Annual Reports

 
Quarterly Reports

  • 10-Q (Jul 30, 2014)
  • 10-Q (Apr 30, 2014)
  • 10-Q (Oct 30, 2013)
  • 10-Q (Jul 31, 2013)
  • 10-Q (May 1, 2013)
  • 10-Q (Nov 2, 2012)

 
8-K

 
Other

Conway Inc 10-Q 2010

Documents found in this filing:

  1. 10-Q
  2. Ex-31
  3. Ex-32
  4. Ex-32
sept10q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q


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

For the quarterly period ended September 30, 2010

OR

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

For the transition period from   N/A   to   N/A  


COMMISSION FILE NUMBER 1-5046

Con-way Inc.

Incorporated in the State of Delaware
I.R.S. Employer Identification No. 94-1444798

2855 Campus Drive, Suite 300, San Mateo, California  94403
Telephone Number (650) 378-5200

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  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  x    No  o

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 o  Non-accelerated filer o  Smaller reporting company  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o    No x



Number of shares of Common Stock, $0.625 par value,
outstanding as of October 31, 2010:  54,764,036


 
 

 


CON-WAY INC.
FORM 10-Q
Quarter Ended September 30, 2010
           
           
Table of Contents
           
         
Page
PART I. FINANCIAL INFORMATION
 
           
 
Item 1.
Financial Statements
 
           
     
Consolidated Balance Sheets -
 
       
September 30, 2010 and December 31, 2009
3
           
     
Statements of Consolidated Operations -
 
       
Three and Nine Months Ended September 30, 2010 and 2009
5
           
     
Statements of Consolidated Cash Flows -
 
       
Nine Months Ended September 30, 2010 and 2009
6
           
     
Notes to Consolidated Financial Statements
7
           
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
19
           
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
33
           
 
Item 4.
Controls and Procedures
35
           
PART II. OTHER INFORMATION
 
           
 
Item 1.
Legal Proceedings
36
           
 
Item 1A.
Risk Factors
36
           
 
Item 6.
Exhibits
37
           
 
Signatures
38
           
           
           


 
- 2 -

 


PART I. FINANCIAL INFORMATION
 
             
             
             
ITEM 1.  FINANCIAL STATEMENTS
           
             
             
CON-WAY INC.
 
CONSOLIDATED BALANCE SHEETS
 
(Dollars in thousands)
 
             
             
             
   
September 30,
   
December 31,
 
ASSETS
 
2010
   
2009
 
   
(Unaudited)
       
Current Assets
           
Cash and cash equivalents
  $ 352,008     $ 476,575  
Marketable securities
    26,250       -  
Trade accounts receivable, net
    589,963       494,075  
Other accounts receivable
    70,059       32,489  
Operating supplies, at lower of average cost or market
    21,298       18,290  
Prepaid expenses
    38,175       42,803  
Deferred income taxes
    11,151       12,662  
      1,108,904       1,076,894  
                 
                 
Property, Plant and Equipment
               
Land
    194,818       194,963  
Buildings and leasehold improvements
    812,701       809,460  
Revenue equipment
    1,460,810       1,373,148  
Other equipment
    305,653       286,629  
      2,773,982       2,664,200  
Accumulated depreciation
    (1,379,077 )     (1,288,927 )
      1,394,905       1,375,273  
                 
Other Assets
               
Deferred charges and other assets
    37,441       38,524  
Capitalized software, net
    20,301       22,051  
Marketable securities
    6,284       6,691  
Intangible assets, net
    17,954       23,126  
Goodwill
    337,448       353,658  
      419,428       444,050  
                 
Total Assets
  $ 2,923,237     $ 2,896,217  
                 
                 
                 
                 
The accompanying notes are an integral part of these statements.
 


 
- 3 -

 


CON-WAY INC.
 
CONSOLIDATED BALANCE SHEETS
 
(Dollars in thousands except per share amounts)
 
             
             
             
   
September 30,
   
December 31,
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
2010
   
2009
 
   
(Unaudited)
       
Current Liabilities
           
Accounts payable
  $ 335,886     $ 272,285  
Accrued liabilities
    213,889       210,316  
Self-insurance accruals
    104,891       87,742  
Short-term borrowings
    18,536       10,325  
Current maturities of long-term debt and capital leases
    15,274       210,816  
Total Current Liabilities
    688,476       791,484  
                 
Long-Term Liabilities
               
Long-term debt
    718,186       719,501  
Long-term obligations under capital leases
    63,525       41,288  
Self-insurance accruals
    169,386       156,939  
Employee benefits
    340,806       439,899  
Other liabilities and deferred credits
    43,086       44,516  
Deferred income taxes
    47,651       15,861  
Total Liabilities
    2,071,116       2,209,488  
                 
Commitments and Contingencies (Note 10)
               
                 
Shareholders' Equity
               
Common stock, $0.625 par value; authorized 100,000,000 shares;
               
issued 62,639,833 and 62,512,456 shares, respectively
    39,074       38,971  
Additional paid-in capital, common stock
    575,628       567,584  
Retained earnings
    822,568       890,915  
Cost of repurchased common stock
               
(8,188,957 and 13,287,693 shares, respectively)
    (354,072 )     (575,219 )
Total Common Shareholders' Equity
    1,083,198       922,251  
Accumulated Other Comprehensive Loss
    (231,077 )     (235,522 )
Total Shareholders' Equity
    852,121       686,729  
Total Liabilities and Shareholders' Equity
  $ 2,923,237     $ 2,896,217  
                 
                 
                 
The accompanying notes are an integral part of these statements.
 


 
- 4 -

 


CON-WAY INC.
 
STATEMENTS OF CONSOLIDATED OPERATIONS
 
(Unaudited)
 
(Dollars in thousands except per share amounts)
 
                         
                         
                         
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Revenues
  $ 1,270,183     $ 1,133,441     $ 3,738,357     $ 3,152,706  
                                 
Costs and Expenses
                               
Salaries, wages and employee benefits
    517,221       476,454       1,530,630       1,380,568  
Purchased transportation
    331,137       271,842       952,817       717,892  
Other operating expenses
    137,563       131,408       411,505       368,830  
Fuel and fuel-related taxes
    112,863       95,786       349,547       252,821  
Depreciation and amortization
    50,568       47,390       143,532       146,352  
Maintenance
    30,640       28,690       94,141       78,561  
Rents and leases
    29,622       24,497       88,673       70,451  
Purchased labor
    31,654       16,240       85,998       45,630  
Loss from impairment of goodwill and intangible assets
    16,414       -       19,181       134,813  
      1,257,682       1,092,307       3,676,024       3,195,918  
                                 
Operating Income (Loss)
    12,501       41,134       62,333       (43,212 )
                                 
Other Income (Expense)
                               
Investment income
    352       509       1,059       2,001  
Interest expense
    (13,818 )     (15,864 )     (44,906 )     (48,463 )
Miscellaneous, net
    (568 )     (755 )     (2,622 )     (1,742 )
      (14,034 )     (16,110 )     (46,469 )     (48,204 )
                                 
Income (Loss) before Income Tax Provision
    (1,533 )     25,024       15,864       (91,416 )
Income Tax Provision
    6,695       11,532       14,266       14,402  
                                 
Net Income (Loss)
    (8,228 )     13,492       1,598       (105,818 )
Preferred Stock Dividends
    -       -       -       3,189  
                                 
Net Income (Loss) Applicable to Common Shareholders
  $ (8,228 )   $ 13,492     $ 1,598     $ (109,007 )
                                 
Weighted-Average Common Shares Outstanding
                               
Basic
    54,286,677       48,862,692       51,780,610       47,009,642  
Diluted
    54,286,677       49,497,740       52,410,846       47,009,642  
                                 
Earnings (Loss) per Common Share
                               
Basic
                               
  Net Income (Loss) Applicable to Common Shareholders
  $ (0.15 )   $ 0.28     $ 0.03     $ (2.32 )
                                 
Diluted
                               
  Net Income (Loss) Applicable to Common Shareholders
  $ (0.15 )   $ 0.27     $ 0.03     $ (2.32 )
                                 
                                 
The accompanying notes are an integral part of these statements.
 


 
- 5 -

 


CON-WAY INC.
 
STATEMENTS OF CONSOLIDATED CASH FLOWS
 
(Unaudited)
 
(Dollars in thousands)
 
             
   
Nine Months Ended
 
   
September 30,
 
   
2010
   
2009
 
             
Cash and Cash Equivalents, Beginning of Period
  $ 476,575     $ 278,253  
                 
Operating Activities
               
Net Income (Loss)
    1,598       (105,818 )
Adjustments to reconcile net income (loss) to net cash provided
               
by operating activities:
               
Depreciation and amortization, net of accretion
    140,619       141,162  
Non-cash compensation and employee benefits
    17,360       30,965  
Increase in deferred income taxes
    33,163       8,787  
Provision for uncollectible accounts
    5,519       5,593  
Loss from impairment of goodwill and intangible assets
    19,181       134,813  
Loss from sales of property and equipment, net
    972       7,647  
Changes in assets and liabilities:
               
Receivables
    (108,590 )     (27,958 )
Prepaid expenses
    4,628       7,397  
Accounts payable
    57,052       15,080  
Accrued variable compensation
    7,873       1,358  
Accrued liabilities, excluding accrued variable compensation
               
     and employee benefits
    (5,347 )     (6,890 )
Self-insurance accruals
    29,596       452  
Accrued income taxes
    (31,021 )     17,375  
Employee benefits
    (70,701 )     (7,800 )
Deferred charges and credits
    (1,075 )     3,814  
Other
    (5,554 )     3,719  
Net Cash Provided by Operating Activities
    95,273       229,696  
                 
Investing Activities
               
Capital expenditures
    (119,989 )     (46,648 )
Software expenditures
    (7,015 )     (4,230 )
Proceeds from sales of property and equipment
    3,258       13,491  
Purchases of marketable securities
    (54,260 )     (157,127 )
Proceeds from sales of marketable securities
    28,460       136,734  
Net Cash Used in Investing Activities
    (149,546 )     (57,780 )
                 
Financing Activities
               
Repayment of long-term debt, guarantees and capital leases
    (207,704 )     (22,700 )
Net proceeds from short-term borrowings
    8,154       3,107  
Net proceeds from issuance of common stock
    143,325       -  
Proceeds from exercise of stock options
    1,148       4,171  
Excess tax benefit from share-based compensation
    150       165  
Payments of common dividends
    (15,367 )     (14,157 )
Payments of preferred dividends
    -       (3,507 )
Net Cash Used in Financing Activities
    (70,294 )     (32,921 )
                 
Net Cash Provided by (Used in) Continuing Operations
    (124,567 )     138,995  
                 
Discontinued Operations
               
Net Cash Used in Operating Activities
    -       (103 )
Net Cash Used in Discontinued Operations
    -       (103 )
                 
Increase (Decrease) in Cash and Cash Equivalents
    (124,567 )     138,892  
Cash and Cash Equivalents, End of Period
  $ 352,008     $ 417,145  
                 
Supplemental Disclosure
               
Cash paid (refunded) for income taxes, net
  $ 16,988     $ (8,865 )
Cash paid for interest, net of amounts capitalized
  $ 51,878     $ 50,303  
                 
Non-cash Investing and Financing Activities
               
Capital lease incurred to acquire revenue equipment
  $ 35,104     $ -  
Repurchased common stock issued under defined contribution plan
  $ 27,383     $ 18,671  
Repurchased common stock issued for payment of preferred dividends
  $ -     $ 3,189  
                 
The accompanying notes are an integral part of these statements.
 

 
- 6 -

 

CON-WAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


1. Principal Accounting Policies

Organization

Con-way Inc. and its consolidated subsidiaries (“Con-way”) provide transportation, logistics and supply-chain management services for a wide range of manufacturing, industrial and retail customers. Con-way’s business units operate in regional and transcontinental less-than-truckload and full-truckload freight transportation, contract logistics and supply-chain management, multimodal freight brokerage and trailer manufacturing. As more fully discussed in Note 4, “Segment Reporting,” for financial reporting purposes, Con-way is divided into four reporting segments: Freight, Logistics, Truckload and Other.

Basis of Presentation

These interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and Rule 10-01 of Regulation S-X, and should be read in conjunction with Con-way’s 2009 Annual Report on Form 10-K. Accordingly, significant accounting policies and other disclosures normally provided have been omitted.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, including normal recurring adjustments, necessary to present fairly Con-way’s financial condition, results of operations and cash flows for the periods presented. Results for the interim periods presented are not necessarily indicative of annual results.

Property, Plant and Equipment

Con-way periodically evaluates whether changes to estimated useful lives or salvage values are necessary to ensure that these estimates accurately reflect the economic use of the assets.

In Con-way’s periodic evaluation conducted in the first quarter of 2010, the estimated useful lives for revenue equipment were extended in response to planned capital expenditure levels. As a result of the revised estimates, in January 2010, Con-way Freight extended the estimated useful life for most of its tractors to 10 years from 8 years and extended the estimated useful life for its trailers to 14 years from 13 years. Also effective in January 2010, Con-way Truckload extended the estimated useful life for its tractors to 6 years from 4 years, and decreased the associated estimated salvage values.

In June 2010, the Con-way board of directors approved an accelerated fleet replacement program for Con-way Truckload that is expected to replace nearly the entire tractor fleet by 2012 and change the estimated useful lives of tractors to 4 years based on the planned replacement cycles. The change transitions the current 6-year life to a 4-year life by 2012 and also impacts associated estimated salvage values depending on when the units are scheduled to be replaced.

As a result of these combined changes, net loss applicable to common shareholders in the third quarter of 2010 declined by $0.6 million ($0.01 per diluted share), while net income available to common shareholders in the first nine months increased by $2.9 million ($0.06 per diluted share).

 
- 7 -

 


Earnings (Loss) per Share (“EPS”)

Basic EPS is computed by dividing reported earnings (loss) by the weighted-average common shares outstanding. Diluted EPS is calculated as follows:

(Dollars in thousands except per share data)
 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Numerator:
                       
Net income (loss) applicable to common
                       
 shareholders, as reported
  $ (8,228 )   $ 13,492     $ 1,598     $ (109,007 )
                                 
Denominator:
                               
Weighted-average common shares outstanding
    54,286,677       48,862,692       51,780,610       47,009,642  
Stock options and nonvested stock
    --       635,048       630,236       --  
      54,286,677       49,497,740       52,410,846       47,009,642  
                                 
Anti-dilutive securities excluded from the
                               
computation of diluted EPS
    3,582,653       1,588,526       1,707,718       5,025,354  
                                 
Earnings (Loss) per Diluted Share:
                               
Applicable to common shareholders
  $ (0.15 )   $ 0.27     $ 0.03     $ (2.32 )

In the computation of diluted EPS, only potential common shares that are dilutive are included. Potential common shares are dilutive if they reduce earnings per share or increase loss per share. Stock options, nonvested stock and convertible preferred stock are not included in the computation if the result is antidilutive, such as when a loss applicable to common shareholders is reported.

New Accounting Standards

In October 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-13, “Multi-Deliverable Revenue Arrangements- a consensus of the FASB Emerging Issues Task Force.” ASU 2009-13 was codified in the “Revenue Recognition” topic of the FASB Accounting Standards Codification, which details the requirements that must be met for an entity to recognize revenue from the sale of a delivered item that is part of a multiple-element arrangement when other items have not yet been delivered. ASU 2009-13 addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting and how the arrangement consideration should be allocated among separate units of accounting. One of the current requirements is that there be objective and reliable evidence of the standalone selling price of the undelivered items, which must be supported by either vendor-specific objective evidence (“VSOE”) or third-party evidence. ASU 2009-13 modifies the current GAAP by amending the objective and reliable evidence threshold to allow use of estimated selling price when VSOE does not exist. Under ASU 2009-13, deliverables would be expected to meet the separation criteria more frequently. ASU 2009-13 is effective for fiscal years beginning on or after June 15, 2010. Con-way will apply the guidance prospectively to revenue arrangements entered into or materially modified on or after January 1, 2011. Con-way does not expect the adoption of ASU 2009-13 to have a material effect on its financial statements.

Reclassifications

Certain amounts in the prior-period financial statements have been reclassified to conform to the current-period presentation.

2. Goodwill and Intangible Assets

Goodwill

Goodwill is recorded as the excess of an acquired entity’s purchase price over the amounts assigned to assets acquired (including separately recognized intangible assets) and liabilities assumed. Goodwill is not amortized but is assessed for impairment on an annual basis in the fourth quarter, 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 the reporting-unit goodwill with the carrying amount of the goodwill. If the carrying amount of the reporting-unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.

 
- 8 -

 
 
The following table shows the changes in the carrying amounts of goodwill attributable to each applicable segment:

(Dollars in thousands)
 
Logistics
   
Truckload
   
Other
   
Total
 
                         
Balances at December 31, 2008
                       
Goodwill
  $ 54,453     $ 464,598     $ 727     $ 519,778  
Accumulated impairment losses
    (31,822 )     --       --       (31,822 )
      22,631       464,598       727       487,956  
Impairment charge
    --       (134,813 )     --       (134,813 )
Change in foreign-currency exchange rates
    515       --       --       515  
Balances at December 31, 2009
                               
Goodwill
    54,968       464,598       727       520,293  
Accumulated impairment losses
    (31,822 )     (134,813 )     --       (166,635 )
      23,146       329,785       727       353,658  
Impairment charge
    (16,414 )     --       --       (16,414 )
Change in foreign-currency exchange rates
    204       --       --       204  
Balances at September 30, 2010
                               
Goodwill
    55,172       464,598       727       520,497  
Accumulated impairment losses
    (48,236 )     (134,813 )     --       (183,049 )
    $ 6,936     $ 329,785     $ 727     $ 337,448  

As a result of continued operating losses and lower-than-forecasted operating results at the Chic Logistics reporting unit, Con-way evaluated the goodwill associated with Chic Logistics during the third quarter of 2010. Con-way determined that the goodwill related to Chic Logistics was impaired and, as a result, Menlo Worldwide Logistics recognized a $16.4 million impairment charge to reduce the carrying amount of the goodwill to zero. The impairment was primarily due to a decrease in projected operating income in future years. For the valuation of Chic Logistics, Con-way utilized a discounted cash flow model.

In 2009, Con-way evaluated its goodwill for impairment prior to its annual measurement date due primarily to deteriorating truckload market conditions, lower profit projections for Con-way Truckload and a decline in Con-way’s market capitalization during the first quarter of 2009. In the first quarter of 2009, Con-way determined that the goodwill associated with Con-way Truckload was impaired and, as a result, Con-way Truckload recognized a $134.8 million impairment charge to reduce the carrying amount of the goodwill to its implied fair value. The impairment charge was primarily due to lower projected revenues and operating income in future years and a discount rate that reflected the adverse economic and market conditions at the measurement date.

For the valuation of Con-way Truckload, Con-way applied two equally weighted methods: public-company multiples and a discounted cash flow model. The key assumptions used in the discounted cash flow model were cash flow projections involving forecasted revenues and expenses, capital expenditures, working capital changes, the discount rate and the terminal growth rate applied to projected future cash flows. The discount rate was equal to the estimated weighted-average cost of capital for the reporting unit from a market-participant perspective. The terminal growth rate was based on inflation assumptions adjusted for factors that may impact future growth such as industry-specific expectations.

Intangible Assets

The fair value of intangible assets is amortized on a straight-line basis over the estimated useful life. In the third quarter and first nine months of 2010, amortization expense related to intangible assets was $0.8 million and $2.5 million, respectively, compared to $1.1 million and $3.3 million in the same respective periods of 2009. Intangible assets consisted of the following:

   
September 30, 2010
   
December 31, 2009
 
(Dollars in thousands)
 
Gross Carrying Amount
   
Accumulated Amortization
   
Gross Carrying Amount
   
Accumulated Amortization
 
                         
Customer relationships
  $ 27,404     $ 9,450     $ 31,472     $ 8,346  
 
 
 
- 9 -

 
 
In the first quarter of 2010, Con-way evaluated the fair value of Chic Logistics’ customer-relationship intangible asset due to lower projected revenues from customers comprising the customer-relationship intangible asset. As a result, Menlo Worldwide Logistics recognized a $2.8 million impairment loss and reduced the carrying amount of the intangible asset to zero.

Estimated amortization expense for the next five years is presented in the following table:

(Dollars in thousands)
     
       
Year ending December 31:
     
Remaining three months of 2010
  $ 800  
2011
    3,100  
2012
    2,700  
2013
    2,400  
2014
    2,400  
2015
    2,400  

3. Restructuring Activities

During the periods presented, Con-way incurred expenses in connection with a number of restructuring activities. Con-way reported the employee-separation costs in salaries, wages and employee benefits, the contract-termination costs in other operating expenses and facility costs primarily in rents and leases in the statements of consolidated operations. Con-way recognized restructuring charges of $2.4 million and $3.8 million in the third quarter and first nine months of 2010, respectively, and expects to recognize $4.2 million of additional expense through 2011. In the first nine months of 2009, Con-way recognized $0.5 million of expense reductions, as more fully discussed below. Con-way’s remaining liability for amounts expensed but not yet paid was $4.4 million at September 30, 2010. The remaining liability relates to operating lease commitments that are expected to be payable over several years and employee-separation costs that are expected to be paid through 2011.

Con-way Other

Outsourcing Initiative

In 2009, as part of an ongoing effort to reduce costs and improve capabilities, Con-way initiated a project to outsource a significant portion of its information-technology infrastructure function and a small portion of its administrative and accounting functions. The outsourcing initiative was completed in the third quarter of 2010.

The following table summarizes the effect of the outsourcing initiative:

(Dollars in thousands)
 
Employee-Separation Costs
   
Contract-Termination Costs
   
Total
 
Balance at December 31, 2009
  $ 3,360     $ --     $ 3,360  
2010 charges
    1,766       525       2,291  
Cash payments
    (5,126 )     --       (5,126 )
Balance at September 30, 2010
  $ --     $ 525     $ 525  
                         
Total expense recognized to date
  $ 5,126     $ 525     $ 5,651  

In the first nine months of 2010, Con-way allocated corporate outsourcing charges of $1.8 million and $0.5 million to the Freight and Logistics segments, respectively.

Consolidation of Executive Offices

In the third quarter of 2010, in an effort to more closely align corporate functions and better support the business, Con-way initiated a project to consolidate its executive offices located in San Mateo, California and Ann Arbor, Michigan. As a result, the office in San Mateo will be closed and the office in Ann Arbor will serve as Con-way’s principal executive office. Con-way expects the consolidation to be substantially completed by the end of the second quarter of 2011.


 
- 10 -

 


The following table summarizes the effect of the initiative:

(Dollars in thousands)
 
Employee-Separation Costs
   
Relocation and
Other costs
   
Total
 
2010 charges
  $ 1,552       --     $ 1,552  
Cash payments
    --       --       --  
Balance at September 30, 2010
  $ 1,552     $ --     $ 1,552  
                         
Total expense recognized to date
  $ 1,552     $ --     $ 1,552  
Expected remaining expenses
    2,417       1,742       4,159  

In connection with the consolidation of its executive offices, Con-way, in the third quarter of 2010, allocated restructuring charges of $1.2 million, $0.2 million and $0.2 million to the Freight, Logistics and Truckload segments, respectively.

Con-way Freight

In August 2007, Con-way Freight implemented an operational restructuring to combine its three regional operating companies into one centralized operation and, in November 2008, completed a major network re-engineering. In the first nine months of 2009, Con-way recognized $0.5 million of expense reductions due primarily to a decline in estimated lease liabilities. The remaining lease liability was $2.3 million at September 30, 2010.

4. Segment Reporting

Con-way discloses segment information in the manner in which the business units are organized for making operating decisions, assessing performance and allocating resources. For the periods presented, Con-way is divided into the following four reporting segments:

 
·
Freight. The Freight segment consists of the operating results of the Con-way Freight business unit, which provides regional, inter-regional and transcontinental less-than-truckload freight services throughout North America.

 
·
Logistics. The Logistics segment consists of the operating results of the Menlo Worldwide Logistics business unit, which develops contract-logistics solutions, including the management of complex distribution networks and supply-chain engineering and consulting, and also provides multimodal freight brokerage services.
 
 
·
Truckload. The Truckload segment consists of the operating results of the Con-way Truckload business unit. Con-way Truckload provides asset-based full-truckload freight services throughout North America.

 
·
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 segments.
 


 
- 11 -

 


 
Financial Data
 
 
Management evaluates segment performance primarily based on revenue and operating income (loss). Accordingly, investment income, interest expense, and other non-operating items are not reported in segment results. Corporate expenses are generally allocated based on measurable services provided to each segment, or for general corporate expenses, based on segment revenue. Inter-segment revenue and related operating income (loss) have been eliminated to reconcile to consolidated revenue and operating income (loss). Transactions between segments are generally based on negotiated prices.
 
 

 
(Dollars in thousands)
 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Revenues before Inter-segment Eliminations
                       
Freight
  $ 797,078     $ 704,459     $ 2,339,046     $ 1,927,623  
Logistics
    370,049       346,352       1,111,007       990,451  
Truckload
    140,655       146,251       426,725       424,332  
Other
    10,416       3,858       36,274       14,384  
Inter-segment Revenue Eliminations
    (48,015 )     (67,479 )     (174,695 )     (204,084 )
    $ 1,270,183     $ 1,133,441     $ 3,738,357     $ 3,152,706  
                                 
Inter-segment Revenue Eliminations
                               
Freight
  $ 12,741     $ 11,709     $ 38,123     $ 37,189  
Logistics
    5,447       1,991       13,977       2,658  
Truckload
    20,854       50,570       90,640       152,842  
Other
    8,973       3,209       31,955       11,395  
    $ 48,015     $ 67,479     $ 174,695     $ 204,084  
                                 
Revenues from External Customers
                               
Freight
  $ 784,337     $ 692,750     $ 2,300,923     $ 1,890,434  
Logistics
    364,602       344,361       1,097,030       987,793  
Truckload
    119,801       95,681       336,085       271,490  
Other
    1,443       649       4,319       2,989  
    $ 1,270,183     $ 1,133,441     $ 3,738,357     $ 3,152,706  
Operating Income (Loss)
                               
Freight
  $ 13,062     $ 22,816     $ 27,135     $ 48,423  
Logistics
    (6,282 )     9,532       19,582       22,305  
Truckload
    5,475       10,620       13,582       (115,179 )
Other
    246       (1,834 )     2,034       1,239  
    $ 12,501     $ 41,134     $ 62,333     $ (43,212 )
                                 

 
- 12 -

 

5. Fair-Value Measurements

Assets and liabilities reported at fair value are classified in one of the following three levels within the fair-value hierarchy:

Level 1: Quoted market prices in active markets for identical assets or liabilities
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data
Level 3: Unobservable inputs that are not corroborated by market data

The following table summarizes the valuation of financial instruments within the fair-value hierarchy:

   
September 30, 2010
 
(Dollars in thousands)
 
Total
   
Level 1
   
Level 2
   
Level 3
 
                         
Cash equivalents
  $ 322,458     $ 98,819     $ 223,639     $ --  
Current marketable securities
    26,250       --       26,250       --  
Other marketable securities
    6,284       --       --       6,284  

   
December 31, 2009
 
(Dollars in thousands)
 
Total
   
Level 1
   
Level 2
   
Level 3
 
                         
Cash equivalents
  $ 450,915     $ 143,578     $ 307,337     $ --  
Other marketable securities
    6,691       --       --       6,691  

Cash equivalents consist of short-term interest-bearing instruments (primarily commercial paper, certificates of deposit and money-market funds) with maturities of three months or less at the date of purchase. Current marketable securities consist of variable-rate demand notes.

Money-market funds reflect their published net asset value and are classified as Level 1 instruments within the fair-value hierarchy. Commercial paper, certificates of deposit and variable-rate demand notes are generally valued using published interest rates for instruments with similar terms and maturities, and accordingly, are classified as Level 2 instruments within the fair-value hierarchy. At September 30, 2010, the average remaining maturity of the cash equivalents was less than one month. Based on their short maturities, the carrying amount of the cash equivalents approximates their fair value.

Con-way’s other marketable security consists of one auction-rate security, which was valued with an income approach that utilized a discounted cash flow model. The following table summarizes the change in fair values of Con-way’s auction-rate security, which was valued using Level 3 inputs:

(Dollars in thousands)
 
Auction-Rate Security
 
       
Balance at December 31, 2008
  $ 6,712  
Unrealized gain
    379  
Partial redemption
    (400 )
Balance at December 31, 2009
  $ 6,691  
Unrealized gain
    43  
Partial redemption
    (450 )
Balance at September 30, 2010
  $ 6,284  

Due primarily to changes in interest-rate benchmarks, the fair value of Con-way’s auction-rate security increased in the first nine months of 2010. Con-way has recorded a cumulative life-to-date $0.4 million decline in the carrying value of the auction-rate security with an equal and offsetting unrealized loss in accumulated other comprehensive loss in shareholders’ equity. Con-way has evaluated the unrealized loss and concluded that the decline in fair value is not other-than-temporary.

 
- 13 -

 


6. Employee Benefit Plans

In the periods presented, employees of Con-way and its subsidiaries in the U.S. were covered under several retirement benefit plans, including defined benefit pension plans, defined contribution retirement plans, a postretirement medical plan and a long-term disability plan. See Note 12, “Employee Benefit Plans,” of Item 8, “Financial Statements and Supplementary Data,” in Con-way’s 2009 Annual Report on Form 10-K for additional information concerning its employee benefit plans. See “Cost-Reduction Actions” below for a discussion of employee benefits changes that were effective in April 2009.

Defined Benefit Pension Plans

The following table summarizes the components of net periodic benefit expense for Con-way’s domestic defined benefit pension plans:

   
Qualified Pension Plans
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
(Dollars in thousands)
 
2010
   
2009
   
2010
   
2009
 
                         
Interest cost on benefit obligation
  $ 17,284     $ 17,153     $ 51,852     $ 52,704  
Expected return on plan assets
    (18,760 )     (14,938 )     (56,279 )     (45,588 )
Net amortization and deferral
    2,268       1,816       6,803       15,419  
Net periodic benefit expense
  $ 792     $ 4,031     $ 2,376     $ 22,535  
       
   
Non-Qualified Pension Plans
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
(Dollars in thousands)
    2010       2009       2010       2009  
                                 
Interest cost on benefit obligation
  $ 969     $ 1,069     $ 2,909     $ 3,107  
Net amortization and deferral
    113       18       339       (2,395 )
Net periodic benefit expense
  $ 1,082     $ 1,087     $ 3,248     $ 712  


Con-way has made $93.8 million in contributions to its Qualified Pension Plans in 2010, including $1.2 million contributed in October 2010. Con-way does not anticipate making any further contributions to the plans in 2010.

Defined Contribution Retirement Plans

Con-way’s defined contribution retirement plans consist mostly of the primary defined contribution retirement plan (the “Primary DC Plan”).

Con-way’s expense under the Primary DC Plan was $9.1 million and $28.3 million in the third quarter and first nine months of 2010, respectively, compared to $8.5 million and $36.4 million in the same periods of 2009. At September 30, 2010 and December 31, 2009, Con-way had recognized accrued liabilities of $11.4 million and $10.5 million, respectively, for its contributions related to the Primary DC Plan. In 2009, Con-way’s contributions to the Primary DC Plan included allocations of Con-way preferred stock and contributions of cash and Con-way common stock. In 2010, Con-way’s contributions were made with Con-way common stock. In the first nine months of 2010 and 2009, Con-way used 826,504 shares and 610,176 shares, respectively, of repurchased common stock (also referred to as treasury stock) to fund $27.4 million and $18.7 million, respectively, of contributions to the Primary DC Plan.

 
- 14 -

 



Postretirement Medical Plan

The following table summarizes the components of net periodic benefit expense for the postretirement medical plan:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
(Dollars in thousands)
 
2010
   
2009
   
2010
   
2009
 
                         
Service cost – benefits earned during the period
  $ 351     $ 374     $ 1,054     $ 1,154  
Interest cost on benefit obligation
    1,208       1,406       3,624       4,184  
Net amortization and deferral
    (301 )     (306 )     (902 )     (917 )
Net periodic benefit expense
  $ 1,258     $ 1,474     $ 3,776     $ 4,421  

In March 2010, the Patient Protection and Affordable Care Act, as modified by the Health Care and Education Reconciliation Act, was signed into law. Certain provisions of this legislation eliminated future tax deductions for expenditures reimbursed under the Medicare Part D retiree drug subsidy program. Elimination of this tax deduction resulted in a $2.3 million income-tax charge in the first quarter of 2010. Any effect from other provisions of the legislation will be included in the determination of the benefit obligation at the actuarial plan measurement date on December 31, 2010.

Long-term Disability Plan

Con-way’s expense associated with the long-term disability plan was $3.2 million and $10.3 million in the third quarter and first nine months of 2010, respectively, compared to $2.5 million and $8.0 million in the same respective periods of 2009. In Con-way’s consolidated balance sheets, the long-term and current portions of the long-term disability plan obligation are reported in employee benefits and accrued liabilities, respectively. At September 30, 2010, the long-term and current portions of the obligation were $25.5 million and $11.4 million, respectively, and at December 31, 2009, were $28.2 million and $11.4 million, respectively.

Cost-Reduction Actions

In response to economic conditions, in March 2009 Con-way announced several measures to reduce costs and conserve cash, as detailed below. The measures announced in March 2009 substantially consisted of the suspension or curtailment of employee benefits and a reduction in salaries and wages. As described below, Con-way in the first half of 2010 restored a portion of the wage and salary reductions and reinstated the compensated-absences benefits.

Salaries and Wages

Effective in March 2009, the salaries and wages of certain employees were reduced by 5%, including corporate and shared-services employees and those at the Con-way Freight and Road Systems business units. Effective in January 2010, Con-way restored one-half of the salary and wage reductions.

Compensated Absences

Effective in April 2009, a compensated-absences benefit was suspended at Con-way Freight. During the period of suspension, no compensated-absences benefits were earned for current-year service; however, employees could use previously vested benefits. Also, effective in March 2009, Menlo Worldwide Logistics reduced its compensated-absences benefit by 25%. Effective in April 2010, Con-way Freight and Menlo Worldwide Logistics reinstated their compensated-absences benefits.

Defined Contribution Plan

Effective in April 2009, employer contributions to Con-way’s Primary DC Plan were suspended or limited. The matching and transition contributions were suspended and the basic contribution was limited to no more than 3% of an employee’s eligible compensation.

 
- 15 -

 


7. Shareholders’ Equity

Comprehensive Income

Comprehensive income, which is a measure of all changes in equity except those resulting from investments by owners and distributions to owners, was as follows:

(Dollars in thousands)
 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Net income (loss)
  $ (8,228 )   $ 13,492     $ 1,598     $ (105,818 )
                                 
Other comprehensive income (loss):
                               
Foreign currency translation adjustment
    799       260       (1,639 )     1,430  
Unrealized gain (loss) on available-for-sale
                               
security, net of deferred tax of $5, $15,
                               
$17, and $208, respectively
    (8 )     23       26       325  
Employee benefit plans, net of deferred tax of
                               
$812, $595, $4,699,  and $121,667,
                               
respectively
    1,268       933       6,058       190,303  
Comprehensive income (loss)
  $ (6,169 )   $ 14,708     $ 6,043     $ 86,240  

Common Stock Offering

In May 2010, Con-way sold 4,300,000 shares of repurchased common stock in an underwritten public offering at a price of $35.00 per share. The net proceeds from the offering were $143.3 million after deducting the underwriting discount and direct costs. The $42.8 million difference between the net proceeds and the $186.1 million historical cost of the repurchased common stock was recorded as a reduction to retained earnings in common shareholders’ equity.

8. Share-Based Compensation

Under terms of its share-based compensation plans, Con-way grants various types of share-based compensation awards to employees and directors. The plans provide for awards in the form of stock options, nonvested stock (also known as restricted stock), performance-share plan units and stock appreciation rights. See Note 13, “Share-Based Compensation,” of Item 8, “Financial Statements and Supplementary Data,” in Con-way’s 2009 Annual Report on Form 10-K for additional information concerning its share-based compensation awards.

In the first quarter of 2010, Con-way awarded 694,033 cash-settled stock-appreciation rights (“SARs”) to eligible employees. The SARs were granted at the stock price on the grant date and have a three-year graded-vesting term. The awards provide for accelerated vesting if the employee ceases employment due to retirement, death, disability, or a change in control (as defined in the SAR agreement). The SARs are liability-classified awards and, as a result, Con-way re-measures the fair value of the awards each reporting period until the awards are settled. During the vesting period, compensation cost is recognized based on the proportionate amount of service rendered to date. Con-way will recognize any changes in fair value after the vesting period as compensation cost in the current period. The ultimate expense recognized for the SARs is equal to the intrinsic value at settlement. The following expense was recognized for share-based compensation:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
(Dollars in thousands)
 
2010
   
2009
   
2010
   
2009
 
                         
Salaries, wages and employee benefits
  $ 4,224     $ 2,801     $ 11,119     $ 8,422  
Deferred income tax benefit
    (1,632 )     (1,077 )     (4,289 )     (3,237 )
     Net share-based compensation expense
  $ 2,592     $ 1,724     $ 6,830     $ 5,185  

As the result of executive severances in the third quarter of 2010, Con-way modified the terms of outstanding awards for four executives. The modifications resulted in the immediate vesting of certain awards and, as a result, Con-way recognized $1.1 million of expense.

 
- 16 -

 


9. Income Taxes

Con-way recognized a tax provision of $6.7 million in the third quarter of 2010 and $11.5 million in the same quarter of 2009. In the first nine months, Con-way recognized a tax provision of $14.3 million in 2010 and $14.4 million in 2009. The effective tax rates in 2010 and 2009 reflect the effect of non-deductible goodwill impairment charges in the third quarter of 2010 and the first quarter of 2009, respectively. Excluding the effect of the non-deductible goodwill impairment charges and various discrete tax adjustments, the third-quarter effective tax rate increased to 42.6% in 2010 from 37.0% in 2009, while the year-to-date effective rate increased to 42.6% from 37.4% due primarily to a prior-year benefit associated with a now-expired fuel-related tax credit.

Other accounts receivable in the consolidated balance sheets include income tax receivables of $33.2 million and $2.7 million at September 30, 2010 and December 31, 2009, respectively. In October 2010, Con-way received $28.1 million of federal income tax refunds, which reduced by an equal amount Con-way’s income tax receivable reported at September 30, 2010.

Uncertain Tax Positions

In the normal course of business, Con-way is subject to examination by taxing authorities throughout the world. As a result of these examinations, Con-way maintains ongoing discussions and negotiations relating to tax matters with the taxing authorities in these various jurisdictions. The years subject to examination include 2005 to 2009 for federal income taxes. The Internal Revenue Service ("IRS") has issued a Revenue Agent's Report for tax years 2005 through 2007 proposing certain adjustments, one of which relates primarily to the treatment of certain payments to retirees and former employees of Menlo Worldwide Forwarding, Inc. and its subsidiaries and Menlo Worldwide Expedite!, Inc. (collectively “MWF”) by Con-way after the sale of MWF to United Parcel Service, Inc. in 2004. Con-way disagrees with this proposed adjustment and has contested it through the IRS administrative appeals process. Con-way has conducted meetings with the IRS Appeals Division in 2010. If Con-way is unable to settle the matter through the IRS appeals process, Con-way will take the matter to litigation. Con-way anticipates the appeals process and litigation could take an extended period of time to resolve. Although the timing of income tax audit resolutions and negotiations with taxing authorities are highly uncertain, Con-way does not anticipate a significant change to the total amount of unrecognized income tax benefits within the next 12 months. Con-way believes that it has provided adequate reserves related to all matters contained in tax periods open to examination. However, should Con-way experience an unfavorable outcome in this matter, it could have a material impact on its financial position, results of operations and cash flows.

10. Commitments and Contingencies

Purchase Obligations

In connection with its outsourcing initiative, Con-way entered into agreements with third-party service providers in the first quarter of 2010. Payments to the third-party providers are estimated to be $257 million between 2010 and 2016, when the agreements are expected to expire.

MW

Menlo Worldwide, LLC (“MW”) has asserted claims against the sellers of Chic Holdings alleging inaccurate books and records, misstatement of revenue, and other similar matters related to the pre-sale financial performance of the Chic businesses and is pursuing all legal and equitable remedies available to MW. There currently exists a $9 million hold-back in escrow against which MW may apply any award for breach of warranty under the purchase agreement. The ultimate outcome of this matter is uncertain and any resulting award will not be recognized until received.

EWA

In February 2002, a lawsuit was filed against Emery Worldwide Airlines, Inc. (“EWA”) in the District Court for the Southern District of Ohio, alleging violations of the Worker Adjustment and Retraining Notification Act (the “WARN Act”) in connection with employee layoffs and ultimate terminations due to the August 2001 grounding of EWA’s airline operations and the shutdown of the airline operations in December 2001. The court subsequently certified the lawsuit as a class action on behalf of affected employees laid off between August 11 and August 15, 2001. The WARN Act generally requires employers to give 60-days notice, or 60-days pay and benefits in lieu of notice, of any shutdown of operations or mass layoff at a site of employment. The estimated range for potential loss on this matter is zero to approximately $11 million, including accrued interest. The lawsuit was tried in early January 2009, and on September 28, 2009, the court issued its decision in favor of EWA. Plaintiffs have appealed the judgment.

 
- 17 -

 

Con-way is a defendant in various other lawsuits incidental to its businesses. It is the opinion of management that the ultimate outcome of these actions will not have a material effect on Con-way’s financial condition, results of operations or cash flows.

11. Leases and Long-term Debt

In April 2010, Con-way acquired $35.1 million of tractors for Freight under a capital-lease agreement in which Con-way guarantees the residual value of the tractors at the end of the lease term. Including the stated amount of the residual-value guarantee, the minimum lease payments during the five-year term of the lease are expected to be $39.5 million. Con-way’s lease obligations as of December 31, 2009 are summarized in Note 9, “Leases,” of Item 8, “Financial Statements and Supplementary Data,” in Con-way’s 2009 Annual Report on Form 10-K.

In May 2010, Con-way repaid the $200 million outstanding under its 8 7/8% Notes Due 2010. See Note 8, “Debt and Other Financing Arrangements,” of Item 8, “Financial Statements and Supplementary Data,” in Con-way’s 2009 Annual Report on Form 10-K for additional information concerning Con-way’s debt instruments.




 
- 18 -

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Introduction

Management’s Discussion and Analysis of Financial Condition and Results of Operations (referred to as “Management’s Discussion and Analysis”) is intended to assist in 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
 
·
New Accounting Standards
 
·
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 business units operate in regional and transcontinental less-than-truckload and full-truckload freight transportation, contract logistics and supply-chain management, multimodal freight brokerage and trailer manufacturing. For financial reporting purposes, Con-way is divided into four reporting segments:
 
 
·
Freight. The Freight segment consists of the operating results of the Con-way Freight business unit, which provides regional, inter-regional and transcontinental less-than-truckload freight services throughout North America.

 
·
Logistics. The Logistics segment consists of the operating results of the Menlo Worldwide Logistics business unit, which develops contract-logistics solutions, including the management of complex distribution networks and supply-chain engineering and consulting, and also provides multimodal freight brokerage services.
 
 
·
Truckload. The Truckload segment consists of the operating results of the Con-way Truckload business unit, which provides asset-based full-truckload freight services throughout North America.
 
 
·
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 segments.
 
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’s primary business units are affected by the timing and degree of fluctuations in fuel prices and their ability to recover incremental fuel costs through fuel-surcharge programs and/or cost-recovery mechanisms, as more fully discussed in Item 3, “Quantitative and Qualitative Disclosures About Market Risk – Fuel.”

Con-way Freight primarily 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. Menlo Worldwide Logistics manages the logistics functions of its customers and primarily utilizes third-party transportation providers for the movement of customer shipments. Con-way Truckload primarily transports shipments using a fleet of company-operated long-haul tractors and trailers.

 

 

 
- 19 -

 

Results of Operations

The overview below provides a high-level summary of Con-way’s results 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.


(Dollars in thousands except per share amounts)
 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2010
   
2009