14_03 Form 10-Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended March 31, 2014

OR

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

For the transition period from ___ to___


Commission File Number: 1-05046

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.)
 
2211 Old Earhart Road, Suite 100, Ann Arbor, MI
48105
(Address of principal executive offices)
(Zip code)
 
Registrant’s telephone number, including area code: (734) 994-6600

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (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  ý    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  ý    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. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer ý  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 ý

The number of shares of common stock, $0.625 par value, outstanding as of March 31, 2014 was 57,053,664.




Con-way Inc.
FORM 10-Q
 
Table of Contents
 
 
 
 
 
 
 
Item
 
 
 
 
Page
PART 1. FINANCIAL INFORMATION
1.
Financial Statements
 
 
 
Consolidated Balance Sheets - March 31, 2014 and December 31, 2013
 
Statements of Consolidated Income - Three Months Ended March 31, 2014 and 2013
 
Statements of Consolidated Comprehensive Income - Three Months Ended March 31, 2014 and 2013
 
Statements of Consolidated Cash Flows - Three Months Ended March 31, 2014 and 2013
 
Notes to Consolidated Financial Statements
2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
3.
Quantitative and Qualitative Disclosures About Market Risk
4.
Controls and Procedures
 
 
 
 
 
 
PART II. OTHER INFORMATION
1.
Legal Proceedings
1A.
Risk Factors
6.
Exhibits
 
Signatures




PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Con-way Inc.
Consolidated Balance Sheets

(Dollars in thousands)
March 31,
 
December 31,
 
2014
 
2013
 
(Unaudited)
 
 
Assets
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
405,732

 
$
484,502

Trade accounts receivable, net
657,932

 
575,013

Other accounts receivable
51,226

 
51,063

Operating supplies, at lower of average cost or market
24,780

 
23,910

Prepaid expenses and other current assets
75,227

 
57,961

Deferred income taxes
15,411

 
15,332

Total Current Assets
1,230,308

 
1,207,781

 
 
 
 
Property, Plant and Equipment
 

 
 

Land
193,292

 
193,364

Buildings and leasehold improvements
857,089

 
856,038

Revenue equipment
1,855,435

 
1,857,737

Other equipment
347,290

 
353,205

 
3,253,106

 
3,260,344

Accumulated depreciation
(1,615,093
)
 
(1,603,511
)
Net Property, Plant and Equipment
1,638,013

 
1,656,833

 
 
 
 
Other Assets
 

 
 

Deferred charges and other assets
32,977

 
32,200

Capitalized software, net
21,544

 
21,488

Employee benefits
15,342

 
15,018

Intangible assets, net
8,051

 
8,640

Goodwill
337,898

 
337,971

 
415,812

 
415,317

Total Assets
$
3,284,133

 
$
3,279,931


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

 
1
 



Con-way Inc.
Consolidated Balance Sheets

(Dollars in thousands, except per share data)
March 31,
 
December 31,
 
2014
 
2013
Liabilities and Shareholders' Equity
(Unaudited)
 
 
Current Liabilities
 
 
 
Accounts payable
$
392,642

 
$
390,537

Accrued liabilities
230,456

 
229,078

Self-insurance accruals
117,429

 
105,063

Short-term borrowings
1,876

 
1,588

Current maturities of capital leases
19,357

 
19,685

Total Current Liabilities
761,760

 
745,951

 
 
 
 
Long-Term Liabilities
 

 
 

Long-term debt
719,191

 
719,155

Long-term obligations under capital leases
17,457

 
16,185

Self-insurance accruals
146,316

 
142,307

Employee benefits
211,383

 
240,171

Other liabilities and deferred credits
37,294

 
39,524

Deferred income taxes
241,616

 
237,949

Total Liabilities
2,135,017

 
2,141,242

 
 
 
 
Commitments and Contingencies (Note 8)


 


 
 
 
 
Shareholders' Equity
 

 
 

Common stock, $0.625 par value; authorized 100,000,000 shares; issued 64,781,259
and 64,592,756 shares, respectively
40,467

 
40,349

Additional paid-in capital, common stock
657,630

 
653,487

Retained earnings
1,050,662

 
1,043,472

Cost of repurchased common stock (7,727,595 and 7,669,889 shares, respectively)
(331,288
)
 
(329,088
)
Accumulated other comprehensive loss
(268,355
)
 
(269,531
)
Total Shareholders' Equity
1,149,116

 
1,138,689

Total Liabilities and Shareholders' Equity
$
3,284,133

 
$
3,279,931


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

 
2
 



Con-way Inc.
Statements of Consolidated Income
(Unaudited)

(Dollars in thousands, except per share data)
Three Months Ended
 
March 31,
 
2014
 
2013
Revenue
$
1,368,843

 
$
1,336,164


 
 
 
Costs and Expenses
 

 
 

Salaries, wages and employee benefits
537,252

 
517,841

Purchased transportation
332,985

 
348,523

Other operating expenses
162,236

 
157,697

Fuel and fuel-related taxes
136,702

 
137,412

Depreciation and amortization
59,611

 
55,928

Purchased labor
42,220

 
27,982

Rents and leases
33,959

 
29,850

Maintenance
30,816

 
29,332

 
1,335,781

 
1,304,565

Operating Income
33,062

 
31,599


 
 
 
Other Income (Expense)
 

 
 

Investment income
161

 
164

Interest expense
(13,306
)
 
(13,505
)
Miscellaneous, net
(695
)
 
(1,483
)
 
(13,840
)
 
(14,824
)
Income before Income Tax Provision
19,222

 
16,775

Income Tax Provision
6,329

 
2,770

Net Income
$
12,893

 
$
14,005


 
 
 
Weighted-Average Common Shares Outstanding
 

 
 

Basic
56,957,433

 
56,096,637

Diluted
57,540,068

 
56,731,972

Earnings per Common Share
 

 
 

Basic
$
0.23

 
$
0.25

Diluted
$
0.22

 
$
0.25

Cash Dividends Declared per Common Share
$
0.10

 
$
0.10



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

 
3
 



Con-way Inc.
Statements of Consolidated Comprehensive Income
(Unaudited)

(Dollars in thousands, except per share data)
Three Months Ended
 
March 31,
 
2014
 
2013
Net Income
$
12,893

 
$
14,005


 
 
 
Other Comprehensive Income (Loss):
 

 
 

Foreign currency translation adjustment
122

 
440

Employee benefit plans
 
 
 
Net actuarial loss included in net periodic benefit expense or income, net of deferred tax of $794 and $1,922, respectively
1,243

 
3,007

Amortization of prior service cost or credit included in net periodic benefit expense or income, net of deferred tax of $122 and $61, respectively
(189
)
 
95

 
1,054

 
3,102

Total Other Comprehensive Income
1,176


3,542

Comprehensive Income
$
14,069

 
$
17,547


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

 
4
 



Con-way Inc.
Statements of Consolidated Cash Flow
(Unaudited)

(Dollars in thousands)
Three Months Ended
 
March 31,
 
2014
 
2013
Cash and Cash Equivalents, Beginning of Period
$
484,502

 
$
429,784

Operating Activities
 

 
 

Net income
12,893

 
14,005

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 

 
 

Depreciation and amortization, net of accretion
59,409

 
55,673

Non-cash compensation and employee benefits
4,761

 
9,180

Increase in deferred income taxes
1,709

 
5,556

Provision for uncollectible accounts
439

 
401

Loss (gain) from sales of property and equipment, net
(1,211
)
 
249

Changes in assets and liabilities:
 

 
 

Receivables
(87,887
)
 
(49,353
)
Prepaid expenses
(18,051
)
 
(9,307
)
Accounts payable
34,843

 
26,290

Accrued variable compensation
(26,787
)
 
(44,256
)
Accrued liabilities, excluding accrued variable compensation and employee
benefits
35,301

 
39,831

Self-insurance accruals
13,546

 
(1,157
)
Accrued income taxes
1,608

 
(5,483
)
Employee benefits
(33,860
)
 
(15,675
)
Other
(1,256
)
 
1,393

Net Cash Provided by (Used in) Operating Activities
(4,543
)
 
27,347

Investing Activities
 

 
 

Capital expenditures
(70,478
)
 
(49,686
)
Software expenditures
(2,637
)
 
(960
)
Proceeds from sales of property and equipment
5,842

 
1,396

Proceeds from sales of marketable securities

 
3,200

Net Cash Used in Investing Activities
(67,273
)
 
(46,050
)
Financing Activities
 

 
 

Payment of capital leases
(2,866
)
 
(3,173
)
Net proceeds from (repayment of) short-term borrowings
286

 
(4,162
)
Proceeds from exercise of stock options
824

 
5,669

Excess tax benefit from share-based compensation
505

 
733

Payments of common dividends
(5,703
)
 
(5,617
)
Net Cash Used in Financing Activities
(6,954
)
 
(6,550
)
Decrease in Cash and Cash Equivalents
(78,770
)
 
(25,253
)
Cash and Cash Equivalents, End of Period
$
405,732

 
$
404,531

 
 
 
 
Supplemental Disclosure
 

 
 

Cash paid for income taxes, net
$
2,554

 
$
1,897

Cash paid for interest
$
15,735

 
$
15,929

Non-cash Investing and Financing Activities
 

 
 

Property, plant and equipment acquired through partial non-monetary exchanges
$
2,518

 
$
6,394

Property, plant and equipment acquired through capital lease
$
3,810

 
$


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

 
5
 



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, inter-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 3, “Segment Reporting,” for financial reporting purposes, Con-way is divided into three reporting segments: Freight, Logistics and Truckload.
Basis of Presentation
These unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. for interim financial information and Rule 10-01 of Regulation S-X, and should be read in conjunction with Con-way’s 2013 Annual Report on Form 10-K. Accordingly, significant accounting policies and other disclosures normally provided have been reduced or omitted. In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments, including normal recurring adjustments, necessary to present fairly Con-way’s financial position, results of operations and cash flows for the periods presented. Results for the interim periods presented are not necessarily indicative of annual results.
Earnings per Share (“EPS”)
Basic EPS is computed by dividing net income by the weighted-average common shares outstanding during the period. Diluted EPS is calculated as follows:
(Dollars in thousands, except per share data)
Three Months Ended
March 31,
 
2014
 
2013
Numerator:
 
 
 
Net income
$
12,893

 
$
14,005

Denominator:
 

 
 

Weighted-average common shares outstanding
56,957,433

 
56,096,637

Stock options and nonvested stock
582,635

 
635,335

 
57,540,068

 
56,731,972

 
 
 
 
Diluted Earnings per Share
$
0.22

 
$
0.25

Anti-dilutive stock options excluded from the computation of diluted EPS
899,241

 
1,141,137

Property, Plant and Equipment
Con-way periodically evaluates whether changes in estimated useful lives or salvage values are necessary to ensure that these estimates accurately reflect the economic use of the assets. In response to conditions in the used-trailer market, Con-way Truckload increased the estimated salvage values for certain of its trailers in the fourth quarter of 2013. The effect of the change in estimate decreased depreciation expense and increased operating income for the first quarter of 2014 by $1.8 million. As a result of this change, net income in the first quarter of 2014 increased by $1.1 million and basic and diluted EPS increased $0.02 per share.
New Accounting Standards
As of March 31, 2014, there are no material new accounting standards that have been issued but not yet adopted by Con-way.


 
6
 



2. Goodwill and Intangible Assets
Goodwill
The following table shows the changes in the gross carrying amounts of goodwill:
(Dollars in thousands)
Logistics
 
Truckload
 
Corporate and Eliminations
 
Total
Goodwill
$
55,888

 
$
464,598

 
$
727

 
$
521,213

Accumulated impairment losses
(48,236
)
 
(134,813
)
 

 
(183,049
)
Balances at December 31, 2012
7,652

 
329,785

 
727

 
338,164

 
 
 
 
 
 
 
 
Change in foreign currency exchange rates
(193
)
 

 

 
(193
)
 
 

 
 

 
 

 
 

Goodwill
55,695

 
464,598

 
727

 
521,020

Accumulated impairment losses
(48,236
)
 
(134,813
)
 

 
(183,049
)
Balances at December 31, 2013
7,459

 
329,785

 
727

 
337,971

 
 
 
 
 
 
 
 
Change in foreign currency exchange rates
(73
)
 

 

 
(73
)
 
 

 
 

 
 

 
 

Goodwill
55,622

 
464,598

 
727

 
520,947

Accumulated impairment losses
(48,236
)
 
(134,813
)
 

 
(183,049
)
Balances at March 31, 2014
$
7,386

 
$
329,785

 
$
727

 
$
337,898

Intangible Assets
Intangible assets are amortized on a straight-line basis over their estimated useful life. Amortization expense was $0.6 million for the first quarter of 2014 and 2013. Intangible assets consisted of the following:
 
March 31, 2014
 
December 31, 2013
(Dollars in thousands)
Gross Carrying Amount
 
Accumulated Amortization
 
Gross Carrying Amount
 
Accumulated Amortization
Customer relationships
$
23,088

 
$
15,037

 
$
23,088

 
$
14,448

Con-way's customer-relationship intangible asset relates to the Con-way Truckload business unit. Estimated future amortization expense is presented in the following table:
(Dollars in thousands)
 
Years ending December 31:
 
Remaining nine months of 2014
$
1,767

2015
2,356

2016
2,356

2017
1,572

3. 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 three 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 ("Menlo") 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.

 
7
 



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. Transactions between segments are generally based on negotiated prices.
(Dollars in thousands)
Three Months Ended
March 31,
 
2014
 
2013
Revenue from External Customers
 
 
 
Freight
$
836,329

 
$
817,136

Logistics
389,372

 
378,728

Truckload
140,597

 
138,349

Corporate and Eliminations
2,545

 
1,951

 
$
1,368,843

 
$
1,336,164

Revenue from Internal Customers
 

 
 

Freight
$
11,698

 
$
10,400

Logistics
16,993

 
13,629

Truckload
15,413

 
18,654

Corporate and Eliminations
14,390

 
14,652

 
$
58,494

 
$
57,335

Operating Income (Loss)
 

 
 

Freight
$
18,565

 
$
16,024

Logistics
6,174

 
6,532

Truckload
6,380

 
9,955

Corporate and Eliminations
1,943

 
(912
)
 
$
33,062

 
$
31,599

4. 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
Financial Assets Measured at Fair Value on a Recurring Basis
The following table summarizes the valuation of financial instruments within the fair-value hierarchy:
 
March 31, 2014
(Dollars in thousands)
Total
 
Level 1
 
Level 2
 
Level 3
Cash equivalents
$
343,499

 
$
58,092

 
$
285,407

 
$

 
December 31, 2013
(Dollars in thousands)
Total
 
Level 1
 
Level 2
 
Level 3
Cash equivalents
$
441,199

 
$
99,092

 
$
342,107

 
$

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.
Money-market funds reflect their published net asset value and are classified as Level 1 instruments. Commercial paper and certificates of deposit are generally valued using published interest rates for instruments with similar terms and maturities, and accordingly, are classified as Level 2 instruments. At March 31, 2014, the weighted-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.

 
8
 



5. Employee Benefit Plans
In the periods presented, certain 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 and a postretirement medical plan. See Note 9, “Employee Benefit Plans,” of Item 8, “Financial Statements and Supplementary Data,” in Con-way’s 2013 Annual Report on Form 10-K for additional information concerning its employee benefit plans.
Defined Benefit Pension Plans
As a result of plan amendments in previous years, no additional benefits accrue under these plans and already-accrued benefits will not be adjusted for future increases in compensation. The following table summarizes the components of net periodic benefit expense (income) for Con-way’s domestic defined benefit pension plans:
 
Qualified Pension Plans
 
Non-Qualified Pension Plans
 
Three Months Ended
March 31,
 
Three Months Ended
March 31,
(Dollars in thousands)
2014
 
2013
 
2014
 
2013
Interest cost on benefit obligation
$
18,871

 
$
17,589

 
$
862

 
$
804

Expected return on plan assets
(23,327
)
 
(22,657
)
 

 

Amortization of actuarial loss
2,475

 
4,650

 
219

 
279

Amortization of prior-service costs
404

 
418

 
1

 
1

Net periodic benefit expense (income)
$
(1,577
)
 
$

 
$
1,082

 
$
1,084

Con-way expects to make contributions of approximately $60 million to its qualified pension plans in 2014, including $29.5 million contributed through March 2014.
Defined Contribution Retirement Plans
Con-way’s cost for defined contribution retirement plans was $13.6 million in the first quarter of 2014, compared to $13.3 million in the same period of 2013.
Postretirement Medical Plan
The following table summarizes the components of net periodic benefit expense (income) for the postretirement medical plan:
 
Three Months Ended
March 31,
(Dollars in thousands)
2014
 
2013
Service cost
$
271

 
$
429

Interest cost on benefit obligation
672

 
891

Amortization of actuarial gain
(657
)
 

Amortization of prior-service credit
(716
)
 
(263
)
Net periodic benefit expense (income)
$
(430
)
 
$
1,057

6. 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 nonvested stock (also known as restricted stock), performance-share plan units, stock options and stock appreciation rights ("SARs"). See Note 10, “Share-Based Compensation,” of Item 8, “Financial Statements and Supplementary Data,” in Con-way’s 2013 Annual Report on Form 10-K for additional information concerning its share-based compensation awards. The following expense was recognized for share-based compensation:
 
Three Months Ended
March 31,
(Dollars in thousands)
2014
 
2013
Salaries, wages and employee benefits
$
3,330


$
6,031

Deferred income tax benefit
(1,299
)

(2,347
)
Net share-based compensation expense
$
2,031


$
3,684

At March 31, 2014 and December 31, 2013, Con-way had recognized accrued liabilities for cash-settled SARs of $4.6 million and $4.3 million, respectively, using a weighted-average fair value per SAR of $16.18 and $15.13, respectively.

 
9
 



7. Income Taxes
Con-way's first-quarter effective tax rates in 2014 and 2013 were 32.9% and 16.5%, respectively. The customary relationship between income tax expense and pretax income was affected by discrete adjustments. In the first quarter of 2014 and 2013, the effective tax rates included discrete tax benefits of $1.3 million and $3.4 million, respectively. In the first quarter of 2014, the discrete items primarily related to the expiration of the statute of limitations on uncertain tax positions. In the first quarter of 2013, the discrete items primarily related to the alternative-fuel tax credits for 2012 that were recognized in the first quarter of 2013 because of a retroactive change to tax laws. Excluding discrete items, the effective tax rate in 2013 benefited from the 2013 alternative-fuel credit; this credit is not expected to be available for 2014.
Other accounts receivable in the consolidated balance sheets include income tax receivables of $5.8 million and $10.6 million at March 31, 2014 and December 31, 2013, respectively.
8. Commitments and Contingencies
Service Contracts
Con-way has agreements with third-party service providers to perform certain information-technology, administrative and accounting services. The payments under the terms of the agreements are subject to change depending on the quantities and types of services consumed. The contracts also contain provisions that allow Con-way to terminate the contract at any time; however, Con-way would be required to pay fees if termination is for causes other than the failure of the service providers to perform.
California Wage and Hour
Con-way is a defendant in several class-action lawsuits alleging violations of the state of California's wage and hour laws. Plaintiffs allege that Con-way failed to pay certain drivers for all compensable time and that certain other drivers were not provided with required meal breaks and rest breaks. Plaintiffs seek to recover unspecified monetary damages, penalties, interest and attorneys' fees. The two primary cases are Jorge R. Quezada v. Con-way Inc., dba Con-way Freight, (the "Quezada" case), and Jose Alberto Fonseca Pina, et al. v. Con-way Freight Inc., et al. (the "Pina" case). The Quezada case was initially filed in February 2009 in San Mateo County Superior Court, and was removed to the U.S. District Court of California, Northern District. The Pina case was initially filed in November 2009 in Monterey County Superior Court and was removed to the U.S. District Court of California, Northern District. By agreement of the parties, in March 2010, the Pina case and the Quezada case were deemed related and transferred to the same judge. On April 12, 2012, the Court granted plaintiff's request for class certification in the Pina case as to a limited number of issues. On October 15, 2012, the Court granted plaintiffs' request for class certification in the Quezada case and granted summary judgment as to certain issues. The class certification rulings do not address whether Con-way will ultimately be held liable.
Con-way continues to challenge the certification of the class in both cases, and further contends that plaintiffs' claims are preempted by federal law and not substantiated by the facts. Con-way has denied any liability with respect to these claims and intends to vigorously defend itself in these cases. There are multiple factors that prevent Con-way from being able to estimate the amount of potential loss, if any, in excess of its accrued liability that may result from this matter, including: (1) Con-way is vigorously defending itself and believes that it has a number of meritorious legal defenses; and (2) at this early stage in the cases, there are unresolved questions of fact that could be important to the resolution of these matters. Accordingly, Con-way cannot estimate the amount or range of potential loss, if any, in excess of its accrued liability.
Unclaimed-Property Audits
Con-way is currently being audited by eight states, primarily the State of Delaware, for compliance with unclaimed-property laws. The property subject to review in this audit process generally includes unclaimed securities and unclaimed payments and refunds to employees, vendors and customers. State and federal escheat laws generally require companies to report and remit unclaimed property to the states. Con-way believes it has procedures in place to comply with these laws. The audits of Con-way securities were completed in the third quarter of 2013 with no material findings and the remaining audits will continue into 2014. Given the current stage of the remaining audits, Con-way cannot estimate the amount or range of potential loss.
Other
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.

 
10
 



9. Shareholders' Equity
Accumulated Other Comprehensive Loss
All changes in equity, except those resulting from investments by owners and distributions to owners, are reported in the statements of consolidated comprehensive income. The following is a summary of the components of accumulated other comprehensive loss and the changes in accumulated other comprehensive loss:
 
 
Foreign Currency Translation Adjustment
 
Employee Benefit Plans
 
Total
Balances at December 31, 2013
$
(424
)
 
$
(269,107
)
 
$
(269,531
)
 
Other comprehensive income before reclassifications
122

 

 
122

 
Amounts reclassified from accumulated other comprehensive loss

 
1,054

 
1,054

Balances at March 31, 2014
$
(302
)
 
$
(268,053
)
 
$
(268,355
)
 
 
 
 
 
 
 
 
 
Foreign Currency Translation Adjustment
 
Employee Benefit Plans
 
Total
Balances at December 31, 2012
$
(1,295
)
 
$
(455,166
)
 
$
(456,461
)
 
Other comprehensive income before reclassifications
440

 

 
440

 
Amounts reclassified from accumulated other comprehensive loss

 
3,102

 
3,102

Balances at March 31, 2013
$
(855
)
 
$
(452,064
)
 
$
(452,919
)
See Note 5, “Employee Benefit Plans” for additional information concerning Con-way's employee benefit plans, including amounts reported for net periodic benefit expense.

 
11
 



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
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, inter-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 three reporting segments: Freight, Logistics and Truckload.
Con-way Freight primarily transports shipments utilizing a network of freight service centers combined with a fleet of company-operated linehaul and pickup-and-delivery tractors and trailers. Menlo Worldwide Logistics ("Menlo") 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 tractors and trailers.
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. Due to Con-way Freight's relatively high fixed-cost structure, sudden or severe changes in shipment volumes can have a negative impact on management's ability to manage costs.
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.”
Results of Operations
The overview below provides a high-level summary of Con-way’s results of 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.
(Dollars in thousands, except per share data)
Three Months Ended
March 31,
 
2014
 
2013
Revenue
$
1,368,843

 
$
1,336,164

 
 
 
 
Operating expenses
1,335,781

 
1,304,565

Operating income
33,062

 
31,599

Other income (expense)
(13,840
)
 
(14,824
)
Income before income tax provision
19,222

 
16,775

Income tax provision
6,329

 
2,770

Net income
$
12,893

 
$
14,005


 
 
 
Diluted earnings per share
$
0.22

 
$
0.25



 
12
 



Overview
Con-way's consolidated revenue for the first quarter of 2014 increased 2.4% from the same period of 2013, primarily the result of increased revenue from Freight and Logistics. Revenue at Freight increased in the first quarter primarily from higher revenue per hundredweight. Revenue at Logistics increased in the first quarter primarily from new warehouse-management business.
Con-way's consolidated operating income in the first quarter increased 4.6% to $33.1 million in 2014 from $31.6 million in the same period of 2013. Results in the first quarter of 2014 were adversely affected by the prolonged period of severe winter weather, which reduced 2014 first-quarter operating income by an estimated $20 million.
Con-way's first quarter effective tax rates in 2014 and 2013 were 32.9% and 16.5%, respectively. Both years included discrete tax adjustments that impacted the effective tax rate, as more fully discussed in Note 7, “Income Taxes,” of Item 1, “Financial Statements.”
Reporting Segment Review
For the discussion and analysis of segment operating results, management utilizes revenue before inter-segment eliminations. Management believes that revenue before inter-segment eliminations, combined with the detailed operating expense information, provides the most meaningful analysis of segment results. Both revenue from external customers and revenue from internal customers are reported in Note 3, “Segment Reporting,” of Item 1, “Financial Statements.”

 
13
 



Freight
The following table compares operating results, operating margins, and the percentage change in selected operating statistics of the Freight reporting segment:
(Dollars in thousands)
Three Months Ended
March 31,
 
2014
 
2013
Revenue before inter-segment eliminations
$
848,027

 
$
827,536

 
 
 
 
Salaries, wages and employee benefits
392,371

 
377,745

Purchased transportation
138,574

 
145,914

Other operating expenses
121,615

 
124,316

Fuel and fuel-related taxes
95,080

 
93,844

Depreciation and amortization
36,670

 
32,384

Purchased labor
11,450

 
3,972

Rents and leases
11,312

 
11,762

Maintenance
22,390

 
21,575

Total operating expenses
829,462

 
811,512

Operating income
$
18,565

 
$
16,024

 
 
 
 
Operating margin
2.2
%
 
1.9
%
 
2014 vs. 2013
 
 
Selected Operating Statistics
 
 
 
Weight per day
+0.3
 %
 
 
Revenue per hundredweight ("yield")
+1.0
 %
 
 
Shipments per day
-3.1
 %
 
 
Weight per shipment
+3.5
 %
 
 
Freight's revenue in the first quarter of 2014 increased 2.5% from the same period of 2013 due to a 1.0% increase in yield, a half-day increase in the number of working days, and a 0.3% increase in weight per day. The increased yield is a result of increased base rates. The increase in weight per day reflects a 3.5% increase in weight per shipment offset by a 3.1% decrease in shipments per day.
Yield excluding fuel surcharges increased by 1.0% in the first quarter of 2014 from the same period of 2013. Freight's fuel-surcharge revenue decreased to 17.7% of revenue from 17.8% in 2013. 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 below in Item 3, “Quantitative and Qualitative Disclosures About Market Risk – Fuel.”
Freight's operating income increased 15.9% in the first quarter of 2014 from the same period of 2013 as the result of higher revenue and an improved operating margin. Operating income benefited from Freight's lane-based pricing and linehaul optimization initiatives, which were implemented over the course of 2013, and recent cost-containment initiatives. The severe winter weather experienced during the first quarter of 2014 negatively affected operating income by an estimated $18 million due to increased costs and lower tonnage growth. The increased costs related primarily to lower employee and equipment productivity, increased snow removal, propane price hikes and excess diesel fuel consumption.
Expenses for salaries, wages and employee benefits increased 3.9% in the first quarter of 2014 from the same period of 2013 due to increased benefits and salaries and wages expense (excluding variable compensation). Employee benefit expense increased 10.3% in the first quarter of 2014 from the same period of 2013, primarily due to increased workers' compensation expense and employee medical benefits. The increase in workers' compensation expense was due to increases in the expense per claim and the number of claims. Employee medical benefits expense increased due to an increase in the expense per claim, partially offset by a decrease in the number of claims. Salaries and wages (excluding variable compensation) increased 1.5% in the first quarter of 2014 from the same period of 2013, primarily due to increased mileage wages for drivers resulting from a shift in the proportion of miles driven by company drivers as opposed to third-party carriers.
Purchased transportation expense decreased 5.0% in the first quarter of 2014 from the same period of 2013 due to decreased third-party miles. The decrease in third-party miles is the result of Con-way's ongoing line-haul optimization initiative.

 
14
 



Other operating expenses decreased 2.2% in the first quarter of 2014 from the same period of 2013 primarily due to decreased costs for vehicular claims. This decrease was partially offset by increased costs for cargo claims. Decreased vehicular claims expense was due to a decrease in the cost per claim, partially offset by an increase in the number of claims. Increased costs for cargo claims resulted from an increase in the number of claims and the cost per claim.
Expense for fuel and fuel-related taxes increased 1.3% in the first quarter of 2014 from the same period of 2013 primarily due to increased propane costs, partially offset by lower diesel fuel expense. Propane, mainly used for forklifts, experienced a nationwide shortage as a result of severe winter weather which increased the cost per gallon. Diesel fuel expense decreased as a result of a lower cost per gallon, partially offset by higher diesel fuel consumption due to increased miles driven by company drivers.
Depreciation and amortization expense increased 13.2% in the first quarter of 2014 from the same period of 2013, primarily due to the replacement of older tractors with newer models. Newer models are more costly due in part to the inclusion of more expensive emissions-control and safety technology.
Purchased labor expense increased $7.5 million in the first quarter of 2014 from the same period of 2013 due to more of this source of labor being used for freight-handling functions and a decrease in productivity due in part to severe winter weather.
Logistics
The table below compares operating results and operating margins of the Logistics reporting segment. The table summarizes Logistics’ revenue as well as net revenue (revenue less purchased transportation expense). Transportation-management revenue is attributable to contracts for which Menlo manages the transportation of freight but subcontracts to carriers the actual transportation and delivery of products, which Menlo refers to as purchased transportation. Menlo's management places emphasis on net revenue as a meaningful measure of the relative importance of its principal services since revenue earned on most transportation-management services includes the carriers’ charges to Menlo for transporting the shipments.
(Dollars in thousands)
Three Months Ended
March 31,
 
2014
 
2013
Revenue before inter-segment eliminations
$
406,365

 
$
392,357

Purchased transportation
(223,875
)
 
(235,200
)
Net revenue
182,490

 
157,157

 
 
 
 
Salaries, wages and employee benefits
70,615

 
65,330

Other operating expenses
50,709

 
43,540

Fuel and fuel-related taxes
293

 
151

Depreciation and amortization
2,838

 
2,203

Purchased labor
28,830

 
21,668

Rents and leases
22,160

 
17,163

Maintenance
871

 
570

Total operating expenses excluding purchased transportation
176,316

 
150,625

Operating income
$
6,174

 
$
6,532

 
 
 
 
Operating margin on revenue
1.5
%
 
1.7
%
Operating margin on net revenue
3.4
%
 
4.2
%
In the first quarter of 2014, Logistics' revenue increased 3.6% from the same quarter of 2013 due to a 22.3% increase in revenue from warehouse-management services, partially offset by an 8.4% decrease in revenue from transportation-management services. Increased revenue from warehouse management is primarily related to new contracts which began in the second and third quarters of 2013. Additionally, volumes at existing warehouse customers increased. Decreased revenue from transportation management includes the effect of the termination of certain customer contracts and lower volumes from existing contracts.
Logistics' net revenue increased 16.1% in the first quarter of 2014 from the same quarter of 2013. Growth in net revenue resulted from increased revenue from warehouse-management services. Purchased transportation expense decreased by 4.8% as a result of decreased revenue from transportation management.

 
15
 



Logistics' operating income decreased 5.5% in the first quarter of 2014 from the same quarter of 2013. Lower operating income was largely due to increased expenses for purchased labor and rents and leases. Lower operating income also reflects a decline in transportation-management margins on net revenue. Additionally, Logistics’ operating margin on net revenue was adversely affected by an increase in the proportion of net revenue earned from warehouse-management services, which generally have a lower margin on net revenue than transportation-management services.
Salaries, wages and employee benefits increased 8.1% in the first quarter of 2014 from the same quarter of 2013 due largely to a 9.3% increase in salaries and wages (excluding variable compensation) as a result of increased headcount to support new business from warehouse-management services.
Other operating expenses increased 16.5% in the first quarter of 2014 from the same quarter of 2013 primarily due to higher expenses for facilities and other warehouse-related costs in support of increased volumes relating to warehouse-management contracts.
Purchased labor expense increased 33.1% in the first quarter of 2014 from the same quarter of 2013 primarily due to increased volumes relating to warehouse-management contracts.
Expenses for rents and leases increased 29.1% in the first quarter of 2014 from the same quarter of 2013 primarily due to several large warehouse-management contracts which began in the second and third quarters of 2013.
Truckload
The table below compares operating results, operating margins and the percentage change in selected operating statistics of the Truckload reporting segment. The table summarizes the segment’s revenue before inter-segment eliminations, including freight revenue, fuel-surcharge revenue and other non-freight revenue. The table also includes operating income and operating margin excluding fuel-surcharge revenue. Truckload’s management believes these measures are relevant to evaluate its on-going operations.
(Dollars in thousands)
Three Months Ended
March 31,
 
2014
 
2013
Freight revenue
$
115,413

 
$
116,280

Fuel-surcharge revenue
34,922

 
36,082

Other revenue
5,675

 
4,641

Revenue before inter-segment eliminations
156,010

 
157,003

 
 
 
 
Salaries, wages and employee benefits
50,279

 
49,955

Purchased transportation
14,371

 
9,884

Other operating expenses
17,094

 
15,922

Fuel and fuel-related taxes
41,300

 
43,385

Depreciation and amortization
17,150

 
18,385

Purchased labor
281

 
268

Rents and leases
409

 
356

Maintenance
8,746

 
8,893

Total operating expenses
149,630

 
147,048

Operating income
$
6,380

 
$
9,955

 
 
 
 
Operating margin on revenue
4.1
%
 
6.3
%
Operating margin on revenue excluding fuel-surcharge revenue
5.3
%
 
8.2
%
 
2014 vs. 2013
 
 
Selected Operating Statistics
 
 
 
Freight revenue per loaded mile
+0.4
 %
 
 
Loaded miles
-1.1
 %
 
 
Truckload's revenue decreased 0.6% in the first quarter of 2014 from the same quarter of 2013 primarily due to decreases of 3.2% and 0.7% in fuel-surcharge and freight revenue, respectively, offset by an increase in other revenue. The decrease in freight revenue was due to a 1.1% decrease in loaded miles, partially offset by a 0.4% increase in revenue per loaded mile. The

 
16
 



decrease in loaded miles resulted from lower tractor productivity (as measured by miles per tractor), partially offset by an increase in the size of the tractor fleet, which grew as a result of an increase in the number of owner-operator units.
Truckload's operating income decreased 35.9% or $3.6 million in the first quarter of 2014 from the same quarter of 2013, reflecting the decline in revenue and increased operating expenses. The severe winter weather experienced during the first quarter of 2014 negatively affected operating income by an estimated $2 million.
Salaries, wages and employee benefits increased 0.6% in the first quarter of 2014 from the same quarter of 2013 primarily due to a 22.7% increase in employee benefits expenses, partially offset by a 3.2% decrease in salaries and wages expenses (excluding variable compensation). Increased employee benefits expenses reflect higher costs for employee medical benefits and workers' compensation claims, which resulted from increases to the expense per claim and the number of claims. Salaries and wages expenses (excluding variable compensation) decreased as miles driven by company-drivers decreased.
Purchased transportation expense increased 45.4% in the first quarter of 2014 from the same quarter of 2013 due to increased miles driven by the owner-operator fleet.
Other operating expenses increased 7.4% in the first quarter of 2014 from the same quarter of 2013 primarily due to increases in the number and expense per claim of vehicular claims. Higher expense per claim resulted primarily from the adverse development of a prior-year claim.
Expenses for fuel and fuel-related taxes decreased 4.8% in the first quarter of 2014 from the same quarter of 2013 primarily due to lower fuel consumption from fewer miles driven by company-drivers, and a lower cost per gallon of diesel fuel.
Depreciation and amortization expense decreased 6.7% in the first quarter of 2014 from the same quarter of 2013 reflecting the change in estimated salvage value of certain trailers. This change in estimate is more fully discussed in Note 1, “Principal Accounting Policies,” of Item 1, “Financial Statements.”
Corporate and Eliminations
Corporate and Eliminations consists of the operating results of Con-way's trailer manufacturer, certain corporate activities for which the related income or expense was not allocated to other reporting segments, and eliminations. Other corporate costs include costs associated with Con-way's defined benefit pension plans. The table below summarizes components of Corporate and Eliminations other than inter-segment revenue eliminations:
(Dollars in thousands)
Three Months Ended
March 31,
 
2014
 
2013
Revenue before inter-segment eliminations
 
 
 
Trailer manufacturing
$
16,935

 
$
16,603




 


Operating income (loss)


 


Trailer manufacturing
(27
)
 
30

Reinsurance activities
1,887

 
482

Corporate properties
(345
)
 
(407
)
Other corporate costs
428

 
(1,017
)
 
$
1,943

 
$
(912
)


 
17
 



Liquidity and Capital Resources
Cash and cash equivalents decreased to $405.7 million at March 31, 2014 from $484.5 million at December 31, 2013, as Con-way used $4.5 million in operating activities, $67.3 million in investing activities and $7.0 million in financing activities. Cash used in operating activities reflects changes in assets and liabilities, partially offset by adjustments for non-cash items and net income. Cash used in investing activities primarily reflects capital expenditures. Cash used in financing activities primarily reflects the payments of common dividends and capital leases.
 
(Dollars in thousands)
Three Months Ended
March 31,
 
2014
 
2013
Operating Activities
 
 
 
Net income
$
12,893

 
$
14,005

Non-cash adjustments (1)
65,107

 
71,059

Changes in assets and liabilities
(82,543
)
 
(57,717
)
Net Cash Provided by (Used in) Operating Activities
(4,543
)
 
27,347

Net Cash Used in Investing Activities
(67,273
)
 
(46,050
)
Net Cash Used in Financing Activities
(6,954
)
 
(6,550
)
Decrease in Cash and Cash Equivalents
$
(78,770
)
 
$
(25,253
)
(1) “Non-cash adjustments” refer to depreciation, amortization, deferred income taxes, provision for uncollectible accounts, and other non-cash income and expenses.
Operating Activities
The most significant items affecting the comparison of Con-way’s operating cash flows for the periods presented are summarized below:
In the first three months of 2014, net income and non-cash adjustments collectively provided $7.1 million less operating cash flow compared to the same period of 2013. Changes in assets and liabilities used $24.8 million more cash in the first three months of 2014 compared to the same period of 2013. Significant comparative changes include receivables, employee benefits, accrued variable compensation and self-insurance accruals.
Changes in receivables increased cash used in operating activities by $38.5 million during the first three months of 2014 compared to the prior-year period. Changes in receivables reflect variations in revenue and average collection periods, primarily at Logistics.
Employee benefits used $33.9 million in the first three months of 2014, compared to $15.7 million used in the same prior-year period primarily due to an increase in pension funding contributions. In the first three months of 2014, Con-way contributed $29.5 million to its qualified pension plans, compared to $8.3 million in the first three months of 2013. Con-way expects to make contributions of approximately $60 million to its qualified pension plans in 2014, compared to actual contributions made in 2013 of $55.3 million. Con-way’s expected 2014 contribution is subject to change based on variations in interest rates, asset return, Pension Protection Act requirements and other factors.
Self-insurance accruals provided $13.5 million in the first three months of 2014, compared to $1.2 million used in the same prior-year period primarily due to increases in the liabilities for employee medical benefits and cargo claims.
Accrued variable compensation used $26.8 million in the first three months of 2014, compared to $44.3 million used in the same prior-year period. Variations in performance relative to variable-compensation plan targets resulted in lower variable-compensation payments in the first three months of 2014 when compared to the prior-year period.
Investing Activities
The most significant items affecting the comparison of Con-way’s investing cash flows for the periods presented are summarized below:
Capital expenditures during the first quarter of 2014 used $70.5 million in cash compared to $49.7 million of cash used in the same period of 2013. The increase in capital expenditures includes the first-quarter payment for tractors acquired by Con-way Freight in the fourth quarter of 2013.
Financing Activities
There were no significant financing transactions that affected the comparison of Con-way's financing cash flows for the periods presented.

 
18
 



Contractual Cash Obligations
Con-way’s contractual cash obligations as of December 31, 2013 are summarized in Item 7, “Management’s Discussion and Analysis – Liquidity and Capital Resources – Contractual Cash Obligations,” of Con-way’s 2013 Annual Report on Form 10-K. In the first three months of 2014, there have been no material changes in Con-way's contractual obligations outside the ordinary course of business.
Capital Resources and Liquidity Outlook
Con-way’s capital requirements relate primarily to the acquisition of revenue equipment to support growth and/or replacement of older equipment with newer equipment. In funding these capital expenditures and meeting working-capital requirements, Con-way may utilize various sources of liquidity and capital, including cash and cash equivalents, cash flow from operations, credit facilities, and access to capital markets. Con-way may also manage its liquidity requirements and cash-flow generation by varying the timing and amount of capital expenditures.
Con-way has a $325 million unsecured revolving credit facility that matures on June 28, 2018. The revolving facility is available for cash borrowings and issuance of letters of credit. At March 31, 2014, no cash borrowings were outstanding under the credit facility; however, $109.3 million of letters of credit were outstanding, leaving $215.7 million of available capacity for additional letters of credit or cash borrowings, subject to compliance with financial covenants and other customary conditions of borrowing. At March 31, 2014, Con-way was in compliance with the revolving credit facility’s financial covenants and expects to remain in compliance.
Con-way had other uncommitted unsecured credit facilities totaling $59.5 million at March 31, 2014, which are available to support short-term borrowings, letters of credit, bank guarantees and overdraft facilities. At March 31, 2014, Con-way had $36.0 million of available capacity under these facilities.
See “Forward-Looking Statements” below and Item 1A, “Risk Factors,” and Note 5, “Debt and Other Financing Arrangements,” of Item 8, “Financial Statements and Supplementary Data,” in Con-way’s 2013 Annual Report on Form 10-K for additional information concerning Con-way's $325 million credit facility.
In 2014, Con-way anticipates capital and software expenditures of approximately $285 million, net of proceeds from asset dispositions, which compares to $275.1 million in 2013. During the first three months of 2014, Con-way had $67.3 million of capital and software expenditures, net of proceeds from asset dispositions. Con-way’s actual 2014 capital expenditures may differ from the estimated amount depending on factors such as availability and timing of delivery of equipment.
At March 31, 2014, Con-way’s senior unsecured debt was rated as investment grade by Standard and Poor’s (BBB-), Fitch Ratings (BBB-), and Moody’s (Baa3). Standard and Poor's, Fitch Ratings, and Moody's assigned an outlook of “stable.”

 
19
 



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
Goodwill
Income Taxes
Property, Plant and Equipment and Other Long-Lived Assets
Revenue Recognition
Self-Insurance Accruals
There have been no significant changes to the critical accounting policies and estimates disclosed in Con-way’s 2013 Annual Report on Form 10-K.

 
20
 



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, revenue, 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 legal and other claims and proceedings that may be brought by or against Con-way;
any statements regarding future economic conditions or performance;
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,” of Con-way's 2013 Annual Report on Form 10-K. Any forward-looking statements speak only as of the date the statement is made and are subject to change. Con-way does not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as otherwise required by law.


 
21
 



ITEM 3. 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. For the periods presented, Con-way held no material derivative financial instruments.
Interest Rates
Con-way invests in cash-equivalent investments and marketable securities that earn investment income. For the periods presented, the amount of investment income earned on Con-way’s investments was not material.
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.
As discussed more fully in “Critical Accounting Policies and Estimates,” of Con-way's 2013 Annual Report on Form 10-K, the amounts 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, including the discount rate used to measure the present value of the pension obligations.
Fuel
Con-way is subject to risks associated with the availability and price of fuel, which are subject to political, economic and market factors that are outside of Con-way’s control.
Con-way would be adversely affected by an inability to obtain fuel in the future. Although, historically, Con-way has been able to obtain fuel from various sources and in the desired quantities, there can be no assurance that this will continue to be the case in the future.
Con-way may also be adversely affected by the timing and degree of fluctuations in fuel prices. Currently, Con-way’s business units have fuel-surcharge revenue programs or cost-recovery mechanisms in place with a majority of customers. Con-way Freight and Con-way Truckload maintain fuel-surcharge programs designed to offset or mitigate the adverse effect of rising fuel prices. Menlo Worldwide Logistics has cost-recovery mechanisms incorporated into most of its customer contracts under which it recognizes fuel-surcharge revenue designed to eliminate the adverse effect of rising fuel prices on purchased transportation.
Con-way’s competitors in the less-than-truckload and truckload markets also impose fuel surcharges. Although fuel surcharges are generally based on a published national index, there is no industry-standard fuel-surcharge formula. As a result, fuel-surcharge revenue constitutes only part of the overall rate structure. Revenue excluding fuel surcharges (sometimes referred to as base freight rates) represents the collective pricing elements that exclude fuel surcharges. Ultimately, the total amount that Con-way Freight and Con-way Truckload can charge for their services is determined by competitive pricing pressures and market factors.
Historically, Con-way Freight’s fuel-surcharge program has enabled it to more than recover increases in fuel costs and fuel-related increases in purchased transportation. As a result, Con-way Freight may be adversely affected if fuel prices fall and the resulting decrease in fuel-surcharge revenue is not offset by an equivalent increase in base freight-rate revenue. Although lower fuel surcharges may improve Con-way Freight’s ability to increase the freight rates that it would otherwise charge, there can be no assurance in this regard. Con-way Freight may also be adversely affected if fuel prices increase. Customers faced with fuel-related increases in transportation costs often seek to negotiate lower rates through reductions in the base freight rates and/or limitations on the fuel surcharges charged by Con-way Freight, which adversely affect Con-way Freight’s ability to offset higher fuel costs with higher revenue.
Con-way Truckload’s fuel-surcharge program mitigates the effect of rising fuel prices but does not always result in Con-way Truckload fully recovering increases in its cost of fuel. The extent of recovery may vary depending on the amount of customer-negotiated adjustments and the degree to which Con-way Truckload is not compensated due to empty and out-of-route miles or from engine idling during cold or warm weather.
Con-way would be adversely affected if, due to competitive and market factors, its business units are unable to continue their current fuel-surcharge programs and/or cost-recovery mechanisms. In addition, there can be no assurance that these programs, as currently maintained or as modified in the future, will be sufficiently effective to offset increases in the price of fuel.

 
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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. However, the market risk related to foreign currency exchange rates is not material to Con-way’s financial condition, results of operations or cash flows. For the periods presented, Con-way used no material derivative financial instruments to manage foreign currency risk.
ITEM 4. CONTROLS AND PROCEDURES
(a)
Disclosure Controls and Procedures
Con-way's management, with the participation of Con-way's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of Con-way's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, Con-way's Chief Executive Officer and Chief Financial Officer have concluded that Con-way’s disclosure controls and procedures are effective as of the end of such period. 
(b)
Internal Control Over Financial Reporting
There have not been any changes in Con-way's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, Con-way’s internal control over financial reporting.



 
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Certain legal proceedings of Con-way are discussed in Note 8, “Commitments and Contingencies,” of Item 1, “Financial Statements.”
ITEM 1A. RISK FACTORS
There are no material changes to the risk factors previously disclosed in Item 1A, “Risk Factors,” of Con-way’s 2013 Annual Report on Form 10-K.

 
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ITEM 6. EXHIBITS
 Exhibit No.
 
 
 
(10)
 
Material Contracts:
 
 
 
 
 
10.1
Form of Restricted Stock Unit Grant Agreement#.
 
 
 
 
 
 
10.2
Form of Performance Share Plan Unit Grant Agreement#.
 
 
 
 
 
 
10.3
Con-way Inc. Executive Incentive Plan#.
 
 
 
 
(31)
 
Certification of Officers pursuant to Section 302 of the Sarbanes-Oxley Act of 2002:
 
 
 
 
 
 
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
 
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
(32)
 
Certification of Officers pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
(101)
 
Interactive Data File:
 
 
101.INS
XBRL Instance Document
 
 
101.SCH
XBRL Taxonomy Extension Schema Document
 
 
101.CAL
XBRL Taxonomy Calculation Linkbase Document
 
 
101.DEF
XBRL Taxonomy Definition Linkbase Document
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
 

Footnotes to Exhibit Index
#
Designates a contract or compensation plan for Management or Directors.


 
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
Con-way Inc.
 
 
(Registrant)
 
 
 
April 30, 2014
By:
/s/ Stephen L. Bruffett
 
 
Stephen L. Bruffett
 
 
Executive Vice President and Chief Financial Officer
 
 
(Duly Authorized Officer and Principal Financial Officer)
 
 
 
 
 
 

 
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