10-K 1 a13_12form10-k.htm 10-K 13_12 Form 10-K


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
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
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock ($0.625 par value)
 
New York Stock Exchange (NYSE)
Securities Registered Pursuant to Section 12(g) of the Act:
7.25% Senior Notes due 2018
6.70% Senior Debentures due 2034
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ýYes      oNo  
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. oYes      ýNo  
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. ýYes      oNo  
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). ýYes      oNo  
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
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 (Check one): 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). oYes     ýNo  
The aggregate market value of the shares of common stock held by non-affiliates of the registrant on June 28, 2013 (based upon the closing price of the common stock as of that date on the NYSE) was $1,605,429,045.
The number of shares of common stock, $0.625 par value, outstanding as of January 31, 2014 was 56,924,043.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement related to its annual meeting of shareholders scheduled to be held on May 13, 2014 are incorporated by reference into Part III of this Form 10-K.




Con-way Inc.
FORM 10-K
Table of Contents
 
 
 
Item
 
Page
 
PART I
 
1.
Business
1A.
Risk Factors
1B.
Unresolved Staff Comments
2.
Properties
3.
Legal Proceedings
4.
Mine Safety Disclosures
 
Executive Officers of the Registrant
 
 
 
 
PART II
 
5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
6.
Selected Financial Data
7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
7A.
Quantitative and Qualitative Disclosures About Market Risk
 
Report of Independent Registered Public Accounting Firm
8.
Financial Statements and Supplementary Data
9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
9A.
Controls and Procedures
9B.
Other Information
 
 
 
 
PART III
 
10.
Directors, Executive Officers and Corporate Governance
11.
Executive Compensation
12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
13.
Certain Relationships and Related Transactions, and Director Independence
14.
Principal Accounting Fees and Services
 
 
 
 
PART IV
 
15.
Exhibits and Financial Statement Schedules









PART I
ITEM 1. BUSINESS
Overview
Con-way Inc. was incorporated in Delaware in 1958. Con-way Inc. and its subsidiaries (“Con-way” or “the Company”) provide transportation, logistics and supply-chain management services for a wide range of manufacturing, industrial and retail customers. Con-way’s 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.
Reporting Segments
For financial reporting purposes, Con-way is divided into three reporting segments: Freight, Logistics and Truckload. For financial information concerning Con-way’s geographic and reporting-segment operating results, refer to Note 12, “Segment Reporting,” of Item 8, “Financial Statements and Supplementary Data.”
Freight
The Freight segment consists of the operating results of the Con-way Freight business unit. Con-way Freight is a less-than-truckload (“LTL”) motor carrier that utilizes a network of freight service centers to provide day-definite regional, inter-regional and transcontinental less-than-truckload freight services throughout North America.
LTL carriers transport shipments from multiple shippers utilizing a network of freight service centers combined with a fleet of linehaul and pickup-and-delivery tractors and trailers. Freight is picked up from customers and consolidated for shipment at the originating service center. Freight is consolidated for transportation to the destination service centers or other intermediate service centers (referred to as freight assembly centers). At freight assembly centers, freight from various service centers can be reconsolidated for transportation to other freight assembly centers or destination service centers. From the destination service center, the freight is delivered to the customer. Typically, LTL shipments weigh between 100 and 15,000 pounds. In 2013, Con-way Freight’s average weight per shipment was 1,334 pounds.
The LTL trucking environment is highly competitive. Principal competitors of Con-way Freight include regional and national LTL companies, some of which are subsidiaries of global, integrated transportation service providers. Competition is based on freight rates, service, reliability, transit times and scope of operations.
Logistics
The Logistics segment consists of the operating results of the Menlo Worldwide Logistics ("Menlo") business unit. Menlo develops contract-logistics solutions, which can include managing complex distribution networks, and providing supply-chain engineering and consulting, and multimodal freight brokerage services. The term “supply chain” generally refers to a strategically designed process that directs the movement of materials and related information from the acquisition of raw materials to the delivery of products to the end-user.
Menlo's supply-chain management offerings are primarily related to transportation-management and contract-warehousing services. Transportation management refers to the management of asset-based carriers and third-party transportation providers for customers’ inbound and outbound supply-chain needs through the use of logistics-management systems to consolidate, book and track shipments. Contract warehousing refers to the optimization and operation of warehouses for customers using technology and warehouse-management systems to reduce inventory carrying costs and supply-chain cycle times. For several customers, contract-warehousing operations include light assembly or kitting operations. Menlo's ability to link these systems with its customers’ internal enterprise resource-planning systems is intended to provide customers with improved visibility to their supply chains. Compensation from Menlo's customers takes different forms, including cost-plus, transactional, fixed-dollar, performance-based and consulting-fee arrangements.
Menlo provides its services using a customer- or project-based approach when the supply-chain solution requires customer-specific transportation management, single-client warehouses, and/or single-customer technological solutions. However, Menlo also utilizes a shared-resource, process-based approach that leverages a centralized transportation-management group, multi-client warehouses and technology to provide scalable solutions to multiple customers. Additionally, Menlo segments its business based on customer type. These industry-focused groups leverage the capabilities of personnel, systems and solutions throughout the organization to give customers expertise in their respective sectors.

 
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In 2013, Menlo's three largest customers collectively accounted for 33.6% of the revenue and 13.3% of net revenue (revenue less purchased transportation) reported for the Logistics reporting segment. Menlo's largest customer accounted for 3.6% of the consolidated revenue of Con-way in 2013.
There are numerous competitors in the contract-logistics market that include domestic and foreign logistics companies, the logistics arms of integrated transportation companies, and contract manufacturers. However, Menlo primarily competes against a limited number of major competitors that have sufficient resources to provide services under large logistics contracts. Competition for projects is generally based on price and the ability to rapidly implement technology-based transportation and logistics solutions. With an increase in the number of freight brokers and the increasing availability of commercial logistics-management systems, customers’ cost-reduction efforts are often focused on price. In response to this competitive pressure, Menlo seeks to design logistics solutions for customers based on innovative solutions that use a structured continuous-improvement program.
Truckload
The Truckload segment consists of the operating results of the Con-way Truckload business unit. Con-way Truckload is a full-truckload motor carrier that utilizes a fleet of tractors and trailers to provide short- and long-haul, asset-based transportation services throughout North America. Con-way Truckload provides dry-van transportation services to manufacturing, industrial and retail customers while using single drivers as well as two-person driver teams over long-haul routes, with each trailer containing only one customer’s goods. This origin-to-destination freight movement limits intermediate handling and is not dependent on the same network of locations utilized by LTL carriers. On average, Con-way Truckload transports shipments more than 800 miles from origin to destination. Under its regional service offering, Con-way Truckload transports truckload shipments between 100 and 600 miles, including local-area service for truckload shipments of less than 100 miles.
Con-way Truckload offers “through-trailer” service into and out of Mexico through all major gateways in Texas, Arizona and California. This service eliminates the need for shipment transfer and/or storage fees at the border and typically involves equipment-interchange operations with various Mexican motor carriers. For a shipment with an origin or destination in Mexico, Con-way Truckload provides transportation for the domestic portion of the freight move, and a Mexican carrier provides the pick-up, linehaul and delivery services within Mexico.
The truckload market is fragmented with numerous carriers of varying sizes. Principal competitors of Con-way Truckload include other truckload carriers, logistics providers, railroads, private fleets, and to a lesser extent, LTL carriers. Competition is based on freight rates, service, reliability, transit times, and driver and equipment availability.
General
Employees
At December 31, 2013, Con-way had approximately 29,500 regular full-time employees. The approximate number of regular full-time employees by segment was as follows: Freight, 19,000; Logistics, 6,000; and Truckload, 3,600. In addition to the regular full-time employees at the reporting segments, Con-way had approximately 900 regular full-time employees consisting primarily of executive, technology and administrative positions that support Con-way’s operating subsidiaries.
Con-way’s business units utilize other sources of labor that provide flexibility in responding to varying levels of economic activity and customer demand. In addition to regular full-time employees, Con-way Freight employs part-time employees and non-employee contract labor; Menlo utilizes non-employee contract labor primarily related to its warehouse-management services; and Con-way Truckload contracts with owner-operators to transport shipments.
Cyclicality and Seasonality
Con-way’s operations are affected, in large part, by conditions in the cyclical markets of its customers and in the U.S. and global economies, as more fully discussed in Item 1A, “Risk Factors.”
Con-way’s operating results are also affected by seasonal fluctuations that change demand for transportation services. In the Freight segment, generally the second and third quarters have the highest business levels while the fourth quarter usually has the lowest business levels. In the Truckload segment, the months of August and October typically have the highest business levels while the months of December and February usually have the lowest business levels. The Logistics segment does not generally experience seasonal fluctuations.

 
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Price and Availability of Fuel
Con-way is exposed to the effects of changes in the price and availability of diesel fuel, as more fully discussed in Item 1A, “Risk Factors.”
Regulation
Ground Transportation
The motor-carrier industry is subject to federal regulation by the Federal Motor Carrier Safety Administration (“FMCSA”), the Pipeline and Hazardous Materials Safety Agency (“PHMSA”), and the Surface Transportation Board (“STB”), which are units of the U.S. Department of Transportation. The FMCSA publishes and enforces comprehensive trucking safety regulations and performs certain functions relating to motor-carrier registration, cargo and liability insurance, extension of credit to motor-carrier customers, and leasing of equipment by motor carriers from owner-operators. The PHMSA publishes and enforces regulations regarding the transportation of hazardous materials. The STB has authority to resolve certain types of pricing disputes and authorize certain types of intercarrier agreements.
The FMCSA operates the Compliance Safety Accountability (“CSA”) program in an effort to improve commercial truck and bus safety. A component of the CSA is the Safety Measurement System, which analyzes all safety-based violations to determine a commercial motor carrier's safety performance. This safety program allows the FMCSA to identify carriers with safety-performance issues and intervene to address a carrier's specific safety problems.
Federal law allows all states to impose insurance requirements on motor carriers conducting business within their borders, and empowers most states to require motor carriers conducting interstate operations through their territory to make annual filings verifying that they hold appropriate registrations from FMCSA. Motor carriers also must pay state fuel taxes and vehicle registration fees, which normally are apportioned on the basis of mileage operated in each state.
Hours of service (“HOS”) regulations establish the maximum number of hours that a commercial truck driver may work. The FMCSA issued a new HOS rule in December 2011 that went into effect in July 2013. This rule reduced the number of hours a commercial truck driver may work during his or her work day. The full effects of this rule on various trucking operations are still not completely known and Congress is considering proposals that may alter certain aspects of the HOS rule.
Environmental
Con-way's operations involve the storage, handling and use of diesel fuel and other hazardous substances. Con-way is subject to laws and regulations that (1) govern activities or operations that may have adverse environmental effects such as discharges to air and water, and the handling and disposal practices for solid and hazardous waste, and (2) impose liability for the costs of cleaning up, and certain damages resulting from, sites of past spills, disposals, or other releases of hazardous materials. Environmental liabilities relating to Con-way's properties may be imposed regardless of whether Con-way leases or owns the properties in question and regardless of whether such environmental conditions were created by Con-way or by a prior owner or tenant, and also may be imposed with respect to properties that Con-way may have owned or leased in the past. Con-way has accrued for its estimate of remediation costs at these sites.
Homeland Security
Con-way is subject to compliance with various cargo-security and transportation regulations issued by the Department of Homeland Security, including regulation by the Transportation Security Administration and the Bureau of Customs and Border Protection.
Other Information
Information Available on Website
Con-way makes available, free of charge, on its website at “www.con-way.com,” under the heading “Annual Reports & SEC Filings,” within the "Investors" tab, copies of its annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K and any amendments to those reports, in each case as soon as reasonably practicable after such reports are electronically filed with or furnished to the Securities and Exchange Commission.
In addition, Con-way makes available, free of charge, on its website at “www.con-way.com,” under the heading “Corporate Governance,” within the "Investors" tab, current copies of the following documents: (1) the charters of the Audit, Compensation, and Governance and Nominating Committees of its Board of Directors; (2) its Corporate Governance Guidelines; and (3) its Code of Business Ethics. Copies of these documents are also available in print to shareholders upon request, addressed to the Corporate Secretary at 2211 Old Earhart Road, Suite 100, Ann Arbor, Michigan 48105.

 
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None of the information on Con-way’s website shall be deemed to be a part of this report.
Regulatory Certifications
In 2013, Con-way filed the written affirmations and Chief Executive Officer certifications required by Section 303A.12 of the NYSE Listing Manual and Section 302 of the Sarbanes-Oxley Act.
ITEM 1A. RISK FACTORS
Con-way’s consolidated financial condition, results of operations and cash flows could be adversely affected by various risks. These risks include, but are not limited to, the principal factors listed below and other matters set forth in this Annual Report on Form 10-K. You should carefully consider all of these risks before making any investment or other decisions.
Economic Cyclicality
Con-way’s operating results are affected, in large part, by cyclical conditions in its customers’ markets and in the U.S. and global economies. While economic conditions affect most companies, the transportation industry is cyclical and susceptible to trends in economic activity. When individuals and companies purchase and produce fewer goods, Con-way’s businesses transport fewer goods. In addition, Con-way Freight and Con-way Truckload are capital-intensive and Con-way Freight has a relatively high fixed-cost structure that is difficult to adjust to match shifting volume levels. Accordingly, any sustained weakness in demand or continued downturn or uncertainty in the economy generally would have an adverse effect on Con-way.
Government Regulation
Con-way is subject to various federal, state and local, as well as foreign, laws and regulations that apply to its business activities. These include regulations related to, among other things, driver hours-of-service limitations, labor-organizing activities, cargo-security requirements, anti-corruption and anti-bribery laws, tax laws, employment practices, and environmental matters, including potential limits on carbon emissions under climate-change legislation. The costs of compliance with, liabilities under, or violations of, existing or future laws or regulations could have an adverse effect on Con-way. Con-way is not able to accurately predict how new governmental laws and regulations, or changes to existing laws and regulations, will affect the transportation industry generally, or Con-way in particular. Although government regulation that affects Con-way and its competitors may simply result in higher costs that could be passed to customers with no adverse consequences, there can be no assurance that this would be the case. As a result, Con-way believes that any additional measures that may be required by future laws and regulations or changes to existing laws and regulations could result in additional costs and could have an adverse effect on Con-way.
Concern over climate change has led to increased legislative and regulatory efforts to limit carbon dioxide and other greenhouse gas emissions. Even without such regulation, Con-way’s response to customer-led sustainability initiatives could lead to increased costs to implement additional efforts to reduce its emissions. Additionally, Con-way may experience reduced demand for its services if it does not comply with customers’ sustainability requirements. As a result, increased costs or loss of revenue resulting from sustainability initiatives could have an adverse effect on Con-way.
Capital Markets
Significant disruptions or volatility in the global capital markets may increase Con-way’s cost of borrowing or affect its ability to access credit, debt and equity capital markets. Market conditions may affect Con-way’s ability to refinance indebtedness as and when it becomes due. In addition, changes in Con-way’s credit ratings could adversely affect its ability and cost to borrow funds. Con-way is unable to predict how conditions in the capital markets will affect its financial condition, results of operations or cash flows.
Price and Availability of 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 would 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

 
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fuel prices. Menlo 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 LTL 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.
Employees
The workforce of Con-way and its subsidiaries is not affiliated with labor unions. Con-way believes that the non-unionized operations of its business units have advantages over unionized competitors in providing reliable and cost-competitive customer services, including greater efficiency and flexibility. There can be no assurance that Con-way’s business units will be able to maintain their non-unionized status.
Con-way hires drivers primarily for Con-way Freight and Con-way Truckload. At times, there is significant competition for qualified drivers in the transportation industry. As a result, these business units may be required to increase driver compensation and benefits, or face difficulty meeting customer demands, all of which could adversely affect Con-way.
Business Interruption
A sustained interruption in Con-way's systems or operations in the event of a catastrophic event, such as terrorist activity, earthquake, weather event, or cyber attack, could have a material adverse effect on Con-way.
Con-way and its business units rely on shared-service facilities that provide shared administrative and technology services. Con-way is dependent on its automated systems and technology to operate its businesses and to increase employee productivity. Con-way has outsourced a significant portion of its information-technology infrastructure function and a small portion of its administrative and accounting functions. Although Con-way and the third-party service providers collectively maintain backup systems and have disaster-recovery processes and procedures in place, a sustained interruption in the operation of these facilities, whether due to transition to upgraded or replacement technology or any other reason, could have a material adverse effect on Con-way. Certain of the outsourced services are performed in developing countries and, as a result, may be subject to geopolitical uncertainty. A service provider’s failure to perform could have a material adverse effect on Con-way.
Additionally, Con-way’s dependence on its automated systems and technology gives rise to cyber-security risks. Although Con-way and its third-party providers have preventive systems and processes in place to protect against the risk of cyber attacks, a security breach may cause a disruption of Con-way’s business or the loss of information and could have a material adverse effect on Con-way.

 
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Capital Intensity
Two of Con-way’s primary businesses are capital-intensive. Con-way Freight and Con-way Truckload make significant investments in revenue equipment and Con-way Freight also makes significant investments in freight service centers. The amount and timing of capital investments depend on various factors, including anticipated volume levels, and the price and availability of appropriate-use property for service centers and newly manufactured tractors, which are subject to restrictive Environmental Protection Agency engine-design requirements. If anticipated service-center and/or fleet requirements differ materially from actual usage, Con-way’s capital-intensive business units may have too much or too little capacity. Con-way attempts to mitigate the risk associated with too much or too little revenue equipment capacity by adjusting capital expenditures and by utilizing short-term equipment rentals and sub-contracted operators in order to match capacity with business volumes. Con-way’s investments in revenue equipment and freight service centers depend on its ability to generate cash flow from operations and its access to credit, debt and equity capital markets. A decline in the availability of these funding sources could adversely affect Con-way.
Asset Impairments
Con-way’s assets include significant amounts of goodwill and other long-lived assets. Con-way’s regular reviews of the carrying value of its assets have resulted, from time to time, in significant impairment charges. It is possible that Con-way may be required to recognize additional impairment charges in the future, which could adversely affect Con-way’s results of operations.
Defined Benefit Plans
Con-way maintains defined benefit plans, including funded qualified pension plans, unfunded non-qualified pension plans, and an unfunded postretirement medical plan. A decline in interest rates and/or lower returns on funded plan assets may cause increases in the expense and funding requirements for Con-way’s defined benefit pension plans. Despite past amendments that permanently curtailed benefits under its defined benefit pension plans, Con-way’s defined benefit pension plans remain subject to volatility associated with interest rates, returns on plan assets and funding requirements. In addition to being subject to volatility associated with interest rates, Con-way’s expense and obligation under its postretirement medical plan are also subject to trends in health-care costs. As a result, Con-way is unable to predict the financial-statement effect associated with the defined benefit pension plans and the postretirement medical plan.
Self-Insurance Accruals
Con-way uses a combination of large-deductible purchased insurance and self-insurance programs to provide for the costs of employee medical, vehicular, cargo and workers’ compensation claims. Con-way’s estimated liability for self-retained insurance claims reflects certain actuarial assumptions and judgments, which are subject to a high degree of variability. Con-way periodically evaluates the level of insurance coverage and adjusts insurance levels based on risk tolerance and premium expense. An increase in the number or severity of self-insured claims or an increase in insurance premiums could have an adverse effect on Con-way.
Con-way has a captive insurance company that participates in a reinsurance pool to reinsure a portion of Con-way’s workers’ compensation claims. Each company that participates in the pool cedes claims to the pool and assumes an equivalent amount of claims. The operating results of the captive insurance company are affected by the number and severity of claims and the associated premiums paid or received. Con-way’s financial condition, results of operations and cash flows could be adversely affected by the risk assumed and ceded by the captive insurance company.
Con-way expects costs associated with providing benefits under postretirement medical plans and employee medical plans to increase due to health-care reform legislation. Changes made to the design of Con-way’s medical plans have the potential to mitigate some of the cost impact of the provisions included in the legislation. Ultimately, the cost of providing benefits under medical plans is dependent on a variety of factors, including governmental laws and regulations, health-care cost trends, claims experience, and health-care decisions by plan participants. As a result, Con-way is unable to predict how the cost of providing benefits under medical plans will affect its financial condition, results of operations or cash flows.
Customer Concentration and Contract Terms
Menlo is subject to risk related to customer concentration because of the relative importance of its largest customers and the ability of those customers to negotiate aggressive pricing and other customer-favorable contract terms. Many of its competitors in the logistics industry segment are subject to the same risk. Although Menlo strives to broaden and diversify its customer base, a significant portion of its revenue is derived from a relatively small number of large and sophisticated customers, as more fully discussed in Item 1, “Business.” Consequently, a significant loss of business from, or adverse performance by,

 
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Menlo's major customers, may have a material adverse effect on Con-way’s financial condition, results of operations and cash flows. Similarly, the renegotiation of major customer contracts may also have an adverse effect on Con-way.
Menlo is also subject to credit risk associated with its customer concentration. If one or more of its largest customers were to become bankrupt, insolvent or otherwise were unable to pay for services provided, Menlo may incur significant write-offs of accounts receivable or incur lease or asset-impairment charges that may have a material adverse effect on Con-way's financial condition, results of operations or cash flows. Menlo always seeks to reduce risks related to the termination of a customer relationship, for reasons other than the business failure of a customer, by requiring, upon the termination of the contract, that the customer assume any related lease obligations and/or purchase contract-specific assets purchased by Menlo. Its ability to successfully negotiate for those contract terms with any particular customer is, however, dependent upon many factors.
Additionally, Menlo is subject to risk if contract terms and conditions do not adequately cover Menlo's exposure to increased or unexpected expenses. Changes in customers' business needs or operations may result in Menlo incurring expenses it may not be able to completely recover or offset through contractual pricing terms or contract renegotiations. Also, contract terms and conditions may not sufficiently limit Menlo's exposure to claims from customers or third parties. As a result, increased expenses resulting from these exposures could have an adverse effect on Con-way.
Other Factors
In addition to the risks identified above, Con-way’s annual and quarterly operating results may be affected by a number of business, economic, regulatory and competitive factors, including:
increasing competition and pricing pressure;
the creditworthiness of Con-way’s customers and their ability to pay for services rendered;
any liability resulting from and the costs of defending against litigation and claims related to labor and employment, personal injury, property damage, business practices, environmental liability and other matters;
the effect of severe winter weather or other weather-related events;
the possibility of defaults under Con-way’s $325 million credit agreement and other debt instruments; and
labor matters, including labor-organizing activities, work stoppages or strikes.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

 
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ITEM 2. PROPERTIES
Con-way believes that its facilities are suitable and adequate, that they are being appropriately utilized and that they have sufficient capacity to meet current operational needs. Management continuously reviews anticipated requirements for facilities and may acquire additional facilities and/or dispose of existing facilities as appropriate.
Freight
At December 31, 2013, Con-way Freight operated 300 freight service centers, of which 149 were owned and 151 were leased. The service centers are strategically located to cover the geographic areas served by Con-way Freight and represent physical buildings and real property with dock, office and/or shop space. These facilities do not include meet-and-turn points or zone operations, which generally represent small owned or leased real property with no physical structures. At December 31, 2013, Con-way Freight’s owned service centers accounted for 69% of its door capacity. At December 31, 2013, Con-way Freight owned and operated approximately 9,300 tractors and 24,600 trailers, including tractors held under capital lease agreements. The headquarters for Con-way Freight are located at a leased facility in Ann Arbor, Michigan which is shared with Con-way's executive offices.
Logistics
At December 31, 2013, Menlo operated 86 warehouses in North America, of which 64 were leased by Menlo and 22 were leased or owned by clients of Menlo. Outside of North America, Menlo operated an additional 74 warehouses, of which 56 were leased by Menlo and 18 were leased or owned by clients. Menlo owns and operates a small fleet of tractors and trailers to support its operations, but primarily utilizes third-party transportation providers for the movement of customer shipments. The headquarters for Menlo are located at a leased facility in San Francisco, California.
Truckload
At December 31, 2013, Con-way Truckload operated five owned terminals with bulk fuel, tractor and trailer parking, and in some cases, equipment maintenance and washing facilities. In addition, Con-way Truckload also utilizes various drop yards for temporary trailer storage throughout the United States. At December 31, 2013, Con-way Truckload owned and operated approximately 2,700 tractors and 8,200 trailers. The Con-way Truckload headquarters are located at an owned facility in Joplin, Missouri.
Corporate
Other principal properties include Con-way’s leased executive offices in Ann Arbor, Michigan and its owned shared-services center in Portland, Oregon. Con-way's trailer manufacturing business owns and operates a facility in Searcy, Arkansas.
ITEM 3. LEGAL PROCEEDINGS
Certain legal proceedings of Con-way are discussed in Note 11, “Commitments and Contingencies,” of Item 8, “Financial Statements and Supplementary Data.”
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.

 
8
 



Executive Officers of Con-way Inc.
The name, age and relevant business experience of Con-way's executive officers as of February 25, 2014, are set forth below.
Name, Age and Positions with the Company
Relevant Business Experience
Douglas W. Stotlar
53, President and Chief Executive Officer
Served as Con-way's President and Chief Executive Officer since April 2005. Prior to this, served as Con-way's Senior Vice President and Con-way Freight's President and Chief Executive Officer since December 2004. Prior to this, served as Con-way Freight's Executive Vice President and Chief Operating Officer since June 2002. Prior to this, served as Con-way Freight's Executive Vice President of Operations since 1999. Prior to this, from 1985 to 1999, served in various capacities with Con-way and Con-way Freight, including as Vice President and General Manager of Con-way's expediting business.
Stephen L. Bruffett
50, Executive Vice President and Chief Financial Officer
Served as Con-way's Executive Vice President and Chief Financial Officer since September 2008. Prior to this, from 1998 to 2008, served in various capacities in finance and accounting, operations, investor relations and sales and marketing with YRC Worldwide, including as Chief Financial Officer.
Robert L. Bianco Jr.
49, Executive Vice President of Con-way and
President of Menlo Worldwide, LLC
Served as Con-way's Executive Vice President and Menlo Worldwide, LLC's President since June 2005. Prior to this, served as Menlo Logistics' President since 2002. Prior to this, from 1992 to 2002, served in various capacities with Menlo Logistics, including as Vice President of Operations since 1997.
Kevin S. Coel
55, Senior Vice President and Corporate Controller
Served as Con-way's Senior Vice President since April 2009 and Corporate Controller since 2000. Prior to this, from 1990 to 2000, served in various capacities in finance and accounting with Con-way.
Joseph M. Dagnese
53, Executive Vice President of Con-way and
President of Con-way Truckload Inc.
Served as Con-way's Executive Vice President and Con-way Truckload Inc.'s President since February 2014. Prior to this, from 1995 to 2014, served in various capacities with Menlo Worldwide Logistics including as Vice President of International since October 2013 and prior to that, as Vice President of Menlo's Automotive and Government Services Group since September 2008.
Stephen K. Krull
49, Executive Vice President, General Counsel and Secretary
Served as Con-way's Executive Vice President, General Counsel and Secretary since April 2011. Prior to this, from 2003 to 2011, served as Senior Vice President, General Counsel and Secretary of Owens Corning. Prior to this, from 1996 to 2003, served in various capacities in legal and corporate communications with Owens Corning.
W. Gregory Lehmkuhl
41, Executive Vice President of Con-way and
President of Con-way Freight Inc.
Served as Con-way's Executive Vice President and Con-way Freight Inc.'s President since September 2011. Prior to this, served as Con-way Freight's Executive Vice President of Operations since August 2008. Served previously in various capacities with Menlo Worldwide Logistics, including as Vice President of Menlo's Automotive Industry Group since January 2005.
Leslie P. Lundberg
56, Senior Vice President, Human Resources
Served as Con-way's Senior Vice President, Human Resources since January 2006. Prior to this, served as Executive Director of Compensation, Benefits and Human Resource Information Systems for a division of Sun Microsystems since 2003.
Charles R. Mullett
60, Vice President, Government Relations and Public Affairs
Served as Con-way's Vice President, Government Relations and Public Affairs since September 2007. Prior to this, served as Vice President of Government Relations since January 2005, and before that as Director Government Relations since January 2003. Prior to this, from 1989 to 2003, served in various capacities in operations and sales management with Con-way Freight Inc.


 
9
 



PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Con-way’s common stock is listed for trading on the New York Stock Exchange (“NYSE”) under the symbol “CNW.”
See Note 13, “Quarterly Financial Data,” of Item 8, “Financial Statements and Supplementary Data” for the range of common stock prices as reported on the NYSE and for the common stock dividends paid in 2013 and 2012. At January 31, 2014, Con-way had 5,443 common stockholders of record.
Performance Graph
The following performance graph compares Con-way’s five-year cumulative return (assuming an initial investment of $100 and reinvestment of dividends), with the S&P Midcap 400 Index and Dow Jones Transportation Average Index.

COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL SHAREHOLDERS RETURN*
Con-way Inc., S&P Micap 400 Index, Dow Jones Transportation Average Index
 
Cumulative Total Return
 
12/08

12/09

12/10

12/11

12/12

12/13

Con-way Inc.
$
100.00

133.05

141.13

114.01

110.21

158.99

S&P Midcap 400
$
100.00

137.38

173.98

170.96

201.53

269.04

DJ Transportation Average
$
100.00

118.58

150.29

150.30

161.64

228.52


*$100 invested on 12/31/08 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.

Copyright© 2014 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
Copyright© 2014 Dow Jones & Co. All rights reserved.


 
10
 



ITEM 6. SELECTED FINANCIAL DATA
The following table includes selected financial and operating data for Con-way as of and for the five years ended December 31, 2013. This information should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Item 8, “Financial Statements and Supplementary Data.”
Con-way Inc.
Five-Year Financial Summary
(Dollars in thousands, except per share data)
 
 
 
 
 
 
 
 
 
 
 
 
2013
 
2012
 
2011
 
2010
 
2009
Results of Operations
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
5,473,356

 
$
5,580,247

 
$
5,289,953

 
$
4,952,000

 
$
4,269,239

Operating Income (Loss) [a]
 
208,953

 
228,841

 
207,928

 
78,170

 
(25,928
)
Income (Loss) Before Income Tax
 
 
 
 
 
 
 
 
 
 
Provision
 
154,365

 
170,954

 
148,072

 
16,557

 
(90,269
)
Income Tax Provision [b]
 
55,212

 
66,408

 
59,629

 
12,572

 
17,478

Net Income (Loss)
 
99,153

 
104,546

 
88,443

 
3,985

 
(107,747
)
Net Income (Loss) Applicable to
 
 
 
 
 
 
 
 
 
 
Common Shareholders
 
99,153

 
104,546

 
88,443

 
3,985

 
(110,936
)
Per Common Share
 

 

 

 

 

Basic Earnings (Loss)
 
 
 
 
 
 
 
 
 
 
Net Income (Loss) Applicable
 
 
 
 
 
 
 
 
 
 
to Common Shareholders
 
1.75

 
1.87

 
1.60

 
0.08

 
(2.33
)
Diluted Earnings (Loss)
 
 
 
 
 
 
 
 
 
 
Net Income (Loss) Applicable
 
 
 
 
 
 
 
 
 
 
to Common Shareholders
 
1.73

 
1.85

 
1.58

 
0.07

 
(2.33
)
Cash Dividends
 
0.40

 
0.40

 
0.40

 
0.40

 
0.40

Market Price
 

 

 

 

 

High
 
46.04

 
38.78

 
42.38

 
40.34

 
48.32

Low
 
29.12

 
25.97

 
20.56

 
26.15

 
12.99

Weighted-Average Common Shares
 
 
 
 
 
 
 
 
 
 
Outstanding
 
 
 
 
 
 
 
 
 
 
Basic
 
56,511,563

 
55,837,574

 
55,388,297

 
52,507,320

 
47,525,862

Diluted
 
57,240,588

 
56,485,987

 
56,101,903

 
53,169,299

 
47,525,862

Financial Condition
 
 
 
 
 

 

 

Cash and cash equivalents
 
$
484,502

 
$
429,784

 
$
438,010

 
$
421,420

 
$
476,575

Total assets
 
3,279,931

 
3,152,415

 
3,100,016

 
2,943,732

 
2,896,217

Long-term debt and capital leases
 
735,340

 
749,371

 
770,238

 
793,950

 
760,789

Other Data at Year-End
 

 

 

 

 

Number of shareholders
 
5,452

 
5,803

 
6,168

 
6,481

 
6,745

Approximate number of regular full-time
 
 
 
 
 
 
 
 
 
 
employees
 
29,500

 
29,100

 
27,800

 
27,900

 
27,400

[a]
The comparability of Con-way's consolidated operating income (loss) was affected by the following:
Gain of $10.0 million in 2011 at Menlo Worldwide Logistics resulting from a purchase-price adjustment to settle a dispute associated with the 2007 acquisition of Chic Logistics.
Charge of $19.2 million in 2010 for the impairment of goodwill and other intangible assets at Menlo Worldwide Logistics.
Charge of $134.8 million in 2009 for the impairment of goodwill at Con-way Truckload.
[b]
The comparability of Con-way's income tax provision was affected by the following:
2010 reflects a non-deductible goodwill impairment charge at Menlo Worldwide Logistics.
2009 reflects a non-deductible goodwill impairment charge at Con-way Truckload.

 
11
 



ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
Management’s Discussion and Analysis of Financial Condition and Results of Operations (referred to as “Management’s Discussion and Analysis”) is intended to assist in a historical and prospective understanding of Con-way’s financial condition, results of operations and cash flows, including a discussion and analysis of the following:
Overview of Business
Results of Operations
Liquidity and Capital Resources
Critical Accounting Policies and Estimates
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, 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.
In prior periods, the Other reporting segment consisted of the operating results of Con-way's trailer manufacturer and certain corporate activities for which the related income or expense was not allocated to other reporting segments. Beginning in the first quarter of 2013, the former Other segment is reported as Corporate and Eliminations in order to reconcile the segment results to the consolidated totals. All periods presented reflect this change to the reporting segment structure.
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 1A, “Risk Factors.”


 
12
 



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.
 
 
Years ended December 31,
 (Dollars in thousands, except per share data)
 
2013
 
2012
 
2011
Revenue
 
$
5,473,356

 
$
5,580,247

 
$
5,289,953

Operating expenses
 
 
 
 
 
 
Other costs and expenses
 
5,264,403

 
5,351,406

 
5,092,025

Gain from purchase-price adjustment
 

 

 
(10,000
)
 
 
5,264,403

 
5,351,406

 
5,082,025

Operating income
 
208,953

 
228,841

 
207,928

Other income (expense)
 
(54,588
)
 
(57,887
)
 
(59,856
)
Income before income tax provision
 
154,365

 
170,954

 
148,072

Income tax provision
 
55,212

 
66,408

 
59,629

Net income
 
$
99,153

 
$
104,546

 
$
88,443

 
 
 
 
 
 
 
Diluted earnings per share
 
$
1.73

 
$
1.85

 
$
1.58

Operating margin
 
3.8
%
 
4.1
%
 
3.9
%
Overview
2013 Compared to 2012
Con-way’s consolidated revenue of $5.5 billion in 2013 decreased 1.9% from $5.6 billion in 2012 due to lower revenue from Logistics, partially offset by higher revenue from Freight and Truckload. Lower revenue from Logistics was the result of decreased transportation-management services, partially offset by increased warehouse-management services. Freight's revenue increased due to an increase in yield, partially offset by a decrease in weight per day. Truckload's revenue increased primarily due to improved revenue per mile, partially offset by a decrease in loaded miles.
Con-way’s consolidated operating income decreased to $209.0 million in 2013 from $228.8 million in 2012. The decrease in operating income was due to lower operating income at Logistics and Truckload, partially offset by improved operating income at Freight. Logistics' operating income declined due to higher warehouse-related operating costs for certain warehouse-management contracts. Truckload’s operating income decreased due to higher operating expenses, primarily from increases in depreciation and maintenance.
Other income (expense) in 2013 decreased $3.3 million compared to 2012, reflecting lower interest expense and lower letters-of-credit fees.
Con-way’s effective tax rate in 2013 was 35.8% compared to 38.8% in 2012. The lower effective tax provision in 2013 benefited from $8.2 million in discrete tax benefits, including a $3.3 million benefit in the first quarter to recognize the 2012 alternative-fuel credit. Discrete tax benefits were $0.8 million in 2012. Excluding discrete items, the effective tax rate in 2013 benefited from the 2013 alternative-fuel credit; this credit is not expected to be available in 2014.
2012 Compared to 2011
Con-way’s consolidated revenue of $5.6 billion in 2012 increased 5.5% from $5.3 billion in 2011, reflecting higher revenue from all segments. Higher revenue from Freight and Truckload was primarily the result of increased base freight rates and higher fuel surcharges. Higher revenue from Logistics was due to increased revenue for both transportation-management and warehouse-management services.
Con-way’s operating income increased to $228.8 million in 2012 from $207.9 million in 2011. The increase in operating income was due to improvements at Freight and Truckload, partially offset by reduced operating income at Logistics. Higher operating income at Freight and Truckload was due to increased revenue and improved operating margins. Lower operating income at Logistics was primarily due to a 2011 gain of $10.0 million from a purchase-price adjustment to settle a dispute associated with the acquisition of Chic Logistics.
Other income (expense) in 2012 decreased $2.0 million compared with 2011, largely due to a $1.2 million decrease in other miscellaneous expenses, mostly from letters-of-credit fees. Also, interest expense declined $0.8 million.

 
13
 



Con-way’s effective tax rate in 2012 was 38.8% compared to 40.3% in 2011. Con-way's tax provision in 2012 benefited from discrete tax adjustments, while the effective tax rate in 2011 was adversely affected by discrete tax adjustments. The 2011 income tax provision also included the effect of the $10.0 million gain, for which there was only $1.1 million of related tax. The effective tax rate in 2011 benefited from a fuel-related tax credit that was not available to be recognized in 2012.
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 12, “Segment Reporting,” of Item 8, “Financial Statements and Supplementary Data.”
Freight
The following table compares operating results, operating margins and the percentage change in selected operating statistics of the Freight reporting segment:
 
 
Years ended December 31,
(Dollars in thousands)
 
2013
 
2012
 
2011
Revenue before inter-segment eliminations
 
$
3,466,100

 
$
3,392,596

 
$
3,247,107

 
 
 
 
 
 
 
Salaries, wages and employee benefits
 
1,572,021

 
1,551,742

 
1,493,421

Purchased transportation
 
594,356

 
585,489

 
532,059

Other operating expenses
 
480,649

 
445,940

 
441,891

Fuel and fuel-related taxes
 
363,026

 
376,323

 
386,928

Depreciation and amortization
 
135,310

 
124,372

 
109,875

Purchased labor
 
33,669

 
22,704

 
21,341

Rents and leases
 
49,477

 
48,755

 
47,159

Maintenance
 
91,545

 
93,402

 
94,654

Total operating expenses
 
3,320,053

 
3,248,727

 
3,127,328

Operating income
 
$
146,047

 
$
143,869

 
$
119,779

Operating margin
 
4.2
%
 
4.2
%
 
3.7
%
 
 
2013 vs. 2012
 
2012 vs. 2011
 
Selected Operating Statistics
 
 
 
 
 
Weight per day
 
-0.2
 %
 
-0.3
 %
 
Revenue per hundredweight ("yield")
 
+2.2
 %
 
+4.4
 %
 
Shipments per day ("volume")
 
-0.8
 %
 
-1.9
 %
 
Weight per shipment
 
+0.6
 %
 
+1.6
 %
 
2013 Compared to 2012
Freight’s revenue in 2013 increased 2.2% compared to 2012, due to a 2.2% increase in yield, partially offset by a 0.2% decline in weight per day. The 2.2% increase in yield was largely due to increased base freight rates, while the 0.2% decline in weight per day reflects a 0.8% decline in shipments per day, partially offset by a 0.6% increase in weight per shipment.
Excluding fuel surcharges, yield increased 2.4% in 2013 compared to 2012. Fuel-surcharge revenue decreased to 17.3% of revenue in 2013 from 17.5% in 2012. The fuel surcharge is intended to compensate Con-way Freight for the adverse effects of higher fuel costs and fuel-related increases in purchased transportation. Fuel surcharges are only one part of Con-way Freight’s overall rate structure, and the total price that Con-way Freight receives from customers for its services is governed by market forces, as more fully discussed in Item 1A, “Risk Factors.”
Freight’s operating income increased by $2.2 million in 2013 compared to 2012 primarily due to an increase in yield. In addition, operating results in 2013 reflect progress made under Freight’s lane-based pricing and linehaul optimization initiatives. These initiatives were implemented over the course of 2013; however, the benefits of these initiatives were largely offset by increased costs for cargo, workers’ compensation and vehicular claims.

 
14
 



Expenses for salaries, wages and employee benefits increased 1.3% in 2013 compared to 2012 due to a 2.2% increase in salaries and wages (excluding variable compensation), which was partially offset by a $2.9 million or 9.8% decrease in variable compensation. Benefits expense was relatively flat in 2013 as a decrease in costs for employee medical benefits was offset by an increase in workers' compensation expense. The 2.2% increase in salaries and wages (excluding variable compensation) was largely due to annual salary and wage rate increases. The 9.8% decrease in variable compensation was based primarily on variations in performance relative to variable compensation plan targets. The decrease in costs for employee medical benefits was primarily due to a decrease in the number of claims. The increase in workers' compensation expense was due to an increase in the expense per claim, partially offset by a decrease in the number of claims.
Purchased transportation expense increased 1.5% in 2013 from 2012 due to higher carrier rates and increased third-party miles, as more fully discussed below.
Other operating expenses increased 7.8% in 2013 compared to 2012 due to higher expenses for information-technology services, increased costs for cargo and vehicular claims, and a decline in gains from the sale of property. The increase in information-technology expenses was primarily due to higher costs for information-technology projects (including the initiatives discussed above) and infrastructure. The increase in costs for cargo and vehicular claims resulted from an increase in the cost per claim and the number of claims.
Expenses for fuel and fuel-related taxes decreased 3.5% compared to 2012 primarily due to lower fuel consumption, which reflects improved miles per gallon and fewer miles driven by company drivers, and a lower cost per gallon of diesel fuel. The decline in miles driven by company drivers included the effect of improved linehaul productivity (as measured by average weight per trailer).
The increase in purchased transportation expense and the decrease in fuel expense are related. Both reflect a higher proportion of miles driven by third-party carriers as opposed to company drivers. The increase in third-party miles is part of Con-way Freight's effort to reduce total linehaul costs by reducing empty miles. The increase in third-party miles was more than offset by the decrease in miles driven by company drivers, which resulted largely from improved linehaul productivity.
Depreciation and amortization expense increased 8.8% in 2013 compared to 2012 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 48.3% in 2013 compared to 2012 as more of this source of labor was used in freight-handling functions.
2012 Compared to 2011
Freight’s revenue in 2012 increased 4.5% from 2011, primarily due to a 4.4% increase in yield, partially offset by a 0.3% decline in weight per day. The 4.4% increase in yield was largely due to increased base freight rates, while the 0.3% decline in weight per day reflects a 1.9% decline in shipments per day, partially offset by a 1.6% increase in weight per shipment.
Excluding fuel surcharges, yield increased 3.7% in 2012. Fuel-surcharge revenue increased to 17.5% of revenue in 2012 from 17.0% in 2011.
In 2012, Freight’s operating income increased $24.1 million when compared with 2011. Higher operating income in 2012 was largely due to higher revenue and higher operating margins.
Expenses for salaries, wages and employee benefits increased 3.9% in 2012 compared to 2011. Salaries and wages (excluding variable compensation) increased 1.9% due to annual pay increases and a new sales bonus program, partially offset by a decline in the number of miles driven by company drivers. Employee benefits expense increased 8.4% primarily due to higher costs for employee medical benefits, and defined contribution and defined benefit retirement plans. Higher costs for employee medical benefits were largely due to an increase in the number of claims. The increase in defined contribution retirement plan expense was mainly due to the restoration of certain benefits previously suspended in March 2009 in response to economic conditions.
Purchased transportation expense increased 10.0% in 2012 due to increased third-party miles and higher carrier rates.
Expenses for fuel and fuel-related taxes decreased 2.7% primarily due to lower fuel consumption, the result of decreased miles driven by company drivers, partly offset by an increase in the cost per gallon of diesel fuel.
Depreciation and amortization expense increased 13.2% in 2012 compared to 2011 primarily due to the replacement of older tractors with newer models. Newer models are more costly due in part to more expensive emissions-control and safety technology.

 
15
 



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.
 
 
Years ended December 31,
(Dollars in thousands)
 
2013
 
2012
 
2011
Revenue before inter-segment eliminations
 
$
1,540,399

 
$
1,726,200

 
$
1,589,994

Purchased transportation
 
(858,468
)
 
(1,087,056
)
 
(988,405
)
Net revenue
 
681,931

 
639,144

 
601,589

 
 
 
 
 
 
 
Salaries, wages and employee benefits
 
265,837

 
260,863

 
230,760

Other operating expenses
 
198,187

 
167,478

 
156,334

Fuel and fuel-related taxes
 
780

 
850

 
1,034

Depreciation and amortization
 
9,647

 
9,605

 
10,846

Purchased labor
 
104,914

 
88,092

 
89,824

Rents and leases
 
76,243

 
64,508

 
65,046

Maintenance
 
2,856

 
3,132

 
2,998

Gain from purchase-price adjustment
 

 

 
(10,000
)
Total operating expenses excluding purchased transportation
 
658,464

 
594,528

 
546,842

Operating income
 
$
23,467

 
$
44,616

 
$
54,747

Operating margin on revenue
 
1.5
%
 
2.6
%
 
3.4
%
Operating margin on net revenue
 
3.4
%
 
7.0
%
 
9.1
%
2013 Compared to 2012
In 2013, Logistics’ revenue decreased 10.8% compared to 2012 due to an 18.4% decrease in revenue from transportation-management services, partially offset by a 10.3% increase in revenue from warehouse-management services. In 2013, lower revenue from transportation-management services was primarily due to lower volumes, including the effect of a change in the scope of a large customer contract and the conclusion of work under other customer contracts. These declines were partially offset by increased revenue from warehouse-management services primarily due to new business.
Logistics’ net revenue in 2013 increased 6.7% compared to 2012, as increased warehouse-management services revenue was partially offset by declines in net revenue from transportation-management services.
In 2013, Logistics reported operating income of $23.5 million compared to $44.6 million in 2012. Lower operating income was primarily due to increases in other operating expenses, including costs incurred during the start-up phase of certain warehouse-management contracts, increases in costs 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 1.9% in 2013 compared to 2012 due to increased salaries and wages (excluding variable compensation), and benefits expense, partially offset by decreased variable compensation expense. Salaries and wages (excluding variable compensation expense) increased 7.7% in 2013 due to increased headcount in response to growth from new and existing warehouse-management services customers. Employee benefits expense increased 4.1% in 2013, reflecting increased expenses for various benefits as the result of growth in headcount and increased salaries and wages. Variable-compensation expense decreased $11.6 million or 85.9%, as only $1.9 million of expense was recognized as the result of low performance relative to variable-compensation plan targets.
Other operating expenses increased 18.3% in 2013 compared to 2012 primarily due to higher costs for information-technology projects and infrastructure, and higher expenses for other warehouse-related costs, facilities, and travel. Higher expenses for other warehouse-related costs, facilities, and travel were incurred primarily in support of new warehouse-management

 
16
 



contracts. Additionally, increased other operating expenses include an increase in the provision for uncollectible accounts receivable, primarily related to two specific customers.
Purchased labor expense increased 19.1% as additional labor was required to support new business from warehouse-management services, including contracts in the start-up phase.
Expenses for rents and leases increased 18.2% in 2013 compared to 2012 due to increases in the number of leased warehouse facilities, including facilities to support customer contracts that were at various stages of start-up during 2013.
2012 Compared to 2011
In 2012, Logistics’ revenue increased 8.6% due to increases in revenue from both transportation-management and warehouse-management services. In 2012, revenue from transportation-management services increased 11.5%, while revenue from warehouse-management services increased 1.2%. Higher revenue from transportation-management services was primarily due to new customers. Increased revenue from warehouse-management services was primarily due to growth at existing customers.
Logistics’ net revenue in 2012 increased 6.2%, as revenue growth was partially offset by purchased transportation expense that grew at a faster rate than revenue. Purchased transportation expense increased 10.0% in 2012 primarily due to increased transportation-management volumes.
In 2012, Logistics reported operating income of $44.6 million compared to $54.7 million in 2011. Operating results in 2011 included a $10.0 million gain resulting from a purchase-price adjustment to settle a dispute associated with the 2007 acquisition of Chic Logistics. Excluding this item, Logistics’ operating income in 2012 decreased 0.3% from 2011, reflecting increases in salaries, wages and employee benefits expense, and higher other operating expenses.
Salaries, wages and employee benefits increased 13.0% in 2012. Salaries and wages (excluding variable compensation) rose 14.9% primarily due to increased average employee counts in response to growth from new and existing customers, and salary and wage rate increases. Employee benefits expense increased 14.5% in 2012, primarily due to increased costs for employee medical benefits, payroll taxes and compensated absences. Higher costs for employee medical benefits were largely due to increases in the number of claims. Increased expense for compensated absences and payroll taxes was primarily due to the increase in salaries and wages.
Other operating expenses increased 7.1% in 2012 primarily due to increased costs for information-technology projects and infrastructure, higher expenses for warehouse-related packaging materials and supplies, higher expenses for professional services that support customer operations, and an increase in the provision for uncollectible accounts receivable. The increase in the provision for uncollectible accounts receivable in 2012 was primarily due to a single customer.

 
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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.
 
 
Years ended December 31,
(Dollars in thousands)
 
2013
 
2012
 
2011
Freight revenue
 
$
475,439

 
$
470,429

 
$
459,221

Fuel-surcharge revenue
 
142,037

 
145,972

 
138,549

Other revenue
 
19,334

 
19,155

 
17,244

Revenue before inter-segment eliminations
 
636,810

 
635,556

 
615,014

 
 
 
 
 
 
 
Salaries, wages and employee benefits
 
203,528

 
210,515

 
209,220

Purchased transportation
 
46,703

 
36,397

 
27,650

Other operating expenses
 
65,904

 
64,723

 
61,267

Fuel and fuel-related taxes
 
169,041

 
175,635

 
177,633

Depreciation and amortization
 
74,450

 
69,799

 
70,003

Purchased labor
 
1,101

 
1,140

 
1,160

Rents and leases
 
1,464

 
1,242

 
1,097

Maintenance
 
35,928

 
31,184

 
32,171

Total operating expenses
 
598,119

 
590,635

 
580,201

Operating income
 
$
38,691

 
$
44,921

 
$
34,813

Operating margin on revenue
 
6.1
%
 
7.1
%
 
5.7
%
Operating margin on revenue excluding fuel-surcharge revenue
 
7.8
%
 
9.2
%
 
7.3
%
 
 
2013 vs. 2012
 
2012 vs. 2011
 
Selected Operating Statistics
 
 
 
 
 
Freight revenue per loaded mile
 
+1.6
 %
 
+2.6
 %
 
Loaded miles
 
-0.5
 %
 
-0.2
 %
 
2013 Compared to 2012
In 2013, Truckload’s revenue increased 0.2% from 2012, primarily due to a 1.1% increase in freight revenue which was partially offset by a 2.7% decrease in fuel-surcharge revenue. The increase in freight revenue reflects a 1.6% increase in revenue per loaded mile, partially offset by a 0.5% decrease in loaded miles. The decrease in loaded miles resulted from lower tractor productivity, partially offset by an increase in the size of the tractor fleet. During 2013, Truckload's tractor fleet grew as a result of an increase in the number of owner-operator units.
In 2013, Truckload operating income decreased 13.9% compared to 2012 as a result of increased operating expenses, primarily from increases in depreciation and maintenance.
Salaries, wages and employee benefits decreased 3.3% primarily due to lower expense for employee benefits. Lower expenses for employee benefits reflect declines in costs for workers’ compensation claims and employee medical benefits. Workers' compensation claims expense decreased in 2013 due to a decrease in expense per claim, partially offset by an increase in the number of claims. Employee medical decreased in 2013 due to decreases in the number of claims and expense per claim.
Purchased transportation increased 28.3% in 2013 compared to 2012 due to increased miles driven by Truckload's owner-operator fleet, which grew during the period.
Other operating expenses increased 1.8% in 2013 compared to 2012 primarily due to declines in gains from the sale of tractors.
Expenses for fuel and fuel-related taxes decreased 3.8% in 2013 compared to 2012 primarily due to lower fuel consumption from fewer miles driven by company drivers compared to 2012. Additionally, the cost per gallon of diesel fuel decreased during 2013.

 
18
 



Depreciation and amortization expense increased 6.7% in 2013 compared to 2012, reflecting the higher cost of new tractors. Newer models are more costly due in part to more expensive emission-control and safety technology. This was partially offset by the effect of a change in estimated salvage values for certain trailers. As a result of this change, depreciation and amortization expense was relatively consistent in the fourth quarter of 2013 compared to the fourth quarter of 2012. Con-way Truckload’s change in estimated salvage value for trailers is more fully discussed in Note 1, “Principal Accounting Policies,” of Item 8, “Financial Statements and Supplementary Data.”
Maintenance expense increased 15.2% in 2013 compared to 2012. Based on axle specifications, newer models of tractors require more frequent tire replacement than older models, which resulted in higher maintenance expense in 2013. Increased maintenance expense also included higher repair costs for trailers as the trailer fleet increases in age, and higher costs to maintain newer tractors with more complex emission-control technology.
2012 Compared to 2011
In 2012, Truckload’s revenue increased 3.3% from 2011, primarily due to a 2.4% increase in freight revenue and a 5.4% increase in fuel-surcharge revenue. The increase in freight revenue reflects a 2.6% increase in revenue per loaded mile, partially offset by a 0.2% decrease in loaded miles. The higher revenue per loaded mile included the effect of negotiated rate increases. The decrease in loaded miles was primarily due to a decline in the number of tractors operated by two-person teams, which resulted in lower miles per tractor. Higher fuel-surcharge revenue reflects higher fuel prices in 2012 compared to 2011 and an improved fuel-surcharge recovery rate.
In 2012, Truckload earned operating income of $44.9 million compared to $34.8 million in 2011, primarily reflecting the increase in revenue and higher operating margins.
Salaries, wages and employee benefits increased 0.6% in 2012, reflecting an increase in variable-compensation expense, partially offset by decreases in salaries and wages (excluding variable compensation) and employee benefits expense. Variable-compensation expense increased $1.8 million or 79.7% in 2012 based on variations in performance measures relative to variable-compensation plan targets. Salaries and wages (excluding variable compensation) decreased 0.3% primarily due to lower wages as a result of fewer miles driven by company drivers. Employee benefits expense decreased 0.1% in 2012, primarily due to a decrease in costs for workers compensation claims, partially offset by increases for employee medical benefits and defined contribution retirement plans. The decreases in expense for workers' compensation claims were due to decreases in expense per claim and the number of claims. The increases in expense for employee medical benefits were largely due to increases in the number of claims. The increase in expenses for defined contribution retirement plans was mainly due to the restoration of certain benefits in the fourth quarter of 2011.
Purchased transportation increased 31.6% in 2012 due to increased miles driven by Truckload's owner-operator fleet, which grew during the period, and fuel-related rate increases.
Expenses for fuel and fuel-related taxes decreased 1.1% in 2012 primarily due to improved miles per gallon and lower fuel consumption due to fewer miles driven by company drivers compared to 2011. These decreases were partially offset by higher fuel cost per gallon in 2012 compared to 2011.
Other operating expenses increased 5.6% in 2012 primarily due to increases for vehicular self-insurance and employee development expenses, partially offset by gains from equipment sales. The increase in expenses for vehicular self-insurance was due to an increase in expense per claim, partially offset by a decline in the number of claims. Higher expenses for employee development relate to increased driver certification and training costs. The increase in gains from equipment sales reflect improved conditions in the used tractor market.

 
19
 



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 the reporting segments and inter-segment eliminations. Beginning in 2013, costs associated with the defined benefit pension plans are included in Corporate and Eliminations as other corporate costs. The amount of defined benefit pension cost retained in Corporate and Eliminations for the year ended December 31, 2013 was $4.2 million. In prior periods, these costs are included in the results of the Freight, Logistics and Truckload reporting segments and total $9.6 million in 2012 and $0.4 million in 2011. In 2013 and 2011, the results for Con-way corporate properties include gains of $5.6 million and $5.1 million, respectively from the sales of properties. The table below summarizes components of Corporate and Eliminations other than inter-segment revenue eliminations:
 
 
Years ended December 31,
(Dollars in thousands)
 
2013
 
2012
 
2011
Revenue before inter-segment eliminations
 
 
 
 
 
 
Trailer manufacturing
 
$
78,279

 
$
57,664

 
$
46,685

 
 
 
 
 
 
 
Operating income (loss)
 
 
 
 
 
 
Trailer manufacturing
 
$
(37
)
 
$
(112
)
 
$
(123
)
Reinsurance activities
 
1,712

 
(3,049
)
 
(4,921
)
Corporate properties
 
3,303

 
(1,363
)
 
3,750

Other corporate costs
 
(4,230
)
 
(41
)
 
(117
)
 
 
$
748

 
$
(4,565
)
 
$
(1,411
)
The results from reinsurance activities primarily relate to Con-way’s participation in a reinsurance pool, as more fully discussed in Note 1, “Principal Accounting Policies,” of Item 8, “Financial Statements and Supplementary Data.”
Liquidity and Capital Resources
Cash and cash equivalents increased to $484.5 million at December 31, 2013 from $429.8 million at December 31, 2012, as $348.0 million provided by operating activities exceeded $271.9 million used in investing activities and $21.3 million used in financing activities. Cash provided by operating activities came from net income after non-cash adjustments, partially offset by changes in assets and liabilities. Cash used in investing activities primarily reflects capital expenditures. Cash used in financing activities primarily reflects the payment of common dividends and capital leases.
 
 
Years ended December 31,
(Dollars in thousands)
 
2013
 
2012
 
2011
Operating Activities
 
 
 
 
 
 
Net income
 
$
99,153

 
$
104,546

 
$
88,443

Non-cash adjustments (1)
 
326,343

 
309,182

 
265,489

Changes in assets and liabilities
 
(77,512
)
 
(102,317
)
 
(9,222
)
Net Cash Provided by Operating Activities
 
347,984

 
311,411

 
344,710

Net Cash Used in Investing Activities
 
(271,939
)
 
(265,845
)
 
(287,028
)
Net Cash Used in Financing Activities
 
(21,327
)
 
(53,792
)
 
(41,092
)
Increase (Decrease) in Cash and Cash Equivalents
 
$
54,718

 
$
(8,226
)
 
$
16,590

(1)
“Non-cash adjustments” refer to depreciation, amortization, deferred income taxes, provision for uncollectible accounts, purchase-price adjustments and other non-cash income and expenses.

 
20
 



Operating Activities
The most significant items affecting the comparison of Con-way’s operating cash flows for the periods presented are summarized below:
2013 Compared to 2012
In 2013, net income and non-cash adjustments collectively provided $11.8 million more operating cash flow compared to 2012. Changes in assets and liabilities used $24.8 million less operating cash flows in 2013 when compared to the prior-year period. Significant comparative changes included accounts payable, receivables, accrued variable compensation, employee benefits and self-insurance accruals.
Accounts payable and receivables collectively provided $13.1 million in 2013 compared to $7.7 million used in 2012. Variations in accounts payable and receivables included the effect of lower transportation-management volumes at Logistics during 2013.
Accrued variable compensation used $17.1 million in 2013, compared to $1.2 million provided in 2012. Variations in performance relative to variable-compensation plan targets resulted in lower variable-compensation expense accruals in 2013.
Employee benefits used $82.5 million in 2013, compared to $67.3 million used in 2012 primarily due to lower expense accruals for defined benefit pension and long-term disability plans, and increased funding contributions to the qualified defined benefit pension plans. In 2013, Con-way contributed $55.3 million to its qualified defined benefit pension plans, compared to $51.4 million in 2012.
Accruals for self-insurance used $3.7 million in 2013, compared to $18.7 million used in 2012, due primarily to increases in vehicular and cargo claims liabilities.
2012 Compared to 2011
In 2012, net income and non-cash adjustments collectively increased operating cash flows $59.8 million from 2011. Changes in assets and liabilities decreased operating cash flows by $93.1 million in 2012 when compared to the prior-year period. Significant comparative changes included accrued income taxes, accrued variable compensation and employee benefits.
In 2012, accrued income taxes used $2.3 million, compared to $34.4 million provided in 2011, reflecting variations in income tax refunds and payments as well as variations in current income tax provisions. In 2012, Con-way made net payments of $6.2 million, compared to $28.7 million of net refunds in 2011.
Accrued variable compensation provided $1.2 million in 2012, compared to $22.4 million provided in 2011. Variations in performance measures relative to variable-compensation plan targets resulted in a higher level of payments in 2012 when compared to 2011.
Employee benefits used $67.3 million in 2012, compared to $52.7 million used in 2011. Comparative period changes were primarily due to a change in the funding method for contributions to the defined contribution retirement plan and a decline in the amount of funding for the defined benefit pension plans. Con-way used repurchased common stock (also referred to as treasury stock) to fund contributions to the defined contribution retirement plan in the first six months of 2011. In 2011, Con-way used 461,151 shares of treasury stock to fund $17.3 million of contributions to the defined contributions retirement plans. In 2012, Con-way contributed $51.4 million to its qualified defined benefit pension plans, compared to $62.6 million in 2011.
Investing Activities
The most significant items affecting the comparison of Con-way’s investing cash flows for the periods presented are summarized below:
2013 compared to 2012
Cash used by capital expenditures decreased to $281.9 million in 2013 from $293.1 million in 2012 primarily due to increased capital expenditures in 2012 to update Con-way Freight's fleet of tractor equipment. Cash provided from the proceeds of property and equipment decreased to $14.2 million in 2013 from $20.8 million in 2012 primarily due to fewer sales of excess properties in 2013.
Net proceeds from marketable securities declined to $3.2 million in 2013 from $15.4 million in 2012 due to decreased investing activity.

 
21
 



2012 Compared to 2011
In 2012, capital expenditures were $293.1 million, compared with $289.0 million in 2011. Increased capital expenditures in 2012 were primarily due to increased acquisitions of tractor equipment at Con-way Freight. Con-way received sale-related proceeds of $20.8 million in 2012 and $13.2 million in 2011. Proceeds in 2012 were primarily due to the sale of facilities in the Freight segment. Proceeds in 2011 were primarily due to the sale of excess corporate properties and the sale of tractors in connection with the fleet-replacement program at Con-way Truckload.
Investment transactions involving the purchase and sale of marketable securities resulted in $15.4 million of net proceeds in 2012 and $12.6 million of cash used in 2011.
Financing Activities
The most significant items affecting the comparison of Con-way’s financing cash flows for the periods presented are summarized below:
2013 compared to 2012
Cash provided by the exercise of stock options increased to $20.8 million in 2013, compared to $3.6 million in 2012 primarily due to an increase in the market price for Con-way’s common stock.
Con-way used $16.1 million in 2013 for the payment of capital leases, compared to $29.0 million used in 2012. Payments in 2012 included the early payment of certain capital leases scheduled to mature in December 2013.
2012 compared to 2011
Con-way used $29.0 million in 2012 for the repayment of debt obligations, compared to $19.8 million used in 2011. Payments in 2012 included the early payment of certain capital leases previously scheduled to mature in December 2012 and December 2013.
Contractual Cash Obligations
The table below summarizes contractual cash obligations for Con-way as of December 31, 2013. Some of the amounts in the table are based on management’s estimates and assumptions about these obligations, including their duration, the possibility of renewal, and other factors. Because of these estimates and assumptions, the actual future payments may vary from those reflected in the table. Certain long-term liabilities, including self-insurance accruals, and other liabilities and deferred credits, are reported in Con-way’s consolidated balance sheets but not reflected in the table below due to the absence of stated due dates.
(Dollars in thousands)
 
Total
 
Payments Due by Period
2014
 
2015-2016
 
2017-2018
 
2019 &
Thereafter
Long-term debt
 
$
1,276,294

 
$
50,927

 
$
102,398

 
$
511,419

 
$
611,550

Capital leases
 
38,065

 
21,063

 
14,186

 
2,504

 
312

Operating leases
 
299,111

 
94,438

 
113,854

 
49,116

 
41,703

Service contracts
 
301,005

 
76,959

 
136,909

 
70,350

 
16,787

Employee benefit plans
 
102,067

 
9,606

 
19,563

 
20,746

 
52,152

Total
 
$
2,016,542

 
$
252,993

 
$
386,910

 
$
654,135

 
$
722,504

As presented above, contractual obligations on long-term debt and capital leases represent principal and interest payments.
Contractual obligations for operating leases represent the payments under the lease arrangements and are not included in Con-way’s consolidated balance sheets.
Con-way has agreements with third-party service providers who provide 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. As presented above, the payments reflect amounts based on projections of services expected to be 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.
The employee benefit plan-related cash obligations in the table represent estimated payments under Con-way’s non-qualified defined benefit pension plans and postretirement medical plan through December 31, 2023. Expected benefit payments for

 
22
 



Con-way’s qualified defined benefit pension plans are not included in the table, as these benefits will be satisfied by the use of plan assets. Con-way estimates that it will make $59 million of contributions to its qualified defined benefit pension plans in 2014; however, the contribution amount could change based on variations in interest rates, asset returns, Pension Protection Act ("PPA") requirements and other factors.
Letters of credit outstanding under Con-way’s credit facilities, as described below under “Capital Resources and Liquidity Outlook,” are generally required as collateral to support self-insurance programs and do not represent additional liabilities as the underlying self-insurance accruals are already included in Con-way’s consolidated balance sheets.
For further discussion, see Note 5, “Debt and Other Financing Arrangements,” Note 6, “Leases,” Note 7, “Income Taxes,” and Note 9, “Employee Benefit Plans,” of Item 8, “Financial Statements and Supplementary Data.”
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.
As more fully discussed in Note 5, “Debt and Other Financing Arrangements,” of Item 8, “Financial Statements and Supplementary Data,” Con-way has a $325 million unsecured revolving credit facility. At December 31, 2013, 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. At December 31, 2013, 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 $67.8 million at December 31, 2013, which are available to support short-term borrowings, letters of credit, bank guarantees and overdraft facilities. At December 31, 2013, $1.6 million of cash borrowings and $29.9 million of other credit commitments were outstanding leaving $36.3 million of available capacity.
In 2014, Con-way anticipates capital and software expenditures of approximately $285 million, net of asset dispositions, primarily for the acquisition of tractor equipment. 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 December 31, 2013, 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.”
Con-way believes that its working-capital requirements and capital-expenditure plans in 2014 will be adequately met with various sources of liquidity and capital, including Con-way’s cash and cash equivalents, cash flow from operations, credit facilities and access to capital markets.
As detailed in Note 7, “Income Taxes,” of Item 8, “Financial Statements and Supplementary Data,” the cumulative undistributed earnings of Con-way’s foreign subsidiaries were $29.9 million at December 31, 2013, which if remitted, are subject to withholding and U.S. taxes. Of Con-way’s $484.5 million in cash and cash equivalents at December 31, 2013, $52.8 million was related to its foreign subsidiaries. Con-way currently does not expect to rely on these foreign cash and cash-equivalent balances as a source of liquidity or capital to fund its domestic operations.

 
23
 



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
Defined Benefit Pension 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 several qualified and non-qualified defined benefit pension plans.
Significant assumptions
The net periodic benefit expense (income) and the projected benefit obligation for Con-way’s defined benefit pension plans depend upon a number of assumptions and factors, the most significant being the discount rate used to measure the present value of pension obligations and the expected rate of return on plan assets for the funded qualified plans. Con-way assesses its plan assumptions for the discount rate, expected rate of return on plan assets, and other significant assumptions on a periodic basis, but concludes on those assumptions at the actuarial plan measurement date.
Discount Rate
In determining the appropriate discount rate, Con-way is assisted by actuaries who utilize a yield-curve model based on a universe of high-grade corporate bonds (rated Aa or better by Moody's rating service). The model determines a single equivalent discount rate by applying the yield curve to Con-way's expected future benefit payments. The discount rate used in determining net periodic benefit expense (income) for the periods presented and for 2014 are as follows:
 
 
2014
 
2013
 
2012
 
2011
Discount rate on plan obligations
 
5.05%
 
4.25%
 
4.65%
 
5.55%
Rate of Return on Plan Assets
For its qualified defined benefit pension plans, Con-way sets the expected return on plan assets using current market expectations and historical returns. The expected return on plan assets is based on estimates of long-term expected returns and considers the plans' anticipated asset allocation over the course of the next year. The expected return includes the effect of actively managing the plan assets, and is net of fees and expenses. The plan assets are managed pursuant to a long-term allocation strategy that seeks to mitigate the plans’ funded status volatility by increasing the plans’ investment in fixed-income investments over time. This strategy was developed by analyzing a variety of diversified asset-class combinations in conjunction with the projected liabilities of the plans. As a result of the higher concentration in fixed-income securities, the expected return on plan assets has declined over time as follows:
 
 
2014
 
2013
 
2012
 
2011
Expected long-term rate of return on plan assets
 
6.53%
 
7.10%
 
7.65%
 
8.00%
Significant assumption sensitivity
The increase in the discount rate from 4.25% at December 31, 2012 to 5.05% at December 31, 2013 resulted in a $185.1 million decrease in the benefit obligation for Con-way's defined benefit pension plans. The sensitivity analysis below shows the

 
24
 



effect on net periodic benefit expense (income) and the projected benefit obligation from a 25 basis point change in the assumed discount rate:
(Dollars in thousands)
25 Basis Point Increase
 
25 Basis Point Decrease
Discount rate
 
 
 
Effect on 2013 net periodic benefit expense (income)
$
(983
)
 
$
947

Effect on December 31, 2013 projected benefit obligation
(53,610
)
 
56,559

The funded status of Con-way’s defined benefit pension plans is less sensitive to a 25 basis point change in the assumed discount rate, given that the fixed-income investments held by some of these plans would also experience a corresponding change in value.
For the year ended December 31, 2013, Con-way's expected return on plan assets was $91.3 million compared to the actual return on plan assets of $152.0 million. The sensitivity analysis below shows the effect on net periodic benefit expense (income) from a 25 basis point change in the expected return on plan assets:
(Dollars in thousands)
25 Basis Point Increase
 
25 Basis Point Decrease
Expected return on plan assets
 
 
 
Effect on 2013 net periodic benefit expense (income)
$
(3,215
)
 
$
3,215

Actuarial gains and losses
Changes in the discount rate and/or differences between the expected and actual rate of return on plan assets may result in unrecognized actuarial gains or losses. For Con-way’s defined benefit pension plans, accumulated unrecognized actuarial losses decreased to $441.2 million at December 31, 2013 from $704.2 million at December 31, 2012. The portion of the unrecognized actuarial gain/loss that exceeds 10% of the greater of the projected benefit obligation or the fair value of plan assets at the beginning of the year is amortized and recognized as income/expense over the estimated average remaining life expectancy of plan participants.
Effect on operating results
The effect of the defined benefit pension plans on Con-way’s operating results consist primarily of the net effect of the interest cost on plan obligations for the qualified and non-qualified defined benefit pension plans, the expected return on plan assets for the funded qualified defined benefit pension plans and the amortization of gains or losses. Con-way estimates that the defined benefit pension plans will result in annual income of $2.0 million in 2014. For its defined benefit pension plans, Con-way recognized annual expense of $4.2 million in 2013, $9.6 million in 2012 and $0.4 million in 2011.
Funding
In determining the amount and timing of its pension contributions, Con-way considers its cash position, both the PPA- and GAAP-based measurements of funded status, and the tax deductibility of contributions, among other factors. Con-way made contributions of $55.3 million and $51.4 million to its qualified defined benefit pension plans in 2013 and 2012, respectively. Con-way estimates that it will make $59 million of contributions to its qualified defined benefit pension plans in 2014. The level of Con-way’s annual contributions to its qualified pension plans is subject to change based on variations in interest rates, asset returns, PPA requirements and other factors.
Goodwill
Goodwill is recorded as the excess of the acquired entity’s purchase price over the amounts assigned to assets acquired (including identified intangible assets) and liabilities assumed. Con-way tests for impairment of goodwill annually (with a measurement date of November 30) or whenever events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Each quarter, Con-way considers events that may trigger an impairment of goodwill, including such factors as changes in the total company market value compared to underlying book value, and significant adverse changes that may impact reporting segments or underlying reporting units. A reporting unit for goodwill impairment purposes may be a component of a reporting segment that independently generates revenue and has discrete financial information that is regularly reviewed by management.

 
25
 



Con-way considers multiple valuation methods to determine the fair value of a reporting unit. These methods include the use of public-company multiples, precedent transactions and discounted cash flow models, and may vary depending on the availability of information. In any of the valuation methods, assumptions used to determine the fair value of reporting units may significantly impact the result. The key assumptions used in discounted cash flow models are cash flow projections involving forecasted revenue and expenses, capital expenditures, working capital changes, and the discount rate and the terminal growth rate applied to projected cash flows. Cash flow projections are developed from Con-way’s annual planning process. The discount rate equals the estimated weighted-average cost of capital of the reporting unit from a market-participant perspective. Terminal growth rates are based on inflation assumptions adjusted for factors that may impact future growth such as industry-specific expectations. These estimates and assumptions may be incomplete or inaccurate because of unanticipated events and circumstances. As a result, changes in assumptions and estimates related to goodwill could have a material effect on Con-way’s valuation result, and accordingly, its financial condition or results of operations.
Con-way Truckload had $329.8 million of goodwill at December 31, 2013. For the valuation of Con-way Truckload, Con-way applied three methods: public-company multiples, discounted cash flow, and precedent transaction models. In the assessment of Con-way Truckload’s goodwill, the fair value of the reporting unit exceeded its carrying value by 13% or approximately $78 million. A 100 basis point change in the assumed discount rate would result in a $16 million change in fair value. A 10% change in estimated operating income for each of the next five years would result in a $22 million change in fair value. Changes in forecasted operating results and other assumptions could materially affect the estimated fair value of Con-way Truckload and may result in impairment charges in the future.
Income Taxes
In establishing its deferred income tax assets and liabilities, Con-way makes judgments and interpretations based on the enacted tax laws and published tax guidance that are applicable to its operations. Con-way periodically evaluates the need for a valuation allowance to reduce deferred tax assets to realizable amounts. The likelihood of a material change in Con-way’s expected realization of these assets is dependent on future taxable income, future capital gains, its ability to use tax loss and credit carryforwards and carrybacks, final U.S. and foreign tax settlements, and the effectiveness of its tax-planning strategies in the various relevant jurisdictions.
Con-way assesses its income tax positions and records tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances, and information available at the reporting date. For those positions where it is more likely than not that a tax benefit will be sustained, Con-way has recorded the largest amount of tax benefit with a greater-than-50-percent likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions that do not meet the more-likely-than-not criteria, no tax benefit has been recognized in the financial statements.
Property, Plant and Equipment and Other Long-Lived Assets
In accounting for property, plant and equipment, Con-way makes estimates about the expected useful lives and the expected residual values of these assets, and the potential for impairment based on the fair values of the assets and the cash flows generated by these assets.
The depreciation of property, plant and equipment over their estimated useful lives and the determination of any salvage values require management to make judgments about future events. Con-way periodically evaluates whether changes to estimated useful lives or salvage values are necessary to ensure these estimates accurately reflect the economic use of the assets. Con-way’s periodic evaluation may result in changes in the estimated lives and/or salvage values used to depreciate its assets, which can affect the amount of periodic depreciation expense recognized and, ultimately, the gain or loss on the disposal of the asset. In response to recent 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. This change decreased depreciation expense by $1.3 million in 2013 and is expected to decrease 2014 depreciation expense by $7.3 million.
Long-lived assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. For assets that are to be held and used, an impairment charge is recognized when the estimated undiscounted cash flows associated with the asset or group of assets is less than the carrying value. If impairment exists, a charge is recognized for the difference between the carrying value and the fair value. Fair values are determined using quoted market values, discounted cash flows or external appraisals, as applicable. Assets held for disposal are carried at the lower of carrying value or estimated net realizable value.
Each quarter, Con-way considers events that may trigger an impairment of long-lived assets. Indicators of impairment that Con-way considers include such factors as a significant decrease in market value of the long-lived asset, a significant change in the extent or manner in which the long-lived asset is being used, and current-period losses combined with a history of losses or a projection of continuing losses associated with the use of the long-lived asset.

 
26
 



Revenue Recognition
Con-way Freight recognizes revenue between reporting periods based on relative transit time in each period and recognizes expense as incurred. Con-way Truckload recognizes revenue and related direct costs when the shipment is delivered. Menlo recognizes revenue based on the service outputs provided to the customer.
Critical revenue-related policies and estimates for Con-way Freight and Con-way Truckload include those related to revenue adjustments and uncollectible accounts receivable. Critical revenue-related policies and estimates for Menlo include those related to uncollectible accounts receivable, measuring the service outputs provided to customers, and gross- or net-basis revenue recognition. Con-way believes that its revenue recognition policies are appropriate and that its use of revenue-related estimates and judgments provide a reasonable approximation of the actual revenue earned.
Estimated revenue adjustments
Generally, the pricing assessed by companies in the transportation industry is subject to subsequent adjustment due to several factors, including weight and freight-classification verifications and pricing discounts. Revenue adjustments are estimated based largely on historical experience.
Uncollectible accounts receivable
Con-way Freight and Con-way Truckload report accounts receivable at net realizable value and provide an allowance for uncollectible accounts when losses are probable. Estimates for uncollectible accounts are based on various judgments and assumptions, including revenue levels, historical loss experience, economic conditions and the aging of outstanding accounts receivable.
Menlo, based on the size and nature of its client base, performs a periodic evaluation of its customers’ creditworthiness and accounts receivable portfolio and recognizes expense from uncollectible accounts when losses are both probable and reasonably estimable.
Service outputs
For certain customer contracts, Menlo makes estimates when measuring the service outputs provided to the customer, including services provided under performance-based incentive arrangements. The contingent portion of the revenue in these performance-based incentive arrangements is not considered fixed or determinable until the performance criteria have been met.
Gross or net-basis revenue recognition
Determining whether revenue should be reported on a gross or net basis is based on an assessment of whether Menlo is acting as the principal or the agent in the transaction and involves judgment based on the terms of the arrangement.
Self-Insurance Accruals
Con-way uses a combination of large-deductible purchased insurance and self-insurance programs to provide for the costs of medical, vehicular, cargo and workers’ compensation claims. The long-term portion of self-insurance accruals relates primarily to workers’ compensation and vehicular claims that are expected to be payable over several years. Con-way periodically evaluates the level of insurance coverage and adjusts insurance levels based on risk tolerance and premium expense.
The measurement and classification of self-insured costs requires the consideration of historical cost experience, demographic and severity factors, and judgments about the current and expected levels of cost per claim and retention levels. These methods provide estimates of undiscounted liability associated with claims incurred as of the balance sheet date, including estimates of claims incurred but not reported. Con-way believes its actuarial methods are appropriate for measuring these highly judgmental self-insurance accruals. However, based on the magnitude of claims and the length of time from incurrence of the claims to ultimate settlement, the use of any estimation method is sensitive to the assumptions and factors described above. Accordingly, changes in these assumptions and factors can materially affect the estimated liability and those amounts may be different than the actual costs paid to settle the claims.

 
27
 



New Accounting Standards
Refer to Note 1, “Principal Accounting Policies,” of Item 8, “Financial Statements and Supplementary Data” for a discussion of recently issued accounting standards that Con-way has not yet adopted.
Forward-Looking Statements
Certain statements included herein constitute “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to a number of risks and uncertainties, and should not be relied upon as predictions of future events. All statements other than statements of historical fact are forward-looking statements, including:
any projections of earnings, 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.” 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.


 
28
 



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Con-way is exposed to a variety of market risks, including the effects of interest rates, fuel prices and foreign currency exchange rates.
Con-way enters into derivative financial instruments only in circumstances that warrant the hedge of an underlying asset, liability or future cash flow against exposure to some form of interest rate, commodity or currency-related risk. Additionally, the designated hedges should have high correlation to the underlying exposure such that fluctuations in the value of the derivatives offset reciprocal changes in the underlying exposure. 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 above in “Critical Accounting Policies and Estimates,” 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 exposed to the effects of changes in the price and availability of diesel fuel, as more fully discussed in Item 1A, “Risk Factors.” For the periods presented, Con-way used no material derivative financial instruments to manage the risk associated with changes in the price of diesel fuel.
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.

 
29
 



Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Con-way Inc.:
We have audited the accompanying consolidated balance sheets of Con-way Inc. and subsidiaries (the Company) as of December 31, 2013 and 2012, and the related statements of consolidated income, comprehensive income (loss), shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2013. We also have audited the Company’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting in Item 9A. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Con-way Inc. and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).


/s/ KPMG LLP
Portland, Oregon
February 25, 2014

 
30
 



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Con-way Inc.
Consolidated Balance Sheets
(Dollars in thousands)
 
December 31,
 
 
2013
 
2012
Assets
 
 
 
 
Current Assets
 
 
 
 
Cash and cash equivalents
 
$
484,502

 
$
429,784

Marketable securities
 

 
3,200

Trade accounts receivable, net
 
575,013

 
567,097

Other accounts receivable
 
51,063

 
43,912

Operating supplies, at lower of average cost or market
 
23,910

 
23,180

Prepaid expenses and other current assets
 
57,961

 
49,681

Deferred income taxes
 
15,332

 
34,520

Total Current Assets
 
1,207,781

 
1,151,374

 
 
 
 
 
Property, Plant and Equipment
 
 
 
 
Land
 
193,364

 
195,737

Buildings and leasehold improvements
 
856,038

 
840,966

Revenue equipment
 
1,857,737

 
1,746,816

Other equipment
 
353,205

 
329,730

 
 
3,260,344

 
3,113,249

Accumulated depreciation
 
(1,603,511
)
 
(1,526,648
)
Net Property, Plant and Equipment
 
1,656,833

 
1,586,601

 
 
 
 
 
Other Assets
 
 
 
 
Deferred charges and other assets
 
32,200

 
33,963

Capitalized software, net
 
21,488

 
20,365

Employee benefits
 
15,018

 
10,951

Intangible assets, net
 
8,640

 
10,997

Goodwill
 
337,971

 
338,164

 
 
415,317

 
414,440

Total Assets
 
$
3,279,931

 
$
3,152,415

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














 
31
 



Con-way Inc.
Consolidated Balance Sheets
 
(Dollars in thousands, except per share data)
 
December 31,
 
 
2013
 
2012
Liabilities and Shareholders' Equity
 
 
 
 
Current Liabilities
 
 
 
 
Accounts payable
 
$
390,537

 
$
330,665

Accrued liabilities
 
229,078

 
253,209

Self-insurance accruals
 
105,063

 
100,828

Short-term borrowings
 
1,588

 
6,982

Current maturities of long-term debt and capital leases
 
19,685

 
16,008

Total Current Liabilities
 
745,951

 
707,692

 
 
 
 
 
Long-Term Liabilities
 
 
 
 
Long-term debt
 
719,155

 
719,016

Long-term obligations under capital leases
 
16,185

 
30,355

Self-insurance accruals
 
142,307

 
143,735

Employee benefits
 
240,171

 
603,619

Other liabilities and deferred credits
 
39,524

 
32,201

Deferred income taxes
 
237,949

 
77,412

Total Liabilities
 
2,141,242

 
2,314,030

 
 
 
 
 
Commitments and Contingencies (Notes 5, 6, 7 and 11)
 

 

 
 
 
 
 
Shareholders' Equity
 
 
 
 
Common stock, $0.625 par value; authorized 100,000,000 shares; issued
 
 
 
 
64,592,756 and 63,565,453 shares, respectively
 
40,349

 
39,701

Additional paid-in capital, common stock
 
653,487

 
614,334

Retained earnings
 
1,043,472

 
966,939

Cost of repurchased common stock (7,669,889 and 7,583,471 shares, respectively)
 
(329,088
)
 
(326,128
)
Accumulated other comprehensive loss
 
(269,531
)
 
(456,461
)
Total Shareholders' Equity
 
1,138,689

 
838,385

Total Liabilities and Shareholders' Equity
 
$
3,279,931

 
$
3,152,415

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


 
32
 



Con-way Inc.
Statements of Consolidated Income
 
(Dollars in thousands, except per share data)
 
Years ended December 31,
 
 
2013
 
2012
 
2011
Revenue
 
$
5,473,356

 
$
5,580,247

 
$
5,289,953

 
 
 
 
 
 
 
Costs and Expenses
 
 
 
 
 
 
Salaries, wages and employee benefits
 
2,143,036

 
2,125,104

 
2,027,870

Purchased transportation
 
1,323,005

 
1,531,319

 
1,381,267

Other operating expenses
 
634,107

 
567,810

 
553,692

Fuel and fuel-related taxes
 
532,958

 
553,301

 
566,026

Depreciation and amortization
 
230,751

 
216,215

 
202,647

Purchased labor
 
148,165

 
113,619

 
113,929

Rents and leases
 
129,325

 
115,954

 
116,415

Maintenance
 
123,056

 
128,084

 
130,179

Gain from purchase-price adjustment
 

 

 
(10,000
)
 
 
5,264,403

 
5,351,406

 
5,082,025

Operating Income
 
208,953

 
228,841

 
207,928

 
 
 
 
 
 
 
Other Income (Expense)
 
 
 
 
 
 
Investment income
 
621

 
831

 
920

Interest expense
 
(53,339
)
 
(54,777
)
 
(55,589
)
Miscellaneous, net
 
(1,870
)
 
(3,941
)
 
(5,187
)
 
 
(54,588
)
 
(57,887
)
 
(59,856
)
Income before Income Tax Provision
 
154,365

 
170,954

 
148,072

Income Tax Provision
 
55,212

 
66,408

 
59,629

Net Income
 
$
99,153

 
$
104,546

 
$
88,443

 
 
 
 
 
 
 
Weighted-Average Common Shares Outstanding
 
 
 
 
 
 
Basic
 
56,511,563

 
55,837,574

 
55,388,297

Diluted
 
57,240,588

 
56,485,987

 
56,101,903

 
 
 
 
 
 
 
Earnings per Common Share
 
 
 
 
 
 
Basic
 
$
1.75

 
$
1.87

 
$
1.60

Diluted
 
$
1.73

 
$
1.85

 
$
1.58

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


 
33
 



Con-way Inc.
Statements of Consolidated Comprehensive Income (Loss)
 
 
 
 
 
 
(Dollars in thousands)
Years ended December 31,
 
2013
 
2012
 
2011
Net Income
$
99,153

 
$
104,546

 
$
88,443

 
 
 
 
 
 
Other Comprehensive Income (Loss):
 

 
 

 
 
Foreign currency translation adjustment
871

 
481

 
(1,331
)
Unrealized gain (loss) on available-for-sale security, net of deferred tax of
 
 
 
 
 
$0, $145, and $4, respectively

 
226

 
(6
)
Employee benefit plans
 
 
 
 
 
Actuarial gain (loss), net of deferred tax of $103,308, $1,903,
 
 
 
 
 
and $104,425, respectively
161,631

 
(2,977
)
 
(163,312
)
Net actuarial loss included in net periodic benefit expense or income,
 
 
 
 
 
net of deferred tax of $7,562, $7,969, and $4,373, respectively
11,827

 
12,465

 
6,837

Prior-service cost or credit, net of deferred tax of $7,505, $17,577,
 
 
 
 
 
and $0, respectively
11,738

 
(27,493
)
 

Amortization of prior service cost or credit included in net periodic
 
 
 
 
 
benefit expense or income, net of deferred tax of $552, $465, and $468, respectively
863

 
(727
)
 
(730
)
 
186,059

 
(18,732
)
 
(157,205
)
Total Other Comprehensive Income (Loss)
186,930

 
(18,025
)
 
(158,542
)
 
 
 
 
 
 
Comprehensive Income (Loss)
$
286,083

 
$
86,521

 
$
(70,099
)
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.



 
34
 



Con-way Inc.
Statements of Consolidated Cash Flows
(Dollars in thousands)
 
Years ended December 31,
 
 
2013
 
2012
 
2011
Cash and Cash Equivalents, Beginning of Period
 
$
429,784

 
$
438,010

 
$
421,420

Operating Activities
 
 
 
 
 
 
Net income
 
99,153

 
104,546

 
88,443

Adjustments to reconcile net income to net cash provided by operating
 
 
 
 
 
 
activities:
 
 
 
 
 
 
Depreciation and amortization, net of accretion
 
229,236

 
215,202

 
201,638

Non-cash compensation and employee benefits
 
38,496

 
33,180

 
22,050

Increase in deferred income taxes
 
57,423

 
63,091

 
52,160

Provision for uncollectible accounts
 
6,908

 
6,358

 
6,761

Gain from purchase-price adjustment
 

 

 
(10,000
)
Gain from sales of property, equipment and investment, net
 
(5,720
)
 
(8,649
)
 
(7,120
)
Changes in assets and liabilities:
 

 

 

Receivables
 
(12,869
)
 
7,076

 
(42,315
)
Prepaid expenses
 
21

 
(1,312
)
 
(1,024
)
Accounts payable
 
25,972

 
(14,824
)
 
41,313

Accrued variable compensation
 
(17,140
)
 
1,201

 
22,439

Accrued liabilities, excluding accrued variable compensation
 
 
 
 
 
 
and employee benefits
 
11,572

 
1,988

 
3,808

Self-insurance accruals
 
(3,661
)
 
(18,654
)
 
(11,951
)
Accrued income taxes
 
(4,846
)
 
(2,316
)
 
34,362

Employee benefits
 
(82,507
)
 
(67,291
)
 
(52,713
)
Other
 
5,946

 
(8,185
)
 
(3,141
)
Net Cash Provided by Operating Activities
 
347,984

 
311,411

 
344,710

Investing Activities
 
 
 
 
 
 
Capital expenditures
 
(281,943
)
 
(293,135
)
 
(288,994
)
Software expenditures
 
(7,398
)
 
(8,963
)
 
(8,667
)
Proceeds from sales of property and equipment
 
14,202

 
20,840

 
13,213

Proceeds from purchase-price adjustment
 

 

 
10,000

Purchases of marketable securities
 

 
(8,200
)
 
(13,480
)
Proceeds from sales of marketable securities
 
3,200

 
23,613

 
900

Net Cash Used in Investing Activities
 
(271,939
)
 
(265,845
)
 
(287,028
)
Financing Activities
 
 
 
 
 
 
Payment of capital leases
 
(16,068
)
 
(29,015
)
 
(19,811
)
Net repayments of short-term borrowings
 
(5,383
)
 
(7,621
)
 
(4,691
)
Payment of debt issuance costs
 
(543
)
 

 
(661
)
Proceeds from exercise of stock options
 
20,777

 
3,560

 
5,532

Excess tax benefit from share-based compensation
 
2,510

 
1,641

 
716

Payments of common dividends
 
(22,620
)
 
(22,357
)
 
(22,177
)
Net Cash Used in Financing Activities
 
(21,327
)
 
(53,792
)
 
(41,092
)
Increase (Decrease) in Cash and Cash Equivalents
 
54,718

 
(8,226
)
 
16,590

Cash and Cash Equivalents, End of Period
 
$
484,502

 
$
429,784

 
$
438,010

Supplemental Disclosure
 
 
 
 
 
 
Cash paid (refunded) for income taxes, net
 
$
(21
)
 
$
6,163

 
$
(28,740
)
Cash paid for interest, net of amounts capitalized
 
$
52,809

 
$
53,806

 
$
54,676

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

 
35
 



Con-way Inc.
Statements of Consolidated Shareholders' Equity
 
Common Stock

Retained
Earnings

Repurchased
Common
Stock

Accumulated
Other
Comprehensive
Loss
(Dollars in thousands, except per share data)
Number of
Shares

Amount

Additional
Paid-in
Capital
Balance, December 31, 2010
62,750,994

 
$
39,143

 
$
580,008

 
$
821,187

 
$
(340,912
)
 
$
(279,894
)
Net income






88,443





Other comprehensive loss:











Foreign currency translation adjustment










(1,331
)
Employee benefit plans, net of deferred tax of $100,520










(157,205
)
Unrealized loss on available-for-sale security, net of
 
 
 
 
 
 
 
 
 
 
 
deferred tax of $4










(6
)
Exercise of stock options, including tax of $629
244,944


153


6,008







Share-based compensation, net of tax of $1,966
69,993


98


9,976


(73
)

(1,471
)


Repurchased common stock issued under defined
 
 
 
 
 
 
 
 
 
 
 
contribution plan






(2,622
)

19,929



Common dividends declared ($.40 per share)






(22,177
)




Balance, December 31, 2011
63,065,931


$
39,394


$
595,992


$
884,758


$
(322,454
)

$
(438,436
)
Net income






104,546





Other comprehensive income (loss):











Foreign currency translation adjustment










481

Employee benefit plans, net of deferred tax of $24,108










(18,732
)
Unrealized gain on available-for-sale security, net of
 
 
 
 
 
 
 
 
 
 
 
deferred tax of $145