,664       107,520  

Operating supplies, at lower of average cost or market

     24,142       19,223  

Prepaid expenses and other assets

     40,746       36,343  

Deferred income taxes

     37,672       43,107  
                

Total Current Assets

     855,478       1,090,484  
                

Property, Plant, and Equipment

    

Land

     187,323       159,506  

Buildings and leasehold improvements

     792,962       688,644  

Revenue equipment

     1,246,816       970,290  

Other equipment

     265,640       239,244  
                
     2,492,741       2,057,684  

Accumulated depreciation and amortization

     (1,033,953 )     (939,709 )
                

Net Property, Plant, and Equipment

     1,458,788       1,117,975  
                

Other Assets

    

Deferred charges and other assets

     33,139       25,894  

Capitalized software, net

     35,010       34,831  

Employee benefits

     89,039       —    

Intangible assets, net

     18,780       —    

Goodwill

     527,446       727  

Deferred income taxes

     —         31,978  
                
     703,414       93,430  
                

Total Assets

   $ 3,017,680     $ 2,301,889  
                

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

 

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Con-way Inc.

Consolidated Balance Sheets

 

     December 31,  
     2007     2006  
     (Dollars in thousands except
per share data)
 

Liabilities and Shareholders’ Equity

    

Current Liabilities

    

Accounts payable

   $ 276,105     $ 240,870  

Accrued liabilities

     266,625       207,925  

Self-insurance accruals

     110,986       92,372  

Short-term borrowings

     5,072       —    

Current maturities of long-term debt

     22,704       18,635  
                

Total Current Liabilities

     681,492       559,802  

Long-Term Liabilities

    

Long-term debt and guarantees

     955,722       557,723  

Self-insurance accruals

     118,854       114,431  

Employee benefits

     195,145       314,559  

Other liabilities and deferred credits

     24,639       14,595  

Deferred income taxes

     132,732       —    
                

Total Liabilities

     2,108,584       1,561,110  
                

Commitments and Contingencies (Notes 4, 7, 8 and 13)

    

Shareholders’ Equity

    

Preferred stock, no par value; authorized 5,000,000 shares: Series B, 8.5% cumulative, convertible, $.01 stated value; designated 1,100,000 shares; issued 560,998 and 603,816 shares, respectively

     6       6  

Additional paid-in capital, preferred stock

     85,322       91,834  

Deferred compensation, defined contribution retirement plan

     (20,805 )     (31,491 )
                

Total Preferred Shareholders’ Equity

     64,523       60,349  
                

Common stock, $.625 par value; authorized 100,000,000 shares; issued 61,914,495 and 61,616,649 shares, respectively

     38,615       38,434  

Additional paid-in capital, common stock

     568,190       549,267  

Retained earnings

     972,243       847,068  

Cost of repurchased common stock (16,698,513 and 15,168,447 shares, respectively)

     (720,583 )     (638,929 )
                

Total Common Shareholders’ Equity

     858,465       795,840  
                

Accumulated Other Comprehensive Loss

     (13,892 )     (115,410 )
                

Total Shareholders’ Equity

     909,096       740,779  
                

Total Liabilities and Shareholders’ Equity

   $ 3,017,680     $ 2,301,889  
                

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

 

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Con-way Inc.

Statements of Consolidated Income

 

     Years ended December 31,  
     2007     2006     2005  
     (Dollars in thousands except per share data)  

Revenues

   $ 4,387,363     $ 4,221,478     $ 4,115,575  
                        

Costs and Expenses

      

Salaries, wages and other employee benefits

     1,907,508       1,719,203       1,660,970  

Purchased transportation

     1,040,712       1,173,979       1,200,884  

Fuel and fuel-related taxes

     359,486       283,177       241,195  

Depreciation and amortization

     167,146       143,726       128,141  

Maintenance

     112,906       105,691       95,429  

Rents and leases

     91,156       75,086       82,684  

Purchased labor

     65,163       65,531       55,040  

Other operating expenses

     376,134       312,087       296,347  

Loss (Income) from equity investment

     2,699       (52,599 )     (16,061 )

Gain from sale of Con-way Expedite

     —         (6,231 )     —    
                        
     4,122,910       3,819,650       3,744,629  
                        

Operating Income

     264,453       401,828       370,946  
                        

Other Income (Expense)

      

Investment income

     19,007       24,781       22,730  

Interest expense

     (42,805 )     (34,206 )     (37,501 )

Miscellaneous, net

     1,991       (94 )     (3,819 )
                        
     (21,807 )     (9,519 )     (18,590 )
                        

Income from Continuing Operations Before Income Tax Provision

     242,646       392,309       352,356  

Income Tax Provision

     88,871       119,978       121,981  
                        

Income from Continuing Operations

     153,775       272,331       230,375  
                        

Discontinued Operations, net of tax

      

Loss from Discontinued Operations

     —         (1,929 )     (2,394 )

Loss from Disposal

     (863 )     (4,270 )     (6,219 )
                        
     (863 )     (6,199 )     (8,613 )
                        

Net Income

     152,912       266,132       221,762  

Preferred Stock Dividends

     6,960       7,154       7,728  
                        

Net Income Available to Common Shareholders

   $ 145,952     $ 258,978     $ 214,034  
                        

Net Income From Continuing Operations Available to Common Shareholders

   $ 146,815     $ 265,177     $ 222,647  
                        

Weighted-Average Common Shares Outstanding

      

Basic

     45,318,740       48,962,382       52,192,539  

Diluted

     48,327,784       52,280,341       56,213,049  

Earnings (Loss) Per Common Share

      

Basic

      

Net Income from Continuing Operations

   $ 3.24     $ 5.42     $ 4.27  

Loss from Discontinued Operations

     —         (0.04 )     (0.05 )

Loss from Disposal

     (0.02 )     (0.09 )     (0.12 )
                        

Net Income Available to Common Shareholders

   $ 3.22     $ 5.29     $ 4.10  
                        

Diluted

      

Net Income from Continuing Operations

   $ 3.06     $ 5.09     $ 3.98  

Loss from Discontinued Operations

     —         (0.03 )     (0.04 )

Loss from Disposal

     (0.02 )     (0.08 )     (0.11 )
                        

Net Income Available to Common Shareholders

   $ 3.04     $ 4.98     $ 3.83  
                        

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

 

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Con-way Inc.

Statements of Consolidated Cash Flows

 

     Years ended December 31,  
     2007     2006     2005  
     (Dollars in thousands)  

Cash and Cash Equivalents, Beginning of Year

   $ 260,039     $ 514,275     $ 346,581  
                        

Operating Activities

      

Net income

     152,912       266,132       221,762  

Adjustments to reconcile net income to net cash provided by operating activities:

      

Discontinued operations, net of tax

     863       6,199       8,613  

Depreciation and amortization, net of accretion

     162,293       139,200       124,267  

Increase in deferred income taxes

     26,500       11,130       15,444  

Amortization of deferred compensation

     10,686       9,137       8,489  

Share-based compensation

     11,235       7,427       2,031  

Provision for uncollectible accounts

     3,343       2,902       4,688  

Loss (Income) from equity investment

     2,699       (52,599 )     (16,061 )

Gain from sale of business

     —         (6,231 )     —    

Loss from restructuring activities

     7,380       —         —    

Gain from sales of property and equipment, net

     (1,208 )     (1,273 )     (647 )

Changes in assets and liabilities, net of acquisitions:

      

Receivables

     (5,816 )     86,397       (124,245 )

Prepaid expenses

     3,860       (5,689 )     (3,430 )

Accounts payable

     (5,125 )     (33,589 )     27,204  

Accrued incentive compensation

     4,782       (4,448 )     (19,965 )

Accrued liabilities, excluding accrued incentive compensation and employee benefits

     8,243       (3,412 )     2,562  

Self-insurance accruals

     (642 )     13,045       3,849  

Income taxes

     23,393       14,815       20,166  

Employee benefits

     (19,373 )     (23,295 )     (78,061 )

Deferred charges and credits

     (2,418 )     12,232       27,517  

Other

     (9,734 )     (4,380 )     (2,845 )
                        

Net Cash Provided by Operating Activities

     373,873       433,700       221,338  
                        

Investing Activities

      

Capital expenditures

     (139,429 )     (299,211 )     (211,465 )

Software expenditures

     (12,124 )     (8,892 )     (8,387 )

Proceeds from sales of property and equipment, net

     27,758       8,118       5,516  

Proceeds from sale of businesses and equity investment

     51,900       8,000       108,366  

Acquisitions, net of cash acquired

     (839,796 )     —         —    

Net decrease in marketable securities

     154,525       17,825       283,950  
                        

Net Cash Provided by (Used in) Investing Activities

     (757,166 )     (274,160 )     177,980  
                        

Financing Activities

      

Net proceeds from issuance of debt

     846,049       —         —    

Repayment of debt and guarantees

     (443,635 )     (15,033 )     (112,730 )

Proceeds from exercise of stock options

     8,229       12,235       76,054  

Excess tax benefit from stock option exercises

     583       2,674       —    

Payments of common dividends

     (18,191 )     (19,693 )     (21,036 )

Payments of preferred dividends

     (7,931 )     (8,457 )     (9,664 )

Repurchases of common stock

     (89,865 )     (350,215 )     (149,053 )
                        

Net Cash Provided by (Used in) Financing Activities

     295,239       (378,489 )     (216,429 )
                        

Net Cash Provided by (Used in) Continuing Operations

     (88,054 )     (218,949 )     182,889  
                        

Discontinued Operations

      

Net Cash Provided by (Used in) Operating Activities

     4,313       (35,109 )     (15,084 )

Net Cash Used in Investing Activities

     —         (178 )     (111 )
                        

Net Cash Provided by (Used in) Discontinued Operations

     4,313       (35,287 )     (15,195 )
                        

Increase (Decrease) in Cash and Cash Equivalents

     (83,741 )     (254,236 )     167,694  
                        

Cash and Cash Equivalents, End of Year

   $ 176,298     $ 260,039     $ 514,275  
                        

Supplemental Disclosure

      

Cash paid for income taxes, net of refunds

   $ 35,210     $ 89,191     $ 80,893  
                        

Cash paid for interest, net of amounts capitalized

   $ 47,555     $ 41,374     $ 47,684  
                        

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

 

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Con-way Inc.

Statements of Consolidated Shareholders’ Equity

(Dollars in thousands except per share data)

 

    Preferred Stock
Series B
    Common Stock     Additional
Paid-in
Capital
    Deferred
Compensation
    Retained
Earnings
    Repurchased
Common
Stock
    Accumulated
Other
Comprehensive
Income (Loss)
    Comprehensive
Income (Loss)
 
    Number of
Shares
    Amount     Number of
Shares
    Amount              

Balance, December 31, 2004

  742,995     7     58,544,254     36,590     542,136     (54,861 )   414,785     (157,069 )   (15,736 )  

Net income

  —       —       —       —       —       —       221,762     —       —       $ 221,762  

Other comprehensive income (loss):

                   

Foreign currency translation adjustment

  —       —       —       —       —       —       —       —       124       124  

Minimum pension liability adjustment, net of deferred tax of $13,742

  —       —       —       —       —       —       —       —       (21,495 )     (21,495 )
                         

Comprehensive income

                    $ 200,391  
                         

Exercise of stock options, including tax benefits of $22,490

  —       —       2,688,272     1,680     96,864     —       —       —       —      

Share-based compensation

  —       —       (28,263 )   (17 )   62     2,666     —       (33 )   —      

Primary DC Plan 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 )   607,783     (293,380 )   (37,107 )  

Net income

  —       —       —       —       —       —       266,132     —       —       $ 266,132  

Other comprehensive income:

                   

Foreign currency translation adjustment

  —       —       —       —       —       —       —       —       221       221  

Minimum pension liability adjustment, net of deferred tax of $10,885

  —       —       —       —       —       —       —       —       17,025       17,025  
                         

Comprehensive income

                    $ 283,378  
                         

Exercise of stock options, including tax benefits of $4,317

  —       —       392,200     246     16,306     —       —       —       —      

Share-based compensation, including tax benefits of $848

  —       —       20,186     (65 )   8,359       —       (2,107 )   —      

Adjustment to initially apply SFAS 123R

  —       —       —       —       (3,078 )   3,078     —       —       —      

Primary DC Plan deferred compensation

  —       —       —       —       —       9,137     —       —       —      

Repurchased common stock issued for conversion of preferred stock

  (37,543 )   —       —       —       (6,773 )   —       —       6,773     —      

 

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Con-way Inc.

Statements of Consolidated Shareholders’ Equity—(Continued)

(Dollars in thousands except per share data)

 

    Preferred Stock
Series B
  Common Stock   Additional
Paid-in
Capital
    Deferred
Compensation
    Retained
Earnings
    Repurchased
Common
Stock
    Accumulated
Other
Comprehensive
Income (Loss)
    Comprehensive
Income (Loss)
    Number of
Shares
    Amount   Number of
Shares
  Amount            

Treasury stock repurchases

  —         —     —               (350,215 )    

Common dividends declared ($.40 per share)

  —         —     —       —       —         —         (19,693 )     —         —      

Series B, Preferred dividends ($12.93 per share), net of tax benefits of $1,019

  —         —     —       —       —         —         (7,154 )     —         —      

Adjustment to initially apply SFAS 158—recognition provision net of deferred tax of $61,088

  —         —     —       —       —         —         —         —         (95,549 )  
                                                               

Balance, December 31, 2006

  603,816     $ 6   61,616,649   $ 38,434   $ 641,101     $ (31,491 )   $ 847,068     $ (638,929 )   $ (115,410 )  

Net income

  —         —     —       —       —         —         152,912       —         —       $ 152,912

Other comprehensive income:

                   

Foreign currency translation adjustment

  —         —     —       —       —         —         —         —         699       699

Employee benefit plans

                   

Actuarial gain, net of deferred tax of $47,126

  —         —     —       —       —         —         —         —         73,711       73,711

Prior-service credit, net of deferred tax of $7,356

  —         —     —       —       —         —         —         —         11,506       11,506
                       

Comprehensive income

                    $ 238,828
                       

Exercise of stock options, including tax benefits of $1,530

  —         —     247,657     155     9,604       —         —         —         —      

Share-based compensation, including tax benefits of $110

  —         —     50,189     26     11,326         —         (308 )     —      

Primary DC Plan deferred compensation

  —         —     —       —       —         10,686       —         —         —      

Repurchased common stock issued for conversion of preferred stock

  (42,818 )     —     —       —       (8,519 )     —         —         8,519       —      

Treasury stock repurchases

  —         —     —               (89,865 )    

Common dividends declared ($.40 per share)

  —         —     —       —       —         —         (18,191 )     —         —      

Series B, Preferred dividends ($12.93 per share), net of tax benefits of $691

  —         —     —       —       —         —         (6,960 )     —         —      

Adjustment to initially apply SFAS 158—measurement provision, net of deferred tax of $8,321

  —         —     —       —       —         —         (2,586 )     —         15,602    
                                                               

Balance, December 31, 2007

  560,998     $ 6   61,914,495   $ 38,615   $ 653,512     $ (20,805 )   $ 972,243     $ (720,583 )   $ (13,892 )  
                                                               

 

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Con-way Inc.

Notes to Consolidated Financial Statements

1. Principal Accounting Policies

Organization: Con-way Inc. and its consolidated subsidiaries (“Con-way” or the “Company”) provide transportation and logistics services for a wide range of manufacturing, industrial and retail customers. As more fully discussed in Note 14, “Segment Reporting,” for financial reporting purposes, Con-way is divided into five reporting segments: Freight, Logistics, Truckload, Vector and Other.

Principles of Consolidation: The consolidated financial statements include the accounts of Con-way Inc. and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. A difference exists between Con-way’s fiscal year-end and the reporting year-end of certain acquired companies. Typically, this lag period is no more than one month and does not have a material effect on Con-way’s financial position or results of operations.

Recognition of Revenues: Con-way Freight allocates revenue between reporting periods based on relative transit time in each period and recognizes expense as incurred. Business units in the Truckload segment recognize revenue and related direct costs when the shipment is delivered. Estimates for future billing adjustments to revenue, including those related to weight and freight classification verification and earned discounts, are recognized at the time of shipment.

Menlo Logistics recognizes revenue in accordance with contractual terms as services are provided. Revenue is recorded on a gross basis, without deducting third-party purchased transportation costs, on transactions for which Menlo Logistics acts as a principal. Revenue is recorded on a net basis, after deducting purchased transportation costs, on transactions for which Menlo Logistics acts as an agent.

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, 2007 and 2006, cash-equivalent investments of $160.2 million and $249.6 million, 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. Historically, these securities have interest or dividend rates that reset every 7 to 35 days and have been easily liquidated. 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.

At December 31, 2007, marketable securities included $20.0 million of auction-rate securities that were subsequently sold in January 2008. Later in January 2008, Con-way separately acquired $15.0 million of additional auction-rate securities that remain outstanding. The liquidity of auction-rate securities has been adversely affected by recent auction failures that have prevented investors from selling securities on predetermined auction dates, which generally occur every 7 to 35 days. If current market conditions persist, Con-way may be unable to sell these auction-rate securities at their regularly scheduled auction dates. However, based on the credit ratings of these securities, Con-way does not expect to recognize any impairment loss related to its marketable securities.

Trade Accounts Receivable, Net: Con-way’s business units in the Freight and Truckload segments report accounts receivable at net realizable value and provide an allowance when collection is considered doubtful. Estimates for uncollectible accounts are based on various judgments and assumptions, including revenue levels,

 

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historical loss experience, and the aging of outstanding accounts receivable. Menlo Logistics, based on the size and nature of its client base, performs a periodic evaluation of its customers’ creditworthiness and accounts receivable portfolio and recognizes expense from uncollectible accounts when losses are both probable and reasonably estimable. Activity in the allowance for uncollectible accounts is presented in the following table:

 

     Additions           
     Balance at
beginning of period
   Charged to expense    Acquisitions    Write-offs net
of recoveries
    Balance at end
of period
     (Dollars in thousands)

2007

   $ 3,590    $ 3,343    $ 947    $ (4,179 )   $ 3,701

2006

     6,769      2,902      —        (6,081 )     3,590

2005

     6,501      4,688      —        (4,420 )     6,769

Property, Plant and Equipment: Property, plant and equipment are reported at historical cost and are depreciated primarily on a straight-line basis over their estimated useful lives, generally 25 years for buildings and improvements, 4 to 13 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. Con-way periodically evaluates whether changes to estimated useful lives are necessary to ensure that these estimates accurately reflect the economic use 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 other operating expenses.

Expenses associated with Con-way’s re-branding initiative are expensed as incurred and are primarily classified as maintenance expense. The rebranding initiative was launched in 2006 and includes a new Con-way logo and graphic identity. Re-branding expenses of $14.3 million in 2007 and $1.7 million in 2006 consist primarily of the costs to re-brand Con-way Freight’s tractors and trailers.

Tires: The cost of replacement tires are expensed at the time those tires are placed into service, as is the case with other repairs and maintenance costs. The cost of tires on new revenue equipment is capitalized and depreciated over the estimated useful life of the related equipment.

Capitalized Software: Capitalized software consists of certain direct internal and external costs associated with internal-use software, net of accumulated amortization. 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 $13.4 million in 2007 and $14.2 million in 2006 and 2005. Accumulated amortization at December 31, 2007 and 2006 was $110.5 million and $96.9 million, respectively.

Intangible Assets: In connection with the acquisitions of CFI and Cougar Logistics, Con-way recognized as definite-lived intangible assets the estimated fair value of acquired customer relationships and trademarks. The preliminary estimates of fair value of intangible assets are amortized on an item-by-item basis over the preliminary estimates of useful life. As more fully discussed in Note 2, “Acquisitions,” the estimated fair value and useful life of these intangible assets are based on current estimates and, as a result, revisions to these preliminary estimates and evaluations may be necessary as these items are finalized. At December 31, 2007, intangible assets are presented net of accumulated amortization of $1.0 million recognized during 2007.

Goodwill and Long-Lived Assets: Con-way 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

 

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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.

Goodwill is not amortized but is tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The assessment requires the comparison of the fair value of a reporting unit to the carrying value of its net assets, including allocated goodwill. If the carrying value of the reporting unit exceeds its fair value, Con-way must then compare the implied fair value of reporting-unit goodwill with the carrying amount of that goodwill. If the carrying amount of reporting-unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The goodwill recorded in 2007 as a result of the acquisitions, as more fully discussed in Note 2, “Acquisitions,” will be tested for impairment in 2008.

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. Con-way uses the liability method to account for income taxes, which requires deferred taxes to be recorded at the statutory rate anticipated to be in effect when the taxes are paid.

Self-Insurance Accruals: Con-way uses a combination of purchased insurance and self-insurance programs to provide for the costs of medical, casualty, liability, vehicular, cargo and workers’ compensation claims. The long-term portion of self-insurance accruals relates primarily to workers’ compensation and vehicular claims that are expected to be payable over several years. Con-way periodically evaluates the level of insurance coverage and adjusts insurance levels based on risk tolerance and premium expense.

The measurement and classification of self-insured costs requires the consideration of historical cost experience, demographic and severity factors, and judgments about the current and expected levels of cost per claim and retention levels. These methods provide estimates of the undiscounted liability associated with claims incurred as of the balance sheet date, including claims not reported. Changes in these assumptions and factors can materially affect actual costs paid to settle the claims and those amounts may be different than estimates.

Con-way 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 Con-way of its liabilities under the original policy. However, in the opinion of management, potential exposure to Con-way for non-payment is minimal. At December 31, 2007 and 2006, Con-way had recorded a liability related to assumed claims of $31.3 million and $26.5 million, respectively, and had recorded a receivable from the re-insurance pool of $28.0 million and $23.1 million, respectively. Revenues related to these reinsurance activities are reported net of the associated expenses and are classified as other operating expenses. In connection with its participation in the reinsurance pool, Con-way recognized no net effect on operating results in 2007, operating expense of $0.2 million in 2006 and operating income of $1.6 million in 2005.

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 functional currency are included in results of operations.

Advertising Expenses: Advertising costs are expensed as incurred and are classified as other operating expenses. Advertising expenses were $8.5 million in 2007, $9.7 million in 2006 and $4.7 million in 2005.

 

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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,  
     2007     2006     2005  
     (Dollars in thousands except per share data)  

Numerator:

      

Continuing operations (after preferred stock dividends), as reported

   $ 146,815     $ 265,177     $ 222,647  

Add-backs:

      

Dividends on Series B preferred stock, net of replacement funding

     1,134       1,141       1,156  
                        

Continuing operations

     147,949       266,318       223,803  
                        

Discontinued operations

     (863 )     (6,199 )     (8,613 )
                        

Available to common shareholders

   $ 147,086     $ 260,119     $ 215,190  
                        

Denominator:

      

Weighted-average common shares outstanding

     45,318,740       48,962,382       52,192,539  

Stock options and nonvested stock

     367,871       475,193       1,000,988  

Series B preferred stock

     2,641,173       2,842,766       3,019,522  
                        
     48,327,784       52,280,341       56,213,049  
                        

Anti-dilutive stock options not included in denominator

     889,565       338,600       8,000  
                        

Earnings (Loss) per Diluted Share:

      

Continuing operations

   $ 3.06     $ 5.09     $ 3.98  

Discontinued operations

     (0.02 )     (0.11 )     (0.15 )
                        

Available to common shareholders

   $ 3.04     $ 4.98     $ 3.83  
                        

New Accounting Standards: In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair-value measurements. SFAS 157 applies to other accounting pronouncements that require or permit fair-value measurements and does not require any new fair-value measurements. The effective date of SFAS 157 is the first fiscal year beginning after November 15, 2007, and interim periods within those years, which for Con-way is the first quarter of 2008. In November 2007, the FASB proposed a one-year deferral of SFAS 157’s fair-value measurement requirement for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value on a recurring basis. Con-way does not expect the adoption of SFAS 157 to have a material effect on its financial statements.

In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” which permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair-value option has been elected will be reported in earnings. The effective date for SFAS 159 is the first fiscal year beginning after November 15, 2007, which for Con-way is 2008. Con-way does not expect the adoption of SFAS 159 to have a material effect on its financial statements.

In December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements—an Amendment of ARB 51.” Under the new statement, noncontrolling interests in the net assets of

 

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subsidiaries must be reported in the balance sheet within equity. On the face of the income statement, SFAS 160 requires disclosure of the amounts of consolidated net income attributable to both the parent and to the noncontrolling interest. The effective date of SFAS 160 is the first fiscal year beginning after December 15, 2008, and interim periods within those years, which for Con-way is the first quarter of 2009. Con-way does not expect the adoption of SFAS 160 to have a material effect on its financial statements.

In December 2007, the FASB issued SFAS 141 (revised 2007), “Business Combinations” (“SFAS 141R”). The statement changes the acquisition-date and subsequent-period accounting associated with business acquisitions. Several of the changes have the potential to generate greater earnings volatility in connection with and after an acquisition. The most significant provisions of SFAS 141R result in a change in the accounting for transactions costs, contingencies, and acquisition-date accounting estimates. Under the new statement, transaction costs and transaction-related restructuring charges will be expensed as incurred. Under SFAS 141R, certain contingent assets and liabilities will be recognized at fair value. If new information is available after the acquisition, these amounts may be subject to remeasurement. Also, adjustments to acquisition-date accounting estimates will be accounted for as adjustments to prior-period financial statements. The effective date of SFAS 141R is the first fiscal year beginning after December 15, 2008, which for Con-way is 2009. Con-way is evaluating the effect of adopting SFAS 141R, including the effect on any acquisitions consummated in 2009 or thereafter, and the effect on future goodwill evaluations for companies acquired prior to the effective date.

Estimates: Management makes estimates and assumptions when preparing the financial statements in conformity with GAAP. 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 assets and liabilities, self-insurance accruals, pension plan and postretirement obligations, contingencies, and assets and liabilities recognized in connection with acquisitions, restructurings and dispositions.

Reclassifications and Revisions: Certain amounts in the prior-period financial statements have been reclassified or revised to conform to the current-period presentation.

2. Acquisitions

Contract Freighters, Inc.

On August 23, 2007, Con-way acquired the outstanding common shares of Transportation Resources, Inc. (“TRI”). TRI is the holding company for Contract Freighters, Inc. and other affiliated companies (collectively, “CFI”). CFI is a truckload carrier headquartered in Joplin, Missouri, and provides asset-based full-truckload freight services throughout North America, including services into and out of Mexico.

Following the acquisition, the operating results of CFI are reported with the operating results of the Con-way Truckload business unit in the Truckload reporting segment. The Truckload reporting segment includes the operating results of CFI from August 23, 2007 through December 31, 2007. As more fully discussed in Note 3, “Restructuring Activities,” Con-way in September 2007 integrated the Con-way Truckload business unit with the CFI business unit.

In connection with the acquisition, former shareholders of TRI paid $4.0 million into an escrow account for the purpose of retaining certain key executive officers of CFI. Under the escrow agreement, the key executive officers will receive pro rata payments if they remain employees of CFI over a two-year period ending

 

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August 23, 2009. Accordingly, $4.0 million has been allocated to the purchase price as the value of the retention-related restricted cash and an equal liability to the key executive officers will be accrued ratably over the two-year service period. If the key executive officers terminate employment prior to August 23, 2009, any unearned portion of the restricted cash in escrow would be remitted to Con-way.

The acquisition of CFI establishes Con-way as an enterprise that offers domestic and international shippers a diverse suite of solutions, including LTL, full-truckload, and logistics services. Con-way expects to realize a number of strategic benefits from the acquisition of CFI, including the diversification of its revenue mix, a more efficient and integrated truckload operation, and opportunities to leverage sales efforts, infrastructure and freight flows among Con-way’s LTL, truckload and logistics business units.

Cougar Logistics

On September 5, 2007, Menlo Worldwide, LLC (“MW”) acquired the outstanding common shares of Cougar Holdings Pte Ltd., and its primary subsidiary, Cougar Express Logistics (collectively, “Cougar Logistics”). Cougar Logistics is a warehousing, logistics, distribution-management and freight-forwarding company headquartered in Singapore. Cougar Logistics provides services to a client base in Asia of nearly 200 global businesses with personnel, facilities and operations in 12 locations in Singapore, Malaysia and Thailand.

Following the acquisition, the operating results of Cougar Logistics are reported with the operating results of the Menlo Logistics business unit in the Logistics reporting segment. The Logistics reporting segment includes the operating results of Cougar Logistics from September 5, 2007 through December 31, 2007.

The acquisition of Cougar Logistics expands Menlo Logistics’ operations in the important Asia-Pacific region. Menlo Logistics expects to realize a number of strategic benefits from the acquisition, including the entry into new service offerings and markets, and the expansion of capabilities within its existing service portfolio and its industry-focused groups.

Chic Logistics

On October 18, 2007, MW acquired the outstanding common shares of Chic Holdings, Ltd. and its wholly owned subsidiaries, Shanghai Chic Logistics Co. Ltd. and Shanghai Chic Supply Chain Management Co. Ltd. (collectively, “Chic Logistics”). Chic Logistics is a well-established provider of logistics and transportation-management services in China and maintains a network with operating sites in 78 cities.

Following the acquisition, the operating results of Chic Logistics are reported with the operating results of the Menlo Logistics business unit in the Logistics reporting segment. The Logistics reporting segment includes the operating results of Chic Logistics from October 18, 2007 through December 31, 2007.

The purchase price for Chic Logistics was subject to earn-out provisions that could have potentially increased the purchase price by as much as $29.0 million. Con-way has determined than no amounts will be payable under these earn-out provisions, which were based on earnings (as defined by the agreement) for the year ended December 31, 2007.

In addition, MW may be required to pay an additional amount of consideration in October 2009 based, in part, on the percentage increase in earnings for the year ended December 31, 2008 over the year ended December 31, 2007. Any consideration paid under this provision will increase the purchase price and be allocated to goodwill.

 

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The acquisition of Chic Logistics expands Menlo Logistics’ operations in China and positions Menlo Logistics to capitalize on growth in China’s domestic economy. Menlo Logistics expects to realize a number of strategic benefits from the acquisition, including the entry into new service offerings and markets, and the expansion of capabilities within its existing service portfolio and its industry-focused groups.

Purchase Price and Allocation to Net Assets Acquired

In the presentation below, the preliminary allocation of the purchase price is based on the purchase price calculated as of the respective acquisition closing dates and the estimated fair value or carrying amount (which approximates fair value) of assets acquired and liabilities assumed as of the same date. The purchase-price accounting is based on current estimates of the assets acquired and liabilities assumed. Accordingly, revisions to the preliminary estimates and evaluations, including valuations of tangible and intangible assets and certain contingencies, may be necessary as information is received from third parties and these items are finalized.

 

     CFI     Cougar Logistics     Chic Logistics  
     (dollars in millions)  

Calculation of purchase price:

      

Cash consideration paid:

      

Purchase price

   $ 750.0     $ 28.2     $ 60.0  

Adjustment for working capital

     12.2       0.2       —    

Direct transaction costs

     5.5       1.1       1.4  
                        

Gross purchase price

   $ 767.7     $ 29.5     $ 61.4  

Cash acquired

     (15.4 )     (0.9 )     (2.4 )
                        

Net purchase price

   $ 752.3     $ 28.6     $ 59.0  
                        

Allocation of purchase price:

      

Current assets, excluding cash acquired

   $ 52.4     $ 4.4     $ 21.4  

Non-current assets:

      

Property and equipment

     351.2       21.3       6.2  

Intangible assets

      

Customer relationships

     14.0       3.8       —    

Trademarks

     1.7       —         —    

Goodwill

     471.6       6.0       48.8  
                        
     487.3       9.8       48.8  

Other assets

      

Internal-use software

     3.0       0.1       0.6  

Restricted cash

     4.0       —         —    

Other

     4.7       1.8       —    
                        
     11.7       1.9       0.6  

Current liabilities

      

Short-term borrowings

     —         (4.5 )     (0.3 )

Other

     (46.7 )     (4.1 )     (13.5 )
                        
     (46.7 )     (8.6 )     (13.8 )

Non-current liabilities

      

Deferred taxes

     (92.9 )     —         —    

Other

     (10.7 )     (0.2 )     (4.2 )
                        
   $ 752.3     $ 28.6     $ 59.0  
                        

 

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Notes to Consolidated Financial Statements—(Continued)

 

As required by SFAS 142, “Goodwill and Intangible Assets,” intangible assets with an indefinite life are not amortized while intangible assets with lives of definite duration are amortized over their estimated useful lives. Accordingly, goodwill will not be amortized, but will be subject to an annual impairment test. None of the goodwill is expected to be deductible for income tax purposes. Identifiable intangible assets will be amortized on a straight-line basis over the estimated useful lives of the assets, which, for the CFI intangibles, are 10 years for customer relationships and 2 years for trademarks. The Cougar Logistics’ customer-relationship intangible will be amortized over 5 years.

Pro Forma Financial Information

The following unaudited pro forma condensed financial information presents the combined results of operations of Con-way as if the CFI acquisition had occurred as of the beginning of the periods presented, and based on Con-way’s assessment of materiality, does not reflect the acquisition of Cougar Logistics or Chic Logistics. The unaudited pro forma condensed consolidated financial information is for illustrative purposes only, is hypothetical in nature and does not purport to represent what Con-way’s financial information would have been if the acquisition had occurred as of the dates indicated or what such results will be for any future periods.

The unaudited financial information reflects pro forma adjustments that are based upon available information and certain assumptions that Con-way believes are reasonable, including estimates related to purchase-method fair-value accounting adjustments, the effect of financing transactions and conforming changes in accounting policies. However, the pro forma condensed consolidated statements of income from continuing operations reflect only pro forma adjustments expected to have a continuing effect on the consolidated results beyond 12 months from the consummation of the acquisition and do not reflect any changes in operations that may occur, including synergistic benefits that may be realized through the acquisition or the costs that may be incurred in integrating operations.

 

     Years Ended
December 31,
     2007    2006
     (Dollars in thousands except
per share amounts)

Revenue

   $ 4,697,588    $ 4,700,636

Income from continuing operations

     177,317      277,756

Net income

     157,842      271,557

Net income available to common shareholders

     148,410      264,403

Earnings per share

     

Basic

   $ 3.27    $ 5.40

Diluted

     3.09      5.08

3. Restructuring Activities

Freight

In August 2007, Con-way Freight began an operational restructuring to combine its three regional operating companies into one centralized operation to improve the customer experience and streamline its processes. The reorganization into a centralized entity is intended to improve customer service and efficiency through the development of uniform new pricing and operational processes, implementation of best practices, and fostering of innovation. In connection with the reorganization, Con-way Freight recognized a 2007 restructuring charge of $13.2 million.

 

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Con-way expects the reorganization to be substantially complete by the end of the first quarter of 2008 and, during the period of reorganization, estimates that it will recognize total restructuring charges of approximately $16 million. Estimated restructuring charges consist primarily of employee-separation costs, lease-termination costs, and asset-impairment charges. Employee-separation costs primarily include severance payments and retention bonuses for employees who have been notified of their immediate or future separation, and accordingly, the related expenses are recognized over the employees’ remaining service period.

The following table summarizes the effect of restructuring activities for the year ended December 31, 2007:

 

     Charges
Incurred
   Cash
Payments or
Write-offs
    Liability at
December 31,
2007
     (Dollars in thousands)

Employee-separation costs

   $ 6,229    $ (4,444 )   $ 1,785

Facility costs

     2,794      —         2,794

Asset-impairment charges

     2,401      (2,401 )     —  

Other

     1,824      (1,232 )     592
                     

Total

   $ 13,248    $ (8,077 )   $ 5,171
                     

Con-way reported the employee-separation costs in salaries, wages and other employee benefits, the facility costs in rents and leases and the asset-impairment charges and other charges in other operating expenses in the statements of consolidated income.

Truckload

In connection with the acquisition of CFI, as more fully discussed in Note 2, “Acquisitions,” Con-way in September 2007 integrated the Con-way Truckload business unit with the CFI business unit. In connection with the integration, Con-way closed the general office of Con-way Truckload and incurred a $1.5 million third-quarter restructuring charge in 2007, primarily for costs related to employee separation, lease termination and asset impairment. Con-way substantially completed the Con-way Truckload reorganization in 2007.

4. Discontinued Operations

Discontinued operations in the periods presented relate to (1) the closure of the freight forwarding business known as Con-way Forwarding in 2006, (2) the sale of Menlo Worldwide Forwarding, Inc. and its subsidiaries and Menlo Worldwide Expedite!, Inc. (collectively “MWF”) in 2004, (3) the shut-down of Emery Worldwide Airlines, Inc. (“EWA”) in 2001 and the termination of its Priority Mail contract with the USPS in 2000, and (4) the spin-off of CFC in 1996. The results of operations and cash flows of discontinued operations have been segregated from continuing operations, except where otherwise noted.

 

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Results of discontinued operations are summarized below:

 

     Years Ended December 31 ,  
     2007     2006     2005  
     (Dollars in thousands)  

Revenues

      

Con-way Forwarding

   $ —       $ 21,699     $ 54,015  
                        

Income (Loss) from Discontinued Operations

      

Con-way Forwarding

      

Loss before income tax benefit

     —         (2,963 )     (3,312 )

Income tax benefit

     —         1,034       918  
                        
   $ —       $ (1,929 )   $ (2,394 )
                        

Income (Loss) from Disposal, net of tax

      

Con-way Forwarding

   $ 88     $ (4,162 )     —    

MWF

     (183 )     1,246       1,247  

EWA

     2,325       (1,188 )     (9,026 )

CFC

     (3,093 )     (166 )     1,560  
                        
   $ (863 )   $ (4,270 )   $ (6,219 )
                        

Con-way Forwarding

In June 2006, Con-way closed the operations of its domestic air freight forwarding business known as Con-way Forwarding. The decision to close the business unit was made following management’s review of the unit’s competitive position and its prospects in relation to Con-way’s long-term strategies. As a result of the closure, Con-way in 2006 recognized net losses of $4.2 million (net of a $3.0 million of tax benefits) for the write-off of non-transferable capitalized software and other assets, a loss related to non-cancelable operating leases, and other costs.

MWF

In October 2004, Con-way and MW entered into a stock purchase agreement with United Parcel Service, Inc. (“UPS”) to sell all of the issued and outstanding capital stock of MWF. Con-way completed the sale in December 2004. The stock purchase agreement excludes the assets and liabilities related to EWA, and the obligation related to former MWF employees covered under Con-way’s domestic pension, postretirement medical and long-term disability plans. Under the agreement, UPS agreed to pay to Con-way an amount equal to MWF’s cash position as of December 31, 2004, and to pay the estimated present value of Con-way’s retained obligations related to MWF employees covered under Con-way’s long-term disability and postretirement medical plans. Con-way 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 will be recognized in future periods as an additional loss from disposal when and if incurred.

In 2005, Con-way received cash from UPS of $29.4 million for settlement of the MWF cash balance and $79.0 million for the agreed-upon estimated present value of the retained obligations of reimbursable long-term disability and postretirement medical plans. The sales-related amounts received from UPS in 2005 are reported as proceeds in investing activities of continuing operations. As a result of the settlement of the MWF cash balance and revisions to other disposal-related cost estimates, Con-way in 2005 reported a net gain of $1.2 million.

 

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Notes to Consolidated Financial Statements—(Continued)

 

EWA

In the periods presented, results from EWA relate to adjustments of loss estimates, except for a first-quarter net gain in 2007 of $2.9 million (net of tax of $1.7 million) that relates to a recovery of prior losses. In 2005, EWA’s net loss was due primarily to an increase in the estimated exposure for litigation of claims related to the Priority Mail contract. In 2006, Con-way paid $10.0 million to the USPS in settlement of substantially all claims relating to the Priority mail contract, an amount equal to the previously established reserve. EWA’s estimated loss reserves declined to $3.3 million at December 31, 2007, from $4.0 million at December 31, 2006, due primarily to the cash payment of liabilities. EWA’s remaining loss reserves at December 31, 2007 consisted of Con-way’s estimated remaining exposure related to the labor matters described below.

In connection with the cessation of its air-carrier operations in 2001, EWA terminated the employment of all of its pilots and flight crewmembers. Those pilots and crewmembers were represented by the Air Line Pilots Association (“ALPA”) under a collective bargaining agreement. Subsequently, ALPA filed grievances on behalf of the pilots and flight crewmembers protesting the cessation of EWA’s air-carrier operations and MWF’s use of other air carriers. These matters have been the subject of litigation in U.S. District Court and state court in California, including litigation brought by ALPA and by former EWA pilots and crewmembers no longer represented by ALPA. On June 30, 2006, EWA, for itself and for Con-way Inc. and Menlo Worldwide Forwarding, Inc. (“MWF, Inc.”), concluded a final settlement of the California state court litigation. Under the terms of the settlement, plaintiffs received a cash payment of $9.2 million from EWA, and the lawsuit was dismissed with prejudice. The cash settlement reduced by an equal amount EWA’s estimated loss reserve applicable to the grievances filed by ALPA. On August 8, 2006, EWA paid $10.9 million to settle the litigation brought by ALPA that finally concluded litigation with former EWA pilots and flight crewmembers still represented by ALPA as of that date. The remaining matters are also the subject of a claim by former EWA pilots and flight crewmembers no longer represented by ALPA that has been ordered by the court to binding arbitration. Other former pilots have also initiated litigation in federal court. Based on management’s current evaluation, Con-way believes that it has provided for its estimated remaining exposure related to these matters. However, there can be no assurance in this regard as Con-way cannot predict with certainty the ultimate outcome of these matters.

CFC

The results of CFC relate to Con-way’s spin-off of CFC to Con-way’s shareholders on December 2, 1996. In connection with the spin-off of CFC, Con-way agreed to indemnify certain states, insurance companies and sureties against the failure of CFC to pay certain workers’ compensation, tax and public liability claims that were pending as of September 30, 1996. In the periods presented, Con-way’s losses related to CFC were due to revisions of estimated losses related to indemnified workers’ compensation liabilities.

5. Sale of Unconsolidated Joint Venture

Vector SCM, LLC (“Vector”) was a joint venture formed with General Motors (“GM”) in December 2000 for the purpose of providing logistics management services on a global basis for GM, and for customers in addition to GM.

GM Exercise of Call Right

In June 2006, GM exercised its right to purchase Con-way’s membership interest in Vector. In December 2006, an independent financial advisor established a fair value for Vector that was agreed upon by Con-way and GM. The advisor established a fair value of $96.4 million for the membership interests of both joint-venture partners, including a fair value of $84.8 million that was attributable to Con-way’s membership interest in Vector.

 

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Con-way Inc.

Notes to Consolidated Financial Statements—(Continued)

 

As a result of the agreed-upon valuation, Con-way in December 2006 recognized a receivable from GM of $51.9 million (an amount equal to the $84.8 million fair value of Con-way’s membership interest reduced by Con-way’s $32.9 million payable to Vector) and also recognized a $41.0 million gain (an amount equal to the $51.9 million receivable reduced by Con-way’s $9.0 million net investment in Vector and $1.9 million of sale-related costs). In January 2007, Con-way received a $51.9 million payment from GM.

Investment in Vector

Con-way’s net investment in Vector consisted of Con-way’s membership interest in Vector, reduced by Con-way’s payable to Vector. Under the agreements, Con-way’s membership interest in Vector consisted of Con-way’s capital account and its portion of Vector’s undistributed earnings.

Con-way’s payable to Vector related to Vector’s participation in Con-way’s centralized cash-management system and Con-way’s investment of excess cash balances in Vector’s bank accounts. Prior to the sale, Vector’s domestic trade accounts payable and payroll costs were paid by Con-way and excess cash balances in Vector’s bank accounts, if any, were invested by Con-way. Prior to June 30, 2006, these transactions were settled through Vector’s affiliate accounts with Con-way, which earned interest income based on a rate earned by Con-way’s cash-equivalent investments and marketable securities.

Operating Results from Vector

Although Con-way owned a majority interest in Vector, Con-way’s portion of Vector’s operating results were reported as an equity-method investment based on GM’s ability to control certain operating decisions. Prior to the sale of Vector, Con-way’s proportionate share of the net income from Vector was reported in Con-way’s statements of consolidated income as a reduction of operating expenses.

Except for the sale-related gain described above, Vector’s segment results subsequent to June 30, 2006 included only profit or loss associated with the settlement of business-case activity related to the periods prior to June 30, 2006. In connection with these business cases, Con-way at December 31, 2006 reported a $2.7 million receivable from GM. Following negotiation with GM in the first quarter of 2007, the business-case receivable due from GM could not be collected, and accordingly, a $2.7 million loss was recognized in the Vector reporting segment to write off the outstanding receivable from GM.

Transition and Related Services

Pursuant to a closing agreement, GM and Con-way specified the transition services, primarily accounting assistance, and the compensation amounts for such services, to be provided to GM through March 31, 2008. In addition, GM and Con-way entered into an agreement for Con-way to provide certain information-technology support services at an agreed-upon compensation through at least September 30, 2008. Under these agreements, Menlo Logistics reported revenue of $10.9 million in 2007, primarily for information-technology services provided to GM.

 

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Con-way Inc.

Notes to Consolidated Financial Statements—(Continued)

 

Summarized Financial Information for Vector

The table below summarizes results of operations of Vector. As described above, Vector’s segment results prior to June 30, 2006 include the proportionate share of Vector’s net income, and subsequent to June 30, 2006, include only profits associated with the settlement of business-case activity related to the periods prior to June 30, 2006.

 

     Six Months
Ended
June 30,
2006
   December 31,
2005
     (Dollars in thousands)

Revenues

   $ 43,349    $