item 14 exhibits financial statement schedules reports form 8k financial statements exhibits filed 1 financial statements see index financial information 2 financial statement schedules see index financial information 3 exhibits see index exhibits b reports form 8k reports form 8k filed three months ended december 31 1994 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused form 10k annual report signed behalf undersigned thereunto duly authorized consolidated freightways inc registrant march 27 1995 sdonald e moffitt donald e moffitt president chief executive officer march 27 1995 sgregory l quesnel gregory l quesnel executive vice president chief financial officer march 27 1995 sgary taliaferro gary taliaferro vice president controller signatures pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated march 27 1995 sraymond f obrien raymond f obrien chairman board march 27 1995 sdonald e moffitt donald e moffitt president chief executive officer director march 27 1995 searl f cheit earl f cheit director march 27 1995 sg robert evans g robert evans director march 27 1995 srobert jaunich ii robert jaunich ii director march 27 1995 swilliam walsh william walsh director march 27 1995 srobert p wayman robert p wayman director consolidated freightways inc form 10k year ended december 31 1994 index financial information consolidated freightways inc subsidiaries following consolidated financial statements consolidated freightways inc subsidiaries appearing pages 21 41 inclusive companys 1994 annual report shareholders incorporated herein reference report independent public accountants consolidated balance sheets december 31 1994 1993 statements consolidated operations years ended december 31 1994 1993 1992 statements consolidated cash flows years ended december 31 1994 1993 1992 statements consolidated shareholders equity years ended december 31 1994 1993 1992 notes consolidated financial statements addition following consolidated financial information filed part form 10k page consent independent public accountants 21 report independent public accountants 21 schedule ii valuation qualifying accounts 22 schedules omitted either 1 neither required applicable 2 required information included consolidated financial statements notes thereto signature consent independent public accountants independent public accountants hereby consent incorporation reports included incorporated reference form 10k companys previously filed registration statement file nos 281030 3329793 3352599 sarthur andersen llp arthur andersen llp san francisco california march 27 1995 report independent public accountants shareholders board directors consolidated freightways inc audited accordance generally accepted auditing standards consolidated financial statements included consolidated freightways incs 1994 annual report shareholders incorporated reference form 10k issued report thereon dated january 27 1995 audit made purpose forming opinion statements taken whole schedule page 22 responsibility companys management presented purposes complying securities exchange commissions rules part basic financial statements schedule subjected auditing procedures applied audit basic financial statements opinion fairly states material respects financial data required set forth therein relation basic financial statements taken whole sarthur andersen llp arthur andersen llp san francisco california january 27 1995 schedule ii consolidated freightways inc valuation qualifying accounts three years ended december 31 1994 thousands description allowance doubtful accounts additions balance charged balance beginning costs end period expenses accounts deductions period 1994 29780 6676 9518 26938 1993 26198 27127 23545a 29780 1992 25742 29707 29251a 26198 accounts written net recoveries index exhibits item 14a3 exhibit 3 articles incorporation bylaws 31 consolidated freightways inc certificates incorporation amended exhibit 3a2 companys quarterly report form 10q quarter ended march 31 1987 32 consolidated freightways inc bylaws amended september 26 4 instruments defining rights security holders including debentures 41 consolidated freightways inc stockholder rights plan exhibit 1 form 8a dated october 27 1986 42 certificate designations series b cumulative convertible preferred stock exhibit 41 filed form se dated may 25 1989 43 indenture registrant security pacific national bank trustee respect 918 notes due 1999 medium term notes series exhibit 41 filed form se dated march 20 1990 44 form security 918 notes due 1999 issued consolidated freightways inc exhibit 41 filed form se dated august 25 1989 45 officers certificate dated august 24 1989 establishing form terms debt securities issued consolidated freightways inc exhibit 42 filed form se dated august 25 1989 46 form security mediumterm notes series issued consolidated freightways inc exhibit 41 filed form se dated september 18 1989 47 officers certificate dated september 18 1989 establishing form terms debt securities issued consolidated freightways inc exhibit 42 filed form se dated september 19 1989 instruments defining rights security holders longterm debt consolidated freightways inc subsidiaries financial statements required filed form 10k total amount securities authorized instrument less 10 total assets consolidated freightways inc subsidiaries consolidated basis filed exhibits form 10k company agrees furnish copy applicable instrument securities exchange commission upon request previously filed securities exchange commission incorporated herein reference exhibit 10 material contracts 101 consolidated freightways inc longterm incentive plan 1978 amended amendment 4 exhibit 10e companys form 10k year ended december 31 1983 102 amendments 5 6 7 consolidated freightways inc longterm incentive plan 1978 amended amendment 4 exhibit 101 filed form se dated march 25 1991 103 consolidated freightways inc longterm incentive plan 1988 exhibit 10g companys form 10k year ended december 31 1987 104 amendment 3 consolidated freightways inc longterm incentive plan 1988 exhibit 102 filed form se dated march 25 1991 105 consolidated freightways inc stock option plan 1978 amended amendment 1 exhibit 10e companys form 10k year ended december 31 1981 106 consolidated freightways inc stock option plan 1988 amended exhibit 10i companys form 10k year ended december 31 1987 amended form s8 dated december 16 1992 107 forms stock option agreement without cash surrender rights consolidated freightways inc stock option plan 1988 exhibit 10j companys form 10k year ended december 31 1987 108 form consolidated freightways inc deferred compensation agreement exhibit 10i companys form 10k year ended december 31 1981 109 consolidated freightways inc retirement plan formerly emery air freight corporation pension plan amended effective january 1 1985 amendments dated october 30 1987 exhibit 422 emery air freight corporation quarterly report form 10q dated november 16 1987 1010 emery air freight plan retirees effective october 31 1987 exhibit 423 emery air freight corporation quarterly report form 10q dated november 16 1987 1011 consolidated freightways inc common stock fund formerly emery air freight corporation employee stock ownership plan effective october 1 1987 esop exhibit 433 emery air freight corporation annual report form 10k dated march 28 1988 previously filed securities exchange commission incorporated herein reference incorporated reference indicated reports filed securities act 1934 amended emery air freight corporation file 13893 designates contract compensation plan management directors exhibit 1012 employee stock ownership trust agreement dated october 8 1987 amended emery air freight corporation arthur w demelle daniel j mccauley daniel w shea trustees esop trust exhibit 434 emery air freight corporation annual report form 10k dated march 28 1988 1013 amended restated subscription stock purchase agreement dated december 31 1987 emery air freight corporation boston safe deposit trust company capacity successor trustee emery air freight corporation employee stock ownership plan trust boston safe exhibit b emery air freight corporation current report form 8k dated january 11 1988 1014 supplemental subscription stock purchase agreement dated january 29 1988 emery air freight corporation boston safe exhibit b emery air freight corporation current report form 8k dated february 12 1988 1015 trust indenture dated november 1 1988 city dayton ohio security pacific national trust company new york trustee bankers trust company trustee exhibit 41 emery air freight corporation current report form 8k dated december 2 1988 1016 bond purchase agreement dated november 7 1988 among city dayton ohio emery air freight corporation drexel burnham lambert incorporated exhibit 287 emery air freight corporation current report form 8k dated december 2 1988 1017 lease agreement dated november 1 1988 city dayton ohio emery air freight corporation exhibit 101 emery air freight corporation annual report form 10k year ended december 31 1988 1018 credit agreement dated january 14 1993 among emery receivables corporation borrower emery air freight corporation consolidated freightways inc individually servicer various financial institutions exhibit 1019 companys form 10k year ended december 31 1992 1019 purchase sale agreement dated january 14 1993 among emery air freight corporation emery distribution systems inc originators emery receivables corporation consolidated freightways inc servicer exhibit 1020 companys form 10k year ended december 31 1992 1020 consolidated freightways inc directors election form deferral payment directors fees 1021 consolidated freightways inc 1993 executive deferral plan exhibit 1022 companys form 10k year ended december 31 1992 previously filed securities exchange commission incorporated herein reference incorporated reference indicated reports filed securities act 1934 amended emery air freight corporation file 13893 designates contract compensation plan management directors exhibit 1022 consolidated freightways inc executive incentive plan 1995 1023 cf motorfreight incentive plan 1995 1024 conway transportation services inc incentive plan 1995 1025 emery worldwide incentive plan 1995 1026 leland james service corporationcfi executive incentive plan 1995 1027 300 million amended restated credit agreement dated january 10 1995 among consolidated freightways inc various financial institutions 1028 official statement issuers special facilities revenue refunding bonds 1993 series e f dated september 29 1993 among city dayton ohio emery air freight corporation exhibit 101 companys form 10q quarterly period ended september 30 1993 1029 trust indenture dated september 1 1993 city dayton ohio bankers trust company trustee exhibit 102 companys form 10q quarterly period ended september 30 1993 1030 supplemental lease agreement dated september 1 1993 city dayton ohio lessor emery air freight corporation lessee exhibit 103 companys form 10q quarterly period ended september 30 1993 1031 supplemental retirement plan dated january 1 1990 exhibit 1031 companys form 10k year ended december 31 1993 1032 directors 24hour accidental death dismemberment plan exhibit 1032 companys form 10k year ended december 31 1993 1033 executive splitdollar life insurance plan dated january 1 1994 exhibit 1033 companys form 10k year ended december 31 1993 1034 board directors compensation plan dated january 1 1994 exhibit 1034 companys form 10k year ended december 31 1993 1035 excess benefit plan dated january 1 1987 exhibit 1035 companys form 10k year ended december 31 1993 1036 directors business travel insurance plan exhibit 1036 companys form 10k year ended december 31 1993 1037 deferred compensation plan executives dated october 1 1993 exhibit 1037 companys form 10k year ended december 31 1993 1038 amended restated 1993 nonqualified employee benefit plans trust agreement dated january 1 1995 1039 consolidated freightways inc equity incentive plan non employee directors attachment companys 1994 proxy statement dated march 18 1994 previously filed securities exchange commission incorporated herein reference designates contract compensation plan management directors exhibit 1040 amended restated retirement plan directors consolidated freightways inc dated january 1 1994 13 annual report security holders consolidated freightways inc 1994 annual report shareholders portions referenced herein incorporated form 10k portions shareholders employees required therefore filed part form 10k 22 significant subsidiaries company 27 financial data schedule 28 additional documents 281 consolidated freightways inc 1995 notice annual meeting proxy statement dated march 17 1995 portions referenced herein incorporated form 10k portions required therefore filed part form 10k 282 note agreement dated july 17 1989 esop consolidated freightways inc note purchasers named therein exhibit 281 filed form se dated july 21 1989 283 guarantee agreement dated july 17 1989 delivered consolidated freightways inc exhibit 282 filed form se dated july 21 1989 284 form restructured note agreement consolidated freightways inc thrift stock ownership trust issuer various financial institutions purchasers named therein dated november 3 1992 exhibit 284 companys form 10k year ended december 31 1992 285 form restructured guarantee agreement consolidated freightways inc issuer various financial institutions purchasers named therein dated november 3 1992 exhibit 285 companys form 10k year ended december 31 1992 remaining exhibits omitted either 1 neither required applicable 2 required information included consolidated financial statements notes thereto previously filed securities exchange commission incorporated herein reference designates compensation plan management directorsitem 14 exhibits financial statement schedules reports form 8k financial statements exhibits filed 1 financial statements see index financial information 2 financial statement schedules see index financial information 3 exhibits see index exhibits b reports form 8k reports form 8k filed three months ended december 31 1995 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused form 10k annual report signed behalf undersigned thereunto duly authorized consolidated freightways inc registrant march 25 1996 sdonald e moffitt donald e moffitt chairman president chief executive officer march 25 1996 sgregory l quesnel gregory l quesnel executive vice president chief financial officer march 25 1996 sgary taliaferro gary taliaferro vice president controller signatures pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated march 25 1996 sdonald e moffitt donald e moffitt chairman board president chief executive officer march 25 1996 srobert alpert robert alpert director march 25 1996 searl f cheit earl f cheit director march 25 1996 srichard clarke richard clarke director march 25 1996 sg robert evans g robert evans director march 25 1996 smargaret g gill margaret g gill director march 25 1996 srobert jaunich ii robert jaunich ii director march 25 1996 srichard b madden richard b madden director march 25 1996 sronald e poelman ronald e poelman director signatures march 25 1996 srobert rogers robert rogers director march 25 1996 swilliam walsh william walsh director march 25 1996 srobert p wayman robert p wayman director consolidated freightways inc form 10k year ended december 31 1995 index financial information consolidated freightways inc subsidiaries following consolidated financial statements consolidated freightways inc subsidiaries appearing pages 19 37 inclusive companys 1995 annual report shareholders incorporated herein reference report independent public accountants consolidated balance sheets december 31 1995 1994 statements consolidated income years ended december 31 1995 1994 1993 statements consolidated cash flows years ended december 31 1995 1994 1993 statements consolidated shareholders equity years ended december 31 1995 1994 1993 notes consolidated financial statements addition following consolidated financial information filed part form 10k page consent independent public accountants 21 report independent public accountants 21 schedule ii valuation qualifying accounts 22 schedules omitted either 1 neither required applicable 2 required information included consolidated financial statements notes thereto signature consent independent public accountants independent public accountants hereby consent incorporation reports included incorporated reference form 10k companys previously filed registration statement file nos 2 81030 3329793 3352599 3360619 3360625 sarthur andersen llp arthur andersen llp san francisco california march 25 1996 report independent public accountants shareholders board directors consolidated freightways inc audited accordance generally accepted auditing standards consolidated financial statements included consolidated freightways incs 1995 annual report shareholders incorporated reference form 10k issued report thereon dated january 26 1996 audit made purpose forming opinion statements taken whole schedule page 22 responsibility companys management presented purposes complying securities exchange commissions rules part basic financial statements schedule subjected auditing procedures applied audit basic financial statements opinion fairly states material respects financial data required set forth therein relation basic financial statements taken whole sarthur andersen llp arthur andersen llp san francisco california january 26 1996 schedule ii consolidated freightways inc valuation qualifying accounts three years ended december 31 1995 thousands description allowance doubtful accounts additions balance charged balance beginning costs end period expenses accounts deductions period 1995 26938 13343 14062a 26219 1994 29780 6676 9518a 26938 1993 26198 27127 23545a 29780 accounts written net recoveries index exhibits item 14a3 exhibit 3 articles incorporation bylaws 31 consolidated freightways inc certificates incorporation amended exhibit 3a2 companys quarterly report form 10q quarter ended march 31 1987 32 consolidated freightways inc bylaws amended december 4 instruments defining rights security holders including debentures 41 consolidated freightways inc stockholder rights plan exhibit 1 form 8a dated october 27 1986 42 certificate designations series b cumulative convertible preferred stock exhibit 41 filed form se dated may 25 1989 43 indenture registrant security pacific national bank trustee respect 918 notes due 1999 medium term notes series exhibit 41 filed form se dated march 20 1990 44 form security 918 notes due 1999 issued consolidated freightways inc exhibit 41 filed form se dated august 25 1989 45 officers certificate dated august 24 1989 establishing form terms debt securities issued consolidated freightways inc exhibit 42 filed form se dated august 25 1989 46 form security mediumterm notes series issued consolidated freightways inc exhibit 41 filed form se dated september 18 1989 47 officers certificate dated september 18 1989 establishing form terms debt securities issued consolidated freightways inc exhibit 42 filed form se dated september 19 1989 48 indenture registrant first national bank chicago bank trustee respect registration various debt equity securities exhibit 4b filed form s3 dated june 27 1995 49 indenture registrant bank one columbus na trustee respect registration various debt equity securities exhibit 4e filed form s3 dated june 27 1995 410 form security 735 notes due 2005 issued consolidated freightways inc exhibit 44 filed form s4 dated june 27 1995 previously filed securities exchange commission incorporated herein reference instruments defining rights security holders longterm debt consolidated freightways inc subsidiaries financial statements required filed form 10k total amount securities authorized instrument less 10 total assets consolidated freightways inc subsidiaries consolidated basis filed exhibits form 10k company agrees furnish copy applicable instrument securities exchange commission upon request exhibit 10 material contracts 101 consolidated freightways inc longterm incentive plan 1978 amended amendment 4 exhibit 10e companys form 10k year ended december 31 1983 102 amendments 5 6 7 consolidated freightways inc longterm incentive plan 1978 amended amendment 4 exhibit 101 filed form se dated march 25 1991 103 consolidated freightways inc longterm incentive plan 1988 exhibit 10g companys form 10k year ended december 31 1987 104 amendment 3 consolidated freightways inc longterm incentive plan 1988 exhibit 102 filed form se dated march 25 1991 105 consolidated freightways inc stock option plan 1978 amended amendment 1 exhibit 10e companys form 10k year ended december 31 1981 106 consolidated freightways inc stock option plan 1988 amended exhibit 10i companys form 10k year ended december 31 1987 amended form s8 dated december 16 1992 107 forms stock option agreement without cash surrender rights consolidated freightways inc stock option plan 1988 exhibit 10j companys form 10k year ended december 31 1987 previously filed securities exchange commission incorporated herein reference designates contract compensation plan management directors exhibit 108 form consolidated freightways inc deferred compensation agreement exhibit 10i companys form 10k year ended december 31 1981 109 consolidated freightways inc retirement plan formerly emery air freight corporation pension plan amended effective january 1 1985 amendments dated october 30 1987 exhibit 422 emery air freight corporation quarterly report form 10q dated november 16 1987 1010 emery air freight plan retirees effective october 31 1987 exhibit 423 emery air freight corporation quarterly report form 10q dated november 16 1987 1011 consolidated freightways inc common stock fund formerly emery air freight corporation employee stock ownership plan effective october 1 1987 esop exhibit 433 emery air freight corporation annual report form 10k dated march 28 1988 1012 employee stock ownership trust agreement dated october 8 1987 amended emery air freight corporation arthur w demelle daniel j mccauley daniel w shea trustees esop trust exhibit 434 emery air freight corporation annual report form 10k dated march 28 1988 1013 amended restated subscription stock purchase agreement dated december 31 1987 emery air freight corporation boston safe deposit trust company capacity successor trustee emery air freight corporation employee stock ownership plan trust boston safe exhibit b emery air freight corporation current report form 8k dated january 11 1988 1014 supplemental subscription stock purchase agreement dated january 29 1988 emery air freight corporation boston safe exhibit b emery air freight corporation current report form 8k dated february 12 1988 1015 trust indenture dated november 1 1988 city dayton ohio security pacific national trust company new york trustee bankers trust company trustee exhibit 41 emery air freight corporation current report form 8k dated december 2 1988 previously filed securities exchange commission incorporated herein reference incorporated reference indicated reports filed securities act 1934 amended emery air freight corporation file 13893 designates contract compensation plan management directors exhibit 1016 bond purchase agreement dated november 7 1988 among city dayton ohio emery air freight corporation drexel burnham lambert incorporated exhibit 287 emery air freight corporation current report form 8k dated december 2 1988 1017 lease agreement dated november 1 1988 city dayton ohio emery air freight corporation exhibit 101 emery air freight corporation annual report form 10k year ended december 31 1988 1018 credit agreement dated january 14 1993 among emery receivables corporation borrower emery air freight corporation consolidated freightways inc individually servicer various financial institutions exhibit 1019 companys form 10k year ended december 31 1992 1019 purchase sale agreement dated january 14 1993 among emery air freight corporation emery distribution systems inc originators emery receivables corporation consolidated freightways inc servicer exhibit 1020 companys form 10k year ended december 31 1992 1020 consolidated freightways inc directors election form deferral payment directors fees 1021 consolidated freightways inc 1993 executive deferral plan exhibit 1022 companys form 10k year ended december 31 1992 1022 300 million amended restated credit agreement dated january 10 1995 among consolidated freightways inc various financial institutions exhibit 1027 companys form 10k year ended december 31 1994 1023 official statement issuers special facilities revenue refunding bonds 1993 series e f dated september 29 1993 among city dayton ohio emery air freight corporation exhibit 101 companys form 10q quarterly period ended september 30 1993 1024 trust indenture dated september 1 1993 city dayton ohio bankers trust company trustee exhibit 102 companys form 10q quarterly period ended september 30 1993 1025 supplemental lease agreement dated september 1 1993 city dayton ohio lessor emery air freight corporation lessee exhibit 103 companys form 10q quarterly period ended september 30 1993 previously filed securities exchange commission incorporated herein reference incorporated reference indicated reports filed securities act 1934 amended emery air freight corporation file 13893 designates contract compensation plan management directors exhibit 1026 supplemental retirement plan dated january 1 1990 exhibit 1031 companys form 10k year ended december 31 1993 1027 directors 24hour accidental death dismemberment plan exhibit 1032 companys form 10k year ended december 31 1993 1028 executive splitdollar life insurance plan dated january 1 1994 exhibit 1033 companys form 10k year ended december 31 1993 1029 board directors compensation plan dated january 1 1994 exhibit 1034 companys form 10k year ended december 31 1993 1030 excess benefit plan dated january 1 1987 exhibit 1035 companys form 10k year ended december 31 1993 1031 directors business travel insurance plan exhibit 1036 companys form 10k year ended december 31 1993 1032 deferred compensation plan executives dated october 1 1993 exhibit 1037 companys form 10k year ended december 31 1993 1033 amended restated 1993 nonqualified employee benefit plans trust agreement dated january 1 1995 exhibit 1038 companys form 10k year ended december 31 1994 1034 consolidated freightways inc equity incentive plan non employee directors attachment companys 1994 proxy statement dated march 18 1994 1035 amended restated retirement plan directors consolidated freightways inc dated january 1 1994 exhibit 1040 companys form 10k year ended december 31 1994 1036 consolidated freightways inc 1996 return equity plan dated march 4 1996 previously filed securities exchange commission incorporated herein reference designates contract compensation plan management directors exhibit 12 computation ratios earnings fixed charges 13 annual report security holders consolidated freightways inc 1995 annual report shareholders portions referenced herein incorporated form 10k portions letter shareholders required therefore filed part form 10k 21 significant subsidiaries company 27 financial data schedule 99 additional documents 991 consolidated freightways inc 1996 notice annual meeting proxy statement dated march 22 1996 portions referenced herein incorporated form 10k portions required therefore filed part form 10k 992 note agreement dated july 17 1989 esop consolidated freightways inc note purchasers named therein exhibit 281 filed form se dated july 21 1989 993 guarantee agreement dated july 17 1989 delivered consolidated freightways inc exhibit 282 filed form se dated july 21 1989 994 form restructured note agreement consolidated freightways inc thrift stock ownership trust issuer various financial institutions purchasers named therein dated november 3 1992 exhibit 284 companys form 10k year ended december 31 1992 995 form restructured guarantee agreement consolidated freightways inc issuer various financial institutions purchasers named therein dated november 3 1992 exhibit 285 companys form 10k year ended december 31 1992 remaining exhibits omitted either 1 neither required applicable 2 required information included consolidated financial statements notes thereto previously filed securities exchange commission incorporated herein reference designates compensation plan management directorsitem 14 exhibits financial statement schedules reports form 8k financial statements exhibits filed 1 financial statements see index financial information 2 financial statement schedules see index financial information 3 exhibits see index exhibits b reports form 8k form 8k dated december 2 1996 filed december 17 1996 item 5 information report previously announced spin companys shareholders stock new publicly traded company consolidated freightways corporation composed longhaul carrier related businesses included filing amended laws december 9 1996 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused form 10k annual report signed behalf undersigned thereunto duly authorized consolidated freightways inc dba cnf transportation inc registrant march 26 1997 sdonald e moffitt donald e moffitt chairman president chief executive officer march 26 1997 sgregory l quesnel gregory l quesnel executive vice president chief financial officer march 26 1997 sgary taliaferro gary taliaferro vice president controller signatures pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated march 26 1997 sdonald e moffitt donald e moffitt chairman board president chief executive officer march 26 1997 robert alpert director march 26 1997 searl f cheit earl f cheit director march 26 1997 srichard clarke richard clarke director march 26 1997 margaret g gill director march 26 1997 srobert jaunich ii robert jaunich ii director march 26 1997 sw keith kennedy jr w keith kennedy jr director march 26 1997 srichard b madden richard b madden director signatures march 26 1997 srobert rogers robert rogers director march 26 1997 swilliam j schroeder william j schroeder director march 26 1997 srobert p wayman robert p wayman director consolidated freightways inc dba cnf transportation inc form 10k year ended december 31 1996 index financial information cnf transportation inc subsidiaries following consolidated financial statements cnf transportation inc subsidiaries appearing pages 21 39 inclusive companys 1996 annual report shareholders incorporated herein reference report independent public accountants consolidated balance sheets december 31 1996 1995 statements consolidated income years ended december 31 1996 1995 1994 statements consolidated cash flows years ended december 31 1996 1995 1994 statements consolidated shareholders equity years ended december 31 1996 1995 1994 notes consolidated financial statements addition following consolidated financial information filed part form 10k page consent independent public accountants 20 report independent public accountants 20 schedule ii valuation qualifying accounts 21 schedules omitted either 1 neither required applicable 2 required information included consolidated financial statements notes thereto signature consent independent public accountants independent public accountants hereby consent incorporation reports included incorporated reference form 10k companys previously filed registration statement file nos 2 81030 3352599 3360619 3360625 3360629 sarthur andersen llp arthur andersen llp san francisco california march 26 1997 report independent public accountants shareholders board directors cnf transportation inc audited accordance generally accepted auditing standards consolidated financial statements included cnf transportation incs 1996 annual report shareholders incorporated reference form 10k issued report thereon dated january 24 1997 audit made purpose forming opinion statements taken whole schedule iivaluation qualifying accounts page 21 responsibility companys management presented purpose complying securities exchange commissions rules part basic financial statements schedule subjected auditing procedures applied audit basic financial statements opinion fairly states material respects financial data required set forth therein relation basic financial statements taken whole sarthur andersen llp arthur andersen llp san francisco california january 24 1997 schedule ii cnf transportation inc valuation qualifying accounts three years ended december 31 1996 thousands description allowance doubtful accounts additions balance charged balance beginning costs end period expenses accounts deductions period 1996 16870 16729 14887a 18712 1995 15889 11017 10036a 16870 1994 17506 5067 6684a 15889 accounts written net recoveries index exhibits item 14a3 exhibit 3 articles incorporation bylaws 31 consolidated freightways inc certificates incorporation amended exhibit 3a2 companys quarterly report form 10q quarter ended march 31 1987 32 consolidated freightways inc bylaws amended december 9 1996 exhibit 31 companys form 8k dated december 2 1996 4 instruments defining rights security holders including debentures 41 consolidated freightways inc stockholder rights plan exhibit 1 form 8a dated october 27 1986 42 certificate designations series b cumulative convertible preferred stock exhibit 41 filed form se dated may 25 1989 43 indenture registrant bank one columbus na successor trustee respect 918 notes due 1999 medium term notes series 735 notes due 2005 exhibit 41 filed form se dated march 20 1990 44 form security 918 notes due 1999 issued consolidated freightways inc exhibit 41 filed form se dated august 25 1989 45 officers certificate dated august 24 1989 establishing form terms debt securities issued consolidated freightways inc exhibit 42 filed form se dated august 25 1989 46 form security mediumterm notes series issued consolidated freightways inc exhibit 41 filed form se dated september 18 1989 47 officers certificate dated september 18 1989 establishing form terms debt securities issued consolidated freightways inc exhibit 42 filed form se dated september 19 1989 48 indenture registrant first national bank chicago bank trustee respect debt securities exhibit 4d filed form s3 dated june 27 1995 49 indenture registrant bank one columbus na trustee respect subordinated debt securities exhibit 4e filed form s3 dated june 27 1995 410 form security 735 notes due 2005 issued consolidated freightways inc exhibit 44 filed form s4 dated june 27 1995 previously filed securities exchange commission incorporated herein reference instruments defining rights security holders longterm debt consolidated freightways inc subsidiaries financial statements required filed form 10k total amount securities authorized instrument less 10 total assets consolidated freightways inc subsidiaries consolidated basis filed exhibits form 10k company agrees furnish copy applicable instrument securities exchange commission upon request exhibit 10 material contracts 101 consolidated freightways inc longterm incentive plan 1978 amended amendment 7exhibit 101 filed form se dated march 25 1991 102 consolidated freightways inc longterm incentive plan 1988 amended amendment 3 exhibit 102 filed form se dated march 25 1991 103 consolidated freightways inc stock option plan 1978 amended amendment 1 exhibit 10e companys form 10k year ended december 31 1981 104 consolidated freightways inc stock option plan 1988 amended exhibit 10i companys form 10k year ended december 31 1987 amended form s8 dated december 16 1992 105 forms stock option agreement without cash surrender rights consolidated freightways inc stock option plan 1988 exhibit 10j companys form 10k year ended december 31 1987 106 form consolidated freightways inc deferred compensation agreement exhibit 10i companys form 10k year ended december 31 1981 107 consolidated freightways inc retirement plan formerly emery air freight corporation pension plan amended effective january 1 1985 amendments dated october 30 1987exhibit 422 emery air freight corporation quarterly report form 10q dated november 16 1987 previously filed securities exchange commission incorporated herein reference incorporated reference indicated reports filed securities act 1934 amended emery air freight corporation file 13893 designates contract compensation plan management directors exhibit 108 emery air freight plan retirees effective october 31 1987 exhibit 423 emery air freight corporation quarterly report form 10q dated november 16 1987 109 consolidated freightways inc common stock fund formerly emery air freight corporation employee stock ownership plan effective october 1 1987 esop exhibit 433 emery air freight corporation annual report form 10k dated march 28 1988 1010 employee stock ownership trust agreement dated october 8 1987 amended emery air freight corporation arthur w demelle daniel j mccauley daniel w shea trustees esop trust exhibit 434 emery air freight corporation annual report form 10k dated march 28 1988 1011 amended restated subscription stock purchase agreement dated december 31 1987 emery air freight corporation boston safe deposit trust company capacity successor trustee emery air freight corporation employee stock ownership plan trust boston safe exhibit b emery air freight corporation current report form 8k dated january 11 1988 1012 supplemental subscription stock purchase agreement dated january 29 1988 emery air freight corporation boston safe exhibit b emery air freight corporation current report form 8k dated february 12 1988 1013 trust indenture dated november 1 1988 city dayton ohio security pacific national trust company new york trustee bankers trust company trustee exhibit 41 emery air freight corporation current report form 8k dated december 2 1988 1014 bond purchase agreement dated november 7 1988 among city dayton ohio emery air freight corporation drexel burnham lambert incorporated exhibit 287 emery air freight corporation current report form 8k dated december 2 1988 1015 lease agreement dated november 1 1988 city dayton ohio emery air freight corporation exhibit 101 emery air freight corporation annual report form 10k year ended december 31 1988 1016 consolidated freightways inc directors election form deferral payment directors fees 1017 consolidated freightways inc 1993 executive deferral plan exhibit 1022 companys form 10k year ended december 31 1992 previously filed securities exchange commission incorporated herein reference incorporated reference indicated reports filed securities act 1934 amended emery air freight corporation file 13893 designates contract compensation plan management directors exhibit 1018 350 million amended restated credit agreement dated november 21 1996 among consolidated freightways inc various financial institutions 1019 official statement issuers special facilities revenue refunding bonds 1993 series e f dated september 29 1993 among city dayton ohio emery air freight corporation exhibit 101 companys form 10q quarterly period ended september 30 1993 1020 trust indenture dated september 1 1993 city dayton ohio bankers trust company trustee exhibit 102 companys form 10q quarterly period ended september 30 1993 1021 supplemental lease agreement dated september 1 1993 city dayton ohio lessor emery air freight corporation lessee exhibit 103 companys form 10q quarterly period ended september 30 1993 1022 supplemental retirement plan dated january 1 1990 exhibit 1031 companys form 10k year ended december 31 1993 1023 directors 24hour accidental death dismemberment plan exhibit 1032 companys form 10k year ended december 31 1993 1024 executive splitdollar life insurance plan dated january 1 1994 exhibit 1033 companys form 10k year ended december 31 1993 1025 board directors compensation plan dated january 1 1994 exhibit 1034 companys form 10k year ended december 31 1993 1026 excess benefit plan dated january 1 1987 exhibit 1035 companys form 10k year ended december 31 1993 1027 directors business travel insurance plan exhibit 1036 companys form 10k year ended december 31 1993 1028 deferred compensation plan executives dated october 1 1993 exhibit 1037 companys form 10k year ended december 31 1993 1029 amended restated 1993 nonqualified employee benefit plans trust agreement dated january 1 1995 exhibit 1038 companys form 10k year ended december 31 1994 previously filed securities exchange commission incorporated herein reference incorporated reference indicated reports filed securities act 1934 amended emery air freight corporation file 13893 designates contract compensation plan management directors exhibit 1030 consolidated freightways inc equity incentive plan non employee directors attachment companys 1994 proxy statement dated march 18 1994 1031 amended restated retirement plan directors consolidated freightways inc dated january 1 1994 exhibit 1040 companys form 10k year ended december 31 1994 1032 consolidated freightways inc 1996 return equity plan dated march 4 1996 exhibit 1036 companys form 10k year ended december 31 1995 1033 employee benefit matters agreement consolidated freightways inc consolidated freightways corporation dated december 2 1996 1034 distribution agreement consolidated freightways inc consolidated freightways corporation dated november 25 1996 1035 transition services agreement cnf service company inc consolidated freightways corporation dated december 2 1996 1036 tax sharing agreement consolidated freightways inc consolidated freightways corporation dated december 2 1996 1037 cnf transportation inc executive incentive plan 1997 1038 cnf service company executive incentive plan 1997 1039 conway transportation services inc incentive plan 1997 1040 emery worldwide incentive plan 1997 1041 cnf transportation inc special bonus plan 1997 12 computation ratios earnings fixed charges 13 annual report security holders cnf transportation inc 1996 annual report shareholders portions referenced herein incorporated form 10k portions letter shareholders required therefore filed part form 10k 21 significant subsidiaries company 27 financial data schedule previously filed securities exchange commission incorporated herein reference designates contract compensation plan management directors exhibit 99 additional documents 991 consolidated freightways inc dba cnf transportation inc 1997 notice annual meeting proxy statement dated march 24 1997 portions referenced herein incorporated form 10k portions required therefore filed part form 10k 992 note agreement dated july 17 1989 esop consolidated freightways inc note purchasers named therein exhibit 281 filed form se dated july 21 1989 993 guarantee agreement dated july 17 1989 delivered consolidated freightways inc exhibit 282 filed form se dated july 21 1989 994 form restructured note agreement consolidated freightways inc thrift stock ownership trust issuer various financial institutions purchasers named therein dated november 3 1992 exhibit 284 companys form 10k year ended december 31 1992 995 form restructured guarantee agreement consolidated freightways inc issuer various financial institutions purchasers named therein dated november 3 1992 exhibit 285 companys form 10k year ended december 31 1992 remaining exhibits omitted either 1 neither required applicable 2 required information included consolidated financial statements notes thereto previously filed securities exchange commission incorporated herein reference designates compensation plan management directorsitem 14 exhibits financial statement schedules reports form 8k financial statements exhibits filed 1 financial statements see index financial information 2 financial statement schedules see index financial information 3 exhibits see index exhibits b reports form 8k reports form 8k filed quarter ended december 31 1997 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused form 10k annual report signed behalf undersigned thereunto duly authorized cnf transportation inc registrant march 24 1998 sdonald e moffitt donald e moffitt chairman chief executive officer march 24 1998 sgregory l quesnel gregory l quesnel president chief operating officer march 24 1998 schutta ratnathicam chutta ratnathicam senior vice president chief financial officer march 24 1998 sgary taliaferro gary taliaferro vice president controller signatures pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated march 24 1998 sdonald e moffitt donald e moffitt chairman board chief executive officer march 24 1998 robert alpert director march 24 1998 searl f cheit earl f cheit director march 24 1998 richard clarke director march 24 1998 smargaret g gill margaret g gill director march 24 1998 srobert jaunich ii robert jaunich ii director march 24 1998 sw keith kennedy jr w keith kennedy jr director march 24 1998 srichard b madden richard b madden director signatures march 24 1998 michael j murray director march 24 1998 robert rogers director march 24 1998 swilliam j schroeder william j schroeder director march 24 1998 srobert p wayman robert p wayman director cnf transportation inc form 10k year ended december 31 1997 index financial information cnf transportation inc subsidiaries following consolidated financial statements cnf transportation inc subsidiaries appearing pages 21 39 inclusive companys 1997 annual report shareholders incorporated herein reference report independent public accountants consolidated balance sheets december 31 1997 1996 statements consolidated income years ended december 31 1997 1996 1995 statements consolidated cash flows years ended december 31 1997 1996 1995 statements consolidated shareholders equity years ended december 31 1997 1996 1995 notes consolidated financial statements addition following consolidated financial information filed part form 10k page consent independent public accountants 25 report independent public accountants 25 schedule ii valuation qualifying accounts 26 schedules omitted either 1 neither required applicable 2 required information included consolidated financial statements notes thereto signature consent independent public accountants independent public accountants hereby consent incorporation reports included incorporated reference form 10k companys previously filed registration statement file nos 2 81030 3352599 3360619 3360625 3360629 33326595 33330327 sarthur andersen llp arthur andersen llp san francisco california march 23 1998 report independent public accountants shareholders board directors cnf transportation inc audited accordance generally accepted auditing standards consolidated financial statements included cnf transportation incs 1997 annual report shareholders incorporated reference form 10k issued report thereon dated january 23 1998 audit made purpose forming opinion statements taken whole schedule iivaluation qualifying accounts page 26 responsibility companys management presented purpose complying securities exchange commissions rules part basic financial statements schedule subjected auditing procedures applied audit basic financial statements opinion fairly states material respects financial data required set forth therein relation basic financial statements taken whole sarthur andersen llp arthur andersen llp san francisco california january 23 1998 schedule ii cnf transportation inc valuation qualifying accounts three years ended december 31 1997 thousands description allowance doubtful accounts additions balance charged balance beginning costs end period expenses accounts deductions period 1997 18712 12528 11085a 20155 1996 16870 16729 14887a 18712 1995 15889 11017 10036a 16870 accounts written net recoveries index exhibits item 14a3 exhibit 3 articles incorporation bylaws 31 cnf transportation inc certificate incorporation amended exhibit 4a companys registration statement form s3 dated may 6 1997 32 cnf transportation inc bylaws amended may 3 1997 exhibit 4b companys registration statement form 3 dated may 6 1997 4 instruments defining rights security holders including debentures 41 certificate designations series b cumulative convertible preferred stock exhibit 41 filed form se dated may 25 1989 42 indenture registrant bank one columbus na successor trustee respect 918 notes due 1999 medium term notes series 735 notes due 2005 exhibit 41 filed form se dated march 20 1990 43 form security 918 notes due 1999 issued consolidated freightways inc exhibit 41 filed form se dated august 25 1989 44 officers certificate dated august 24 1989 establishing form terms debt securities issued consolidated freightways inc exhibit 42 filed form se dated august 25 1989 45 form security mediumterm notes series issued consolidated freightways inc exhibit 41 filed form se dated september 18 1989 46 officers certificate dated september 18 1989 establishing form terms debt securities issued consolidated freightways inc exhibit 42 filed form se dated september 19 1989 47 indenture registrant first national bank chicago bank trustee respect debt securities exhibit 4d filed form s3 dated june 27 1995 48 indenture registrant bank one columbus na trustee respect subordinated debt securities exhibit 4e filed form s3 dated june 27 1995 49 form security 735 notes due 2005 issued consolidated freightways inc exhibit 44 filed form s4 dated june 27 1995 previously filed securities exchange commission incorporated herein reference exhibit 410 declaration trust exhibit 4k companys amendment 1 form s3 dated may 30 1997 411 form amended restated declaration trust including form trust preferred security exhibit 4l companys amendment 1 form s3 dated may 9 1997 412 form guarantee agreement respect trust preferred securities exhibit 4m companys amendment 1 form s3 dated may 30 1997 instruments defining rights security holders longterm debt cnf transportation inc subsidiaries financial statements required filed form 10k total amount securities authorized instrument less 10 total assets cnf transportation inc subsidiaries consolidated basis filed exhibits form 10k company agrees furnish copy applicable instrument securities exchange commission upon request 10 material contracts 101 consolidated freightways inc longterm incentive plan 1988 amended amendment 3 exhibit 102 filed form se dated march 25 1991 102 consolidated freightways inc stock option plan 1988 amended exhibit 10i companys form 10k year ended december 31 1987 amended form s8 dated december 16 1992 103 emery air freight plan retirees effective october 31 1987 exhibit 423 emery air freight corporation quarterly report form 10q dated november 16 1987 104 consolidated freightways inc common stock fund formerly emery air freight corporation employee stock ownership plan effective october 1 1987 esop exhibit 433 emery air freight corporation annual report form 10k dated march 28 1988 previously filed securities exchange commission incorporated herein reference incorporated reference indicated reports filed securities act 1934 amended emery air freight corporation file 13893 designates contract compensation plan management directors exhibit 105 employee stock ownership trust agreement dated october 8 1987 amended emery air freight corporation arthur w demelle daniel j mccauley daniel w shea trustees esop trust exhibit 434 emery air freight corporation annual report form 10k dated march 28 1988 106 amended restated subscription stock purchase agreement dated december 31 1987 emery air freight corporation boston safe deposit trust company capacity successor trustee emery air freight corporation employee stock ownership plan trust boston safe exhibit b emery air freight corporation current report form 8k dated january 11 1988 107 supplemental subscription stock purchase agreement dated january 29 1988 emery air freight corporation boston safe exhibit b emery air freight corporation current report form 8k dated february 12 1988 108 trust indenture dated november 1 1988 city dayton ohio security pacific national trust company new york trustee bankers trust company trustee exhibit 41 emery air freight corporation current report form 8k dated december 2 1988 109 bond purchase agreement dated november 7 1988 among city dayton ohio emery air freight corporation drexel burnham lambert incorporated exhibit 287 emery air freight corporation current report form 8k dated december 2 1988 1010 lease agreement dated november 1 1988 city dayton ohio emery air freight corporation exhibit 101 emery air freight corporation annual report form 10k year ended december 31 1988 1011 350 million amended restated credit agreement dated november 21 1996 among consolidated freightways inc various financial institutions exhibit 1018 companys form 10k year ended december 31 1996 1012 official statement issuers special facilities revenue refunding bonds 1993 series e f dated september 29 1993 among city dayton ohio emery air freight corporation exhibit 101 companys form 10q quarterly period ended september 30 1993 previously filed securities exchange commission incorporated herein reference incorporated reference indicated reports filed securities act 1934 amended emery air freight corporation file 13893 designates contract compensation plan management directors exhibit 1013 trust indenture dated september 1 1993 city dayton ohio bankers trust company trustee exhibit 102 companys form 10q quarterly period ended september 30 1993 1014 supplemental lease agreement dated september 1 1993 city dayton ohio lessor emery air freight corporation lessee exhibit 103 companys form 10q quarterly period ended september 30 1993 1015 supplemental retirement plan dated january 1 1990 exhibit 1031 companys form 10k year ended december 31 1993 1016 directors 24hour accidental death dismemberment plan exhibit 1032 companys form 10k year ended december 31 1993 1017 executive splitdollar life insurance plan dated january 1 1994 exhibit 1033 companys form 10k year ended december 31 1993 1018 board directors compensation plan dated january 1 1994 exhibit 1034 companys form 10k year ended december 31 1993 1019 directors business travel insurance plan exhibit 1036 companys form 10k year ended december 31 1993 1020 deferred compensation plan executives 1998 restatement 1021 amended restated 1993 nonqualified employee benefit plans trust agreement dated january 1 1995 exhibit 1038 companys form 10k year ended december 31 1994 1022 cnf transportation inc 1997 equity incentive plan nonemployee directors amended june 30 1997 1023 amended restated retirement plan directors consolidated freightways inc dated january 1 1994 exhibit 1040 companys form 10k year ended december 31 1994 1024 cnf transportation inc return equity plan amended amendment 1 1025 employee benefit matters agreement consolidated freightways inc consolidated freightways corporation dated december 2 1996 exhibit 1033 companys form 10k year ended december 31 1996 previously filed securities exchange commission incorporated herein reference incorporated reference indicated reports filed securities act 1934 amended emery air freight corporation file 13893 designates contract compensation plan management directors exhibit 1026 distribution agreement consolidated freightways inc consolidated freightways corporation dated november 25 1996 exhibit 1034 companys form 10 k year ended december 31 1996 1027 transition services agreement cnf service company inc consolidated freightways corporation dated december 2 1996 exhibit companys form 10k year ended december 31 1996 1028 tax sharing agreement consolidated freightways inc consolidated freightways corporation dated december 2 1996 exhibit companys form 10k year ended december 31 1996 1029 cnf transportation inc executive incentive plan 1998 1030 conway transportation services inc incentive plan 1998 1031 emery worldwide incentive plan 1998 1032 cnf transportation inc special bonus plan 1998 1033 cnf transportation inc 1997 equity incentive plan amended june 30 1997 1034 cnf transportation inc deferred compensation plan directors 1998 restatement 12a computation ratios earnings fixed charges 12b computation ratios earnings combined fixed charges preferred stock dividends 13 annual report security holders cnf transportation inc 1997 annual report shareholders portions referenced herein incorporated form 10k portions letter shareholders required therefore filed part form 10k 21 significant subsidiaries company 27 financial data schedule previously filed securities exchange commission incorporated herein reference designates contract compensation plan management directors exhibit 99 additional documents 991 cnf transportation inc 1997 notice annual meeting proxy statement dated march 17 1998 portions referenced herein incorporated form 10k portions required therefore filed part form 10k 992 note agreement dated july 17 1989 esop consolidated freightways inc note purchasers named therein exhibit 281 filed form se dated july 21 1989 993 guarantee agreement dated july 17 1989 delivered consolidated freightways inc exhibit 282 filed form se dated july 21 1989 994 form restructured note agreement consolidated freightways inc thrift stock ownership trust issuer various financial institutions purchasers named therein dated november 3 1992 exhibit 284 companys form 10k year ended december 31 1992 remaining exhibits omitted either 1 neither required applicable 2 required information included consolidated financial statements notes thereto previously filed securities exchange commission incorporated herein reference designates compensation plan management directorsitem 14 exhibits financial statement schedules reports form 8k financial statements exhibits filed 1 financial statements see index financial information 2 financial statement schedules see index financial information 3 exhibits see index exhibits b reports form 8k reports form 8k filed quarter ended december 31 1998 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused form 10k annual report signed behalf undersigned thereunto duly authorized cnf transportation inc registrant march 26 1999 sgregory l quesnel gregory l quesnel president chief executive officer march 26 1999 schutta ratnathicam chutta ratnathicam senior vice president chief financial officer march 26 1999 sgary taliaferro gary taliaferro corporate controller signatures pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated march 26 1999 sdonald e moffitt donald e moffitt chairman board march 26 1999 sgregory l quesnel gregory l quesnel president chief executive officer director march 26 1999 srobert alpert robert alpert director march 26 1999 searl f cheit earl f cheit director march 26 1999 richard clarke director march 26 1999 smargaret g gill margaret g gill director march 26 1999 srobert jaunich ii robert jaunich ii director march 26 1999 w keith kennedy jr director signatures march 26 1999 srichard b madden richard b madden director march 26 1999 smichael j murray michael j murray director march 26 1999 srobert rogers robert rogers director march 26 1999 swilliam j schroeder william j schroeder director march 26 1999 srobert p wayman robert p wayman director cnf transportation inc form 10k year ended december 31 1998 index financial information cnf transportation inc subsidiaries following consolidated financial statements cnf transportation inc subsidiaries appearing pages 24 45 inclusive companys 1998 annual report shareholders incorporated herein reference report independent public accountants consolidated balance sheets december 31 1998 1997 statements consolidated income years ended december 31 1998 1997 1996 statements consolidated cash flows years ended december 31 1998 1997 1996 statements consolidated shareholders equity years ended december 31 1998 1997 1996 notes consolidated financial statements addition following consolidated financial information filed part form 10k page consent independent public accountants 24 report independent public accountants 24 schedule ii valuation qualifying accounts 25 schedules omitted either 1 neither required applicable 2 required information included consolidated financial statements notes thereto signature consent independent public accountants independent public accountants hereby consent incorporation reports included incorporated reference form 10k companys previously filed registration statement file nos 2 81030 3352599 3360619 3360625 3360629 33326595 33330327 333 48733 33356667 sarthur andersen llp arthur andersen llp san francisco california march 25 1999 report independent public accountants shareholders board directors cnf transportation inc audited accordance generally accepted auditing standards consolidated financial statements included cnf transportation incs 1998 annual report shareholders incorporated reference form 10k issued report thereon dated january 22 1999 audit made purpose forming opinion statements taken whole schedule iivaluation qualifying accounts page 25 responsibility companys management presented purpose complying securities exchange commissions rules part basic financial statements schedule subjected auditing procedures applied audit basic financial statements opinion fairly states material respects financial data required set forth therein relation basic financial statements taken whole sarthur andersen llp arthur andersen llp san francisco california january 22 1999 schedule ii cnf transportation inc valuation qualifying accounts three years ended december 31 1998 thousands description allowance doubtful accounts additions balance charged balance beginning costs end period expenses accounts deductions period 1998 20155 11050 10107a 21098 1997 18712 12528 11085a 20155 1996 16870 16729 14887a 18712 accounts written net recoveries index exhibits item 14a3 exhibit 3 articles incorporation bylaws 31 cnf transportation inc certificate incorporation amended exhibit 4a companys registration statement form s3 dated may 6 1997 32 cnf transportation inc bylaws amended september 28 1998 exhibit 4b companys registration statement form s3 dated november 10 1998 4 instruments defining rights security holders including debentures 41 certificate designations series b cumulative convertible preferred stock exhibit 41 filed form se dated may 25 1989 42 indenture registrant bank one columbus na successor trustee respect 918 notes due 1999 medium term notes series 735 notes due 2005 exhibit 41 filed form se dated march 20 1990 43 form security 918 notes due 1999 issued consolidated freightways inc exhibit 41 filed form se dated august 25 1989 44 officers certificate dated august 24 1989 establishing form terms debt securities issued consolidated freightways inc exhibit 42 filed form se dated august 25 1989 45 form security mediumterm notes series issued consolidated freightways inc exhibit 41 filed form se dated september 18 1989 46 officers certificate dated september 18 1989 establishing form terms debt securities issued consolidated freightways inc exhibit 42 filed form se dated september 19 1989 47 indenture registrant first national bank chicago bank trustee respect debt securities exhibit 4d filed form s3 dated june 27 1995 48 indenture registrant bank one columbus na trustee respect subordinated debt securities exhibit 4e filed form s3 dated june 27 1995 49 form security 735 notes due 2005 issued consolidated freightways inc exhibit 44 filed form s4 dated june 27 1995 previously filed securities exchange commission incorporated herein reference exhibit 410 declaration trust exhibit 4k companys amendment 1 form s3 dated may 30 1997 411 form amended restated declaration trust including form trust preferred security exhibit 4l companys amendment 1 form s3 dated may 9 1997 412 form guarantee agreement respect trust preferred securities exhibit 4m companys amendment 1 form s3 dated may 30 1997 instruments defining rights security holders longterm debt cnf transportation inc subsidiaries financial statements required filed form 10k total amount securities authorized instrument less 10 total assets cnf transportation inc subsidiaries consolidated basis filed exhibits form 10k company agrees furnish copy applicable instrument securities exchange commission upon request 10 material contracts 101 consolidated freightways inc longterm incentive plan 1988 amended amendment 3 exhibit 102 filed form se dated march 25 1991 102 consolidated freightways inc stock option plan 1988 amended exhibit 10i companys form 10k year ended december 31 1987 amended form s8 dated december 16 1992 103 emery air freight plan retirees effective october 31 1987 exhibit 423 emery air freight corporation quarterly report form 10q dated november 16 1987 104 consolidated freightways inc common stock fund formerly emery air freight corporation employee stock ownership plan effective october 1 1987 esop exhibit 433 emery air freight corporation annual report form 10k dated march 28 1988 previously filed securities exchange commission incorporated herein reference incorporated reference indicated reports filed securities act 1934 amended emery air freight corporation file 13893 designates contract compensation plan management directors exhibit 105 employee stock ownership trust agreement dated october 8 1987 amended emery air freight corporation arthur w demelle daniel j mccauley daniel w shea trustees esop trust exhibit 434 emery air freight corporation annual report form 10k dated march 28 1988 106 amended restated subscription stock purchase agreement dated december 31 1987 emery air freight corporation boston safe deposit trust company capacity successor trustee emery air freight corporation employee stock ownership plan trust boston safe exhibit b emery air freight corporation current report form 8k dated january 11 1988 107 supplemental subscription stock purchase agreement dated january 29 1988 emery air freight corporation boston safe exhibit b emery air freight corporation current report form 8k dated february 12 1988 108 trust indenture dated november 1 1988 city dayton ohio security pacific national trust company new york trustee bankers trust company trustee exhibit 41 emery air freight corporation current report form 8k dated december 2 1988 109 bond purchase agreement dated november 7 1988 among city dayton ohio emery air freight corporation drexel burnham lambert incorporated exhibit 287 emery air freight corporation current report form 8k dated december 2 1988 1010 lease agreement dated november 1 1988 city dayton ohio emery air freight corporation exhibit 101 emery air freight corporation annual report form 10k year ended december 31 1988 1011 350 million amended restated credit agreement dated november 21 1996 among consolidated freightways inc various financial institutions exhibit 1018 companys form 10k year ended december 31 1996 1012 official statement issuers special facilities revenue refunding bonds 1993 series e f dated september 29 1993 among city dayton ohio emery air freight corporation exhibit 101 companys form 10q quarterly period ended september 30 1993 previously filed securities exchange commission incorporated herein reference incorporated reference indicated reports filed securities act 1934 amended emery air freight corporation file 13893 designates contract compensation plan management directors exhibit 1013 trust indenture dated september 1 1993 city dayton ohio bankers trust company trustee exhibit 102 companys form 10q quarterly period ended september 30 1993 1014 supplemental lease agreement dated september 1 1993 city dayton ohio lessor emery air freight corporation lessee exhibit 103 companys form 10q quarterly period ended september 30 1993 1015 supplemental retirement plan dated january 1 1990 exhibit 1031 companys form 10k year ended december 31 1993 1016 directors 24hour accidental death dismemberment plan exhibit 1032 companys form 10k year ended december 31 1993 1017 executive splitdollar life insurance plan dated january 1 1994 exhibit 1033 companys form 10k year ended december 31 1993 1018 board directors compensation plan dated january 1 1994 exhibit 1034 companys form 10k year ended december 31 1993 1019 directors business travel insurance plan exhibit 1036 companys form 10k year ended december 31 1993 1020 deferred compensation plan executives 1998 restatement exhibit 1020 companys form 10k year ended december 31 1997 1021 amended restated 1993 nonqualified employee benefit plans trust agreement dated january 1 1995 exhibit 1038 companys form 10k year ended december 31 1994 1022 cnf transportation inc 1997 equity incentive plan non employee directors amended june 30 1997 exhibit 1033 companys form 10k year ended december 31 1997 1023 amended restated retirement plan directors consolidated freightways inc dated january 1 1994 exhibit 1040 companys form 10k year ended december 31 1994 1024 cnf transportation inc return equity plan amended amendment 1 exhibit 1024 companys form 10k year ended december 31 1997 1025 employee benefit matters agreement consolidated freightways inc consolidated freightways corporation dated december 2 1996 exhibit 1033 companys form 10k year ended december 31 1996 previously filed securities exchange commission incorporated herein reference incorporated reference indicated reports filed securities act 1934 amended emery air freight corporation file 13893 designates contract compensation plan management directors exhibit 1026 distribution agreement consolidated freightways inc consolidated freightways corporation dated november 25 1996 exhibit 1034 companys form 10 k year ended december 31 1996 1027 transition services agreement cnf service company inc consolidated freightways corporation dated december 2 1996 exhibit companys form 10k year ended december 31 1996 1028 tax sharing agreement consolidated freightways inc consolidated freightways corporation dated december 2 1996 exhibit companys form 10k year ended december 31 1996 1029 cnf transportation inc 1997 equity incentive plan amended june 30 1997 exhibit 1022 companys form 10k year ended december 31 1997 1030 cnf transportation inc deferred compensation plan directors 1998 restatement exhibit 1034 companys form 10k year ended december 31 1997 1031 cnf transportation inc summary incentive compensation plans 1999 1032 cnf transportation inc executive severance plan 12a computation ratios earnings fixed charges 12b computation ratios earnings combined fixed charges preferred stock dividends 13 annual report security holders cnf transportation inc 1998 annual report shareholders portions referenced herein incorporated form 10k portions letter shareholders required therefore filed part form 10k 21 significant subsidiaries company 27 financial data schedule previously filed securities exchange commission incorporated herein reference designates contract compensation plan management directors exhibit 99 additional documents 991 cnf transportation inc 1998 notice annual meeting proxy statement dated march 22 1999 portions referenced herein incorporated form 10k portions required therefore filed part form 10k 992 note agreement dated july 17 1989 esop consolidated freightways inc note purchasers named therein exhibit 281 filed form se dated july 21 1989 993 guarantee agreement dated july 17 1989 delivered consolidated freightways inc exhibit 282 filed form se dated july 21 1989 994 form restructured note agreement consolidated freightways inc thrift stock ownership trust issuer various financial institutions purchasers named therein dated november 3 1992 exhibit 284 companys form 10k year ended december 31 1992 remaining exhibits omitted either 1 neither required applicable 2 required information included consolidated financial statements notes thereto previously filed securities exchange commission incorporated herein reference designates compensation plan management directorsitem 14 exhibits financial statement schedules reports form 8k 1 financial statements consolidated financial statements company together notes consolidated financial statements report thereon arthur andersen llp dated january 28 2000 presented pages 14 33 companys 1999 annual report shareholders incorporated herein reference exception information incorporated reference items 1 3 5 6 7 7a 8 14 hereof companys 1999 annual report shareholders deemed filed part report 2 financial statement schedule page number form 10k report independent public accountants financial statement schedule s1 schedule ii valuation qualifying accounts s2 financial statement schedules omitted applicable required information included consolidated financial statements notes thereto contained companys 1999 annual report shareholders incorporated herein reference page 20 3 exhibits filed connection report incorporated herein reference exhibit index pages e1 e6 incorporated herein reference b reports form 8k march 8 2000 registrant filed report form 8k connection issuance 200 million aggregate principal amount 8 78 notes due 2010 notes companys shelf registration statement form s3 file 33356667 report form 8k company filed underwriting agreement indenture form note executed connection previously announced public offering notes page 21 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused form 10k annual report signed behalf undersigned thereunto duly authorized cnf transportation inc registrant march 27 2000 gregory l quesnel president chief executive officer march 27 2000 chutta ratnathicam chutta ratnathicam senior vice president chief financial officer march 27 2000 gary taliaferro gary taliaferro corporate controller page 22 signatures pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated march 27 2000 donald e moffitt donald e moffitt chairman board march 27 2000 gregory l quesnel gregory l quesnel president chief executive officer director march 27 2000 robert alpert robert alpert director march 27 2000 richard clarke richard clarke director march 27 2000 margaret g gill margaret g gill director march 27 2000 robert jaunich ii director march 27 2000 w keith kennedy jr w keith kennedy jr director page 23 signatures march 27 2000 richard b madden richard b madden director march 27 2000 michael j murray michael j murray director march 27 2000 robert rogers robert rogers director march 27 2000 william j schroeder director march 27 2000 robert p wayman robert p wayman director s1 consent independent public accountants independent public accountants hereby consent incorporation reports included incorporated reference form 10k companys previously filed registration statement file nos 281030 3352599 3360619 33 60625 3360629 33326595 33330327 33348733 33356667 33392399 sarthur andersen llp arthur andersen llp san francisco california march 24 2000 report independent public accountants shareholders board directors cnf transportation inc audited accordance generally accepted auditing standards consolidated financial statements included cnf transportation incs 1999 annual report shareholders incorporated reference form 10k issued report thereon dated january 28 2000 audit made purpose forming opinion statements taken whole schedule iivaluation qualifying accounts page s2 responsibility companys management presented purpose complying securities exchange commissions rules part basic financial statements schedule subjected auditing procedures applied audit basic financial statements opinion fairly states material respects financial data required set forth therein relation basic financial statements taken whole sarthur andersen llp arthur andersen llp san francisco california january 28 2000 s2 schedule ii cnf transportation inc valuation qualifying accounts three years ended december 31 1999 thousands description allowance doubtful accounts additions balance charged balance beginning costs end period expenses accounts deductions period 1999 21098 15229 10164a 26163 1998 20155 11050 10107a 21098 1997 18712 12528 11085a 20155 accounts written net recoveries e1 index exhibits item 14a3 exhibit 3 articles incorporation bylaws 31 cnf transportation inc certificate incorporationas amended exhibit 4a companys registration statement form s3 dated may 6 1997 32 cnf transportation inc bylaws amended september 28 1998 exhibit 4b companys registration statement form s3 dated november 10 1998 4 instruments defining rights security holders including debentures 41 certificate designations series b cumulative convertible preferred stock exhibit 41 filed form se dated may 25 1989 42 indenture registrant bank one columbus na successor trustee respect 918 notes due 1999 mediumterm notes series 735 notes due 2005 exhibit 41 filed form se dated march 20 1990 43 indenture registrant first national bank chicago bank trustee respect debt securities exhibit 4d filed form s3 dated june 27 1995 44 indenture registrant bank one columbus na trustee respect subordinated debt securities exhibit 4e filed form s3 dated june 27 1995 45 form security 735 notes due 2005 issued consolidated freightways inc exhibit 44 filed form s4 dated june 27 1995 46 declaration trust exhibit 4k companys amendment 1 form s3 dated may 30 1997 47 form amended restated declaration trust including form trust preferred security exhibit 4l companys amendment 1 form s3 dated may 9 1997 48 form guarantee agreement respect trust preferred securities exhibit 4m companys amendment 1 form 3 dated may 30 1997 e2 49 form indenture cnf transportation inc bank one trust company national association exhibit 4di companys form 8k dated march 3 2000 410 form security 8 78 notes due 2010 issued cnf transportation inc exhibit 4i companys form 8k dated march 3 2000 instruments defining rights security holders longterm debt cnf transportation inc subsidiaries financial statements required filed form 10k total amount securities authorized instrument less 10 total assets cnf transportation inc subsidiaries consolidated basis filed exhibits form 10k company agrees furnish copy applicable instrument securities exchange commission upon request 10 material contracts 101 consolidated freightways inc longterm incentive plan 1988 amended amendment 3 exhibit 102 filed form se dated march 25 1991 102 consolidated freightways inc stock option plan 1988 amended exhibit 10i companys form 10k year ended december 31 1987 amended form s8 dated december 16 1992 103 emery air freight plan retirees effective october 31 1987 exhibit 423 emery air freight corporation quarterly report form 10q dated november 16 1987 104 consolidated freightways inc common stock fund formerly emery air freight corporation employee stock ownership plan effective october 1 1987 esop exhibit 433 emery air freight corporation annual report form 10k dated march 281988 105 employee stock ownership trust agreement dated october 8 1987 amended emery air freight corporation arthur w demelle daniel j mccauley daniel w shea trustees esop trust exhibit 434 emery air freight corporation annual report form 10k dated march 28 1988 e3 106 amended restated subscription stock purchase agreement dated december 31 1987 emery air freight corporation boston safe deposit trust company capacity successor trustee emery air freight corporation employee stock ownership plan trust boston safe exhibit b emery air freight corporation current report form 8k dated january 11 1988 107 supplemental subscription stock purchase agreement dated january 29 1988 emery air freight corporation boston safe exhibit b emery air freight corporation current report form 8k dated february 12 1988 108 trust indenture dated november 1 1988 city dayton ohio security pacific national trust company new york trustee bankers trust company trustee exhibit 41 emery air freight corporation current report form 8k dated december 2 1988 109 bond purchase agreement dated november 7 1988 among city dayton ohio emery air freight corporation drexel burnham lambert incorporated exhibit 287 emery air freight corporation current report form 8k dated december 2 1988 1010 lease agreement dated november 1 1988 city dayton ohio emery air freight corporation exhibit 101 emery air freight corporation annual report form 10k year ended december 31 1988 1011 350 million amended restated credit agreement dated november 21 1996 among consolidated freightways inc various financial institutions exhibit 1018 companys form 10k year ended december 31 1996 1012 official statement issuers special facilities revenue refunding bonds 1993 series e f dated september 29 1993 among city dayton ohio emery air freight corporation exhibit 101 companys form 10q quarterly period ended september 30 1993 1013 trust indenture dated september 1 1993 city dayton ohio bankers trust company trustee exhibit 102 companys form 10q quarterly period ended september 30 1993 e4 1014 supplemental lease agreement dated september 1 1993 city dayton ohio lessor emery air freight corporation lessee exhibit 103 companys form 10q quarterly period ended september 30 1993 1015 supplemental retirement plan dated january 1 1990 exhibit 1031 companys form 10k year ended december 31 1993 1016 directors 24hour accidental death dismemberment plan exhibit 1032 companys form 10k year ended december 31 1993 1017 executive splitdollar life insurance plan dated january 1 1994 exhibit 1033 companys form 10k year ended december 31 1993 1018 board directors compensation plan dated january 1 1994 exhibit 1034 companys form 10k year ended december 31 1993 1019 directors business travel insurance plan exhibit 1036 companys form 10k year ended december 31 1993 1020 deferred compensation plan executives 1998 restatement exhibit 1020 companys form 10k year ended december 31 1997 1021 amended restated 1993 nonqualified employee benefit plans trust agreement dated january 1 1995 exhibit 1038 companys form 10k year ended december 31 1994 1022 cnf transportation inc 1997 equity incentive plan nonemployee directors amended june 30 1997 exhibit 1033 companys form 10k year ended december 31 1997 1023 amended restated retirement plan directors consolidated freightways inc dated january 1 1994 exhibit 1040 companys form 10k year ended december 31 1994 1024 cnf transportation inc return equity plan amended amendment 1 exhibit 1024 companys form 10k year ended december 31 1997 1025 employee benefit matters agreement consolidated freightways inc consolidated freightways corporation dated december 2 1996 exhibit 1033 companys form 10k year ended december 31 1996 e5 1026 distribution agreement consolidated freightways inc consolidated freightways corporation dated november 25 1996 exhibit 1034 companys form 10k year ended december 31 1996 1027 transition services agreement cnf service company inc consolidated freightways corporation dated december 2 1996 exhibit companys form 10k year ended december 31 1996 1028 tax sharing agreement consolidated freightways inc consolidated freightways corporation dated december 2 1996 exhibit companys form 10k year ended december 31 1996 1029 cnf transportation inc 1997 equity incentive plan amended january 31 2000 exhibit companys proxy statement dated march 20 2000 1030 cnf transportation inc deferred compensation plan directors 1998 restatement exhibit 1034 companys form 10k year ended december 31 1997 1031 cnf transportation inc executive severance plan exhibit 1032 companys form 10k year ended december 31 1998 1032 cnf transportation inc summary incentive compensation plans 2000 1033 value management plan dated june 28 1999 12acomputation ratios earnings fixed charges 12bcomputation ratios earnings combined fixed charges preferred stock dividends 13 annual report security holders cnf transportation inc 1999 annual report shareholders portions referenced herein incorporated form 10k portions letter shareholders required therefore filed part form 10k 21 significant subsidiaries company 27 financial data schedule e6 99 additional documents 991 cnf transportation inc 1999 notice annual meeting proxy statement dated march 20 2000 filed form def 14a portions referenced herein incorporated form 10k portions required therefore filed part form 10k 992 note agreement dated july 17 1989 esop consolidated freightways inc note purchasers named therein exhibit 281 filed form se dated july 21 1989 993 guarantee agreement dated july 17 1989 delivered consolidated freightways inc exhibit 282 filed form se dated july 21 1989 994 form restructured note agreement consolidated freightways inc thrift stock ownership trust issuer various financial institutions purchasers named therein dated november 3 1992 exhibit 284 companys form 10k year ended december 31 1992 remaining exhibits omitted either 1 neither required applicable 2 required information included consolidated financial statements notes thereto footnotes exhibit index previously filed securities exchange commission incorporated herein reference incorporated reference indicated reports filed securities act 1934 amended emery air freight corporation file 13893 designates contract compensation plan management directorsitem 14 exhibits financial statement schedules reports form 8k 1 financial statements consolidated financial statements company together notes consolidated financial statements report thereon arthur andersen llp dated january 26 2001 presented pages 20 39 companys 2000 annual report shareholders incorporated herein reference exception information incorporated reference items 1 3 5 6 7 7a 8 14 hereof companys 2000 annual report shareholders deemed filed part report 2 financial statement schedule page number form 10k report independent public accountants financial statement schedule s1 schedule ii valuation qualifying accounts s2 financial statement schedules omitted applicable required information included consolidated financial statements notes thereto contained companys 2000 annual report shareholders incorporated herein reference 3 exhibits filed connection report incorporated herein reference exhibit index pages e1 e6 incorporated herein reference b reports form 8k reports form 8k filed quarter ended december 31 2000 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused form 10k annual report signed behalf undersigned thereunto duly authorized cnf transportation inc registrant march 26 2001 gregory l quesnel president chief executive officer interim chief financial officer signatures pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated march 26 2001 donald e moffitt donald e moffitt chairman board march 26 2001 gregory l quesnel gregory l quesnel president chief executive officer director march 26 2001 robert alpert robert alpert director march 26 2001 richard clarke richard clarke director march 26 2001 margaret g gill director march 26 2001 robert jaunich ii robert jaunich ii director march 26 2001 w keith kennedy jr w keith kennedy jr director march 26 2001 richard b madden richard b madden director march 26 2001 michael j murray michael j murray director march 26 2001 robert rogers robert rogers director march 26 2001 william j schroeder william j schroeder director march 26 2001 robert p wayman robert p wayman director s1 consent independent public accountants independent public accountants hereby consent incorporation reports included incorporated reference form 10k companys previously filed registration statement file nos 281030 3352599 3360619 33 60625 3360629 33326595 33330327 33348733 33356667 333 92399 33336180 33354558 sarthur andersen llp arthur andersen llp san francisco california march 26 2001 report independent public accountants shareholders board directors cnf transportation inc audited accordance auditing standards generally accepted united states consolidated financial statements included cnf transportation incs 2000 annual report shareholders incorporated reference form 10k issued report thereon dated january 26 2001 audit made purpose forming opinion statements taken whole schedule iivaluation qualifying accounts page s2 responsibility companys management presented purpose complying securities exchange commissions rules part basic financial statements schedule subjected auditing procedures applied audit basic financial statements opinion fairly states material respects financial data required set forth therein relation basic financial statements taken whole sarthur andersen llp arthur andersen llp san francisco california january 26 2001 s2 schedule ii cnf transportation inc valuation qualifying accounts three years ended december 31 2000 thousands description allowance doubtful accounts additions balance charged balance beginning costs deductions end period expenses accounts period 2000 26163 9070 13511 21722 1999 21098 15229 10164 26163 1998 20155 11050 10107 21098 accounts written net recoveries allowance costs discontinued operations additions balance charged balance beginning costs deductions end period expenses accounts period 2000 22144 513 21631 e1 index exhibits item 14a3 exhibit 3 articles incorporation bylaws 31 cnf transportation inc certificate incorporationas amended exhibit 4a companys registration statement form s3 dated may 6 1997 32 cnf transportation inc bylaws amended september 28 1998 exhibit 4b companys registration statement form s3 dated november 10 1998 4 instruments defining rights security holders including debentures 41 certificate designations series b cumulative convertible preferred stock exhibit 41 filed form se dated may 25 1989 42 indenture registrant bank one columbus na successor trustee respect 918 notes due 1999 mediumterm notes series 735 notes due 2005 exhibit 41 filed form se dated march 20 1990 43 indenture registrant first national bank chicago bank trustee respect debt securities exhibit 4d filed form s3 dated june 27 1995 44 indenture registrant bank one columbus na trustee respect subordinated debt securities exhibit 4e filed form s3 dated june 27 1995 45 form security 735 notes due 2005 issued consolidated freightways inc exhibit 44 filed form s4 dated june 27 1995 46 declaration trust exhibit 4k companys amendment 1 form s3 dated may 30 1997 47 form amended restated declaration trust including form trust preferred security exhibit 4l companys amendment 1 form s3 dated may 9 1997 48 form guarantee agreement respect trust preferred securities exhibit 4m companys amendment 1 form 3 dated may 30 1997 e2 49 form indenture cnf transportation inc bank one trust company national association exhibit 4di companys form 8k dated march 3 2000 410 form security 8 78 notes due 2010 issued cnf transportation inc exhibit 4i companys form 8k dated march 3 2000 instruments defining rights security holders longterm debt cnf transportation inc subsidiaries financial statements required filed form 10k total amount securities authorized instrument less 10 total assets cnf transportation inc subsidiaries consolidated basis filed exhibits form 10k company agrees furnish copy applicable instrument securities exchange commission upon request 10 material contracts 101 consolidated freightways inc longterm incentive plan 1988 amended amendment 3 exhibit 102 filed form se dated march 25 1991 102 consolidated freightways inc stock option plan 1988 amended exhibit 10i companys form 10k year ended december 31 1987 amended form s8 dated december 16 1992 103 emery air freight plan retirees effective october 31 1987 exhibit 423 emery air freight corporation quarterly report form 10q dated november 16 1987 104 consolidated freightways inc common stock fund formerly emery air freight corporation employee stock ownership plan effective october 1 1987 esop exhibit 433 emery air freight corporation annual report form 10k dated march 281988 105 employee stock ownership trust agreement dated october 8 1987 amended emery air freight corporation arthur w demelle daniel j mccauley daniel w shea trustees esop trust exhibit 434 emery air freight corporation annual report form 10k dated march 28 1988 e3 106 amended restated subscription stock purchase agreement dated december 31 1987 emery air freight corporation boston safe deposit trust company capacity successor trustee emery air freight corporation employee stock ownership plan trust boston safe exhibit b emery air freight corporation current report form 8k dated january 11 1988 107 supplemental subscription stock purchase agreement dated january 29 1988 emery air freight corporation boston safe exhibit b emery air freight corporation current report form 8k dated february 12 1988 108 trust indenture dated november 1 1988 city dayton ohio security pacific national trust company new york trustee bankers trust company trustee exhibit 41 emery air freight corporation current report form 8k dated december 2 1988 109 bond purchase agreement dated november 7 1988 among city dayton ohio emery air freight corporation drexel burnham lambert incorporated exhibit 287 emery air freight corporation current report form 8k dated december 2 1988 1010 lease agreement dated november 1 1988 city dayton ohio emery air freight corporation exhibit 101 emery air freight corporation annual report form 10k year ended december 31 1988 1011 350 million amended restated credit agreement dated november 21 1996 among consolidated freightways inc various financial institutions exhibit 1018 companys form 10k year ended december 31 1996 1012 official statement issuers special facilities revenue refunding bonds 1993 series e f dated september 29 1993 among city dayton ohio emery air freight corporation exhibit 101 companys form 10q quarterly period ended september 30 1993 1013 trust indenture dated september 1 1993 city dayton ohio bankers trust company trustee exhibit 102 companys form 10q quarterly period ended september 30 1993 e4 1014 supplemental lease agreement dated september 1 1993 city dayton ohio lessor emery air freight corporation lessee exhibit 103 companys form 10q quarterly period ended september 30 1993 1015 supplemental retirement plan dated january 1 1990 exhibit 1031 companys form 10k year ended december 31 1993 1016 directors 24hour accidental death dismemberment plan exhibit 1032 companys form 10k year ended december 31 1993 1017 executive splitdollar life insurance plan dated january 1 1994 exhibit 1033 companys form 10k year ended december 31 1993 1018 board directors compensation plan dated january 1 1994 exhibit 1034 companys form 10k year ended december 31 1993 1019 directors business travel insurance plan exhibit 1036 companys form 10k year ended december 31 1993 1020 deferred compensation plan executives 1998 restatement exhibit 1020 companys form 10k year ended december 31 1997 1021 amended restated 1993 nonqualified employee benefit plans trust agreement dated january 1 1995 exhibit 1038 companys form 10k year ended december 31 1994 1022 cnf transportation inc 1997 equity incentive plan nonemployee directors amended june 30 1997 exhibit 1033 companys form 10k year ended december 31 1997 1023 amended restated retirement plan directors consolidated freightways inc dated january 1 1994 exhibit 1040 companys form 10k year ended december 31 1994 1024 cnf transportation inc return equity plan amended amendment 1 exhibit 1024 companys form 10k year ended december 31 1997 1025 employee benefit matters agreement consolidated freightways inc consolidated freightways corporation dated december 2 1996 exhibit 1033 companys form 10k year ended december 31 1996 e5 1026 distribution agreement consolidated freightways inc consolidated freightways corporation dated november 25 1996 exhibit 1034 companys form 10k year ended december 31 1996 1027 transition services agreement cnf service company inc consolidated freightways corporation dated december 2 1996 exhibit companys form 10k year ended december 31 1996 1028 tax sharing agreement consolidated freightways inc consolidated freightways corporation dated december 2 1996 exhibit companys form 10k year ended december 31 1996 1029 cnf transportation inc 1997 equity incentive plan amended january 31 2000 exhibit companys proxy statement dated march 20 2000 1030 cnf transportation inc deferred compensation plan directors 1998 restatement exhibit 1034 companys form 10k year ended december 31 1997 1031 cnf transportation inc executive severance plan exhibit 1032 companys form 10k year ended december 31 1998 1032 cnf transportation inc summary incentive compensation plans 2001 1033 value management plan dated june 28 1999 12acomputation ratios earnings fixed charges 12bcomputation ratios earnings combined fixed charges preferred stock dividends 13 annual report security holders cnf transportation inc 2000 annual report shareholders portions referenced herein incorporated form 10k portions letter shareholders required therefore filed part form 10k 18 preferability letter regarding change accounting principle 21 significant subsidiaries company e6 99 additional documents 991 cnf transportation inc 2000 notice annual meeting proxy statement dated march 8 2001 filed form def 14a portions referenced herein incorporated form 10k portions required therefore filed part form 10k 992 note agreement dated july 17 1989 esop consolidated freightways inc note purchasers named therein exhibit 281 filed form se dated july 21 1989 993 guarantee agreement dated july 17 1989 delivered consolidated freightways inc exhibit 282 filed form se dated july 21 1989 994 form restructured note agreement consolidated freightways inc thrift stock ownership trust issuer various financial institutions purchasers named therein dated november 3 1992 exhibit 284 companys form 10k year ended december 31 1992 remaining exhibits omitted either 1 neither required applicable 2 required information included consolidated financial statements notes thereto footnotes exhibit index previously filed securities exchange commission incorporated herein reference incorporated reference indicated reports filed securities act 1934 amended emery air freight corporation file 13893 designates contract compensation plan management directorsitem 14 exhibits financial statement schedules reports form 8k 1 financial statements consolidated financial statements cnf together notes consolidated financial statements report thereon arthur andersen llp dated january 25 2002 except respect increase unsecured revolving credit facility discussed note 5 date february 22 2002 presented pages 28 52 cnfs 2001 annual report shareholders incorporated herein reference exception information incorporated reference items 1 3 5 6 7 7a 8 14 hereof cnfs 2001 annual report shareholders deemed filed part report 2 financial statement schedule page number form 10k report independent public accountants financial statement schedule s1 schedule ii valuation qualifying accounts s2 financial statement schedules omitted applicable required information included consolidated financial statements notes thereto contained cnfs 2001 annual report shareholders incorporated herein reference 3 exhibits filed connection report incorporated herein reference exhibit index pages e1 e6 incorporated herein reference b reports form 8k august 14 2001 cnf filed report form 8k reporting suspension ewas air carrier operations part interim settlement agreement faa described item 1 emery worldwide regulatory matters signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused form 10k annual report signed behalf undersigned thereunto duly authorized cnf inc registrant gregory l quesnel march 25 2002 gregory l quesnel president chief executive officer chutta ratnathicam march 25 2002 chutta ratnathicam senior vice president chief financial officer kevin coel march 25 2002 kevin coel controller signatures pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated march 25 2002 donald e moffitt donald e moffitt chairman board gregory l quesnel march 25 2002 gregory l quesnel president chief executive officer director robert alpert march 25 2002 robert alpert director march 25 2002 richard clarke director march 25 2002 margaret g gill margaret g gill director robert jaunich ii march 25 2002 robert jaunich ii director w keith kennedy jr march 25 2002 w keith kennedy jr director signatures richard b madden march 25 2002 richard b madden director michael j murray march 25 2002 michael j murray director robert rogers march 25 2002 robert rogers director william j schroeder march 25 2002 william j schroeder director robert p wayman march 25 2002 robert p wayman director s1 consent independent public accountants independent public accountants hereby consent incorporation reports included incorporated reference form 10k companys previously filed registration statement file nos 281030 3352599 3360619 33 60625 3360629 33326595 33330327 33348733 33356667 333 92399 33336180 33354558 sarthur andersen llp arthur andersen llp san francisco california march 25 2002 report independent public accountants shareholders board directors cnf inc audited accordance auditing standards generally accepted united states consolidated financial statements included cnf incs 2001 annual report shareholders incorporated reference form 10k issued report thereon dated january 25 2002 except respect increase unsecured revolving credit facility discussed note 5 date february 22 2002 audit made purpose forming opinion statements taken whole schedule ii valuation qualifying accounts page s2 responsibility companys management presented purposes complying securities exchange commissions rules part basic financial statements schedule subjected auditing procedures applied audit basic financial statements opinion fairly states material respects financial data required set forth therein relation basic financial statements taken whole sarthur andersen llp arthur andersen llp san francisco california january 25 2002 s2 schedule ii cnf inc valuation qualifying accounts three years ended december 31 2001 thousands description allowance doubtful accounts additions balance charged balance beginning costs deductions end period expenses accounts period 2001 21722 17435 16482 22675 2000 26163 9070 13511 21722 1999 21098 15229 10164 26163 accounts written net recoveries allowance costs discontinued operations additions balance charged balance beginning costs deductions end period expenses accounts period 2001 22144 3561 22448 3257 2000 22144 e1 index exhibits item 14a3 exhibit 3 articles incorporation bylaws 31 cnf transportation inc certificate incorporation amended exhibit 4a cnfs registration statement form s3 dated may 6 1997 32 cnf transportation inc bylaws amended september 28 1998 exhibit 4b cnfs registration statement form s3 dated november 10 1998 4 instruments defining rights security holders including debentures 41 certificate designations series b cumulative convertible preferred stock exhibit 41 filed form se dated may 25 1989 42 indenture registrant bank one columbus na successor trustee respect 918 notes due 1999 mediumterm notes series 735 notes due 2005 exhibit 41 filed form se dated march 20 1990 43 indenture registrant first national bank chicago bank trustee respect debt securities exhibit 4d filed form s3 dated june 27 1995 44 indenture registrant bank one columbus na trustee respect subordinated debt securities exhibit 4e filed form s3 dated june 27 1995 45 form security 735 notes due 2005 issued consolidated freightways inc exhibit 44 filed form s4 dated june 27 1995 46 declaration trust exhibit 4k cnfs amendment 1 form s3 dated may 30 1997 47 form amended restated declaration trust including form trust preferred security exhibit 4l cnfs amendment 1 form s3 dated may 9 1997 48 form guarantee agreement respect trust preferred securities exhibit 4m cnfs amendment 1 form s3 dated may 30 1997 e2 49 form indenture cnf transportation inc bank one trust company national association exhibit 4di cnfs form 8k dated march 3 2000 410 form security 8 78 notes due 2010 issued cnf transportation inc exhibit 4i cnfs form 8k dated march 3 2000 instruments defining rights security holders longterm debt cnf transportation inc subsidiaries financial statements required filed form 10k total amount securities authorized instrument less 10 total assets cnf transportation inc subsidiaries consolidated basis filed exhibits form 10k cnf agrees furnish copy applicable instrument securities exchange commission upon request 10 material contracts 101 consolidated freightways inc longterm incentive plan 1988 amended amendment 3 exhibit 102 filed form se dated march 25 1991 102 consolidated freightways inc stock option plan 1988 amended exhibit 10i cnfs form 10k year ended december 31 1987 amended form s8 dated december 16 1992 103 emery air freight plan retirees effective october 31 1987 exhibit 423 emery air freight corporation quarterly report form 10q dated november 16 1987 104 consolidated freightways inc common stock fund formerly emery air freight corporation employee stock ownership plan effective october 1 1987 esop exhibit 433 emery air freight corporation annual report form 10k dated march 281988 105 employee stock ownership trust agreement dated october 8 1987 amended emery air freight corporation arthur w demelle daniel j mccauley daniel w shea trustees esop trust exhibit 434 emery air freight corporation annual report form 10k dated march 28 1988 e3 106 amended restated subscription stock purchase agreement dated december 31 1987 emery air freight corporation boston safe deposit trust company capacity successor trustee emery air freight corporation employee stock ownership plan trust boston safe exhibit b emery air freight corporation current report form 8k dated january 11 1988 107 supplemental subscription stock purchase agreement dated january 29 1988 emery air freight corporation boston safe exhibit b emery air freight corporation current report form 8k dated february 12 1988 108 trust indenture dated november 1 1988 city dayton ohio security pacific national trust company new york trustee bankers trust company trustee exhibit 41 emery air freight corporation current report form 8k dated december 2 1988 109 bond purchase agreement dated november 7 1988 among city dayton ohio emery air freight corporation drexel burnham lambert incorporated exhibit 287 emery air freight corporation current report form 8k dated december 2 1988 1010 lease agreement dated november 1 1988 city dayton ohio emery air freight corporation exhibit 101 emery air freight corporation annual report form 10k year ended december 31 1988 1011 350 million amended restated credit agreement dated november 21 1996 among consolidated freightways inc various financial institutions exhibit 1018 cnfs form 10k year ended december 31 1996 1012 official statement issuers special facilities revenue refunding bonds 1993 series e f dated september 29 1993 among city dayton ohio emery air freight corporation exhibit 101 cnfs form 10q quarterly period ended september 30 1993 1013 trust indenture dated september 1 1993 city dayton ohio bankers trust company trustee exhibit 102 cnfs form 10q quarterly period ended september 30 1993 e4 1014 supplemental lease agreement dated september 1 1993 city dayton ohio lessor emery air freight corporation lessee exhibit 103 cnfs form 10q quarterly period ended september 30 1993 1015 supplemental retirement plan dated january 1 1990 exhibit 1031 cnfs form 10k year ended december 31 1993 1016 directors 24hour accidental death dismemberment plan exhibit 1032 cnfs form 10k year ended december 31 1993 1017 executive splitdollar life insurance plan dated january 1 1994 exhibit 1033 cnfs form 10k year ended december 31 1993 1018 board directors compensation plan dated january 1 1994 exhibit 1034 cnfs form 10k year ended december 31 1993 1019 directors business travel insurance plan exhibit 1036 cnfs form 10k year ended december 31 1993 1020 deferred compensation plan executives 1998 restatement exhibit 1020 cnfs form 10k year ended december 31 1997 1021 amended restated 1993 nonqualified employee benefit plans trust agreement dated january 1 1995 exhibit 1038 cnfs form 10k year ended december 31 1994 1022 cnf transportation inc 1997 equity incentive plan nonemployee directors amended june 30 1997 exhibit 1033 cnfs form 10k year ended december 31 1997 1023 amended restated retirement plan directors consolidated freightways inc dated january 1 1994 exhibit 1040 cnfs form 10k year ended december 31 1994 1024 cnf transportation inc return equity plan amended amendment 1 exhibit 1024 cnfs form 10k year ended december 31 1997 1025 employee benefit matters agreement consolidated freightways inc consolidated freightways corporation dated december 2 1996 exhibit 1033 cnfs form 10k year ended december 31 1996 e5 1026 distribution agreement consolidated freightways inc consolidated freightways corporation dated november 25 1996 exhibit 1034 cnfs form 10k year ended december 31 1996 1027 transition services agreement cnf service company inc consolidated freightways corporation dated december 2 1996 exhibit cnfs form 10k year ended december 31 1996 1028 tax sharing agreement consolidated freightways inc consolidated freightways corporation dated december 2 1996 exhibit cnfs form 10k year ended december 31 1996 1029 cnf transportation inc 1997 equity incentive plan amended january 31 2000 exhibit cnfs proxy statement dated march 20 2000 1030 cnf transportation inc deferred compensation plan directors 1998 restatement exhibit 1034 cnfs form 10k year ended december 31 1997 1031 cnf transportation inc executive severance plan exhibit 1032 cnfs form 10k year ended december 31 1998 1032 cnf inc summary incentive compensation plans 2002 1033 value management plan dated june 28 1999 12acomputation ratios earnings fixed charges 12bcomputation ratios earnings combined fixed charges preferred stock dividends 13 annual report security holders cnf inc 2001 annual report shareholders portions referenced herein incorporated form 10 k portions letter shareholders required therefore filed part form 10k 21 significant subsidiaries cnf e6 99 additional documents 991 cnf transportation inc 2001 notice annual meeting proxy statement dated march 22 2002 filed form def 14a portions referenced herein incorporated form 10k portions required therefore filed part form 10k 992 note agreement dated july 17 1989 esop consolidated freightways inc note purchasers named therein exhibit 281 filed form se dated july 21 1989 993 guarantee agreement dated july 17 1989 delivered consolidated freightways inc exhibit 282 filed form se dated july 21 1989 994 form restructured note agreement consolidated freightways inc thrift stock ownership trust issuer various financial institutions purchasers named therein dated november 3 1992 exhibit 284 cnfs form 10k year ended december 31 1992 995 confirmation arthur andersen representations remaining exhibits omitted either 1 neither required applicable 2 required information included consolidated financial statements notes thereto footnotes exhibit index previously filed securities exchange commission incorporated herein reference incorporated reference indicated reports filed securities act 1934 amended emery air freight corporation file 13893 designates contract compensation plan management directorsitem 14 controls procedures evaluation disclosure controls procedures cnf’s chief executive officer chief financial officer evaluated effectiveness cnf’s disclosure controls procedures term defined rules 13a14c 15d14c securities exchange act 1934 amended “exchange act” date within 90 days prior filing date annual report “evaluation date” based evaluation chief executive officer chief financial officer concluded evaluation date cnf’s disclosure controls procedures effective alerting timely basis material information relating cnf including consolidated subsidiaries required included cnf’s reports filed submitted exchange act b changes internal controls since evaluation date significant changes cnf’s internal controls factors could significantly affect internal controls part iv item 15item 14 principal accounting fees services information regarding principal accounting fees services presented caption “ratification auditors” 2004 proxy statement incorporated herein reference part iv item 15item 14 principal accounting fees services information regarding principal accounting fees services presented caption “ratification auditors” 2005 proxy statement incorporated herein reference part iv item 15item 14 principal accountant fees services information regarding principal accountant fees services presented 2007 proxy statement incorporated herein reference part iv item 15item 14 principal accountant fees services information regarding principal accountant fees services presented 2008 proxy statement incorporated herein reference part iv item 15item 14 principal accountant fees services information regarding principal accountant fees services presented 2009 proxy statement incorporated herein reference part iv item 15item 14 principal accountant fees services information regarding principal accountant fees services presented 2010 proxy statement incorporated herein reference part iv item 15item 14 principal accountant fees services information regarding principal accountant fees services presented 2011 proxy statement incorporated herein reference part iv item 15item 14 principal accounting fees services information regarding principal accountant fees services presented 2012 proxy statement incorporated herein reference part iv item 15item 14 principal accounting fees services information regarding principal accounting fees services incorporated herein reference material heading “proposal number 6 ratification appointment independent registered public accounting firm fees” 2013 proxy statement part iv item 15item 14 principal accounting fees services information regarding principal accounting fees services incorporated herein reference material heading “proposal number 4 ratification appointment independent registered public accounting firm fees” 2014 proxy statement part iv item 15item 14 principal accounting fees services information regarding principal accounting fees services presented caption “ratification auditors” 2006 proxy statement incorporated herein reference part iv item 15item 14 principal accounting fees services information regarding principal accounting fees services incorporated herein reference material heading proposal number 4 ratification appointment independent registered public accounting firm fees 2015 proxy statement part iv item 15item 14 exhibits financial statement schedules reports form 8k financial statements exhibits filed 1 financial statements see index financial information 2 financial statement schedules see index financial information 3 exhibits see index exhibits b reports form 8k reports form 8k filed three months ended december 31 1993 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused form 10k annual report signed behalf undersigned thereunto duly authorized consolidated freightways inc registrant march 28 1994 sdonald e moffitt donald e moffitt president chief executive officer march 28 1994 sgregory l quesnel gregory l quesnel executive vice president chief financial officer march 28 1994 srobert e wrightson robert e wrightson vice president controller signatures pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated march 28 1994 sraymond f obrien raymond f obrien chairman board march 28 1994 sdonald e moffitt donald e moffitt president chief executive officer director march 28 1994 sjohn c bolinger jr john c bolinger jr director march 28 1994 searl f cheit earl f cheit director march 28 1994 sg robert evans g robert evans director march 28 1994 srobert jaunich ii robert jaunich ii director march 28 1994 sjohn perkins john perkins director consolidated freightways inc form 10k year ended december 31 1993 index financial information consolidated freightways inc subsidiaries following consolidated financial statements consolidated freightways inc subsidiaries appearing pages 27 45 inclusive companys 1993 annual report shareholders incorporated herein reference report independent public accountants consolidated balance sheets december 31 1993 1992 statements consolidated operations years ended december 31 1993 1992 1991 statements consolidated cash flows years ended december 31 1993 1992 1991 statements consolidated shareholders equity years ended december 31 1993 1992 1991 notes consolidated financial statements addition following consolidated financial information filed part form 10k page consent independent public accountants 20 report independent public accountants 20 schedule v property plant equipment years ended december 31 1993 1992 1991 21 schedule vi accumulated depreciation property plant equipment years ended december 31 1993 1992 1991 22 schedule viii valuation qualifying accounts 23 schedule x supplementary income statement information 24 schedules iv vii ix xi xiv omitted either 1 neither required applicable 2 required information included consolidated financial statements notes thereto signature consent independent public accountants independent public accountants hereby consent incorporation reports included incorporated reference form 10k companys previously filed registration statement file nos 281030 3329793 3345313 3352599 sarthur andersen co arthur andersen co san francisco california march 28 1994 report independent public accountants shareholders board directors consolidated freightways inc audited accordance generally accepted auditing standards consolidated financial statements included consolidated freightways incs 1993 annual report shareholders incorporated reference form 10k issued report thereon dated january 28 1994 audit made purpose forming opinion statements taken whole schedules pages 21 24 responsibility companys management presented purposes complying securities exchange commissions rules part basic financial statements schedules subjected auditing procedures applied audit basic financial statements opinion fairly state material respects financial data required set forth therein relation basic financial statements taken whole sarthur andersen co arthur andersen co san francisco california january 28 1994 schedule viii consolidated freightways inc valuation qualifying accounts three years ended december 31 1993 thousands description allowance doubtful accounts additions balance charged balance beginning costs end period expenses accounts deductions period 1993 26198 27127 23545 29780 1992 25742 29707 29251 26198 1991 30385 29858 34501 25742 accounts written net recoveries schedule x consolidated freightways inc supplementary income statement information years ended december 31 thousands 1993 1992 1991 maintenance repairs 131512 146375 151475 taxes payroll income taxes fuel 63147 56066 54385 43647 39675 41142 106794 95741 95527 index exhibits item 14a3 exhibit 3 articles incorporation bylaws 31 consolidated freightways inc certificates incorporation amended exhibit 3a2 companys quarterly report form 10q quarter ended march 31 1987 32 consolidated freightways inc bylaws amended march 29 1993 4 instruments defining rights security holders including debentures 41 consolidated freightways inc stockholder rights plan exhibit 1 form 8a dated october 27 1986 42 certificate designations series b cumulative convertible preferred stock exhibit 41 filed form se dated may 25 1989 43 indenture registrant security pacific national bank trustee respect 918 notes due 1999 medium term notes series exhibit 41 filed form se dated march 20 1990 44 form security 918 notes due 1999 issued consolidated freightways inc exhibit 41 filed form se dated august 25 1989 45 officers certificate dated august 24 1989 establishing form terms debt securities issued consolidated freightways inc exhibit 42 filed form se dated august 25 1989 46 form security mediumterm notes series issued consolidated freightways inc exhibit 41 filed form se dated september 18 1989 47 officers certificate dated september 18 1989 establishing form terms debt securities issued consolidated freightways inc exhibit 42 filed form se dated september 19 1989 48 form certificate designations series c conversion preferred stock incorporated reference exhibit 43 contained form se dated january 29 1992 49 form stock certificate series c conversion preferred stock incorporated reference exhibit 44 contained form se dated january 29 1992 410 subsidiary guaranty agreement dated july 30 1993 among consolidated freightways inc various financial institutions connection 250 million credit agreement date exhibit 41 companys form 10q quarterly period ended june 30 1993 previously filed securities exchange commission incorporated herein reference exhibit 4 instruments defining rights security holders including debentures continued instruments defining rights security holders longterm debt consolidated freightways inc subsidiaries financial statements required filed form 10k total amount securities authorized instrument less 10 total assets consolidated freightways inc subsidiaries consolidated basis filed exhibits form 10k company agrees furnish copy applicable instrument securities exchange commission upon request 10 material contracts 101 consolidated freightways inc longterm incentive plan 1978 amended amendment 4 exhibit 10e companys form 10k year ended december 31 1983 102 amendments 5 6 7 consolidated freightways inc longterm incentive plan 1978 amended amendment 4 exhibit 101 filed form se dated march 25 1991 103 consolidated freightways inc longterm incentive plan 1988 exhibit 10g companys form 10k year ended december 31 1987 104 amendment 3 consolidated freightways inc longterm incentive plan 1988 exhibit 102 filed form se dated march 25 1991 105 consolidated freightways inc stock option plan 1978 amended amendment 1 exhibit 10e companys form 10k year ended december 31 1981 106 consolidated freightways inc stock option plan 1988 amended exhibit 10i companys form 10k year ended december 31 1987 amended form s8 dated december 16 1992 107 forms stock option agreement without cash surrender rights consolidated freightways inc stock option plan 1988 exhibit 10j companys form 10k year ended december 31 1987 108 form consolidated freightways inc deferred compensation agreement exhibit 10i companys form 10k year ended december 31 1981 109 consolidated freightways inc retirement plan formerly emery air freight corporation pension plan amended effective january 1 1985 amendments dated october 30 1987 exhibit 422 emery air freight corporation quarterly report form 10q dated november 16 1987 previously filed securities exchange commission incorporated herein reference incorporated reference indicated reports filed securities act 1934 amended emery air freight corporation file 13893 exhibit 1010 emery air freight plan retirees effective october 31 1987 exhibit 423 emery air freight corporation quarterly report form 10q dated november 16 1987 1011 consolidated freightways inc common stock fund formerly emery air freight corporation employee stock ownership plan effective october 1 1987 esop exhibit 433 emery air freight corporation annual report form 10k dated march 28 1988 1012 employee stock ownership trust agreement dated october 8 1987 amended emery air freight corporation arthur w demelle daniel j mccauley daniel w shea trustees esop trust exhibit 434 emery air freight corporation annual report form 10k dated march 28 1988 1013 amended restated subscription stock purchase agreement dated december 31 1987 emery air freight corporation boston safe deposit trust company capacity successor trustee emery air freight corporation employee stock ownership plan trust boston safe exhibit b emery air freight corporation current report form 8k dated january 11 1988 1014 supplemental subscription stock purchase agreement dated january 29 1988 emery air freight corporation boston safe exhibit b emery air freight corporation current report form 8k dated february 12 1988 1015 trust indenture dated november 1 1988 city dayton ohio security pacific national trust company new york trustee bankers trust company trustee exhibit 41 emery air freight corporation current report form 8k dated december 2 1988 1016 bond purchase agreement dated november 7 1988 among city dayton ohio emery air freight corporation drexel burnham lambert incorporated exhibit 287 emery air freight corporation current report form 8k dated december 2 1988 1017 lease agreement dated november 1 1988 city dayton ohio emery air freight corporation exhibit 101 emery air freight corporation annual report form 10k year ended december 31 1988 previously filed securities exchange commission incorporated herein reference incorporated reference indicated reports filed securities act 1934 amended emery air freight corporation file 13893 exhibit 1018 credit agreement dated january 14 1993 among emery receivables corporation borrower emery air freight corporation consolidated freightways inc individually servicer various financial institutions exhibit 1019 companys form 10k year ended december 31 1992 1019 purchase sale agreement dated january 14 1993 among emery air freight corporation emery distribution systems inc originators emery receivables corporation consolidated freightways inc servicer exhibit 1020 companys form 10k year ended december 31 1992 1020 consolidated freightways inc directors election form deferral payment directors fees 1021 consolidated freightways inc 1993 executive deferral plan exhibit 1022 companys form 10k year ended december 31 1992 1022 consolidated freightways inc executive incentive plan 1994 1023 cf motorfreight incentive plan 1994 1024 conway transportation services inc incentive plan 1994 1025 emery worldwide incentive plan 1994 1026 250 million credit agreement dated july 30 1993 among consolidated freightways inc various financial institutions exhibit 101 companys form 10q quarterly period ended june 30 1993 1027 letter credit facility agreement dated july 30 1993 consolidated freightways inc bank america national trust savings association exhibit 102 companys form 10q quarterly period ended june 30 1993 1028 official statement issuers special facilities revenue refunding bonds 1993 series e f dated september 29 1993 among city dayton ohio emery air freight corporation exhibit 101 companys form 10q quarterly period ended september 30 1993 1029 trust indenture dated september 1 1993 city dayton ohio bankers trust company trustee exhibit 102 companys form 10q quarterly period ended september 30 1993 1030 supplemental lease agreement dated september 1 1993 city dayton ohio lessor emery air freight corporation lessee exhibit 103 companys form 10q quarterly period ended september 30 1993 1031 supplemental retirement plan dated january 1 1990 1032 directors 24hour accidental death dismemberment plan 1033 executive splitdollar life insurance plan dated january 1 1994 1034 board directors compensation plan dated january 1 1994 1035 excess benefit plan dated january 1 1987 1036 directors business travel insurance plan previously filed securities exchange commission incorporated herein reference exhibit 1037 deferred compensation plan executives dated october 1 1993 1038 1993 nonqualified employee benefit plans trust agreement dated october 1 1993 13 annual report security holders consolidated freightways inc 1993 annual report shareholders portions referenced herein incorporated form 10k portions shareholders employees required therefore filed part form 10k 22 significant subsidiaries company 28 additional documents 281 consolidated freightways inc 1993 notice annual meeting proxy statement dated march 18 1994 portions referenced herein incorporated form 10k portions required therefore filed part form 10k 282 note agreement dated july 17 1989 esop consolidated freightways inc note purchasers named therein exhibit 281 filed form se dated july 21 1989 283 guarantee agreement dated july 17 1989 delivered consolidated freightways inc exhibit 282 filed form se dated july 21 1989 284 form restructured note agreement consolidated freightways inc thrift stock ownership trust issuer various financial institutions purchasers named therein dated november 3 1992 exhibit 284 companys form 10k year ended december 31 1992 285 form restructured guarantee agreement consolidated freightways inc issuer various financial institutions purchasers named therein dated november 3 1992 exhibit 285 companys form 10k year ended december 31 1992 remaining exhibits omitted either 1 neither required applicable 2 required information included consolidated financial statements notes thereto previously filed securities exchange commission incorporated herein reference item 7 managements discussion analysis financial condition results operations managements discussion analysis financial condition results operations presented financial review management discussion pages 18 20 inclusive 1994 annual report shareholders incorporated herein reference item 8item 7 managements discussion analysis financial condition results operations managements discussion analysis financial condition results operations presented financial review management discussion pages 16 18 inclusive 1995 annual report shareholders incorporated herein reference certain statements included incorporated reference herein including certain statements financial review management discussion referred constitute forwardlooking statements within meaning section 21e securities exchange act 1934 amended subject number risks uncertainties regard following factors among others could cause actual results matters differ materially statements changes general business economic conditions increasing domestic international competition pricing pressure changes fuel prices uncertainty regarding companys ability improve results operations among things implementation bas cfmf labor matters including changes labor costs renegotiation labor contracts risk work stoppages strikes changes governmental regulation environmental tax matters result foregoing assurance given future results operations financial condition item 8item 7 managements discussion analysis financial condition results operations managements discussion analysis financial condition results operations presented financial review management discussion pages 18 20 inclusive 1996 annual report shareholders incorporated herein reference certain statements included incorporated reference herein constitute forwardlooking statements within meaning section 21e securities exchange act 1934 amended subject number risks uncertainties forwardlooking statements contained incorporated reference herein relied upon predictions future events certain forwardlooking statements identified use forwardlooking terminology believes expects may seeks anticipates negative thereof variations thereof comparable terminology discussions strategy forwardlooking statements necessarily dependent assumptions data methods may incorrect imprecise may incapable realized regard following factors among others could cause actual results matters differ materially forwardlooking statements changes general business economic conditions increasing domestic international competition pricing pressure changes fuel prices uncertainty regarding companys ability improve results operations labor matters including changes labor costs renegotiation labor contracts risk work stoppages strikes changes governmental regulation environmental tax matters relating recently completed spinoff consolidated freightways corporation cfc regard company may subject substantial liabilities respect certain matters relating cfcs business operations including without limitation guarantees certain indebtedness cfc liabilities employmentrelated matters although cfc general either primary obligor jointly severally liable company respect matters failure pay default cfc respect obligations company may perceived liable whether cfcs bankruptcy insolvency otherwise could lead substantial claims company result foregoing assurance given future results operations financial condition item 8item 7 managements discussion analysis financial condition results operations managements discussion analysis financial condition results operations presented financial review management discussion pages 18 20 inclusive 1997 annual report shareholders incorporated herein reference march 17 1998 company issued press release reporting lower expected domestic international air freight revenues continuing startup costs new priority mail contract would result first quarter 1998 earnings expectations partially offsetting expectation best quarterly operating income cts history 6 million charge taken first quarter recognize costs extending openings five pmpcs priority mail contract company expects earn 27 cents 32 cents per diluted share quarter certain statements included incorporated reference herein constitute forwardlooking statements within meaning section 21e securities exchange act 1934 amended subject number risks uncertainties forwardlooking statements contained incorporated reference herein relied upon predictions future events certain forwardlooking statements identified use forwardlooking terminology believes expects may seeks approximately intends plans estimates anticipates negative thereof variations thereof comparable terminology discussions strategy plans intentions forwardlooking statements necessarily dependent assumptions data methods may incorrect imprecise may incapable realized regard following factors among others addition matters discussed elsewhere document documents incorporated deemed incorporated reference herein could cause actual results matters differ materially forwardlooking statements changes general business economic conditions increasing domestic international competition pricing pressure changes fuel prices uncertainty regarding companys new contract usps including costs extending openings pmpcs labor matters including changes labor costs renegotiations labor contracts risk work stoppages strikes changes governmental regulation environmental tax matters including aviation excise tax aircraft maintenance tax matters discussed documents incorporated reference emerys results operations first quarter 1998 adversely affected less planned revenues matters relating spinoff consolidated freightways corporation cfc regard company may subject substantial liabilities respect certain matters relating cfcs business operations including without limitation guarantees certain indebtedness cfc liabilities employmentrelated matters although cfc general either primary obligor jointly severally liable company respect matters failure pay default cfc respect obligations company may perceived liable whether cfcs bankruptcy insolvency otherwise could lead substantial claims company result foregoing assurance given future results operations financial condition item 8item 7 managements discussion analysis financial condition results operations managements discussion analysis financial condition results operations presented financial review management discussion pages 18 23 inclusive 1998 annual report shareholders incorporated herein reference certain statements included incorporated reference herein constitute forwardlooking statements within meaning section 21e securities exchange act 1934 amended subject number risks uncertainties forwardlooking statements contained incorporated reference herein relied upon predictions future events certain forwardlooking statements identified use forwardlooking terminology believes expects may seeks approximately intends plans estimates anticipates negative thereof variations thereof comparable terminology discussions strategy plans intentions forwardlooking statements necessarily dependent assumptions data methods may incorrect imprecise may incapable realized regard following factors among others addition matters discussed elsewhere document documents incorporated reference herein could cause actual results matters differ materially forwardlooking statements changes general business economic conditions increasing domestic international competition pricing pressure changes fuel prices uncertainty regarding companys priority mail contract usps labor matters including changes labor costs renegotiations labor contracts risk work stoppages strikes changes governmental regulation environmental tax matters including aviation excise tax aircraft maintenance tax matters discussed documents incorporated reference matters relating spinoff consolidated freightways corporation cfc regard company may subject substantial liabilities respect certain matters relating cfcs business operations including without limitation guarantees certain indebtedness cfc liabilities employmentrelated tax environmental matters although cfc general either primary secondary obligor jointly severally liable company respect matters failure pay default cfc respect obligations company may perceived liable whether cfcs bankruptcy insolvency otherwise could lead substantial claims company result foregoing assurance given future results operations financial condition item 8item 7 managements discussion analysis financial condition results operations 8 item 7aitem 7 managements discussion analysis financial condition results operations 14 recent developments march 14 2001 company announced expected first quarter 2001 earnings first quarter 2000 company estimates diluted earnings per share first quarter 2001 range 022 027 companys core transportation businesses experiencing substantial tonnage revenue declines result continuing slowdown us economy company believes slowdown first noted late third quarter 2000 become pronounced successive month february 2001 march traditionally companys strongest month first quarter however decline operating results march 2001 compared march 2000 consistent lower operating results january february 2001 compared months last year company expects conways operating income first quarter 2001 decline operating income quarter last year tonnage shipped conway 2001 first quarter expected lower last years first quarter estimated percentage decline 3 7 percent company expects emery incur operating loss first quarter 2001 company believes emerys domestic airfreight volumes first quarter 2001 lower quarter last year due continued significant weakness automotive technology sectors estimated percentage decline 15 19 percent emerys international airfreight volumes first quarter 2001 expected essentially unchanged quarter last year company expects menlos operating income first quarter 2001 slightly higher quarter last year management initiated cost control programs throughout company emery particular continuing restructuring program bring size line lower business levels management also believes weather conditions adversely affected revenues costs emery conway certain statements included incorporated reference herein constitute forwardlooking statements within meaning section 21e securities exchange act 1934 amended subject number risks uncertainties forwardlooking statements contained incorporated reference herein relied upon predictions future events statements historical fact forwardlooking statements including projections earnings revenues tonnage volumes income financial operating items statements plans strategies objectives management future operations statements concerning proposed new products services statements regarding future economic conditions performance statements estimates belief statements assumptions underlying foregoing certain forwardlooking statements identified use forwardlooking terminology believes expects may seeks approximately intends plans estimates anticipates negative thereof variations thereof comparable terminology discussions strategy plans intentions forwardlooking statements necessarily dependent assumptions data methods may incorrect imprecise assurance realized regard following factors among others addition matters discussed elsewhere document documents incorporated reference herein could cause actual results matters differ materially forward looking statements changes general business economic conditions including lower business levels company experienced first quarter 2001 company expects continue increasing domestic international competition pricing pressure changes fuel prices particularly light recent fuel price increases uncertainty regarding ewas claims former priority mail contract usps described herein incorporated reference uncertainties regarding ewas existing express mail contract usps labor matters including changes labor costs renegotiations labor contracts risk work stoppages strikes enforcement changes governmental regulations environmental tax matters including claims made internal revenue service respect aircraft maintenance tax matters discussed documents incorporated reference department transportation investigation relating emery worldwides handling hazardous materials february 2000 crash ewa aircraft related litigation matters relating spinoff consolidated freightways corporation cfc regard company may subject substantial liabilities respect certain matters relating cfcs business operations including without limitation guarantees certain indebtedness cfc liabilities employmentrelated tax environmental matters including tax matters discussed documents incorporated reference although cfc general either primary secondary obligor jointly severally liable company respect matters failure pay default cfc respect obligations company may perceived liable whether cfc successfully contesting obligation reimburse company otherwise could lead substantial claims company result foregoing assurance given future results operations financial condition item 7aitem 7 managements discussion analysis financial condition results operations 1427 item 7aitem 7 management’s discussion analysis financial condition results operations management’s discussion analysis results operations financial condition referred management’s discussion analysis intended assist understanding assessment principal factors affecting results operations liquidity capital resources well critical accounting policies cnf subsidiaries discussion analysis read conjunction audited consolidated financial statements accompanying notes include additional information cnf’s significant accounting policies practices transactions underlie cnf’s financial results policies read conjunction financial statements related notes item 8 “financial statements supplementary data” cnf inc management company global supply chain services specializing movement freight principal businesses provide supply chain management services commercial industrial shipments land air sea throughout north america world used management’s discussion analysis references cnf “the company” “we” “us” “our” similar references mean cnf inc subsidiaries unless otherwise expressly stated context otherwise requires results operations net income available common shareholders 936 million 174 per diluted share 2002 improved net loss applicable common shareholders 4029 million 826 per diluted share 2001 continuing operations generated 2002 net income preferred dividends 1060 million 196 per diluted share compared 2001 net loss 4418 million 906 per diluted share 2000 net income available common shareholders 1268 million 236 per diluted share primarily due net income continuing operations 1431 million 265 per diluted share discontinued operations resulted aftertax loss 124 million 022 per diluted share 2002 aftertax gain 390 million 080 per diluted share 2001 aftertax loss 135 million 024 per diluted share 2000 gains losses discontinued operations periods presented due terminated priority mail contract us postal service fully settled 2002 except aftertax losses 153 million recognized 2002 upon business failure consolidated freightways corporation “cfc” september 2002 described “liquidity capital resourcesdiscontinued operationsspinoff cfc” continuing operations 2002 net income continuing operations preferred dividends improved net loss continuing operations 2001 cnf earned operating income 1818 million 2002 compared operating loss 6607 million 2001 net income continuing operations 2002 benefited settlement irs matters resulted 250 million tax benefit third quarter 2002 reduced effective tax rate 2002 operating income 2002 largely due improved operating results menlo worldwide businesses net effect unusual andor nonrecurring items summarized 2001 operating loss included 6522 million restructuring charges emery 475 million loss business failure menlo logistics’ customer net adverse effect 644 million unusual andor nonrecurring items 2001 excluding identified items operating income 2002 would 1569 million compared 1034 million 2001 due largely decline operating loss emery forwarding partially offset higher incentivebased employee compensation increase pension costs employee benefits expense reporting segments revenue 476 billion 2002 fell 21 486 billion 2001 due primarily lower revenue emery forwarding partially offset improved revenue conway transportation services menlo worldwide logistics 4418 million net loss continuing operations 2001 compared net income continuing operations 1431 million 2000 2001 cnf reported 6607 million operating loss compared operating income 2900 million 2000 2001 operating loss reflected net adverse effect restructuring charge unusual andor nonrecurring items decline revenue due part weak global economic conditions september 11 2001 terrorist attacks operating income 2000 benefited higher revenue comparatively stronger economic conditions 127 decline revenue 486 billion 2001 557 billion 2000 principally due comparatively weaker economic environment 2001 contributed revenue declines conway emery forwarding reflected lower revenue emery worldwide airlines’ “ewa” express mail contract usps terminated 2001 net expense 2002 increased 08 2001 due largely higher costs obtaining letters credit declines cashsurrender value corporateowned life insurance policies partially offset lower interest expense longterm debt april 2000 cnf entered interest rate swaps effectively converted longterm debt fixedrate floatingrate swaps terminated december 2002 fully discussed “other mattersmarket risk” net expense 2002 2001 included equity venture losses 46 million 53 million respectively net expense 2001 increased 226 2000 due primarily 53 million equity venture loss 2001 26 million gain sale securities 2000 cnf’s results operations included various items affected yeartoyear comparability reported operating income loss reporting segments cnf identified “unusual andor nonrecurring” three years ended december 31 2002 items summarized table identified cnf’s management based part materiality relevant reporting segment reporting segments cnf’s principal businesses consist conway transportation services conway menlo worldwide financial reporting purposes cnf divided five reporting segments operating results conway reported one reporting segment menlo worldwide divided three reporting segments emery forwarding menlo worldwide logistics menlo worldwide also certain corporate activities results road systems trailer manufacturer reported cnf reporting segment conway transportation services revenue conway 2002 rose 52 2001 201 billion due primarily higher revenue conway’s regional carriers conway’s assetlight businesses described revenue per day regional carriers including fuel surcharges grew 35 2001 25 improvement revenue per hundredweight yield 10 increase total lessthantruckload “ltl” weight per day weight fourthquarter regionalcarrier revenue per day 2002 increased 92 2001 fourthquarter yield increased 76 total fourthquarter weight rose 15 slightly higher weight 2002 aided part bankruptcy cfc september 2002 adversely affected loss major customer first quarter 2002 yield 2002 adversely affected lower fuel surcharges benefited aforementioned lost business major customer partly replaced higheryielding freight continued growth interregional joint services percentage revenue also benefited yield 2002 services typically command higher rates longer lengths haul 2002 conway’s assetlight businesses including conway logistics cli conway air express cax increased revenue 230 million 2001 767 million conway defines “assetlight” businesses subsidiaries affiliated companies require comparatively smaller capital investment lessthantruckload ltl operations operating income conway 2002 declined 65 1472 million excluding 87 million net gain sale excess property 2002 operating income declined 121 2002 due principally 109 increase employee compensation including incentivebased compensation benefits expense partially offset higher revenue operating income 2002 2001 included losses cax began operations may 2001 losses cli conway’s revenue 2001 fell 65 2000 191 billion due primarily lower revenue conway’s regional carriers closure august 2000 conway truckload services accounted revenue 626 million 2000 conway’s regional carriers’ revenue per day including fuel surcharges fell 43 2001 declines total ltl weight 38 32 respectively 05 decrease yield weight yield 2001 adversely affected weak global economic conditions us operating income 1575 million 2001 307 lower 2000 due primarily decline revenue 105 increase health welfare costs operating losses cax conway’s operating income 2273 million 2000 included 55 million loss sale certain assets conway truckload services operating losses cax adversely affected operating income primarily last half 2001 operating losses cli reduced operating income 2001 2000 menlo worldwide cnf formed new menlo worldwide group supply chain service providers effective january 1 2002 financial reporting purposes new menlo worldwide group divided three reporting segments emery forwarding menlo worldwide logistics menlo worldwide vector scm joint venture general motors reported menlo worldwide segment equitymethod investment 2002 menlo worldwide group businesses reported revenue 275 billion operating income 380 million menlo worldwideemery forwarding operating results 2002 emery’s revenue 178 billion 130 decline 2001 due primarily lower north american air freight revenue essentially flat international air freight revenue termination us postal service usps ewa’s contract transport express mail described “express mail contract” 2001 emery recognized revenue 1170 million express mail contract termination contract effective august 26 2001 emery’s average international air freight revenue per day air freight revenue 2002 including fuel surcharges essentially unchanged 2001 27 improvement average pounds per day weight offset 29 decline revenue per pound yield however international air freight revenue last quarter 2002 grew 178 last quarter 2001 fourthquarter international weight yield increased 122 20 respectively growth international weight 2002 attributable part improved business levels international markets served emery particularly asia lesser extent laborrelated disruption ports western us temporarily diverted international freight ocean vessels air carriers international weight 2001 reflects lost revenue terrorist incident described “terrorist attacks” international yields 2002 negatively affected decline fuel surcharges 2001 north american airfreight revenue including fuel surcharges fell 167 2002 68 decline north american weight 106 drop yield however decline fourth quarter 2002 less acute fullyear decline fourthquarter north american airfreight revenue 2002 fell 57 quarter 2001 102 decrease yield 50 increase weight north american weight 2002 negatively impacted comparatively weaker us economic conditions reduction number aircraft routes domestic markets served emery loss business ground transportation providers 2001 adversely affected lost business september 11 2001 terrorist attacks lower yield 2002 due part emery’s efforts increase secondday economy service contributed higher percentage loweryield service offerings lower fuel surcharges emery’s operating loss 2002 improved 120 million 7903 million 2001 emery’s operating loss 2002 included 57 million net gain final settlement express mail contract 99 million net gain payment air transportation safety system stabilization act emery’s operating loss 2001 included restructuring charges 6522 million unusual andor nonrecurring items detailed “results operationscontinuing operations” collectively resulted net negative impact 644 million emery’s 2001 operating results excluding identified unusual andor nonrecurring items emery’s operating loss would 276 million 2002 compared 737 million operating loss 2001 due primarily lower airhaul costs 167 decline employee compensation benefits expense decline depreciation aircraft rentals aircraftrelated expenses 2001 emery’s revenue fell 216 204 billion due primarily lower north american international airfreight revenue termination express mail contract effective august 26 2001 emery recognized revenue 1170 million express mail contract compared 2291 million 2000 average international air freight revenue per day 2001 including fuel surcharges fell 132 2000 due 141 decline weight partially offset 11 improvement yield average north american air freight revenue per day including fuel surcharges declined 284 308 drop weight offset 36 improvement yield international north american weight declines 2001 largely attributable weak global economic conditions reduced business activity emery’s international domestic markets revenue declines resulting september 11 2001 terrorist attacks north american weight 2001 also adversely affected loss business ground transportation providers reduction number aircraft flown domestic markets served emery’s 7903 million operating loss 2001 reflects 6522 million restructuring charges unusual andor nonrecurring items collectively resulted net negative impact 644 million detailed “results operationscontinuing operations” emery’s operating income 284 million 2000 included 119 million unusual loss termination aircraft leases fullyear operating income express mail contract terminated effective august 26 2001 excluding identified unusual andor nonrecurring items emery would operating loss 737 million 2001 compared operating income 229 million 2000 due primarily lower revenue 2001 restructuring charges june 2001 emery began operational restructuring align management’s estimates future business prospects domestic heavy air freight address changes market conditions deteriorated due primarily slowing domestic economy loss ewa’s contracts usps transport express mail priority mail 3405 million secondquarter restructuring charge 2001 consisted primarily noncash impairment charges estimated future cash expenditures related primarily return lessors certain aircraft leased ewa based issues identified inspections conducted federal aviation administration faa august 13 2001 ewa required suspend air carrier operations part interim settlement agreement faa result ewa furloughed approximately 400 pilots crewmembers emery made arrangements continue service customers utilizing aircraft operated several air carriers primarily response faa action worsening global economic downturn emery reevaluated restructuring plan december 5 2001 cnf announced emery 2002 would become part cnf’s new menlo worldwide group supply chain services providers north america would utilize aircraft operated air carriers instead ewa operating fleet aircraft ewa would permanently cease air carrier operations connection revised restructuring plan fourth quarter 2001 emery recognized additional restructuring charges 3117 million planned disposal leased aircraft cessation ewa’s remaining operations employee separation costs 157 emery’s nonpilot employees costs connection cnf’s announcement cessation ewa’s air carrier operations december 5 2001 ewa terminated employment pilots crewmembers bringing total number terminated employees 2001 800 pilots crewmembers represented air line pilots association alpa union collective bargaining agreement subsequently alpa filed grievance behalf pilots crewmembers protesting cessation ewa’s air carrier operations emery’s use air carriers aspects alpa matters may subject binding arbitration based cnf’s current evaluation management believes addressed estimated exposure related alpa matters however assurance regard cnf cannot predict certainty ultimate outcome matters following fourthquarter restructuring charge 2001 emery’s cash flows reflected cost air carriers provide service emery’s north american customers well lease payments costs associated emery’s remaining fleet grounded aircraft however emery’s operating expenses reflected cost aircraft operated carriers included scheduled rental payments return costs relating ewa’s grounded aircraft costs accrued connection restructuring charges described suspension ewa’s air carrier operations august 13 2001 requirement interim settlement agreement faa amendments settlement agreement faa ewa’s air carrier certificate terminated december 4 2002 detailed discussion settlement agreement related faa matters refer “regulationair transportation” item 1 “business” 2002 emery paid 3026 million aircraft leases return costs including 2885 million costs terminating aircraft leases returning leased aircraft connection 2001 restructuring charges 141 million aircraft costs including payments aircraft leased ewa operated independent thirdparty air carrier february 2003 emery negotiated early return 4 additional aircraft 2003 result estimated 24 million reduction related restructuring reserves result one aircraft 37aircraft fleet grounded connection emery’s restructuring charges remained lease february 28 2003 restructuring charges recognized emery 2001 reflect cnf’s estimate costs terminating ewa’s air carrier operations restructuring emery’s business related matters cnf believes estimate adequate cover costs based information currently available assumptions management believes reasonable circumstances however assurance actual costs differ estimate difference would recognized additional expense income period determination made refer item 8 “financial statements supplementary data” note 3 “restructuring charges” cumulative activity related emery’s 2001 restructuring plan terrorist attacks emery’s operating results 2001 adversely affected terrorist attacks september 11 2001 contractors providing air carrier service emery grounded september 11 12 resume service evening september 13 response terrorist attacks us congress passed air transportation safety system stabilization act “act” 15 billion emergency economic assistance package intended mitigate financial losses air carrier industry legislation provides 5 billion direct loss reimbursement 10 billion federal loan guarantees credits expands war risk insurance coverage air carriers provides government assistance shortterm increases insurance premiums march 2002 emery received 119 million payment act resulting recognition 99 million firstquarter net gain 2002 payment made emery act subject audit emery seeking additional payments act emery able accurately quantify events september 11 subsequent terrorist activities affect global economy governmental regulation air transportation industry emery’s costs providing airfreight services demand emery’s airfreight services however emery believes additional security measures may required future regulations could result additional costs could adverse effect operations service described “other mattersbusiness interruption” express mail contract effective august 26 2001 usps terminated “for convenience” contract ewa transported express mail classes mail usps “express mail contract” described “discontinued operations” ewa received 700 million provisional payment usps termination costs claims related express mail contract september 26 2001 700 million provisional payment included deferred credits cnf’s consolidated balance sheets december 31 2001 pending settlement usps time would used recover remaining costs related express mail contract subsequent settlement agreement usps december 17 2002 paid ewa additional 50 million settle ewa’s express mail contract termination costs including reimbursement certain aircraft assets result final 50 million settlement payment emery december 2002 fully recovered remaining express mail assets recorded 57 million net gain 2001 emery recognized revenue 1170 million transportation mail express mail contract compared 2291 million 2000 operating income express mail contract 2001 63 million compared 282 million 2000 outlook new menlo worldwide group management continue emery’s focus increasing revenue operating margins variablecostbased international operations north america management continue position emery freight forwarder utilizing aircraft operated carriers result management’s strategy implement flexible variablecostbased operating structure north america increase proportion revenue generated secondday deferred delivery services management continue efforts reduce emery’s costs initiatives intended reduce cost structure north american service center hub network administrative costs menlo worldwidemenlo worldwide logistics revenue 9691 million menlo worldwide logistics increased 79 2001 due largely higher revenue recognized carrier warehouse management services partially offset lower revenue contract carriage services operating income 2002 318 million included 19 million net gain early termination contract improved 158 million operating loss 2001 resulted primarily 475 million loss business failure customer excluding unusual andor nonrecurring items operating income 2002 would 300 million compared 316 million 2001 decline 52 operating income 2002 benefited higher revenues adversely affected higher employee compensation including incentivebased compensation benefits expense collectively rose 83 2001 menlo worldwide logistics’ revenue 8982 million 2001 rose 08 revenue 8908 million 2000 revenue 2001 adversely affected weak global economic conditions menlo worldwide logistics incurred 158 million operating loss 2001 compared operating income 333 million 2000 due principally 475 million loss business failure customer 2001 excluding significant nonrecurring loss 2001 menlo worldwide logistics’ operating income would 316 million 2001 decrease 50 2000 due primarily decline percentage highermargin consulting fees partially offset increase lowermargin transportation management services portion menlo worldwide logistics’ revenue attributable logistics contracts menlo worldwide logistics manages transportation freight subcontracts actual transportation delivery products third parties menlo worldwide logistics refers purchased transportation menlo worldwide logistics’ net revenue less purchased transportation 2002 2866 million compared 2685 million 2001 2656 million 2000 menlo worldwidemenlo worldwide menlo worldwide reporting segment includes results vector scm vector joint venture formed general motors “gm” december 2000 provide logistics services gm although cnf owns majority equity interest vector operating results vector reported equitymethod investment based gm’s ability control certain operating decisions cnf reported operating income vector 182 million compared operating loss 94 million 2001 vector’s first full year operation one month operation 2000 cnf reported operating loss vector 06 million improved operating results vector 2002 due implementation acceptance approved business cases “abc” abc project developed approved gm aimed reducing costs assuming operational responsibilities andor achievement operational changes gm particular service area service areas cnf’s operating income first half 2002 included substantially vector’s net income period rather cnf’s pro rata portion net income cnf contractually entitled substantially vector’s net income extent vector’s cumulative losses contract vector’s losses prior periods allocated cnf second quarter 2002 cnf’s allocated cumulative losses vector joint venture recouped allocated net income result gm began sharing vector’s net income third quarter 2002 agreement “llc agreement” gm right purchase cnf’s membership interest vector “call right” cnf right require gm purchase cnf’s membership interest vector “put right” call right put right exercisable sole discretion gm cnf respectively exercise call right put right would require gm pay cnf full value cnf’s membership interest vector determined approved appraisers using predetermined valuation formula result would likely material effect cnf’s financial condition cash flows results operations cnf segment includes results road systems certain corporate activities 34 million operating loss 2002 included 36 million loss business failure cfc 24 million net gain sale excess corporate property operating loss 25 million 2001 operating income 15 million 2000 included collective operating results road systems various corporate activities discontinued operations priority mail contract result termination priority mail contract results operations cash flows priority mail operations segregated classified discontinued operations november 3 2000 ewa usps announced agreement “termination agreement” terminate contract transportation sortation priority mail “priority mail contract” described claims relating amounts owed ewa priority mail contract fully settled connection payments usps ewa 2002 2001 terms termination agreement usps agreed reimburse ewa priority mail contract termination costs january 7 2001 usps paid ewa 600 million toward termination costs july 3 2002 usps paid ewa 60 million fully settle ewa’s priority mail contract termination costs resulted 2002 thirdquarter gain discontinuance 29 million net 18 million income taxes september 26 2001 ewa entered agreement usps settle claims relating underpayment amounts owed ewa priority mail contract usps “settlement agreement” settlement agreement ewa received 2350 million payment usps september 28 2001 settle nontermination claims priority mail contract well 700 million provisional payment termination costs related separate express mail contract usps claims recover costs operating contract well profit interest thereon priority mail termination agreement described unaffected settlement agreement result payment settlement agreement unbilled revenue contract fully recovered ewa third quarter 2001 recognized gain discontinuance 390 million net 249 million income taxes ewa 2000 also recognized 135 million loss net 86 million income tax benefits estimates nonreimbursable costs discontinuance refer item 8 “financial statements supplementary data” note 2 “discontinued operationspriority mail contract” discussion discontinued priority mail operations spinoff cfc fully discussed “liquidity capital resourcesdiscontinued operationsspinoff cfc” cnf recognized 2002 thirdquarter fourthquarter losses discontinuance 130 million net 83 million income taxes 23 million net 14 million income taxes respectively connection bankruptcy cfc september 2002 liquidity capital resources 2002 cash equivalents decreased 1304 million december 31 2001 2704 million december 31 2002 cash used investing activities 845 million financing activities 542 million funded primarily reduction cash lesser extent cash operations operating activities 2002 generated net cash 48 million decline 3074 million cash generated operating activities 2001 due primarily restructuringrelated aircraft lease payments return costs described “results operationsmenlo worldwideemery forwardingrestructuring charges” cash 2002 provided primarily net income continuing operations noncash items “noncash items” years presented refers depreciation amortization deferred income taxes provision uncollectible accounts equity earnings losses equitymethod investments noncash gains losses 2001 also include restructuring charges loss business failure customer positive operating cash flows 2002 also provided 259 million increase accrued liabilities consisted primarily 522 million increase accrued incentive compensation 310 million received partial payment connection termination interest rate swaps fully discussed “other mattersmarket risk” cash outflows 2002 consisted primarily aircraft lease payments return costs 3026 million defined benefit pension plan funding payments 762 million described “defined benefit pension plan” cash operating activities 3074 million 2001 largely due net income continuing operations noncash items collection receivables increase deferred credits reflected receipt 70 million provisional payment usps described “results operationsmenlo worldwideemery forwardingexpress mail contract” cash outflows 2001 included primarily declines accounts payable accrued liabilities investing activities 2002 used 845 million cash compared 1940 million used 2001 capital expenditures 848 million 2002 fell 1921 million 2001 due primarily 840 million reduction conway 149 million reduction emery’s capital expenditures 2001 capital expenditures decreased 431 million 2000 due primarily net effect 442 million reduction emery 253 million reduction corporate capital expenditures reflects substantial completion 2000 cnf corporate administration technology facility increase 265 million conway principally due 794 million cash spent planned periodic replacement linehaul equipment 2000 conway acquired use 667 million equipment operating lease agreements financing activities 2002 used cash 542 million due primarily capital lease payments aircraft dividend payments compared net cash 346 million used financing activities 2001 2000 financing activities provided cash 324 million reflected 1975 million net proceeds issuance longterm debt part used repay shortterm longterm borrowings outstanding lines credit cnf 385 million revolving credit facility matures july 3 2006 revolving credit facility available cash borrowings issuance letters credit 385 million december 31 2002 borrowings outstanding facility 2441 million letters credit outstanding leaving 1409 million available capacity additional letters credit cash borrowings subject compliance financial covenants customary conditions borrowing cnf uncommitted unsecured credit facilities totaling 913 million december 31 2002 available support letters credit bank guarantees overdraft facilities date total 666 million outstanding facilities total letters credit outstanding december 31 2002 2368 million provided collateral cnf workers’ compensation vehicular selfinsurance programs see “forwardlooking statements” item 8 “financial statements supplementary data” note 5 “debt financing arrangements” additional information concerning cnf’s 385 million credit facility debt instruments including certain rights remedies available lenders irs matters august 2002 cnf entered settlement agreements internal revenue service irs pursuant parties settled issues related deductibility aircraft maintenance costs years 1987 2000 open issues irs examinations years 1987 1996 cnf reversed tax provision related tax liabilities previously recognized issue resulting 250 million tax benefit third quarter 2002 result settlement agreements cnf required make additional payments irs 934 million payment made respect issues 2000 certain issues remain open years 1997 2000 management believe resolution issues likely material adverse effect cnf’s financial condition cash flows results operations discontinued operations spinoff cfc december 2 1996 cnf completed spinoff cfc cnf’s shareholders connection spinoff cfc cnf agreed indemnify certain states insurance companies sureties failure cfc pay certain workers’ compensation tax public liability claims pending september 30 1996 cases indemnities supported letters credit surety bonds cnf liable issuing bank surety company september 2002 cfc filed bankruptcy ceased us operations following commencement bankruptcy proceeding cfc ceased making payments respect workers’ compensation public liability claims cnf required take payment claims expects demands payment likely made respect remaining claims cnf estimates aggregate amount claims plus costs 250 million result cnf accrued additional reserves 2002 primarily accrued claims costs consolidated balance sheets recognized 2002 thirdquarter fourthquarter losses discontinuance 130 million net 83 million income taxes 23 million net 14 million income taxes respectively cnf intends seek reimbursement cfc bankruptcy proceeding amounts cnf pays respect claims although assurance cnf successful recovering portion payments addition cfc time spinoff remains party certain multiemployer pension plans covering current former employees cessation us operations result cfc’s “complete withdrawal” within meaning applicable federal law multiemployer plans point become obligated federal law pay share unfunded vested benefits plans possible trustees cfc’s multiemployer pension plans may assert claims cnf liable amounts owing plans result cfc’s withdrawal plans assurance claims would material cnf received request information regarding spinoff cfc representatives pension funds accordance federal law cnf process responding request federal law representatives cfc’s multiemployer plans entitled request information assist determining whether believe basis exists asserting claim cnf based advice legal counsel knowledge facts cnf believes would ultimately prevail claims made although assurance regard cnf believes amount claims asserted would material judgment cnf significant part claims would likely material adverse effect cnf’s financial condition cash flows results operations claims made cnf unless relieved obligation appropriate legal proceedings would required federal law make periodic cash payments multiemployer plans asserting claims cnf aggregate amount full amount claims however federal law claims would initially decided arbitration upon final decision arbitrator favor cnf plan trustees would required promptly refund payments interest length time required reach final decision arbitration cannot predicted certainty cnf believes decision could reached within twelve eighteen months receipt claims plans although assurance regard cnf currently estimates net amount quarterly payments deductibility tax purposes could range 20 million 25 million based certain assumptions although actual amount could greater less estimate based cnf’s current financial condition management’s projections cnf’s estimated future financial condition cash flows results operations well number estimates assumptions cnf believes would sufficient financial resources make periodic payments required however assurance regard accordingly requirement make periodic payments could material adverse effect cnf’s cash flows result foregoing assurance matters relating cfc bankruptcy proceedings material adverse effect cnf’s financial condition cash flows results operations including potentially triggering downgrades debt instruments events default credit agreements see note 5 “debt financing arrangements” item 8 “financial statements supplementary data” priority mail contract described “results operationsdiscontinued operations” cash flows priority mail operations segregated classified net cash flows discontinued operations statements consolidated cash flows described item 8 “financial statements supplementary data” note 2 “discontinued operations” ewa received payments 2002 2001 usps related discontinued priority mail operations january 2001 ewa received 600 million provisional payment toward reimbursable termination costs provided termination agreement signed ewa usps november 2000 september 2001 ewa received 3050 million payment usps including 2350 million settle nontermination claims priority mail contract july 2002 ewa received 60 million payment usps addition 600 million provisional payment january 2001 additional 60 million payment fully settled ewa’s priority mail contract termination costs defined benefit pension plan cnf periodically reviews funding status defined benefit pension plan noncontractual employees makes contributions time necessary order comply funding requirements employee retirement income security act “erisa” 2002 cnf contributed 762 million cash payments defined benefit pension plans cnf currently estimates contribute total approximately 75 million cash 2003 however estimate subject uncertainties assumptions including assumptions rate return plan assets actual amount cnf’s cash contributions may differ except cash payments 762 million 2002 131 million 2001 cnf made contributions defined benefit pension plans since 1995 due part high rate return realized plan assets 1996 2000 recent declines equity markets caused market value defined benefit pension plan assets decrease result accumulated benefit obligation abo cnf’s defined benefit pension plans exceeded fair value plan assets december 31 2002 accordance accounting principles generally accepted united states cnf recorded additional minimum pension liability adjustment 2002 increased accrued pension benefit cost cnf’s qualified nonqualified defined benefit pension plans 458 million increased intangible pension asset 67 million reduced shareholders’ equity 195 million netoftax increase accumulated comprehensive loss funding cnf’s defined benefit pension described based erisadefined measurements rather recognition measurement criteria prescribed accounting principles generally accepted united states resulted minimum pension liability adjustment future minimum pension liability adjustments without sufficient levels cash funding cnf would reduce shareholders’ equity result foregoing assurance matters related cnf’s defined benefit pension plans material adverse effect cnf’s financial condition cash flows results operations including potentially triggering downgrades debt instruments events default credit agreements determination accrued pension benefit cost includes unrecognized actuarial loss results cumulative difference estimated actual values yearend projected pension benefit obligation fair value plan assets accounting principles generally accepted united states portion unrecognized actuarial loss gain exceeds ten percent greater projected benefit obligation fair value plan assets must amortized expense average service period employees approximately thirteen years cnf amortization unrecognized actuarial loss december 31 2002 increase annual pension benefit costs 2003 approximately 6 million see “other mattersforwardlooking statements” note 5 “debt financing arrangements” note 11 “benefit plans” item 8 “financial statements supplementary data” general cnf expects future liquidity affected timing amount cash flows related capital expenditures pension plan funding requirements restructuring charge reserves repayment longterm debt guarantees capital operating leases preferred securities subsidiary trust following table summarizes cnf’s contractual cash obligations december 31 2002 certain contractual obligations reflected consolidated balance sheets others disclosed future obligations accounting principles generally accepted united states presented cash obligations longterm debt guarantees represent principal payments cash obligations capital operating leases represent notional payments lease agreements including anticipated future cash payments interest capital leases discussion see item 8 “financial statements supplementary data” note 5 “debt financing arrangements” note 6 “leases” note 14 “commitments contingencies” cnf’s ratio total debt capital decreased 403 december 31 2002 431 december 31 2001 due primarily net income repayment debt capital lease obligations 2002 estimates critical accounting policies cnf makes estimates assumptions preparing financial statements conformity accounting principles generally accepted united states estimates assumptions affect amounts reported accompanying financial statements notes thereto actual results could differ estimates cnf’s critical accounting policies upon management bases estimates relating selfinsurance reserves income taxes restructuring reserves defined benefit pension plan costs goodwill intangible assets selfinsurance reserves cnf uses combination insurance selfinsurance mechanisms provide potential liabilities medical casualty liability vehicular cargo workers’ compensation claims liabilities associated risks retained cnf estimated part considering historical claims experience medical costs demographic factors severity factors assumptions estimated accruals liabilities could significantly affected actual costs differ assumptions historical trends income taxes establishing deferred income tax assets liabilities cnf makes judgments interpretations based enacted tax laws published tax guidance applicable operations cnf records deferred tax assets liabilities periodically evaluates need valuation allowances reduce deferred tax assets realizable amounts likelihood material change cnf’s expected realization assets dependent future taxable income ability use foreign tax credit carryforwards carrybacks final us foreign tax settlements effectiveness tax planning strategies various relevant jurisdictions cnf also subject examination income tax returns multiple years irs tax authorities cnf periodically assesses likelihood adverse outcomes resulting examinations determine adequacy provision related accruals income taxes restructuring reserves restructuring charges recognized 2001 based significant estimates assumptions made management refer “results operationsmenlo worldwideemery forwardingrestructuring charges” description assumptions used item 8 “financial statements supplementary data” note 3 “restructuring charges” cumulative activity related emery’s 2001 restructuring plan defined benefit pension plan cnf defined benefit pension plan covers noncontractual employees united states amounts recognized pension expense accrued pension benefit cost depend upon number assumptions factors significant discount rate used measure present value pension obligations ii assumed rate return plan assets cnf adjusts discount rate periodically reflect market conditions taking account number factors including changes highquality corporate bond yields advice outside actuaries purposes calculating 2001 yearend accrued pension benefit cost cnf used 725 discount rate also used calculate 2002 pension expense due declines market rates cnf used 675 discount rate calculating 2002 yearend accrued pension benefit cost also use rate calculate 2003 pension expense factors held constant 05 decline discount rate increases annual pension expense approximately 4 million rates return plan assets also affected economic conditions market fluctuations cnf’s assumed rate return plan assets based historic returns plan assets since inception plan 2002 2001 assumed rate return plan assets 95 recent declines market returns caused cnf reduce assumed rate return plan assets 2003 90 using yearend plan asset values 05 decline assumed rate return plan assets increases annual pension expense approximately 2 million goodwill intangible assets effective january 1 2002 cnf adopted sfas 142 “goodwill intangible assets” sfas 142 specifies goodwill indefinitelived intangible assets longer amortized instead subject annual impairment test accordance provisions sfas 142 cnf ceased goodwill amortization associated emery forwarding reporting segment prior adoption sfas 142 cnf amortized goodwill 102 million 2001 109 million 2000 based impairment test december 31 2002 cnf required record charge goodwill impairment cnf perform fourthquarter goodwill impairment test annual basis annual tests certain circumstances assessing recoverability goodwill cnf must make various assumptions regarding estimated future cash flows factors determining fair values respective assets estimates related assumptions change future cnf may required record impairment charges assets future periods resulting impairment charges could material adverse effect cnf’s financial condition cash flows results operations including potentially triggering downgrades debt instruments events default credit agreements see “other mattersforwardlooking statements” note 5 “debt financing arrangements” item 8 “financial statements supplementary data” matters market risk cnf exposed variety market risks including effects interest rates commodity prices foreign currency exchange rates credit risk cnf enters derivative financial instruments circumstances warrant hedge underlying asset liability future cash flow exposure form commodity interest rate currencyrelated risk additionally designated hedges high correlation underlying exposure fluctuations value derivatives offset reciprocal changes underlying exposure cnf subject effect interest rate fluctuations fair value longterm debt capital lease obligations summarized item 8 “financial statements supplementary data” note 5 “debt financing arrangements” note 6 “leases” change fair value cnf’s longterm debt guarantees given hypothetical 10 change interest rates would approximately 12 million december 31 2002 december 31 2002 cnf held three interest rate swap derivatives initially entered cash flow hedges mitigate effects interest rate volatility floatingrate operating lease payments december 31 2002 one three outstanding interest rate swap derivatives qualified hedge accounting sfas 133 december 31 2002 fair value interest rate swap designated cash flow hedge reported liability 06 million 04 million tax connection restructuring charges described ewa made payments fourth quarter 2002 settle obligation pay certain future floatingrate aircraft lease payments previously hedged two cnf’s interest rate swap derivatives consequently december 31 2002 interest rate swap derivatives qualify hedge accounting sfas 133 therefore freestanding derivatives estimated fair value freestanding derivatives based converting 626 million future notional payments floating rate fixed rate reported 39 million liability emery’s restructuring reserves december 31 2002 terminated changes estimated fair value freestanding interest rate swap derivatives reported nonoperating income expense prior termination december 2002 cnf designated four interest rate swap derivatives fair value hedges mitigate effects interest rate volatility fair value fixedrate longterm debt 2002 estimated fair value fair value hedges prior termination increased 193 million 398 million offsetting equal increase carrying amount hedged fixedrate longterm debt december 2002 cnf terminated fair value hedges accordingly cnf december 2002 received cash 310 million settlement three four interest rate swaps recognized receivable december 31 2002 fourth swap terminated december 2002 settled cash january 2003 prior termination fair value derivative instruments included assets consolidated balance sheets consistent sfas 133 398 million cumulative adjustment carrying amount longterm debt accreted future earnings effective interest rate debt extinguished time unamortized fairvalue adjustment would fully recognized earnings absent terminated fair value hedges longterm debt cease adjusted fluctuations fair value attributable changes interest rate risk december 31 2002 cnf entered derivative contracts hedge foreign currency exchange exposure cyclicality seasonality cnf’s businesses operate industries affected directly general economic conditions seasonal fluctuations affect demand transportation services trucking air freight industries typical year months september october usually highest business levels months january february usually lowest business levels business interruption although operations cnf’s subsidiaries largely decentralized emery forwarding maintains major hub operation dayton international airport dayton ohio cnf currently maintains property business interruption insurance covering emery forwarding operations dayton hub insurance policies contain limits certain causes loss including limited earthquake flood policies insure property loss business interruption resulting terrorist act accordingly assurance insurance coverage sufficient result major property loss sustained interruption business operations dayton hub whether due terrorist activities otherwise could material adverse effect cnf’s financial condition cash flows results operations addition cnf subsidiaries rely administrative technology adtech center portland oregon performance shared administrative technology services conduct business cnf’s centralized computer facilities administrative technology employees located adtech center campus although cnf maintains backup systems disaster recovery processes procedures place sustained interruption operation facilities whether due terrorist activities earthquakes floods otherwise could material adverse effect cnf’s financial condition cash flows results operations since 2001 cnf subject compliance cargo security transportation regulations issued transportation security administration beginning 2002 cnf subject regulations issued department homeland security cnf able accurately predict recent events affect governmental regulation transportation industry however cnf believes additional security measures may required future regulations could result additional costs could adverse effect operations service employees workforce cnf subsidiaries affiliated labor unions consequently cnf believes operations subsidiaries significant advantages comparable unionized competitors particularly trucking industry providing reliable costcompetitive customer services including greater efficiency flexibility assurance cnf subsidiaries able maintain current advantages certain competitors accounting standards june 2001 fasb issued sfas 143 “accounting asset retirement obligations” effective cnf january 1 2003 sfas 143 addresses financial accounting reporting obligations associated retirement tangible longlived assets associated asset retirement costs cnf adopt sfas 143 effective january 1 2003 anticipated material impact june 2002 fasb issued sfas 146 “accounting costs associated exit disposal activities” effective exit disposal activities initiated december 31 2002 sfas 146 adopted updates guidance eitf issue 943 sfas 146 requires liability cost associated exit disposal activity recognized liability incurred whereas eitf 943 allowed recognition liability commitment date exit plan cnf adopt sfas 146 effective january 1 2003 apply provisions sfas 146 exit disposal activities initiated adoption december 2002 fasb issued sfas 148 “accounting stockbased compensationtransition disclosure” sfas 148 amends transition disclosure provisions sfas 123 see note 1 “principal accounting policies” item 8 “financial statements supplementary data” pro forma disclosures required sfas 148 cnf currently evaluating sfas 148 determine adopt sfas 123 account stockbased compensation using fair value method begin transition method november 2002 fasb issued interpretation 45 “guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others” fin 45 quarter ended december 31 2002 cnf adopted disclosure provisions fin 45 require increased disclosure guarantees including likelihood payment remote fin 45 also requires upon issuance guarantee guarantor must recognize liability fair value obligation assumes guarantee initial recognition measurement provisions fin 45 applied prospective basis guarantees issued modified december 31 2002 cnf evaluating effect adopting fin 45 january 2003 fasb issued interpretation 46 “consolidation variable interest entities interpretation arb 51” fin 46 fin 46 addresses consolidation business enterprises entities equity investors characteristics controlling financial interest sufficient equity risk entity finance activities without additional subordinated financial support parties variable interest entities required consolidated primary beneficiaries effectively disperse risks among parties involved primary beneficiary variable interest entity party absorbs majority entity’s expected losses receives majority expected residual returns consolidation requirements fin 46 apply immediately variable interest entities created january 31 2003 apply existing entities first fiscal year interim period beginning june 15 2003 certain new disclosure requirements apply financial statements issued january 31 2003 cnf evaluating impact adopting fin 46 forwardlooking statements certain statements included herein constitute “forwardlooking statements” within meaning section 21e securities exchange act 1934 amended subject number risks uncertainties relied upon predictions future events statements historical fact forwardlooking statements including projections earnings revenues weight yield volumes income financial operating items statements plans strategies expectations objectives cnf management future operations future items statements concerning proposed new products services statements regarding cnf’s estimated future contributions pension plans statements regarding expectations early termination aircraft leases costs thereof statements adequacy reserves statements regarding outcome claims may brought cnf cfc’s multiemployer pension plans regarding amount periodic cash payments cnf may required make claims pending cnf’s ability make periodic payments statements regarding future economic conditions performance statements regarding outcome legal claims proceedings cnf statements estimates belief statements assumptions underlying foregoing certain forwardlooking statements identified use forwardlooking terminology “believes” “expects” “may” “will” “should” “seeks” “approximately” “intends” “plans” “estimates” “anticipates” negative terms variations terms comparable terminology discussions strategy plans intentions forwardlooking statements necessarily dependent assumptions data methods may incorrect imprecise assurance realized regard following factors among others addition matters discussed elsewhere document reports documents filed cnf securities exchange commission could cause actual results matters differ materially discussed forwardlooking statements changes general business economic conditions including slowdown global economy creditworthiness cnf’s customers ability pay services rendered increasing competition pricing pressure changes fuel prices effects cessation ewa’s air carrier operations possibility additional unusual charges costs expenses relating emery’s operations possibility defaults cnf’s 385 million credit agreement debt instruments including defaults resulting additional unusual charges costs expenses cnf may incur connection cfc’s bankruptcy proceedings claims may asserted cfc’s multiemployer pension plans cnf’s failure perform accordance management’s expectations additional minimum pension liability adjustments cnf may required record respect defined benefit pension plan possibility cnf may required pledge collateral secure indebtedness repay indebtedness event ratings assigned longterm senior debt credit rating agencies reduced labor matters including grievance furloughed pilots crewmembers renegotiations labor contracts labor organizing activities work stoppages strikes enforcement changes governmental regulations including effects new regulations issued department homeland security environmental tax matters department transportation faa department justice investigation relating emery’s handling hazardous materials february 2000 crash ewa aircraft related investigation litigation matters relating cnf’s 1996 spinoff cfc including possibility cfc’s multiemployer pension plans may assert claims cnf may required make periodic cash payments claims pending matters relating cnf’s defined benefit pension plans including possibility cnf may required record additional minimum pension liability adjustments market value plan assets declines result foregoing assurance given future financial condition cash flows results operations see item 8 “financial statements supplementary data” note 14 “commitments contingencies” included elsewhere herein page intentionally left blank item 8item 7 management’s discussion analysis financial condition results operations management’s discussion analysis financial condition results operations referred “management’s discussion analysis” intended assist understanding assessment principal factors affecting results operations liquidity capital resources well critical accounting policies cnf subsidiaries discussion analysis read conjunction audited consolidated financial statements accompanying notes include additional information cnf’s significant accounting policies practices transactions underlie cnf’s financial results cnf provides supply chain management services commercial industrial shipments land air sea throughout world cnf’s principal businesses consist conway menlo worldwide group businesses however financial reporting purposes cnf divided five reporting segments operating results conway provider regional lessthantruckload “ltl” freight services reported one reporting segment menlo worldwide divided three reporting segments forwarding primarily global provider air freight ocean forwarding services logistics provider integrated contract logistics solutions menlo worldwide consists vector joint venture gm serves lead logistics manager gm also certain corporate activities results road systems trailer manufacturer reported separate cnf reporting segment cnf’s operating results generally expected depend number weight shipments transported prices received shipments mix services provided customers well fixed variable costs incurred cnf providing services ability manage costs changing shipment levels fully discussed item 1 “business” conway forwarding primarily transport shipments freight service center networks logistics vector manage logistics functions customers primarily utilize thirdparty transportation providers movement customer shipments results operations consolidated results 2003 cnf’s net income available common shareholders 838 million 157 per diluted share 104 decline 2002 net income available common shareholders 2002 936 million 174 per diluted share included 124 million aftertax net loss 022 per diluted share discontinued operations 2001 cnf reported net loss applicable common shareholders 4029 million 826 per diluted share included 390 million aftertax gain 080 per diluted share discontinued operations gains losses discontinued operations periods presented due terminated priority mail contract us postal service andor business failure consolidated freightways corporation “cfc” september 2002 described “discontinued operations” continuing operations following table compares results continuing operations dollars thousands except per share amounts years ended december 31 cnf’s results continuing operations reported periods included various income loss items affected yeartoyear comparisons reported operating income loss “special items” identified cnf’s management based part materiality relevant reporting segment separately summarized reporting segment continuing operations overview 2003 compared 2002 cnf’s revenue 2003 increased 72 510 billion conway menlo worldwide group businesses achieved revenue growth amid improved us global economic conditions consolidated operating income rose 53 1914 million due principally significantly higher operating income conway larger operating loss forwarding decline operating income logistics partially offset higher operating income vector special items separately summarized reporting segment resulted net operating loss 71 million 2003 2002 reflects 249 million net gain special items conway’s operating income grew 327 2003 1953 million due principally effect revenue growth operating leverage forwarding’s operating loss increased 476 million 2003 120 million 2002 reflecting 71 million net operating loss effect special items 2003 compared 156 million net gain special items 2002 forwarding’s revenue 2003 grew 58 insufficient cover costs although north american air freight revenue decreased 2003 rate decline slowed previous two years gross margins international air freight fell primarily loss highermargin business related prioryear port disruption partially offset increase highermargin military business 2003 response continued declines north american air freight revenue forwarding recognized 78 million restructuring charge 2003 primarily reduce costs north american freight service center network logistics’ operating income 2003 fell 205 253 million higher percentage lowermargin services contributed lower operating income despite 42 increase revenue vector’s operating income rose 139 207 million reflects compensation earned amended agreements gm joint venture partner customer net expense 2003 354 million essentially unchanged 2002 30 million decline investment income 65 million increase interest expense mostly offset 81 million increase cashsurrender value corporateowned life insurance policies higher interest expense 2003 primarily due settlement interest rate swaps december 2002 effectively converted longterm debt fixedrate floatingrate prior termination cnf recognized equity venture losses 37 million 2003 46 million 2002 2003 cnf’s income continuing operations income tax provision increased 67 2002 growth revenue operating income cnf’s net income continuing operations income taxes preferred stock dividends declined 2003 despite higher revenue operating income primarily due increase effective tax rate 410 2003 219 2002 reflects 250 million reversal accrued taxes settlement tax matters 2002 continuing operations overview 2002 compared 2001 consolidated revenue 2002 fell 21 476 billion revenue decline forwarding partially offset revenue growth conway logistics operating income 1818 million 2002 including 249 million net gain special items improved 6607 million operating loss 2001 included net loss 7641 million special items operating income 2002 largely due improved operating results menlo worldwide businesses partially offset lower operating income conway whose operating income fell 65 due principally higher employee costs operating results 2001 largely reflect adverse effect special items including 6522 million restructuring charge forwarding 475 million loss business failure logistics’ customer net expense 356 million essentially flat 2002 higher costs obtaining letters credit decline cashsurrender value corporate owned life insurance policies mostly offset lower interest expense longterm debt cnf recognized equity venture losses 46 million 2002 53 million 2001 2002 net income continuing operations 1060 million primarily reflects significant improvement consolidated operating results low 219 effective tax rate described net loss 4418 million continuing operations 2001 substantially due significant special charges forwarding logistics conway transportation services following table compares operating results dollars thousands operating margins percentage increase selected operating statistics conway reporting segment years ended december 31 2003 conway’s revenue rose 100 due higher revenue conway’s regional carriers continued growth conway’s assetlight businesses include conway logistics conway air express revenue per day regional carriers rose 88 2002 increases revenue per hundredweight “yield” weight per day “weight” 2003 growth weight transported due part comparatively better economic conditions particularly fourth quarter fourth quarter 2003 revenue per day increased 111 fourth quarter 2002 94 increase weight 15 improvement yield improvement 2003 achieved rate increases continued growth interregional joint services typically command higher rates longer lengths haul higher fuel surcharges excluding fuel surcharges yield 2003 rose 36 conway’s operating income 2003 increased 327 due largely higher revenue regional carriers well revenue growth conway’s assetlight businesses reduced collective net operating loss 2003 260 improvement conway’s operating margin 2003 reflects operating leverage conway’s service center network accommodated additional shipments proportionally smaller cost increases operating income 2003 benefited 452 decline variable employee compensation partially offset 66 increase pension expense operating income 2002 included 87 million net gain sale property conway’s revenue 2002 increased 52 2001 revenue growth conway’s regional carriers 429 increase revenue conway’s assetlight businesses regionalcarrier revenue per day rose 35 2001 25 improvement yield 10 increase weight yield 2002 benefited rate increases growth higheryielding interregional joint services adversely affected decline fuel surcharges excluding fuel surcharges yield 2002 increased 28 2001 conway’s operating income 2002 fell 65 due primarily 109 increase employee costs including variable compensation partially offset higher revenue 87 million net gain sale property 2002 menlo worldwide financial reporting purposes menlo worldwide group divided three reporting segments forwarding logistics menlo worldwide vector scm joint venture general motors reported menlo worldwide segment equitymethod investment 2003 menlo worldwide group businesses reported revenue 289 billion operating loss 15 million forwarding following table compares operating results dollars thousands operating margins percentage increase decrease selected operating statistics forwarding reporting segment years ended december 31 2003 forwarding’s revenue grew 58 due higher international air freight revenue partially offset lower north american air freight revenue strong growth international air freight revenue per day largely due 140 increase international average pounds per day “weight” benefited improved business levels asian european markets increase warrelated military business primarily benefited first quarter 2003 weight 2002 positively affected laborrelated disruption western us ports temporarily diverted international freight ocean carriers air carriers fourth quarter 2002 revenue per pound “yield” international freight rose slightly 2003 principally higher fuel surcharges increase higheryield military business partially offset loss higheryield business related port disruption 2002 excluding fuel surcharges international yield 2003 fell 09 2002 north american air freight revenue per day 2003 fell 88 03 increase weight 91 decline yield due primarily higher percentage loweryield delivery services 2003 partially offset yieldenhancing effect higher fuel surcharges excluding fuel surcharges decline north american yield 121 forwarding’s efforts increase secondday deferred delivery services well decline demand nextday delivery services contributed higher percentage loweryield secondday deferred delivery services decline demand nextday delivery services due primarily loss business transportation providers using groundbased modes delivery forwarding’s operating loss increased 476 million 2003 120 million 2002 reflecting 71 million net operating loss 2003 effect special items 2002 156 million net gain special items forwarding’s revenue 2003 grew 58 insufficient cover costs although north american air freight revenue decreased 2003 rate decline slowed previous two years gross margins international air freight fell primarily loss highermargin business related prioryear port disruption partially offset increase highermargin military business 2003 response continued declines north american air freight revenue forwarding 2003 recognized 78 million restructuring charge primarily reduce costs north american freight service center network fully discussed “ restructuring plans” management continue forwarding’s focus increasing revenue operating margins variablecostbased international operations north america continue efforts align costs revenues 2002 forwarding’s revenue fell 130 2001 178 billion due primarily lower north american air freight revenue essentially flat international air freight revenue termination us postal service “usps” ewa’s contract transport express mail described “ express mail contract” 2001 forwarding recognized revenue 1170 million express mail contract termination contract effective august 2001 forwarding’s average international air freight revenue per day 2002 essentially unchanged 2001 27 improvement weight offset 29 decline yield growth international weight 2002 attributable part improved business levels international markets served forwarding particularly asia weight yield 2002 benefited business related laborrelated port disruption international yields 2002 negatively affected decline fuel surcharges 2001 excluding fuel surcharges international yield 2002 fell 12 north american air freight revenue per day fell 167 2002 68 decline north american weight 106 drop yield north american weight 2002 negatively affected comparatively weaker us economic conditions reduction number aircraft routes domestic markets served forwarding loss business ground transportation providers 2001 adversely affected lost business september 11 2001 terrorist attacks 2002 lower yield north america due part forwarding’s efforts increase secondday economy service contributed higher percentage loweryield service offerings lower fuel surcharges excluding fuel surcharges decline north american yield 96 forwarding’s operating loss 2002 improved 120 million 7903 million 2001 forwarding’s operating loss 2002 included 156 million net gain special items operating loss 2001 reflects special items collectively represented 7166 million net charge consisted primarily forwarding’s restructuring charges detailed “ restructuring plans” forwarding’s operating loss 2002 reduced lower airhaul costs 167 decrease employee costs decline depreciation aircraft lease payments aircraftrelated expenses restructuring plans 2001 restructuring plan june 2001 forwarding began operational restructuring align management’s estimates future business prospects domestic heavy air freight address changes market conditions deteriorated due primarily slowing domestic economy loss ewa’s contracts usps transport express mail priority mail 3405 million secondquarter restructuring charge 2001 consisted primarily noncash impairment charges 2780 million 625 million estimated future cash expenditures related primarily return lessors certain aircraft leased ewa based issues identified inspections conducted federal aviation administration “faa” august 13 2001 ewa required suspend air carrier operations part interim settlement agreement faa result ewa furloughed approximately 400 pilots crew members forwarding made arrangements continue service customers utilizing aircraft operated several air carriers primarily response faa action worsening global economic downturn forwarding reevaluated restructuring plan december 5 2001 cnf announced forwarding formerly known “emery” “emery forwarding” 2002 would become part cnf’s new menlo worldwide group supply chain services providers north america would utilize aircraft operated air carriers instead ewa operating fleet aircraft ewa would permanently cease air carrier operations connection revised restructuring plan fourth quarter 2001 forwarding recognized additional restructuring charges 3117 million including 3056 million planned disposal leased aircraft cessation ewa’s remaining operations costs 61 million employee separation costs 157 ewa’s nonpilot employees connection cnf’s announcement cessation ewa’s air carrier operations december 5 2001 ewa terminated employment pilots crew members bringing total number terminated employees 2001 800 pilots crew members represented alpa collective bargaining agreement subsequently alpa filed grievance behalf pilots crew members protesting cessation ewa’s air carrier operations forwarding’s use air carriers alpa matters subject binding arbitration based cnf’s current evaluation management believes provided estimated exposure related alpa matters however cnf cannot predict certainty ultimate outcome matters following fourthquarter restructuring charge 2001 forwarding’s cash flows reflected cost air carriers provide service forwarding’s north american customers well lease payments costs associated forwarding’s restructuring plan however forwarding’s operating expenses reflected cost aircraft operated carriers included scheduled lease payments return costs restructuringrelated payments expenses accrued connection restructuring charges forwarding’s restructuring reserves aircraft costs declined 348 million december 31 2003 677 million december 31 2002 due primarily aircraft lease payments return costs none 37 aircraft grounded connection forwarding’s 2001 restructuring plan remained lease december 31 2003 restructuring reserves december 31 2003 consisted primarily cnf’s estimated exposure related labor matters arbitration described well estimated restructuring obligations 2003 restructuring plan response continued declines north american air freight revenue forwarding continued restructuring operations fourth quarter 2003 primarily reduce costs north american freight service center network restructuring plan forwarding closed nine service centers located markets transportation shipments service centers customers could served cost effectively cartage agents connection restructuring plan forwarding recognized 78 million charge primarily accrual future lease payments closed facilities employee termination costs management estimates restructuring plan reduce annual operating expenses 2004 20 million adverse effect revenue levels quality coverage delivery service lower future operating expenses expected result primarily decline service center lease expense lower employee costs partially offset higher costs thirdparty cartage service forwarding’s restructuring charges recognized 2001 2003 reflect cnf’s estimate costs related restructuring activities cnf believes estimates adequate cover costs based information currently available assumptions management believes reasonable circumstances however assurance actual costs differ estimate difference would recognized additional expense income period determination made refer item 8 “financial statements supplementary data” note 3 “restructuring plans” cumulative activity related forwarding’s 2001 2003 restructuring plans terrorist attacks forwarding’s operating results 2001 adversely affected terrorist attacks september 11 2001 contractors providing air carrier service forwarding grounded september 11 12 resume service evening september 13 response september 11 2001 terrorist attacks us congress passed air transportation safety system stabilization act “act” 15 billion emergency economic assistance package intended mitigate financial losses air carrier industry legislation provides 5 billion direct loss reimbursement financial assistance march 2002 forwarding received 119 million payment act resulting 99 million firstquarter net gain 2002 march 2003 forwarding received final payment 75 million resulting 72 million firstquarter net gain 2003 forwarding able accurately quantify events september 11 subsequent terrorist activities affect global economy governmental regulation air transportation industry forwarding’s costs providing air freight services demand forwarding’s air freight services however forwarding believes additional security measures may required future regulations could result additional costs could adverse effect operations service express mail contract effective august 26 2001 usps terminated “for convenience” contract ewa transported express mail classes mail usps “express mail contract” described “discontinued operations” ewa received 700 million provisional payment usps termination costs claims related express mail contract september 26 2001 subsequent settlement agreement usps december 17 2002 paid ewa additional 50 million settle ewa’s express mail contract termination costs including reimbursement certain aircraft assets result final 50 million settlement payment ewa december 2002 fully recovered remaining express mail assets resulting 57 million net gain reported forwarding segment 2001 ewa recognized revenue 1170 million operating income 63 million transportation mail express mail contract reported forwarding segment logistics following table compares operating results dollars thousands operating margins logistics reporting segment years ended december 31 logistics’ revenue 2003 rose 42 2002 due principally increase carrier management warehouse management services partially offset lower revenue contractcarriage consulting services higher revenue carrier management services 2003 achieved despite fourthquarter loss significant customer division large company terminated logistics outsourcing arrangements divisions customer accounted 60 logistics’ revenue 2003 among logistics’ lowestmargin accounts fourthquarter revenue 2003 fell 12 fourth quarter 2002 due part customer loss operating income 2003 253 million 205 decline 2002 included 19 million net gain contract termination excluding prioryear contract termination gain lower operating income 2003 due principally increase lowermargin carrier management services decline highermargin consulting fee revenue operating income 2003 included 31 million costs incurred throughout year contracts terminated due customer failure scheduled expiration termination outsourcing arrangement revenue logistics 2002 increased 79 2001 higher revenue carrier warehouse management services offset decline revenue contractcarriage consulting services logistics’ 2002 operating income 318 million including 19 million net gain contract termination improved 158 million operating loss 2001 included 475 million loss business failure customer excluding special items decline 2002 operating results attributable mix lowermargin services higher employee costs rose 83 2001 portion logistics’ revenue attributable contracts logistics manages transportation freight subcontracts actual transportation delivery products third parties logistics refers purchased transportation logistics’ net revenue less purchased transportation 2003 2928 million increase 2866 million 2002 2685 million 2001 menlo worldwide menlo worldwide reporting segment consists results vector joint venture formed gm december 2000 purpose providing logistics management services global basis gm ultimately customers addition gm prior amendments described agreements pertaining vector collectively “vector agreements” provided vector would compensated sharing efficiency gains cost savings achieved implementation approved business cases “abcs” special projects gm’s north america region gm’s three international regions abc project developed approved gm aimed reducing costs assuming operational responsibilities andor achieving operational changes august 2003 vector agreements amended primarily expedite transition logistics services north america region gm vector amendments changed compensation principles gm’s north american logistics operations revised allocation vector’s profit gm mw modified formula valuation vector event mw exercises put right described amendments vector agreements provide vector compensated management logistics gm’s north america operations rather sharing efficiency gains cost savings individual separately approved abcs north america year fiveyear period retroactive january 1 2003 vector compensated management fee based shipment volumes earn additional compensation certain performance criteria achieved accordance gaap compensation volumebased management fee recognized vehicles shipped performancebased compensation recognized specified levels cost savings achieved generally determinable fourth quarter contract year vector also compensated gm direct administrative costs north america subject certain limitations amended vector agreements also increase vector’s allocation profit loss 80 85 although mw owns majority equity interest operating results vector reported equitymethod investment based gm’s ability control certain operating decisions vector agreements gm right purchase mw’s membership interest vector “call right” mw right require gm purchase mw’s membership interest vector “put right” call right put right exercisable sole discretion gm mw respectively prior amendment vector agreements exercise call right put right required gm pay mw fair value mw’s membership interest vector determined approved appraisers using predetermined valuation formula amended vector agreements amount payable gm mw put right based mutually agreedupon estimated value mw’s membership interest contract amendment date decline straightline basis 8year period beginning january 1 2004 exercise mw’s put right gm’s call right would result mw retaining commercialization contracts involving customers gm reported operating income menlo worldwide segment 2003 207 million 139 increase 2002 operating income 2003 reflects recognition vector’s compensation accordance amended vector agreements operating income menlo worldwide segment first half 2002 included substantially vector’s net income period rather cnf’s prorata portion net income cnf contractually entitled substantially vector’s net income extent vector’s cumulative losses contract vector’s losses prior periods allocated cnf second quarter 2002 cnf’s allocated cumulative losses vector joint venture recouped allocated net income result gm began sharing vector’s net income third quarter 2002 mw reported operating income vector 182 million compared operating loss 94 million 2001 vector’s first full year operation successive year covered amended vector agreements management anticipates performancebased compensation represent growing percentage compensation earned gm’s north america region management also intends increase percentage compensation earned commercialization activities gm’s international regions aftermarket parts supply operations unaffected amended vector agreements cnf following table compares operating loss dollars thousands cnf reporting segment years ended december 31 cnf segment consists results road systems certain corporate activities majority revenue road systems sales cnf subsidiaries prior bankruptcy september 2002 consolidated freightways corporation cnf operating loss 2003 primarily reflects net loss sale corporate properties operating loss 2002 primarily net result 36 million loss uncollectible nontrade receivables following business failure cfc 24 million net gain sale corporate property operating loss 2001 reflects collective results rsi various corporate activities discontinued operations priority mail contract november 3 2000 ewa usps announced agreement “termination agreement” terminate contract transportation sortation priority mail “priority mail contract” fully discussed item 8 “financial statements supplementary data” note 2 “discontinued operations” claims relating amounts owed ewa priority mail contract fully settled connection payments usps ewa 2002 2001 resulted aftertax gains 29 million 2002 390 million 2001 spinoff cfc fully discussed “liquidity capital resources discontinued operations spinoff cfc” cnf recognized 2002 thirdquarter fourthquarter losses discontinuance 130 million net 83 million income taxes 23 million net 14 million income taxes respectively connection bankruptcy cfc september 2002 liquidity capital resources 2003 operating activities provided 2226 million used primarily fund investing activities used 1313 million financing activities consumed 386 million excess cash flow operations increased cash equivalents 2704 million december 31 2002 3215 million december 31 2003 following table summarizes cnf’s cash flows years ended december 31 1 “noncash adjustments” refer depreciation amortization deferred income taxes provision uncollectible accounts equity earnings joint venture noncash gains losses continuing operations 2003 operating activities generated 2226 million increase 48 million 2002 cash flow operations 2003 reflects 263 million restructuringrelated aircraft lease payments return costs 2002 reflects 3026 million payments purpose cash operating activities 2003 provided primarily net income noncash adjustments 2896 million partially offset 670 million used net change assets liabilities cash flow accrued liabilities 2003 included net effect 367 million decline accrued incentive compensation 200 million increase accrued liabilities periods reported changes accrued incentive compensation reflect cnf’s payment schedule employee incentive plans total incentive compensation earned award year paid employees partial payment december award year final payment february next award year changes employee benefits 2003 2002 largely reflect net effect defined benefit pension plan funding contributions described “ defined benefit pension plan” partially offset expense accruals cnf’s defined benefit pension plan obligation accrued income taxes increased 2003 based taxable income declined 2002 2001 based taxable losses years due principally restructuringrelated payments taxdeductible years result receivables cnf’s consolidated balance sheets december 31 2003 2002 included receivables 240 million 609 million respectively income tax refunds accordance gaap changes accrued income taxes based taxable income taxbased accounting rules deferred taxes reflect effect temporary differences gaapbased taxbased accounting rules cash operating activities 48 million 2002 declined 3074 million 2001 due mostly substantial payments made 2002 restructuringrelated aircraft lease payments return costs decline accrued income taxes defined benefit plan funding payments 762 million positive cash flows operating activities included increase accrued incentive compensation 310 million received connection termination interest rate swaps fully discussed item 8 “financial statements supplementary data” note 10 “derivative instruments hedging activities” investing activities 2003 used 1313 million increase 845 million used 2002 due principally 530 million increase capital expenditures conway primarily acquisition revenue equipment investing activities 2002 fell 1940 million used 2001 due largely capital expenditure reductions 840 million conway 149 million forwarding periods reported net cash used financing activities consisted primarily dividend payments scheduled principal payments thrift stock plan notes guaranteed cnf cash used financing activities 2003 also included 48 million repayment industrial revenue bonds 2002 included 224 million repayment capital aircraft leases cnf 385 million revolving credit facility matures july 3 2006 revolving credit facility available cash borrowings issuance letters credit 385 million december 31 2003 borrowings outstanding facility 2570 million letters credit outstanding leaving 1280 million available capacity additional letters credit cash borrowings subject compliance financial covenants customary conditions borrowing cnf uncommitted unsecured credit facilities totaling 993 million december 31 2003 available support letters credit bank guarantees overdraft facilities date total 856 million outstanding facilities total letters credit outstanding december 31 2003 2546 million provided collateral cnf workers’ compensation vehicular selfinsurance programs see “other matters forwardlooking statements” note 6 “debt financing arrangements” item 8 “financial statements supplementary data” additional information concerning cnf’s 385 million credit facility debt instruments defined benefit pension plan cnf periodically reviews funding status defined benefit pension plan noncontractual employees makes contributions time necessary order comply funding requirements employee retirement income security act “erisa” funding cnf’s defined benefit pension based erisadefined measurements rather recognition measurement criteria prescribed accounting principles generally accepted united states “gaap” 2003 cnf contributed total 75 million defined benefit pension plans currently estimates contribute additional 75 million 2004 cnf also made defined benefit pension plan contributions 762 million 2002 131 million 2001 made contributions 1996 2000 due part high rate return realized plan assets period assurance cnf required make cash contributions could substantial defined benefit pension plan future contractual cash obligations table summarizes contractual cash obligations cnf december 31 2003 contractual cash obligations reflected consolidated balance sheets except operating leases disclosed future obligations gaap presented contractual obligations longterm debt guarantees represent principal payments contractual obligations capital operating leases represent notional payments lease arrangements including anticipated future cash payments interest capital leases certain liabilities including related pension postretirement benefit plans accrued claims costs reported cnf’s consolidated balance sheets reflected table due absence stated maturities fully discussed “defined benefit pension plans “ cnf currently estimates contribute 75 million defined benefit pension plan 2004 described “continuing operations” letters credit 2546 million outstanding december 31 2003 provide collateral cnf’s accrued claims costs related workers’ compensation vehicular selfinsurance programs letters credit generally required selfinsurance programs represent additional liabilities underlying accrued claims already reflected cnf’s consolidated balance sheets accordance gaap cnf’s operating leases included cnf’s consolidated balance sheets cnf’s operating leases determined provide economic benefits preferable ownership based primarily aftertax cash flows effect cnf’s capitalization certain operating leases conway guarantees residual value tractors trailers end lease term december 31 2003 residual value guaranteed lease agreements 185 million cnf recognizes liability shortfall residual value guarantee equipment’s estimated fair value fluctuates depending market conditions 2004 cnf anticipates capital expenditures 135 million 165 million primarily acquisition additional tractor trailer equipment cnf’s capital expenditure requirements may increase decrease depending business levels factors discussion see note 6 “debt financing arrangements” note 7 “leases” included item 8 “financial statements supplementary data” cnf’s ratio total debt capital decreased 368 december 31 2003 403 december 31 2002 due primarily net income repayment debt 2003 discontinued operations priority mail contract described “results operationsdiscontinued operations” cash flows priority mail operations segregated classified net cash flows discontinued operations statements consolidated cash flows described note 2 “discontinued operationspriority mail contract” item 8 “financial statements supplementary data” ewa received payments 2002 2001 fully settle ewa’s priority mail contract termination costs spinoff cfc december 2 1996 cnf completed spinoff cfc cnf’s shareholders connection spinoff cfc cnf agreed indemnify certain states insurance companies sureties failure cfc pay certain workers’ compensation tax public liability claims pending september 30 1996 cases indemnities supported letters credit surety bonds cnf liable issuing bank surety company september 2002 cfc filed bankruptcy ceased us operations following commencement bankruptcy proceeding cfc ceased making payments respect workers’ compensation public liability claims cnf required take payment claims expects demands payment likely made respect remaining claims cnf estimates aggregate amount claims plus costs 250 million result cnf accrued additional reserves 2002 primarily accrued claims costs consolidated balance sheets recognized 2002 thirdquarter fourthquarter losses discontinuance 130 million net 83 million income taxes 23 million net 14 million income taxes respectively cnf intends seek reimbursement cfc bankruptcy proceeding amounts cnf pays respect claims although assurance cnf successful recovering portion payments addition cfc time spinoff remains party certain multiemployer pension plans covering current former employees cessation us operations result cfc’s “complete withdrawal” within meaning applicable federal law multiemployer plans point become obligated federal law pay share unfunded vested benefits plans possible trustees cfc’s multiemployer pension plans may assert claims cnf liable amounts owing plans result cfc’s withdrawal plans assurance claims would material cnf received requests information regarding spinoff cfc representatives pension funds accordance federal law cnf responded requests federal law representatives cfc’s multiemployer plans entitled request information assist determining whether believe basis exists asserting claim cnf based advice legal counsel knowledge facts cnf believes would ultimately prevail claims made although assurance regard cnf believes amount claims asserted could material judgment cnf significant part claims could material adverse effect cnf’s financial condition cash flow results operations claims made cnf unless relieved obligation appropriate legal proceedings would required federal law make periodic cash payments multiemployer plans asserting claims cnf aggregate amount full amount claims however federal law claims would initially decided arbitration upon final decision arbitrator favor cnf plan trustees would required promptly refund payments interest length time required reach final decision arbitration cannot predicted certainty cnf believes decision could reached within twelve eighteen months receipt claims plans although assurance regard cnf currently estimates net amount quarterly payments deductibility tax purposes could range 20 million 25 million based certain assumptions although actual amount could greater less estimate based cnf’s current financial condition management’s projections cnf’s estimated future financial condition cash flows results operations well number estimates assumptions cnf believes would sufficient financial resources make periodic payments required however assurance regard accordingly requirement make periodic payments could material adverse effect cnf’s financial condition cash flows result foregoing assurance matters relating spinoff cfc’s bankruptcy material adverse effect cnf’s financial condition cash flows results operations including potentially triggering downgrades debt instruments events default credit agreements see “other mattersforwardlooking statements” note 6 “debt financing arrangements” item 8 “financial statements supplementary data” matters estimates critical accounting policies cnf makes estimates assumptions preparing financial statements conformity accounting principles generally accepted united states estimates assumptions affect amounts reported accompanying financial statements notes thereto actual results could differ estimates cnf’s critical accounting policies upon management bases estimates described selfinsurance reserves cnf uses combination insurance selfinsurance mechanisms provide potential liabilities medical casualty liability vehicular cargo workers’ compensation claims liabilities associated risks retained cnf estimated part considering historical claims experience medical costs demographic factors severity factors assumptions undiscounted estimated accruals liabilities could significantly affected actual costs differ assumptions historical trends income taxes establishing deferred income tax assets liabilities cnf makes judgments interpretations based enacted tax laws published tax guidance applicable operations cnf records deferred tax assets liabilities periodically evaluates need valuation allowance reduce deferred tax assets realizable amounts likelihood material change cnf’s expected realization assets dependent future taxable income ability use foreign tax credit carry forwards carry backs final us foreign tax settlements effectiveness tax planning strategies various relevant jurisdictions cnf also subject examination income tax returns multiple years irs tax authorities cnf periodically assesses likelihood adverse outcomes resulting examinations determine adequacy provision related accruals income taxes restructuring reserves restructuring charges recognized 2003 2001 based significant estimates assumptions made management refer “menlo worldwide forwarding restructuring plans” section “results operations” description significant assumptions used uncollectible accounts receivable cnf subsidiaries report accounts receivable net realizable value provide allowance uncollectible accounts collection considered doubtful conway forwarding provide uncollectible accounts based various judgments assumptions including revenue levels historical loss experience composition outstanding accounts receivable logistics based size nature client base performs frequent periodic evaluation customers’ creditworthiness accounts receivable portfolio recognizes expense uncollectible accounts losses probable estimable defined benefit pension plan cnf defined benefit pension plan covers noncontractual employees united states amount recognized pension expense accrued pension liability depend upon number assumptions factors significant discount rate used measure present value pension obligations assumed rate return plan assets affected economic conditions market fluctuations rate compensation increase cnf adjusts discount rate periodically taking account number factors including changes highquality corporate bond yields advice outside actuaries cnf adjusts assumed rate return plan assets based historic returns plan assets current market expectations cnf used 675 discount rate purposes calculating 2003 pension expense used 625 discount rate calculating 2003 yearend pension liability 2004 pension expense due primarily declines highquality corporate bond yields 2003 way example factors held constant 05 decline discount rate would estimated 6 million increase 2004 annual pension expense cnf used assumed rate return plan assets 90 2003 assume rate 2004 using yearend plan asset values 05 decline assumed rate return plan assets would estimated 3 million increase 2004 annual pension expense determination cnf’s accrued pension benefit cost includes unrecognized actuarial loss results cumulative difference estimated actual values yearend projected pension benefit obligation fair value plan assets gaap portion unrecognized actuarial loss gain exceeds ten percent greater projected benefit obligation fair value plan assets must amortized expense average service period employees approximately thirteen years cnf amortization unrecognized actuarial loss decreases annual pension expense 2004 approximately 1 million annual pension expense 2003 accumulated benefit obligation cnf’s defined benefit pension plan less plan assets actuarial measurement dates 2003 2002 exceeded cnf’s accrued benefit cost accordingly gaap cnf reported minimum pension liability adjustment recognize shortfall year due principally improved equity markets corresponding increase actual rate return plan assets 2003 accumulated minimum pension liability adjustments reduced 2003 resulting 110 million decline netoftax accumulated comprehensive loss shareholders’ equity cnf’s consolidated balance sheets included following accumulated minimum pension liability adjustments goodwill longlived assets effective january 1 2002 cnf adopted sfas 142 “goodwill intangible assets” sfas 142 specifies goodwill indefinitelived intangible assets amortized instead subject annual impairment test cnf utilizes thirdparty independent valuation consultant perform goodwill impairment test annual basis fourth quarter annual tests certain circumstances based impairment test december 31 2003 cnf required record charge goodwill impairment accordance provisions sfas 142 cnf ceased goodwill amortization associated forwarding reporting segment prior adoption sfas 142 forwarding amortized goodwill 102 million 2001 consistent sfas 144 “accounting impairment disposal longlived assets” cnf performs impairment analysis longlived assets goodwill intangible assets whenever circumstances indicate carrying amount may recoverable assessing recoverability goodwill longlived assets cnf must make various assumptions regarding estimated future cash flows factors determining fair values respective assets estimates related assumptions change future cnf may required record impairment charges goodwill longlived assets future periods resulting impairment charges could material adverse effect cnf’s financial condition results operations including potentially triggering downgrades debt instruments see “ forwardlooking statements” note 6 “debt financing arrangements” item 8 “financial statements supplementary data” market risk cnf exposed variety market risks including effects interest rates commodity prices foreign currency exchange rates credit risk cnf enters derivative financial instruments circumstances warrant hedge underlying asset liability future cash flow exposure form interest rate commodity currencyrelated risk additionally designated hedges high correlation underlying exposure fluctuations value derivatives offset reciprocal changes underlying exposure cnf subject effect interest rate fluctuations fair value longterm debt capital lease obligations summarized item 8 “financial statements supplementary data” note 6 “debt financing arrangements” note 7 “leases” given hypothetical 10 change interest rates change fair value cnf’s longterm debt guarantees would approximately 9 million december 31 2003 fully discussed note 10 “derivative instruments hedging activities” item 8 “financial statements supplementary data” cnf held two freestanding interest rate swap derivatives december 31 2003 initially entered cash flow hedges mitigate effects interest rate volatility floatingrate lease payments connection forwarding’s 2001 restructuring plan hedge accounting discontinued interest rate swaps ewa settled floatingrate operating leases hedged interest rate swaps prior termination december 2002 cnf used interest rate swaps mitigate impact interest rate volatility fair value fixedrate longterm debt december 31 2003 cnf entered material derivative contracts hedge exposure commodity prices foreign currency cyclicality seasonality cnf’s businesses operate industries affected directly general economic conditions seasonal fluctuations affect demand transportation services trucking air freight industries typical year months september october usually highest business levels months december january february usually lowest business levels business interruption although operations cnf’s subsidiaries largely decentralized forwarding maintains major hub operation dayton international airport dayton ohio cnf currently maintains property business interruption insurance covering forwarding’s operations dayton hub insurance policies contain limits certain causes loss including limited earthquake flood policies insure property loss business interruption resulting terrorist act accordingly assurance insurance coverage sufficient result major property loss sustained interruption business operations dayton hub whether due terrorist activities otherwise could material adverse effect cnf’s financial condition cash flows results operations addition cnf subsidiaries rely cnf service company performance shared administrative technology services conduct businesses cnf’s centralized computer facilities administrative technology employees located administrative technology “adtech” center portland oregon although cnf maintains backup systems disaster recovery processes procedures place sustained interruption operation facilities whether due terrorist activities earthquakes floods otherwise could material adverse effect cnf’s financial condition cash flows results operations homeland security cnf subject compliance cargo security transportation regulations issued transportation security administration department homeland security cnf able accurately predict new governmental regulation affect transportation industry however cnf believes additional security measures may required future regulations could result additional costs could adverse effect ability serve customers financial condition cash flows results operations employees workforce cnf subsidiaries affiliated labor unions consequently cnf believes operations subsidiaries significant advantages comparable unionized competitors particularly trucking industry providing reliable costcompetitive customer services including greater efficiency flexibility assurance cnf’s subsidiaries able maintain current advantages certain competitors accounting standards january 2003 fasb issued interpretation 46 “consolidation variable interest entities interpretation arb 51” “fin 46” fin 46 requires specialpurpose entities designated either votinginterest entity variableinterest entity “vie” vie entity equity investors characteristics controlling financial interest sufficient equity risk vie finance activities without additional subordinated financial support parties vie required consolidated primary beneficiary effectively disperse risks among parties involved primary beneficiary vie party absorbs majority vie’s expected losses receives majority expected residual returns implementation fin 46 required periods beginning june 15 2003 however october 2003 fasb deferred effective date applying fin 46 vies created february 1 2003 end first interim period ending december 15 2003 december 2003 fasb revised fin 46 “fin 46r” incorporate certain revisions including requirement disregard certain rights determining whether entity primary beneficiary vie fin 46r cnf primary beneficiary subsidiary trust 1250 million term convertible securities “tecons” outstanding december 31 2003 result cnf required deconsolidate tecons issued june 1997 currently reported cnf’s consolidated balance sheets companyobligated mandatorily redeemable preferred securities subsidiary trust holding solely convertible debentures company quarter ending march 31 2004 cnf report 1289 million convertible subordinated debentures held subsidiary trust longterm debt also report 39 million equity ownership subsidiary trust investment may 2003 fasb issued sfas 150 “accounting certain financial instruments characteristics liabilities equity” “sfas 150” sfas 150 establishes classification standards financial instruments characteristics liabilities equity cnf adopted sfas 150 effective july 1 2003 impact forwardlooking statements certain statements included herein constitute “forwardlooking statements” within meaning section 21e securities exchange act 1934 amended subject number risks uncertainties relied upon predictions future events statements historical fact forwardlooking statements including projections earnings revenues weight yield volumes income financial operating items statements plans strategies expectations objectives cnf management future operations future items statements concerning proposed new products services statements regarding cnf’s estimated future contributions pension plans statements adequacy reserves statements regarding outcome claims may brought cnf cfc’s multiemployer pension plans regarding amount periodic cash payments cnf may required make claims pending cnf’s ability make periodic payments statements regarding future economic conditions performance statements regarding outcome legal claims proceedings cnf statements estimates belief statements assumptions underlying foregoing certain forwardlooking statements identified use forwardlooking terminology “believes” “expects” “may” “will” “should” “seeks” “approximately” “intends” “plans” “estimates” “anticipates” negative terms variations terms comparable terminology discussions strategy plans intentions forwardlooking statements necessarily dependent assumptions data methods may incorrect imprecise assurance realized regard following factors among others addition matters discussed elsewhere document reports documents filed cnf securities exchange commission could cause actual results matters differ materially discussed forwardlooking statements changes general business economic conditions including global economy creditworthiness cnf’s customers ability pay services rendered increasing competition pricing pressure changes fuel prices effects cessation ewa’s air carrier operations possibility additional unusual charges costs expenses relating forwarding’s operations possibility cnf may time required record impairment charges goodwill longlived assets possibility defaults cnf’s 385 million credit agreement debt instruments including defaults resulting additional unusual charges costs expenses cnf may incur connection cfc’s bankruptcy proceedings claims may asserted cfc’s multiemployer pension plans possibility cnf may required repay certain indebtedness event ratings assigned longterm senior debt credit rating agencies reduced labor matters including grievance furloughed pilots crew members renegotiations labor contracts labor organizing activities work stoppages strikes enforcement changes governmental regulations including effects new regulations issued department homeland security environmental tax matters february 2000 crash ewa aircraft related litigation matters relating cnf’s 1996 spinoff cfc including possibility cfc’s multiemployer pension plans may assert claims cnf may required make periodic cash payments claims pending cnf may prevail proceedings may financial resources necessary satisfy amounts payable plans matters relating cnf’s defined benefit pension plans result foregoing assurance given future financial condition cash flows results operations see note 15 “commitments contingencies” item 8 “financial statements supplementary data” item 8item 7 management’s discussion analysis financial condition results operations introduction management’s discussion analysis financial condition results operations referred “management’s discussion analysis” intended assist historical prospective understanding cnf’s results operations financial condition cash flows including discussion analysis following • overview business • results operations related information • liquidity capital resources • estimates critical accounting policies • matters overview business cnf provides transportation supply chain management services wide range manufacturing industrial retail customers cnf’s principal businesses consist conway mw however financial reporting purposes cnf divided four reporting segments operating results conway primarily provider regional ltl freight services reported one reporting segment mw divided two reporting segments logistics provider integrated contract logistics solutions menlo worldwide consists vector joint venture gm serves lead logistics manager gm also certain corporate activities results road systems trailer manufacturer reported separate cnf reporting segment cnf’s operating results generally expected depend number weight shipments transported prices received shipments mix services provided customers well fixed variable costs incurred cnf providing services ability manage costs changing shipment levels conway primarily transports shipments freight service center network logistics vector manage logistics functions customers primarily utilize thirdparty transportation providers movement customer shipments fully discussed “results operations discontinued operations” cnf 2004 sold mwf ups 150 million assumption 110 million debt accordingly results operations net assets cash flows menlo worldwide forwarding “forwarding” segment segregated reported discontinued operations results operations cnf’s net income continuing operations preferred stock dividends income taxes 2004 rose 267 1422 million 257 per diluted share due primarily significantly higher operating income conway net income continuing operations offset 2663 million net loss 472 per diluted share discontinued operations primarily reflects loss disposition mwf resulting net loss applicable common shareholders 2004 1241 million 215 per diluted share 2003 net income continuing operations improved 60 1122 million 207 per diluted share due largely increased operating income conway net income continuing operations 2003 partially offset 285 million net loss 50 per diluted share operations discontinued forwarding segment net income applicable common shareholders 2003 838 million 157 per diluted share fell 104 2002 improved results continuing operations offset higher loss discontinued operations following table summarizes cnf’s consolidated operating results income taxes preferred stock dividends required eitf 8724 “allocation interest discontinued operations” continuing operations allocated general corporate overhead charges previously allocated discontinued forwarding segment corporate overhead charges 169 million 2004 140 million 2003 2002 allocated discontinued operations conway logistics reporting segments based segment revenue capital employed continuing operations overview 2004 compared 2003 2004 cnf’s revenue increased 150 371 billion due higher revenue reporting segments benefited improved economic conditions consolidated operating income 2004 rose 263 significantly higher operating income conway partially offset lower operating income mw increase conway’s operating income due principally effect operating leverage revenue growth conway’s operating income 2004 increased 341 revenue growth 177 mw companies reported lower operating income 2004 due primarily decline operating income vector partially offset improvement logistics vector’s operating income 2004 fell 25 million 183 million logistics reported 39 increase operating income 88 growth revenue operating income conway logistics presented accompanying financial statements includes cnf corporate expenses previously allocated discontinued forwarding segment fully discussed “discontinued operations” net expense 2004 increased 99 million 373 million due primarily increases interest expense net nonoperating expenses partially offset higher interest income marketable securities interest expense 2004 rose 101 million due largely net effect financing transactions including issuance april 2004 67 senior debentures redemption june 2004 5 convertible debentures fully discussed note 5 “debt financing arrangements” item 8 “financial statements supplementary data” net miscellaneous nonoperating expenses 2004 reflects 43 million decline income corporateowned life insurance “coli” policies terminated third quarter 2004 27 million costs associated redemption convertible debentures 13 million decline foreign exchange gain partially offset prioryear equity venture losses 37 million 2004 increase net income continuing operations income taxes preferred stock dividends reflects improved operating income higher revenue partially offset increase net nonoperating expense effective tax rate 2004 2003 390 overview 2003 compared 2002 cnf’s revenue 2003 grew 78 323 billion conway logistics businesses achieved revenue growth amid comparatively better economic conditions consolidated operating income rose 247 2249 million significantly higher operating income conway 2003 conway’s operating income grew 356 1831 million due principally effect operating leverage 100 increase revenue operating income mw companies fell 2003 lower operating income logistics partially offset higher operating income vector logistics’ operating income 2003 fell 230 235 million higher percentage lowermargin services contributed lower operating income despite 36 increase revenue vector’s operating income rose 139 207 million reflects compensation earned amended agreements gm joint venture partner customer 2003 net expense fell 21 68 million increase interest expense 30 million decline investment income largely offset 81 million increase cashsurrender value coli policies higher interest expense 2003 primarily due settlement interest rate swaps december 2002 effectively converted longterm debt fixedrate floatingrate prior termination cnf recognized equity venture losses 37 million 2003 46 million 2002 cnf’s net income continuing operations 2003 reflects increase effective tax rate 390 2003 251 2002 benefited 140 million reversal accrued taxes settlement tax matters 2002 conway transportation services following table compares operating results dollars thousands operating margins percentage increase selected operating statistics conway reporting segment years ended december 31 2004 conway’s revenue rose 177 due 161 increase revenue conway’s regional carriers revenue growth 600 conway’s businesses include conway logistics conway air express revenue per day regional carriers rose 160 2003 125 increase weight per day “weight” 31 increase revenue per hundredweight “yield” 2004 weight improvement due primarily comparatively better economic conditions us lesser extent change composition freight higher proportion freight 2004 composed shipments excess 10000 pounds resulting newly initiated spotquote program concerns shippers regarding hoursofservice regulations affecting service provided truckload carriers yield increases primarily reflect increase fuel surcharges excluding fuel surcharges yield 2004 increased 03 2003 yields 2004 also benefited continued growth higherrated interregional joint services general rate increases adversely affected 43 increase weight per shipment rates typically decline weight per shipment increases freight higher weight per shipment typically lower transportation cost per unit weight conway’s operating income 2004 increased 341 due largely higher revenue improved margins regional carriers well revenue growth conway’s businesses reduced collective net operating loss 2004 98 million 2003 improvement conway’s operating margin 2004 also reflects operating leverage conway’s regionalcarrier service center network accommodated additional shipments proportionally smaller cost increases operating income 2004 affected employee costs rose 148 due primarily increases employee payroll benefits employee payroll grew 164 due largely increases variable compensation employee headcount employee benefits expense rose 111 workers’ compensation costs increased due part higher unit cost volume claims thirdquarter entry correct cumulative underrecognition expense certain priorperiod claims 39 million adverse effect net incentive compensation employee benefits expense 2004 also reflects increase payroll taxes employee benefits certain corporate expenses previously allocated discontinued forwarding segment reported continuing operations fully discussed note 2 “discontinued operations” item 8 “financial statements supplementary data” additional corporate overhead charge allocated conway reporting segment 148 million 2004 122 million 2003 2002 june 2004 conway announced formation ctl began operations january 2005 fully discussed item 1 “business” new company initially serve conway’s three regional ltl carriers providing linehaul service full loads ltl shipments moving transcontinental lanes eventually offer services customers ctl expected allow conway reduce future linehaul expense material effect cnf’s financial condition results operations cash flows year ended december 31 2004 2003 conway’s revenue rose 100 due higher revenue conway’s regional carriers continued growth conway’s businesses revenue per day regional carriers rose 88 2002 increases yield weight 2003 growth weight transported due part comparatively better economic conditions yield improvement 2003 achieved general rate increases continued growth interregional joint services higher fuel surcharges excluding fuel surcharges yield 2003 rose 36 conway’s operating income 2003 increased 356 reflects operating leverage higher revenue regional carriers well revenue growth conway’s businesses reduced collective net operating loss 2003 41 million operating income 2003 benefited 452 decline variable employee compensation partially offset 66 increase pension expense operating income 2002 included 87 million net gain sale property menlo worldwide financial reporting purposes mw group divided two reporting segments logistics menlo worldwide vector scm joint venture gm reported menlo worldwide segment equitymethod investment logistics following table compares operating results dollars thousands operating margins logistics reporting segment years ended december 31 logistics’ revenue 2004 increased 88 2003 due principally increases carriermanagement warehousemanagement services 2004 logistics’ operating income increased 39 due primarily revenue growth partially offset effect lower operating margins lower operating margins 2004 attributable part competitive transportation pricing environment renegotiation certain contracts existing customers decrease margins startup phase new contracts employee costs rose 79 due largely higher employee benefits variable compensation operating income 2003 adversely affected 31 million contract termination costs 19 million incurred fourth quarter 2003 related contracts terminated due customer failure scheduled expiration termination outsourcing arrangement certain corporate expenses previously allocated discontinued forwarding segment reported continuing operations fully discussed note 2 “discontinued operations” item 8 “financial statements supplementary data” additional corporate overhead charge allocated logistics reporting segment 21 million 2004 18 million 2003 2002 2003 logistics’ revenue rose 36 2002 due principally increase carriermanagement warehousemanagement services partially offset lower revenue consulting services operating income 2003 declined 23 235 million due primarily effects contract terminations lower operating margin revenue contract terminations 2003 accounted additional costs 31 million described termination customer contract 2002 resulted net gain 19 million lower operating margin 2003 due principally increase lowermargin carriermanagement services decline highermargin consulting fee revenue logistics’ carriermanagement revenue attributable contracts logistics manages transportation freight subcontracts actual transportation delivery products third parties logistics refers purchased transportation logistics’ net revenue less purchased transportation 3168 million 2004 increase 3047 million 2003 3022 million 2002 menlo worldwide operating results menlo worldwide reporting segment consists results vector joint venture formed gm december 2000 purpose providing logistics management services global basis gm ultimately customers addition gm operating income reported menlo worldwide segment declined 183 million 2004 207 million 2003 consistent amended vector agreements described mw’s operating income 2004 included 92 million related performancebased compensation abcs earned vector 91 million vector’s volumebased compensation 2003 vector’s compensation volumebased mw’s operating income vector 207 million 2003 increased 25 million 182 million 2002 vector’s operating income 2002 determined compensation principles original vector agreements vector agreements prior amendments described agreements pertaining vector provided vector would compensated sharing efficiency gains cost savings achieved implementation approved business cases “abcs” special projects gm’s north america region gm’s three international regions abc project developed approved gm aimed reducing costs assuming operational responsibilities andor achieving operational changes vector agreements gm right purchase mw’s membership interest vector “call right” mw right require gm purchase mw’s membership interest vector “put right” call right put right exercisable sole discretion gm mw respectively prior amendment vector agreements exercise call right put right required gm pay mw fair value mw’s membership interest vector determined approved appraisers using predetermined valuation formula amended vector agreements amount payable gm mw put right based mutually agreedupon estimated value mw’s membership interest contract amendment date decline straightline basis 8year period beginning january 1 2004 exercise mw’s put right gm’s call right would result mw retaining commercialization contracts involving customers gm 2003 amendments vector agreements august 2003 vector agreements amended primarily expedite transition logistics services north america region gm vector amendments changed compensation principles gm’s north american logistics operations revised allocation vector’s profit gm mw modified formula valuation vector event mw exercises put right described amendments vector agreements provide vector compensated management logistics gm’s north america operations rather sharing efficiency gains cost savings individual separately approved abcs north america year fiveyear period retroactive january 1 2003 vector compensated management fee based shipment volumes beginning 2004 earn additional compensation certain performance criteria achieved accordance gaap compensation volumebased management fee recognized vehicles shipped performancebased compensation recognized achievement specified levels cost savings generally determinable fourth quarter contract year vector also compensated gm direct administrative costs north america subject certain limitations successive year covered amended vector agreements management anticipates performancebased compensation represent growing percentage compensation earned gm’s north america region amended vector agreements also increase vector’s allocation profit loss 80 85 although mw owns majority equity interest operating results vector reported equitymethod investment based gm’s ability control certain operating decisions 2005 regional abc amendments january 2005 abc’s gm’s european region amended compensate vector cost reimbursement management fee based vehicle production volumes rather sharing efficiency gains cost savings individual abc’s 2005 vector’s compensation gm’s european regions based separately approved abc’s unless amendments negotiated compensation principles gm’s international regions unaffected 2005 amendments european region cnf segment consists results road systems certain corporate activities majority revenue road systems sales conway cnf operating losses 40 million 2004 24 million 2003 primarily reflect net loss sale corporate properties operating loss 2002 primarily net result 36 million loss uncollectible nontrade receivables following business failure cfc 24 million net gain sale corporate property discontinued operations discontinued operations periods presented relate sale mwf spinoff cfc ewa terminated priority mail contract usps periods presented results operations net assets cash flows discontinued operations segregated continuing operations except otherwise noted operating results net assets discontinued operations summarized note 2 “discontinued operations” item 8 “financial statements supplementary data” menlo worldwide forwarding october 5 2004 cnf mw entered stock purchase agreement ups united parcel service america inc sell issued outstanding capital stock mwf cnf completed sale december 19 2004 agreement excludes certain assets liabilities mwf includes certain assets liabilities cnf subsidiaries related business conducted mwf among assets liabilities excluded related ewa obligation related mwf employees covered cnf’s domestic pension postretirement medical longterm disability plans agreement cnf reimbursed actuarially determined estimate obligation related mwf employees covered cnf’s longterm disability postretirement medical plans upon completion sale mwf mw received cash consideration 150 million subject certain adjustments including adjustments cash held mwf closing mwf’s net working capital closing addition ups assumed indebtedness associated mwf business including approximately 110 million debt owed mwf connection city dayton ohio special facilities revenue refunding bonds certain capital leases debt letters credit overdraft facilities stock purchase agreement cnf agreed threeyear noncompete covenant subject certain exceptions limit cnf’s annual air freight ocean forwarding andor customs brokerage revenues 175 million cnf also agreed indemnify ups certain losses ups may incur closing sale certain limitations losses related indemnification obligations costs including future cash expenditures related sale estimated recognized time recognized future periods additional loss disposal incurred additional details refer stock purchase agreement filed exhibit cnf’s form 8k dated october 5 2004 amendment stock purchase agreement filed exhibit cnf’s form 8k dated december 21 2004 although stock purchase agreement described entered october 5 2004 decisions cnf’s management board directors thirdquarter sale negotiations ups established cnf’s commitment sell mwf september 30 2004 process evaluating several strategic alternatives mw’s forwarding segment cnf approached ups third quarter 2004 interest acquiring mwf accordingly third quarter 2004 cnf classified mwf held sale recognized 2605 million impairment charge write recorded book value mwf anticipated selling price less costs sell required sfas 144 “accounting impairment disposal longlived assets” impairment charge based agreement sell mwf described primarily represents estimated writedown carrying value mwf’s goodwill longlived assets including mwf’s accumulated foreign currency translation adjustment well estimated selling costs cnf agreed accept less recorded book value mwf due primarily management’s assessment risk resource requirements associated strategic alternatives related mwf’s operations completion sale cnf recognized fourthquarter loss disposal 158 million net 36 million tax benefit adjusted carrying value mwf exceeded cash consideration cnf’s thirdquarter fourthquarter losses disposal mwf treated capital losses tax purposes current tax law capital losses used offset capital gains since cnf currently forecast significant taxable capital gains tax carryforward period tax benefits disposal recognized extent capital gains 2004 accordingly 410 million tax benefit recognized disposition mwf fully offset equal valuation allowance described stock purchase agreement excludes obligation related mwf employees covered certain cnfsponsored employee benefit plans including pension postretirement longterm disability plans cover noncontractual employees former employees continuing discontinued operations plans also include certain pension plans cover current former employees discontinued forwarding segment “forwarding plans” financial reporting purposes prepaid benefit cost forwarding plans reported assets discontinued operations accrued benefit cost related mwf employees covered legally separate cnfsponsored plans reported employee benefits continuing operations december 31 2004 cnf reimbursed obligation related mwf employees covered cnf’s longterm disability postretirement medical plans pending conclusion actuarially determined estimates accordingly december 31 2004 accounts receivable continuing operations included 941 million receivable cnf’s estimate employee benefit obligations well estimate reimbursable mwf cash balance settlement cash balance subject inprocess evaluation difference estimated actual cash position december 31 2004 would recognized future periods gain loss disposal incurred described stock purchase agreement excludes assets liabilities ewa including restructuring reserves related 2001 restructuring plan ewa’s restructuring reserves decreased 338 million december 31 2004 348 million december 31 2003 primarily due payments restructuringrelated obligations partially offset proceeds sales aircraft equipment restructuring reserves december 31 2004 primarily classified accrued liabilities discontinued operations consisted primarily cnf’s estimated exposure related labor matters described well estimated remaining restructuringrelated obligations connection cessation air carrier operations 2001 ewa terminated employment pilots crew members pilots crew members represented air line pilots association “alpa” union collective bargaining agreement subsequently alpa filed grievance behalf pilots crew members protesting cessation ewa’s air carrier operations mwf’s use air carriers alpa matters subject litigation us district court depending outcome litigation may subject binding arbitration based cnf’s current evaluation management believes provided estimated exposure related alpa matters however assurance regard cnf cannot predict certainty ultimate outcome matters spinoff cfc december 2 1996 cnf completed spinoff cfc cnf’s shareholders connection spinoff cfc cnf agreed indemnify certain states insurance companies sureties failure cfc pay certain workers’ compensation tax public liability claims pending september 30 1996 cases indemnities supported letters credit surety bonds cnf liable issuing bank surety company september 2002 cfc filed bankruptcy ceased us operations following commencement bankruptcy proceeding cfc ceased making payments respect workers’ compensation public liability claims cnf required take payment claims expects demands payment likely made respect remaining claims cnf estimated aggregate amount claims plus costs 250 million result cnf accrued additional reserves primarily selfinsurance accruals consolidated balance sheets 2002 recognized loss disposal 153 million net 97 million income taxes based actual payment experience claims december 31 2004 cnf accrued additional reserves recognized loss disposal 24 million net 16 million income taxes fourth quarter 2004 cnf seeking reimbursement cfc bankruptcy proceeding amounts cnf pays respect claims although assurance cnf successful recovering portion payments priority mail contract november 3 2000 ewa usps announced agreement “termination agreement” terminate contract transportation sortation priority mail “priority mail contract” terms termination agreement usps agreed reimburse ewa priority mail contract termination costs january 7 2001 usps paid ewa 600 million toward termination costs july 3 2002 usps paid ewa 60 million fully settle ewa’s priority mail contract termination costs resulted 2002 thirdquarter gain discontinuance 29 million net 18 million income taxes liquidity capital resources cash equivalents rose 3869 million december 31 2004 382 million december 31 2003 3796 million cash provided operating activities 1755 million provided financing activities exceeded 1843 million used investing activities cash provided financing activities primarily reflects net proceeds 2926 million received issuance 300 million senior debentures april 2004 partially offset redemption june 2004 1289 million convertible debentures cash used investing activities primarily reflects capital expenditures 1515 million 1859 million increase shortterm marketable securities partially offset cash proceeds 1500 million sale mwf fully discussed “results operations discontinued operations” cnf’s cash flows summarized table 1 “noncash adjustments” refer depreciation amortization deferred income taxes provision uncollectible accounts equity earnings joint venture noncash gains losses continuing operations operating activities cash flow continuing operations 2004 increased 1534 million 3796 million higher operating cash flow 2004 primarily due increase net income noncash items 2004 included 2763 million noncash net loss disposal mwf asset liability changes related liquidation corporateowned life insurance “coli” policies pension funding payments incentive compensation based volatility insufficiency returns coli investments cnf 2004 fully liquidated corporateowned policies reported deferred charges assets consolidated balance sheets changes employee benefits years presented reflect net effect defined benefit pension plan funding contributions 908 million 2004 750 million 2003 762 million 2002 described “ defined benefit pension plans” partially offset expense accruals cnf’s pension obligation accrued incentive compensation increased 294 million 2004 2003 reflects 279 million reduction periods presented changes accrued incentive compensation reflect cnf’s payment schedule employee incentive plans total incentive compensation earned award year paid employees partial payment december award year final payment february next award year 2004 incentive compensation expense accruals exceeded payments 2003 payments incentive compensation exceeded expense accruals operating cash flow 2003 declined 2002 78 million 2262 million increase net income noncash items offset changes assets liabilities related primarily income taxes accrued incentive compensation termination interest rate swaps 2002 accrued income taxes increased 2003 based taxable income declined 2002 based taxable losses accrued incentive compensation declined 2003 increased 2002 based timing expense accruals payments described operating cash flows 2002 benefited 310 million received partial payment connection termination interest rate swaps fully discussed note 5 “debt financing arrangements” item 8 financial statements supplementary data” investing activities investing activities 2004 used 1843 million compared 3034 million used 2003 periods presented investing activities consisted primarily capital expenditures investment cash shortterm marketable securities 2004 investing activities also included sale mwf cnf received 1500 million december 2004 capital expenditures 2004 increased 237 million 2003 due substantially increased expenditures conway increased tractor trailer acquisitions 1445 million 2004 1182 million 2003 capital expenditures 2003 increased 519 million 2002 due principally 530 million increase conway investments marketable securities fluctuate depending investable cash balances increased 2004 2003 1859 million 1694 million respectively fell 960 million 2002 financing activities financing activities provided cash 1755 million 2004 used cash 336 million 2003 april 2004 cnf issued 300 million 670 senior debentures due 2034 private placement exchange rights net proceeds 2926 million cnf used portion proceeds redeem 1289 million cnf’s convertible debentures june 1 2004 fully discussed note 5 “debt financing arrangements” item 8 “financial statements supplementary data” cnf intends use remaining proceeds repurchase time pay maturity 100 million 735 notes due june 2005 working capital general corporate purposes financing activities years presented also reflect dividend payments scheduled principal payments thrift stock plan notes guaranteed cnf january 2005 board directors authorized repurchase 300 million cnf’s common stock time within next two years open market purchases privately negotiated transactions cnf currently estimates repurchase approximately 150 million cnf’s common stock annually 2005 2006 cnf 385 million revolving credit facility matures july 3 2006 revolving credit facility available cash borrowings issuance letters credit 385 million december 31 2004 2003 borrowings outstanding facility december 31 2004 2297 million letters credit outstanding leaving 1553 million available capacity additional letters credit cash borrowings subject compliance financial covenants customary conditions borrowing cnf uncommitted unsecured credit facilities totaling 1200 million december 31 2004 available support letters credit bank guarantees overdraft facilities date total 391 million outstanding facilities total letters credit outstanding december 31 2004 2593 million provided collateral cnf workers’ compensation vehicular selfinsurance programs march 2005 cnf entered new fiveyear 400 million unsecured revolving credit facility replaced existing 385 million facility see “other matters forwardlooking statements” note 5 “debt financing arrangements” item 8 “financial statements supplementary data” additional information concerning cnf’s 385 million credit facility new facility entered march 2005 debt instruments fully discussed “results operations discontinued operations” cnf recognized 2763 million noncash net loss disposal mwf 2004 remain compliance certain financial covenants cnf obtained amendment credit agreement cnf’s 385 million revolving credit facility additionally credit agreement contains restrictions sale subsidiary guarantors threshold sale assets cnf obtained necessary creditors’ consent sale mwf see “other matters forwardlooking statements” note 5 “debt financing arrangements” item 8 “financial statements supplementary data” defined benefit pension plans cnf periodically reviews funding status defined benefit pension plans noncontractual employees makes contributions time necessary order comply funding requirements employee retirement income security act “erisa” funding cnf’s defined benefit pensions based erisadefined measurements rather recognition measurement criteria prescribed accounting principles generally accepted united states “gaap” cnf contributed 908 million defined benefit pension plans 2004 currently estimates contribute 75 million 2005 cnf also made defined benefit pension plan contributions 750 million 2003 762 million 2002 131 million 2001 made contributions 1996 2000 due part high rate return realized plan assets lack tax deductibility funding period contractual cash obligations table summarizes contractual cash obligations cnf december 31 2004 amounts table based management’s estimates assumptions obligations including duration possibility renewal factors estimates assumptions actual future payments may vary reflected table contractual cash obligations reflected consolidated balance sheets except operating leases disclosed future obligations gaap presented contractual obligations longterm debt guarantees represent principal payments contractual obligations operating leases represent payments lease arrangements certain liabilities including related pension postretirement benefit plans selfinsurance accruals reported cnf’s consolidated balance sheets reflected table due absence stated maturities described cnf currently estimates contribute 75 million defined benefit pension plan 2005 described “ continuing operations” letters credit 2593 million outstanding december 31 2004 provide collateral cnf’s workers’ compensation vehicular selfinsurance programs letters credit generally required selfinsurance programs represent additional liabilities underlying selfinsurance accruals already reflected cnf’s consolidated balance sheets accordance gaap cnf’s operating leases included cnf’s consolidated balance sheets cnf’s operating leases determined provide economic benefits preferable ownership based primarily aftertax cash flows financial operating flexibility effect cnf’s capitalization certain operating leases conway guarantees residual value tractors trailers end lease term december 31 2004 residual value guaranteed lease agreements 185 million cnf recognizes liability shortfall residual value guarantee equipment’s estimated fair value fluctuates depending market conditions 2005 cnf anticipates capital expenditures approximately 250 million primarily acquisition additional tractor trailer equipment including 20 million capital expenditures planned 2004 invested 2004 result equipment production delays cnf’s capital expenditure requirements may increase decrease depending business levels factors discussion see note 5 “debt financing arrangements” note 6 “leases” included item 8 “financial statements supplementary data” cnf’s ratio total debt capital increased 479 december 31 2004 410 december 31 2003 due primarily net effect secondquarter financing transactions 2004 described decline retained earnings resulting loss disposal mwf 2004 discussed “results operations discontinued operations” discontinued operations sale agreement ups december 19 2004 cnf completed sale mwf ups 150 million cash amount subject adjustment cash held mwf closing net capital mwf closing fully discussed “results operations discontinued operations” december 31 2004 cnf reimbursed obligation related mwf employees covered cnf’s longterm disability postretirement medical plans pending conclusion actuarially determined estimates accordingly december 31 2004 accounts receivable included 941 million receivable cnf’s estimate employee benefit obligations well estimate reimbursable mwf cash balance settlement cash balance subject inprocess evaluation difference estimated actual cash position december 31 2004 would recognized future periods gain loss disposal incurred spinoff cfc december 2 1996 cnf completed spinoff cfc cnf’s shareholders cfc withdrew 2002 certain multiemployer pension funds thereby incurring withdrawal liabilities funds prior enactment april 2004 pension funding equity act 2004 multiemployer funds asserted claims cnf liabilities cnf would statutory obligation make cash payments funds prior arbitral judicial decisions funds’ determinations facts relating cfc withdrawals law effect enactment pension funding equity act 2004 cnf would longer required make payments multiemployer funds unless final decisions arbitration proceedings court upheld funds’ determination refer note 11 “commitments contingencies” item 8 “financial statements supplementary data” estimates critical accounting policies preparation financial statements accordance accounting principles generally accepted us requires management adopt accounting policies make significant judgments estimates many cases alternative policies estimation techniques could used cnf maintains process evaluate appropriateness accounting policies estimation techniques including discussion review audit committee board directors independent auditors accounting policies estimates may require adjustment based changing facts circumstances actual results could differ estimates policies estimates discussed include critical financial statements selfinsurance accruals cnf uses combination insurance selfinsurance programs provide costs medical casualty liability vehicular cargo workers’ compensation claims measurement costs cnf considers historical claims experience medical costs demographic severity factors assumptions selfinsurance accruals developed based estimated undiscounted cost claims including claims incurred reported balance sheet date longterm portion selfinsurance accruals relates primarily workers’ compensation vehicular claims payable several years actual costs may vary estimates income taxes establishing deferred income tax assets liabilities cnf makes judgments interpretations based enacted tax laws published tax guidance applicable operations cnf records deferred tax assets liabilities periodically evaluates need valuation allowance reduce deferred tax assets realizable amounts likelihood material change cnf’s expected realization assets dependent future taxable income future capital gains ability use foreign tax credit carry forwards carry backs final us foreign tax settlements effectiveness tax planning strategies various relevant jurisdictions cnf also subject examination income tax returns multiple years irs tax authorities cnf periodically assesses likelihood adverse outcomes resulting examinations determine adequacy provision related accruals income taxes disposition restructuring estimates fully discussed “results operations discontinued operations” cnf’s management made significant estimates assumptions connection restructuring ewa 2001 disposition mwf 2004 actual results could differ estimates could affect related amounts reported financial statements uncollectible accounts receivable cnf subsidiaries report accounts receivable net realizable value provide allowance uncollectible accounts collection considered doubtful conway provides uncollectible accounts based various judgments assumptions including revenue levels historical loss experience composition outstanding accounts receivable logistics based size nature client base performs frequent periodic evaluation customers’ creditworthiness accounts receivable portfolio recognizes expense uncollectible accounts losses probable estimable defined benefit pension plans cnf defined benefit pension plans cover noncontractual employees united states amount recognized pension expense accrued pension liability depend upon number assumptions factors significant discount rate used measure present value pension obligations assumed rate return plan assets affected economic conditions market fluctuations rate compensation increase cnf assumed discount rate 625 675 purposes calculating pension expense 2004 2003 respectively assumed discount rate 625 calculating yearend liability 2004 2003 decline assumed discount rate pension expense due primarily declines highquality corporate bond yields 2004 cnf adjusts discount rate periodically taking account changes highquality corporate bond yields guidance outside actuaries determining appropriate discount rate cnf 2004 began utilizing bond model incorporates expected cash flows plan obligations bond model uses selected portfolio moody’s aaorbetter rated bonds cash flows maturities match projected benefit payments cnf’s pension plans cnf’s discount rate equal yield portfolio bonds typically exceed moody’s aa corporate bond index due long duration expected benefit payments cnf’s plan factors held constant 025 decline discount rate would result estimated 6 million increase 2005 annual pension expense cnf adjusts assumed rate return plan assets based historic returns plan assets current market expectations rate return based meanexpected 20year return current asset allocation effect actively managing plan net fees expenses purposes calculating pension expense cnf assumed rate return plan assets 90 2004 2003 expects use rate 85 2005 using yearend plan asset values 05 decline assumed rate return plan assets would result estimated 4 million increase 2005 annual pension expense determination cnf’s accrued pension benefit cost includes unrecognized actuarial loss results cumulative difference estimated actual values yearend projected pension benefit obligation fair value plan assets gaap portion unrecognized actuarial loss gain exceeds ten percent greater projected benefit obligation fair value plan assets must amortized expense average service period employees approximately thirteen years cnf lower amortization unrecognized actuarial loss reduces annual pension expense 2005 approximately 6 million annual pension expense 2004 goodwill longlived assets cnf performs impairment analysis longlived assets whenever circumstances indicate carrying amount may recoverable assets held used impairment charge recognized estimated undiscounted cash flows associated asset group assets less carrying value impairment exists charge recognized difference carrying value fair value fair values determined using quoted market values discounted cash flows external appraisals applicable assets held disposal carried lower carrying value estimated net realizable value cnf tests recoverability goodwill annual basis fourth quarter annual tests certain circumstances fairvalue approach used test goodwill impairment charge recognized carrying amount goodwill exceeds fair value cnf utilized thirdparty independent valuation consultant perform impairment test goodwill associated forwarding reporting segment december 31 2003 based annual impairment test fourth quarter 2003 assumed improving cash flows cnf required record charge goodwill impairment fully discussed “results operations discontinued operations” cnf committed sell mwf third quarter 2004 recognized 2605 million impairment charge write recorded book value mwf anticipated selling price less costs sell impairment charge based agreement sell mwf represented estimated writedown carrying value mwf’s goodwill longlived assets including mwf’s accumulated foreign currency translation adjustment well estimated selling costs cnf agreed accept less recorded book value mwf due primarily management’s assessment risk resource requirements associated strategic alternatives related mwf’s operations matters cyclicality seasonality cnf’s businesses operate industries affected directly general economic conditions seasonal fluctuations affect demand transportation services trucking air freight industries typical year months september october usually highest business levels months december january february usually lowest business levels business interruption cnf subsidiaries rely cnf service company performance shared administrative technology services conduct businesses cnf’s centralized computer facilities administrative technology employees located administrative technology “adtech” center portland oregon although cnf maintains backup systems disaster recovery processes procedures place sustained interruption operation facilities whether due terrorist activities earthquakes floods otherwise could material adverse effect cnf’s financial condition cash flows results operations homeland security cnf subject compliance cargo security transportation regulations issued transportation security administration department homeland security cnf able accurately predict new governmental regulation affect transportation industry however cnf believes additional security measures may required future regulations could result additional costs could adverse effect ability serve customers financial condition results operations cash flows employees workforce cnf subsidiaries affiliated labor unions consequently cnf believes operations subsidiaries significant advantages comparable unionized competitors particularly trucking industry providing reliable costcompetitive customer services including greater efficiency flexibility assurance cnf’s subsidiaries able maintain current advantages certain competitors new accounting standards variable interest entities january 2003 fasb issued interpretation 46 “consolidation variable interest entities interpretation arb 51” “fin 46” fin 46 requires specialpurpose entities designated either votinginterest entity variableinterest entity “vie” vie entity equity investors characteristics controlling financial interest sufficient equity risk vie finance activities without additional subordinated financial support parties vie required consolidated primary beneficiary effectively disperse risks among parties involved primary beneficiary vie party absorbs majority vie’s expected losses receives majority expected residual returns implementation fin 46 required periods beginning june 15 2003 however october 2003 fasb deferred effective date applying fin 46 vie’s created february 1 2003 end first interim period ending december 15 2003 december 2003 fasb revised fin 46 “fin 46r” incorporate certain revisions including requirement disregard certain rights determining whether entity primary beneficiary vie fin 46r cnf primary beneficiary cnf trust 1 “trust” wholly owned subsidiary cnf therefore required deconsolidate trust effective quarter ended march 31 2004 accordingly cnf’s 5 convertible debentures held trust redeemed cnf june 1 2004 included longterm debt march 31 2004 prior periods restated reflect adoption fin 46r fully discussed note 5 “debt financing arrangements” item 8 “financial statements supplementary data” sharebased payment december 2004 fasb issued sfas 123r “sharebased payment” “sfas 123r” revision sfas 123 supersedes apb 25 related implementation guidance sfas 123r eliminates alternative use apb 25’s intrinsicvalue method accounting provided sfas 123 originally issued requires companies recognize cost employee services received exchange awards equity instruments based grantdate fair value awards limited exceptions period employee required provide service exchange award sfas 123r also amends fasb statement 95 “statement cash flows” require benefits associated tax deductions excess recognized compensation cost reported financing cash flows rather reduction taxes paid requirement reduce net operating cash flows increase net financing cash flows periods effective date future amounts cannot estimated depend factors cannot predicted including employees exercise stock options effective date sfas 123r beginning first reporting period begins june 15 2005 cnf third quarter 2005 cnf currently assessing impact sfas 123r financial statements forwardlooking statements certain statements included herein constitute “forwardlooking statements” within meaning section 21e securities exchange act 1934 amended subject number risks uncertainties relied upon predictions future events statements historical fact forwardlooking statements including projections earnings revenues weight yield volumes income financial operating items statements plans strategies expectations objectives cnf management future operations future items statements concerning proposed new products services statements regarding cnf’s estimated future contributions pension plans statements adequacy reserves statements regarding outcome claims may brought cnf cfc’s multiemployer pension plans statements regarding future economic conditions performance statements regarding outcome legal claims proceedings cnf statements estimates belief statements assumptions underlying foregoing certain forwardlooking statements identified use forwardlooking terminology “believes” “expects” “may” “will” “should” “seeks” “approximately” “intends” “plans” “estimates” “anticipates” negative terms variations terms comparable terminology discussions strategy plans intentions forwardlooking statements necessarily dependent assumptions data methods may incorrect imprecise assurance realized regard following factors among others addition matters discussed elsewhere document reports documents filed cnf securities exchange commission could cause actual results matters differ materially discussed forwardlooking statements • changes general business economic conditions including global economy • creditworthiness cnf’s customers ability pay services rendered • increasing competition pricing pressure • changes fuel prices • effects cessation ewa’s air carrier operations • possibility cnf may time required record impairment charges longlived assets • possibility defaults cnf’s 400 million credit agreement debt instruments including defaults resulting additional unusual charges costs expenses cnf may incur possibility cnf may required repay certain indebtedness event ratings assigned longterm senior debt credit rating agencies reduced • labor matters including grievance furloughed pilots crew members labor organizing activities work stoppages strikes enforcement changes governmental regulations including effects new regulations issued department homeland security • environmental tax matters • matters relating cnf’s 1996 spinoff cfc including possibility cfc’s multiemployer pension plans may assert claims cnf may prevail proceedings may financial resources necessary satisfy amounts payable plans matters relating cnf’s defined benefit pension plans • matters relating sale mwf including cnf’s obligation indemnify ups certain losses connection sale result foregoing assurance given future financial condition results operations cash flows see note 11 “commitments contingencies” item 8 “financial statements supplementary data” item 7aitem 7 management’s discussion analysis financial condition results operations introduction management’s discussion analysis financial condition results operations referred “management’s discussion analysis” intended assist historical prospective understanding conway’s financial condition results operations cash flows including discussion analysis following • overview business • results operations related information • liquidity capital resources • estimates critical accounting policies • forwardlooking statements overview business company provides transportation logistics supplychain management services wide range manufacturing industrial retail customers financial reporting purposes conway divided three reporting segments conway freight transportation primarily provider regional lessthantruckload “ltl” freight services menlo worldwide provider integrated contract logistics solutions conway includes certain corporate activities menlo worldwide consists operating results menlo worldwide logistics “logistics” vector joint venture gm accounted equitymethod investment conway’s operatingunit results depend number weight distance shipments transported prices received shipments mix services provided customers well fixed variable costs incurred conway providing services ability manage costs changing circumstances conway freight transportation primarily transports shipments freight service center network menlo worldwide manages logistics functions customers primarily utilizes thirdparty transportation providers movement customer shipments organizational accounting events affecting financial reporting organization june 2006 conway closed operations domestic air freight forwarding business known conway forwarding 2004 conway menlo worldwide llc “mw” sold mwf ups accordingly results operations net liabilities cash flows menlo worldwide forwarding segment conway forwarding operating unit segregated reported discontinued operations except otherwise noted december 2006 conway recognized sale gm mw’s membership interest vector sale vector qualify discontinued operation due classification equitymethod investment accordingly 410 million salerelated gain reported net income continuing operations menlo worldwide reporting segment july 2006 conway sold expeditedshipping portion former conway expedite brokerage business sale assets 62 million gain recognized sale reported net income continuing operations conway freight transportation reporting segment change accounting policy tires fourth quarter 2006 conway changed accounting policy tires prior change cost original replacement tires mounted new existing equipment reported current assets prepaid expense amortized based estimated usage new policy cost replacement tires expensed time tires placed service case repairs maintenance costs cost tires new revenue equipment capitalized depreciated estimated useful life related equipment conway believes new policy preferable circumstances provides precise less subjective method recognizing expenses related tires consistent industry practice sfas 154 “accounting changes error corrections” conway required report change accounting policy retrospectively applying new policy prior periods presented unless impractical determine priorperiod effect accordingly conway adjusted previously reported financial information periods presented effect accounting policy change immaterial effect 2006 reduced net income continuing operations 13 million 002 per diluted share 2005 20 million 003 per diluted share 2004 accounting policy change also affected conway’s consolidated balance sheets periods presented increasing reported amounts revenue equipment reducing amounts prepaid expenses retained earnings new accounting standards effective january 1 2006 conway adopted recognition related disclosure provisions sfas 123r “sharebased payment” revision sfas 123 “accounting stockbased compensation” supersedes accounting principles board opinion 25 “accounting stock issued employees” “apb 25” related implementation guidance sfas 123r requires companies recognize cost employee services received exchange awards equity instruments based grantdate fair value awards period employee required provide service exchange award conway adopted sfas 123r using modified prospective transition method requires recognition compensation expense 2006 determined sfas 123r result retrospective application recognition provisions sfas 123r priorperiod financial statements result adopting sfas 123r conway 2006 recognized 58 million sharebased compensation expense 007 per diluted share would recognized conway continued account sharebased compensation apb 25 effective december 31 2006 conway adopted recognition related disclosure provisions sfas 158 “employers’ accounting defined benefit postretirement plans amendment sfas 87 88 106 132r” recognition provisions sfas 158 conway required recognize overfunded underfunded status defined benefit pension postretirement plans asset liability respectively balance sheet december 31 2006 sfas 158 gives recognition effect changes funded status plan liability shareholders’ equity compared prior accounting standards sfas 158 generally result changes recognized periodic benefits expense except certain conditions since retrospective adoption sfas 158 prohibited different recognition provisions applied determining planrelated amounts reported conway’s consolidated balance sheets december 31 2006 2005 connection adoption sfas 158 effective december 31 2006 conway increased reported amounts employee benefits liability 1553 million reduced shareholders’ equity 955 million net 611 million deferred tax benefits results operations table summarizes conway’s consolidated operating results continuing discontinued operations 1 preferred stock dividends conway’s net income continuing operations preferred stock dividends grew 191 2652 million 2006 2226 million 2005 due gains 473 million related sale mw’s membership interest vector sale conway expedite 2005 net income continuing operations increased 552 1434 million 2004 due improved operating results conway reporting segments conway’s diluted earnings per share continuing operations increased 279 509 2006 due higher net income accretive effect conway’s share repurchase program included repurchase may 2006 375 million shares two significant privately negotiated transactions primarily result share repurchases conway’s average diluted shares outstanding declined 523 million shares 2006 562 million shares 2005 conway’s diluted earnings per share continuing operations increased 537 398 259 primarily reflecting higher net income 2006 net income continuing operations partially offset losses discontinued operations primarily reflect 42 million net loss related closure conway forwarding periods prior closure june 2006 discontinued operations periods presented include operating losses reported conway forwarding 2005 discontinued operations also include 62 million net loss primarily related disposal mwf shutdown ewa resulting net income applicable common shareholders increased 2590 million 498 per diluted share 2006 2140 million 383 per diluted share 2005 2004 net income continuing operations offset 2695 million net loss 477 per diluted share discontinued operations primarily reflects loss disposition mwf resulting net loss applicable common shareholders 2004 1261 million 218 per diluted share continuing operations overview provides highlevel summary conway’s results continuing operations periods presented introductory section intended facilitate executivelevel understanding provides context remainder discussion reporting segments refer “reporting segment review” complete detailed discussion analysis overview 2006 compared 2005 2006 conway’s net income continuing operations increased 191 2652 million 2006 2226 million 2005 due primarily higher consolidated operating income decline nonoperating expenses lower effective tax rate consolidated operating income benefited revenue growth gains sale vector conway expedite adversely affected lower operating margins excluding salerelated gains conway’s revenue 42 billion 2006 increased 26 prioryear period due increases revenuegenerating segments revenue conway freight transportation reflects conway freight’s pricing initiatives emphasized higher yields grew 44 focus yield adversely affected tonnage market slowing demand freight transportation resulting weightperday decline 05 revenue menlo worldwide logistics increased 12 due primarily growth warehousemanagement services consolidated operating income 2006 increased 83 period last year due gains 473 million related sale mw’s membership interest vector sale conway expedite excluding gains consolidated operating income declined 44 due largely lower operating income conway freight transportation vector lesser extent logistics decline conway’s operating income primarily reflects increases depreciation maintenance selfinsurance costs well higher allocated corporate costs fully discussed due sale vector conway june 30 2006 recognized 20 million operating income associated vector business cases inprocess june 30 2006 resulting 140 million operating income 2006 excluding salerelated gain compared 203 million 2005 consolidated operating income 2006 adversely affected decline costs reimbursed ups transitionservices agreement following sale mwf ups portion conway’s corporate administrative costs 2005 charged ups transitionservices agreement 2005 conway reimbursed ups 113 million general administrative costs reimbursed ups 2006 also 2006 conway began recognizing expense related employee stockoption awards rebranding initiative 2006 conway recognized additional sharebased compensation expense 58 million connection adoption sfas 123r effective january 1 2006 conway’s advertising expense increased 2005 51 million 97 million due largely customerfocused advertising employeefocused events including 09 million costs related conway’s rebranding initiative certain advertising programs implemented 2006 continue 2007 accordingly advertising expense 2007 expected approximate costs incurred 2006 corporate administrative costs related conway’s sharedservices center executive headquarters including costs described generally allocated based measurable services provided segment general corporate expenses based segment revenue capital employed connection rebranding initiative conway 2006 recognized expense 18 million primarily costs related advertising legal services 2008 conway estimates incur additional costs approximately 20 million 24 million due primarily cost rebranding tractors trailers recognized maintenance expense incurred approximately 12 million 14 million rebranding costs estimated incurred 2007 net expense 2006 decreased 91 million 95 million due primarily reduction interest expense increase investment income foreign exchange gains interest expense decreased 33 million 2006 due largely 1000 million repayment june 2005 735 notes investment income increased 21 million higher interest rates earned cashequivalent investments marketable securities partially offset lower average balances interestearning financial instruments 2006 miscellaneous nonoperating expense primarily reflects positive variations foreign exchange transactions improved comparative operating results 33 million conway’s effective tax rate 306 2006 declined 346 2005 tax provision 2006 benefited utilization capitalloss carryforwards offset tax 29 million sale conway expedite 148 million sale mw’s membership interest vector conway’s effective tax rate periods reflects effect net tax credits primarily related settlement irs previous tax filings net tax credits consisted reversals accrued tax amount 121 million 2006 78 million 2005 overview 2005 compared 2004 conway’s net income continuing operations 2005 increased 552 2226 million 1434 million 2004 due primarily significantly higher operating income decline nonoperating expenses lower effective tax rate higher operating income due primarily revenue growth improvement operating margins 2005 conway’s revenue increased 125 41 billion due higher revenue conway freight transportation logistics conway freight transportation’s revenue growth 2005 primarily reflects increases conway freight increased weight per day 124 improved yield 42 consolidated operating income 2005 rose 305 significantly higher operating income conway freight transportation improved results menlo worldwide conway freight transportation’s operating income increased 340 due largely revenue growth 118 improved conway freight operating margins conway freight transportation’s revenue increase 2005 reflects conway freight tonnage growth yield improvement increased fuel surcharges improved operating margins primarily reflect productivity gains decline employee costs percentage revenue due largely lower incentive compensation resulted variations operating income performance factors relative incentive plan targets menlo worldwide’s operating income 2005 increased 145 improved results logistics higher income vector’s foreign operations logistics’ operating income increased 174 revenue growth 140 reported segment income vector increased 110 net expense 2005 decreased 170 million 186 million due primarily increases investment income rose 152 million higher interest rates earned larger average balance cashequivalent investments marketable securities interest expense decreased 22 million 2005 due largely net effect interest financing transactions including 1000 million repayment june 2005 735 notes 1289 million redemption june 2004 5 convertible debentures 2926 million net issuance april 2004 67 senior debentures reporting segment review conway freight transportation table compares operating results operating margins percentage increase selected operating statistics conway freight transportation reporting segment years ended december 31 compared 2005 2006 conway freight transportation’s revenue rose 33 due revenue increases conway freight partially offset declines revenue conway transportation following sale expeditedshipping portion former conway expedite brokerage business july 2006 described revenue increases conway freight 2006 reflect higher revenue per day partially offset effects 15 fewer working days compared period last year revenue per day grew 39 44 increase yield 05 decrease weight per day yield weight per day affected conway freight’s pricing initiatives emphasized higher yields yield focus adversely affected tonnage market slowing demand freight transportation particularly third fourth quarter 2006 weight per day declined third fourth quarter 39 80 respectively compared prioryear periods response third fourthquarter declines weight per day conway management implemented targeted sales initiatives believes lead tonnage growth second quarter 2007 yield increases 2006 primarily reflect increase fuel surcharges general rate increases results pricing initiatives discussed like ltl carriers conway freight assesses many customers fuel surcharge fuel prices risen fuel surcharge increased conway freight’s yield revenue excluding fuel surcharges yields 2006 increased 20 fuel surcharges improved yield comparisons every quarter years presented except fourth quarter 2006 yields fourth quarter 2006 improved 29 quarter 2005 yields excluding surcharges rose 35 comparative period fuel surcharges one part conway freight’s overall rate structure total price conway freight receives customers services governed market forces fully discussed item 1a “risk factors” yield increases 2006 partially offset effect 07 increase weight per shipment commensurate lower transportation cost per unit weight lowercost higherweight shipments generally lower yields fully discussed note 12 “segment reporting” item 8 “financial statements supplementary data” conway sold expeditedshipping portion former conway expedite brokerage business july 2006 remaining truckloadbrokerage operation merged conway truckload truckloadbrokerage business integrated menlo worldwide logistics effective january 2007 fully discussed “ menlo worldwide logistics” connection sale conway expedite conway received proceeds 80 million 2006 recognized 62 million gain excluding gain conway freight transportation’s operating income declined 41 compared prioryear period operating income 2006 adversely affected higher depreciation maintenance selfinsurance costs 198 million 155 increase allocated corporate administrative expenses discussed “ continuing operations” depreciation expense increased 152 2006 due planned investments service centers tractor trailer acquisitions conway freight conway truckload maintenance costs increased 106 due technology requirements relating repair maintenance newer equipment costs related maintaining trailers longer estimated useful life increased maintenance costs also reflect major repair programs undertaken 2006 address specific issues operating costs include costs cargo claims vehicular insurance fuelrelated taxes increased 91 2006 37 million increase advertising expense reflects customerfocused advertising employeefocused events portion support conway’s rebranding initiative fuel costs 2006 increased 204 purchased transportation costs decreased 108 due part increase conway freight’s utilization conway truckload linehaul services increased fuel consumption lowered purchased transportation requirements purchased transportation fuel expense 2006 adversely affected increase average diesel fuel prices higher fuel costs fuelrelated increases purchased transportation costs recovered fuel surcharges 2006 employee costs increased 28 declined percentage revenue administrativerelated employee costs increased 45 operationsrelated employee costs increased 26 employee costs reflect increases base compensation employee benefits partially offset lower incentive compensation base compensation 2006 rose 33 due primarily wage salary rate increases employee benefits expense increased 58 due primarily higher costs healthcare benefits paid time pension benefits partially offset decline longterm incentive compensation executives compensation earned general annual incentive plan 2006 declined 196 million based variations operating income performance measures relative incentive plan targets compared 2004 2005 conway freight transportation’s revenue rose 118 due higher revenue conway freight conway transportation revenue per day conway freight rose 124 2004 79 increase weight 42 increase yield increases 2005 primarily reflect increase fuel surcharges continued growth higherrated interregional services general rate increases partially offset growth loweryielding lowercost shipments excluding fuel surcharges yields 2005 unchanged compared 2004 yields 2005 adversely affected 36 increase weight per shipment largely driven spotquote program contributed increase number shipments excess 10000 pounds conway freight transportation’s operating income 2005 increased 340 due largely improved margins primarily reflect revenue growth productivity gains decline employee costs percentage revenue employee costs 2005 increased 53 reflecting higher base compensation employee benefits partially offset lower incentive compensation base compensation rose 100 due primarily headcount increases attributable higher business volumes lesser extent wage salary rate increases incentive compensation 2005 declined 275 million 345 employee benefits expense increased 26 increase healthcare costs due largely growth headcount partially offset decline workers’ compensation expense 2005 fuel purchased transportation costs increased 645 229 respectively however higher fuel costs fuelrelated increases purchased transportation costs recovered fuel surcharges menlo worldwide menlo worldwide reporting segment consists operating results logistics vector menlo worldwide 2006 reported operating income 807 million compared 469 million 2005 410 million 2004 results 2006 include 410 million gain due sale mw’s membership interest vector gm although mw owned majority equity interest vector mw’s portion vector’s operating results reported equitymethod investment based gm’s ability control certain operating decisions accordingly conway’s statements consolidated operations include revenue vector mw’s proportionate share net income vector reported reduction operating expenses table compares operating results operating margins menlo worldwide reporting segment years ended december 31 table summarizes logistics gross revenues well net revenues less purchased transportation expenses carriermanagement revenue attributable contracts logistics manages transportation freight subcontracts actual transportation delivery products third parties logistics refers purchased transportation logistics’ management believes net revenues meaningful measure relative importance principal services since gross revenues earned carriermanagement services include thirdparty carriers’ charges logistics transporting shipments menlo worldwide logistics compared 2005 logistics’ revenue 2006 increased 12 due 45 increase warehousemanagement services 03 increase carriermanagement services growth carriermanagement revenue slowed management’s decision terminate may 2006 lowmargin carriermanagement contract accounted 29 logistics’ annual segment revenues 2005 net revenues 2006 increased 68 due 12 increase revenue 09 reduction purchased transportation expense lower transportation costs 2006 achieved better carrier rates carriermanagement services increase percentage revenue derived warehousemanagement services effect increasing gross net revenues without associated increase purchased transportation logistics’ operating income 2006 decreased 38 period last year due primarily higher employee costs purchased labor collectively increased 120 2006 employee costs increased 92 operationsrelated employee costs increased 80 administrativerelated employee costs increased 144 higher employee costs reflect increases base compensation employee benefits incentive compensation base compensation 2006 increased 58 due primarily growth headcount wage salary rate increases employee benefits expense increased 162 primarily increase cost healthcare benefits employee benefit costs incentive compensation 2006 increased 26 million 400 based variations operating income working capital performance measures relative incentive plan targets purchased labor costs increased 200 due new warehousemanagement projects logistics utilizes purchased labor warehousemanagement services due flexibility provided responding varying customer demand expenses supplies increased 398 reflecting volume increases related certain warehousemanagement customers corporate administrative costs allocated logistics 2006 increased 51 million 133 described “ continuing operations” expenses outside services increased 141 due primarily 13 million costs related bid significant contract compared 2004 2005 logistics’ revenue increased 140 2004 due 159 increase carriermanagement services 76 increase warehousemanagement services logistics’ net revenue 2005 increased 65 2004 revenue growth partially offset 172 increase purchased transportation costs due higher business levels fuelrelated increases carrier rates 2005 logistics’ operating income increased 174 due primarily growth net revenue lower employee costs due largely declines healthcare costs workers’ compensation incentive compensation incentive compensation 2005 declined 10 million 137 based variations operating income performance measures relative incentive plan targets integration former conway transportation businesses recent years logistics integrated operations two supplychain management businesses previously reported conway freight transportation reporting segment second quarter 2005 logistics integrated former conway logistics business prior periods reclassified january 2007 logistics also integrated truckloadbrokerage business integration truckloadbrokerage business expected leverage logistics’ significant procurement volumes purchased transportation improve value customers improve margin earned services provided integration truckloadbrokerage business also expected expand logisticsservices opportunities access truckloadbrokerage customers leverage shared expertise logistics truckloadbrokerage professionals menlo worldwide vector operating results 2006 segment income reported mw’s equity investment vector increased 551 million 203 million 2005 higher reported segment income vector due 410 million gain recognized sale mw’s membership interest vector gm 2005 segment income vector increased 203 million 183 million 2004 due primarily higher income earned gm’s international regions partially offset decline income gm’s north america region gm exercise call right june 23 2006 gm exercised call right december 11 2006 independent financial advisor established fair value vector agreed upon conway gm advisor established fair value 964 million membership interests jointventure partners including fair value 848 million attributable mw’s membership interest vector result agreedupon valuation conway december 2006 recognized receivable gm 519 million amount equal 848 million fair value mw’s membership interest reduced conway’s 329 million payable vector also recognized 410 million gain amount equal 519 million receivable reduced conway’s 90 million net investment vector 19 million salerelated costs settlement date january 5 2007 conway received 519 million payment gm conway’s sale mw’s membership interest vector fully discussed note 3 “investment unconsolidated joint venture” item 8 “financial statements supplementary data” conway reporting segment consists certain corporate activities related income loss allocated reporting segments table summarizes operating results conway discontinued operations discontinued operations periods presented relate closure conway forwarding sale mwf shutdown ewa terminated priority mail contract us postal service “usps” spinoff consolidated freightways corporation “cfc” results operations net liabilities cash flows discontinued operations segregated continuing operations except otherwise noted see note 2 “discontinued operations” item 8 “financial statements supplementary data” summary financial information related discussion liquidity capital resources 2006 cash 6879 million used investing activities financing activities discontinued operations funded 4337 million provided operating activities 2542 million cash equivalents declined 2600 million december 31 2006 5143 million december 31 2005 investing activities 2006 used 2742 million due primarily capital expenditures 2992 million financing activities used 3785 million primarily repurchase 3502 million common stock conway’s cash flows summarized table 1 “noncash adjustments” refer depreciation amortization deferred income taxes provision uncollectible accounts equity earnings gain sale joint venture noncash income expenses continuing operations operating activities cash flow operating activities 2006 4337 million 2124 million increase 2005 due increase net income noncash items cash provided changes assets liabilities primarily receivables 2006 receivables provided 864 million primarily due improvement average collection period logistics’ receivables 2005 receivables used 1242 million higher revenue increase average collection period logistics’ receivables due part longer customernegotiated payment terms processing delays decline accrued incentive compensation used 44 million 2006 prioryear period used 200 million 2006 2005 expense accruals incentive compensation 500 million 683 million respectively incentive compensation payments periods 544 million 883 million respectively use cash decline employee benefit liabilities years presented reflects net effect defined benefit pension plan funding contributions 750 million 2006 1265 million 2005 908 million 2004 partially offset expense accruals related conway’s benefit plans years presented cash provided deferred charges credits reflects variations conway’s affiliate payable vector proceeds related sale vector received settlement date january 5 2007 fully discussed note 3 “investment unconsolidated joint venture” item 8 “financial statements supplementary data” accordingly reflected conway’s consolidated cash flows 2006 cash flow operating activities 2005 2213 million 1627 million decrease 2004 increase net income noncash items offset net use cash due changes assets liabilities primarily receivables 2005 receivables used 1242 million compared 331 million used 2004 based revenue growth increase average collection period logistics 2005 accrued incentive compensation decreased 200 million 2005 2004 reflects 292 million increase cash provided changes deferred charges credits declined 275 million 2005 671 million provided 2004 due primarily 545 million cash payments received 2004 connection liquidation corporateowned life insurance policies investing activities investing activities 2006 used 2742 million compared 1780 million provided 2005 capital expenditures 2006 increased 877 million 2005 due primarily increased tractor trailer expenditures conway freight transportation capital expenditures 2005 increased 587 million 2004 also due increases conway freight transportation proceeds sale businesses 80 million 2006 compared 1084 million 2005 2006 conway sold expeditedshipping portion former conway expedite brokerage business 80 million 2005 2004 conway received payments 1084 million 1500 million respectively connection sale mwf ups periods presented investing activities also reflect fluctuations shortterm marketable securities marketable securities 2006 provided 178 million 2005 provided 2840 million primarily due firstquarter conversion auctionrate securities cash equivalents investments marketable securities 2004 used 2259 million financing activities financing activities used cash 3785 million 2006 compared 2164 million used 2005 common stock repurchases 3502 million 2006 1491 million 2005 made conway’s repurchase programs significant increase stock repurchases 2006 attributable repurchase may 2006 375 million shares two significant privately negotiated transactions program fully discussed note 8 “shareholders’ equity” item 8 “financial statements supplementary data” conway authorized repurchase additional 903 million common stock june 30 2007 financing activities 2005 reflect repayment maturity june 1 100 million 735 notes 2004 reflects 2926 million net issuance 67 senior debentures 1289 million redemption 5 convertible debentures financing activities periods presented also reflect dividend payments scheduled principal payments notes related conway’s defined contribution retirement plan cash provided exercise stock options decreased 122 million 2006 761 million 2005 561 million 2004 lower level stockoption exercises 2006 primarily reflects decline number exercisable options following high volume stockoption exercises 2005 2004 conway 400 million revolving credit facility matures september 30 2011 revolving credit facility available cash borrowings issuance letters credit 400 million december 31 2006 borrowings outstanding conway’s revolving credit facility december 31 2006 2103 million letters credit outstanding leaving 1897 million available capacity additional letters credit cash borrowings subject compliance financial covenants customary conditions borrowing conway uncommitted unsecured credit facilities totaling 350 million december 31 2006 available support letters credit bank guarantees overdraft facilities date total 172 million letters credit outstanding facilities see “ forwardlooking statements” note 5 “debt financing arrangements” item 8 “financial statements supplementary data” additional information concerning conway’s 400 million credit facility debt instruments contractual cash obligations table summarizes contractual cash obligations conway december 31 2006 amounts table based management’s estimates assumptions obligations including duration possibility renewal factors estimates assumptions actual future payments may vary reflected table certain liabilities including related selfinsurance accruals reported conway’s consolidated balance sheets reflected table due absence stated maturities presented contractual obligations longterm fixedrate debt guarantees represent principal interest payments amounts representing principal portion interest payable 2007 reported consolidated balance sheets contractual obligations operating leases represent payments lease arrangements accordance gaap future operating lease payments included conway’s consolidated balance sheets conway’s operating leases determined provide economic benefits preferable ownership based primarily aftertax cash flows financial operating flexibility effect conway’s capitalization employee benefit plan payments table represent estimated payments conway’s nonqualified defined benefit pension plans postretirement medical plan december 31 2016 expected benefit payments conway’s qualified defined benefit pension plans included table plans funded conway expects contribute approximately 13 million qualified defined benefit pension plans 2007 subject variation based changes interest rates asset returns based funded status conway’s qualified pension plans expected future contributions represent contractual obligations governed conway’s funding practices amount estimated defined benefit pension plan contributions reflects plan amendments effective january 1 2007 however conway believes decline funding requirements defined benefit pension plans whole part offset higher contributions conway’s defined contribution pension plan fully discussed “ critical accounting policies estimates” 2007 conway anticipates capital expenditures approximately 185 million including software expenditures primarily acquisition additional tractor trailer equipment conway’s actual 2007 capital expenditures may differ estimated amount depending factors availability timing delivery equipment availability land desired locations new facilities timing obtaining permits environmental studies approvals necessary development new existing facilities planned expenditures represent contractual obligations december 31 2006 described “financing activities” letters credit 2103 million outstanding december 31 2006 letters credit generally required selfinsurance programs represent additional liabilities underlying selfinsurance accruals already included conway’s consolidated balance sheets discussion see note 5 “debt financing arrangements” note 6 “leases” item 8 “financial statements supplementary data” conway’s ratio total debt capital increased 438 december 31 2006 399 december 31 2005 due primarily share repurchases 2006 lesser extent decrease common shareholders’ equity adoption sfas 158 share repurchases adoption sfas 158 partially offset increase retained earnings net income earned 2006 150 million debt repayment january december 31 2006 conway’s senior unsecured debt rated investment grade moody’s baa3 standard poor’s bbb addition fitch ratings initiated coverage conway january 25 2006 rating “bbb” conway believes working capital requirements capital expenditure plans foreseeable future adequately met various sources liquidity capital including conway’s cash equivalents marketable securities cash flow operations credit facilities access capital markets discontinued operations discontinued operations periods presented relate closure conway forwarding sale mwf shutdown ewa terminated priority mail contract usps spin cfc periods prior closure june 2006 cash flow discontinued operations relate primarily conway forwarding except described cash flows discontinued operations segregated continuing operations reported separately discontinued operations 2006 conway settled lawsuits filed former ewa pilots crew members resulted payments 92 million june 2006 109 million august 2006 fully discussed note 2 “discontinued operations” item 8 financial statements supplementary data” also 2006 conway paid 100 million settle dispute pertaining priority mail contract fully discussed note 11 “commitments contingencies” item 8 financial statements supplementary data” fully discussed “continuing operations investing activities” salesrelated amounts received ups 2005 2004 reported proceeds investing activities see note 2 “discontinued operations mwf” item 8 “financial statements supplementary data” complete description disposition mwf including discussion losses impairment disposal mwf cash payments received ups connection sale mwf estimates critical accounting policies preparation financial statements accordance accounting principles generally accepted us requires management adopt accounting policies make significant judgments estimates many cases alternative policies estimation techniques could used conway maintains process evaluate appropriateness accounting policies estimation techniques including discussion review audit committee board directors independent auditors accounting policies estimates may require adjustment based changing facts circumstances actual results could differ estimates fully discussed note 1 “principal accounting policies” item 8 “financial statements supplementary data” effective fourth quarter 2006 conway retrospectively applied change accounting policy tires capitalizeandamortize method expenseasincurred method policies estimates discussed include critical financial statements employee retirement benefit plans periods presented employees conway subsidiaries us covered several retirement benefit plans including several qualified nonqualified defined benefit pension plans defined contribution retirement plan october 2006 conway’s board directors approved changes conway’s retirement benefits plans intended preserve retirement benefits earned existing employees conway’s primary qualified defined benefit pension plan “primary db plan” primary nonqualified supplemental defined benefit pension plan “supplemental db plan” expanding benefits earned primary defined contribution plan “primary dc plan” new supplemental defined contribution plan “supplemental dc plan” major provisions plan amendments effective january 1 2007 fully discussed note 9 “employee benefit plans” item 8 “financial statements supplementary data” provisions result increased expense related primary dc plan elimination future service cost associated primary db plan supplemental db plan effect plan changes conway’s financial condition results operations cash flows fully discussed “amendments employee retirement benefit plans” defined benefit pension plans amount recognized pension expense accrued pension liability conway’s defined benefit pension plans depend upon number assumptions factors significant discount rate used measure present value pension obligations expected rate return plan assets funded qualified plans conway assesses plan assumptions discount rate expected rate return plan assets significant assumptions continuous basis concludes assumptions actuarial plan measurement date november 30 year conway’s significant assumptions used determining pension expense periods presented 2007 summarized discount rate determining appropriate discount rate conway utilizes bond model incorporates expected cash flows plan obligations bond model uses selected portfolio moody’s aaorbetter rated bonds cash flows maturities approximate projected benefit payments conway’s pension plans conway’s discount rate equal yield portfolio bonds typically exceed moody’s aa corporate bond index due long duration expected benefit payments conway’s plans factors held constant 025 decrease increase discount rate would result estimated 50 million increase decrease cumulative unrecognized actuarial loss related loss credit would amortized futureperiod earnings described return plan assets qualified funded defined benefit pension plans conway adjusts expected rate return plan assets based current market expectations historical returns rate return based expected 20year return current asset allocation effect actively managing plan net fees expenses using yearend plan asset values 025 decrease increase expected rate return plan assets would result estimated 3 million increase decrease 2007 annual pension expense differences expected actual rate return plan assets andor changes discount rate may result cumulative unrecognized actuarial gains losses conway’s defined benefit pension plans unrecognized actuarial losses primarily reflect declining discount rate lower market returns recent years although amounts may recovered future periods actuarial gains portion unrecognized actuarial loss outside corridor amount must amortized recognized expense average service period employees plan amendments effective january 1 2007 result elimination future service cost primary db plan supplemental db plan material service cost recognized conway’s defined benefit pension plans accordingly future effect defined benefit pension plans conway’s operating results consist primarily net effect interest cost plan obligations qualified nonqualified defined benefit pension plans expected return plan assets funded qualified defined benefit pension plans 2007 conway estimates defined benefit pension plans result income 12 million based primarily increase plan assets mostly due plan contributions increase actual rate return plan assets discountrate decline increased plan obligation fully discussed 2007 conway estimates lower benefits expense income related primary db plan supplemental db plan offset whole part higher company contributions primary dc plan conway’s annual defined benefit pension expense 2006 exceeded annual expense 2005 approximately 120 million reflecting increase 113 million related funded qualified defined benefit pension plans higher pension expense 2006 due primarily increases service cost interest cost amortization unrecognized actuarial loss partially offset higher expected return plan assets qualified funded plans higher pension expense 2006 also attributable 16 million curtailment loss recognized connection plan amendments discussed increase service cost 2006 due part effect 2006 revised mortality assumptions increases interest cost due discountrate decline increased plan obligation effective yearend 2005 valuation conway revised mortality assumption plan participants one based 1983 us census data one based 2000 us census data results longerlife assumption plan participants plan asset returns qualified funded plans 2006 exceeded plan assumption return plan assets increased 2005 based plan contributions increased plan assets amortization unrecognized actuarial loss defined benefit pension plans 2006 increased 58 million 2005 based primarily higher unrecognized actuarial loss december 31 2005 effective december 31 2006 conway adopted recognition related disclosure provisions sfas 158 “employers’ accounting defined benefit pension postretirement plans amendment sfas 87 88 106 132r” fully discussed note 9 “employee benefit plans” item 8 “financial statements supplementary data” recognition provisions sfas 158 conway required recognize overfunded underfunded status defined benefit plans asset liability respectively balance sheet december 31 2006 conway’s defined benefit pension plans funded status measured difference projected benefit obligation fair value plan assets transition provisions sfas 158 actuarial gains losses priorservice costs credits yet included net periodic benefit expense adoption date recognized shareholders’ equity components ending balance accumulated comprehensive income loss net tax accordingly sfas 158 gives recognition effect changes funded status plan liability shareholders’ equity compared prior accounting standards sfas 158 result changes recognized periodic benefits expense except certain conditions since retrospective adoption sfas 158 prohibited different recognition provisions applied determining planrelated amounts reported conway’s consolidated balance sheets december 31 2006 2005 prior adoption sfas 158 accounting standards allowed employer recognize balance sheets asset liability almost always different plan’s overfunded underfunded status primarily delaying effect changes plan design actuarial assumptions previous standards employer required recognize additional minimum pension liability adjustment recognize shortfall fair value pension plan assets accumulated benefit obligation rather projected benefit obligation required sfas 158 accordingly underfunded plan planrelated liability reported sfas 158 exceeds amount reported prior accounting standards connection adoption sfas 158 effective december 31 2006 conway increased reported amounts employee benefits liabilities 1553 million reduced shareholders equity 955 million net 611 million deferred tax benefits conway periodically reviews funded status qualified defined benefit pension plans makes contributions time necessary comply funding requirements employee retirement income security act “erisa” determining amount timing pension contributions conway considers erisa gaapbased measurements funded status well tax deductibility contributions conway made contributions 75 million 1265 million defined benefit pension plans 2006 2005 respectively 2007 expects contribute approximately 13 million conway’s estimates defined benefit plan contributions subject variation based changes interest rates asset returns amendments employee retirement benefit plans recent amendments conway’s retirement benefit plans generally expected decrease financial statement effect associated defined benefit pension plans increase financial statement effect associated defined contribution plans although employee participants primary db plan supplemental db plan december 31 2006 retain benefits credited service time earned years credited service capped december 31 2006 future benefit plan payments consider participants’ pay increases 2016 benefit capped 2007 conway estimates lower benefits expense income related primary db plan supplemental db plan offset whole part higher company contributions primary dc plan changes primary db plan supplemental db plan decreased plans’ projected benefit obligation december 31 2006 420 million decline amortized approximately 12 years average estimated remaining years service thereafter related asset liability reported consolidated balance sheets based changes actuarial assumptions primarily discount rate return plan assets described conway’s funding contributions plans addition actuarial gain recognized future periods conway 2006 recognized curtailment loss 16 million immediate recognition net unrecognized priorservice costs conway’s funding practice defined benefit pension plans unchanged conway continue evaluate tax cash position funded status defined benefit pension plans maximize tax deductibility contributions year although conway expects make additional future contributions defined benefit pension plans expects plan changes reduce funding payments primary db plan otherwise would required without plan amendments however conway believes decline funding requirements primary db plan whole part offset higher contributions primary dc plan selfinsurance accruals conway uses combination purchased insurance selfinsurance programs provide costs medical casualty liability vehicular cargo workers’ compensation claims longterm portion selfinsurance accruals relates primarily workers’ compensation vehicular claims expected payable several years conway periodically evaluates level insurance coverage adjusts insurance levels based risk tolerance premium expense measurement classification selfinsured costs requires consideration historical cost experience demographic severity factors judgments current expected levels cost per claim retention levels methods provide estimates undiscounted liability associated claims incurred balance sheet date including claims reported conway believes actuarial methods appropriate measuring highly judgmental selfinsurance accruals however use estimation method sensitive assumptions factors described based magnitude claims length time incurrence claims ultimate settlement accordingly changes assumptions factors materially affect actual costs paid settle claims amounts may different estimates income taxes establishing deferred income tax assets liabilities conway makes judgments interpretations based enacted tax laws published tax guidance applicable operations conway records deferred tax assets liabilities periodically evaluates need valuation allowance reduce deferred tax assets realizable amounts likelihood material change conway’s expected realization assets dependent future taxable income future capital gains ability use tax loss credit carryforwards carrybacks final us foreign tax settlements effectiveness taxplanning strategies various relevant jurisdictions conway also subject examination income tax returns multiple years irs tax authorities conway periodically assesses likelihood adverse outcomes resulting examinations determine adequacy provision related accruals income taxes disposition restructuring estimates fully discussed note 2 “discontinued operations” item 8 “financial statements supplementary data” conway’s management made significant estimates assumptions connection disposition mwf ewa conway forwarding including related asset impairment disposition costs actual results could differ estimates could affect related amounts reported financial statements revenue recognition conway freight transportation generally recognizes revenue upon delivery shipments related costs delivery recognized incurred shipments transit end accounting period conway freight transportation recognizes portion revenue earned balancesheet date recognizes related delivery costs incurred revenuerelated estimates conway freight transportation primarily include related revenue adjustments uncollectible accounts receivable intransit shipments estimated revenue adjustments companies transportation industry pricing assessed conway freight transportation customers may subsequently adjusted due several factors including weight verifications pricing discounts although majority pricing adjustments occur month original pricing portion occurs subsequent periods revenue adjustments estimated based revenue levels historical experience estimated liability revenue adjustments reported accrued liabilities consolidated balance sheets uncollectible accounts receivable conway freight transportation reports accounts receivable net realizable value provides allowance uncollectible accounts collection considered doubtful estimates uncollectible accounts based various judgments assumptions including revenue levels historical loss experience aging outstanding accounts receivable intransit revenue end accounting period conway freight transportation estimates amount revenue earned shipments transit based actual shipments picked customers scheduled day delivery expected completion time delivery menlo worldwide logistics recognizes revenue accordance contractual terms services provided revenuerelated judgments estimates logistics primarily include related determination gross netbasis revenue recognition uncollectible accounts receivable gross netbasis revenue recognition revenue recorded gross basis without deducting thirdparty purchased transportation costs transactions logistics acts principal revenue recorded net basis deducting purchased transportation costs transactions logistics acts agent determining whether revenue reported gross net based assessment whether logistics acting principal agent transaction involves judgment based terms arrangement uncollectible accounts receivable logistics based size nature client base performs periodic evaluation customers’ creditworthiness accounts receivable portfolio recognizes expense uncollectible accounts losses probable reasonably estimable conway believes use revenuerelated estimates judgments provide reasonable approximation actual revenue earned property plant equipment longlived assets accounting property plant equipment conway makes estimates expected useful lives expected residual values assets potential impairment based fair values assets cash flows generated assets depreciation property plant equipment estimated useful lives determination salvage value requires management make judgments future events conway periodically evaluates whether changes estimated useful lives salvage values necessary ensure estimates accurately reflect economic use assets conway’s periodic evaluation may result changes estimated lives andor salvage values used depreciate assets affect amount periodic depreciation expense recognized ultimately gain loss disposal asset result conway’s periodic evaluation useful lives certain classes revenue equipment changed 2006 fully discussed note 1 “principal accounting policies property plant equipment” item 8 “financial statements supplementary data” conway performs impairment analysis longlived assets whenever circumstances indicate carrying amount may recoverable assets held used impairment charge recognized estimated undiscounted cash flows associated asset group assets less carrying value impairment exists charge recognized difference carrying value fair value fair values determined using quoted market values discounted cash flows external appraisals applicable assets held disposal carried lower carrying value estimated net realizable value forwardlooking statements certain statements included herein constitute “forwardlooking statements” within meaning section 21e securities exchange act 1934 amended subject number risks uncertainties relied upon predictions future events statements historical fact forwardlooking statements including • projections earnings revenues weight yield volumes income financial operating items • statements plans strategies expectations objectives conway’s management future operations future items • statements concerning proposed new products services • statements regarding conway’s estimated future contributions pension plans • statements adequacy reserves • statements regarding outcome claims may brought conway cfc’s multiemployer pension plans statements regarding future economic conditions performance • statements regarding outcome legal claims proceedings conway statements estimates belief statements assumptions underlying foregoing certain forwardlooking statements identified use forwardlooking terminology “believes” “expects” “may” “will” “should” “seeks” “approximately” “intends” “plans” “estimates” “anticipates” negative terms variations terms comparable terminology discussions strategy plans intentions forwardlooking statements necessarily dependent assumptions data methods may incorrect imprecise assurance realized regard following factors among others addition matters discussed elsewhere document reports documents filed conway securities exchange commission could cause actual results matters differ materially discussed forwardlooking statements • changes general business economic conditions including global economy • creditworthiness conway’s customers ability pay services rendered • increasing competition pricing pressure • availability fuel changes fuel prices fuel surcharges • effects cessation ewa’s air carrier operations • possibility conway may time required record impairment charges longlived assets • possibility defaults conway’s 400 million credit agreement debt instruments possibility conway may required repay certain indebtedness event ratings assigned longterm senior debt credit rating agencies reduced • labor matters including grievances furloughed ewa pilots crew members labor organizing activities work stoppages strikes • enforcement changes governmental regulations including effects new regulations issued department homeland security • environmental tax matters • matters relating conway’s 1996 spinoff cfc including possibility cfc’s multiemployer pension plans may assert claims conway may prevail proceedings conway may financial resources necessary satisfy amounts payable plans • matters relating sale mwf including conway’s obligation indemnify ups certain losses connection sale • matters relating conway’s defined benefit contribution pension plans result foregoing assurance given future financial condition results operations cash flows see note 11 “commitments contingencies” item 8 “financial statements supplementary data” item 7aitem 7 management’s discussion analysis financial condition results operations introduction management’s discussion analysis financial condition results operations referred “management’s discussion analysis” intended assist historical prospective understanding conway’s financial condition results operations cash flows including discussion analysis following • overview business • results operations • liquidity capital resources • critical accounting policies estimates • forwardlooking statements overview business conway provides transportation logistics supplychain management services wide range manufacturing industrial retail customers conway’s principal business units operate regional transcontinental lessthantruckload fulltruckload freight transportation contract logistics supplychain management truckload brokerage trailer manufacturing financial reporting purposes conway divided five reporting segments freight logistics truckload vector conway’s primary businessunit results generally depend number weight distance shipments transported prices received shipments services mix services provided customers well fixed variable costs incurred conway providing services ability manage costs changing circumstances conway freight transports shipments utilizing network freight service centers combined fleet companyoperated linehaul pickupanddelivery tractors trailers cfi conway truckload transport shipments using fleet longhaul tractors trailers menlo logistics manages logistics functions customers primarily utilizes thirdparty transportation providers movement customer shipments results operations overview provides highlevel summary conway’s results continuing operations periods presented intended provide context remainder discussion reporting segments refer “reporting segment review” complete detailed discussion analysis continuing operations overview2007 compared 2006 conway’s consolidated revenue 44 billion 2007 increased 39 42 billion 2006 due primarily acquisition cfi august 23 2007 18 increase freight partially offset 43 decline logistics excluding acquisition cfi conway’s 2007 revenues essentially flat compared 2006 revenues freight segment 2007 reflect increases conway freight offset declines due sale expeditedshipping portion former conway expedite brokerage business july 2006 transfer remaining truckloadbrokerage operations conway freight menlo logistics january 2007 lower revenues logistics reflect decline revenue carriermanagement services partially offset increase revenue warehousemanagement services 2007 conway’s consolidated operating income decreased 342 due largely lower operating income freight reporting segment vector operating income freight decreased 268 due primarily highervolume loweryield mix revenue higher employee costs lower operating income vector reflects sale recognized december 2006 fully discussed note 5 “sale unconsolidated joint venture” item 8 “financial statements supplementary data” 2007 operating income included 27 million loss writeoff receivable related vector sale 2006 operating income vector 526 million including 410 million gain sale conway’s membership interest vector connection rebranding initiative conway 2007 recognized expense 143 million compared 17 million 2006 conway’s rebranding initiative announced april 2006 conway recognized expense 160 million estimates recognize additional rebranding expenses 10 million 2008 2 million 2009 total estimated expenses 28 million rebranding initiative consist primarily costs convert conway freight’s tractors trailers new conway graphic identity estimated rebranding expenses 2008 2009 include 4 million conversion cfi trailers conway truckload brand fully discussed note 3 “restructuring activities” item 8 “financial statements supplementary data” 2007 conway incurred 147 million expenses related reorganization initiative conway freight closure conway truckload general office following acquisition cfi nonoperating expense increased 123 million 2007 due primarily 86 million increase interest expense 58 million decline investment income partially offset 17 million increase foreign exchange gains variations interest expense interest income due part acquisition cfi august 23 2007 financed existing cash resources proceeds new debt financing conway’s effective tax rate 2007 366 compared 306 2006 tax provision 2006 benefited utilization capitalloss carryforwards offset tax 29 million sale conway expedite 148 million sale conway’s membership interest vector addition conway’s effective tax rate 2006 reflects effect 121 million net tax credits primarily related settlement irs previous tax filings conway’s net income continuing operations available common shareholders 2007 decreased 446 reflecting lower operating income higher nonoperating expense increase effective tax rate period conway’s diluted earnings per share continuing operations decreased 399 lower net income partially offset accretive effect conway’s share repurchase program concluded june 29 2007 primarily result share repurchases conways average diluted shares outstanding declined 483 million shares 2007 523 million shares 2006 overview2006 compared 2005 2006 conway’s revenue increased 26 42 billion due primarily higher revenue freight logistics revenue freight increased 33 reflects conway freight’s pricing initiatives emphasized higher yields grew 44 focus yield adversely affected tonnage market slowing demand freight transportation resulting weightperday decline 05 revenue logistics increased 12 due primarily growth warehousemanagement services consolidated operating income 2006 increased 83 2005 due gains 473 million related sale conway’s membership interest vector sale conway expedite excluding gains consolidated operating income declined 44 due largely lower operating income freight vector lesser extent truckload logistics consolidated operating income 2006 adversely affected decline costs reimbursed ups transitionservices agreement following sale mwf ups portion conway’s corporate administrative costs 2005 charged ups transitionservices agreement 2005 conway reimbursed ups 113 million costs reimbursed ups 2006 also 2006 conway began recognizing expense related employee stockoption awards 2006 conway recognized additional sharebased compensation expense 58 million connection adoption sfas 123r effective january 1 2006 nonoperating expense 2006 decreased 91 million due primarily reduction interest expense increase investment income foreign exchange gains interest expense decreased 33 million 2006 due largely 1000 million repayment june 2005 735 notes investment income increased 21 million higher interest rates earned cashequivalent investments marketable securities partially offset lower average balances interestearning financial instruments 2006 nonoperating expense reflects positive variations foreign exchange transactions improved comparative operating results 33 million conway’s effective tax rate 306 2006 declined 346 2005 tax provision 2006 benefited utilization capitalloss carryforwards effect net tax credits discussed conway’s effective tax rate 2005 reflects effect 78 million net tax credits primarily related settlement irs previous tax filings 2006 conway’s net income continuing operations available common shareholders increased 191 reflecting increased operating income lower nonoperating expense decrease effective tax rate period conway’s diluted earnings per share continuing operations increased 279 due higher net income accretive effect conway’s share repurchase program primarily result share repurchases conways average diluted shares outstanding declined 523 million shares 2006 562 million shares 2005 reporting segment review freight table compares operating results operating margins percentage change selected operating statistics freight reporting segment years ended december 31 2007 compared 2006 2007 freight’s revenue increased 18 reflecting increases conway freight offset declines due sale expeditedshipping portion former conway expedite brokerage business july 2006 transfer remaining truckloadbrokerage operations conway freight menlo logistics january 2007 revenue per day conway freight increased 28 33 increase weight per day partially offset 05 decline yield 33 increase weight per day achieved 45 increase shipments per day partially offset 12 decline weight per shipment increase weight per day volume freight transported achieved despite increasingly pricesensitive competitive freight market due part targeted sales initiatives contributed improvement growth trends weight transported weight per day increased 51 61 third fourth quarter 2007 respectively compared prioryear periods comparative periods yields declined 28 third quarter increased 34 fourth quarter yields declined 2007 due primarily lower pricing associated new business generated conway’s sales initiatives increasingly pricesensitive competitive freight market required defensive pricing certain customer relationships partially offset effect higher fuelsurcharge revenue excluding fuel surcharges yields 2007 decreased 12 2007 conway’s recent sales initiatives contributed increased business levels large customers typically command lower rates higher quantity freight like ltl carriers conway freight assesses many customers fuel surcharge fuel surcharge intended compensate conway freight adverse effects higher fuel costs fuelrelated increases purchased transportation fuel surcharges one part conway freight’s overall rate structure total price conway freight receives customers services governed market forces fully discussed item 1a “risk factors” 2007 conway freight’s fuelsurcharge revenue increased 135 ltl revenue 129 2006 freight’s operating income 2007 decreased 268 due primarily highervolume loweryield mix revenue required increased freight handling due largely change mix revenue employee costs 2007 increased 67 period 2006 base compensation rose 71 reflecting additional freighthandling requirements wage salary rate increases increase driver count period response increases actual anticipated freight volumes higher base compensation also includes employeeseparation costs incurred connection conway freight’s operational restructuring fully discussed employee benefits expense increased 51 2007 due primarily increased costs compensated absences due part conversion sickpay benefit paidtimeoff benefit included 104 million nonrecurring expense first year plan incentive compensation increased 100 million 314 based variations revenue operating income cargo loss damage claims relative incentiveplan targets 2007 expenses fuel oil fuel taxes increased 102 2006 due higher average diesel fuel prices increases driver miles comparative periods purchased transportation expense decreased 58 due lower transportation requirements following sale expeditedshipping portion former conway expedite brokerage business transfer remaining truckloadbrokerage operations menlo logistics offset increases conway freight operating income also negatively affected increases vehicular selfinsurance expense costs incurred conway’s rebranding initiative operational restructuring combined three regional operating companies one centralized operation vehicular selfinsurance expense increased 242 2007 due primarily 80 million loss related significant claim second quarter 2007 conway’s rebranding initiative announced april 2006 conway freight incurred 143 million costs 2007 compared 05 million 2006 rebranding costs 2007 expenses related primarily conversion tractors trailers new conway graphic identity new uniforms fully discussed note 3 “restructuring activities” item 8 “financial statements supplementary data” conway freight incurred 132 million expense related operational restructuring announced august 2007 comparative operating results freight segment reflect sale expeditedshipping portion former conway expedite brokerage business july 2006 connection sale conway recognized 62 million gain 2006 compared 2005 2006 freight’s revenue rose 33 due revenue increases conway freight partially offset declines due sale july 2006 expeditedshipping portion former conway expedite brokerage business revenue per day conway freight grew 39 44 increase yield 05 decrease weight per day yield weight per day affected conway freight’s pricing initiatives emphasized higher yields yield focus adversely affected tonnage market slowing demand freight transportation particularly third fourth quarter 2006 excluding fuel surcharges yields 2006 increased 20 2006 conway freight’s fuelsurcharge revenue increased 129 ltl revenue 108 2005 operating income freight reporting segment 2006 decreased 20 2005 excluding 62 million gain recognized connection sale conway expedite operating income freight reporting segment declined 39 compared prioryear period operating income 2006 adversely affected higher depreciation maintenance selfinsurance costs depreciation expense increased 104 2006 due planned investments service centers tractor trailer acquisitions maintenance costs increased 68 due technology requirements relating repair maintenance newer equipment costs related maintaining trailers longer estimated useful life operating costs include costs cargo claims vehicular insurance increased 80 2006 37 million increase advertising expense reflects customerfocused advertising employeefocused events portion support conway’s rebranding initiative expenses fuel oil fuel taxes increased 116 2006 adversely affected increase average diesel fuel prices employee costs increased 14 declined percentage revenue increased costs healthcare pension benefits partially offset lower incentive compensation declined 196 million based variations operating income performance measures relative incentive plan targets logistics table compares operating results operating margins logistics reporting segment table summarizes menlo logistics’ revenues well net revenues less purchased transportation expenses carriermanagement revenue attributable contracts menlo logistics manages transportation freight subcontracts actual transportation delivery products third parties menlo logistics refers purchased transportation menlo logistics’ management places emphasis net revenues meaningful measure relative importance principal services since revenues earned carriermanagement services include thirdparty carriers’ charges menlo logistics transporting shipments 2007 compared 2006 logistics’ revenue 2007 decreased 43 due 98 decrease carriermanagement services partially offset 118 increase warehousemanagement services logistics’ net revenue 2007 increased 136 reflects increases net revenue warehousemanagement carriermanagement services 2007 purchased transportation costs decreased 116 due primarily decreases carriermanagement volumes lower carrier rates logistics’ operating income 2007 essentially flat higher net revenue carriermanagement warehousemanagement services almost equally offset increases employee costs allocated corporate costs higher expenses rent selfinsurance employee costs increased 165 2007 reflecting increases base compensation employee benefits base compensation rose 142 due primarily growth headcount lesser extent wage salary rate increases employee benefits expense increased 254 due principally higher healthcare benefits affected large firstquarter claim increased employee benefits expenses also reflect higher costs retirement benefits corporate administrative costs allocated logistics segment 2007 increased 115 million due primarily allocation costs associated corporate informationtechnology personnel retained conway following sale vector gm december 2006 associated costs employees allocated vector prior sale allocated logistics subsequent sale retained employees utilized providing informationtechnology services gm logistics compensated fully discussed note 5 “sale unconsolidated joint venture” item 8 “financial statements supplementary data” retained employees also utilized provide services menlo logistics’ informationtechnology initiatives rent expense increased 180 2007 result warehouse customer space requirements facilities expansion existing customers well rent expense related acquisitions operating costs including costs cargo claims vehicular insurance increased 155 due primarily claims incurred fourth quarter 2007 addition 2007 operating income reflects decline costs incurred department defense contractbid process fully discussed costs incurred connection contract decreased 02 million 2007 13 million 2006 august 2007 conclusion lengthy preparation selection process department defense “dod” selected mwlgs primary contractor defense transportation coordination initiative “dtci” logistics program directed dod streamline improve domestic transportation distribution operations contract menlo logistics responsible deploying operating integrated logistics solution shipment planning shipment execution overall transportation management dod shipments moving among dod facilities contiguous united states contract potential sevenyear life threeyear base period estimated 525 million transportation expenditures implementation initiative expected rolled three phases 25month period delayed briefly protest filed competitor however protest subsequently withdrawn october 2007 conway determined revenue contract reported net basis deducting purchased transportation costs contract material effect logistics’ revenue operating income 2007 fully discussed note 2 “acquisitions” item 8 “financial statements supplementary data” mw acquired cougar logistics september 5 2007 october 18 2007 acquired chic logistics acquisitions material effect logistics’ revenues operating income periods presented 2006 compared 2005 logistics’ revenue 2006 increased 12 due 45 increase warehousemanagement services 03 increase carriermanagement services growth carriermanagement revenue slowed management’s decision terminate may 2006 lowmargin carriermanagement contract accounted 29 logistics’ annual segment revenues 2005 net revenue 2006 increased 68 due 12 increase revenue 09 reduction purchased transportation expense logistics’ operating income 2006 decreased 38 period last year due primarily higher employee costs purchased labor collectively increased 120 2006 employee costs increased 92 reflect increases base compensation employee benefits incentive compensation base compensation 2006 increased 58 due primarily growth headcount wage salary rate increases employee benefits expense increased 162 primarily increase cost healthcare benefits employee benefit costs incentive compensation 2006 increased 26 million 400 based variations operating income working capital performance measures relative incentive plan targets purchased labor costs increased 200 due new warehousemanagement projects expenses supplies increased 398 reflecting volume increases related certain warehousemanagement customers expenses outside services increased 141 due primarily 13 million costs related bid dtci contract described truckload following acquisition cfi operating results cfi reported operating results conway truckload business unit truckload reporting segment accordingly truckload reporting segment includes results conway truckload business unit periods presented includes operating results cfi august 23 2007 december 31 2007 increased revenue truckload reporting segment substantially due acquisition cfi periods presented segment revenue reported elimination revenue recognized truckload services provided cfi conway truckload conway freight menlo logistics accordingly cfi revenue 2007 reported net 403 million intersegment revenue conway truckload revenue reported net intersegment revenue 467 million 2007 711 million 2006 318 million 2005 operating results truckload segment also reflect acquisition cfi subsequent acquisition august 23 2007 cfi reported operating income 188 million 2007 operating income cfi partially offset losses reported conway truckload due part lower operating results following conway’s announcement cfi acquisition july 13 2007 15 million thirdquarter costs incurred integration conway truckload business unit cfi business unit fully discussed note 3 “restructuring activities” item 8 “financial statements supplementary data” acquisition cfi fully discussed note 2 “acquisitions” item 8 “financial statements supplementary data” vector december 2006 conway recognized sale gm conway’s membership interest vector sale vector qualify discontinued operation due classification equitymethod investment accordingly vector’s income losses reported net income continuing operations 2007 segment results reported conway’s equity investment vector included 27 million loss compared income 526 million 2006 161 million 2005 2007 loss due writeoff receivable related vector sale 2006 operating income vector included 410 million gain sale conway’s membership interest vector’s operating results conway’s sale membership interest vector fully discussed note 5 “sale unconsolidated joint venture” item 8 “financial statements supplementary data” reporting segment consists operating results road systems trailer manufacturer certain corporate activities related income expense allocated reporting segments operating losses related corporate properties 2007 reflect increased expenses environmental remediation unused corporate properties table summarizes operating results reporting segment years ended december 31 discontinued operations net income available common shareholders periods presented includes results discontinued operations related closure conway forwarding sale mwf shutdown ewa terminated priority mail contract usps spinoff cfc fully discussed note 4 “discontinued operations” item 8 “financial statements supplementary data” table summarizes results discontinued operations years ended december 31 liquidity capital resources cash equivalents declined 1763 million december 31 2007 2600 million december 31 2006 7572 million used investing activities exceeded 3739 million provided operating activities 2952 million provided financing activities cash used investing activities primarily reflects 8398 million used acquisitions cfi cougar logistics chic logistics cash provided financing activities primarily reflects proceeds received issuance 725 senior notes conway’s cash flows summarized table 1 “noncash adjustments” refer depreciation amortization deferred income taxes provision uncollectible accounts loss income equitymethod investment noncash income expenses continuing operations operating activities cash flow operating activities 2007 3739 million 598 million decrease 2006 due decrease net income noncash items net use cash due changes assets liabilities primarily receivables 2007 receivables used 58 million compared 864 million provided 2006 significant cash provided receivables 2006 primarily related logistics’ receivables declined preceding year due decrease average collection period cash provided income taxes increased 234 million 2007 148 million prioryear period due primarily tax refunds received march 2007 use cash decline employee benefit liabilities years presented reflects net effect defined benefit pension plan funding contributions 127 million 2007 750 million 2006 1265 million 2005 partially offset expense accruals related conway’s benefit plans benefit plan amendments effective january 1 2007 increase obligation conway’s defined contribution retirement plan largely offset decline obligation related conway’s defined benefit pension plans fully discussed note 11 “employee benefit plans” item 8 “financial statements supplementary data” 2007 deferred charges credits used cash 24 million compared 122 million provided 2006 primarily due sale conway’s membership interest vector 2006 cash provided deferred charges credits reflects variations conway’s affiliate payable vector cash flow operating activities 2006 4337 million 2124 million increase 2005 due increase net income noncash items cash provided changes assets liabilities primarily receivables 2006 receivables provided 864 million primarily due improvement average collection period logistics’ receivables 2005 receivables used 1242 million higher revenue increase average collection period logistics’ receivables due part longer customernegotiated payment terms processing delays decline accrued incentive compensation used 44 million 2006 2005 used 200 million 2006 2005 expense accruals incentive compensation 500 million 683 million respectively incentive compensation payments periods 544 million 883 million respectively 2006 2005 cash provided deferred charges credits reflects fluctuations conway’s affiliate payable vector investing activities investing activities used cash 7572 million 2007 compared 2742 million used 2006 due primarily 7523 million used purchase cfi 286 million used purchase cougar logistics 590 million used purchase chic logistics fully discussed note 2 “acquisitions” item 8 “financial statements supplementary data” acquisitionrelated investing activities 2007 partially offset decline capital expenditures proceeds received 2007 sale conway’s membership interest vector increase cash provided conversion marketable securities increase proceeds sale properties equipment capital expenditures 2007 decreased 1598 million 2006 due primarily fewer tractor trailer expenditures freight truckload segments capital expenditures 2006 increased 877 million 2005 due primarily aboveaverage number tractors acquired advance new governmental emission standards proceeds sale businesses 519 million 2007 compared 80 million 2006 2007 conway received 519 million proceeds sale conway’s membership interest vector period 2006 includes 80 million proceeds received sale expeditedshipping portion former conway expedite brokerage business 2005 conway received payments 1084 million connection sale mwf ups periods presented investing activities reflect fluctuations shortterm marketable securities cash provided changes marketable securities increased 1367 million 2007 primarily due conversion august 2007 marketable securities partially fund acquisition cfi investments marketable securities 2005 provided 2840 million primarily due conversion auctionrate securities cash equivalents december 31 2007 marketable securities included 200 million auctionrate securities subsequently sold january 2008 fully discussed note 1 “principal accounting policies” item 8 “financial statements supplementary data” proceeds sale properties equipment 278 million 2007 81 million 2006 55 million 2005 increase 2007 due primarily sale tractors trailers truckload segment reflects shorter service life equipment utilized cfi financing activities financing activities provided cash 2952 million 2007 used 3785 million 2006 august 2007 conway entered bridgeloan facility borrowed 425 million partially fund acquisition cfi december 2007 conway issued 425 million 725 senior notes due 2018 used net proceeds cash hand repay amounts outstanding bridgeloan facility common stock repurchases 899 million 2007 3502 million 2006 1491 million 2005 made repurchase programs authorized conway’s board directors additional repurchases made programs significant increase stock repurchases 2006 attributable repurchase may 2006 375 million shares two significant privately negotiated transactions financing activities 2005 reflect repayment maturity june 1 100 million 735 notes financing activities periods presented also reflect proceeds exercise stock options dividend payments scheduled principal payments notes related conway’s defined contribution retirement plan conway 400 million revolving credit facility matures september 30 2011 revolving credit facility available cash borrowings issuance letters credit 400 million december 31 2007 borrowings outstanding conway’s revolving credit facility however 2133 million letters credit outstanding 1867 million available capacity additional letters credit cash borrowings conway uncommitted unsecured credit facilities totaling 480 million december 31 2007 available support letters credit bank guarantees overdraft facilities date total 166 million outstanding facilities connection mw’s acquisition cougar logistics mw assumed shortterm borrowings outstanding unsecured credit facilities december 31 2007 48 million shortterm borrowings 77 million bank guarantees letters credit overdraft facilities outstanding leaving 122 million available capacity see note 7 “debt financing arrangements” item 8 “financial statements supplementary data” additional information concerning conway’s 400 million credit facility debt instruments contractual cash obligations table summarizes contractual cash obligations conway december 31 2007 amounts table based management’s estimates assumptions obligations including duration possibility renewal factors estimates assumptions actual future payments may vary reflected table certain liabilities including related selfinsurance accruals reported conway’s consolidated balance sheets reflected table due absence stated due dates presented contractual obligations longterm debt guarantees represent principal interest payments amounts representing principal portion interest payable 2008 reported consolidated balance sheets contractual obligations operating leases represent payments lease arrangements accordance accounting principles generally accepted us “gaap” future operating lease payments included conway’s consolidated balance sheets december 31 2007 conway entered purchase commitments acquire 754 million revenue equipment delivery 2008 addition conway entered fuel purchase commitments certain diesel fuel vendors commitments conway agreed purchase market prices specified volume fuel delivered ratably contract period expires july 2008 conway estimates purchase approximately 702 million diesel fuel commitments represent portion conway’s fuel needs contract period employee benefit plan payments table represent estimated payments conway’s nonqualified defined benefit pension plans postretirement medical plan december 31 2017 expected benefit payments conway’s qualified defined benefit pension plans included table plans funded currently conway expect contribute qualified defined benefit pension plans 2008 however could change based changes interest rates asset returns 2008 conway anticipates capital software expenditures approximately 300 million primarily acquisition additional tractor trailer equipment land development new existing facilities conway’s actual 2008 capital expenditures may differ estimated amount depending factors availability timing delivery equipment availability land desired locations new facilities timing obtaining permits environmental studies approvals necessary development new existing facilities except purchase commitments described planned expenditures represent contractual obligations december 31 2007 contractual obligations reported exclude conway’s liability 152 million unrecognized tax benefits next 12 months reasonably possible total unrecognized tax benefits decrease range 10 13 million due settlement agreements conway expects reach various states described “financing activities” letters credit 2133 million outstanding december 31 2007 letters credit generally required selfinsurance programs represent additional liabilities underlying selfinsurance accruals already included conway’s consolidated balance sheets discussion see note 7 “debt financing arrangements” note 8 “leases” note 9 “income taxes” item 8 “financial statements supplementary data” december 31 2007 conway’s senior unsecured debt rated investment grade standard poor’s bbb fitch ratings bbb moody’s baa3 conway believes working capital requirements capital expenditure plans 2008 adequately met various sources liquidity capital including conway’s cash equivalents marketable securities cash flow operations credit facilities access capital markets discontinued operations discontinued operations periods presented relate closure conway forwarding sale mwf shutdown ewa terminated priority mail contract usps spin cfc except described cash flows discontinued operations segregated continuing operations reported separately discontinued operations fully discussed “continuing operations investing activities” salesrelated amounts received ups 2005 reported proceeds investing activities see note 4 “discontinued operationsmwf” item 8 “financial statements supplementary data” description sale mwf including discussion cash payments received ups critical accounting policies estimates preparation financial statements accordance accounting principles generally accepted us requires management adopt accounting policies make significant judgments estimates many cases alternative policies estimation techniques could used conway maintains process evaluate appropriateness accounting policies estimation techniques including discussion review audit committee board directors independent auditors accounting policies estimates may require adjustment based changing facts circumstances actual results could differ estimates conway believes accounting policies judgmental material financial statements related following • defined benefit pension plans • selfinsurance accruals • income taxes • revenue recognition • property plant equipment longlived assets • acquisitions • disposition restructuring activities defined benefit pension plans periods presented employees conway subsidiaries us covered several retirement benefit plans including several qualified nonqualified defined benefit pension plans defined contribution retirement plans october 2006 conway’s board directors approved changes conway’s retirement benefits plans intended preserve retirement benefits earned existing employees conway’s primary qualified defined benefit pension plan “primary db plan” primary nonqualified supplemental defined benefit pension plan “supplemental db plan” expanding benefits earned primary defined contribution plan “primary dc plan” new supplemental defined contribution plan “supplemental dc plan” major provisions plan amendments effective january 1 2007 fully discussed note 11 “employee benefit plans” item 8 “financial statements supplementary data” beginning 2007 provisions increase expense related primary dc plan eliminate future service cost associated primary db plan supplemental db plan significant assumptions amount recognized pension expense accrued pension liability conway’s defined benefit pension plans depend upon number assumptions factors significant discount rate used measure present value pension obligations expected rate return plan assets funded qualified plans conway assesses plan assumptions discount rate expected rate return plan assets significant assumptions periodic basis concludes assumptions actuarial plan measurement date conway’s significant assumptions used determining pension expense periods presented 2008 summarized discount rate determining appropriate discount rate conway assisted actuaries calculate yield theoretical portfolio highgrade corporate bonds rated aa better moody’s rating service cash flows match conway’s expected benefit payments future years conway’s discount rate equal yield portfolio bonds typically exceed moody’s aa corporate bond index due long duration expected benefit payments conway’s plans factors held constant 025 decrease increase discount rate would result estimated 44 million increase decrease cumulative unrecognized actuarial loss december 31 2007 related loss credit would amortized futureperiod earnings described rate return plan assets qualified funded defined benefit pension plans conway adjusts expected rate return plan assets based current market expectations historical returns rate return based expected 20year return current asset allocation effect actively managing plan net fees expenses using yearend plan asset values 025 decrease increase expected rate return plan assets would result estimated 3 million decrease increase 2008 annual pension income actuarial gains losses differences expected actual rate return plan assets andor changes discount rate may result cumulative unrecognized actuarial gains losses conway’s defined benefit pension plans unrecognized actuarial losses december 31 2007 532 million compared unrecognized actuarial losses december 31 2006 1960 million decline amounts primarily reflects increase discount rate december 31 2007 portion unrecognized actuarial gain loss outside corridor amount must amortized recognized income average service period employees adoption sfas 158 effective january 1 2007 conway adopted measurementdate provisions sfas 158 “employers’ accounting defined benefit pension postretirement plans amendment sfas 87 88 106 132r” fully discussed note 11 “employee benefit plans” item 8 “financial statements supplementary data” measurementdate provisions sfas 158 require employers measure plan assets obligations end fiscal year accordingly conway changed measurement date december 31 november 30 defined benefit pension plans transition provisions sfas 158 conway recognized 213 million decrease planrelated liabilities 83 million decline related deferred tax assets 130 million increase shareholders’ equity beginningofperiod increase shareholders’ equity consisted 26 million decline retained earnings recognize service cost december 2006 156 million decline accumulated comprehensive loss recognize effect increase planrelated discount rate effect adoption sfas 158’s measurementdate provisions conway’s financial statements 2007 primarily result increase discount rate used measure planrelated obligations 595 december 31 2006 585 november 30 2006 increase discount rate reduced conway’s estimated plan obligation described also increased annual pension income 2007 77 million effect operating results plan amendments effective january 1 2007 resulted elimination substantially future service cost primary db plan supplemental db plan material service cost recognized conway’s defined benefit pension plans accordingly postamendment effect defined benefit pension plans conway’s operating results consist primarily net effect interest cost plan obligations qualified nonqualified defined benefit pension plans expected return plan assets funded qualified defined benefit pension plans 2008 conway estimates defined benefit pension plans result annual income 247 million based primarily expected return plan assets exceeds interest cost plan obligations also 2008 conway estimates amendmentrelated elimination service cost primary db plan supplemental db plan offset whole part higher company contributions primary dc plan defined benefit pension plans conway recognized annual income 248 million 2007 compared annual expense 661 million 2006 primarily reflects decline service cost result amendments funding conway periodically reviews funded status qualified defined benefit pension plans makes contributions time necessary comply funding requirements employee retirement income security act “erisa” determining amount timing pension contributions conway considers erisa gaapbased measurements funded status well tax deductibility contributions conway made contributions 127 million 750 million defined benefit pension plans 2007 2006 respectively 2008 expect make contributions conway’s estimates defined benefit plan contributions subject variation based changes interest rates asset returns conway’s funding practice defined benefit pension plans unchanged recent plan amendments conway expects make additional future contributions defined benefit pension plans needed expects plan changes reduce funding primary db plan otherwise would required without plan amendments however con way believes decline funding requirements primary db plan whole part offset higher contributions primary dc plan selfinsurance accruals conway uses combination purchased insurance selfinsurance programs provide costs medical casualty liability vehicular cargo workers’ compensation claims longterm portion selfinsurance accruals relates primarily workers’ compensation vehicular claims expected payable several years conway periodically evaluates level insurance coverage adjusts insurance levels based risk tolerance premium expense measurement classification selfinsured costs requires consideration historical cost experience demographic severity factors judgments current expected levels cost per claim retention levels methods provide estimates undiscounted liability associated claims incurred balance sheet date including claims reported conway believes actuarial methods appropriate measuring highly judgmental selfinsurance accruals however use estimation method sensitive assumptions factors described based magnitude claims length time incurrence claims ultimate settlement accordingly changes assumptions factors materially affect actual costs paid settle claims amounts may different estimates income taxes establishing deferred income tax assets liabilities conway makes judgments interpretations based enacted tax laws published tax guidance applicable operations conway records deferred tax assets liabilities periodically evaluates need valuation allowance reduce deferred tax assets realizable amounts likelihood material change conway’s expected realization assets dependent future taxable income future capital gains ability use tax loss credit carryforwards carrybacks final us foreign tax settlements effectiveness taxplanning strategies various relevant jurisdictions effective january 1 2007 conway adopted provisions fin 48 “accounting uncertainty income taxes” fully discussed note 9 “income taxes” item 8 “financial statements supplementary data” conway assesses income tax positions records tax benefits years subject examination based upon management’s evaluation facts circumstances information available reporting date positions likely tax benefit sustained conway recorded largest amount tax benefit greaterthan50percent likelihood realized upon ultimate settlement taxing authority full knowledge relevant information income tax positions likely tax benefit sustained tax benefit recognized financial statements revenue recognition conway freight allocates revenue reporting periods based relative transit time period recognizes expense incurred business units truckload segment recognize revenue related direct costs shipment delivered conway’s business unit logistics segment recognizes revenue accordance contractual terms services provided critical revenuerelated policies estimates conway’s business units freight truckload segments include related revenue adjustments uncollectible accounts receivable intransit shipments critical revenuerelated policies estimates logistics segment include related uncollectible accounts receivable gross netbasis revenue recognition conway believes revenue recognition policies appropriate use revenuerelated estimates judgments provide reasonable approximation actual revenue earned estimated revenue adjustments generally pricing assessed companies transportation industry subject subsequent adjustment due several factors including weight freight classification verifications pricing discounts revenue adjustments estimated based revenue levels historical experience uncollectible accounts receivable conway’s business units freight truckload segments report accounts receivable net realizable value provide allowance uncollectible accounts collection considered doubtful estimates uncollectible accounts based various judgments assumptions including revenue levels historical loss experience aging outstanding accounts receivable logistics segment based size nature client base performs periodic evaluation customers’ creditworthiness accounts receivable portfolio recognizes expense uncollectible accounts losses probable reasonably estimable intransit revenue end accounting period conway freight estimates amount revenue earned shipments transit based actual shipments picked customers scheduled day delivery expected completion time delivery gross netbasis revenue recognition revenue logistics segment recorded gross basis without deducting thirdparty purchased transportation costs transactions logistics acts principal revenue recorded net basis deducting purchased transportation costs transactions acts agent determining whether revenue reported gross net basis based assessment whether logistics acting principal agent transaction involves judgment based terms arrangement property plant equipment longlived assets accounting property plant equipment conway makes estimates expected useful lives expected residual values assets potential impairment based fair values assets cash flows generated assets depreciation property plant equipment estimated useful lives determination salvage value require management make judgments future events conway periodically evaluates whether changes estimated useful lives salvage values necessary ensure estimates accurately reflect economic use assets conway’s periodic evaluation may result changes estimated lives andor salvage values used depreciate assets affect amount periodic depreciation expense recognized ultimately gain loss disposal asset conway performs impairment analysis longlived assets whenever circumstances indicate carrying amount may recoverable assets held used impairment charge recognized estimated undiscounted cash flows associated asset group assets less carrying value impairment exists charge recognized difference carrying value fair value fair values determined using quoted market values discounted cash flows external appraisals applicable assets held disposal carried lower carrying value estimated net realizable value acquisitions conway’s accounting acquisitions requires various judgments estimates including limited purchasemethod accounting estimates related fair value assets acquired liabilities assumed estimated useful lives acquired property equipment internaluse software identifiable intangible assets estimates fair value assets acquired based various valuation techniques marketbased approach applied acquired property equipment cost incomebased approach applied identifiable intangible assets costbased approach applied internaluse software generally assets acquired liabilities assumed recorded carrying value approximates fair value excess acquired entity’s purchase price amounts assigned assets acquired including identified intangible assets liabilities assumed recorded goodwill amortized tested impairment annual basis frequently events changes circumstances indicate asset might impaired assessment requires comparison fair value reporting unit carrying value net assets including allocated goodwill carrying value reporting unit exceeds fair value conway must compare implied fair value reportingunit goodwill carrying amount goodwill carrying amount reportingunit goodwill exceeds implied fair value goodwill impairment loss recognized amount equal excess amounts conway recorded goodwill identifiable intangible assets represent fair values primarily determined incomebased valuation approach estimates assumptions used initial valuation goodwill identifiable intangible assets include limited future expected cash flows sales customer contracts trademarks growth opportunities retention key employees integration costs estimates assumptions may incomplete inaccurate unanticipated events circumstances may occur estimates assumptions used initially value goodwill identifiable intangible assets prove inaccurate ongoing reviews carrying values goodwill intangible assets discussed may result impairment loss period conway identifies impairment changes assumptions estimates related acquisitions could material effect conway’s financial condition results operations disposition restructuring estimates fully discussed note 4 “discontinued operations” note 3 “restructuring activities” item 8 “financial statements supplementary data” conway’s management made significant estimates assumptions connection disposition mwf ewa conway forwarding restructuring business units freight truckload reporting segments actual results could differ estimates could affect related amounts reported financial statements new accounting standards refer note 1 “principal accounting policies” item 8 “financial statements supplementary data” discussion recently issued accounting standards conway yet adopted forwardlooking statements certain statements included herein constitute “forwardlooking statements” within meaning section 21e securities exchange act 1934 amended subject number risks uncertainties relied upon predictions future events statements historical fact forwardlooking statements including • projections earnings revenues weight yield volumes income financial operating items • statements plans strategies expectations objectives conway’s management future operations future items • statements concerning proposed new products services • statements regarding conway’s estimated future contributions pension plans • statements adequacy reserves • statements regarding outcome claims may brought conway cfc’s multiemployer pension plans • statements regarding future economic conditions performance • statements regarding outcome legal claims proceedings conway • statements regarding strategic acquisitions • statements estimates belief statements assumptions underlying foregoing certain forwardlooking statements identified use forwardlooking terminology “believes” “expects” “may” “will” “should” “seeks” “approximately” “intends” “plans” “estimates” “anticipates” negative terms variations terms comparable terminology discussions strategy plans intentions forwardlooking statements necessarily dependent assumptions data methods may incorrect imprecise assurance realized regard certain important factors among others addition matters discussed elsewhere document reports documents filed conway securities exchange commission could cause actual results matters differ materially discussed forwardlooking statements detailed description certain risk factors included item 1a “risk factors” item 7aitem 7 management’s discussion analysis financial condition results operations introduction management’s discussion analysis financial condition results operations referred “management’s discussion analysis” intended assist historical prospective understanding conway’s financial condition results operations cash flows including discussion analysis following • overview business • results operations • liquidity capital resources • critical accounting policies estimates • new accounting standards • forwardlooking statements overview business conway provides transportation logistics supplychain management services wide range manufacturing industrial retail customers conway’s business units operate regional transcontinental lessthantruckload fulltruckload freight transportation contract logistics supplychain management multimodal freight brokerage trailer manufacturing financial reporting purposes conway divided five reporting segments freight logistics truckload vector conway’s primary businessunit results generally depend number weight distance shipments transported prices received shipments services mix services provided customers well fixed variable costs incurred conway providing services ability manage costs changing circumstances conway’s primary business units affected timing degree fluctuations fuel prices ability recover incremental fuel costs fuelsurcharge programs andor costrecovery mechanisms conway freight transports shipments utilizing network freight service centers combined fleet companyoperated linehaul pickupanddelivery tractors trailers conway truckload transports shipments using fleet longhaul tractors trailers menlo worldwide logistics manages logistics functions customers primarily utilizes thirdparty transportation providers movement customer shipments results operations overview provides highlevel summary conway’s results continuing operations periods presented intended provide context remainder discussion reporting segments refer “reporting segment review” complete detailed discussion analysis continuing operations overview 2008 compared 2007 conway’s consolidated revenue 50 billion 2008 increased 148 44 billion 2007 due largely acquisitionrelated revenue increases truckload logistics complemented organic growth excluding revenue companies acquired second half 2007 conway’s revenue 2008 increased 58 due increases freight logistics 2008 consolidated operating income decreased 272 due primarily lower operating income freight operating loss logistics partially offset higher operating income truckload lower operating income freight reflects increasingly adverse economic conditions competitive freight market particularly second half 2008 includes expenses associated restructuring activities operating loss logistics due asset impairment charges one recently acquired companies increased operating income truckload due acquisition cfi excluding results acquired companies conway’s operating income declined 219 fully discussed note 3 “restructuring activities” item 8 “financial statements supplementary data” conway incurred expenses associated restructuring activities costs 265 million 2008 147 million 2007 fully discussed note 2 “acquisitions” item 8 “financial statements supplementary data” logistics recognized 378 million charge impairment goodwill intangible assets related chic logistics nonoperating expense increased 359 million due primarily 201 million increase interest expense 133 million decline investment income variations interest expense interest income due primarily acquisitions second half 2007 financed proceeds new debt financing use existing cash resources nonoperating expense also reflects variations foreign exchange transactions lowered comparative operating results 18 million conway’s effective tax rate 2008 515 compared 366 2007 tax provision 2008 adversely affected primarily nondeductible goodwill impairment charge writedown acquisitionrelated receivable lower income taxes increases percentage effect permanent discrete items conway’s net income continuing operations available common shareholders 2008 decreased 601 due primarily lower operating income higher nonoperating expenses overview 2007 compared 2006 conway’s consolidated revenue 44 billion 2007 increased 39 42 billion 2006 due primarily acquisition cfi august 23 2007 excluding acquisition cfi conway’s 2007 revenues essentially flat compared 2006 reflecting higher revenues freight revenue decline logistics 2007 conway’s consolidated operating income decreased 342 due largely lower operating income freight vector operating income freight decreased 268 due primarily highervolume loweryield mix revenue higher employee expenses cost increases associated rebranding initiative restructuring charges 2007 operating income included 27 million loss writeoff receivable related vector sale 2006 operating income vector 526 million including 410 million gain sale conway’s membership interest vector nonoperating expense increased 123 million 2007 due primarily 86 million increase interest expense 58 million decline investment income partially offset 17 million increase foreign exchange gains variations interest expense interest income due primarily acquisitions second half 2007 financed proceeds new debt financing use existing cash resources conway’s effective tax rate 2007 366 compared 306 2006 tax provision 2006 benefited utilization capitalloss carryforwards offset tax 29 million sale conway expedite 148 million sale conway’s membership interest vector addition conway’s effective tax rate 2006 reflects effect 121 million net tax credits primarily related settlement irs previous tax filings conway’s net income continuing operations available common shareholders 2007 decreased 446 reflecting lower operating income higher nonoperating expense period conway’s diluted earnings per share continuing operations decreased 399 lower net income partially offset accretive effect conway’s share repurchase program concluded june 2007 primarily result share repurchases conway’s average diluted shares outstanding declined 483 million shares 2007 523 million shares 2006 reporting segment review freight table compares operating results operating margins percentage change selected operating statistics freight reporting segment years ended december 31 compared 2007 freight segment’s revenue 2008 increased 38 2007 due primarily 57 increase yield weight per day unchanged 2007 weight per day 2008 reflects 29 increase weight per shipment 29 decline shipments per day yield increases 2008 primarily reflect increases fuel surcharges average length haul commensurate higher transportation costs shipments longer lengths haul generally higher yields periods also reflect general rate increases conway freight implemented general rate increase 55 january 28 2008 compared 49 increase march 19 2007 general rate increases applied customers pricing governed conway freight’s standard tariff however effects increases diminished part competitive pricing environment declining percentage customers pricing governed conway freight’s standard tariff yields 2008 also adversely affected increase weight per shipment excluding fuel surcharges yield 2008 increased 02 like ltl carriers conway freight assesses many customers fuel surcharge fuel surcharge intended compensate conway freight higher fuel costs fuelrelated increases purchased transportation fuel surcharges one part overall rate structure total price received customers governed market forces fully discussed item 1a “risk factors” freight’s fuelsurcharge revenue increased 184 revenue 2008 135 2007 freight’s operating income 2008 decreased 297 compared 2007 operating income adversely affected primarily higher fuel purchased transportation expense collectively rose revenue increases restructuring charges operating expenses partially offset lower rebranding expenses 2008 expenses fuel fuelrelated taxes increased 280 due almost entirely increase cost diesel fuel period purchased transportation expense increased 220 reflecting increase freight transported thirdparty providers fuelrelated rate increases operating expenses increased 76 reflecting increases cargoloss damage expense increased corporate allocations due informationtechnology projects increased expense uncollectible accounts higher expenses sales marketing activities including sales promotions use consultants expenses associated freight’s restructuring activities increased 265 million 2008 132 million 2007 freight’s restructuring activities discussed fully note 3 “restructuring activities” item 8 “financial statements supplementary data” comparative operating results affected costs incurred freight’s rebranding initiative completed second quarter 2008 initiative freight incurred 49 million costs 2008 compared 143 million 2007 rebranding costs expenses related primarily conversion tractors trailers new conway graphic identity operating results benefited 02 decline expenses salaries wages employee benefits due primarily 391 million 930 decrease incentive compensation lower incentive compensation reflects variations performance measures relative incentiveplan targets base compensation increased 23 due primarily wage salary rate increases overtime pay partially offset lower average employee count employee benefits expense increased 19 due primarily higher costs associated workers’ compensation claims partially offset decline expenses compensated absences 2008 2007 expenses compensated absences include nonrecurring firstquarter adjustments benefit plan changes associated businesstransformation operationalrestructuring initiatives employee benefits expense 2008 also reflects 89 million increase costs associated longterm disability benefits offset decline expense associated retireehealth savings plan freight’s revenue operating income trends second half 2008 reflected increasingly adverse economic conditions competitive freight market revenue per day declined sequentially july december declining economic output contributed successive monthly declines freight demand resulted decreasing tonnage successive monthly declines fuel prices contributed decreasing fuelsurcharge revenue yields current market conditions sequential monthly declines fuelsurcharge revenue offset equivalent increases base freightrate revenue since fuelsurcharge program historically enabled conway freight recover increases fuel costs fuelrelated increases purchased transportation declines fuelsurcharge revenue adverse effect operating income primarily result conditions fourthquarter revenue 2008 decreased 134 prioryear quarter excluding fourthquarter restructuring charges 213 million 77 million 2008 2007 respectively conway freight’s fourthquarter operating income decreased 811 119 million 2008 629 million 2007 compared 2006 2007 freight’s revenue increased 18 reflecting increases conway freight offset declines due sale expeditedshipping portion former conway expedite brokerage business july 2006 transfer remaining truckloadbrokerage operations conway freight menlo worldwide logistics january 2007 revenue per day conway freight increased 28 33 increase weight per day partially offset 05 decline yield 33 increase weight per day achieved 45 increase shipments per day partially offset 12 decline weight per shipment increase weight per day volume freight transported achieved despite increasingly pricesensitive competitive freight market due part targeted sales initiatives yields declined 2007 due primarily lower pricing associated new business generated conway freight’s sales initiatives increasingly pricesensitive competitive freight market required defensive pricing certain customer relationships partially offset effect higher fuelsurcharge revenue excluding fuel surcharges yields 2007 decreased 12 2007 conway’s sales initiatives contributed increased business levels large customers typically command lower rates higher quantity freight 2007 freight’s fuelsurcharge revenue increased 135 ltl revenue 129 2006 freight’s operating income 2007 decreased 268 due primarily highervolume loweryield mix revenue required increased freight handling due largely change mix revenue expenses salaries wages employee benefits 2007 increased 62 period 2006 base compensation rose 67 reflecting additional freighthandling requirements wage salary rate increases increase driver count period response increases actual anticipated freight volumes employee benefits expense increased 48 2007 due primarily increased costs compensated absences due part conversion sickpay benefit paidtimeoff benefit included 104 million nonrecurring expense first year plan incentive compensation increased 100 million 314 based variations revenue operating income cargo loss damage claims relative incentiveplan targets 2007 expenses fuel fuelrelated taxes increased 102 2006 due higher average diesel fuel prices increases driver miles comparative periods purchased transportation expense decreased 58 due lower transportation requirements following sale expeditedshipping portion former conway expedite brokerage business transfer remaining truckloadbrokerage operations menlo worldwide logistics offset increases conway freight operating income also negatively affected costs incurred conway’s rebranding initiative operational restructuring charges increases vehicular selfinsurance costs conway’s rebranding initiative announced april 2006 freight incurred 143 million costs 2007 compared 05 million 2006 fully discussed note 3 “restructuring activities” item 8 “financial statements supplementary data” freight incurred 132 million expense related operational restructuring 2007 vehicular selfinsurance expense increased 242 2007 due primarily 80 million loss related significant claim second quarter 2007 comparative operating results freight segment reflect sale expeditedshipping portion former conway expedite brokerage business july 2006 connection sale conway recognized 62 million gain 2006 logistics table compares operating results operating margins logistics reporting segment table summarizes segment’s revenue well net revenue less purchased transportation expenses carriermanagement revenue attributable contracts menlo worldwide logistics manages transportation freight subcontracts third parties actual transportation delivery products menlo worldwide logistics refers purchased transportation menlo worldwide logistics’ management places emphasis net revenue meaningful measure relative importance principal services since revenue earned carriermanagement services includes thirdparty carriers’ charges menlo worldwide logistics transporting shipments compared 2007 logistics’ revenue 2008 increased 165 reflecting organic growth contribution acquisitions chic logistics cougar logistics second half 2007 logistics’ net revenue 2008 increased 144 reflecting 177 increase purchased transportation expense logistics’ operating loss 237 million 2008 attributed companies acquired second half 2007 including 514 million operating loss chic logistics 15 million loss cougar logistics operating loss chic logistics reflects charges 318 million goodwill impairment 60 million impairment customerrelationship intangible asset 49 million writedown acquisitionrelated receivable 42 million integration costs addition chic logistics’ operating loss reflects factors detrimental effects results severe winter weather flooding earthquakes transportation constraints associated 2008 beijing olympics impairment charges chic logistics reflect lower projected revenues including reduced revenue significant customer decreased actual projected operating income higher discount rate reflects current economic market conditions following discussion revenue net revenue operating income percentage changes expense categories excludes chic logistics cougar logistics’ revenue 2008 increased 112 due primarily 121 increase revenue carriermanagement services 90 increase revenue warehousemanagement services increased revenue carriermanagement services includes revenue defense transportation coordination initiative contract fully discussed logistics’ net revenue 2008 increased 85 reflecting 126 increase purchased transportation expense resulted higher carriermanagement volumes fuel surcharges logistics’ operating income 2008 increased 132 reflecting improved margins warehousemanagement services partially offset lower margins carriermanagement services improved margins due part salaries wages employee benefits expense rose lower rate revenue lower margins carriermanagement services reflect purchased transportation expense increased higher rate revenue salaries wages employee benefits collectively increased 18 reflecting increases base compensation partially offset lower incentive compensation base compensation rose 54 due primarily increased headcount lesser extent wage salary rate increases incentive compensation decreased 67 million 645 based variations performance measures relative incentiveplan targets operating expenses costs rents leases purchased labor expense increased due primarily increased warehousemanagement volumes associated new customers growth existing customers operating expenses increased 134 due primarily increases use professional services cargoloss damage claims facilities expenses corporate allocations primarily related informationtechnology projects 2008 operating expenses include two separate customerspecific charges increased expenses cargoloss claims uncollectible accounts 2008 expenses rents leases increased 229 expenses purchased labor increased 56 menlo worldwide logistics provides contractlogistics services department defense “dod” connection defense transportation coordination initiative “dtci” logistics program directed dod contract threeyear base period estimated 525 million transportation expenditures contract may extended seven years implementation initiative rolled 25month period first distribution center began operations march 31 2008 approximately onequarter distribution centers operating december 31 2008 contract contributed revenue 532 million 2008 however contract significant effect logistics’ operating income compared 2006 logistics’ revenue 2007 decreased 43 due 98 decrease carriermanagement services partially offset 118 increase warehousemanagement services logistics’ net revenue 2007 increased 136 reflects increases net revenue warehousemanagement carriermanagement services 2007 purchased transportation costs decreased 116 due primarily decreases carriermanagement volumes lower carrier rates logistics’ operating income 2007 essentially flat higher net revenue carriermanagement warehousemanagement services almost equally offset increases salaries wages employee benefits operating expenses rents leases expenses salaries wages employee benefits increased 165 2007 reflecting increases base compensation employee benefits base compensation rose 142 due primarily growth headcount lesser extent wage salary rate increases employee benefits expense increased 254 due principally higher healthcare benefits affected large claim higher costs retirement benefits operating expense increased 176 due primarily increase allocated corporate costs selfinsurance expense cargo claims expenses rents leases increased 180 2007 result warehouse customer space requirements facilities expansion existing customers well rent expense related acquisitions corporate administrative costs allocated logistics segment 2007 increased 115 million due primarily allocation costs associated corporate informationtechnology personnel retained conway following sale vector gm december 2006 associated costs employees allocated vector prior sale allocated logistics subsequent sale retained employees utilized providing informationtechnology services gm logistics compensated fully discussed note 5 “sale unconsolidated joint venture” item 8 “financial statements supplementary data” retained employees also utilized provide services menlo worldwide logistics’ informationtechnology initiatives addition 2007 operating income reflects decline costs incurred dtci contractbid process fully discussed costs incurred connection contract decreased 02 million 2007 13 million 2006 truckload following table compares revenues operating income truckload reporting segment increased revenue operating income truckload reporting segment due acquisition cfi periods prior acquisition cfi august 2007 operating results truckload segment consist preacquisition truckload business unit reported loss 100 million 2007 including 15 million costs incurred integration two truckload business units fully discussed note 3 “restructuring activities” item 8 “financial statements supplementary data” periods presented segment revenue reported elimination revenue recognized truckload services provided conway truckload conway freight menlo worldwide logistics accordingly truckload segment’s revenue reported net intersegment revenue 1605 million 2008 870 million 2007 711 million 2006 vector december 2006 conway recognized sale gm conway’s membership interest vector sale vector qualify discontinued operation due classification equitymethod investment accordingly vector’s income losses reported net income continuing operations 2007 segment results reported conway’s equity investment vector included 27 million loss compared income 526 million 2006 2007 loss due writeoff receivable related vector sale 2006 operating income vector included 410 million gain sale conway’s membership interest vector’s operating results conway’s sale membership interest vector fully discussed note 5 “sale unconsolidated joint venture” item 8 “financial statements supplementary data” reporting segment consists operating results road systems trailer manufacturer certain corporate activities related income expense allocated reporting segments results 2008 include expenses related variable executivecompensation plan promotes synergistic intersegment activities table summarizes operating results reporting segment discontinued operations net income available common shareholders periods presented includes results discontinued operations related closure conway forwarding sale mwf shutdown ewa terminated priority mail contract usps spinoff cfc fully discussed note 4 “discontinued operations” item 8 “financial statements supplementary data” table summarizes results discontinued operations years ended december 31 liquidity capital resources cash equivalents rose 2783 million december 31 2008 1763 million december 31 2007 3045 million provided operating activities exceeded 1729 million used investing activities 387 million used financing activities cash provided operating activities came primarily net income noncash items cash used investing financing activities primarily reflects capital expenditures repayment debt respectively 1 “noncash adjustments” refer depreciation amortization impairment charges restructuring activities deferred income taxes provision uncollectible accounts loss income equitymethod investment noncash income expenses continuing operations operating activities cash flow operating activities 2008 3045 million 694 million decrease 2007 increase net income noncash items offset increase use cash due changes assets liabilities 2008 increase net income noncash items reflects 792 million decrease net income 92 million change discontinued operations offset 976 million increase noncash adjustments increase noncash adjustments 2008 due primarily increased depreciation following acquisition cfi second half 2007 asset impairment charges 2008 changes accrued income taxes accrued incentive compensation employee benefits receivables reduced operating cash flow compared prior year partially offset increase operating cash flow associated accrued liabilities excluding employee benefits incentive compensation selfinsurance accruals 2008 accrued income taxes used 192 million compared 234 million provided 2007 due primarily tax refunds received 2007 accrued incentive compensation used 197 million 2008 compared 48 million provided 2007 changes accrued incentive compensation reflect conway’s payment schedule employee incentive plans total incentive compensation earned award year typically paid employees partial payment december award year final payment february next award year 2008 payments incentive compensation exceeded expense accruals 2007 expense accruals exceeded payments employee benefits used 414 million 2008 compared 194 million used 2007 variation cash used employee benefits reflects effect defined contribution plan amendments effective january 1 2007 resulted 204 million increase planrelated liability 2007 periods use cash associated changes employee benefit assets liabilities also reflects net benefit income earned qualified pension plans funding contributions defined benefit pension plans benefit payments associated nonqualified pension plans partially offset expense recognized nonqualified plans 2008 receivables used 265 million compared 83 million used 2007 due increased receivables logistics segment result increased revenues increase accrued liabilities provided 222 million 2008 compared 107 million 2007 increases accrued liabilities excluding accrued incentive compensation employee benefits primarily reflect increases accrued interest 725 senior notes issued december 2007 unearned revenue related logistics contract accrued costs related conway freight’s restructuring activities partially offset decline wages salaries payable cash flow operating activities 2007 3739 million 598 million decrease 2006 due decrease net income noncash items net use cash due changes assets liabilities primarily receivables 2007 receivables used 83 million compared 890 million provided 2006 significant cash provided receivables 2006 primarily related logistics’ receivables declined preceding year due decrease average collection period cash provided income taxes increased 234 million 2007 148 million prioryear period due primarily tax refunds received march 2007 deferred charges credits used cash 33 million compared 122 million provided 2006 primarily due sale conway’s membership interest vector 2006 cash provided deferred charges credits reflects variations conway’s affiliate payable vector investing activities cash used investing activities decreased 1729 million 2008 compared 7572 million used 2007 due primarily 7523 million used purchase cfi 286 million used purchase cougar logistics 590 million used purchase chic logistics decrease cash used investing activities also reflects increase capital expenditures decrease cash provided conversion marketable securities decrease proceeds received sale assets 2006 investing activities used cash 2742 million capital expenditures 2008 increased 950 million 2007 due primarily increased tractor trailer expenditures truckload segment capital expenditures 2007 decreased 1598 2006 due primarily fewer tractor trailer expenditures freight truckload segments capital expenditures 2006 included aboveaverage number tractors acquired advance new governmental emission standards cash provided changes marketable securities decreased 225 million 2008 1545 million 2007 primarily due conversion august 2007 marketable securities partially fund acquisition cfi cash provided changes marketable securities 178 million 2006 conway received salerelated proceeds 492 million 2008 797 million 2007 161 million 2006 proceeds 2008 consist primarily 404 million sale two logistics’ warehouses fully discussed note 9 “leases” item 8 “financial statements supplementary data” 2007 primarily includes 519 million proceeds received sale conway’s membership interest vector sales proceeds 2006 include 80 million received expeditedshipping portion former conway expedite brokerage business financing activities financing activities used cash 387 million 2008 compared 2952 million provided 2007 3785 million used 2006 significant financing activities periods presented primarily include acquisitionrelated financing transactions repayment debt obligations commonstock repurchases dividend payments august 2007 conway entered bridgeloan facility borrowed 4250 million partially fund acquisition cfi december 2007 conway issued 425 million 725 senior notes due 2018 used net proceeds cash hand repay amounts outstanding bridgeloan facility common stock repurchases 899 million 2007 3502 million 2006 made repurchase programs authorized conway’s board directors conway 400 million revolving credit facility matures september 30 2011 revolving credit facility available cash borrowings issuance letters credit 400 million december 31 2008 borrowings outstanding conway’s revolving credit facility however 2081 million letters credit outstanding 1919 million available capacity additional letters credit cash borrowings conway uncommitted unsecured credit facilities totaling 740 million december 31 2008 available support borrowings letters credit bank guarantees overdraft facilities total 303 million outstanding facilities december 31 2008 leaving 437 million available capacity see note 8 “debt financing arrangements” item 8 “financial statements supplementary data” additional information concerning conway’s 400 million credit facility debt instruments contractual cash obligations table summarizes contractual cash obligations conway december 31 2008 amounts table based management’s estimates assumptions obligations including duration possibility renewal factors estimates assumptions actual future payments may vary reflected table certain liabilities including related selfinsurance accruals reported conway’s consolidated balance sheets reflected table due absence stated due dates presented contractual obligations longterm debt guarantees represent principal interest payments amounts representing principal portion interest payable 2009 reported consolidated balance sheets contractual obligations operating leases represent payments lease arrangements accordance accounting principles generally accepted us “gaap” future operating lease payments included conway’s consolidated balance sheets employee benefit plan payments table represent estimated payments conway’s nonqualified defined benefit pension plans postretirement medical plan december 31 2018 expected benefit payments conway’s qualified defined benefit pension plans included table benefits satisfied use plan assets conway expects make minimum contribution 238 million qualified defined benefit pension plans 2009 however could change based changes interest rates asset returns employee retirement income security act “erisa” requirements 2009 conway anticipates capital software expenditures approximately 70 million net asset dispositions primarily acquisition tractor trailer equipment conway’s actual 2009 capital expenditures may differ estimated amount depending factors availability timing delivery equipment planned expenditures represent contractual obligations december 31 2008 contractual obligations reported exclude conway’s liability 253 million unrecognized tax benefits next 12 months reasonably possible total unrecognized tax benefits decrease range 18 million 24 million due settlement agreements conway expects reach various states letters credit outstanding conway’s credit facilities described “financing activities” generally required selfinsurance programs represent additional liabilities underlying selfinsurance accruals already included conway’s consolidated balance sheets discussion see note 8 “debt financing arrangements” note 9 “leases” note 10 “income taxes” note 12 “employee benefit plans” item 8 “financial statements supplementary data” capital resources liquidity outlook conway’s capital requirements relate primarily acquisition revenue equipment support growth andor replacement older equipment newer latemodel equipment funding capital expenditures meeting workingcapital requirements conway utilizes various sources liquidity capital including cash equivalents cash flow operations credit facilities access capital markets addition conway may also manage liquidity requirements cashflow generation varying timing amount capital expenditures fully discussed “contractual cash obligations” implementing costreduction initiatives addition alreadyimplemented costreduction initiatives related restructuring activities conway freight changes conway’s definedbenefit pension definedcontribution retirement plans fully discussed note 3 “restructuring activities” note 12 “employee benefit plans” item 8 “financial statements supplementary data” respectively conway also ability implement additional costreduction initiatives future including limited reductions certain discretionary employeecompensation arrangements benefit plans nature timing extent initiatives depend largely future market conditions conway’s financial condition results operations cash flows described “financing activities” conway 400 million revolving credit facility matures september 30 2011 revolving facility guaranteed certain conway’s material domestic subsidiaries contains two financial covenants leverage ratio ii fixedcharge coverage ratio december 31 2008 conway compliance revolving credit facility’s financial covenants expects remain compliance december 31 2009 thereafter fully discussed “reporting segment review freight” adverse economic conditions competitive freight market contributed material declines revenue operating income conway freight particularly second half 2008 worsening trends could adversely affect conway’s ability remain compliance revolving credit facility’s financial covenants december 31 2008 conway’s senior unsecured debt rated investment grade standard poor’s bbb fitch ratings bbb moody’s baa3 february 27 2009 fitch ratings changed rating conway bbb discontinued operations discontinued operations periods presented relate closure conway forwarding sale mwf shutdown ewa terminated priority mail contract usps spinoff cfc fully discussed note 4 “discontinued operations” item 8 “financial statements supplementary data” cash flows discontinued operations segregated continuing operations reported separately discontinued operations critical accounting policies estimates preparation financial statements accordance accounting principles generally accepted us requires management adopt accounting policies make significant judgments estimates many cases alternative policies estimation techniques could used conway maintains process evaluate appropriateness accounting policies estimation techniques including discussion review audit committee board directors independent auditors accounting policies estimates may require adjustment based changing facts circumstances actual results could differ estimates conway believes accounting policies judgmental material financial statements related following • defined benefit pension plans • selfinsurance accruals • income taxes • revenue recognition • property plant equipment longlived assets • goodwill • disposition restructuring activities defined benefit pension plans periods presented employees conway subsidiaries us covered several retirement benefit plans including several qualified nonqualified defined benefit pension plans defined contribution retirement plans october 2006 conway’s board directors approved changes conway’s retirement benefits plans intended preserve retirement benefits earned existing employees conway’s primary qualified defined benefit pension plan “primary db plan” primary nonqualified supplemental defined benefit pension plan “supplemental db plan” expanding benefits earned primary defined contribution plan “primary dc plan” new supplemental defined contribution plan “supplemental dc plan” major provisions plan amendments increase expense related primary dc plan eliminate future service cost associated primary db plan supplemental db plan effective january 1 2007 significant assumptions amount recognized pension expense income accrued pension asset liability conway’s defined benefit pension plans depend upon number assumptions factors significant discount rate used measure present value pension obligations expected rate return plan assets funded qualified plans conway assesses plan assumptions discount rate expected rate return plan assets significant assumptions periodic basis concludes assumptions actuarial plan measurement date conway’s significant assumptions used determining pension expense income periods presented 2009 summarized discount rate determining appropriate discount rate conway assisted actuaries calculate yield theoretical portfolio highgrade corporate bonds rated aa better moody’s rating service cash flows match conway’s expected benefit payments future years conway’s discount rate equal yield portfolio bonds typically exceed moody’s aa corporate bond index due long duration expected benefit payments conway’s plans factors held constant 025 decrease increase discount rate would result estimated 47 million increase decrease cumulative unrecognized actuarial loss december 31 2008 related loss credit would amortized futureperiod earnings described rate return plan assets qualified funded defined benefit pension plans conway adjusts expected rate return plan assets based current market expectations historical returns rate return based expected 20year return current asset allocation effect actively managing plan net fees expenses using yearend plan asset values 025 decrease increase expected rate return plan assets would result estimated 2 million increase decrease 2009 annual pension expense actuarial gains losses differences expected actual rate return plan assets andor changes discount rate may result cumulative unrecognized actuarial gains losses conway’s defined benefit pension plans accumulated unrecognized actuarial losses increased 6454 million december 31 2008 532 million december 31 2007 increase amounts primarily reflects investment losses due declines equity markets portion unrecognized actuarial gain loss outside corridor amount must amortized recognized expense income prior 2007 amount would amortized average remaining service period approximately 107 years following plan amendments january 1 2007 participants longer active result amount amortized recognized expense income estimated average remaining life expectancy 327 years inactive plan participants discussed effect operating results plan amendments effective january 1 2007 resulted elimination substantially future service cost primary db plan supplemental db plan material service cost recognized conway’s defined benefit pension plans accordingly postamendment effect defined benefit pension plans conway’s operating results consist primarily net effect interest cost plan obligations qualified nonqualified defined benefit pension plans expected return plan assets funded qualified defined benefit pension plans amortization unrecognized actuarial gain loss excess corridor january 26 2009 conway issued earnings release announcing 2008 fourth quarter annual results january 27 2009 held conference call investment community discuss results call conway disclosed expected record 55 million pension expense 2009 estimated 55 million pension expense derived using amortization assumption 107 years based service period applicable conway employees actively participating plan however since plan participants became inactive 2007 plan amended provide accruals based credited service amortization period 327 years used based average life expectancy plan participants using amortization period 327 years conway estimates defined benefit pension plans result annual expense 279 million 2009 defined benefit pension plans conway recognized annual income 231 million 2008 248 million 2007 funding conway periodically reviews funded status qualified defined benefit pension plans makes contributions time necessary comply funding requirements erisa determining amount timing pension contributions conway considers erisa gaapbased measurements funded status well tax deductibility contributions conway made contributions 100 million 127 million defined benefit pension plans 2008 2007 respectively 2009 expects make minimum contribution 238 million conway’s estimate defined benefit plan contribution subject variation based changes interest rates asset returns erisa requirements conway’s funding practice defined benefit pension plans unchanged recent plan amendments conway expects make additional future contributions defined benefit pension plans needed plan changes expected reduce funding primary db plan otherwise would required without plan amendments however recent significant declines asset values may require contribution levels larger previously anticipated selfinsurance accruals conway uses combination purchased insurance selfinsurance programs provide costs medical casualty liability vehicular cargo workers’ compensation claims longterm portion selfinsurance accruals relates primarily workers’ compensation vehicular claims expected payable several years conway periodically evaluates level insurance coverage adjusts insurance levels based risk tolerance premium expense measurement classification selfinsured costs requires consideration historical cost experience demographic severity factors judgments current expected levels cost per claim retention levels methods provide estimates undiscounted liability associated claims incurred balance sheet date including claims reported conway believes actuarial methods appropriate measuring highly judgmental selfinsurance accruals however use estimation method sensitive assumptions factors described based magnitude claims length time incurrence claims ultimate settlement accordingly changes assumptions factors materially affect actual costs paid settle claims amounts may different estimates income taxes establishing deferred income tax assets liabilities conway makes judgments interpretations based enacted tax laws published tax guidance applicable operations conway periodically evaluates need valuation allowance reduce deferred tax assets realizable amounts likelihood material change conway’s expected realization assets dependent future taxable income future capital gains ability use tax loss credit carryforwards carrybacks final us foreign tax settlements effectiveness taxplanning strategies various relevant jurisdictions effective january 1 2007 conway adopted provisions fin 48 “accounting uncertainty income taxes” fully discussed note 10 “income taxes” item 8 “financial statements supplementary data” conway assesses income tax positions records tax benefits years subject examination based upon management’s evaluation facts circumstances information available reporting date positions likely tax benefit sustained conway recorded largest amount tax benefit greaterthan50percent likelihood realized upon ultimate settlement taxing authority full knowledge relevant information income tax positions meet morelikelythannot criteria tax benefit recognized financial statements revenue recognition conway freight recognizes revenue reporting periods based relative transit time period recognizes expense incurred conway truckload recognizes revenue related direct costs shipment delivered menlo worldwide logistics recognizes revenue accordance contractual terms services provided critical revenuerelated policies estimates conway freight conway truckload include related revenue adjustments uncollectible accounts receivable intransit shipments critical revenuerelated policies estimates menlo worldwide logistics include related uncollectible accounts receivable gross netbasis revenue recognition conway believes revenue recognition policies appropriate use revenuerelated estimates judgments provide reasonable approximation actual revenue earned estimated revenue adjustments generally pricing assessed companies transportation industry subject subsequent adjustment due several factors including weight freightclassification verifications pricing discounts revenue adjustments estimated based revenue levels historical experience uncollectible accounts receivable conway freight conway truckload report accounts receivable net realizable value provide allowance uncollectible accounts collection considered doubtful estimates uncollectible accounts based various judgments assumptions including revenue levels historical loss experience economic conditions aging outstanding accounts receivable menlo worldwide logistics based size nature client base performs periodic evaluation customers’ creditworthiness accounts receivable portfolio recognizes expense uncollectible accounts losses probable reasonably estimable intransit revenue end accounting period conway freight estimates amount revenue earned shipments transit based actual shipments picked customers scheduled day delivery expected completion time delivery gross netbasis revenue recognition menlo worldwide logistics recognizes revenue gross basis without deducting thirdparty purchased transportation costs transactions menlo worldwide logistics acts principal revenue recorded net basis deducting purchased transportation costs transactions menlo worldwide logistics acts agent determining whether revenue reported gross net basis based assessment whether menlo worldwide logistics acting principal agent transaction involves judgment based terms arrangement property plant equipment longlived assets accounting property plant equipment conway makes estimates expected useful lives expected residual values assets potential impairment based fair values assets cash flows generated assets depreciation property plant equipment estimated useful lives determination salvage value require management make judgments future events conway periodically evaluates whether changes estimated useful lives salvage values necessary ensure estimates accurately reflect economic use assets conway’s periodic evaluation may result changes estimated lives andor salvage values used depreciate assets affect amount periodic depreciation expense recognized ultimately gain loss disposal asset conway’s recent periodic evaluation estimated useful lives revenue equipment increased due primarily planned reductions capital expenditures lower expected usage given freight volume projections result revised estimates conway freight increased estimated useful life tractors 8 years 7 years expected result 10 million decrease 2009 depreciation expense also effective 2009 conway truckload increased estimated useful life tractors previously expected replaced 2009 5 years 4 years decreased associated estimated salvage values result changes conway truckload depreciation expense expected increase 45 million 2009 typically increase useful lives revenue equipment accompanied increase maintenance expenses longlived assets tested impairment whenever events changes circumstances indicate carrying amount may recoverable assets held used impairment charge recognized estimated undiscounted cash flows associated asset group assets less carrying value impairment exists charge recognized difference carrying value fair value fair values determined using quoted market values discounted cash flows external appraisals applicable assets held disposal carried lower carrying value estimated net realizable value quarter conway considers events may trigger impairment longlived assets indicators impairment conway considers include factors significant decrease market value longlived asset significant change extent manner longlived asset used currentperiod losses combined history losses projection continuing losses associated use longlived asset except described conway identified impairment related longlived assets result lower projected revenues including reduced revenue significant customer chic logistics conway evaluated fair value chic logistics’ customerrelationship intangible asset result menlo worldwide logistics recognized 60 million impairment loss fourth quarter 2008 reduce carrying amount intangible asset estimated fair value recorded value customerrelationship intangible assets represents sum present value expected cash flows attributable customer relationships determined revenue profit forecasts associated existing contracts renewals well growth opportunities expected relationships goodwill excess acquired entity’s purchase price amounts assigned assets acquired including identified intangible assets liabilities assumed recorded goodwill amortized tested impairment annual basis frequently events changes circumstances indicate asset might impaired assessment requires comparison fair value reporting unit carrying value net assets including allocated goodwill carrying value reporting unit exceeds fair value conway must compare implied fair value reportingunit goodwill carrying amount goodwill carrying amount reportingunit goodwill exceeds implied fair value goodwill impairment loss recognized amount equal excess conway tests impairment goodwill annually measurement date november 30 whenever events occur circumstances change would likely reduce fair value reporting unit carrying amount quarter conway considers events may trigger impairment goodwill including factors changes total company market value compared underlying book value significant adverse changes may impact reporting segments underlying reporting units reporting unit goodwill impairment purposes case chic logistics cougar logistics may components reporting segment independently generate revenues discrete financial information regularly reviewed management conway uses multiple valuation methods possible determine fair value reporting unit methods used include use publiccompany multiples precedent transactions discounted cash flow models may vary depending availability information valuation conway truckload conway applied two equally weighted methods publiccompany multiples discounted cash flow models precedent transactions either considered comparable available three reporting units evaluated therefore utilized accordingly valuations chic logistics cougar logistics conway used discounted cash flow model valuation methods assumptions used determine fair value reporting units may significantly impact result key assumptions used discounted cash flow models cash flow projections involving forecasted revenues expenses capital expenditures working capital changes addition key assumptions include discount rate terminal growth rates cash flow projections developed conway’s annual planning process discount rates developed measurement weightedaverage cost capital reporting unit terminal growth rates based inflation assumptions adjusted factors may impact future growth industryspecific expectations estimates assumptions may incomplete inaccurate unanticipated events circumstances result changes assumptions estimates related goodwill could material effect conway’s financial condition results operations conway truckload largest reporting unit goodwill 05 change discount rate would result 20 million change fair value 05 change terminal growth rate assumption would result 78 million change fair value result annual impairment test fourth quarter 2008 conway determined goodwill related chic logistics impaired result menlo worldwide logistics recognized 318 million impairment charge reduce carrying amount goodwill implied fair value impairment primarily due decreases actual projected operating income higher discount rate reflects current economic market conditions conway concluded goodwill conway truckload cougar logistics impaired december 31 2008 result worsening business conditions decline conway’s market capitalization 2009 conway may evaluate goodwill impairment prior annual measurement date disposition restructuring activities fully discussed note 4 “discontinued operations” note 3 “restructuring activities” item 8 “financial statements supplementary data” conway’s management made significant estimates assumptions connection disposition mwf ewa conway forwarding restructuring business units freight truckload reporting segments actual results could differ estimates could affect related amounts reported financial statements new accounting standards refer note 1 “principal accounting policies” item 8 “financial statements supplementary data” discussion recently issued accounting standards conway yet adopted forwardlooking statements certain statements included herein constitute “forwardlooking statements” within meaning section 21e securities exchange act 1934 amended subject number risks uncertainties relied upon predictions future events statements historical fact forwardlooking statements including • projections earnings revenues weight yield volumes income financial operating items • statements plans strategies expectations objectives conway’s management future operations future items • statements concerning proposed new products services • statements regarding conway’s estimated future contributions pension plans • statements adequacy reserves • statements regarding outcome legal claims proceedings may brought conway • statements regarding future economic conditions performance • statements regarding strategic acquisitions • statements estimates belief statements assumptions underlying foregoing certain forwardlooking statements identified use forwardlooking terminology “believes” “expects” “may” “will” “should” “seeks” “approximately” “intends” “plans” “estimates” “anticipates” negative terms variations terms comparable terminology discussions strategy plans intentions forwardlooking statements necessarily dependent assumptions data methods may incorrect imprecise assurance realized regard certain important factors among others addition matters discussed elsewhere document reports documents filed conway securities exchange commission could cause actual results matters differ materially discussed forwardlooking statements detailed description certain risk factors included item 1a “risk factors” item 7aitem 7 management’s discussion analysis financial condition results operations introduction management’s discussion analysis financial condition results operations referred “management’s discussion analysis” intended assist historical prospective understanding conway’s financial condition results operations cash flows including discussion analysis following • overview business • results operations • liquidity capital resources • critical accounting policies estimates • new accounting standards • forwardlooking statements overview business conway provides transportation logistics supplychain management services wide range manufacturing industrial retail customers conway’s business units operate regional transcontinental lessthantruckload fulltruckload freight transportation contract logistics supplychain management multimodal freight brokerage trailer manufacturing financial reporting purposes conway divided five reporting segments freight logistics truckload vector conway’s primary businessunit results generally depend number weight distance shipments transported prices received shipments services mix services provided customers well fixed variable costs incurred conway providing services ability manage costs changing circumstances conway’s primary business units affected timing degree fluctuations fuel prices ability recover incremental fuel costs fuelsurcharge programs andor costrecovery mechanisms fully discussed item 1a “risk factors” conway freight primarily transports shipments utilizing network freight service centers combined fleet companyoperated linehaul pickupanddelivery tractors trailers menlo worldwide logistics manages logistics functions customers primarily utilizes thirdparty transportation providers movement customer shipments conway truckload primarily transports shipments using fleet companyoperated longhaul tractors trailers results operations overview provides highlevel summary conway’s results continuing operations periods presented intended provide context remainder discussion reporting segments refer “reporting segment review” complete detailed discussion analysis continuing operations overview 2009 compared 2008 conway’s consolidated revenue 43 billion 2009 declined 152 50 billion 2008 reflecting difficult economic conditions competitive industry pricing conway’s operating results consisted operating loss 259 million 2009 compared operating income 1926 million 2008 primarily reflecting goodwill impairment charge truckload 2009 impairment charges logistics 2008 restructuring charges years excluding impairment restructuring charges years consolidated operating income 2009 declined due primarily net effect lower operating income freight truckload segments partially offset improved operating results logistics segment comparative periods presented effects adverse industry economic conditions partially mitigated costreduction measures nonoperating expense increased 66 million due part 33 million decline investment income reflects lower interest rates earned conway’s cashequivalent investments marketable securities nonoperating expense also reflects 15 million increase interest expense 18 million increase miscellaneous expenses primarily reflect variations foreignexchange gains losses conway’s tax provision periods adversely affected nondeductible goodwillimpairment charges response economic conditions conway march 2009 announced several measures reduce costs conserve cash measures substantially consist suspension curtailment employee benefits reduction certain employees’ salaries wages detailed note 12 “employee benefit plans” item 8 “financial statements supplementary data” costreduction measures announced march 2009 addition actions conway took fourth quarter 2008 included workforce reductions network reengineering suspension meritbased pay increases reduction capital expenditures spending cuts approximately 122 million estimated savings realized measures announced 2009 including 41 million salaries wages 47 million related compensated absences 34 million associated contributions defined contribution retirement plan including 22 million related matching contributions 12 million related basic transition contributions curtailment defined benefit pension plan material effect conway’s 2009 net periodic benefit expense however conway estimates defined benefit pension plans result annual expense 52 million 2010 compared 284 million 2009 savings associated costreduction measures expected lower periods beyond 2009 reflecting reinstatement certain suspended benefits reversal salary wage reductions effective january 2010 conway reversed onehalf salary wage reductions reversal remaining onehalf salary wage reductions contingent upon achievement specified financial metrics conway freight menlo worldwide logistics currently plan reinstate compensatedabsences benefits effective april 2010 reinstatement conway’s basic transition contributions defined contribution retirement plan prior levels contingent upon achievement specified financial metrics additional measure reduce costs conway initiated project outsource significant portion informationtechnology infrastructure function small portion administrative accounting functions outsourcing initiative conway expects incur incremental expense 2010 employeeseparation transition implementation costs expected exceed estimated savings first year agreements overview 2008 compared 2007 conway’s consolidated revenue 50 billion 2008 increased 148 44 billion 2007 due largely acquisitionrelated revenue increases truckload logistics complemented organic growth excluding revenue companies acquired second half 2007 conway’s revenue 2008 increased 58 due primarily increases freight logistics 2008 consolidated operating income decreased 272 due primarily lower operating income freight operating loss logistics partially offset higher operating income truckload lower operating income freight reflected increasingly adverse economic conditions competitive freight market particularly second half 2008 included expenses associated restructuring activities operating loss logistics due asset impairment charges one recently acquired companies increased operating income truckload due acquisition cfi excluding results acquired companies conway’s operating income declined 219 nonoperating expense increased 359 million due primarily 201 million increase interest expense 133 million decline investment income variations interest expense interest income due primarily acquisitions second half 2007 financed proceeds new debt financing use existing cash cashequivalent investments nonoperating expense 2008 also reflected variations foreignexchange gains losses lowered comparative operating results 18 million tax provision 2008 adversely affected primarily nondeductible goodwill impairment charge writedown acquisitionrelated receivable reporting segment review discussion analysis segment operating results management utilizes revenue intersegment eliminations management believes revenue intersegment eliminations combined detailed operating expense information provides meaningful analysis segment results revenue intersegment eliminations reconciled revenue external customers note 15 “segment reporting” item 8 “financial statements supplementary data” freight following table compares operating results operating margins percentage change selected operating statistics freight reporting segment years ended december 31 compared 2008 freight’s revenue 2009 declined 146 2008 due lower revenue per day 1day decline number working days revenue per day decreased 153 due 162 decline yield partially offset 11 increase weight per day 11 increase weight per day reflects 10 increase weight per shipment 01 increase shipments per day 2009 decline yield due primarily decreases fuel surcharges base freight rates increase weight per shipment freight volumes yield reflect competitive pricing environment primarily result excess capacity lessthantruckload market adverse economic conditions weight shipments increased sequentially month 2009 reflecting efforts improve asset utilization leverage servicecenter network capacity increase market share yields also adversely affected declines fuel prices contributed lower fuelsurcharge revenue excluding fuel surcharges yields 2009 decreased 87 freight’s fuelsurcharge revenue decreased 105 revenue 2009 184 2008 due market conditions noted declines fuelsurcharge revenue offset equivalent increases base freightrate revenue since fuelsurcharge program historically enabled freight recover increases fuel costs fuelrelated increases purchased transportation declines fuelsurcharge revenue adverse effect operating results freight’s operating income 2009 decreased 690 compared 2008 decline operating income primarily resulted lower yields however 2009 results benefited earliermentioned costreduction measures announced march 2009 measures reduced approximately 110 million costs related salaries wages employee benefits fully discussed expenses salaries wages employee benefits declined 93 2009 employee benefits expense decreased 205 due lower expense compensated absences defined contribution retirement plan workers’ compensation claims partially offset increased pension expense defined benefit pension plans 2009 lower expense compensated absences employer contributions defined contribution plan reflect conway’s costreduction measures 2008 higher expenses compensated absences also due part nonrecurring adjustment benefit plan changes associated restructuring initiative base compensation 2009 decreased 36 due lower average employee counts costreduction measures 2009 purchased transportation expense increased 28 due increase freight transported thirdparty providers partially offset fuelrelated rate decreases lower negotiated base rates period expense fuel fuelrelated taxes decreased 373 compared 2008 due primarily decline cost per gallon diesel fuel operating expenses decreased 84 2009 reflecting decreased administrative corporate allocations lower corporate allocations 2009 due part employeerelated costreduction measures partially offset allocated costs related corporate administrativeoutsourcing initiative fully discussed note 3 “restructuring activities” “item 8 “financial statements supplementary data” depreciation amortization expense declined 86 2009 due primarily change estimated useful life freight’s tractor fleet lowered depreciation expense 111 million 2009 fully discussed “critical accounting policies estimates property plant equipment longlived assets” conway freight expects extend tractor trailer lives 2010 lower depreciation expense approximately 14 million 2010 periods presented comparative operating results affected costs incurred freight’s restructuring activities rebranding initiative connection restructuring activities freight recognized 05 million net adjustments reduced expense 2009 compared 239 million 132 million charges 2008 2007 respectively additional information concerning freight’s restructuring activities see note 3 “restructuring activities” item 8 “financial statements supplementary data” rebranding initiative completed second quarter 2008 freight incurred costs 49 million 2008 143 million 2007 rebranding costs expenses related primarily conversion tractors trailers new conway graphic identity primarily classified maintenance expense 2009 freight’s results adversely affected change accounting estimate revenue adjustments fully discussed note 1 “principal accounting policies” item 8 “financial statements supplementary data” change accounting estimate lowered freight’s revenue operating income 54 million 2009 compared 2007 2008 freight’s revenue increased 39 2007 due primarily 57 increase yield weight per day unchanged 2007 weight per day 2008 reflects 29 increase weight per shipment 29 decline shipments per day yield increases 2008 primarily reflect increases fuel surcharges average length haul partially offset effects increase weight per shipment freight’s fuelsurcharge revenue increased 184 revenue 2008 135 2007 freight’s operating income 2008 decreased 297 compared 2007 operating income adversely affected primarily higher fuel purchased transportation expense collectively rose revenue increases restructuring charges operating expenses partially offset lower rebranding expenses operating results benefited 02 decline expenses salaries wages employee benefits due primarily 391 million 930 decrease incentive compensation lower incentive compensation reflects variations performance measures relative incentiveplan targets base compensation increased 23 due primarily wage salary rate increases overtime pay partially offset lower average employee count employee benefits expense increased 19 due primarily higher costs associated workers’ compensation claims partially offset decline expenses compensated absences employee benefits expense 2008 also reflects 89 million increase costs associated longterm disability benefits offset decline expense associated retireehealth savings plan 2008 purchased transportation expense increased 220 reflecting increase freight transported thirdparty providers fuelrelated rate increases period expenses fuel fuelrelated taxes increased 280 due almost entirely increase cost per gallon diesel fuel operating expenses increased 79 reflecting increases cargoloss damage expense increased corporate allocations due informationtechnology projects increased expense uncollectible accounts higher expenses sales marketing activities including sales promotions use consultants logistics table compares operating results operating margins logistics reporting segment table summarizes segment’s revenue well net revenue less purchased transportation expense carriermanagement revenue attributable contracts menlo worldwide logistics manages transportation freight subcontracts third parties actual transportation delivery products menlo worldwide logistics refers purchased transportation menlo worldwide logistics’ management places emphasis net revenue meaningful measure relative importance principal services since revenue earned carriermanagement services includes thirdparty carriers’ charges menlo worldwide logistics transporting shipments table also includes operating income operating margin excluding loss impairment goodwill intangible assets management believes measures relevant evaluate ongoing operations compared 2008 2009 logistics’ revenue decreased 119 due 166 decline revenue carriermanagement services partially offset 18 increase revenue warehousemanagement services lower revenue carriermanagement services primarily reflects decline fuelsurcharge revenue changes certain carrier customer contracts lowered amount revenue recognized logistics revenue also reflects increase revenue government contract contributed revenue 2065 million 2009 532 million 2008 contract implementation phase 2009 2008 logistics’ net revenue 2009 increased 20 due increase revenue warehousemanagement services purchased transportation expense declined higher rate revenue carriermanagement services purchased transportation expense declined 190 2009 due primarily fuelrelated rate decreases changes certain carrier customer contracts logistics earned operating income 282 million 2009 reported operating loss 237 million 2008 logistics’ operating loss 2008 attributed companies acquired second half 2007 including 514 million operating loss chic logistics 15 million loss cougar logistics operating loss chic logistics reflects charges 318 million goodwill impairment 60 million impairment customerrelationship intangible asset 49 million writedown acquisitionrelated receivable 42 million integration costs excluding loss impairment goodwill intangible assets 2008 logistics’ operating income 2009 doubled 2008 reflecting improved margins warehousemanagement carriermanagement services improved margins warehousemanagement services due primarily growth warehousemanagement revenue lower purchasedlabor expense partially offset increased expenses rents leases purchased labor expense decreased 103 due primarily efficiency initiatives logisticsmanaged warehouses expenses rents leases increased 129 2009 due primarily addition new warehousemanagement services customers transaction two logistics’ warehouses sold leased back june 2008 improved margins carriermanagement services due largely recognition revenue gainsharing arrangements gainsharing arrangements revenue recognized upon achievement contractually specified performance measures typically without associated increase operating expenses margins carriermanagement services adversely affected government contract discussed significant effect logistics’ operating income periods presented additionally comparative operating results 2009 benefited 91 million charges 2008 related chic logistics comprised 49 million writedown acquisitionrelated receivable 42 million integration costs results 2009 also benefited earliermentioned costreduction measures announced march 2009 measures reduced approximately 5 million costs related salaries wages employee benefits fully discussed salaries wages employee benefits increased 53 2009 reflecting increase incentive compensation higher costs employee benefits partially offset lower expenses employeerelated costs 2009 incentive compensation increased 113 million based variations performance measures relative incentiveplan targets employee benefits expense increased 52 due primarily increased expenses related conway’s defined benefit pension plan sharebased compensation awards partially offset lower expenses related defined contribution retirement plan compensated absences reflect costreduction measures announced march employeerelated costs decreased 272 2009 due primarily lower travel costs 2009 operating expenses declined 88 due primarily lower administrative corporate allocations decrease expense uncollectible accounts lower administrative corporate allocations 2009 due part employeerelated costreduction measures lower expense uncollectible accounts 2009 reflects 2008 writedown acquisitionrelated receivable discussed 2009 lower operating expenses partially offset increase expenses consulting legal services compared 2007 2008 logistics’ revenue increased 165 reflecting organic growth contribution acquisitions chic logistics cougar logistics second half 2007 logistics’ net revenue 2008 increased 144 reflecting 177 increase purchased transportation expense logistics’ operating loss 237 million 2008 attributed companies acquired second half 2007 detailed previous comparative discussion following discussion revenue net revenue operating income percentage changes expense categories excludes chic logistics cougar logistics excluding acquisitions logistics’ revenue 2008 increased 112 due primarily 121 increase revenue carriermanagement services 90 increase revenue warehousemanagement services increased revenue carriermanagement services includes revenue government contract fully discussed logistics’ net revenue 2008 increased 85 reflecting 126 increase purchased transportation expense resulted higher carriermanagement volumes fuel surcharges excluding acquisitions logistics’ operating income 2008 increased 132 reflecting improved margins warehousemanagement services partially offset lower margins carriermanagement services improved margins due part salaries wages employee benefits expense rose lower rate revenue lower margins carriermanagement services reflect purchased transportation expense increased higher rate revenue salaries wages employee benefits collectively increased 18 reflecting increases base compensation partially offset lower incentive compensation base compensation rose 54 due primarily increased headcount lesser extent wage salary rate increases incentive compensation decreased 67 million 645 based variations performance measures relative incentiveplan targets excluding acquisitions expenses rents leases purchased labor operating costs increased due primarily higher warehousemanagement volumes associated new customers growth existing customers operating expenses increased 134 due primarily increases use professional services cargoloss damage claims facilities expenses corporate allocations primarily related informationtechnology projects 2008 operating expenses include two separate customerspecific charges increased expenses cargoloss claims uncollectible accounts 2008 expenses rents leases increased 229 expenses purchased labor increased 56 truckload table compares operating results operating margins percentage change selected operating statistics truckload reporting segment table summarizes segment’s revenue intersegment eliminations including freight revenue fuelsurcharge revenue nonfreight revenue table also includes operating income operating margin excluding loss impairment goodwill truckload’s management believes measures relevant evaluate ongoing operations nm comparison meaningful due acquisition cfi august 2007 compared 2008 2009 truckload’s revenue decreased 153 2008 primarily reflecting 606 decline fuelsurcharge revenue 12 decline freight revenue lower fuelsurcharge revenue due primarily lower fuel prices 2009 compared 2008 12 decline freight revenue reflects 15 decline revenue per mile partially offset 03 increase total miles decline revenue per mile primarily result difficult industry economic conditions characterized decreased demand truckload services excess capacity truckload market truckload’s operating loss 1070 million 2009 primarily reflects 1348 million charge goodwill impairment charge assumed lower projected revenue operating income discount rate reflected economic market conditions measurement date fully discussed note 2 “acquisitions” item 8 “financial statements supplementary data” excluding impairment charge truckload’s operating income 2009 declined 469 due primarily lower revenue particularly fuelsurcharge revenue declined faster rate expenses fuel fuelrelated taxes 2009 expenses salaries wages employee benefits relatively unchanged 2008 reflecting increase employee benefits expense partially offset declines employee costs salaries wages employee benefits expense 2009 increased 137 due primarily increase severity frequency workers’ compensation claims employee costs fell 368 reflecting lower costs driver recruitment due reduction fleet capacity improved driver retention rate 09 decline salaries wages reflects 241 24 million decline incentive compensation partially offset 05 increase base compensation lower incentive compensation reflects variations performance measures relative incentiveplan targets purchased transportation decreased 214 2009 due lower utilization contract drivers fuelrelated rate declines expenses fuel fuelrelated taxes declined 381 2009 due primarily lower fuel cost per gallon operating expenses increased 165 2009 due primarily higher administrative corporate allocations losses 76 million disposition equipment 24 million adjustment taxrelated receivable partially offset 184 decline vehicular insurance expense higher corporate allocations due part increase percentage corporate costs allocated truckload maintenance expenses increased 158 2009 due primarily increase average age tractor fleet resulted increase repairs covered manufacturer warranties fully discussed “critical accounting policies estimates property plant equipment longlived assets” conway truckload expects extend tractor lives lower associated salvage values 2010 result net increase depreciation expense approximately 4 million 2010 compared 2007 increased revenue operating income truckload reporting segment due acquisition cfi periods prior acquisition cfi august 2007 operating results truckload segment consist preacquisition truckload business unit result operating income truckload segment 2007 consisted 188 million postacquisition operating income partially offset 100 million operating losses preacquisition truckload unit preacquisition operating loss included 15 million costs incurred integration two truckload business units vector december 2006 conway recognized sale gm conway’s membership interest vector sale vector qualify discontinued operation due classification equitymethod investment accordingly vector’s income losses reported net income continuing operations 2007 segment results reported conway’s equity investment vector included 27 million loss due writeoff receivable related vector sale vector’s operating results conway’s sale membership interest vector fully discussed note 5 “sale unconsolidated joint venture” item 8 “financial statements supplementary data” reporting segment consists operating results road systems trailer manufacturer certain corporate activities related income expense allocated reporting segments results 2008 included expenses related variable executivecompensation plan promotes synergistic intersegment activities table summarizes operating results reporting segment discontinued operations net income loss applicable common shareholders periods presented includes results discontinued operations related closure conway forwarding sale mwf shutdown ewa terminated priority mail contract usps spinoff cfc fully discussed note 4 “discontinued operations” item 8 “financial statements supplementary data” table summarizes results discontinued operations years ended december 31 liquidity capital resources cash equivalents increased 4766 million december 31 2009 2783 million december 31 2008 2767 million provided operating activities exceeded 407 million used investing activities 378 million used financing activities cash provided operating activities came primarily net income adjustment noncash items cash used investing activities primarily reflects capital expenditures cash used financing activities due primarily repayment debt dividend payments 1 “noncash adjustments” refer depreciation amortization impairment charges restructuring activities deferred income taxes provision uncollectible accounts loss equitymethod investment noncash income expenses continuing operations operating activities significant items affecting comparison conway’s operating cash flows periods presented summarized compared 2008 2009 net income excluding discontinued operations noncash adjustments decreased 1113 million 2008 noncash adjustments 3823 million 2009 619 million increase 2008 primarily due increase assetimpairment charges changes employee benefits accrued income taxes receivables accrued incentive compensation increased operating cash flow 2009 compared prior year partially offset decrease operating cash flow associated accrued liabilities excluding employee benefits incentive compensation 2009 employee benefits provided 03 million compared 414 million used 2008 variation employee benefits reflects recognition net periodic benefit expense qualified pension plans 2009 compared net periodic benefit income earned 2008 cash flows associated qualified pension plans also reflect funding contributions 173 million 100 million 2009 2008 respectively employee benefits cash flows also reflect change funding method contributions defined contribution retirement plan detailed note 12 “employee benefit plans” item 8 financial statements supplementary data” conway used repurchased common stock fund 233 million contributions defined contribution retirement plan 2009 accrued income taxes provided 212 million 2009 compared 192 million used prioryear period reflecting variations conway’s current income tax provision well variations income tax refunds payments 2009 conway received 102 million net income tax refunds 2008 conway made net income tax payments 467 million 2009 receivables provided 92 million due primarily decreased trade accounts receivable logistics segment partially offset increased trade accounts receivable freight segment 2008 receivables used 265 million due primarily increased trade accounts receivable logistics segment partially offset decreased trade accounts receivable freight truckload segments change accrued incentive compensation provided 46 million 2009 compared 197 million used 2008 changes accrued incentive compensation primarily reflect lower payments 2009 compared 2008 due changes conway’s payment schedule 2009 award year conway paid incentive compensation february following award year prior change partial payments made december award year february following year changes accrued liabilities used 418 million 2009 compared 222 million provided 2008 due primarily changes liability compensated absences 2009 liability compensated absences decreased result reductions compensatedabsences benefits salary wage reductions connection costreduction measures cash provided changes accrued liabilities 2008 reflects increase accrued interest 725 senior notes issued december 2007 compared 2007 2008 net income excluding discontinued operations noncash adjustments increased 92 million 2007 noncash adjustments 3205 million 2008 976 million increase 2007 primarily due increased depreciation following acquisition cfi second half 2007 assetimpairment charges changes accrued income taxes accrued incentive compensation employee benefits receivables reduced operating cash flow 2008 compared prior year partially offset increase operating cash flow associated selfinsurance accruals accrued liabilities accrued income taxes used 192 million 2008 compared 234 million provided 2007 due primarily tax refunds received 2007 change accrued incentive compensation balances used 197 million 2008 compared 48 million provided 2007 2008 payments incentive compensation exceeded expense accruals 2007 expense accruals exceeded payments 2008 employee benefits used 414 million compared 194 million used 2007 variation cash used employee benefits reflects effect defined contribution plan amendments effective january 1 2007 resulted 204 million increase planrelated liability 2007 periods use cash associated changes employee benefit assets liabilities also reflects net benefit income earned qualified pension plans funding contributions defined benefit pension plans benefit payments associated nonqualified pension plans partially offset expense recognized nonqualified plans receivables used 265 million 2008 compared 83 million used 2007 due primarily increased receivables logistics segment increase accrued liabilities provided 222 million 2008 compared 107 million provided 2007 increases accrued liabilities primarily reflect increases accrued interest 725 senior notes issued december 2007 unearned revenue related logistics contract partially offset decline wages salaries payable investing activities significant items affecting comparison conway’s investing cash flows periods presented summarized 2009 capital expenditures 682 million compared 2344 million 2008 1394 million 2007 capital expenditures 2009 decreased 1662 million prioryear period due primarily lower tractor trailer expenditures reflected lower 2009 capitalexpenditure plan connection conway’s cashconservation efforts lower reported capital expenditures 2009 also reflect 500 million tractors acquired capitallease financing noncash activity acquisition equipment capital lease reported capital expenditure 2008 capital expenditures increased 950 million due primarily increased tractor trailer expenditures truckload segment 2007 conway used 7523 million purchase cfi 286 million purchase cougar logistics 590 million purchase chic logistics conway received salerelated proceeds 327 million 2009 492 million 2008 797 million 2007 proceeds 2009 2008 reflect saleleaseback transactions 173 million received sale revenue equipment 2009 404 million received sale two logistics’ warehouses 2008 fully discussed note 9 “leases” item 8 “financial statements supplementary data” 2007 conway received proceeds 519 million sale conway’s membership interest vector 278 million sales property equipment cash provided net proceeds sale marketable securities provided 04 million 2009 225 million 2008 1545 million 2007 net proceeds sale marketable securities reflect conway’s sale marketable securities partially fund acquisition cfi august 2007 financing activities significant items affecting comparison conway’s financing cash flows periods presented summarized 2009 2008 conway used 224 million 227 million respectively repayment debt obligations primarily repayment primary dc plan notes matured january 2009 2007 proceeds issuance debt net debt repayments provided 4024 million august 2007 conway entered bridgeloan facility borrowed 425 million partially fund acquisition cfi december 2007 conway issued 425 million 725 senior notes due 2018 used net proceeds cash hand repay amounts outstanding bridgeloan facility 2007 conway made common stock repurchases 899 million repurchase programs authorized conway’s board directors detailed note 12 “employee benefit plans” item 8 financial statements supplementary data” 2009 conway used repurchased common stock fund 233 million contributions defined contribution retirement plan 32 million preferred dividends contractual cash obligations table summarizes contractual cash obligations conway december 31 2009 amounts table based management’s estimates assumptions obligations including duration possibility renewal factors estimates assumptions actual future payments may vary reflected table certain liabilities including related selfinsurance accruals reported conway’s consolidated balance sheets reflected table due absence stated due dates presented contractual obligations longterm debt guarantees represent principal interest payments amounts representing principal portion interest payable 2010 reported consolidated balance sheets december 31 2009 conway’s 200 million 878 notes due may 2010 classified current liabilities consolidated balance sheets consistent conway’s objective reduce total debt balance conway retire notes upon maturity contractual obligations operating leases represent payments lease arrangements accordance accounting principles generally accepted us “gaap” future operating lease payments included conway’s consolidated balance sheets future payments related capital leases include stated amounts residualvalue guarantees employee benefit planrelated cash obligations table represent estimated payments conway’s nonqualified defined benefit pension plans postretirement medical plan december 31 2019 expected benefit payments conway’s qualified defined benefit pension plans included table benefits satisfied use plan assets conway expects make discretionary contribution 250 million qualified defined benefit pension plans 2010 however could change based variations interest rates asset returns pension protection act “ppa” requirements factors 2009 conway initiated project outsource significant portion informationtechnology infrastructure function small portion administrative accounting functions connection outsourcing initiative conway expects enter agreements thirdparty service providers first quarter 2010 estimated payments thirdparty providers expected 15 million 2010 average annual payments estimated 40 million 2011 2016 agreements expected expire payments made thirdparty service providers expected offset cost savings resulting headcount reductions lower expenses operating maintaining conway’s technology platforms 2010 conway anticipates capital software expenditures approximately 125 million net asset dispositions primarily acquisition tractor equipment conway’s actual 2010 capital expenditures may differ estimated amount depending factors availability timing delivery equipment planned expenditures represent contractual obligations december 31 2009 addition conway expects enter 35 million capital leases acquisition tractor equipment 2010 contractual obligations reported exclude conway’s liability 220 million unrecognized tax benefits fully discussed note 10 “income taxes” item 8 “financial statements supplementary data” letters credit outstanding conway’s credit facilities described “capital resources liquidity outlook” generally required selfinsurance programs represent additional liabilities underlying selfinsurance accruals already included conway’s consolidated balance sheets discussion see note 8 “debt financing arrangements” note 9 “leases” note 10 “income taxes” note 12 “employee benefit plans” item 8 “financial statements supplementary data” capital resources liquidity outlook conway’s capital requirements relate primarily acquisition revenue equipment support growth andor replacement older equipment newer equipment funding capital expenditures meeting workingcapital requirements conway utilizes various sources liquidity capital including cash equivalents cash flow operations credit facilities access capital markets conway may also manage liquidity requirements cashflow generation varying timing amount capital expenditures fully discussed “contractual cash obligations” implementing costreduction initiatives fully discussed “results operations overview” conway also ability implement additional costreduction initiatives future nature timing extent initiatives depend largely future market conditions conway’s financial condition results operations cash flows conway 400 million revolving credit facility matures september 30 2011 revolving credit facility available cash borrowings issuance letters credit 400 million december 31 2009 borrowings outstanding revolving credit facility however 1887 million letters credit outstanding 2113 million available capacity additional letters credit cash borrowings revolving facility guaranteed certain conway’s material domestic subsidiaries contains two financial covenants leverage ratio ii fixedcharge coverage ratio december 31 2009 conway compliance revolving credit facility’s financial covenants expects remain compliance december 31 2010 thereafter conway uncommitted unsecured credit facilities totaling 561 million december 31 2009 available support shortterm borrowings letters credit bank guarantees overdraft facilities total 346 million outstanding facilities december 31 2009 leaving 215 million available capacity december 31 2009 conway’s senior unsecured debt rated investment grade standard poor’s bbb fitch ratings bbb moody’s baa3 agency assigning outlook “negative” discontinued operations discontinued operations periods presented relate closure conway forwarding sale mwf shutdown ewa terminated priority mail contract usps spinoff cfc fully discussed note 4 “discontinued operations” item 8 “financial statements supplementary data” critical accounting policies estimates preparation financial statements accordance accounting principles generally accepted us requires management adopt accounting policies make significant judgments estimates many cases alternative policies estimation techniques could used conway maintains process evaluate appropriateness accounting policies estimation techniques including discussion review audit committee board directors independent auditors accounting policies estimates may require adjustment based changing facts circumstances actual results could differ estimates conway believes accounting policies judgmental material financial statements related following • defined benefit pension plans • selfinsurance accruals • income taxes • revenue recognition • property plant equipment longlived assets • goodwill • disposition restructuring activities defined benefit pension plans periods presented employees conway subsidiaries us covered several retirement benefit plans including several qualified nonqualified defined benefit pension plans effective april 30 2009 conway amended primary defined benefit pension plan permanently curtail benefits prior amendment future retirement benefits considered participants’ eligible compensation increases 2016 connection curtailment conway remeasured planrelated assets liabilities april 30 2009 significant assumptions amount recognized pension expense income accrued pension asset liability conway’s defined benefit pension plans depend upon number assumptions factors significant discount rate used measure present value pension obligations expected rate return plan assets funded qualified plans conway assesses plan assumptions discount rate expected rate return plan assets significant assumptions periodic basis concludes assumptions actuarial plan measurement date conway’s significant assumptions used determining pension expense income periods presented 2010 summarized discount rate determining appropriate discount rate conway assisted actuaries utilize yieldcurve model based universe highgrade corporate bonds rated aa better moody’s rating service model employs cash flows match conway’s expected benefit payments future years factors held constant 025 decrease increase discount rate would result estimated 44 million increase decrease cumulative unrecognized actuarial loss december 31 2009 related loss credit would amortized futureperiod earnings described rate return plan assets qualified funded defined benefit pension plans conway evaluates expected rate return plan assets based current market expectations historical returns rate return based expected 20year return current asset allocation effect actively managing plan net fees expenses using yearend plan asset values 025 decrease increase expected rate return plan assets would result estimated 2 million increase decrease 2010 annual pension expense result recent plan change curtailed benefits conway may change asset allocation lower percentage investments equity securities increase percentage investments fixedincome securities effect change may result reduction longterm rate return plan assets increase future pension expense consistent sensitivity described change occurs actuarial gains losses differences expected actual rate return plan assets andor changes discount rate may result cumulative unrecognized actuarial gains losses conway’s defined benefit pension plans accumulated unrecognized actuarial losses declined 3973 million december 31 2009 6114 million december 31 2008 decrease amounts primarily reflects investment gains due positive returns equity markets 2009 april 30 2009 plan curtailment portion unrecognized actuarial gain loss outside corridor amount must amortized recognized expense income estimated average remaining life expectancy active plan participants effect operating results effect defined benefit pension plans conway’s operating results consist primarily net effect interest cost plan obligations qualified nonqualified defined benefit pension plans expected return plan assets funded qualified defined benefit pension plans amortization unrecognized actuarial gain loss excess corridor conway estimates defined benefit pension plans result annual expense 52 million 2010 defined benefit pension plans conway recognized annual expense 284 million 2009 compared income 231 million 248 million 2008 2007 respectively funding conway periodically reviews funded status qualified defined benefit pension plans makes contributions time necessary comply funding requirements ppa determining amount timing pension contributions conway considers ppa gaapbased measurements funded status well tax deductibility contributions conway made contributions 173 million 100 million defined benefit pension plans 2009 2008 respectively 2010 expects make discretionary contribution 250 million conway’s estimate defined benefit plan contribution subject change based variations interest rates asset returns ppa requirements factors april 30 2009 plan changes expected reduce funding primary defined benefit pension plan otherwise would required without plan amendments however significant declines asset values may require contribution levels larger previously anticipated selfinsurance accruals conway uses combination purchased insurance selfinsurance programs provide costs medical casualty liability vehicular cargo workers’ compensation claims longterm portion selfinsurance accruals relates primarily workers’ compensation vehicular claims expected payable several years conway periodically evaluates level insurance coverage adjusts insurance levels based risk tolerance premium expense measurement classification selfinsured costs requires consideration historical cost experience demographic severity factors judgments current expected levels cost per claim retention levels methods provide estimates undiscounted liability associated claims incurred balance sheet date including claims reported conway believes actuarial methods appropriate measuring highly judgmental selfinsurance accruals however use estimation method sensitive assumptions factors described based magnitude claims length time incurrence claims ultimate settlement accordingly changes assumptions factors materially affect actual costs paid settle claims amounts may different estimates income taxes establishing deferred income tax assets liabilities conway makes judgments interpretations based enacted tax laws published tax guidance applicable operations conway periodically evaluates need valuation allowance reduce deferred tax assets realizable amounts likelihood material change conway’s expected realization assets dependent future taxable income future capital gains ability use tax loss credit carryforwards carrybacks final us foreign tax settlements effectiveness taxplanning strategies various relevant jurisdictions conway assesses income tax positions records tax benefits years subject examination based upon management’s evaluation facts circumstances information available reporting date positions likely tax benefit sustained conway recorded largest amount tax benefit greaterthan50percent likelihood realized upon ultimate settlement taxing authority full knowledge relevant information income tax positions meet morelikelythannot criteria tax benefit recognized financial statements revenue recognition conway freight recognizes revenue reporting periods based relative transit time period recognizes expense incurred conway truckload recognizes revenue related direct costs shipment delivered menlo worldwide logistics recognizes revenue proportionalperformance model based service outputs delivered customer critical revenuerelated policies estimates conway freight conway truckload include related revenue adjustments uncollectible accounts receivable critical revenuerelated policies estimates menlo worldwide logistics include related uncollectible accounts receivable measuring proportion service provided customers gross netbasis revenue recognition conway believes revenue recognition policies appropriate use revenuerelated estimates judgments provide reasonable approximation actual revenue earned estimated revenue adjustments generally pricing assessed companies transportation industry subject subsequent adjustment due several factors including weight freightclassification verifications pricing discounts revenue adjustments estimated based revenue levels historical experience uncollectible accounts receivable conway freight conway truckload report accounts receivable net realizable value provide allowance uncollectible accounts collection considered doubtful estimates uncollectible accounts based various judgments assumptions including revenue levels historical loss experience economic conditions aging outstanding accounts receivable menlo worldwide logistics based size nature client base performs periodic evaluation customers’ creditworthiness accounts receivable portfolio recognizes expense uncollectible accounts losses probable reasonably estimable proportional performance service outputs certain customer contracts menlo worldwide logistics makes estimates measuring proportion service outputs delivered customer including services provided performancebased incentive arrangements gross netbasis revenue recognition determining whether revenue reported gross net basis based assessment whether menlo worldwide logistics acting principal agent transaction involves judgment based terms arrangement property plant equipment longlived assets accounting property plant equipment conway makes estimates expected useful lives expected residual values assets potential impairment based fair values assets cash flows generated assets depreciation property plant equipment estimated useful lives determination salvage value require management make judgments future events conway periodically evaluates whether changes estimated useful lives salvage values necessary ensure estimates accurately reflect economic use assets conway’s periodic evaluation may result changes estimated lives andor salvage values used depreciate assets affect amount periodic depreciation expense recognized ultimately gain loss disposal asset conway’s recent periodic evaluation estimated useful lives revenue equipment extended response planned capital expenditure levels result revised estimates conway freight extended estimated useful life tractors 10 years 8 years expected result 12 million decrease 2010 depreciation expense extended estimated useful life trailers 14 years 13 years expected result 2 million decrease 2010 depreciation expense also effective 2010 conway truckload extended estimated useful life tractors 6 years 4 years decreased associated estimated salvage values result changes conway truckload depreciation expense expected increase 4 million 2010 typically increase useful lives revenue equipment accompanied increase maintenance expenses longlived assets tested impairment whenever events changes circumstances indicate carrying amount may recoverable assets held used impairment charge recognized estimated undiscounted cash flows associated asset group assets less carrying value impairment exists charge recognized difference carrying value fair value fair values determined using quoted market values discounted cash flows external appraisals applicable assets held disposal carried lower carrying value estimated net realizable value quarter conway considers events may trigger impairment longlived assets indicators impairment conway considers include factors significant decrease market value longlived asset significant change extent manner longlived asset used currentperiod losses combined history losses projection continuing losses associated use longlived asset goodwill recorded excess acquired entity’s purchase price amounts assigned assets acquired including identified intangible assets liabilities assumed goodwill amortized tested impairment annual basis frequently events changes circumstances indicate asset might impaired assessment requires comparison fair value reporting unit carrying value net assets including allocated goodwill carrying value reporting unit exceeds fair value conway must compare implied fair value reportingunit goodwill carrying amount goodwill carrying amount reportingunit goodwill exceeds implied fair value goodwill impairment loss recognized amount equal excess conway tests impairment goodwill annually measurement date november 30 whenever events occur circumstances change would likely reduce fair value reporting unit carrying amount quarter conway considers events may trigger impairment goodwill including factors changes total company market value compared underlying book value significant adverse changes may impact reporting segments underlying reporting units reporting unit goodwill impairment purposes case acquired businesses formerly called chic logistics cougar logistics may components reporting segment independently generate revenues discrete financial information regularly reviewed management conway uses multiple valuation methods possible determine fair value reporting unit methods used include use publiccompany multiples precedent transactions discounted cash flow models may vary depending availability information valuation methods assumptions used determine fair value reporting units may significantly impact result key assumptions used discounted cash flow models cash flow projections involving forecasted revenues expenses capital expenditures working capital changes discount rate terminal growth rate applied projected cash flows cash flow projections developed conway’s annual planning process discount rate equals estimated weightedaverage cost capital reporting unit marketparticipant perspective terminal growth rates based inflation assumptions adjusted factors may impact future growth industryspecific expectations estimates assumptions may incomplete inaccurate unanticipated events circumstances result changes assumptions estimates related goodwill could material effect conway’s valuation result accordingly financial condition results operations following discusses 2009 annual impairment tests unit significant goodwill truckload conway truckload 3298 million goodwill december 31 2009 valuation conway truckload conway applied two equally weighted methods publiccompany multiples discounted cash flow models assessment conway truckload’s goodwill fair value reporting unit exceeded carrying value 11 approximately 63 million 10 change assumed discount rate would result 20 million change fair value 10 change assumed terminal growth rate would result 6 million change fair value discounted cash flow models used valuation conway truckload include assumptions revenue growth improved margins result 7 annual increase net income next five years 2009 truckload industry segment adversely affected excess capacity competitive pricing conditions deteriorate fair value reporting unit could adversely affected logistics chic logistics 164 million goodwill december 31 2009 valuation chic logistics conway applied discounted cash flow models assessment chic logistics’ goodwill fourth quarter 2009 fair value reporting unit exceeded carrying value 15 approximately 1 million given small difference fair value carrying value adverse change discount rate future results forecasted discounted cash flow models could result lower fair value impairment goodwill considering chic logistics’ historical operating losses degree uncertainty relating future results forecasted discounted cash flow models cougar logistics 67 million goodwill december 31 2009 risk carrying value exceed fair value reporting unit conway concluded goodwill reporting units impaired december 31 2009 given difference fair values carrying amounts discussed conway may required evaluate goodwill impairment prior annual measurement date industry conditions worsen conway’s market capitalization declines materially disposition restructuring activities fully discussed note 3 “restructuring activities” note 4 “discontinued operations” item 8 “financial statements supplementary data” conway’s management made significant estimates assumptions connection disposition mwf ewa conway forwarding restructuring business units freight truckload reporting segments actual results could differ estimates could affect related amounts reported financial statements new accounting standards refer note 1 “principal accounting policies” item 8 “financial statements supplementary data” discussion recently issued accounting standards conway yet adopted forwardlooking statements certain statements included herein constitute “forwardlooking statements” within meaning section 21e securities exchange act 1934 amended subject number risks uncertainties relied upon predictions future events statements historical fact forwardlooking statements including • projections earnings revenues weight yield volumes income financial operating items • statements plans strategies expectations objectives conway’s management future operations future items • statements concerning proposed new products services • statements regarding conway’s estimated future contributions pension plans • statements adequacy reserves • statements regarding outcome legal claims proceedings may brought conway • statements regarding future economic conditions performance • statements regarding strategic acquisitions • statements estimates belief statements assumptions underlying foregoing certain forwardlooking statements identified use forwardlooking terminology “believes” “expects” “may” “will” “should” “seeks” “approximately” “intends” “plans” “estimates” “anticipates” negative terms variations terms comparable terminology discussions strategy plans intentions forwardlooking statements necessarily dependent assumptions data methods may incorrect imprecise assurance realized regard certain important factors among others addition matters discussed elsewhere document reports documents filed conway securities exchange commission could cause actual results matters differ materially discussed forwardlooking statements detailed description certain risk factors included item 1a “risk factors” item 7aitem 7 management’s discussion analysis financial condition results operations introduction management’s discussion analysis financial condition results operations referred “management’s discussion analysis” intended assist historical prospective understanding conway’s financial condition results operations cash flows including discussion analysis following • overview business • results operations • liquidity capital resources • critical accounting policies estimates • new accounting standards • forwardlooking statements overview business conway provides transportation logistics supplychain management services wide range manufacturing industrial retail customers conway’s business units operate regional transcontinental lessthantruckload fulltruckload freight transportation contract logistics supplychain management multimodal freight brokerage trailer manufacturing financial reporting purposes conway divided four reporting segments freight logistics truckload conway’s primary businessunit results generally depend number weight distance shipments transported prices received shipments services mix services provided customers well fixed variable costs incurred conway providing services ability manage costs changing circumstances conway’s primary business units affected timing degree fluctuations fuel prices ability recover incremental fuel costs fuelsurcharge programs andor costrecovery mechanisms fully discussed item 1a “risk factors” conway freight primarily transports shipments utilizing network freight service centers combined fleet companyoperated linehaul pickupanddelivery tractors trailers menlo worldwide logistics manages logistics functions customers primarily utilizes thirdparty transportation providers movement customer shipments conway truckload primarily transports shipments using fleet companyoperated longhaul tractors trailers results operations overview provides highlevel summary conway’s results continuing operations periods presented intended provide context remainder discussion reporting segments refer “reporting segment review” complete detailed discussion analysis continuing operations overview compared 2009 conway’s consolidated revenue 50 billion 2010 increased 160 43 billion 2009 due primarily increased revenue freight logistics conway’s operating results consisted operating income 782 million 2010 compared operating loss 259 million 2009 comparative periods include goodwill intangible asset impairment charges logistics 2010 goodwill impairment charge truckload 2009 excluding impairment charges years consolidated operating income 2010 declined due primarily net effect lower operating income freight partially offset improved operating results logistics lower operating income freight reflects weak industry pricing higher costs higher operating income logistics due improved margins higher revenue nonoperating expense declined 27 million due primarily 54 million decline interest expense reflects net effect various financing transactions include secondquarter repayment 2000 million outstanding conway’s 878 notes due 2010 capitallease transactions entered fourth quarter 2009 second fourth quarters 2010 nonoperating expense also reflects lower interest income lower rates earned conway’s cashequivalent investments marketable securities 17 million increase miscellaneous expenses include increased costs associated conway’s 325 million revolving credit facility entered november 2010 conway’s tax provision adversely affected periods nondeductible goodwillimpairment charges excluding effect nondeductible goodwill impairment charges various discrete tax adjustments effective tax rate 390 2010 408 2009 compared 2008 conway’s consolidated revenue 43 billion 2009 declined 152 50 billion 2008 due lower revenue reporting segments reflecting difficult economic conditions competitive industry pricing conway’s operating results consisted operating loss 259 million 2009 compared operating income 1926 million 2008 comparative periods include goodwill impairment charge truckload 2009 impairment charges logistics 2008 restructuring charges years excluding impairment restructuring charges consolidated operating income 2009 declined due primarily net effect lower operating income freight truckload partially offset improved operating results logistics comparative periods presented effects adverse industry economic conditions partially mitigated costreduction measures described nonoperating expense increased 66 million due part 33 million decline investment income reflects lower interest rates earned conway’s cashequivalent investments marketable securities nonoperating expense also reflects 15 million increase interest expense 18 million increase miscellaneous expenses primarily reflect variations foreignexchange gains losses conway’s tax provision adversely affected periods nondeductible goodwillimpairment charges costreduction actions response economic conditions march 2009 conway announced several employeerelated measures reduce costs conserve cash detailed note 11 “employee benefit plans” item 8 “financial statements supplementary data” effective january 2010 conway restored onehalf salary wage reductions effective april 2010 conway reinstated compensatedabsences benefits conway restored remaining onehalf salary wage reductions effective january 2011 conway freight attains minimum operating ratio 950 also known operating margin 50 two consecutive quarters conway prospectively reinstate “basic” “transition” contributions defined contribution retirement plan prior levels future meritbased pay increases companies instituted salary wage reductions reinstatement conway’s “matching” contributions defined contribution retirement plan based number factors currently subject specified financial metrics table compares estimated cost savings employeerelated costreduction measures predominant amount reported cost savings relate freight segment actual results may differ estimated amounts depending factors employee count turnover assumptions related employee retirement plan contributions reporting segment review discussion analysis segment operating results management utilizes revenue intersegment eliminations management believes revenue intersegment eliminations combined detailed operating expense information provides meaningful analysis segment results revenue intersegment eliminations reconciled revenue external customers note 14 “segment reporting” item 8 “financial statements supplementary data” freight following table compares operating results operating margins percentage change selected operating statistics freight reporting segment years ended december 31 compared 2009 freight’s revenue 2010 increased 172 2009 due 167 increase weight per day 01 increase yield 167 increase weight per day reflects 85 increase shipments per day 75 increase weight per shipment 2010 yield benefited increase fuelsurcharge revenue adversely affected decreases base freight rates increase weight per shipment excluding fuel surcharges yield decreased 28 2010 fuelsurcharge revenue increased 132 revenue 2010 105 2009 despite relatively flat yearoveryear change freight’s yield third fourth quarter 2010 increased 31 71 respectively prioryear periods conway freight’s management believes positive comparisons due part sales pricing initiatives increased base freight rates moderating amount freight transported improved pricing conditions lessthantruckload market weight per day increased 87 third quarter 2010 compared prioryear period decreased 13 fourth quarter 2010 compared prioryear period 2010 freight’s operating income decreased 436 2009 due primarily increased costs operating results 2010 2009 benefited costreduction measures announced march 2009 however comparative impact varied due timing implementation partial reinstatement 2010 certain benefits curtailed costreductions measures results 2010 adversely affected 51 million expense employee severance planned consolidation conway’s executive offices freight allocated portion restructuring charges 2009 freight’s operating results adversely affected change accounting estimate revenue adjustments lowered freight’s revenue operating income 54 million expenses salaries wages employee benefits increased 134 2009 2010 salaries wages increased 114 due primarily higher average employee count response increased shipment volumes partial reinstatement salary wage reductions employee benefits expense increased 175 2010 due primarily higher expenses compensated absences increased 372 million increase expense compensated absences primarily due resumption benefits effective april 2010 employee benefit cost increases 2010 also reflect higher expenses workers’ compensation claims payroll taxes partially offset decrease expense defined benefit defined contribution retirement plans costreduction measures pertaining defined contribution plan remain effect since implementation april 2009 purchased transportation expense increased 268 2010 reflecting increase freight transported thirdparty providers fuelrelated rate increases 2010 operating expenses increased 132 due primarily increases cargorelated selfinsurance costs administrative corporate allocations volumerelated operating costs increased administrative corporate allocations include expense allocated freight segment connection planned consolidation conway’s executive offices expenses fuel fuelrelated taxes increased 391 due primarily increase cost per gallon diesel fuel increased fuel consumption due increased shipment volumes 2010 expenses rents leases increased 503 maintenance expense increased 148 purchased labor increased 240 million due primarily increased business volumes particularly first half year increased costs maintenance expense 2010 also reflect increase average age tractor trailer fleets compared 2008 2009 freight’s revenue declined 146 2008 due 162 decrease yield 1day decline number working days partially offset 11 increase weight per day decline yield due primarily decreases fuel surcharges base freight rates increase weight per shipment decline base freight rates reflected competitive pricing environment primarily resulting excess capacity lessthantruckload market adverse economic conditions yields adversely affected declines fuel prices contributed lower fuelsurcharge revenue excluding fuel surcharges yields 2009 decreased 87 freight’s fuelsurcharge revenue decreased 105 revenue 2009 184 2008 due market conditions noted declines fuelsurcharge revenue offset equivalent increases base freightrate revenue since fuelsurcharge program historically enabled freight recover increases fuel costs fuelrelated increases purchased transportation declines fuelsurcharge revenue adverse effect operating results freight’s operating income 2009 decreased 690 compared 2008 due primarily lower yields periods presented comparative operating results affected costreduction measures restructuring activities change accounting estimate 2009 costreduction measures reduced approximately 110 million costs related salaries wages employee benefits fully discussed connection restructuring activities freight recognized 05 million net adjustments reduced expense 2009 compared 239 million expense 2008 additional information concerning freight’s restructuring activities see note 3 “restructuring activities” item 8 “financial statements supplementary data” 2009 change accounting estimate revenue adjustments lowered freight’s revenue operating income 54 million expenses salaries wages employee benefits declined 91 2009 employee benefits expense decreased 205 due lower expense compensated absences defined contribution retirement plan workers’ compensation claims partially offset increased pension expense defined benefit pension plans salaries wages 2009 decreased 36 due lower average employee counts costreduction measures 2009 purchased transportation expense increased 28 due increase freight transported thirdparty providers partially offset fuelrelated rate decreases lower negotiated base rates operating expenses decreased 84 2009 reflecting decreased administrative corporate allocations lower corporate allocations 2009 due part employeerelated costreduction measures partially offset allocated costs related corporate administrativeoutsourcing initiative 2009 expenses fuel fuelrelated taxes decreased 373 compared 2008 due primarily decline cost per gallon diesel fuel depreciation amortization expense declined 86 2009 due primarily change estimated useful life freight’s tractor fleet lowered depreciation expense 111 million 2009 logistics table compares operating results operating margins logistics reporting segment table summarizes logistics’ revenue well net revenue less purchased transportation expense carriermanagement revenue attributable contracts menlo worldwide logistics manages transportation freight subcontracts third parties actual transportation delivery products menlo worldwide logistics refers purchased transportation menlo worldwide logistics’ management places emphasis net revenue meaningful measure relative importance principal services since revenue earned carriermanagement services includes thirdparty carriers’ charges menlo worldwide logistics transporting shipments table also includes operating income operating margin excluding loss impairment goodwill intangible assets management believes measures relevant evaluate ongoing operations compared 2009 2010 logistics’ revenue increased 110 due increases revenue carriermanagement warehousemanagement services 2010 revenue carriermanagement services increased 111 revenue warehousemanagement services increased 106 higher revenue carriermanagement services due primarily revenue government contract implementation phase 2009 partially offset lower revenue result changes certain customer carrier contracts increased revenue warehousemanagement services due contributions new customers growth existing customers logistics’ net revenue 2010 increased 99 revenue growth partially offset purchased transportation expense grew faster rate revenue purchased transportation expense increased 117 2010 due primarily increased carriermanagement volumes 2010 logistics’ operating income decreased 69 operating results 2010 adversely affected 164 million goodwillimpairment charge 28 million charge impairment customerrelationship intangible asset fully discussed note 2 “goodwill intangible assets” item 8 “financial statements supplementary data” excluding impairment charges logistics’ operating income 2010 increased 172 million due primarily increases net revenue improved margins warehousemanagement carriermanagement services menlo worldwide logistics’ management believes improved margins warehousemanagement services reflect costcontrol measures improved margins carriermanagement services due largely recognition revenue performancebased arrangements performancebased arrangements revenue recognized upon achievement contractually specified performance measures typically without associated increase operating expenses level achievement relating performance measures varies reporting period salaries wages employee benefits increased 88 2010 salaries wages rose 82 due salary wage rate increases headcount growth due new customer contracts variable compensation expense increased 27 million 171 2010 based variations performance measures relative variablecompensation plan targets employee benefits expense increased 79 2010 due primarily increased expenses compensated absences employee medical workers’ compensation claims increase expenses compensated absences due part reinstatement benefits april 2010 prior levels higher expenses employee medical workers’ compensation claims reflects increases number severity claims purchased labor expense increased 332 2010 due increased warehousemanagement volumes compared 2008 2009 logistics’ revenue decreased 119 due 166 decline revenue carriermanagement services partially offset 18 increase revenue warehousemanagement services lower revenue carriermanagement services primarily reflects decline fuelsurcharge revenue changes certain carrier customer contracts revenue also reflects increase revenue government contract implementation phase 2009 2008 logistics’ net revenue 2009 increased 20 due increase revenue warehousemanagement services purchased transportation expense declined higher rate revenue carriermanagement services purchased transportation expense declined 190 2009 due primarily fuelrelated rate decreases changes certain carrier customer contracts logistics earned operating income 282 million 2009 reported operating loss 237 million 2008 logistics’ operating loss 2008 attributed companies acquired second half 2007 reflect charges 318 million goodwill impairment 60 million impairment customerrelationship intangible asset 49 million writedown acquisitionrelated receivable 42 million integration costs excluding loss impairment goodwill intangible assets 2008 logistics’ operating income 2009 doubled 2008 reflecting improved margins warehousemanagement carriermanagement services improved margins carriermanagement services due largely recognition revenue performancebased arrangements additionally comparative operating results 2009 benefited earliermentioned acquisition integration costs costreduction measures salaries wages employee benefits increased 79 2009 reflecting increase variable compensation higher costs employee benefits 2009 variable compensation increased 117 million based variations performance measures relative compensationplan targets employee benefits expense increased 77 due primarily increased expenses related conway’s defined benefit pension plan sharebased compensation awards partially offset lower expenses related defined contribution retirement plan compensated absences reflect costreduction measures expenses rents leases increased 129 2009 due primarily addition new warehousemanagement services customers transaction two logistics’ warehouses sold leased back june 2008 purchased labor expense decreased 103 due primarily efficiency initiatives logisticsmanaged warehouses 2009 operating expenses declined 102 due primarily lower administrative corporate allocations decrease expense uncollectible accounts truckload table compares operating results operating margins percentage change selected operating statistics truckload reporting segment table summarizes segment’s revenue intersegment eliminations including freight revenue fuelsurcharge revenue nonfreight revenue table also includes operating income operating margin excluding loss impairment goodwill truckload’s management believes measures relevant evaluate ongoing operations compared 2009 2010 truckload’s revenue increased 10 2009 due primarily 499 increase fuelsurcharge revenue partially offset 56 decrease freight revenue 56 decrease freight revenue reflects 74 decline loaded miles partially offset 20 increase revenue per mile higher fuelsurcharge revenue due primarily higher fuel prices 2010 compared 2009 decrease loaded miles reflects smaller fleet planned reduction amount services truckload provided freight revenue per mile increased decrease services provided freight allowed truckload take advantage improved truckload pricing external customers redeployment equipment serve external customers caused deterioration asset utilization 2010 revenue per tractor declined 12 2010 truckload earned operating income 208 million reported operating loss 1070 million 2009 truckload’s loss 2009 due goodwillimpairment charge 1348 million fully discussed note 2 “goodwill intangible assets” item 8 “financial statements supplementary data” excluding charge operating income 2010 decreased 251 2009 reflecting higher operating expenses salaries wages employee benefits decreased 60 2010 reflecting decreases salaries wages lower costs employee benefits partially offset increase expense variable compensation salaries wages decreased 65 due primarily decrease miles driven employee benefits expense decreased 80 2010 primarily reflecting decline expense selfinsured workers’ compensation claims operating expenses decreased 42 2010 primarily reflecting decline losses asset dispositions 24 million charge 2009 write taxrelated receivable partially offset 87 million increase vehicular selfinsurance expense due increases severity number claims expense 2009 included losses asset dispositions 76 million expenses fuel fuelrelated taxes increased 134 2010 due primarily higher fuel cost per gallon partially offset decrease miles driven depreciation amortization expense increased 89 2010 due primarily increase depreciation expense tractors 2010 truckload changed estimated useful lives estimated salvage values truckload tractors fully discussed note 1 “principal accounting policies” item 8 “financial statements supplementary data” 2010 maintenance expense increased 211 2009 due increase average age tractor fleet resulted increase repairs covered manufacturers’ warranties compared 2008 2009 truckload’s revenue decreased 153 2008 primarily reflecting 606 decline fuelsurcharge revenue 12 decline freight revenue lower fuelsurcharge revenue due primarily lower fuel prices 2009 compared 2008 lower freight revenue reflects 14 decline revenue per mile partially offset 02 increase loaded miles decline revenue per mile primarily result difficult industry economic conditions characterized decreased demand truckload services excess capacity truckload market truckload’s operating loss 1070 million 2009 primarily reflects 1348 million charge goodwill impairment excluding impairment charge truckload’s operating income 2009 declined 469 due primarily lower revenue particularly fuelsurcharge revenue declined faster rate expenses fuel fuelrelated taxes 2009 expenses salaries wages employee benefits increased 17 2008 primarily reflecting increase employee benefits expense employee benefits expense 2009 increased 137 due primarily increase severity frequency workers’ compensation claims increased employee benefits expense partially offset lower expenses salaries wages variable compensation purchased transportation decreased 214 2009 due lower utilization contract drivers fuelrelated rate declines operating expenses increased 80 2009 due primarily higher administrative corporate allocations losses 76 million disposition equipment 24 million charge write taxrelated receivable partially offset lower employee costs driver recruitment 183 decline vehicular selfinsurance expense higher corporate allocations due part increase percentage corporate costs allocated truckload lower employee costs driver recruitment due reduction fleet capacity improved driver retention rate decline vehicular selfinsurance expense resulted beneficial loss development prioryear claims expenses fuel fuelrelated taxes declined 381 2009 due primarily lower fuel cost per gallon maintenance expense increased 163 2009 due primarily increase average age tractor fleet resulted increase repairs covered manufacturers’ warranties reporting segment consists operating results road systems trailer manufacturer certain corporate activities related income expense allocated reporting segments results 2008 included expenses related variable executivecompensation plan promoted synergistic intersegment activities table summarizes operating results reporting segment variations road systems’ revenue reflect number trailers manufactured refurbished conway freight conway truckload discontinued operations net income loss applicable common shareholders includes results discontinued operations related primarily shutdown emery worldwide airlines inc 2001 fully discussed note 4 “discontinued operations” item 8 “financial statements supplementary data” periods presented results discontinued operations consisted 83 million 017 per diluted share gain disposal 2008 liquidity capital resources cash equivalents decreased 4214 million december 31 2010 4766 million december 31 2009 1611 million used investing activities 790 million used financing activities exceeded 1849 million provided operating activities cash used investing activities primarily reflects capital expenditures cash used financing activities primarily reflects net effect debt repayment proceeds issuance common stock cash provided operating activities came primarily net income adjustment noncash items 1 “noncash adjustments” refer depreciation amortization impairment charges restructuring activities deferred income taxes provision uncollectible accounts noncash income expenses continuing operations operating activities significant items affecting comparison conway’s operating cash flows periods presented summarized compared 2009 2010 net income excluding noncash adjustments increased 402 million 2009 changes receivables employee benefits accrued income taxes decreased operating cash flow 2010 compared prior year changes selfinsurance accruals accounts payable accrued liabilities excluding variable compensation employee benefits increased operating cash flow 2010 receivables used 613 million due primarily increased trade accounts receivable resulting increased revenue 2009 receivables provided 92 million due primarily decreased trade accounts receivable logistics segment partially offset increased trade accounts receivable freight segment employee benefits used 676 million 2010 compared 03 million provided prior year due primarily increase funding contributions 2010 conway contributed 938 million qualified pension plans compared 173 million 2009 level conway’s annual contributions qualified pension plans subject variations interest rates asset returns pension protection act “ppa” requirements factors 2010 accrued income taxes used 396 million compared 212 million provided 2009 reflecting variations conway’s current deferred income tax provisions change selfinsurance accruals provided 305 million 2010 compared 24 million used 2009 cash provided 2010 due primarily increases liabilities workers compensation vehicular claims accounts payable provided 319 million 2010 compared 20 million provided 2009 increase accounts payable reflected increasing business volumes 2010 particularly truckload freight segments changes accrued liabilities used 205 million 2010 compared 418 million used 2009 due primarily changes liability compensated absences 2010 liability compensated absences increased result reinstatement compensatedabsences benefits freight logistics segments compared 2008 2009 net income excluding discontinued operations noncash adjustments decreased 1113 million 2008 changes employee benefits accrued income taxes receivables accrued variable compensation increased operating cash flow 2009 compared prior year partially offset decrease operating cash flow associated accrued liabilities excluding variable compensation employee benefits 2009 employee benefits provided 03 million compared 414 million used 2008 variation employee benefits reflects recognition net periodic benefit expense qualified pension plans 2009 compared net periodic benefit income earned 2008 cash flows associated qualified pension plans also reflect funding contributions 173 million 100 million 2009 2008 respectively employee benefits cash flows also reflect change funding method contributions defined contribution retirement plan detailed note 11 “employee benefit plans” item 8 “financial statements supplementary data” accrued income taxes provided 212 million 2009 compared 192 million used 2008 reflecting variations conway’s current income tax provision well variations income tax refunds payments 2009 conway received 102 million net income tax refunds 2008 conway made net income tax payments 467 million receivables provided 92 million 2009 compared 265 million used 2008 due primarily decreased trade accounts receivable logistics segment partially offset increased trade accounts receivable freight segment change accrued variable compensation provided 46 million 2009 compared 197 million used 2008 changes accrued variable compensation primarily reflect lower payments 2009 compared 2008 due part changes conway’s payment schedule 2009 award year conway paid variable compensation february following award year prior change partial payments made december award year february following year changes accrued liabilities used 418 million 2009 compared 222 million provided 2008 due primarily changes liability compensated absences 2009 liability compensated absences decreased result costreduction measures reduced compensatedabsences benefits cash provided changes accrued liabilities 2008 reflects increase accrued interest 725 senior notes issued december 2007 investing activities significant items affecting comparison conway’s investing cash flows periods presented summarized 2010 capital expenditures 1865 million compared 682 million 2009 2344 million 2008 increased capital expenditures 2010 due primarily acquisition tractor trailer equipment freight truckload segments safestacktm cargoloading system trailers freight segment capital expenditures 2009 reflected lower capitalexpenditure plan connection conway’s cashconservation efforts addition 2010 2009 conway acquired tractor equipment capital lease agreements fully discussed note 8 “leases” item 8 “financial statements supplementary data” conway received salerelated proceeds 328 million 2010 327 million 2009 492 million 2008 proceeds include saleleaseback transactions 204 million 173 million received 2010 2009 respectively sale revenue equipment 404 million received 2008 sale two logistics’ warehouses fully discussed note 8 “leases” item 8 “financial statements supplementary data” financing activities significant items affecting comparison conway’s financing cash flows periods presented summarized conway used 2111 million 2010 repayment debt obligations compared 224 million 2009 227 million 2008 2010 conway used 2000 million repay amount outstanding 878 notes due 2010 cash used 2009 2008 primarily reflects repayment primary dc plan notes matured january 2009 2010 conway issued common stock public offering received net proceeds 1433 million discussed fully note 10 “shareholders’ equity” item 8 “financial statements supplementary data” detailed note 11 “employee benefit plans” item 8 “financial statements supplementary data” 2010 2009 conway used common stock fund 368 million 233 million respectively contributions defined contribution retirement plan contractual cash obligations table summarizes contractual cash obligations conway december 31 2010 amounts table based management’s estimates assumptions obligations including duration possibility renewal factors estimates assumptions actual future payments may vary reflected table certain liabilities including related selfinsurance accruals reported conway’s consolidated balance sheets reflected table due absence stated due dates presented contractual obligations longterm debt represent principal interest payments amounts representing principal portion interest payable 2011 reported consolidated balance sheets contractual obligations operating leases represent payments lease arrangements accordance accounting principles generally accepted us “gaap” future operating lease payments included conway’s consolidated balance sheets future payments related capital leases include stated amounts residualvalue guarantees employee benefit planrelated cash obligations table represent estimated payments conway’s nonqualified defined benefit pension plans postretirement medical plan december 31 2020 expected benefit payments conway’s qualified defined benefit pension plans included table benefits satisfied use plan assets conway estimates make 35 million 50 million contributions qualified defined benefit pension plans 2011 however could change based variations interest rates asset returns ppa requirements factors 2010 conway entered agreements thirdparty service providers outsource significant portion information technology infrastructure function small portion administrative accounting functions payments terms agreements subject change depending quantities types services consumed presented payments reflect amounts based projections services expected consumed although payments made thirdparty service providers expected offset cost savings resulting headcount reduction lower operating costs payments associated savings vary depending actual quantity mix services used contracts also contain provisions allow conway terminate contract time however conway would required pay additional fees termination causes failure service providers perform contractual obligations reported exclude conway’s liability 159 million unrecognized tax benefits fully discussed note 9 “income taxes” item 8 “financial statements supplementary data” letters credit outstanding conway’s credit facilities described “capital resources liquidity outlook” generally required selfinsurance programs represent additional liabilities underlying selfinsurance accruals already included conway’s consolidated balance sheets discussion see note 7 “debt financing arrangements” note 8 “leases” note 9 “income taxes” note 11 “employee benefit plans” item 8 “financial statements supplementary data” capital resources liquidity outlook conway’s capital requirements relate primarily acquisition revenue equipment support growth andor replacement older equipment newer equipment funding capital expenditures meeting workingcapital requirements conway utilizes various sources liquidity capital including cash equivalents cash flow operations credit facilities access capital markets conway may also manage liquidity requirements cashflow generation varying timing amount capital expenditures implementing costreduction initiatives fully discussed “results operations overview” november 2010 conway entered fouryear 325 million unsecured revolving credit facility replaced existing 400 million facility based conway’s sources liquidity conditions credit markets conway determined smaller credit facility appropriate new revolving facility terminates november 4 2014 available cash borrowings issuance letters credit december 31 2010 cash borrowings outstanding credit facility however 1822 million letters credit outstanding leaving 1428 million available capacity additional letters credit cash borrowings revolving facility guaranteed certain conway’s material domestic subsidiaries contains two financial covenants leverage ratio ii fixedcharge coverage ratio december 31 2010 conway compliance revolving credit facility’s financial covenants expects remain compliance december 31 2011 thereafter conway uncommitted unsecured credit facilities totaling 616 million december 31 2010 available support shortterm borrowings letters credit bank guarantees overdraft facilities december 31 2010 186 million cash borrowings 249 million credit commitments outstanding leaving 181 million available capacity 2011 conway anticipates capital software expenditures approximately 275 million net asset dispositions primarily acquisition tractor equipment conway’s actual 2011 capital expenditures may differ estimated amount depending factors availability timing delivery equipment 2011 conway’s net cash flows benefit capital expenditurerelated tax legislation enacted december 2010 fully discussed note 9 “income taxes” item 8 “financial statements supplementary data” december 31 2010 conway’s senior unsecured debt rated investment grade standard poor’s bbb fitch ratings bbb moody’s baa3 standard poor’s moody’s assigned outlook “negative” fitch ratings assigned outlook “stable” conway believes workingcapital requirements capitalexpenditure plans 2011 adequately met various sources liquidity capital including conway’s cash equivalents cash flow operations credit facilities access capital markets critical accounting policies estimates preparation financial statements accordance accounting principles generally accepted us requires management adopt accounting policies make significant judgments estimates many cases alternative policies estimation techniques could used conway maintains process evaluate appropriateness accounting policies estimation techniques including discussion review audit committee board directors independent auditors accounting policies estimates may require adjustment based changing facts circumstances actual results could differ estimates conway believes accounting policies judgmental material financial statements related following • defined benefit pension plans • goodwill • income taxes • property plant equipment longlived assets • revenue recognition • selfinsurance accruals defined benefit pension plans periods presented employees conway subsidiaries us covered several retirement benefit plans including several qualified nonqualified defined benefit pension plans effective april 30 2009 conway amended primary defined benefit pension plan permanently curtail benefits prior amendment future retirement benefits considered participants’ eligible compensation increases 2016 significant assumptions amounts recognized pension expense income accrued pension asset liability conway’s defined benefit pension plans depend upon number assumptions factors significant discount rate used measure present value pension obligations expected rate return plan assets funded qualified plans conway assesses plan assumptions discount rate expected rate return plan assets significant assumptions periodic basis concludes assumptions actuarial plan measurement date conway’s significant assumptions used determining pension expense income periods presented 2011 summarized discount rate determining appropriate discount rate conway assisted actuaries utilize yieldcurve model based universe highgrade corporate bonds rated aa better moody’s rating service model employs cash flows match conway’s expected benefit payments future years factors held constant 025 decrease increase discount rate would result estimated 50 million increase decrease cumulative unrecognized actuarial loss december 31 2010 related loss credit would amortized futureperiod earnings described rate return plan assets qualified funded defined benefit pension plans conway evaluates expected rate return plan assets based current market expectations historical returns rate return based expected 20year return target asset allocation effect actively managing plan net fees expenses asset allocation studies conducted needed targets reviewed determine adjustments required result periodic evaluation 2010 conway changed asset allocation targets lower percentage investments equity securities increase percentage investments fixedincome securities current asset allocation targets disclosed note 11 “employee benefit plans” item 8 “financial statements supplementary data” asset allocations may vary depending market conditions investment performance funded status result change asset allocation targets expected rate return plan assets reduced 850 800 using yearend plan asset values 025 decrease increase expected rate return plan assets would result estimated 3 million increase decrease 2011 annual pension expense actuarial gains losses differences expected actual rate return plan assets andor changes discount rate may result cumulative unrecognized actuarial gains losses conway’s defined benefit pension plans accumulated unrecognized actuarial losses increased 4692 million december 31 2010 3973 million december 31 2009 portion unrecognized actuarial gain loss outside corridor amount must amortized recognized expense income estimated average remaining life expectancy active plan participants effect operating results effect defined benefit pension plans conway’s operating results consist primarily net effect interest cost plan obligations qualified nonqualified defined benefit pension plans expected return plan assets funded qualified defined benefit pension plans amortization unrecognized actuarial gain loss excess corridor conway estimates defined benefit pension plans result annual expense 10 million 2011 defined benefit pension plans conway recognized annual expense 75 million 284 million 2010 2009 respectively compared income 231 million 2008 funding conway periodically reviews funded status qualified defined benefit pension plans makes contributions time necessary comply funding requirements ppa determining amount timing pension contributions conway considers ppa gaapbased measurements funded status well tax deductibility contributions conway made contributions 938 million 173 million defined benefit pension plans 2010 2009 respectively conway estimates make 35 million 50 million contributions qualified defined benefit pension plans 2011 level conway’s annual contributions qualified pension plans subject change based variations interest rates asset returns ppa requirements factors goodwill recorded excess acquired entity’s purchase price amounts assigned assets acquired including identified intangible assets liabilities assumed goodwill amortized tested impairment annual basis frequently events changes circumstances indicate asset might impaired assessment requires comparison fair value reporting unit carrying value net assets including allocated goodwill carrying value reporting unit exceeds fair value conway must compare implied fair value reportingunit goodwill carrying amount goodwill carrying amount reportingunit goodwill exceeds implied fair value goodwill impairment loss recognized amount equal excess conway tests impairment goodwill annually measurement date november 30 whenever events occur circumstances change would likely reduce fair value reporting unit carrying amount quarter conway considers events may trigger impairment goodwill including factors changes total company market value compared underlying book value significant adverse changes may impact reporting segments underlying reporting units reporting unit goodwill impairment purposes may component reporting segment independently generates revenues discrete financial information regularly reviewed management conway uses multiple valuation methods possible determine fair value reporting unit methods used include use publiccompany multiples precedent transactions discounted cash flow models may vary depending availability information valuation methods assumptions used determine fair value reporting units may significantly impact result key assumptions used discounted cash flow models cash flow projections involving forecasted revenues expenses capital expenditures working capital changes discount rate terminal growth rate applied projected cash flows cash flow projections developed conway’s annual planning process discount rate equals estimated weightedaverage cost capital reporting unit marketparticipant perspective terminal growth rates based inflation assumptions adjusted factors may impact future growth industryspecific expectations estimates assumptions may incomplete inaccurate unanticipated events circumstances result changes assumptions estimates related goodwill could material effect conway’s valuation result accordingly financial condition results operations conway truckload 3298 million goodwill december 31 2010 valuation conway truckload conway applied two equally weighted methods publiccompany multiples discounted cash flow models assessment conway truckload’s goodwill fair value reporting unit exceeded carrying value 13 approximately 75 million 10 change assumed discount rate would result 18 million change fair value 10 change estimated operating income next five years would result 30 million change fair value income taxes establishing deferred income tax assets liabilities conway makes judgments interpretations based enacted tax laws published tax guidance applicable operations conway periodically evaluates need valuation allowance reduce deferred tax assets realizable amounts likelihood material change conway’s expected realization assets dependent future taxable income future capital gains ability use tax loss credit carryforwards carrybacks final us foreign tax settlements effectiveness taxplanning strategies various relevant jurisdictions conway assesses income tax positions records tax benefits years subject examination based upon management’s evaluation facts circumstances information available reporting date positions likely tax benefit sustained conway recorded largest amount tax benefit greaterthan50percent likelihood realized upon ultimate settlement taxing authority full knowledge relevant information income tax positions meet morelikelythannot criteria tax benefit recognized financial statements property plant equipment longlived assets accounting property plant equipment conway makes estimates expected useful lives expected residual values assets potential impairment based fair values assets cash flows generated assets depreciation property plant equipment estimated useful lives determination salvage values require management make judgments future events conway periodically evaluates whether changes estimated useful lives salvage values necessary ensure estimates accurately reflect economic use assets conway’s periodic evaluation may result changes estimated lives andor salvage values used depreciate assets affect amount periodic depreciation expense recognized ultimately gain loss disposal asset longlived assets tested impairment whenever events changes circumstances indicate carrying amount may recoverable assets held used impairment charge recognized estimated undiscounted cash flows associated asset group assets less carrying value impairment exists charge recognized difference carrying value fair value fair values determined using quoted market values discounted cash flows external appraisals applicable assets held disposal carried lower carrying value estimated net realizable value quarter conway considers events may trigger impairment longlived assets indicators impairment conway considers include factors significant decrease market value longlived asset significant change extent manner longlived asset used currentperiod losses combined history losses projection continuing losses associated use longlived asset revenue recognition conway freight recognizes revenue reporting periods based relative transit time period recognizes expense incurred conway truckload recognizes revenue related direct costs shipment delivered menlo worldwide logistics recognizes revenue proportionalperformance model based service outputs delivered customer critical revenuerelated policies estimates conway freight conway truckload include related revenue adjustments uncollectible accounts receivable critical revenuerelated policies estimates menlo worldwide logistics include related uncollectible accounts receivable measuring proportion service provided customers gross netbasis revenue recognition conway believes revenue recognition policies appropriate use revenuerelated estimates judgments provide reasonable approximation actual revenue earned estimated revenue adjustments generally pricing assessed companies transportation industry subject subsequent adjustment due several factors including weight freightclassification verifications pricing discounts revenue adjustments estimated based revenue levels historical experience uncollectible accounts receivable conway freight conway truckload report accounts receivable net realizable value provide allowance uncollectible accounts collection considered doubtful estimates uncollectible accounts based various judgments assumptions including revenue levels historical loss experience economic conditions aging outstanding accounts receivable menlo worldwide logistics based size nature client base performs periodic evaluation customers’ creditworthiness accounts receivable portfolio recognizes expense uncollectible accounts losses probable reasonably estimable proportional performance service outputs certain customer contracts menlo worldwide logistics makes estimates measuring proportion service outputs delivered customer including services provided performancebased incentive arrangements gross netbasis revenue recognition determining whether revenue reported gross net basis based assessment whether menlo worldwide logistics acting principal agent transaction involves judgment based terms arrangement selfinsurance accruals conway uses combination largedeductible purchased insurance selfinsurance programs provide costs medical vehicular cargo workers’ compensation claims longterm portion selfinsurance accruals relates primarily workers’ compensation vehicular claims expected payable several years conway periodically evaluates level insurance coverage adjusts insurance levels based risk tolerance premium expense measurement classification selfinsured costs requires consideration historical cost experience demographic severity factors judgments current expected levels cost per claim retention levels methods provide estimates undiscounted liability associated claims incurred balance sheet date including claims reported conway believes actuarial methods appropriate measuring highly judgmental selfinsurance accruals however based magnitude claims length time incurrence claims ultimate settlement use estimation method sensitive assumptions factors described accordingly changes assumptions factors materially affect estimated liability amounts may different actual costs paid settle claims new accounting standards refer note 1 “principal accounting policies” item 8 “financial statements supplementary data” discussion recently issued accounting standards conway yet adopted forwardlooking statements certain statements included herein constitute “forwardlooking statements” within meaning section 21e securities exchange act 1934 amended subject number risks uncertainties relied upon predictions future events statements historical fact forwardlooking statements including • projections earnings revenues weight yield volumes income financial operating items • statements plans strategies expectations objectives conway’s management future operations future items • statements concerning proposed new products services • statements regarding conway’s estimated future contributions pension plans • statements adequacy reserves • statements regarding outcome legal claims proceedings may brought conway • statements regarding future economic conditions performance • statements regarding strategic acquisitions • statements estimates belief statements assumptions underlying foregoing certain forwardlooking statements identified use forwardlooking terminology “believes” “expects” “may” “will” “should” “seeks” “approximately” “intends” “plans” “estimates” “anticipates” negative terms variations terms comparable terminology discussions strategy plans intentions forwardlooking statements necessarily dependent assumptions data methods may incorrect imprecise assurance realized regard certain important factors among others addition matters discussed elsewhere document reports documents filed conway securities exchange commission could cause actual results matters differ materially discussed forwardlooking statements detailed description certain risk factors included item 1a “risk factors” item 7aitem 7 management’s discussion analysis financial condition results operations introduction management’s discussion analysis financial condition results operations referred “management’s discussion analysis” intended assist historical prospective understanding conway’s financial condition results operations cash flows including discussion analysis following • overview business • results operations • liquidity capital resources • critical accounting policies estimates • new accounting standards • forwardlooking statements overview business conway provides transportation logistics supplychain management services wide range manufacturing industrial retail customers conway’s business units operate regional transcontinental lessthantruckload fulltruckload freight transportation contract logistics supplychain management multimodal freight brokerage trailer manufacturing financial reporting purposes conway divided four reporting segments freight logistics truckload conway’s primary businessunit results generally depend number weight distance shipments transported prices received shipments services mix services provided customers well fixed variable costs incurred conway providing services ability manage costs changing circumstances conway’s primary business units affected timing degree fluctuations fuel prices ability recover incremental fuel costs fuelsurcharge programs andor costrecovery mechanisms fully discussed item 1a “risk factors” conway freight primarily transports shipments utilizing network freight service centers combined fleet companyoperated linehaul pickupanddelivery tractors trailers menlo worldwide logistics manages logistics functions customers primarily utilizes thirdparty transportation providers movement customer shipments conway truckload primarily transports shipments using fleet companyoperated longhaul tractors trailers results operations overview provides highlevel summary conway’s results continuing operations periods presented intended provide context remainder discussion reporting segments refer “reporting segment review” complete detailed discussion analysis overview 2011 compared 2010 conway’s consolidated revenue 53 billion 2011 increased 68 50 billion 2010 reflecting higher revenue freight truckload logistics higher revenue freight truckload benefited higher fuel surcharges increased base freight rates logistics’ higher revenue primarily due increased carriermanagement services conway’s operating income increased 2079 million 2011 782 million 2010 increase operating income due improved operating income freight logistics truckload higher operating income freight truckload due large part increased revenues higher operating income logistics reflects 100 million gain 2011 resulted purchaseprice adjustment settle dispute associated 2007 acquisition chic logistics prioryear period included 192 million assetimpairment charges nonoperating expense 2011 decreased 18 million compared 2010 largely due 34 million decline interest expense partially offset 13 million increase miscellaneous expenses primarily letters credit fees decline interest expense reflects 2000 million repayment second quarter 2010 conway’s 8 78 notes due 2010 conway’s effective tax rate 2011 403 compared 759 2010 effective tax rate 2011 included effect 100 million gain 11 million related tax 59 million charge connection internal revenue services audit settlement discussed note 8 “income taxes” item 8 “financial statements supplementary data” conway’s effective tax rate 2010 adversely affected nondeductible goodwillimpairment charges excluding items discrete adjustments effective tax rate 2011 376 compared 390 2010 compared 2009 conway’s consolidated revenue 50 billion 2010 increased 160 43 billion 2009 primarily due increased revenue freight logistics conway’s operating results consisted operating income 782 million 2010 compared operating loss 259 million 2009 primarily reflecting goodwill intangibleasset impairment charges logistics 2010 goodwillimpairment charge truckload 2009 excluding impairment charges years consolidated operating income 2010 declined primarily due net effect lower operating income freight partially offset improved operating results logistics lower operating income freight reflected weak industry pricing higher costs higher operating income logistics due improved margins higher revenue nonoperating expense declined 27 million primarily due 54 million decline interest expense reflects net effect various financing transactions including secondquarter 2000 million repayment conway’s 8 78 notes due 2010 various capitallease transactions entered years nonoperating expense also reflects lower interest rates earned conway’s cashequivalent investments marketable securities nonoperating expense also reflects 17 million increase miscellaneous expenses primarily letters credit fees conway’s tax provision periods adversely affected nondeductible goodwillimpairment charges costreduction actions response economic conditions march 2009 conway announced several measures reduce costs conserve cash detailed measures announced march 2009 substantially consisted suspension curtailment employee benefits reduction salaries wages salaries wages effective march 2009 salaries wages certain employees reduced 5 including corporate sharedservices employees conway freight road systems business units conway restored half salary wage reductions january 2010 restored remaining half january 2011 compensated absences effective april 2009 compensatedabsences benefit suspended conway freight period suspension compensatedabsences benefits earned currentyear service however employees could use previously vested benefits also effective march 2009 menlo worldwide logistics reduced compensatedabsences benefit 25 effective april 2010 conway freight menlo worldwide logistics reinstated compensatedabsences benefits defined contribution plan detailed note 10 “employee benefit plans” item 8 “financial statements supplementary data” effective april 2009 employer contributions conway’s primary defined contribution retirement plan suspended limited “matching” “transition” contributions suspended “basic” contribution limited 3 employee’s eligible compensation fourth quarter 2011 conway prospectively reinstated “basic” “transition” contributions defined contribution retirement plan prior levels “matching” contributions reinstated potential reinstatement conway’s “matching” contributions defined contribution retirement plan based number considerations table compares estimated cost savings employeerelated costreduction measures predominant amount reported cost savings relate freight segment actual results may differ estimated amounts depending factors employee count turnover assumptions related employee retirement plan contributions reporting segment review discussion analysis segment operating results management utilizes revenue intersegment eliminations management believes revenue intersegment eliminations combined detailed operating expense information provides meaningful analysis segment results revenue intersegment eliminations reconciled revenue external customers note 13 “segment reporting” item 8 “financial statements supplementary data” freight following table compares operating results operating margins percentage change selected operating statistics freight reporting segment years ended december 31 2011 compared 2010 freight’s revenue 2011 increased 56 2010 primarily due 103 increase yield partially offset 46 decline weight per day 46 decline weight per day reflects 57 decline shipments per day partially offset 12 increase weight per shipment 2011 yield benefited increases fuelsurcharge revenue base freight rates adversely affected increase weight per shipment excluding fuel surcharges yield increased 57 2011 fuelsurcharge revenue increased 170 revenue 2011 132 2010 fuel surcharge intended compensate conway freight adverse effects higher fuel costs fuelrelated increases purchased transportation fuel surcharges one part conway freight’s overall rate structure total price conway freight receives customers services governed market forces fully discussed item 1a “risk factors” higher yield lower weight per day due part sales pricing initiatives implemented third quarter 2010 increased base freight rates moderated amount freight transported network management initiatives 2011 adapted focus pricing improvements maintaining volume conway freight’s management believes yields also impacted improved pricing conditions lessthantruckload market 2011 compared 2010 2011 freight’s operating income increased 909 million compared 2010 higher operating income 2011 largely due higher revenue described strategic efforts improve network efficiency control costs operating income years includes effect costreduction measures announced march 2009 however 2011 included higher expenses 2010 due reinstatement 2010 2011 certain benefits previously curtailed costreduction measures results 2010 adversely affected 51 million expense employee severance consolidation conway’s executive offices freight allocated portion restructuring charges expenses salaries wages employee benefits essentially flat 2011 compared 2010 salaries wages excluding variable compensation decreased 15 due part lower average employee counts reflected decline shipment volumes reduction miles driven increased productivity partially offset salary wage restorations employee benefits expenses decreased 13 primarily due lower expense workers’ compensation claims partially offset higher expenses compensated absences lower expense workers’ compensation claims reflects decrease number claims lower expense per claim increase expense compensatedabsences benefits primarily due reinstatement benefit effective april 2010 variablecompensation expense increased 224 million due variations performance measures relative variablecompensation plan targets purchased transportation expense increased 42 2011 reflecting fuelrelated rate increases higher base rates partially offset declines freight transported thirdparty providers expenses fuel fuelrelated taxes increased 222 primarily due increase cost per gallon diesel fuel partially offset lower fuel consumption due fewer miles driven result moderation shipment volumes 2011 operating expenses decreased 36 mainly due lower selfinsurance expense cargoloss damage claims partially offset higher costs informationtechnology services decrease cargoclaims expense reflects lower shipment volumes improved freight handling due part increased investment training utilization safestacktm cargo loading system trailers deployed 2010 compared 2009 freight’s revenue 2010 increased 172 2009 due 167 increase weight per day 01 increase yield 167 increase weight per day reflects 85 increase shipments per day 75 increase weight per shipment 2010 yield benefited increase fuelsurcharge revenue adversely affected lower base freight rates increase weight per shipment excluding fuel surcharges yield decreased 28 2010 fuelsurcharge revenue increased 132 revenue 105 2009 despite relatively flat yearoveryear change freight’s yield third fourth quarter 2010 increased 31 71 respectively prioryear periods positive comparisons due part sales pricing initiatives implemented third quarter 2010 fully discussed weight per day increased 87 third quarter 2010 compared prioryear period decreased 13 fourth quarter 2010 compared prioryear period 2010 freight’s operating income decreased 436 2009 primarily due increased costs operating results 2010 2009 benefited costreduction measures announced march 2009 however comparative impact varied due timing implementation partial reinstatement 2010 certain benefits curtailed costreduction measures results 2010 adversely affected 51 million expense employee severance consolidation conway’s executive offices 2009 freight’s operating results adversely affected change accounting estimate revenue adjustments lowered freight’s revenue operating income 54 million expenses salaries wages employee benefits increased 134 2009 2010 salaries wages excluding variable compensation increased 114 primarily due higher average employee count response increased shipment volumes partial reinstatement salary wage reductions employee benefits expense increased 175 2010 primarily due higher expenses compensated absences increased 372 million increase expense compensated absences primarily due resumption benefit effective april 2010 employee benefit cost increases 2010 also reflect higher expenses workers’ compensation claims payroll taxes partially offset decrease collective expense defined benefit defined contribution retirement plans purchased transportation expense increased 268 2010 reflecting increase freight transported thirdparty providers fuelrelated increases expenses fuel fuelrelated taxes increased 391 primarily due increase cost per gallon diesel fuel increased fuel consumption due miles driven result increased shipment volumes 2010 operating expenses increased 132 primarily due increases selfinsurance expense particularly cargoloss damage claims increased corporate allocations increased operating costs due higher business volumes 2010 expenses rents leases increased 503 maintenance expense increased 148 purchased labor increased 240 million primarily due increased business volumes increased costs maintenance expense 2010 also reflect increase average age tractor trailer fleets logistics table compares operating results operating margins logistics reporting segment table summarizes logistics’ revenue well net revenue less purchased transportation expense carriermanagement revenue attributable contracts menlo worldwide logistics manages transportation freight subcontracts carriers actual transportation delivery products menlo worldwide logistics refers purchased transportation menlo worldwide logistics’ management places emphasis net revenue meaningful measure relative importance principal services since revenue earned carriermanagement services includes carriers’ charges menlo worldwide logistics transporting shipments table also includes operating income operating margin excluding loss gain asset impairments purchaseprice adjustment management believes measures relevant evaluate ongoing operations 2011 compared 2010 2011 logistics’ revenue increased 76 due increases revenue carriermanagement warehousemanagement services 2011 revenue carriermanagement services increased 96 revenue warehousemanagement services increased 28 higher revenue carriermanagement services primarily due increased freightbrokerage volumes growth existing customers lesser extent fuelrelated increases purchased transportation increased revenue warehousemanagement services primarily due addition new customers logistics’ net revenue 2011 increased 52 revenue growth partially offset purchased transportation expense grew faster rate revenue purchased transportation expense increased 90 2011 primarily due increased carriermanagement volumes lesser extent fuelrelated rate increases 2011 logistics reported operating income 547 million compared 263 million 2010 operating results 2011 included 100 million gain resulting purchaseprice adjustment settle dispute associated 2007 acquisition chic logistics operating results 2010 adversely affected 164 million goodwillimpairment charge 28 million charge impairment customerrelationship intangible asset items fully discussed note 2 “goodwill intangible assets” item 8 “financial statements supplementary data” excluding items logistics’ operating income 2011 decreased 16 2010 primarily due lower margins warehousemanagement services lower margins warehousemanagement services reflect costs warehousefacility relocations changes customer mix increased startup costs associated new customers salaries wages employee benefits increased 58 2011 salaries wages excluding variable compensation rose 92 due salary wage rate increases increased average employee counts due new customer contracts variable compensation expense decreased 34 million 181 2011 based variations performance measures relative variablecompensation plan targets employee benefits expense increased 50 2011 primarily due increased expenses international employee benefits payroll taxes operating expenses increased 55 2011 reflecting higher costs informationtechnology services increased facility costs due new warehousemanagement customers purchased labor expense increased 116 2011 due increased workloads startup new warehousemanagement facilities warehouse relocations 2010 compared 2009 2010 logistics’ revenue increased 110 due increases revenue carriermanagement warehousemanagement services 2010 revenue carriermanagement services increased 111 revenue warehousemanagement services increased 106 higher revenue carriermanagement services primarily due revenue government contract implementation phase 2009 partially offset lower revenue changes certain customer carrier contracts increased revenue warehousemanagement services due contributions new existing customers logistics’ net revenue 2010 increased 99 revenue growth partially offset purchased transportation expense grew faster rate revenue purchased transportation expense increased 117 2010 primarily due increased carriermanagement volumes 2010 logistics’ operating income decreased 69 operating results 2010 adversely affected 192 million assetimpairment charges fully discussed excluding impairment charges logistics’ operating income 2010 increased 172 million primarily due increases net revenue improved margins warehousemanagement carriermanagement services menlo worldwide logistics’ management believes improved margins warehousemanagement services reflect costcontrol measures improved margins carriermanagement services due largely recognition revenue performancebased arrangements performancebased arrangements revenue recognized upon achievement contractually specified performance measures typically without associated increase operating expenses level achievement relating performance measures varies reporting period salaries wages employee benefits increased 88 2010 salaries wages excluding variable compensation rose 82 due salary wage rate increases headcount growth due new customer contracts variablecompensation expense increased 27 million 171 2010 based variations performance measures relative variablecompensation plan targets employee benefits expense increased 79 2010 primarily due increased expenses compensated absences employee medical workers’ compensation claims increase expenses compensated absences due part reinstatement benefits april 2010 prior levels higher expenses employee medical workers’ compensation claims reflect increases number severity claims purchased labor expense increased 332 2010 due increased warehousemanagement volumes truckload table compares operating results operating margins percentage change selected operating statistics truckload reporting segment table summarizes segment’s revenue intersegment eliminations including freight revenue fuelsurcharge revenue nonfreight revenue table also includes operating income operating margin excluding loss impairment goodwill truckload’s management believes measures relevant evaluate ongoing operations 2011 compared 2010 2011 truckload’s revenue increased 79 2010 primarily due 471 increase fuelsurcharge freight revenue essentially flat reflecting 41 increase revenue per mile 40 decline loaded miles higher fuelsurcharge revenue due higher fuel prices 2011 compared 2010 decrease loaded miles primarily due decline number tractors operated twoperson teams resulted lower miles per tractor slightly smaller fleet 2011 truckload earned operating income 348 million compared 208 million 2010 primarily reflecting effect improved fuelsurcharge recovery rate salaries wages employee benefits decreased 15 2011 reflecting decreases salaries wages excluding variable compensation partially offset increase employee benefits expense salaries wages excluding variable compensation decreased 27 primarily due lower wages result fewer miles driven employee benefits expense increased 23 2011 primarily reflecting increased costs employee medical claims primarily due increase severity claims partially offset decline number claims purchased transportation increased 134 2011 primarily due fuelrelated increases truckload’s owneroperator fleet expenses fuel fuelrelated taxes increased 207 2011 primarily due higher fuel cost per gallon partially offset lower fuel consumption due fewer miles driven operating expenses decreased 67 2011 primarily reflecting declines severity vehicular selfinsurance claims vehicular selfinsurance expense decreased 55 million 2011 compared 2010 depreciation amortization expense increased 92 2011 reflecting tractor replacement program initiated 2010 compared 2009 2010 truckload’s revenue increased 10 2009 primarily due 499 increase fuelsurcharge revenue partially offset 56 decrease freight revenue 56 decrease freight revenue reflects 74 decline loaded miles partially offset 20 increase revenue per mile higher fuelsurcharge revenue primarily due higher fuel prices 2010 compared 2009 decrease loaded miles reflects smaller fleet planned reduction amount services truckload provided freight revenue per mile increased decrease services provided freight allowed truckload take advantage improved truckload pricing external customers redeployment equipment serve external customers caused deterioration asset utilization 2010 revenue per tractor declined 12 2010 truckload earned operating income 208 million reported operating loss 1070 million 2009 truckload’s loss 2009 due goodwillimpairment charge 1348 million primarily due lower projected revenues operating income future years reflected adverse economic market conditions goodwill measurement date excluding charge operating income 2010 decreased 251 2009 reflecting higher operating expenses salaries wages employee benefits decreased 60 2010 reflecting decreases salaries wages excluding variable compensation lower costs employee benefits partially offset increase expense variable compensation salaries wages excluding variable compensation decreased 65 primarily due decrease miles driven employee benefits expense decreased 80 2010 primarily reflecting decline expense selfinsured workers’ compensation claims operating expenses decreased 42 2010 primarily reflecting decline losses asset dispositions 24 million charge 2009 write taxrelated receivable partially offset 87 million increase vehicular selfinsurance expense 2009 included losses asset dispositions 76 million expenses fuel fuelrelated taxes increased 134 2010 primarily due higher fuel cost per gallon partially offset lower fuel consumption due fewer miles driven depreciation amortization expense increased 89 2010 primarily due increase depreciation expense tractors 2010 truckload changed estimated useful lives estimated salvage values truckload tractors 2010 maintenance expense increased 211 2009 due increase average age tractor fleet increased amount repairs covered manufacturers’ warranties reporting segment consists operating results road systems trailer manufacturer certain corporate activities related income expense allocated reporting segments table summarizes operating results reporting segment variations road systems’ revenue reflect number trailers manufactured refurbished conway freight conway truckload results reinsurance activities primarily relate conway’s participation reinsurance pool fully note 1 “principal accounting policies” item “financial statements supplementary data” 2011 operating results related corporate properties included 51 million gain sale excess real estate liquidity capital resources cash equivalents increased 4380 million december 31 2011 4214 million december 31 2010 3447 million provided operating activities exceeded 2870 million used investing activities 411 million used financing activities cash provided operating activities came primarily net income adjustment noncash items cash used investing activities primarily reflects capital expenditures cash used financing activities primarily reflects payment common dividends repayment capital leases 1 “noncash adjustments” refer depreciation amortization impairment charges purchaseprice adjustments deferred income taxes provision uncollectible accounts noncash income expenses operating activities significant items affecting comparison conway’s operating cash flows periods presented summarized 2011 compared 2010 2011 net income noncash adjustments collectively increased operating cash flows 391 million 2010 changes assets liabilities improved operating cash flows 1207 million 2011 compared prioryear period changes accrued income taxes accrued liabilities excluding variable compensation employee benefits receivables employee benefits increased operating cash flows 2011 compared prior year changes selfinsurance accruals decreased operating cash flows 2011 accrued income taxes provided 344 million compared 396 million used 2010 reflecting variations income tax refunds payments well variations current deferred income taxes 2011 conway received 287 million net refunds compared 104 million net refunds 2010 2011 conway’s cash flows related income taxes benefited tax legislation enacted december 2010 result legislation conway deducted substantial portion 2011 capital expenditures 2011 tax year accrued liabilities excluding variable compensation employee benefits provided 38 million 2011 compared 205 million used 2010 primarily due changes liability compensated absences fully discussed “results operations overview” compensatedabsence benefit suspended conway freight april 2009 april 2010 period suspension compensatedabsences benefits earned suspension effect point 2011 resulting increased compensatedabsence benefits 2011 compared 2010 2011 receivables used 423 million compared 613 million used 2010 changes receivables reflect variations revenue average collection periods employee benefits used 527 million 2011 compared 676 million used 2010 primarily due decrease pension funding contributions 2011 conway contributed 626 million qualified pension plans compared 938 million 2010 level conway’s annual contributions qualified pension plans subject variations interest rates asset returns pension protection act “ppa” requirements factors selfinsurance accruals used 120 million 2011 compared 305 million provided 2010 cash used 2011 primarily due decreases liabilities vehicular workers’ compensation claims cash provided 2010 primarily due increases liabilities vehicular workers’ compensation claims 2010 compared 2009 2010 net income loss noncash adjustments collectively increased operating cash flows 402 million 2009 changes assets liabilities lowered operating cash flows 1320 million 2010 compared prioryear period changes receivables employee benefits accrued income taxes decreased operating cash flow 2010 compared prior year changes selfinsurance accruals accounts payable accrued liabilities excluding variable compensation employee benefits increased operating cash flows 2010 receivables used 613 million primarily due increased trade accounts receivable resulting increased revenue 2009 receivables provided 92 million primarily due decreased trade accounts receivable logistics segment partially offset increased trade accounts receivable freight segment employee benefits used 676 million 2010 compared 03 million provided prior year primarily due increase funding contributions 2010 conway contributed 938 million qualified pension plans compared 173 million 2009 2010 accrued income taxes used 396 million compared 212 million provided 2009 reflecting variations conway’s current deferred income tax provisions change selfinsurance accruals provided 305 million 2010 compared 24 million used 2009 cash provided 2010 primarily due increases liabilities workers compensation vehicular claims accounts payable provided 319 million 2010 compared 20 million provided 2009 increase accounts payable reflected increasing business volumes 2010 particularly truckload freight segments changes accrued liabilities used 205 million 2010 compared 418 million used 2009 primarily due changes liability compensated absences 2010 liability compensated absences increased result reinstatement compensatedabsences benefits investing activities significant items affecting comparison conway’s investing cash flows periods presented summarized 2011 capital expenditures 2890 million compared 1865 million 2010 682 million 2009 increased capital expenditures 2011 primarily due acquisition tractor equipment conway truckload higher capital expenditures conway truckload 2011 reflect accelerated fleetreplacement program implemented june 2010 conway received salerelated proceeds 132 million 2011 328 million 2010 327 million 2009 proceeds 2011 primarily due sale excess corporate properties sale tractors connection fleetreplacement program conway truckload proceeds 2010 2009 include saleleaseback transactions 204 million 173 million received respectively sale revenue equipment 2011 conway received 100 million adjustment original purchase price settle dispute associated 2007 acquisition chic logistics fully discussed note 2 “goodwill intangible assets” item 8 “financial statements supplementary data” 2011 126 million cash used result net investment marketable securities compared 07 million 04 million net proceeds received 2010 2009 respectively financing activities significant items affecting comparison conway’s financing cash flows periods presented summarized conway used 198 million 2011 repayment debt obligations compared 2111 million 2010 224 million 2009 payments 2011 2010 reflect repayments capital leases 2010 also includes 2000 million repayment amount outstanding 8 78 notes due 2010 cash used 2009 primarily reflects repayment primary dc plan notes matured january 2009 2010 conway issued common stock public offering received net proceeds 1433 million discussed fully note 9 “shareholders’ equity” item 8 “financial statements supplementary data” detailed note 10 “employee benefit plans” item 8 “financial statements supplementary data” conway used common stock fund 173 million 2011 compared 368 million 2010 233 million 2009 contributions defined contribution retirement plans effective july 2011 conway’s contributions form cash rather common stock contractual cash obligations table summarizes contractual cash obligations conway december 31 2011 amounts table based management’s estimates assumptions obligations including duration possibility renewal factors estimates assumptions actual future payments may vary reflected table certain liabilities including related selfinsurance accruals reported conway’s consolidated balance sheets reflected table due absence stated due dates presented contractual obligations longterm debt capital leases represent principal interest payments amounts representing principal portion interest payable 2012 reported consolidated balance sheets contractual obligations operating leases represent payments lease arrangements included conway’s consolidated balance sheets employee benefit planrelated cash obligations table represent estimated payments conway’s nonqualified defined benefit pension plans postretirement medical plan december 31 2021 expected benefit payments conway’s qualified defined benefit pension plans included table benefits satisfied use plan assets conway estimates make 51 million contributions qualified defined benefit pension plans 2012 however could change based variations interest rates asset returns ppa requirements factors 2010 conway entered agreements thirdparty service providers outsource significant portion information technology infrastructure function small portion administrative accounting functions payments terms agreements subject change depending quantities types services consumed presented payments reflect amounts based projections services expected consumed although payments made thirdparty service providers expected offset cost savings resulting headcount reduction lower operating costs payments associated savings vary depending actual quantity mix services used contracts also contain provisions allow conway terminate contract time however conway would required pay additional fees termination causes failure service providers perform contractual obligations reported exclude conway’s liability 174 million unrecognized tax benefits fully discussed note 8 “income taxes” item 8 “financial statements supplementary data” letters credit outstanding conway’s credit facilities described “capital resources liquidity outlook” generally required selfinsurance programs represent additional liabilities underlying selfinsurance accruals already included conway’s consolidated balance sheets discussion see note 6 “debt financing arrangements” note 7 “leases” note 8 “income taxes” note 10 “employee benefit plans” item 8 “financial statements supplementary data” capital resources liquidity outlook conway’s capital requirements relate primarily acquisition revenue equipment support growth andor replacement older equipment newer equipment funding capital expenditures meeting workingcapital requirements conway utilizes various sources liquidity capital including cash equivalents cash flow operations credit facilities access capital markets conway may also manage liquidity requirements cashflow generation varying timing amount capital expenditures implementing costreduction initiatives fully discussed “results operations overview” conway 325 million unsecured revolving credit facility matures august 2 2016 revolving facility available cash borrowings issuance letters credit december 31 2011 cash borrowings outstanding credit facility however 1741 million letters credit outstanding leaving 1509 million available capacity additional letters credit cash borrowings revolving facility guaranteed certain conway’s material domestic subsidiaries contains two financial covenants leverage ratio ii fixedcharge coverage ratio december 31 2011 conway compliance revolving credit facility’s financial covenants expects remain compliance conway uncommitted unsecured credit facilities totaling 662 million december 31 2011 available support shortterm borrowings letters credit bank guarantees overdraft facilities december 31 2011 145 million cash borrowings 299 million credit commitments outstanding leaving 219 million available capacity 2012 conway anticipates capital software expenditures approximately 300 million net asset dispositions primarily acquisition tractor equipment conway’s actual 2012 capital expenditures may differ estimated amount depending factors availability timing delivery equipment december 31 2011 conway’s senior unsecured debt rated investment grade standard poor’s bbb fitch ratings bbb moody’s baa3 moody’s assigned outlook “negative” standard poor’s fitch ratings assigned outlook “stable” conway believes workingcapital requirements capitalexpenditure plans 2012 adequately met various sources liquidity capital including conway’s cash equivalents cash flow operations credit facilities access capital markets detailed note 8 “income taxes” item 8 “financial statements supplementary data” cumulative undistributed earnings conway’s foreign subsidiaries 293 million december 31 2011 remitted subject withholding us taxes conway’s 4380 million cash equivalents december 31 2011 293 million related foreign subsidiaries conway currently expect utilize foreign cash cashequivalent balances source liquidity capital fund domestic operations critical accounting policies estimates preparation financial statements accordance accounting principles generally accepted us requires management adopt accounting policies make significant judgments estimates many cases alternative policies estimation techniques could used conway maintains process evaluate appropriateness accounting policies estimation techniques including discussion review audit committee board directors independent auditors accounting policies estimates may require adjustment based changing facts circumstances actual results could differ estimates conway believes accounting policies judgmental material financial statements related following • defined benefit pension plans • goodwill • income taxes • property plant equipment longlived assets • revenue recognition • selfinsurance accruals defined benefit pension plans periods presented certain employees conway subsidiaries us covered several retirement benefit plans including several qualified nonqualified defined benefit pension plans effective april 30 2009 conway amended primary defined benefit pension plan permanently curtail benefits prior amendment future retirement benefits considered participants’ eligible compensation increases 2016 significant assumptions amounts recognized pension expense income accrued pension asset liability conway’s defined benefit pension plans depend upon number assumptions factors significant discount rate used measure present value pension obligations expected rate return plan assets funded qualified plans conway assesses plan assumptions discount rate expected rate return plan assets significant assumptions periodic basis concludes assumptions actuarial plan measurement date conway’s significant assumptions used determining pension expense income periods presented 2012 summarized discount rate determining appropriate discount rate conway assisted actuaries utilize yieldcurve model based universe highgrade corporate bonds rated aa better moody’s rating service model determines single equivalent discount rate applying yield curve conway’s expected future benefit payments holding factors constant 025 decrease increase discount rate would cause cumulative unrecognized actuarial loss december 31 2011 increase decrease 64 million related loss credit would amortized futureperiod earnings described rate return plan assets qualified defined benefit pension plans conway sets expected return plan assets using current market expectations historical returns expected return plan assets based average annual return expected next 20 years based plans’ expected asset allocation course next year average annual expected return includes effect actively managing plan assets net fees expenses plan assets managed pursuant longterm allocation strategy seeks mitigate plans’ funded status volatility increasing plans’ investment fixedincome investments time strategy developed analyzing variety diversified assetclass combinations conjunction projected liabilities plans 2011 plans lowered percentage investments equity securities increased percentage investments fixedincome securities using plan asset values december 31 2011 holding factors constant 025 decrease increase expected return plan assets would cause annual net periodic benefit cost decrease increase 3 million actuarial gains losses differences expected actual rate return plan assets andor changes discount rate may result cumulative unrecognized actuarial gains losses conway’s defined benefit pension plans accumulated unrecognized actuarial losses increased 7221 million december 31 2011 4692 million december 31 2010 portion unrecognized actuarial gain loss outside corridor amount must amortized recognized expense income estimated average remaining life expectancy active plan participants effect operating results effect defined benefit pension plans conway’s operating results consist primarily net effect interest cost plan obligations qualified nonqualified defined benefit pension plans expected return plan assets funded qualified defined benefit pension plans amortization unrecognized actuarial gain loss excess corridor conway estimates defined benefit pension plans result annual expense 93 million 2012 defined benefit pension plans conway recognized annual expense 04 million 2011 75 million 2010 284 million 2009 funding conway periodically reviews funded status qualified defined benefit pension plans makes contributions time necessary comply funding requirements ppa determining amount timing pension contributions conway considers cash position ppa gaapbased measurements funded status tax deductibility contributions among factors conway made contributions 626 million 938 million qualified defined benefit pension plans 2011 2010 respectively conway estimates make 51 million contributions qualified defined benefit pension plans 2012 level conway’s annual contributions qualified pension plans subject change based variations interest rates asset returns ppa requirements factors goodwill recorded excess acquired entity’s purchase price amounts assigned assets acquired including identified intangible assets liabilities assumed conway tests impairment goodwill annually measurement date november 30 whenever events occur circumstances change would likely reduce fair value reporting unit carrying amount quarter conway considers events may trigger impairment goodwill including factors changes total company market value compared underlying book value significant adverse changes may impact reporting segments underlying reporting units reporting unit goodwill impairment purposes may component reporting segment independently generates revenues discrete financial information regularly reviewed management conway uses multiple valuation methods possible determine fair value reporting unit methods used include use publiccompany multiples precedent transactions discounted cash flow models may vary depending availability information valuation methods assumptions used determine fair value reporting units may significantly impact result key assumptions used discounted cash flow models cash flow projections involving forecasted revenues expenses capital expenditures working capital changes discount rate terminal growth rate applied projected cash flows cash flow projections developed conway’s annual planning process discount rate equals estimated weightedaverage cost capital reporting unit marketparticipant perspective terminal growth rates based inflation assumptions adjusted factors may impact future growth industryspecific expectations estimates assumptions may incomplete inaccurate unanticipated events circumstances result changes assumptions estimates related goodwill could material effect conway’s valuation result accordingly financial condition results operations conway truckload 3298 million goodwill december 31 2011 valuation conway truckload conway applied two equally weighted methods publiccompany multiples discounted cash flow models assessment conway truckload’s goodwill fair value reporting unit exceeded carrying value 14 approximately 89 million 10 change assumed discount rate would result 24 million change fair value 10 change estimated operating income next five years would result 33 million change fair value income taxes establishing deferred income tax assets liabilities conway makes judgments interpretations based enacted tax laws published tax guidance applicable operations conway periodically evaluates need valuation allowance reduce deferred tax assets realizable amounts likelihood material change conway’s expected realization assets dependent future taxable income future capital gains ability use tax loss credit carryforwards carrybacks final us foreign tax settlements effectiveness taxplanning strategies various relevant jurisdictions conway assesses income tax positions records tax benefits years subject examination based upon management’s evaluation facts circumstances information available reporting date positions likely tax benefit sustained conway recorded largest amount tax benefit greaterthan50percent likelihood realized upon ultimate settlement taxing authority full knowledge relevant information income tax positions meet morelikelythannot criteria tax benefit recognized financial statements property plant equipment longlived assets accounting property plant equipment conway makes estimates expected useful lives expected residual values assets potential impairment based fair values assets cash flows generated assets depreciation property plant equipment estimated useful lives determination salvage values require management make judgments future events conway periodically evaluates whether changes estimated useful lives salvage values necessary ensure estimates accurately reflect economic use assets conway’s periodic evaluation may result changes estimated lives andor salvage values used depreciate assets affect amount periodic depreciation expense recognized ultimately gain loss disposal asset conway’s recent evaluation estimated salvage values revenue equipment conway truckload increased reflecting conditions usedtractor market result change conway truckload depreciation expense expected decrease 67 million 2012 longlived assets tested impairment whenever events changes circumstances indicate carrying amount may recoverable assets held used impairment charge recognized estimated undiscounted cash flows associated asset group assets less carrying value impairment exists charge recognized difference carrying value fair value fair values determined using quoted market values discounted cash flows external appraisals applicable assets held disposal carried lower carrying value estimated net realizable value quarter conway considers events may trigger impairment longlived assets indicators impairment conway considers include factors significant decrease market value longlived asset significant change extent manner longlived asset used currentperiod losses combined history losses projection continuing losses associated use longlived asset revenue recognition conway freight recognizes revenue reporting periods based relative transit time period recognizes expense incurred conway truckload recognizes revenue related direct costs shipment delivered menlo worldwide logistics recognizes revenue proportionalperformance model based service outputs delivered customer critical revenuerelated policies estimates conway freight conway truckload include related revenue adjustments uncollectible accounts receivable critical revenuerelated policies estimates menlo worldwide logistics include related uncollectible accounts receivable measuring proportion service provided customers gross netbasis revenue recognition conway believes revenue recognition policies appropriate use revenuerelated estimates judgments provide reasonable approximation actual revenue earned estimated revenue adjustments generally pricing assessed companies transportation industry subject subsequent adjustment due several factors including weight freightclassification verifications pricing discounts revenue adjustments estimated based revenue levels historical experience uncollectible accounts receivable conway freight conway truckload report accounts receivable net realizable value provide allowance uncollectible accounts collection considered doubtful estimates uncollectible accounts based various judgments assumptions including revenue levels historical loss experience economic conditions aging outstanding accounts receivable menlo worldwide logistics based size nature client base performs periodic evaluation customers’ creditworthiness accounts receivable portfolio recognizes expense uncollectible accounts losses probable reasonably estimable proportional performance service outputs certain customer contracts menlo worldwide logistics makes estimates measuring proportion service outputs delivered customer including services provided performancebased incentive arrangements gross netbasis revenue recognition determining whether revenue reported gross net basis based assessment whether menlo worldwide logistics acting principal agent transaction involves judgment based terms arrangement selfinsurance accruals conway uses combination largedeductible purchased insurance selfinsurance programs provide costs medical vehicular cargo workers’ compensation claims longterm portion selfinsurance accruals relates primarily workers’ compensation vehicular claims expected payable several years conway periodically evaluates level insurance coverage adjusts insurance levels based risk tolerance premium expense measurement classification selfinsured costs requires consideration historical cost experience demographic severity factors judgments current expected levels cost per claim retention levels methods provide estimates undiscounted liability associated claims incurred balance sheet date including claims reported conway believes actuarial methods appropriate measuring highly judgmental selfinsurance accruals however based magnitude claims length time incurrence claims ultimate settlement use estimation method sensitive assumptions factors described accordingly changes assumptions factors materially affect estimated liability amounts may different actual costs paid settle claims new accounting standards refer note 1 “principal accounting policies” item 8 “financial statements supplementary data” discussion recently issued accounting standards conway yet adopted forwardlooking statements certain statements included herein constitute “forwardlooking statements” within meaning section 21e securities exchange act 1934 amended subject number risks uncertainties relied upon predictions future events statements historical fact forwardlooking statements including • projections earnings revenues weight yield volumes income financial operating items • statements plans strategies expectations objectives conway’s management future operations future items • statements concerning proposed new products services • statements regarding conway’s estimated future contributions pension plans • statements adequacy reserves • statements regarding outcome legal claims proceedings may brought conway • statements regarding future economic conditions performance • statements regarding strategic acquisitions • statements estimates belief statements assumptions underlying foregoing certain forwardlooking statements identified use forwardlooking terminology “believes” “expects” “may” “will” “should” “seeks” “approximately” “intends” “plans” “estimates” “anticipates” negative terms variations terms comparable terminology discussions strategy plans intentions forwardlooking statements necessarily dependent assumptions data methods may incorrect imprecise assurance realized regard certain important factors among others addition matters discussed elsewhere document reports documents filed conway securities exchange commission could cause actual results matters differ materially discussed forwardlooking statements detailed description certain risk factors included item 1a “risk factors” forwardlooking statements speak date statement made conway undertake obligation update revise forwardlooking statements whether result new information future events otherwise except otherwise required law item 7aitem 7 management’s discussion analysis financial condition results operations introduction management’s discussion analysis financial condition results operations referred “management’s discussion analysis” intended assist historical prospective understanding conway’s financial condition results operations cash flows including discussion analysis following •overview business •results operations •liquidity capital resources •critical accounting policies estimates •new accounting standards •forwardlooking statements overview business conway provides transportation logistics supplychain management services wide range manufacturing industrial retail customers conway’s business units operate regional transcontinental lessthantruckload fulltruckload freight transportation contract logistics supplychain management multimodal freight brokerage trailer manufacturing financial reporting purposes conway divided four reporting segments freight logistics truckload conway freight primarily transports shipments utilizing network freight service centers combined fleet companyoperated linehaul pickupanddelivery tractors trailers menlo worldwide logistics manages logistics functions customers primarily utilizes thirdparty transportation providers movement customer shipments conway truckload primarily transports shipments using fleet companyoperated tractors trailers conways primary businessunit results generally depend number weight distance shipments transported prices received shipments services mix services provided customers well fixed variable costs incurred conway providing services ability manage costs changing circumstances due conway freights relatively high fixedcost structure sudden severe changes shipment volumes negative impact managements ability manage costs conways primary business units affected timing degree fluctuations fuel prices ability recover incremental fuel costs fuelsurcharge programs andor costrecovery mechanisms fully discussed item 1a “risk factors” results operations overview provides highlevel summary conway’s results continuing operations periods presented intended provide context remainder discussion reporting segments refer “reporting segment review” complete detailed discussion analysis overview 2012 compared 2011 conway’s consolidated revenue 56 billion 2012 increased 55 53 billion 2011 reflecting higher revenue segments higher revenue freight truckload primarily result increased base freight rates higher fuel surcharges higher revenue logistics due increased revenue transportationmanagement warehousemanagement services conway’s operating income increased 2288 million 2012 2079 million 2011 increase operating income due improved operating income freight truckload offset reduced operating income logistics higher operating income freight truckload due increased revenues improved operating margins lower operating income logistics primarily due 2011 gain 100 million purchaseprice adjustment settle dispute associated acquisition chic logistics nonoperating expense 2012 decreased 20 million compared 2011 largely due 12 million decrease miscellaneous expenses mostly lettersofcredit fees also interest expense declined 08 million conway’s effective tax rate 2012 388 compared 403 2011 conways tax provision 2012 benefited discrete tax adjustments effective tax rate 2011 adversely affected discrete tax adjustments 2011 income tax provision also included effect 100 million gain 11 million related tax effective tax rate 2011 benefited fuelrelated tax credit expired available 2012 conways effective tax rate 2013 expected lower 2012 rate result legislation extended fuelrelated tax credit fully discussed note 8 “income taxes” item 8 “financial statements supplementary data” 2011 compared 2010 conway’s consolidated revenue 53 billion 2011 increased 68 50 billion 2010 reflecting higher revenue freight truckload logistics higher revenue freight truckload benefited higher fuel surcharges increased base freight rates logistics’ higher revenue primarily due increased transportationmanagement services conway’s operating income increased 2079 million 2011 782 million 2010 increase operating income due improved operating income freight logistics truckload higher operating income freight truckload due large part increased revenues higher operating income logistics reflects 100 million gain 2011 2010 included 192 million assetimpairment charges nonoperating expense 2011 decreased 18 million compared 2010 largely due 34 million decline interest expense partially offset 13 million increase miscellaneous expenses primarily lettersofcredit fees decline interest expense reflects 2000 million repayment second quarter 2010 conway’s 8 78 notes due 2010 conway’s effective tax rate 2011 403 compared 759 2010 noted effective tax rate 2011 included effect 100 million gain discrete items conway’s effective tax rate 2010 adversely affected nondeductible goodwillimpairment charges costreduction actions response economic conditions march 2009 conway announced several employeerelated measures reduce costs conserve cash periods presented conways comparative expenses affected various reinstatements previously suspended benefits including fourthquarter 2011 reinstatement certain employer contributions defined contribution retirement plan january 2010 2011 reinstatements salary wage reductions certain employees secondquarter 2010 reinstatement compensatedabsences benefits freight logistics segments remaining suspended benefit matching contributions defined contribution retirement plan reinstated potential reinstatement conways matching contributions based number considerations reporting segment review discussion analysis segment operating results management utilizes revenue intersegment eliminations management believes revenue intersegment eliminations combined detailed operating expense information provides meaningful analysis segment results revenue intersegment eliminations reconciled revenue external customers note 13 “segment reporting” item 8 “financial statements supplementary data” freight following table compares operating results operating margins percentage change selected operating statistics freight reporting segment years ended december 31 2012 compared 2011 freight’s revenue 2012 increased 45 2011 primarily due 44 increase yield partially offset 03 decline weight per day 44 increase yield largely due increased base freight rates 03 decline weight per day reflects 19 decline shipments per day partially offset 16 increase weight per shipment excluding fuel surcharges yield increased 37 2012 fuelsurcharge revenue increased 175 revenue 2012 170 2011 fuel surcharge intended compensate conway freight adverse effects higher fuel costs fuelrelated increases purchased transportation fuel surcharges one part conway freight’s overall rate structure total price conway freight receives customers services governed market forces fully discussed item 1a “risk factors” 2012 freight’s operating income increased 241 million compared 2011 higher operating income 2012 largely due higher revenue higher operating margins expenses salaries wages employee benefits increased 39 2012 compared 2011 2012 included higher expenses 2011 due part timing reinstatement certain employeerelated costs suspended costreduction measures fully discussed “overview” salaries wages excluding variable compensation increased 19 due annual pay increases new sales bonus program partially offset decline number miles driven company drivers employee benefits expense increased 84 primarily due higher costs employee medical benefits defined contribution defined benefit retirement plans higher costs employee medical benefits largely due increase number claims increase defined contribution retirement plan expense mainly due restoration certain benefits fourth quarter 2011 purchased transportation expense increased 100 2012 due increased thirdparty miles higher carrier rates expenses fuel fuelrelated taxes decreased 27 primarily due lower fuel consumption result decreased miles driven company drivers partly offset increase cost per gallon diesel fuel increase purchased transportation expense decrease fuel expense related largely due shift toward higher proportion miles driven thirdparty carriers opposed company drivers increase thirdparty miles part conway freights effort reduce total linehaul costs reducing empty miles increase thirdparty miles offset decrease miles driven companyoperated tractors depreciation amortization expense increased 132 2012 compared 2011 primarily due replacement older tractors newer models newer models costly due part inclusion expensive emissionscontrol safety technology 2011 compared 2010 freight’s revenue 2011 increased 56 2010 primarily due 103 increase yield partially offset 46 decline weight per day 46 decline weight per day reflects 57 decline shipments per day partially offset 12 increase weight per shipment 2011 yield benefited increases fuelsurcharge revenue base freight rates adversely affected increase weight per shipment excluding fuel surcharges yield increased 57 2011 fuelsurcharge revenue increased 170 revenue 2011 132 2010 higher yield lower weight per day due part sales pricing initiatives implemented third quarter 2010 increased base freight rates moderated amount freight transported network management initiatives 2011 adapted focus pricing improvements maintaining volume 2011 freight’s operating income increased 909 million compared 2010 higher operating income 2011 largely due higher revenue strategic efforts improve network efficiency control costs results 2010 adversely affected 51 million expense employee severance consolidation conway’s executive offices freight allocated portion restructuring charges expenses salaries wages employee benefits essentially flat 2011 compared 2010 salaries wages excluding variable compensation decreased 15 due part lower average employee counts reflected decline shipment volumes reduction miles driven increased productivity partially offset salary wage restorations employee benefits expense decreased 13 primarily due lower expense workers’ compensation claims partially offset higher expenses compensated absences lower expense workers’ compensation claims reflects decrease number claims lower expense per claim increase expense compensatedabsences benefits primarily due reinstatement benefit effective april 2010 variablecompensation expense increased 224 million due variations performance measures relative variablecompensation plan targets purchased transportation expense increased 42 2011 reflecting fuelrelated rate increases higher base rates partially offset declines freight transported thirdparty providers 2011 operating expenses decreased 36 mainly due lower selfinsurance expense cargoloss damage claims partially offset higher costs informationtechnology services decrease cargoclaims expense reflects lower shipment volumes improved freight handling due part increased investment training utilization safestack™ cargo loading system trailers deployed 2010 expenses fuel fuelrelated taxes increased 222 primarily due increase cost per gallon diesel fuel partially offset lower fuel consumption due fewer miles driven result moderation shipment volumes logistics table compares operating results operating margins logistics reporting segment table summarizes logistics’ revenue well net revenue less purchased transportation expense transportationmanagement revenue attributable contracts menlo worldwide logistics manages transportation freight subcontracts carriers actual transportation delivery products menlo worldwide logistics refers purchased transportation menlo worldwide logistics’ management places emphasis net revenue meaningful measure relative importance principal services since revenue earned transportationmanagement services includes carriers’ charges menlo worldwide logistics transporting shipments table also includes operating income operating margin excluding loss gain asset impairments purchaseprice adjustment management believes measures relevant evaluate ongoing operations 2012 compared 2011 2012 logistics’ revenue increased 86 due increases revenue transportationmanagement warehousemanagement services 2012 revenue transportationmanagement services increased 115 revenue warehousemanagement services increased 12 higher revenue transportationmanagement services primarily due new customers increased revenue warehousemanagement services primarily due growth existing customers logistics’ net revenue 2012 increased 62 revenue growth partially offset purchased transportation expense grew faster rate revenue purchased transportation expense increased 100 2012 primarily due increased transportationmanagement volumes 2012 logistics reported operating income 446 million compared 547 million 2011 operating results 2011 included 100 million gain resulting purchaseprice adjustment settle dispute associated 2007 acquisition chic logistics excluding item logistics’ operating income 2012 decreased 03 2011 reflecting increases salaries wages employee benefits expense higher operating expenses salaries wages employee benefits increased 130 2012 salaries wages excluding variable compensation rose 149 primarily due increased average employee counts response growth new existing customers salary wage rate increases employee benefits expense increased 145 2012 primarily due increased costs employee medical benefits payroll taxes compensated absences higher costs employee medical benefits largely due increases number claims increased expense compensated absences payroll taxes primarily due increase salaries wages operating expenses increased 71 2012 primarily due increased administrative corporate allocations higher expenses warehouserelated packaging materials supplies higher expenses professional services support customer operations increase provision uncollectible accounts receivable increase provision uncollectible accounts receivable 2012 primarily due single international customer 2011 compared 2010 2011 logistics’ revenue increased 76 due increases revenue transportationmanagement warehousemanagement services 2011 revenue transportationmanagement services increased 96 revenue warehousemanagement services increased 28 higher revenue transportationmanagement services primarily due increased freightbrokerage volumes growth existing customers lesser extent fuelrelated increases purchased transportation increased revenue warehousemanagement services primarily due addition new customers logistics net revenue 2011 increased 52 revenue growth partially offset purchased transportation expense grew faster rate revenue purchased transportation expense increased 90 2011 primarily due increased transportationmanagement volumes lesser extent fuelrelated rate increases 2011 logistics reported operating income 547 million compared 263 million 2010 operating results 2011 included 100 million gain operating results 2010 adversely affected 164 million goodwillimpairment charge 28 million charge impairment customerrelationship intangible asset items fully discussed note 2 “goodwill intangible assets” item 8 “financial statements supplementary data” excluding items logistics operating income 2011 decreased 16 2010 primarily due lower margins warehousemanagement services lower margins warehousemanagement services reflect costs warehousefacility relocations changes customer mix increased startup costs associated new customers salaries wages employee benefits increased 58 2011 salaries wages excluding variable compensation rose 92 due salary wage rate increases increased average employee counts due new customer contracts variablecompensation expense decreased 34 million 181 2011 based variations performance measures relative variablecompensation plan targets employee benefits expense increased 50 2011 primarily due increased expenses international employee benefits payroll taxes operating expenses increased 55 2011 reflecting higher costs informationtechnology services increased facility costs due new warehousemanagement customers purchased labor expense increased 116 2011 due increased workloads startup new warehousemanagement facilities warehouse relocations truckload table compares operating results operating margins percentage change selected operating statistics truckload reporting segment table summarizes segment’s revenue intersegment eliminations including freight revenue fuelsurcharge revenue nonfreight revenue table also includes operating income operating margin excluding fuelsurcharge revenue truckload’s management believes measures relevant evaluate ongoing operations 2012 compared 2011 2012 truckload’s revenue increased 33 2011 primarily due 24 increase freight revenue 54 increase fuelsurcharge revenue 24 increase freight revenue reflects 26 increase revenue per loaded mile partially offset 02 decrease loaded miles higher revenue per loaded mile included effect negotiated rate increases decrease loaded miles primarily due decline number tractors operated twoperson teams resulted lower miles per tractor higher fuelsurcharge revenue reflects higher fuel prices 2012 compared 2011 improved fuelsurcharge recovery rate 2012 truckload earned operating income 449 million compared 348 million 2011 primarily reflecting increase revenue higher operating margins salaries wages employee benefits increased 06 2012 reflecting increase variablecompensation expense partially offset decreases salaries wages excluding variable compensation employee benefits expense variablecompensation expense increased 18 million 797 2012 based variations performance measures relative variablecompensation plan targets salaries wages excluding variable compensation decreased 03 primarily due lower wages result fewer miles driven company drivers employee benefits expense decreased 01 2012 primarily due decrease costs workers compensation claims partially offset increases employee medical benefits defined contribution retirement plans decreases expense workers compensation claims due decreases expense per claim number claims increases expense employee medical benefits largely due increases number claims increase expenses defined contribution retirement plans mainly due restoration certain benefits fourth quarter 2011 purchased transportation increased 316 2012 due increased miles driven truckloads owneroperator fleet grew period fuelrelated rate increases expenses fuel fuelrelated taxes decreased 11 2012 primarily due improved miles per gallon lower fuel consumption due fewer miles driven company drivers compared 2011 decreases partially offset higher fuel cost per gallon 2012 compared 2011 operating expenses increased 56 2012 primarily due increases vehicular selfinsurance employee development expenses partially offset gains disposition equipment increase expenses vehicular selfinsurance due increase expense per claim partially offset decline number claims higher expenses employee development relate increased driver certification training costs increase gains disposition equipment reflect improved conditions used tractor market 2011 compared 2010 2011 truckload’s revenue increased 79 2010 primarily due 471 increase fuelsurcharge revenue freight revenue essentially flat reflecting 41 increase revenue per mile 40 decline loaded miles higher fuelsurcharge revenue due higher fuel prices 2011 compared 2010 decrease loaded miles primarily due decline number tractors operated twoperson teams resulted lower miles per tractor slightly smaller fleet 2011 truckload earned operating income 348 million compared 208 million 2010 primarily reflecting effect improved fuelsurcharge recovery rate salaries wages employee benefits decreased 15 2011 reflecting decreases salaries wages excluding variable compensation partially offset increase employee benefits expense salaries wages excluding variable compensation decreased 27 primarily due lower wages result fewer miles driven company drivers employee benefits expense increased 23 2011 primarily reflecting increased costs employee medical benefits primarily due increase severity claims partially offset decline number claims purchased transportation increased 134 2011 primarily due fuelrelated increases truckload’s owneroperator fleet expenses fuel fuelrelated taxes increased 207 2011 primarily due higher fuel cost per gallon partially offset lower fuel consumption due fewer miles driven company drivers operating expenses decreased 67 2011 primarily reflecting declines severity vehicular selfinsurance claims vehicular selfinsurance expense decreased 55 million 2011 compared 2010 depreciation amortization expense increased 92 2011 reflecting tractor replacement program initiated 2010 reporting segment consists operating results road systems trailer manufacturer certain corporate activities related income expense allocated reporting segments table summarizes operating results reporting segment results reinsurance activities primarily relate conway’s participation reinsurance pool fully discussed note 1 “principal accounting policies” item “financial statements supplementary data” 2011 operating results related corporate properties included 51 million gain sale excess real estate liquidity capital resources cash equivalents decreased 4298 million december 31 2012 4380 million december 31 2011 2658 million used investing activities 538 million used financing activities exceeded 3114 million provided operating activities cash used investing activities primarily reflects capital expenditures cash used financing activities primarily reflects repayment capital leases payment common dividends cash provided operating activities came net income noncash adjustments partially offset changes assets liabilities 1 “noncash adjustments” refer depreciation amortization impairment charges purchaseprice adjustments deferred income taxes provision uncollectible accounts noncash income expenses operating activities significant items affecting comparison conway’s operating cash flows periods presented summarized 2012 compared 2011 2012 net income noncash adjustments collectively increased operating cash flows 598 million 2011 changes assets liabilities decreased operating cash flows 931 million 2012 compared prioryear period significant comparative changes include accrued income taxes accrued variable compensation employee benefits 2012 accrued income taxes used 23 million compared 344 million provided 2011 reflecting variations income tax refunds payments well variations current income tax provisions 2012 conway made net payments 62 million compared 287 million net refunds 2011 accrued variable compensation provided 12 million 2012 compared 224 million provided 2011 variations performance measures relative variablecompensation plan targets resulted higher level payments 2012 compared 2011 employee benefits used 673 million 2012 compared 527 million used 2011 comparative period changes primarily due change funding method contributions defined contribution retirement plan decline amount funding defined benefit pension plans detailed note 10 employee benefit plans item 8 financial statements conway used repurchased common stock also referred treasury stock fund contributions defined contribution retirement plan first six months 2011 conway used 461151 shares treasury stock fund 173 million contributions defined contributions retirement plans 2012 conway contributed 514 million qualified defined benefit pension plans compared 626 million 2011 compared 2010 2011 net income noncash adjustments collectively increased operating cash flows 391 million 2010 changes assets liabilities improved operating cash flows 1207 million 2011 compared prioryear period changes accrued income taxes accrued liabilities excluding variable compensation employee benefits employee benefits increased operating cash flows 2011 compared prior year changes selfinsurance accruals decreased operating cash flows 2011 accrued income taxes provided 344 million compared 396 million used 2010 reflecting variations income tax refunds payments well variations current income tax provisions 2011 conway received 287 million net refunds compared 104 million net refunds 2010 accrued liabilities excluding variable compensation employee benefits provided 38 million 2011 compared 205 million used 2010 primarily due changes liability compensated absences fully discussed “results operations overview” compensatedabsence benefit suspended conway freight april 2009 april 2010 period suspension compensatedabsences benefits earned suspension effect point 2011 resulting increased compensatedabsence benefits 2011 compared 2010 employee benefits used 527 million 2011 compared 676 million used 2010 primarily due decrease pension funding contributions 2011 conway contributed 626 million qualified pension plans compared 938 million 2010 selfinsurance accruals used 120 million 2011 compared 305 million provided 2010 cash used 2011 primarily due decreases liabilities vehicular workers’ compensation claims cash provided 2010 primarily due increases liabilities vehicular workers’ compensation claims investing activities significant items affecting comparison conway’s investing cash flows periods presented summarized 2012 capital expenditures 2931 million compared 2890 million 2011 1865 million 2010 increased capital expenditures 2012 primarily due increased acquisitions tractor equipment conway freight increased capital expenditures 2011 primarily due acquisition tractor equipment conway truckload conway received salerelated proceeds 208 million 2012 132 million 2011 328 million 2010 proceeds 2012 primarily due sale facilities freight segment proceeds 2011 primarily due sale excess corporate properties sale tractors connection fleetreplacement program conway truckload proceeds 2010 include saleleaseback transactions 204 million received sale revenue equipment 2011 conway received 100 million adjustment original purchase price settle dispute associated 2007 acquisition chic logistics fully discussed note 2 “goodwill intangible assets” item 8 “financial statements supplementary data” investment transactions involving purchase sale marketable securities resulted 154 million net proceeds 2012 126 million cash used 2011 07 million net proceeds 2010 financing activities significant items affecting comparison conway’s financing cash flows periods presented summarized conway used 290 million 2012 repayment debt obligations compared 198 million 2011 2111 million 2010 payments 2012 2011 2010 reflect repayments capital leases 2010 also includes 2000 million repayment amount outstanding 8 78 notes due 2010 conway issued common stock public offering received net proceeds 1433 million discussed fully note 9 “shareholders’ equity” item 8 “financial statements supplementary data” contractual cash obligations table summarizes contractual cash obligations conway december 31 2012 amounts table based management’s estimates assumptions obligations including duration possibility renewal factors estimates assumptions actual future payments may vary reflected table certain liabilities including related selfinsurance accruals reported conway’s consolidated balance sheets reflected table due absence stated due dates presented contractual obligations longterm debt capital leases represent principal interest payments contractual obligations operating leases represent payments lease arrangements included conway’s consolidated balance sheets employee benefit planrelated cash obligations table represent estimated payments conway’s nonqualified defined benefit pension plans postretirement medical plan december 31 2022 expected benefit payments conway’s qualified defined benefit pension plans included table benefits satisfied use plan assets conway estimates make 55 million contributions qualified defined benefit pension plans 2013 however contribution amount could change based variations interest rates asset returns pension protection act ppa requirements factors conway agreements thirdparty service providers outsource significant portion informationtechnology infrastructure function small portion administrative accounting functions payments terms agreements subject change depending quantities types services consumed presented payments reflect amounts based projections services expected consumed contracts also contain provisions allow conway terminate contract time however conway would required pay additional fees termination causes failure service providers perform contractual obligations reported exclude conway’s liability 150 million unrecognized tax benefits fully discussed note 8 “income taxes” item 8 “financial statements supplementary data” letters credit outstanding conway’s credit facilities described “capital resources liquidity outlook” generally required collateral support selfinsurance programs represent additional liabilities underlying selfinsurance accruals already included conway’s consolidated balance sheets discussion see note 6 “debt financing arrangements” note 7 “leases” note 8 “income taxes” note 10 “employee benefit plans” item 8 “financial statements supplementary data” capital resources liquidity outlook conway’s capital requirements relate primarily acquisition revenue equipment support growth andor replacement older equipment newer equipment funding capital expenditures meeting workingcapital requirements conway may utilize various sources liquidity capital including cash equivalents cash flow operations credit facilities access capital markets conway may also manage liquidity requirements cashflow generation varying timing amount capital expenditures fully discussed note 6 “debt financing arrangements” item 8 “financial statements supplementary data” conway 325 million unsecured revolving credit facility december 31 2012 cash borrowings outstanding credit facility however 1385 million letters credit outstanding leaving 1865 million available capacity additional letters credit cash borrowings december 31 2012 conway compliance revolving credit facilitys financial covenants expects remain compliance conway uncommitted unsecured credit facilities totaling 638 million december 31 2012 available support shortterm borrowings letters credit bank guarantees overdraft facilities december 31 2012 70 million cash borrowings 175 million credit commitments outstanding leaving 394 million available capacity 2013 conway anticipates capital software expenditures approximately 300 million net asset dispositions primarily acquisition tractor equipment conway’s actual 2013 capital expenditures may differ estimated amount depending factors availability timing delivery equipment december 31 2012 conway’s senior unsecured debt rated investment grade standard poor’s bbb fitch ratings bbb moody’s baa3 standard poors fitch ratings moody’s assigned outlook “stable” conway believes workingcapital requirements capitalexpenditure plans 2013 adequately met various sources liquidity capital including conway’s cash equivalents cash flow operations credit facilities access capital markets detailed note 8 “income taxes” item 8 “financial statements supplementary data” cumulative undistributed earnings conway’s foreign subsidiaries 330 million december 31 2012 remitted subject withholding us taxes conway’s 4298 million cash equivalents december 31 2012 428 million related foreign subsidiaries conway currently expect rely foreign cash cashequivalent balances source liquidity capital fund domestic operations critical accounting policies estimates preparation financial statements accordance accounting principles generally accepted us requires management adopt accounting policies make significant judgments estimates many cases alternative policies estimation techniques could used conway maintains process evaluate appropriateness accounting policies estimation techniques including discussion review audit committee board directors independent auditors accounting policies estimates may require adjustment based changing facts circumstances actual results could differ estimates conway believes accounting policies judgmental material financial statements related following •defined benefit pension plans •goodwill •income taxes •property plant equipment longlived assets •revenue recognition •selfinsurance accruals defined benefit pension plans periods presented certain employees conway subsidiaries us covered several retirement benefit plans including several qualified nonqualified defined benefit pension plans significant assumptions net periodic benefit expense income projected benefit obligation conway’s defined benefit pension plans depend upon number assumptions factors significant discount rate used measure present value pension obligations expected rate return plan assets funded qualified plans conway assesses plan assumptions discount rate expected rate return plan assets significant assumptions periodic basis concludes assumptions actuarial plan measurement date discount rate determining appropriate discount rate conway assisted actuaries utilize yieldcurve model based universe highgrade corporate bonds rated aa better moodys rating service model determines single equivalent discount rate applying yield curve conways expected future benefit payments december 31 2012 measurement conway used newly developed yield curve closely matches expected portfolio bonds would used settle obligation yieldcurve model used december 31 2012 measurement produced discount rate 35 basis points higher previous model resulted 936 million reduction projected benefit obligation discount rate used determining net periodic benefit expense income periods presented 2013 follows rate return plan assets qualified defined benefit pension plans conway sets expected return plan assets using current market expectations historical returns expected return plan assets based estimates longterm expected returns considers plans anticipated asset allocation course next year expected return includes effect actively managing plan assets net fees expenses plan assets managed pursuant longterm allocation strategy seeks mitigate plans’ funded status volatility increasing plans’ investment fixedincome investments time strategy developed analyzing variety diversified assetclass combinations conjunction projected liabilities plans result strategies expected return plan assets declined time follows significant assumption sensitivity decline discount rate 465 december 31 2011 425 december 31 2012 caused 1015 million increase benefit obligation conways defined benefit pension plans year ended december 31 2012 conways expected return plan assets 844 million compared actual return plan assets 1709 million sensitivity analysis shows effect net periodic benefit expense income projected benefit obligation 25 basis point change assumed discount rate expected return plan assets actuarial gains losses changes discount rate andor differences expected actual rate return plan assets may result unrecognized actuarial gains losses conway’s defined benefit pension plans accumulated unrecognized actuarial losses decreased 7042 million december 31 2012 7218 million december 31 2011 portion unrecognized actuarial gain loss exceeds 10 greater projected benefit obligation fair value plan assets beginning year amortized recognized expense income estimated average remaining life expectancy plan participants effect operating results effect defined benefit pension plans conway’s operating results consist primarily net effect interest cost plan obligations qualified nonqualified defined benefit pension plans expected return plan assets funded qualified defined benefit pension plans amortization gains losses conway estimates defined benefit pension plans result annual expense 4 million 2013 defined benefit pension plans conway recognized annual expense 96 million 2012 04 million 2011 75 million 2010 funding determining amount timing pension contributions conway considers cash position ppa gaapbased measurements funded status tax deductibility contributions among factors conway made contributions 514 million 626 million qualified defined benefit pension plans 2012 2011 respectively conway estimates make 55 million contributions qualified defined benefit pension plans 2013 level conway’s annual contributions qualified pension plans subject change based variations interest rates asset returns ppa requirements factors goodwill recorded excess acquired entity’s purchase price amounts assigned assets acquired including identified intangible assets liabilities assumed conway tests impairment goodwill annually measurement date november 30 whenever events occur circumstances change would likely reduce fair value reporting unit carrying amount quarter conway considers events may trigger impairment goodwill including factors changes total company market value compared underlying book value significant adverse changes may impact reporting segments underlying reporting units reporting unit goodwill impairment purposes may component reporting segment independently generates revenues discrete financial information regularly reviewed management conway uses multiple valuation methods possible determine fair value reporting unit methods used include use publiccompany multiples precedent transactions discounted cash flow models may vary depending availability information valuation methods assumptions used determine fair value reporting units may significantly impact result key assumptions used discounted cash flow models cash flow projections involving forecasted revenues expenses capital expenditures working capital changes discount rate terminal growth rate applied projected cash flows cash flow projections developed conway’s annual planning process discount rate equals estimated weightedaverage cost capital reporting unit marketparticipant perspective terminal growth rates based inflation assumptions adjusted factors may impact future growth industryspecific expectations estimates assumptions may incomplete inaccurate unanticipated events circumstances result changes assumptions estimates related goodwill could material effect conway’s valuation result accordingly financial condition results operations conway truckload 3298 million goodwill december 31 2012 valuation conway truckload conway applied two equally weighted methods publiccompany multiples discounted cash flow models assessment conway truckload’s goodwill fair value reporting unit exceeded carrying value 15 approximately 93 million 100 basis point change assumed discount rate would result 24 million change fair value 10 change estimated operating income next five years would result 34 million change fair value income taxes establishing deferred income tax assets liabilities conway makes judgments interpretations based enacted tax laws published tax guidance applicable operations conway periodically evaluates need valuation allowance reduce deferred tax assets realizable amounts likelihood material change conway’s expected realization assets dependent future taxable income future capital gains ability use tax loss credit carryforwards carrybacks final us foreign tax settlements effectiveness taxplanning strategies various relevant jurisdictions conway assesses income tax positions records tax benefits years subject examination based upon management’s evaluation facts circumstances information available reporting date positions likely tax benefit sustained conway recorded largest amount tax benefit greaterthan50percent likelihood realized upon ultimate settlement taxing authority full knowledge relevant information income tax positions meet morelikelythannot criteria tax benefit recognized financial statements property plant equipment longlived assets accounting property plant equipment conway makes estimates expected useful lives expected residual values assets potential impairment based fair values assets cash flows generated assets depreciation property plant equipment estimated useful lives determination salvage values require management make judgments future events conway periodically evaluates whether changes estimated useful lives salvage values necessary ensure estimates accurately reflect economic use assets conway’s periodic evaluation may result changes estimated lives andor salvage values used depreciate assets affect amount periodic depreciation expense recognized ultimately gain loss disposal asset longlived assets tested impairment whenever events changes circumstances indicate carrying amount may recoverable assets held used impairment charge recognized estimated undiscounted cash flows associated asset group assets less carrying value impairment exists charge recognized difference carrying value fair value fair values determined using quoted market values discounted cash flows external appraisals applicable assets held disposal carried lower carrying value estimated net realizable value quarter conway considers events may trigger impairment longlived assets indicators impairment conway considers include factors significant decrease market value longlived asset significant change extent manner longlived asset used currentperiod losses combined history losses projection continuing losses associated use longlived asset revenue recognition conway freight recognizes revenue reporting periods based relative transit time period recognizes expense incurred conway truckload recognizes revenue related direct costs shipment delivered menlo worldwide logistics recognizes revenue proportionalperformance model based service outputs delivered customer critical revenuerelated policies estimates conway freight conway truckload include related revenue adjustments uncollectible accounts receivable critical revenuerelated policies estimates menlo worldwide logistics include related uncollectible accounts receivable measuring proportion service provided customers gross netbasis revenue recognition conway believes revenue recognition policies appropriate use revenuerelated estimates judgments provide reasonable approximation actual revenue earned estimated revenue adjustments generally pricing assessed companies transportation industry subject subsequent adjustment due several factors including weight freightclassification verifications pricing discounts revenue adjustments estimated based largely historical experience uncollectible accounts receivable conway freight conway truckload report accounts receivable net realizable value provide allowance uncollectible accounts losses probable estimates uncollectible accounts based various judgments assumptions including revenue levels historical loss experience economic conditions aging outstanding accounts receivable menlo worldwide logistics based size nature client base performs periodic evaluation customers’ creditworthiness accounts receivable portfolio recognizes expense uncollectible accounts losses probable reasonably estimable proportional performance service outputs certain customer contracts menlo worldwide logistics makes estimates measuring proportion service outputs delivered customer including services provided performancebased incentive arrangements gross netbasis revenue recognition determining whether revenue reported gross net basis based assessment whether menlo worldwide logistics acting principal agent transaction involves judgment based terms arrangement selfinsurance accruals conway uses combination largedeductible purchased insurance selfinsurance programs provide costs medical vehicular cargo workers’ compensation claims longterm portion selfinsurance accruals relates primarily workers’ compensation vehicular claims expected payable several years conway periodically evaluates level insurance coverage adjusts insurance levels based risk tolerance premium expense measurement classification selfinsured costs requires consideration historical cost experience demographic severity factors judgments current expected levels cost per claim retention levels methods provide estimates undiscounted liability associated claims incurred balance sheet date including claims reported conway believes actuarial methods appropriate measuring highly judgmental selfinsurance accruals however based magnitude claims length time incurrence claims ultimate settlement use estimation method sensitive assumptions factors described accordingly changes assumptions factors materially affect estimated liability amounts may different actual costs paid settle claims new accounting standards refer note 1 “principal accounting policies” item 8 “financial statements supplementary data” discussion recently issued accounting standards conway yet adopted forwardlooking statements certain statements included herein constitute “forwardlooking statements” within meaning section 21e securities exchange act 1934 amended subject number risks uncertainties relied upon predictions future events statements historical fact forwardlooking statements including • projections earnings revenues weight yield volumes income financial operating items • statements plans strategies expectations objectives conway’s management future operations future items • statements concerning proposed new products services • statements regarding conway’s estimated future contributions pension plans • statements adequacy reserves • statements regarding outcome legal claims proceedings may brought conway • statements regarding future economic conditions performance • statements regarding strategic acquisitions • statements estimates belief statements assumptions underlying foregoing certain forwardlooking statements identified use forwardlooking terminology “believes” “expects” “may” “will” “should” “seeks” “approximately” “intends” “plans” “estimates” “anticipates” negative terms variations terms comparable terminology discussions strategy plans intentions forwardlooking statements necessarily dependent assumptions data methods may incorrect imprecise assurance realized regard certain important factors among others addition matters discussed elsewhere document reports documents filed conway securities exchange commission could cause actual results matters differ materially discussed forwardlooking statements detailed description certain risk factors included item 1a “risk factors” forwardlooking statements speak date statement made conway undertake obligation update revise forwardlooking statements whether result new information future events otherwise except otherwise required law item 7aitem 7 management’s discussion analysis financial condition results operations introduction management’s discussion analysis financial condition results operations referred “management’s discussion analysis” intended assist historical prospective understanding conway’s financial condition results operations cash flows including discussion analysis following •overview business •results operations •liquidity capital resources •critical accounting policies estimates •new accounting standards •forwardlooking statements overview business conway provides transportation logistics supplychain management services wide range manufacturing industrial retail customers conway’s business units operate regional interregional transcontinental lessthantruckload fulltruckload freight transportation contract logistics supplychain management multimodal freight brokerage trailer manufacturing financial reporting purposes conway divided three reporting segments freight logistics truckload conway freight primarily transports shipments utilizing network freight service centers combined fleet companyoperated linehaul pickupanddelivery tractors trailers menlo worldwide logistics menlo manages logistics functions customers primarily utilizes thirdparty transportation providers movement customer shipments conway truckload primarily transports shipments using fleet companyoperated tractors trailers prior periods reporting segment consisted operating results conways trailer manufacturer certain corporate activities related income expense allocated reporting segments beginning first quarter 2013 former segment reported corporate eliminations order reconcile segment results consolidated totals periods presented reflect change reporting segment structure conways primary businessunit results generally depend number weight distance shipments transported prices received shipments services mix services provided customers well fixed variable costs incurred conway providing services ability manage costs changing circumstances due conway freights relatively high fixedcost structure sudden severe changes shipment volumes negative impact managements ability manage costs conways primary business units affected timing degree fluctuations fuel prices ability recover incremental fuel costs fuelsurcharge programs andor costrecovery mechanisms fully discussed item 1a “risk factors” results operations overview provides highlevel summary conway’s results operations periods presented intended provide context remainder discussion reporting segments refer “reporting segment review” complete detailed discussion analysis overview 2013 compared 2012 conway’s consolidated revenue 55 billion 2013 decreased 19 56 billion 2012 due lower revenue logistics partially offset higher revenue freight truckload lower revenue logistics result decreased transportationmanagement services partially offset increased warehousemanagement services freights revenue increased due increase yield partially offset decrease weight per day truckloads revenue increased primarily due improved revenue per mile partially offset decrease loaded miles conway’s consolidated operating income decreased 2090 million 2013 2288 million 2012 decrease operating income due lower operating income logistics truckload partially offset improved operating income freight logistics operating income declined due higher warehouserelated operating costs certain warehousemanagement contracts truckload’s operating income decreased due higher operating expenses primarily increases depreciation maintenance income expense 2013 decreased 33 million compared 2012 reflecting lower interest expense lower lettersofcredit fees conway’s effective tax rate 2013 358 compared 388 2012 lower effective tax provision 2013 benefited 82 million discrete tax benefits including 33 million benefit first quarter recognize 2012 alternativefuel credit discrete tax benefits 08 million 2012 excluding discrete items effective tax rate 2013 benefited 2013 alternativefuel credit expected available 2014 2012 compared 2011 conway’s consolidated revenue 56 billion 2012 increased 55 53 billion 2011 reflecting higher revenue segments higher revenue freight truckload primarily result increased base freight rates higher fuel surcharges higher revenue logistics due increased revenue transportationmanagement warehousemanagement services conway’s operating income increased 2288 million 2012 2079 million 2011 increase operating income due improvements freight truckload partially offset reduced operating income logistics higher operating income freight truckload due increased revenue improved operating margins lower operating income logistics primarily due 2011 gain 100 million purchaseprice adjustment settle dispute associated acquisition chic logistics income expense 2012 decreased 20 million compared 2011 largely due 12 million decrease miscellaneous expenses mostly lettersofcredit fees also interest expense declined 08 million conway’s effective tax rate 2012 388 compared 403 2011 conways tax provision 2012 benefited discrete tax adjustments effective tax rate 2011 adversely affected discrete tax adjustments 2011 income tax provision also included effect 100 million gain 11 million related tax effective tax rate 2011 benefited fuelrelated tax credit available recognized 2012 reporting segment review discussion analysis segment operating results management utilizes revenue intersegment eliminations management believes revenue intersegment eliminations combined detailed operating expense information provides meaningful analysis segment results revenue external customers revenue internal customers reported note 12 “segment reporting” item 8 “financial statements supplementary data” freight following table compares operating results operating margins percentage change selected operating statistics freight reporting segment 2013 compared 2012 freight’s revenue 2013 increased 22 compared 2012 due 22 increase yield partially offset 02 decline weight per day 22 increase yield largely due increased base freight rates 02 decline weight per day reflects 08 decline shipments per day partially offset 06 increase weight per shipment excluding fuel surcharges yield increased 24 2013 compared 2012 fuelsurcharge revenue decreased 173 revenue 2013 175 2012 fuel surcharge intended compensate conway freight adverse effects higher fuel costs fuelrelated increases purchased transportation fuel surcharges one part conway freight’s overall rate structure total price conway freight receives customers services governed market forces fully discussed item 1a “risk factors” freight’s operating income increased 22 million 2013 compared 2012 primarily due increase yield addition operating results 2013 reflect progress made freight’s lanebased pricing linehaul optimization initiatives implemented course 2013 however benefits initiatives largely offset increased costs cargo workers’ compensation vehicular claims expenses salaries wages employee benefits increased 13 2013 compared 2012 due 22 increase salaries wages excluding variable compensation partially offset 29 million 98 decrease variable compensation benefits expense relatively flat 2013 decrease costs employee medical benefits offset increase workers compensation expense 22 increase salaries wages excluding variable compensation largely due annual salary wage rate increases 98 decrease variable compensation based primarily variations performance relative variable compensation plan targets decrease costs employee medical benefits primarily due decrease number claims increase workers compensation expense due increase expense per claim partially offset decrease number claims purchased transportation expense increased 15 2013 2012 due higher carrier rates increased thirdparty miles fully discussed operating expenses increased 78 2013 compared 2012 due higher expenses informationtechnology services increased costs cargo vehicular claims decline gains sale property increase informationtechnology expenses primarily due higher costs informationtechnology projects including initiatives discussed infrastructure increase costs cargo vehicular claims resulted increase cost per claim number claims expenses fuel fuelrelated taxes decreased 35 compared 2012 primarily due lower fuel consumption reflects improved miles per gallon fewer miles driven company drivers lower cost per gallon diesel fuel decline miles driven company drivers included effect improved linehaul productivity measured average weight per trailer increase purchased transportation expense decrease fuel expense related reflect higher proportion miles driven thirdparty carriers opposed company drivers increase thirdparty miles part conway freights effort reduce total linehaul costs reducing empty miles increase thirdparty miles offset decrease miles driven company drivers resulted largely improved linehaul productivity depreciation amortization expense increased 88 2013 compared 2012 primarily due replacement older tractors newer models newer models costly due part inclusion expensive emissionscontrol safety technology purchased labor expense increased 483 2013 compared 2012 source labor used freighthandling functions 2012 compared 2011 freight’s revenue 2012 increased 45 2011 primarily due 44 increase yield partially offset 03 decline weight per day 44 increase yield largely due increased base freight rates 03 decline weight per day reflects 19 decline shipments per day partially offset 16 increase weight per shipment excluding fuel surcharges yield increased 37 2012 fuelsurcharge revenue increased 175 revenue 2012 170 2011 2012 freight’s operating income increased 241 million compared 2011 higher operating income 2012 largely due higher revenue higher operating margins expenses salaries wages employee benefits increased 39 2012 compared 2011 salaries wages excluding variable compensation increased 19 due annual pay increases new sales bonus program partially offset decline number miles driven company drivers employee benefits expense increased 84 primarily due higher costs employee medical benefits defined contribution defined benefit retirement plans higher costs employee medical benefits largely due increase number claims increase defined contribution retirement plan expense mainly due restoration certain benefits previously suspended march 2009 response economic conditions purchased transportation expense increased 100 2012 due increased thirdparty miles higher carrier rates expenses fuel fuelrelated taxes decreased 27 primarily due lower fuel consumption result decreased miles driven company drivers partly offset increase cost per gallon diesel fuel depreciation amortization expense increased 132 2012 compared 2011 primarily due replacement older tractors newer models newer models costly due part expensive emissionscontrol safety technology logistics table compares operating results operating margins logistics reporting segment table summarizes logistics’ revenue well net revenue less purchased transportation expense transportationmanagement revenue attributable contracts menlo manages transportation freight subcontracts carriers actual transportation delivery products menlo refers purchased transportation menlos management places emphasis net revenue meaningful measure relative importance principal services since revenue earned transportationmanagement services includes carriers’ charges menlo transporting shipments 2013 compared 2012 2013 logistics’ revenue decreased 108 compared 2012 due 184 decrease revenue transportationmanagement services partially offset 103 increase revenue warehousemanagement services 2013 lower revenue transportationmanagement services primarily due lower volumes including effect change scope large customer contract conclusion work customer contracts declines partially offset increased revenue warehousemanagement services primarily due new business logistics’ net revenue 2013 increased 67 compared 2012 increased warehousemanagement services revenue partially offset declines net revenue transportationmanagement services 2013 logistics reported operating income 235 million compared 446 million 2012 lower operating income primarily due increases operating expenses including costs incurred startup phase certain warehousemanagement contracts increases costs purchased labor rents leases lower operating income also reflects decline transportationmanagement margins net revenue additionally logistics operating margin net revenue adversely affected increase proportion net revenue earned warehousemanagement services generally lower margin net revenue transportationmanagement services salaries wages employee benefits increased 19 2013 compared 2012 due increased salaries wages excluding variable compensation benefits expense partially offset decreased variable compensation expense salaries wages excluding variable compensation expense increased 77 2013 due increased headcount response growth new existing warehousemanagement services customers employee benefits expense increased 41 2013 reflecting increased expenses various benefits result growth headcount increased salaries wages variablecompensation expense decreased 116 million 859 19 million expense recognized result low performance relative variablecompensation plan targets operating expenses increased 183 2013 compared 2012 primarily due higher costs informationtechnology projects infrastructure higher expenses warehouserelated costs facilities travel higher expenses warehouserelated costs facilities travel incurred primarily support new warehousemanagement contracts additionally increased operating expenses include increase provision uncollectible accounts receivable primarily related two specific customers purchased labor expense increased 191 additional labor required support new business warehousemanagement services including contracts startup phase expenses rents leases increased 182 2013 compared 2012 due increases number leased warehouse facilities including facilities support customer contracts various stages startup 2013 2012 compared 2011 2012 logistics’ revenue increased 86 due increases revenue transportationmanagement warehousemanagement services 2012 revenue transportationmanagement services increased 115 revenue warehousemanagement services increased 12 higher revenue transportationmanagement services primarily due new customers increased revenue warehousemanagement services primarily due growth existing customers logistics’ net revenue 2012 increased 62 revenue growth partially offset purchased transportation expense grew faster rate revenue purchased transportation expense increased 100 2012 primarily due increased transportationmanagement volumes 2012 logistics reported operating income 446 million compared 547 million 2011 operating results 2011 included 100 million gain resulting purchaseprice adjustment settle dispute associated 2007 acquisition chic logistics excluding item logistics’ operating income 2012 decreased 03 2011 reflecting increases salaries wages employee benefits expense higher operating expenses salaries wages employee benefits increased 130 2012 salaries wages excluding variable compensation rose 149 primarily due increased average employee counts response growth new existing customers salary wage rate increases employee benefits expense increased 145 2012 primarily due increased costs employee medical benefits payroll taxes compensated absences higher costs employee medical benefits largely due increases number claims increased expense compensated absences payroll taxes primarily due increase salaries wages operating expenses increased 71 2012 primarily due increased costs informationtechnology projects infrastructure higher expenses warehouserelated packaging materials supplies higher expenses professional services support customer operations increase provision uncollectible accounts receivable increase provision uncollectible accounts receivable 2012 primarily due single customer truckload table compares operating results operating margins percentage change selected operating statistics truckload reporting segment table summarizes segment’s revenue intersegment eliminations including freight revenue fuelsurcharge revenue nonfreight revenue table also includes operating income operating margin excluding fuelsurcharge revenue truckload’s management believes measures relevant evaluate ongoing operations 2013 compared 2012 2013 truckload’s revenue increased 02 2012 primarily due 11 increase freight revenue partially offset 27 decrease fuelsurcharge revenue increase freight revenue reflects 16 increase revenue per loaded mile partially offset 05 decrease loaded miles decrease loaded miles resulted lower tractor productivity partially offset increase size tractor fleet 2013 truckloads tractor fleet grew result increase number owneroperator units 2013 truckload operating income decreased 139 compared 2012 result increased operating expenses primarily increases depreciation maintenance salaries wages employee benefits decreased 33 primarily due lower expense employee benefits lower expenses employee benefits reflect declines costs workers’ compensation claims employee medical benefits workers compensation claims expense decreased 2013 due decrease expense per claim partially offset increase number claims employee medical decreased 2013 due decreases number claims expense per claim purchased transportation increased 283 2013 compared 2012 due increased miles driven truckloads owneroperator fleet grew period operating expenses increased 18 2013 compared 2012 primarily due declines gains sale tractors expenses fuel fuelrelated taxes decreased 38 2013 compared 2012 primarily due lower fuel consumption fewer miles driven company drivers compared 2012 additionally cost per gallon diesel fuel decreased 2013 depreciation amortization expense increased 67 2013 compared 2012 reflecting higher cost new tractors newer models costly due part expensive emissioncontrol safety technology partially offset effect change estimated salvage values certain trailers result change depreciation amortization expense relatively consistent fourth quarter 2013 compared fourth quarter 2012 conway truckload’s change estimated salvage value trailers fully discussed note 1 “principal accounting policies” item 8 “financial statements supplementary data” maintenance expense increased 152 2013 compared 2012 based axle specifications newer models tractors require frequent tire replacement older models resulted higher maintenance expense 2013 increased maintenance expense also included higher repair costs trailers trailer fleet increases age higher costs maintain newer tractors complex emissioncontrol technology 2012 compared 2011 2012 truckload’s revenue increased 33 2011 primarily due 24 increase freight revenue 54 increase fuelsurcharge revenue increase freight revenue reflects 26 increase revenue per loaded mile partially offset 02 decrease loaded miles higher revenue per loaded mile included effect negotiated rate increases decrease loaded miles primarily due decline number tractors operated twoperson teams resulted lower miles per tractor higher fuelsurcharge revenue reflects higher fuel prices 2012 compared 2011 improved fuelsurcharge recovery rate 2012 truckload earned operating income 449 million compared 348 million 2011 primarily reflecting increase revenue higher operating margins salaries wages employee benefits increased 06 2012 reflecting increase variablecompensation expense partially offset decreases salaries wages excluding variable compensation employee benefits expense variablecompensation expense increased 18 million 797 2012 based variations performance measures relative variablecompensation plan targets salaries wages excluding variable compensation decreased 03 primarily due lower wages result fewer miles driven company drivers employee benefits expense decreased 01 2012 primarily due decrease costs workers compensation claims partially offset increases employee medical benefits defined contribution retirement plans decreases expense workers compensation claims due decreases expense per claim number claims increases expense employee medical benefits largely due increases number claims increase expenses defined contribution retirement plans mainly due restoration certain benefits fourth quarter 2011 purchased transportation increased 316 2012 due increased miles driven truckloads owneroperator fleet grew period fuelrelated rate increases expenses fuel fuelrelated taxes decreased 11 2012 primarily due improved miles per gallon lower fuel consumption due fewer miles driven company drivers compared 2011 decreases partially offset higher fuel cost per gallon 2012 compared 2011 operating expenses increased 56 2012 primarily due increases vehicular selfinsurance employee development expenses partially offset gains equipment sales increase expenses vehicular selfinsurance due increase expense per claim partially offset decline number claims higher expenses employee development relate increased driver certification training costs increase gains equipment sales reflect improved conditions used tractor market corporate eliminations corporate eliminations consists operating results conways trailer manufacturer certain corporate activities related income expense allocated reporting segments intersegment eliminations beginning 2013 costs associated defined benefit pension plans included corporate eliminations corporate costs amount defined benefit pension cost retained corporate eliminations year ended december 31 2013 42 million prior periods costs included results freight logistics truckload reporting segments total 96 million 2012 04 million 2011 2013 2011 results conway corporate properties include gains 56 million 51 million respectively sales properties table summarizes components corporate eliminations intersegment revenue eliminations results reinsurance activities primarily relate conway’s participation reinsurance pool fully discussed note 1 “principal accounting policies” item 8 “financial statements supplementary data” liquidity capital resources cash equivalents increased 4845 million december 31 2013 4298 million december 31 2012 3480 million provided operating activities exceeded 2719 million used investing activities 213 million used financing activities cash provided operating activities came net income noncash adjustments partially offset changes assets liabilities cash used investing activities primarily reflects capital expenditures cash used financing activities primarily reflects payment common dividends capital leases 1 “noncash adjustments” refer depreciation amortization deferred income taxes provision uncollectible accounts purchaseprice adjustments noncash income expenses operating activities significant items affecting comparison conway’s operating cash flows periods presented summarized 2013 compared 2012 2013 net income noncash adjustments collectively provided 118 million operating cash flow compared 2012 changes assets liabilities used 248 million less operating cash flows 2013 compared prioryear period significant comparative changes included accounts payable receivables accrued variable compensation employee benefits selfinsurance accruals accounts payable receivables collectively provided 131 million 2013 compared 77 million used 2012 variations accounts payable receivables included effect lower transportationmanagement volumes logistics 2013 accrued variable compensation used 171 million 2013 compared 12 million provided 2012 variations performance relative variablecompensation plan targets resulted lower variablecompensation expense accruals 2013 employee benefits used 825 million 2013 compared 673 million used 2012 primarily due lower expense accruals defined benefit pension longterm disability plans increased funding contributions qualified defined benefit pension plans 2013 conway contributed 553 million qualified defined benefit pension plans compared 514 million 2012 accruals selfinsurance used 37 million 2013 compared 187 million used 2012 due primarily increases vehicular cargo claims liabilities 2012 compared 2011 2012 net income noncash adjustments collectively increased operating cash flows 598 million 2011 changes assets liabilities decreased operating cash flows 931 million 2012 compared prioryear period significant comparative changes included accrued income taxes accrued variable compensation employee benefits 2012 accrued income taxes used 23 million compared 344 million provided 2011 reflecting variations income tax refunds payments well variations current income tax provisions 2012 conway made net payments 62 million compared 287 million net refunds 2011 accrued variable compensation provided 12 million 2012 compared 224 million provided 2011 variations performance measures relative variablecompensation plan targets resulted higher level payments 2012 compared 2011 employee benefits used 673 million 2012 compared 527 million used 2011 comparative period changes primarily due change funding method contributions defined contribution retirement plan decline amount funding defined benefit pension plans conway used repurchased common stock also referred treasury stock fund contributions defined contribution retirement plan first six months 2011 conway used 461151 shares treasury stock fund 173 million contributions defined contributions retirement plans 2012 conway contributed 514 million qualified defined benefit pension plans compared 626 million 2011 investing activities significant items affecting comparison conway’s investing cash flows periods presented summarized 2013 compared 2012 cash used capital expenditures decreased 2819 million 2013 2931 million 2012 primarily due increased capital expenditures 2012 update conway freights fleet tractor equipment cash provided proceeds property equipment decreased 142 million 2013 208 million 2012 primarily due fewer sales excess properties 2013 net proceeds marketable securities declined 32 million 2013 154 million 2012 due decreased investing activity 2012 compared 2011 2012 capital expenditures 2931 million compared 2890 million 2011 increased capital expenditures 2012 primarily due increased acquisitions tractor equipment conway freight conway received salerelated proceeds 208 million 2012 132 million 2011 proceeds 2012 primarily due sale facilities freight segment proceeds 2011 primarily due sale excess corporate properties sale tractors connection fleetreplacement program conway truckload investment transactions involving purchase sale marketable securities resulted 154 million net proceeds 2012 126 million cash used 2011 financing activities significant items affecting comparison conway’s financing cash flows periods presented summarized 2013 compared 2012 cash provided exercise stock options increased 208 million 2013 compared 36 million 2012 primarily due increase market price conway’s common stock conway used 161 million 2013 payment capital leases compared 290 million used 2012 payments 2012 included early payment certain capital leases scheduled mature december 2013 2012 compared 2011 conway used 290 million 2012 repayment debt obligations compared 198 million used 2011 payments 2012 included early payment certain capital leases previously scheduled mature december 2012 december 2013 contractual cash obligations table summarizes contractual cash obligations conway december 31 2013 amounts table based management’s estimates assumptions obligations including duration possibility renewal factors estimates assumptions actual future payments may vary reflected table certain longterm liabilities including selfinsurance accruals liabilities deferred credits reported conway’s consolidated balance sheets reflected table due absence stated due dates presented contractual obligations longterm debt capital leases represent principal interest payments contractual obligations operating leases represent payments lease arrangements included conway’s consolidated balance sheets conway agreements thirdparty service providers provide certain informationtechnology administrative accounting services payments terms agreements subject change depending quantities types services consumed presented payments reflect amounts based projections services expected consumed contracts also contain provisions allow conway terminate contract time however conway would required pay fees termination causes failure service providers perform employee benefit planrelated cash obligations table represent estimated payments conway’s nonqualified defined benefit pension plans postretirement medical plan december 31 2023 expected benefit payments conway’s qualified defined benefit pension plans included table benefits satisfied use plan assets conway estimates make 59 million contributions qualified defined benefit pension plans 2014 however contribution amount could change based variations interest rates asset returns pension protection act ppa requirements factors letters credit outstanding conway’s credit facilities described “capital resources liquidity outlook” generally required collateral support selfinsurance programs represent additional liabilities underlying selfinsurance accruals already included conway’s consolidated balance sheets discussion see note 5 “debt financing arrangements” note 6 “leases” note 7 “income taxes” note 9 “employee benefit plans” item 8 “financial statements supplementary data” capital resources liquidity outlook conway’s capital requirements relate primarily acquisition revenue equipment support growth andor replacement older equipment newer equipment funding capital expenditures meeting workingcapital requirements conway may utilize various sources liquidity capital including cash equivalents cash flow operations credit facilities access capital markets conway may also manage liquidity requirements cashflow generation varying timing amount capital expenditures fully discussed note 5 “debt financing arrangements” item 8 “financial statements supplementary data” conway 325 million unsecured revolving credit facility december 31 2013 cash borrowings outstanding credit facility however 1093 million letters credit outstanding leaving 2157 million available capacity additional letters credit cash borrowings december 31 2013 conway compliance revolving credit facilitys financial covenants expects remain compliance conway uncommitted unsecured credit facilities totaling 678 million december 31 2013 available support shortterm borrowings letters credit bank guarantees overdraft facilities december 31 2013 16 million cash borrowings 299 million credit commitments outstanding leaving 363 million available capacity 2014 conway anticipates capital software expenditures approximately 285 million net asset dispositions primarily acquisition tractor equipment conway’s actual 2014 capital expenditures may differ estimated amount depending factors availability timing delivery equipment december 31 2013 conway’s senior unsecured debt rated investment grade standard poor’s bbb fitch ratings bbb moody’s baa3 standard poors fitch ratings moody’s assigned outlook “stable” conway believes workingcapital requirements capitalexpenditure plans 2014 adequately met various sources liquidity capital including conway’s cash equivalents cash flow operations credit facilities access capital markets detailed note 7 “income taxes” item 8 “financial statements supplementary data” cumulative undistributed earnings conway’s foreign subsidiaries 299 million december 31 2013 remitted subject withholding us taxes conway’s 4845 million cash equivalents december 31 2013 528 million related foreign subsidiaries conway currently expect rely foreign cash cashequivalent balances source liquidity capital fund domestic operations critical accounting policies estimates preparation financial statements accordance accounting principles generally accepted us requires management adopt accounting policies make significant judgments estimates many cases alternative policies estimation techniques could used conway maintains process evaluate appropriateness accounting policies estimation techniques including discussion review audit committee board directors independent auditors accounting policies estimates may require adjustment based changing facts circumstances actual results could differ estimates conway believes accounting policies judgmental material financial statements related following •defined benefit pension plans •goodwill •income taxes •property plant equipment longlived assets •revenue recognition •selfinsurance accruals defined benefit pension plans periods presented certain employees conway subsidiaries us covered several retirement benefit plans including several qualified nonqualified defined benefit pension plans significant assumptions net periodic benefit expense income projected benefit obligation conway’s defined benefit pension plans depend upon number assumptions factors significant discount rate used measure present value pension obligations expected rate return plan assets funded qualified plans conway assesses plan assumptions discount rate expected rate return plan assets significant assumptions periodic basis concludes assumptions actuarial plan measurement date discount rate determining appropriate discount rate conway assisted actuaries utilize yieldcurve model based universe highgrade corporate bonds rated aa better moodys rating service model determines single equivalent discount rate applying yield curve conways expected future benefit payments discount rate used determining net periodic benefit expense income periods presented 2014 follows rate return plan assets qualified defined benefit pension plans conway sets expected return plan assets using current market expectations historical returns expected return plan assets based estimates longterm expected returns considers plans anticipated asset allocation course next year expected return includes effect actively managing plan assets net fees expenses plan assets managed pursuant longterm allocation strategy seeks mitigate plans’ funded status volatility increasing plans’ investment fixedincome investments time strategy developed analyzing variety diversified assetclass combinations conjunction projected liabilities plans result higher concentration fixedincome securities expected return plan assets declined time follows significant assumption sensitivity increase discount rate 425 december 31 2012 505 december 31 2013 resulted 1851 million decrease benefit obligation conways defined benefit pension plans sensitivity analysis shows effect net periodic benefit expense income projected benefit obligation 25 basis point change assumed discount rate funded status conway’s defined benefit pension plans less sensitive 25 basis point change assumed discount rate given fixedincome investments held plans would also experience corresponding change value year ended december 31 2013 conways expected return plan assets 913 million compared actual return plan assets 1520 million sensitivity analysis shows effect net periodic benefit expense income 25 basis point change expected return plan assets actuarial gains losses changes discount rate andor differences expected actual rate return plan assets may result unrecognized actuarial gains losses conway’s defined benefit pension plans accumulated unrecognized actuarial losses decreased 4412 million december 31 2013 7042 million december 31 2012 portion unrecognized actuarial gainloss exceeds 10 greater projected benefit obligation fair value plan assets beginning year amortized recognized incomeexpense estimated average remaining life expectancy plan participants effect operating results effect defined benefit pension plans conway’s operating results consist primarily net effect interest cost plan obligations qualified nonqualified defined benefit pension plans expected return plan assets funded qualified defined benefit pension plans amortization gains losses conway estimates defined benefit pension plans result annual income 20 million 2014 defined benefit pension plans conway recognized annual expense 42 million 2013 96 million 2012 04 million 2011 funding determining amount timing pension contributions conway considers cash position ppa gaapbased measurements funded status tax deductibility contributions among factors conway made contributions 553 million 514 million qualified defined benefit pension plans 2013 2012 respectively conway estimates make 59 million contributions qualified defined benefit pension plans 2014 level conway’s annual contributions qualified pension plans subject change based variations interest rates asset returns ppa requirements factors goodwill recorded excess acquired entity’s purchase price amounts assigned assets acquired including identified intangible assets liabilities assumed conway tests impairment goodwill annually measurement date november 30 whenever events occur circumstances change would likely reduce fair value reporting unit carrying amount quarter conway considers events may trigger impairment goodwill including factors changes total company market value compared underlying book value significant adverse changes may impact reporting segments underlying reporting units reporting unit goodwill impairment purposes may component reporting segment independently generates revenue discrete financial information regularly reviewed management conway considers multiple valuation methods determine fair value reporting unit methods include use publiccompany multiples precedent transactions discounted cash flow models may vary depending availability information valuation methods assumptions used determine fair value reporting units may significantly impact result key assumptions used discounted cash flow models cash flow projections involving forecasted revenue expenses capital expenditures working capital changes discount rate terminal growth rate applied projected cash flows cash flow projections developed conway’s annual planning process discount rate equals estimated weightedaverage cost capital reporting unit marketparticipant perspective terminal growth rates based inflation assumptions adjusted factors may impact future growth industryspecific expectations estimates assumptions may incomplete inaccurate unanticipated events circumstances result changes assumptions estimates related goodwill could material effect conway’s valuation result accordingly financial condition results operations conway truckload 3298 million goodwill december 31 2013 valuation conway truckload conway applied three methods publiccompany multiples discounted cash flow precedent transaction models assessment conway truckload’s goodwill fair value reporting unit exceeded carrying value 13 approximately 78 million 100 basis point change assumed discount rate would result 16 million change fair value 10 change estimated operating income next five years would result 22 million change fair value changes forecasted operating results assumptions could materially affect estimated fair value conway truckload may result impairment charges future income taxes establishing deferred income tax assets liabilities conway makes judgments interpretations based enacted tax laws published tax guidance applicable operations conway periodically evaluates need valuation allowance reduce deferred tax assets realizable amounts likelihood material change conway’s expected realization assets dependent future taxable income future capital gains ability use tax loss credit carryforwards carrybacks final us foreign tax settlements effectiveness taxplanning strategies various relevant jurisdictions conway assesses income tax positions records tax benefits years subject examination based upon management’s evaluation facts circumstances information available reporting date positions likely tax benefit sustained conway recorded largest amount tax benefit greaterthan50percent likelihood realized upon ultimate settlement taxing authority full knowledge relevant information income tax positions meet morelikelythannot criteria tax benefit recognized financial statements property plant equipment longlived assets accounting property plant equipment conway makes estimates expected useful lives expected residual values assets potential impairment based fair values assets cash flows generated assets depreciation property plant equipment estimated useful lives determination salvage values require management make judgments future events conway periodically evaluates whether changes estimated useful lives salvage values necessary ensure estimates accurately reflect economic use assets conway’s periodic evaluation may result changes estimated lives andor salvage values used depreciate assets affect amount periodic depreciation expense recognized ultimately gain loss disposal asset response recent conditions usedtrailer market conway truckload increased estimated salvage values certain trailers fourth quarter 2013 change decreased depreciation expense 13 million 2013 expected decrease 2014 depreciation expense 73 million longlived assets tested impairment whenever events changes circumstances indicate carrying amount may recoverable assets held used impairment charge recognized estimated undiscounted cash flows associated asset group assets less carrying value impairment exists charge recognized difference carrying value fair value fair values determined using quoted market values discounted cash flows external appraisals applicable assets held disposal carried lower carrying value estimated net realizable value quarter conway considers events may trigger impairment longlived assets indicators impairment conway considers include factors significant decrease market value longlived asset significant change extent manner longlived asset used currentperiod losses combined history losses projection continuing losses associated use longlived asset revenue recognition conway freight recognizes revenue reporting periods based relative transit time period recognizes expense incurred conway truckload recognizes revenue related direct costs shipment delivered menlo recognizes revenue based service outputs provided customer critical revenuerelated policies estimates conway freight conway truckload include related revenue adjustments uncollectible accounts receivable critical revenuerelated policies estimates menlo include related uncollectible accounts receivable measuring service outputs provided customers gross netbasis revenue recognition conway believes revenue recognition policies appropriate use revenuerelated estimates judgments provide reasonable approximation actual revenue earned estimated revenue adjustments generally pricing assessed companies transportation industry subject subsequent adjustment due several factors including weight freightclassification verifications pricing discounts revenue adjustments estimated based largely historical experience uncollectible accounts receivable conway freight conway truckload report accounts receivable net realizable value provide allowance uncollectible accounts losses probable estimates uncollectible accounts based various judgments assumptions including revenue levels historical loss experience economic conditions aging outstanding accounts receivable menlo based size nature client base performs periodic evaluation customers’ creditworthiness accounts receivable portfolio recognizes expense uncollectible accounts losses probable reasonably estimable service outputs certain customer contracts menlo makes estimates measuring service outputs provided customer including services provided performancebased incentive arrangements contingent portion revenue performancebased incentive arrangements considered fixed determinable performance criteria met gross netbasis revenue recognition determining whether revenue reported gross net basis based assessment whether menlo acting principal agent transaction involves judgment based terms arrangement selfinsurance accruals conway uses combination largedeductible purchased insurance selfinsurance programs provide costs medical vehicular cargo workers’ compensation claims longterm portion selfinsurance accruals relates primarily workers’ compensation vehicular claims expected payable several years conway periodically evaluates level insurance coverage adjusts insurance levels based risk tolerance premium expense measurement classification selfinsured costs requires consideration historical cost experience demographic severity factors judgments current expected levels cost per claim retention levels methods provide estimates undiscounted liability associated claims incurred balance sheet date including estimates claims incurred reported conway believes actuarial methods appropriate measuring highly judgmental selfinsurance accruals however based magnitude claims length time incurrence claims ultimate settlement use estimation method sensitive assumptions factors described accordingly changes assumptions factors materially affect estimated liability amounts may different actual costs paid settle claims new accounting standards refer note 1 “principal accounting policies” item 8 “financial statements supplementary data” discussion recently issued accounting standards conway yet adopted forwardlooking statements certain statements included herein constitute “forwardlooking statements” within meaning section 21e securities exchange act 1934 amended subject number risks uncertainties relied upon predictions future events statements historical fact forwardlooking statements including • projections earnings revenue weight yield volumes income financial operating items • statements plans strategies expectations objectives conway’s management future operations future items • statements concerning proposed new products services • statements regarding conway’s estimated future contributions pension plans • statements adequacy reserves • statements regarding outcome legal claims proceedings may brought conway • statements regarding future economic conditions performance • statements regarding strategic acquisitions • statements estimates belief statements assumptions underlying foregoing certain forwardlooking statements identified use forwardlooking terminology “believes” “expects” “may” “will” “should” “seeks” “approximately” “intends” “plans” “estimates” “anticipates” negative terms variations terms comparable terminology discussions strategy plans intentions forwardlooking statements necessarily dependent assumptions data methods may incorrect imprecise assurance realized regard certain important factors among others addition matters discussed elsewhere document reports documents filed conway securities exchange commission could cause actual results matters differ materially discussed forwardlooking statements detailed description certain risk factors included item 1a “risk factors” forwardlooking statements speak date statement made subject change conway undertake obligation update revise forwardlooking statements whether result new information future events otherwise except otherwise required law item 7aitem 7 management’s discussion analysis financial condition results operations introduction management’s discussion analysis financial condition results operations referred “management’s discussion analysis” intended assist historical prospective understanding cnf’s results operations financial condition cash flows including discussion analysis following • overview business • results operations related information • liquidity capital resources • estimates critical accounting policies • matters overview business cnf provides transportation logistics supply chain management services wide range manufacturing industrial retail customers financial reporting purposes cnf divided three reporting segments conway transportation services “conway” primarily provider regional lessthantruckload “ltl” freight services menlo worldwide provider contract logistics solutions cnf includes certain corporate activities road systems trailer manufacturer menlo worldwide consists operating results menlo worldwide logistics “logistics” vector scm joint venture gm accounted equitymethod investment cnf’s operating results generally expected depend number weight shipments transported prices received shipments mix services provided customers well fixed variable costs incurred cnf providing services ability manage costs changing shipment levels conway primarily transports shipments freight service center network logistics vector manage logistics functions customers primarily utilize thirdparty transportation providers movement customer shipments fully discussed “results operations discontinued operations” cnf menlo worldwide llc “mw” 2004 sold mwf ups accordingly results operations net liabilities cash flows forwarding segment segregated reported discontinued operations except otherwise noted results operations table summarizes cnf’s consolidated operating results 1 preferred stock dividends 2 required eitf 8724 “allocation interest discontinued operations” periods prior disposition mwf 2004 continuing operations allocated general corporate overhead charges previously allocated discontinued forwarding segment corporate overhead charges 169 million 2004 140 million 2003 allocated discontinued operations conway logistics based segment revenue capital employed cnf’s net income continuing operations preferred stock dividends grew 558 2215 million 396 per diluted share 2005 1422 million 257 per diluted share 2004 due improved operating results cnf reporting segments 2005 cnf’s net income available common shareholders 2153 million 385 per diluted share improved significantly net loss prior year due primarily last year’s 2763 million loss disposition mwf fully discussed “results operations discontinued operations” periods presented discontinued operations related sale mwf shutdown ewa terminated priority mail contract usps spinoff cfc cnf’s net income continuing operations preferred stock dividends 2004 rose 267 1422 million 257 per diluted share net income continuing operations offset 2663 million net loss 472 per diluted share discontinued operations primarily reflects loss disposition mwf resulting net loss applicable common shareholders 2004 1241 million 215 per diluted share continuing operations overview 2005 compared 2004 2005 cnf’s revenue increased 123 42 billion due higher revenue reporting segments consolidated operating income 2005 rose 305 significantly higher operating income conway improved results menlo worldwide conway’s operating income increased 340 due largely revenue growth 112 improved regionalcarrier operating margins conway’s revenue increase 2005 reflects regionalcarrier tonnage growth yield improvement increased fuel surcharges higher operating income reflects improved margins improved operating margins conway primarily reflect revenue growth productivity gains decline employee costs percentage revenue due largely lower incentive compensation resulted variations operating income performance factors relative incentive plan targets menlo worldwide’s operating income 2005 increased 145 improved results logistics higher income vector’s foreign operations logistics’ operating income increased 174 revenue growth 140 reported segment income vector increased 110 203 million net expense 2005 decreased 177 million 196 million due primarily increases investment income rose 152 million increased average cash equivalents marketable securities increased investment income also reflects higher interest rates earned cash equivalents marketable securities 2005 interest expense decreased 22 million 2005 due largely net effect interest financing transactions including 1000 million repayment june 2005 735 notes 1289 million redemption june 2004 5 convertible debentures 2926 million net issuance april 2004 67 senior debentures net miscellaneous nonoperating expenses 2005 primarily reflects 27 million costs 2004 associated redemption convertible debentures partially set 25 million increase foreign exchange losses 2005 cnf’s effective tax rate 347 declined 390 2004 lower rate 2005 reflects reversals accrued income taxes 78 million related irs settlement issues related tax years prior 2002 excluding effect reversals accrued taxes lower effective tax rate 2005 due primarily increase taxexempt interest income increased foreign tax credits effect gaap classification income vector’s increasing foreign income fully discussed note 3 “investment unconsolidated joint venture” item 8 “financial statements supplementary data” mw’s portion us federal income taxes vector’s domestic income reported cnf’s tax provision cnf’s foreign tax credits related vector’s foreign income also reflected cnf’s tax provision however gaap mw’s portion vector’s foreign income taxes foreign income reported component equitymethod income component cnf’s tax provision overview 2004 compared 2003 2004 cnf’s revenue increased 150 37 billion due higher revenue reporting segments benefited improved economic conditions consolidated operating income 2004 rose 263 significantly higher operating income conway improved operating results menlo worldwide increase conway’s operating income due principally effect improved margins revenue growth conway’s operating income 2004 increased 307 revenue growth 170 menlo worldwide’s operating income increased 73 improvement logistics partially offset decline operating income vector logistics reported 300 increase operating income 105 growth revenue vector’s operating income 2004 fell 25 million 183 million 2004 net expense increased 99 million 373 million due primarily increases interest expense net nonoperating expenses partially offset higher interest income marketable securities interest expense 2004 rose 101 million due largely net effect financing transactions 2004 described net miscellaneous nonoperating expenses 2004 reflects 43 million decline income corporateowned life insurance policies terminated third quarter 2004 27 million costs associated redemption convertible debentures 13 million decline foreign exchange gain partially offset prioryear equity venture losses 37 million conway transportation services table compares operating results dollars thousands operating margins percentage increase selected operating statistics conway reporting segment years ended december 31 2005 conway’s revenue rose 112 due higher revenue conway’s regional carriers continued growth conway supply chain services group includes conway air express conway truckload revenue per day regional carriers rose 124 2004 79 increase weight 42 increase yield increases 2005 primarily reflect increase fuel surcharges continued growth higherrated interregional services general rate increases partially offset growth loweryielding lowercost shipments fully discussed like ltl carriers conway assesses many customers fuel surcharge fuel surcharge part conway’s overall rate structure customers intended compensate conway adverse effects higher fuel costs fuel prices risen fuel surcharge increased conway’s yield revenue times interest customers conway temporarily capped fuel surcharge fixed percentage following sharp increase fuel costs aftermath hurricanes us conway imposed temporary cap fuel surcharge 2005 effect august 29 october 24 excluding fuel surcharges yields 2005 unchanged compared 2004 yields 2005 adversely affected 36 increase weight per shipment largely driven spotquote program contributed increase number shipments excess 10000 pounds spotquote program developed place loweryielding large shipments empty linehaul leg segments without requiring additional capacity commensurate lower transportation cost per unit weight spotquote lowercost higherweight shipments generally lower yields conway’s operating income 2005 increased 340 due largely improved margins primarily reflect revenue growth productivity gains decline employee costs percentage revenue 2005 fuel purchased transportation costs increased 642 193 respectively however higher fuel costs fuelrelated increases purchased transportation costs recovered fuel surcharges discussed fully discussed item 1a “risk factors price availability fuel” employee costs 2005 increased 50 declined percentage revenue employee costs 2005 reflect increases base compensation employee benefits partially offset lower incentive compensation base compensation rose 95 due primarily headcount increases attributable higher business volumes lesser extent wage salary rate increases incentive compensation 2005 declined 277 million 347 based variations operating income performance factors relative incentive plan targets employee benefits expense increased 26 increase health welfare costs due largely growth headcount partially offset decline workers’ compensation expense lower workers’ compensation expense 2005 largely due improved claims experience thirdquarter entry 2004 correct cumulative underrecognition expense certain priorperiod claims 39 million adverse effect net incentive compensation 2004 conway’s revenue rose 170 due higher revenue conway’s regional carriers continued growth conway’s supply chain services group businesses revenue per day regional carriers rose 160 2003 increases weight yield 2004 management believes growth weight transported due primarily comparatively better economic conditions market share gains yield improvement 2004 achieved primarily higher fuel surcharges general rate increases partially offset growth loweryielding business spotquote program excluding fuel surcharges yield 2004 rose 03 conway’s operating income 2004 increased 307 improved margins regional carriers well improved results conway’s supply chain services reduced collective net operating loss 2004 55 million 2003 certain corporate expenses previously allocated discontinued forwarding segment reported continuing operations fully discussed note 2 “discontinued operations” item 8 “financial statements supplementary data” additional corporate overhead charge allocated conway reporting segment 148 million 2004 122 million 2003 menlo worldwide menlo worldwide reporting segment consists operating results logistics vector menlo worldwide 2005 reported operating income 469 million increase 145 last year although mw owns majority equity interest operating results vector reported equitymethod investment based gm’s ability control certain operating decisions accordingly cnf’s consolidated statements operations include revenue vector mw’s proportionate share net income vector reported reduction operating expenses table compares operating results dollars thousands operating margins menlo worldwide reporting segment years ended december 31 table summarizes logistics net revenues less transportation expenses well gross revenues logistics’ management believes net revenues meaningful measure relative importance principal services since total revenues earned carriermanagement services include thirdparty carriers’ charges logistics carrying shipments menlo worldwide logistics’ revenue 2005 increased 140 2004 due increases carriermanagement warehousemanagement services 2005 revenue carriermanagement services increased 159 revenue warehousemanagement services rose 76 carriermanagement revenue attributable contracts logistics manages transportation freight subcontracts actual transportation delivery products third parties logistics refers purchased transportation logistics’ net revenue less purchased transportation 2005 increased 65 2005 logistics’ operating income increased 174 due primarily revenue growth improved margins warehousemanagement services partially offset decline margins carriermanagement services margins warehousemanagement carriermanagement services positively affected lower employee costs due primarily declines health welfare costs workers’ compensation incentive compensation incentive compensation 2005 declined 10 million 137 based variations operating income performance measures relative incentive plan targets 2005 margins carriermanagement services adversely affected higher purchased transportation costs 2005 purchased transportation costs grew 172 due increased business levels fuelrelated increases carrier rates management seek improve carriermanagement margins evaluating customer contracts renegotiating certain lowermargin contracts management intending increase number customers served logistics’ centralized transportationmanagement group expected increase operating margins reducing administrative costs beginning second quarter 2005 logistics integrated operations conway logistics business previously reported conway reporting segment accordingly operating results conway logistics reported menlo worldwide logistics prior periods reclassified conform currentperiod presentation integration two businesses intended provide enterprise solution offering logistics’ customers want use conway primary transportation provider addition customers want vendorneutral transportation solution integration also expands conway logistics’ multiclient warehousing service model logistics’ larger warehouse network 2004 logistics’ revenue rose 105 2003 due principally increase carriermanagement warehousemanagement services operating income 2004 improved 300 227 million due primarily revenue growth significantly higher revenue former conway logistics operations contributed 43 million reduction operating loss related operations operating margins 2004 adversely affected competitive transportation pricing environment renegotiation certain contracts existing customers decrease margins startup phase new contracts higher employee costs operating income 2003 adversely affected 31 million contract termination costs certain corporate expenses previously allocated discontinued forwarding segment reported continuing operations fully discussed note 2 “discontinued operations” item 8 “financial statements supplementary data” additional corporate overhead charge allocated logistics reporting segment 21 million 2004 18 million 2003 menlo worldwide vector operating results 2005 segment income reported mw’s equity investment vector increased 203 million 183 million 2004 higher reported segment income vector due primarily higher income earned gm’s international regions partially offset decline income gm’s north america region improved income gm’s international regions substantially due 97 million increase volumebased compensation resulted increased business levels revised compensation rates gm’s european region described higher income international regions partially offset lower income gm’s north america region reflects 17 million reduction volumebased compensation 68 million decline performancebased compensation defined income reported mw’s equity investment vector declined 183 million 2004 207 million 2003 90 million decline volumebased income north america partially offset increases performancebased income 44 million 25 million north america international regions respectively north america august 2003 vector agreements amended primarily expedite transition logistics services north america region gm vector prior 2003 amendment agreements pertaining vector provided vector would compensated sharing efficiency gains cost savings achieved implementation approved business cases “abcs” special projects gm’s north america region gm’s three international regions abc project developed approved gm aimed reducing costs assuming operational responsibilities andor achieving operational changes amended vector agreements vector compensated management logistics gm’s north america operations rather sharing efficiency gains cost savings individual abcs year fiveyear period january 1 2003 vector compensated management fee based shipment volumes “volumebased compensation” beginning 2004 earn additional compensation certain performance criteria achieved “performancebased compensation” accordance gaap compensation volumebased management fee recognized vehicles shipped performancebased compensation recognized achievement specified levels cost savings generally determinable fourth quarter contract year vector also compensated gm direct administrative costs north america subject certain limitations special projects gm’s north america region vector compensated abcs cnf expects declining amount compensation management fee successive year covered amended vector agreements north america except special projects compensated abcs vector’s north america region earn performancebased compensation 2005 based primarily currentyear increases fuel transportation costs prevented attainment performance criteria 2005 cnf believes similar external market conditions also prevent attainment performance criteria 2006 international compensation earned gm’s european region 2005 increased 77 million due primarily increased business levels amendment abcs gm’s european region effective january 1 2005 calendar year abcs gm’s european region amended compensate vector cost reimbursement management fee based vehicle production volumes rather separately approved abcs agreement reached gm transition management defined logistics activities vector similar cost reimbursement volumebased management fee structure 2006 2007 compensation principles gm’s latin america asiapacific regions unaffected amendments european region call right put right vector agreements gm right purchase mw’s membership interest vector “call right” mw right require gm purchase mw’s membership interest vector “put right” call right put right exercisable sole discretion gm mw respectively amended vector agreements amount payable gm mw put right based mutually agreedupon estimated value mw’s membership interest contract amendment date decline straightline basis 8year period beginning january 1 2004 exercise mw’s put right gm’s call right would result mw retaining commercialization contracts involving customers gm cnf segment consists results road systems certain corporate activities majority revenue road systems sales conway cnf segment reported operating losses 31 million 2005 40 million 2004 net loss 2005 primarily reflects 22 million loss resulting insurance settlement 2004 affected corporate insurance activities sales corporate properties 24 million operating loss 2003 primarily includes net loss sale corporate properties discontinued operations discontinued operations periods presented relate sale mwf shutdown ewa terminated priority mail contract usps spinoff cfc results operations net liabilities cash flows discontinued operations segregated continuing operations except otherwise noted operating results net liabilities discontinued operations summarized note 2 “discontinued operations” item 8 “financial statements supplementary data” mwf impairment charge october 5 2004 cnf mw entered stock purchase agreement ups sell issued outstanding capital stock mwf cnf completed sale december 19 2004 fully discussed although stock purchase agreement entered october 5 2004 decisions cnf’s management board directors thirdquarter sale negotiations ups established cnf’s commitment sell mwf september 30 2004 process evaluating several strategic alternatives menlo worldwide’s forwarding segment cnf approached ups third quarter 2004 interest acquiring mwf accordingly third quarter 2004 cnf classified mwf held sale recognized 2605 million impairment charge write recorded book value mwf anticipated selling price less costs sell impairment charge based agreement sell mwf described primarily represents estimated writedown fair value mwf’s goodwill longlived assets including mwf’s accumulated foreign currency translation adjustment well estimated selling costs stock purchase agreement stock purchase agreement excludes certain assets liabilities mwf includes certain assets liabilities cnf subsidiaries related business conducted mwf among assets liabilities excluded related ewa obligation related mwf employees covered cnf’s domestic pension postretirement medical longterm disability plans agreement ups agreed pay cnf amount equal mwf’s cash position december 31 2004 pay estimated present value cnf’s retained obligations related mwf employees covered cnf’s longterm disability postretirement medical plans agreed parties stock purchase agreement cnf agreed threeyear noncompete covenant subject certain exceptions limit cnf’s annual air freight ocean forwarding andor customs brokerage revenues 175 million cnf’s 2007 fiscal year cnf also agreed indemnify ups certain losses ups may incur closing sale certain limitations losses related indemnification obligations costs including future cash expenditures related sale estimated recognized time recognized future periods additional loss disposal incurred additional details refer stock purchase agreement filed exhibit cnf’s form 8k dated october 5 2004 amendment stock purchase agreement filed exhibit cnf’s form 8k dated december 21 2004 disposition mwf upon completion sale mwf december 19 2004 cnf received cash consideration 150 million subject certain postclosing adjustments including adjustments cash held mwf closing mwf’s net working capital closing connection sale cnf 2004 recognized fourthquarter loss disposal 158 million net 36 million tax benefit adjusted carrying value mwf exceeded cash consideration including amounts received closing expected received future thirdquarter impairment charge fourthquarter loss disposal resulted total salerelated charges 2763 million 2004 following settlement mwf cash balance march 2005 cnf received cash 294 million recognized additional firstquarter net loss disposal 98 million primarily recognize difference actual cash received cnf’s estimate cash position december 31 2004 accrue additional estimated transaction costs remainder 2005 cnf reported 110 million net gain additional adjustments estimated disposition loss including 90 million thirdquarter net gain recognize increase estimate deferred tax assets associated employee benefit obligations retained cnf fully discussed “ excluded assets liabilities” cnf’s disposal mwf generated capital loss tax purposes current tax law capital losses used offset capital gains since cnf forecast significant taxable capital gains fiveyear tax carryforward period 408 million cumulative disposalrelated tax benefit december 31 2004 fully offset valuation allowance equal amount 2005 cumulative disposalrelated tax benefit associated valuation allowance declined 300 million december 31 2005 due primarily thirdquarter salerelated proceeds received ups revisions tax effect salerelated estimates partially offset firstquarter disposalrelated capital loss excluded assets liabilities described stock purchase agreement excludes cnf retained obligations related mwf employees covered certain cnfsponsored employee benefit plans including domestic pension postretirement medical longterm disability plans cover noncontractual employees former employees continuing operations well discontinued forwarding segment collectively “cnf benefit plans” stock purchase agreement ups agreed pay cnf estimated present value cnf’s retained obligations related mwf employees covered cnf’s longterm disability postretirement medical plans “reimbursable plans” accordingly cnf december 2004 recorded accounts receivable estimate present value retained obligations reimbursable plans agreement reached august 2005 ups paid 790 million cnf agreedupon estimated present value retained obligations reimbursable plans carrying value obligations december 31 2005 substantially equal cash reimbursement ups present value estimated thirdparty actuary cnf’s annual november 30 actuarial measurement date based cnf’s intention retain obligation related employees mwf ewa covered cnf benefit plans obligation included employee benefits continuing operations cnf’s consolidated balance sheets december 31 2005 2004 stock purchase agreement also excludes cnf retained net prepaid benefit cost related certain pension plans cover former employees discontinued forwarding segment “forwarding plans” cnf’s consolidated balance sheets prepaid benefit cost related forwarding plans reported assets discontinued operations december 31 2004 based cnf’s decision retain obligations completion salerelated adjustments 2005 reclassified employee benefits continuing operations december 31 2005 future changes carrying value retained obligations cnf benefit plans prepaid benefit cost forwarding plans recognized future periods income loss continuing operations ewa results ewa relate cessation aircarrier operations 2001 termination priority mail contract usps 2000 2005 ewa recognized net losses 90 million due primarily increases estimated exposure litigation restructuringrelated obligations ewa’s estimated loss reserves increased 341 million december 31 2005 338 million december 31 2004 due primarily losses described partially offset cash settlement restructuringrelated obligations ewa’s remaining loss reserves december 31 2005 reported liabilities discontinued operations consisted mostly cnf’s estimated exposure related labor matters described litigationrelated losses fully discussed note 11 “commitments contingencies” item 8 “financial statements supplementary data” connection cessation aircarrier operations 2001 ewa terminated employment pilots crew members pilots crew members represented air line pilots association “alpa” union collective bargaining agreement subsequently alpa filed grievance behalf pilots crew members protesting cessation ewa’s aircarrier operations mwf’s use air carriers alpa matters subject litigation us district court depending outcome litigation may subject binding arbitration based cnf’s current evaluation management believes provided estimated exposure related alpa matters however assurance regard cnf cannot predict certainty ultimate outcome matters liquidity capital resources cash equivalents rose 5143 million december 31 2005 3469 million december 31 2004 2176 million cash provided operating activities 1793 million provided investing activities exceeded 2164 million used financing activities cash provided investing activities primarily reflects net effect 2840 million decrease shortterm marketable securities 2102 million capital expenditures 1084 million payments received ups connection sale mwf decline shortterm marketable securities brought balance liquid investments 2024 million december 31 2005 cash used financing activities primarily reflects common stock repurchases 1491 million debt repayment 1127 million cnf’s cash flows summarized table 1 “noncash adjustments” refer depreciation amortization deferred income taxes provision uncollectible accounts equity earnings joint venture noncash gains losses continuing operations operating activities cash flow operating activities 2005 2176 million 1621 million decrease 2004 increase net income noncash items offset net use cash due changes assets liabilities receivables 2005 used 1243 million higher revenue increase average collection period logistics’ receivables due part longer customernegotiated payment terms processing delays net use cash decline employee benefit liabilities years presented reflects effect defined benefit pension plan funding contributions 1265 million 2005 908 million 2004 750 million 2003 described “ defined benefit pension plans” partially offset expense accruals cnf’s defined benefit plan obligations accrued incentive compensation decreased 201 million 2005 2004 reflects 294 million increase 2005 2004 expense accruals incentive compensation 686 million 1023 million respectively incentive compensation payments years 887 million 729 million respectively cash provided changes deferred charges credits declined 275 million 2005 671 million provided 2004 due primarily 545 million cash payments received 2004 connection liquidation corporateowned life insurance policies years presented cash provided deferred charges credits reflect variations cnf’s affiliate payable vector fully discussed note 3 “investment unconsolidated joint venture” item 8 “financial statements supplementary data” operating cash flow 2004 increased 2003 1534 million 3796 million higher operating cash flow 2004 due part increase net income noncash items 2004 included 2763 million noncash net loss disposal mwf asset liability changes related liquidation corporateowned life insurance policies accounts payable incentive compensation partially offset pension funding payments accrued incentive compensation increased 2004 declined 2003 based timing expense accruals payments investing activities investing activities 2005 provided 1793 million compared 2243 million used 2004 cnf received payments ups 1084 million 2005 1500 million 2004 fully discussed “ discontinued operations” periods presented investing activities also reflect fluctuations shortterm marketable securities capital expenditures investments marketable securities decreased 2005 2840 million primarily firstquarter conversion auctionrate securities cash equivalents 2004 2003 investments marketable securities increased 2259 million 1694 million respectively capital expenditures 2005 increased 587 million 2004 due substantially expenditures conway increased 1976 million 1440 million 2004 due largely increased tractor trailer acquisitions capital expenditures 2004 increased 237 million 2003 also due increases conway financing activities financing activities used cash 2164 million 2005 provided cash 1755 million 2004 2005 cash used financing activities included 1491 million used repurchase common stock cnf’s repurchase program described financing activities 2005 reflect repayment maturity june 1 100 million 735 notes 2004 reflects 2926 million net issuance 67 senior debentures 1289 million redemption 5 convertible debentures financing activities periods presented also reflect dividend payments scheduled principal payments thrift stock plan notes guaranteed cnf cash provided exercise stock options increased 761 million 2005 561 million 2004 64 million 2003 due primarily increase market price cnf’s common stock january 2005 board directors authorized repurchase 300 million cnf’s common stock time twoyear period openmarket purchases privately negotiated transactions 2005 cnf used 1491 million repurchase common stock currently estimates repurchase approximately 150 million cnf’s common stock 2006 cnf 400 million revolving credit facility matures march 11 2010 400 million revolving facility cnf entered march 2005 replaced 385 million revolving credit facility revolving credit facility available cash borrowings issuance letters credit 400 million december 31 2005 2004 borrowings outstanding cnf’s revolving credit facility december 31 2005 2151 million letters credit outstanding leaving 1849 million available capacity additional letters credit cash borrowings subject compliance financial covenants customary conditions borrowing total letters credit outstanding december 31 2005 provided collateral cnf’s selfinsurance programs cnf uncommitted unsecured credit facilities totaling 350 million december 31 2005 available support letters credit bank guarantees overdraft facilities date total 157 million letters credit outstanding facilities see “other matters forwardlooking statements” note 5 “debt financing arrangements” item 8 “financial statements supplementary data” additional information concerning cnf’s 400 million credit facility debt instruments defined benefit pension plans fully discussed “estimates critical accounting policies defined benefit pension plans” cnf periodically reviews funded status defined benefit pension plans noncontractual employees makes contributions time necessary comply funding requirements employee retirement income security act “erisa” determining amount timing pension contributions cnf considers erisa gaapbased measurements funded status well tax deductibility contributions cnf contributed 1265 million defined benefit pension plans 2005 currently estimates contribute 75 million 2006 cnf made defined benefit pension plan contributions 908 million 2004 750 million 2003 contractual cash obligations table summarizes contractual cash obligations cnf december 31 2005 amounts table based management’s estimates assumptions obligations including duration possibility renewal factors estimates assumptions actual future payments may vary reflected table contractual cash obligations reflected consolidated balance sheets except operating leases purchase obligations interest longterm debt guarantees disclosed future obligations gaap 1 portion interest payable 2006 reflected consolidated balance sheets refer note 4 “accrued liabilities” item 8 “financial statements supplementary data” presented contractual obligations longterm debt guarantees represent principal interest payments contractual obligations operating leases represent payments lease arrangements purchase obligations represent noncancelable agreements purchase equipment conway’s operations certain liabilities including related pension postretirement benefit plans selfinsurance accruals reported cnf’s consolidated balance sheets reflected table due absence stated maturities described cnf currently estimates contribute 75 million defined benefit pension plan 2006 subject variation based changes interest rates asset returns described “ continuing operations” letters credit 2151 million outstanding december 31 2005 letters credit generally required selfinsurance programs represent additional liabilities underlying selfinsurance accruals already reflected cnf’s consolidated balance sheets accordance gaap cnf’s operating leases included cnf’s consolidated balance sheets cnf’s operating leases determined provide economic benefits preferable ownership based primarily aftertax cash flows financial operating flexibility effect cnf’s capitalization certain operating leases conway guarantees residual value tractors trailers end lease term december 31 2005 residual value guaranteed lease agreements 41 million cnf recognizes liability shortfall residual value guarantee equipment’s estimated fair value fluctuates depending market conditions 2006 cnf anticipates capital expenditures approximately 395 million including software expenditures increase 2186 million 2005 increased level capital expenditures consist primarily 127 million related land buildings including approximately 27 million improvements 141 million acquisition additional tractor trailer equipment conway’s regional carriers conway’s truckload business expects add 67 million additional tractor trailer equipment subsequent december 31 2005 conway entered additional agreements acquire 918 million revenue equipment delivery 2006 discussion see note 5 “debt financing arrangements” note 6 “leases” included item 8 “financial statements supplementary data” cnf’s ratio total debt capital decreased 396 december 31 2005 479 december 31 2004 due primarily increase retained earnings resulting net income earned 2005 repayment june 100 million 735 notes february 1 2006 standard poor’s raised rating cnf’s senior unsecured debt “bbb” “bbb” addition fitch ratings initiated coverage cnf january 25 2006 rating “bbb” agencies reported rating outlook cnf “stable” discontinued operations december 19 2004 cnf completed sale mwf ups 150 million cash subject adjustment cash held mwf closing net working capital mwf closing march 2005 cnf received 294 million ups reimbursable cash held mwf closing adjustment net working capital ups agreed pay cnf amount equal cnf’s retained obligations related mwf employees covered cnf’s longterm disability postretirement medical plans accordingly cnf december 2004 recorded accounts receivable estimate present value employee benefit obligations agreement reached august 2005 ups paid 790 million cnf agreedupon present value employee benefit obligations retained cnf payments ups fully discussed “results operations discontinued operations” reported salerelated proceeds investing activities cnf’s statements consolidated cash flows estimates critical accounting policies preparation financial statements accordance accounting principles generally accepted us requires management adopt accounting policies make significant judgments estimates many cases alternative policies estimation techniques could used cnf maintains process evaluate appropriateness accounting policies estimation techniques including discussion review audit committee board directors independent auditors accounting policies estimates may require adjustment based changing facts circumstances actual results could differ estimates policies estimates discussed include critical financial statements selfinsurance accruals cnf uses combination insurance selfinsurance programs provide costs medical casualty liability vehicular cargo workers’ compensation claims measurement costs cnf considers historical claims experience medical costs demographic severity factors assumptions selfinsurance accruals developed based estimated undiscounted cost claims including claims incurred reported balance sheet date longterm portion selfinsurance accruals relates primarily workers’ compensation vehicular claims payable several years actual costs may vary estimates income taxes establishing deferred income tax assets liabilities cnf makes judgments interpretations based enacted tax laws published tax guidance applicable operations cnf records deferred tax assets liabilities periodically evaluates need valuation allowance reduce deferred tax assets realizable amounts likelihood material change cnf’s expected realization assets dependent future taxable income future capital gains ability use foreign tax credit carryforwards carrybacks final us foreign tax settlements effectiveness tax planning strategies various relevant jurisdictions cnf also subject examination income tax returns multiple years irs tax authorities cnf periodically assesses likelihood adverse outcomes resulting examinations determine adequacy provision related accruals income taxes disposition restructuring estimates fully discussed “results operations discontinued operations” cnf’s management made significant estimates assumptions connection disposition mwf 2004 actual results could differ estimates could affect related amounts reported financial statements uncollectible accounts receivable cnf subsidiaries report accounts receivable net realizable value provide allowance uncollectible accounts collection considered doubtful conway provides uncollectible accounts based various judgments assumptions including revenue levels historical loss experience composition outstanding accounts receivable logistics based size nature client base performs frequent periodic evaluation customers’ creditworthiness accounts receivable portfolio recognizes expense uncollectible accounts losses probable reasonably estimable defined benefit pension plans cnf defined benefit pension plans cover employees former noncontractual employees united states amount recognized pension expense accrued pension liability depend upon number assumptions factors significant discount rate used measure present value pension obligations expected rate return plan assets cnf assesses plan assumptions discount rate expected rate return plan assets significant assumptions continuous basis concludes assumptions actuarial plan measurement date november year cnf’s significant assumptions used determining pension expense periods presented 2006 summarized cnf adjusts discount rate periodically taking account changes highquality corporate bond yields guidance outside actuaries determining appropriate discount rate cnf 2004 began utilizing bond model incorporates expected cash flows plan obligations bond model uses selected portfolio moody’s aaorbetter rated bonds cash flows maturities match projected benefit payments cnf’s pension plans cnf’s discount rate equal yield portfolio bonds typically exceed moody’s aa corporate bond index due long duration expected benefit payments cnf’s plan factors held constant 025 decline discount rate would result estimated 7 million increase 2006 annual pension expense cnf adjusts expected rate return plan assets based current market expectations historical returns rate return based expected 20year return current asset allocation effect actively managing plan net fees expenses using yearend plan asset values 025 decline expected rate return plan assets would result estimated 2 million increase 2006 annual pension expense differences expected actual rate return plan assets andor changes discount rate may result cumulative unrecognized actuarial losses unrecognized actuarial losses primarily reflect declining discount rate lower market returns recent years although amounts may recovered future periods actuarial gains portion unrecognized actuarial loss outside corridor amount must amortized recognized expense average service period employees amortization unrecognized actuarial loss 2005 declined 4 million 2004 due primarily reduction difference expected actual returns plan assets 2004 determination plan obligation december 31 2005 pension expense 2006 cnf revised mortality assumption plan participants one based 1983 us census data one based 2000 us census data results longerlife assumption plan participants cnf expects defined benefit pension expense 2006 exceed expense 2005 approximately 6 million based increases service cost interest cost amortization unrecognized actuarial loss partially offset higher expected return plan assets increase service cost due part effect 2006 revised mortality assumptions increase interest cost due lower discount rate increases plan obligation despite unchanged expectations longterm rate return plan assets cnf expects increase return plan assets 2006 based plan contributions increase plan assets amortization unrecognized actuarial loss 2006 increase 4 million 2005 based primarily higher unrecognized actuarial loss december 31 2005 assumptions applied 2005 measurement date accumulated benefit obligation certain cnf pension plans exceeded fair value plan assets accordingly cnf recorded minimum pension liability adjustment accumulated comprehensive loss shareholders’ equity recognize shortfall fair value assets accumulated benefit obligation plans december 31 2005 cumulative additional minimum pension liability increased 362 million net 231 million tax benefits 147 million net 94 million tax benefits december 31 2004 due primarily remeasurement accumulated benefit obligation lower discount rate cnf periodically reviews funded status defined benefit pension plans noncontractual employees makes contributions time necessary comply funding requirements employee retirement income security act “erisa” determining amount timing pension contributions cnf considers erisa gaapbased measurements funded status well tax deductibility contributions cnf contributed 1265 million defined benefit pension plans 2005 currently estimates contribute 75 million 2006 subject variation based changes interest rates asset returns cnf made defined benefit pension plan contributions 908 million 2004 750 million 2003 property plant equipment longlived assets accounting property plant equipment cnf makes estimates expected useful lives expected residual values assets potential impairment based fair values assets cash flows generated assets depreciation property plant equipment estimated useful lives determination salvage value requires management make judgments future events cnf periodically evaluates whether changes estimated useful lives salvage values necessary ensure estimates accurately reflect economic use assets cnf’s periodic evaluation may result changes estimated lives andor salvage values used depreciate assets affect amount periodic depreciation expense recognized ultimately gain loss disposal asset cnf performs impairment analysis longlived assets whenever circumstances indicate carrying amount may recoverable assets held used impairment charge recognized estimated undiscounted cash flows associated asset group assets less carrying value impairment exists charge recognized difference carrying value fair value fair values determined using quoted market values discounted cash flows external appraisals applicable assets held disposal carried lower carrying value estimated net realizable value matters new accounting standards december 2004 fasb issued sfas 123r “sharebased payment” “sfas 123r” revision sfas 123 supersedes apb 25 related implementation guidance sfas 123r eliminates alternative use apb 25’s intrinsicvalue method accounting provided sfas 123 originally issued requires companies recognize cost employee services received exchange awards equity instruments based grantdate fair value awards limited exceptions period employee required provide service exchange award sfas 123r also amends fasb statement 95 “statement cash flows” require benefits associated tax deductions excess recognized compensation cost reported financing cash flows rather reduction taxes paid requirement reduce net operating cash flows increase net financing cash flows periods effective date effective date sfas 123r beginning first interim annual reporting period first fiscal year beginning june 15 2005 cnf first quarter 2006 adoption sfas 123r cnf concluded continue use blackscholes model estimating fair value stock option grants apply modified prospective transition method past sharebased awards outstanding unvested effective adoption date january 1 2006 modified prospective transition method cnf recognize associated expense remaining vesting period based fair values previously determined disclosed part proforma disclosures presented note 1 “principal accounting policies” item 8 “financial statements supplementary data” estimated annual compensation expense related unvested stock options 2006 approximately 007 per diluted common share however calculation total compensation expense sharebased awards effective date sfas 123r cannot known time affected number future shares awarded may different calculation proforma compensation expense sfas 123 forwardlooking statements certain statements included herein constitute “forwardlooking statements” within meaning section 21e securities exchange act 1934 amended subject number risks uncertainties relied upon predictions future events statements historical fact forwardlooking statements including projections earnings revenues weight yield volumes income financial operating items statements plans strategies expectations objectives cnf management future operations future items statements concerning proposed new products services statements regarding cnf’s estimated future contributions pension plans statements adequacy reserves statements regarding outcome claims may brought cnf cfc’s multiemployer pension plans statements regarding future economic conditions performance statements regarding outcome legal claims proceedings cnf statements estimates belief statements assumptions underlying foregoing certain forwardlooking statements identified use forwardlooking terminology “believes” “expects” “may” “will” “should” “seeks” “approximately” “intends” “plans” “estimates” “anticipates” negative terms variations terms comparable terminology discussions strategy plans intentions forwardlooking statements necessarily dependent assumptions data methods may incorrect imprecise assurance realized regard following factors among others addition matters discussed elsewhere document reports documents filed cnf securities exchange commission could cause actual results matters differ materially discussed forwardlooking statements • changes general business economic conditions including global economy • creditworthiness cnf’s customers ability pay services rendered • increasing competition pricing pressure • changes fuel prices fuel surcharges • effects cessation ewa’s air carrier operations • possibility cnf may time required record impairment charges longlived assets • possibility defaults cnf’s 400 million credit agreement debt instruments possibility cnf may required repay certain indebtedness event ratings assigned longterm senior debt credit rating agencies reduced • labor matters including grievance furloughed ewa pilots crew members labor organizing activities work stoppages strikes • enforcement changes governmental regulations including effects new regulations issued department homeland security • environmental tax matters • matters relating cnf’s 1996 spinoff cfc including possibility cfc’s multiemployer pension plans may assert claims cnf may prevail proceedings may financial resources necessary satisfy amounts payable plans • matters relating sale mwf including cnf’s obligation indemnify ups certain losses connection sale • matters relating cnf’s defined benefit pension plans result foregoing assurance given future financial condition results operations cash flows see note 11 “commitments contingencies” item 8 “financial statements supplementary data” item 7aitem 7 managements discussion analysis financial condition results operations introduction managements discussion analysis financial condition results operations referred managements discussion analysis intended assist historical prospective understanding conways financial condition results operations cash flows including discussion analysis following • overview business • results operations • liquidity capital resources • critical accounting policies estimates • new accounting standards • forwardlooking statements overview business conway provides transportation logistics supplychain management services wide range manufacturing industrial retail customers conways business units operate regional interregional transcontinental lessthantruckload fulltruckload freight transportation contract logistics supplychain management multimodal freight brokerage trailer manufacturing financial reporting purposes conway divided three reporting segments freight logistics truckload conway freight primarily transports shipments utilizing network freight service centers combined fleet companyoperated linehaul pickupanddelivery tractors trailers menlo logistics menlo manages logistics functions customers primarily utilizes thirdparty transportation providers movement customer shipments conway truckload primarily transports shipments using fleet companyoperated tractors trailers prior 2013 former segment consisted operating results conways trailer manufacturer certain corporate activities related income expense allocated reporting segments beginning first quarter 2013 intersegment eliminations combined segment reported corporate eliminations order reconcile segment results consolidated totals periods presented reflect change reporting segment structure conways primary businessunit results generally depend number weight distance shipments transported prices received shipments services mix services provided customers well fixed variable costs incurred conway providing services ability manage costs changing circumstances due conway freights relatively high fixedcost structure sudden severe changes shipment volumes negative impact managements ability manage costs conways primary business units affected timing degree fluctuations volatility fuel prices ability recover incremental fuel costs fuelsurcharge programs andor costrecovery mechanisms fully discussed item 1a risk factors results operations overview provides highlevel summary conways results operations periods presented intended provide context remainder discussion reporting segments refer reporting segment review complete detailed discussion analysis overview 2014 compared 2013 conways consolidated revenue 58 billion 2014 increased 61 55 billion 2013 due increased revenue logistics freight partially offset slightly lower revenue truckload increased revenue logistics result increased transportation warehousemanagement services freights revenue increased primarily due increase yield truckloads revenue decreased primarily due decrease loaded miles lower fuelsurcharge revenue conways consolidated operating income increased 285 2685 million 2014 2090 million 2013 increase operating income due higher operating income three segments partially offset 160 million charge related settlement legacy pension plan higher operating income freight benefited revenuemanagement linehauloptimization initiatives higher operating income logistics largely due revenue growth improved margins transportationmanagement services higher operating income truckload result decreased operating expenses increased freight revenue per loaded mile income expense 2014 578 million compared 546 million 2013 income expense adversely affected increase foreign currency exchange rate losses foreign denominated balances logistics conways effective tax rate 2014 350 compared 358 2013 tax provision 2014 included benefits 54 million related change state tax rates 38 million recognize 2014 alternativefuel credit tax provision 2013 included 70 million benefits recognize 2012 2013 alternativefuel credits 2012 alternativefuel credit available legislation enacted early 2013 alternativefuel credit expected available 2015 2013 compared 2012 conways consolidated revenue 55 billion 2013 decreased 19 56 billion 2012 due lower revenue logistics partially offset higher revenue freight truckload lower revenue logistics result decreased transportationmanagement services partially offset increased warehousemanagement services freights revenue increased due increase yield partially offset decrease weight per day truckloads revenue increased primarily due improved revenue per mile partially offset decrease loaded miles conways consolidated operating income decreased 2090 million 2013 2288 million 2012 decrease operating income due lower operating income logistics truckload partially offset improved operating income freight logistics operating income declined due higher warehouserelated operating costs certain warehousemanagement contracts truckloads operating income decreased due higher operating expenses primarily increases depreciation maintenance income expense 2013 decreased 33 million compared 2012 reflecting lower interest expense lower lettersofcredit fees conways effective tax rate 2013 358 compared 388 2012 lower effective tax rate 2013 due primarily 70 million tax benefits recognize 2012 2013 alternativefuel credits 2012 alternativefuel credit available legislation enacted early 2013 reporting segment review discussion analysis segment operating results management utilizes revenue intersegment eliminations management believes revenue intersegment eliminations combined detailed operating expense information provides meaningful analysis segment results revenue external customers revenue internal customers reported note 12 segment reporting item 8 financial statements supplementary data freight table compares operating results operating margins percentage change selected operating statistics freight reporting segment 2014 compared 2013 freights revenue 2014 increased 48 compared 2013 due 45 increase yield 06 increase weight per day 45 increase yield largely due increased base freight rates 06 increase weight per day reflects 15 increase weight per shipment partially offset 09 decline shipments per day 2014 higher yields also include effects general rate increases effective march 31 october 27 2013 general rate increase effective june 24 general rate increases apply customers pricing governed conway freights standard tariff accounts approximately 25 freights business competitive factors impact extent general rate increases retained time excluding fuel surcharges yield increased 47 2014 compared 2013 fuelsurcharge revenue decreased slightly 172 revenue 2014 173 2013 fuel surcharge intended compensate conway freight adverse effects higher fuel costs fuelrelated increases purchased transportation fuel surcharges one part conway freights overall rate structure total price conway freight receives customers services governed market forces fully discussed item 1a risk factors freights operating income 2014 increased 440 compared 2013 operating income benefited revenuemanagement linehauloptimization initiatives expenses salaries wages employee benefits increased 44 2014 compared 2013 due increased costs related salaries wages excluding variable compensation employee benefits variable compensation salaries wages excluding variable compensation increased 34 2014 largely due increased miles driven company drivers annual salary wage rate increases employee benefits expense increased 49 2014 reflecting increases workers compensation claims costs employee medical benefits variablecompensation expense increased 93 million 353 due variations performance relative variable compensation plan targets increase workers compensation claims due increase number claims increase costs employee medical benefits due increase cost per claim partially offset decrease number claims comparative changes yeartodate expenses salaries wages employee benefits also affected timing salary wage rate increases 2014 increases effective july compared 2013 increases effective april january 2015 conway freight implemented wage rate increases drivers included adjustments ensure conway freights pay structures competitive market based overall amount timing increase also designed improve conway freights ability attract retain professional drivers context industrywide driver shortage result adjustments management expects 2015 expense driver wages benefits increase 60 million 2014 recent years comparable yearoveryear impact annual driver wage increase approximately half amount purchased transportation expense decreased 12 2014 2013 due decrease number thirdparty miles partially offset higher cost per mile decrease thirdparty miles result conway freights ongoing linehauloptimization initiative operating expenses increased 44 2014 compared 2013 due increased costs cargo claims higher expenses informationtechnology services partially offset higher gains sale property decreased vehicular claims cargo loss damage claims increased due increases cost per claim number claims increase informationtechnology expenses primarily due higher costs network infrastructure upgrades electronic onboard technologies vehicular claims decreased due decreases cost per claim number claims expenses fuel fuelrelated taxes decreased 44 compared 2013 primarily due lower cost per gallon diesel fuel lower fuel consumption result improved miles per gallon depreciation amortization expense increased 112 2014 compared 2013 primarily due replacement older tractors newer models newer models costly due part inclusion expensive emissionscontrol safety technology purchased labor expense increased 391 2014 compared 2013 source labor used freight handling clerical functions maintenance expense increased 95 2014 compared 2013 primarily due increases frequency cost maintenance related tractors 2013 compared 2012 freights revenue 2013 increased 22 compared 2012 due 22 increase yield partially offset 02 decline weight per day 22 increase yield largely due increased base freight rates 02 decline weight per day reflects 08 decline shipments per day partially offset 06 increase weight per shipment excluding fuel surcharges yield increased 24 2013 compared 2012 fuelsurcharge revenue decreased 173 revenue 2013 175 2012 freights operating income increased 22 million 2013 compared 2012 primarily due increase yield addition operating results 2013 reflect progress made freights lanebased pricing linehaul optimization initiatives implemented course 2013 however benefits initiatives largely offset increased costs cargo workers compensation vehicular claims expenses salaries wages employee benefits increased 13 2013 compared 2012 due 22 increase salaries wages excluding variable compensation partially offset 29 million 98 decrease variable compensation benefits expense relatively flat 2013 decrease costs employee medical benefits offset increase workers compensation expense 22 increase salaries wages excluding variable compensation largely due annual salary wage rate increases 98 decrease variable compensation based primarily variations performance relative variable compensation plan targets decrease costs employee medical benefits primarily due decrease number claims increase workers compensation expense due increase expense per claim partially offset decrease number claims purchased transportation expense increased 15 2013 2012 due higher carrier rates increased thirdparty miles operating expenses increased 78 2013 compared 2012 due higher expenses informationtechnology services increased costs cargo vehicular claims decline gains sale property increase informationtechnology expenses primarily due higher costs informationtechnology projects including initiatives discussed infrastructure increase costs cargo vehicular claims resulted increase cost per claim number claims expenses fuel fuelrelated taxes decreased 35 compared 2012 primarily due lower fuel consumption reflects improved miles per gallon fewer miles driven company drivers lower cost per gallon diesel fuel decline miles driven company drivers included effect improved linehaul productivity measured average weight per trailer depreciation amortization expense increased 88 2013 compared 2012 primarily due replacement older tractors newer models newer models costly due part inclusion expensive emissionscontrol safety technology purchased labor expense increased 483 2013 compared 2012 source labor used freighthandling functions logistics table compares operating results operating margins logistics reporting segment table summarizes logistics revenue net revenue less purchased transportation expense transportationmanagement revenue attributable contracts menlo manages transportation freight subcontracts carriers actual transportation delivery products menlo refers purchased transportation menlos management places emphasis net revenue meaningful measure relative importance principal services since revenue earned transportationmanagement services includes carriers charges menlo transporting shipments 2014 compared 2013 2014 logistics revenue increased 115 compared 2013 due increases 109 127 revenue transportation warehousemanagement services respectively increased revenue transportationmanagement services primarily due new business improved volumes growth services existing customers partially offset change scope large customer contract conclusion work customer contracts increased revenue warehousemanagement services primarily due improved volumes growth services existing customers new business partially offset conclusion work customer contracts logistics net revenue 2014 increased 98 compared 2013 primarily due increased revenue warehousemanagement services purchased transportation expense 2014 increased 129 compared 2013 result increased revenue transportationmanagement services 2014 operating income increased 159 compared 2013 increased operating income largely due revenue growth improved margins transportationmanagement services salaries wages employee benefits increased 105 2014 compared 2013 due 76 increase salaries wages 101 million increase variable compensation 43 increase employee benefits salaries wages excluding variable compensation increased 2014 due increased headcount response growth new existing warehousemanagement customers variablecompensation expense increased 19 million expense recognized 2013 result low performance relative variablecompensation plan targets employee benefits increased primarily due increased expense payroll taxes reflects increase salaries wages higher variable pay operating expenses increased 11 2014 compared 2013 primarily due increased expenses facilities increased informationtechnology service costs partially offset decrease provision uncollectible revenue increased expenses facilities related primarily support new warehousemanagement contracts increase informationtechnology expense primarily due higher costs network infrastructure enduser computing upgrades provision uncollectible revenue decreased 2014 due write offs related two specific customers occurred 2013 purchased labor expense increased 144 additional labor required support new warehousemanagement contracts growth warehousemanagement services existing customers expenses rents leases increased 188 2014 compared 2013 due increase number leased warehouse facilities including facilities support customer contracts various stages startup 2013 compared 2012 2013 logistics revenue decreased 108 compared 2012 due 184 decrease revenue transportationmanagement services partially offset 103 increase revenue warehousemanagement services 2013 lower revenue transportationmanagement services primarily due lower volumes including effect change scope large customer contract conclusion work customer contracts declines partially offset increased revenue warehousemanagement services primarily due new business logistics net revenue 2013 increased 67 compared 2012 increased warehousemanagement services revenue partially offset declines net revenue transportationmanagement services 2013 logistics reported operating income 235 million compared 446 million 2012 lower operating income primarily due increases operating expenses including costs incurred startup phase certain warehousemanagement contracts increases costs purchased labor rents leases lower operating income also reflects decline transportationmanagement margins net revenue additionally logistics operating margin net revenue adversely affected increase proportion net revenue earned warehousemanagement services generally lower margin net revenue transportationmanagement services salaries wages employee benefits increased 19 2013 compared 2012 due increased salaries wages excluding variable compensation benefits expense partially offset decreased variable compensation expense salaries wages excluding variable compensation expense increased 77 2013 due increased headcount response growth new existing warehousemanagement services customers employee benefits expense increased 41 2013 reflecting increased expenses various benefits result growth headcount increased salaries wages variablecompensation expense decreased 116 million 859 19 million expense recognized result low performance relative variablecompensation plan targets operating expenses increased 183 2013 compared 2012 primarily due higher costs informationtechnology projects infrastructure higher expenses warehouserelated costs facilities travel higher expenses warehouserelated costs facilities travel incurred primarily support new warehousemanagement contracts additionally increased operating expenses include increase provision uncollectible accounts receivable primarily related two specific customers purchased labor expense increased 191 additional labor required support new business warehousemanagement services including contracts startup phase expenses rents leases increased 182 2013 compared 2012 due increases number leased warehouse facilities including facilities support customer contracts various stages startup 2013 truckload table compares operating results operating margins percentage change selected operating statistics truckload reporting segment table summarizes segments revenue intersegment eliminations including freight revenue fuelsurcharge revenue nonfreight revenue table also includes operating income operating margin excluding fuelsurcharge revenue truckloads management believes measures relevant evaluate ongoing operations 2014 compared 2013 2014 truckloads revenue decreased 08 2013 primarily due 49 decrease fuelsurcharge revenue 09 decrease freight revenue partially offset 306 increase revenue fuelsurcharge revenue decreased primarily due decreases loaded miles cost per gallon diesel fuel decrease freight revenue reflects 25 decrease loaded miles partially offset 16 increase revenue per loaded mile decrease loaded miles resulted lower tractor productivity result industrywide driver shortage increasing number unassigned tractors revenue increased primarily due additional revenue detention loads increased logistics revenue 2014 truckload operating income increased 66 compared 2013 result decreased operating expenses increased freight revenue per loaded mile expenses salaries wages employee benefits increased 11 2014 compared 2013 due 201 increase employee benefits partially offset 33 decrease salaries wages excluding variable compensation increased employee benefits reflects higher costs workers compensation claims employee medical benefits salaries wages excluding variablecompensation expense decreased 2014 largely due fewer miles driven company drivers partially offset annual salary wage rate increases increase workers compensation claims due increase cost per claim partially offset decrease number claims increase costs employee medical benefits primarily due increase cost per claim purchased transportation increased 356 2014 compared 2013 due increased miles driven owneroperator fleet grew 2014 operating expenses decreased 48 2014 compared 2013 primarily due increased gains sale retired trailers tractors expenses fuel fuelrelated taxes decreased 111 2014 compared 2013 due lower fuel consumption primarily fewer miles driven company drivers lower cost per gallon diesel fuel depreciation amortization expense decreased 82 2014 compared 2013 reflecting change estimated salvage value certain trailers change estimate fully discussed note 1 principal accounting policies item 8 financial statements supplementary data 2013 compared 2012 2013 truckloads revenue increased 02 2012 primarily due 11 increase freight revenue partially offset 27 decrease fuelsurcharge revenue increase freight revenue reflects 16 increase revenue per loaded mile partially offset 05 decrease loaded miles decrease loaded miles resulted lower tractor productivity partially offset increase size tractor fleet 2013 truckloads tractor fleet grew result increase number owneroperator units 2013 truckload operating income decreased 139 compared 2012 result increased operating expenses primarily increases depreciation maintenance salaries wages employee benefits decreased 33 primarily due lower expense employee benefits lower expenses employee benefits reflect declines costs workers compensation claims employee medical benefits workers compensation claims expense decreased 2013 due decrease expense per claim partially offset increase number claims employee medical decreased 2013 due decreases number claims expense per claim purchased transportation increased 283 2013 compared 2012 due increased miles driven truckloads owneroperator fleet grew period operating expenses increased 18 2013 compared 2012 primarily due declines gains sale tractors expenses fuel fuelrelated taxes decreased 38 2013 compared 2012 primarily due lower fuel consumption fewer miles driven company drivers compared 2012 additionally cost per gallon diesel fuel decreased 2013 depreciation amortization expense increased 67 2013 compared 2012 reflecting higher cost new tractors newer models costly due part expensive emissioncontrol safety technology partially offset effect change estimated salvage values certain trailers fully discussed maintenance expense increased 152 2013 compared 2012 based axle specifications newer models tractors require frequent tire replacement older models resulted higher maintenance expense 2013 increased maintenance expense also included higher repair costs trailers trailer fleet increases age higher costs maintain newer tractors complex emissioncontrol technology corporate eliminations corporate eliminations consists operating results conways trailer manufacturer certain corporate activities related income expense allocated reporting segments intersegment eliminations beginning 2013 costs associated defined benefit pension plans included corporate eliminations corporate costs amount defined benefit pension cost retained corporate eliminations 135 million 42 million years ended december 31 2014 2013 respectively 2012 costs included results freight logistics truckload reporting segments total 96 million 2014 results conways corporate costs include charge 160 million settlement legacy pension plan 2013 results conways corporate properties include 56 million gain sales corporate properties results reinsurance activities primarily relate conways participation reinsurance pool fully discussed note 1 principal accounting policies item 8 financial statements supplementary data table summarizes components corporate eliminations intersegment revenue eliminations liquidity capital resources cash equivalents decreased 4328 million december 31 2014 4845 million december 31 2013 2632 million used investing activities 284 million used financing activities exceeded 2399 million provided operating activities cash provided operating activities came net income noncash adjustments partially offset changes assets liabilities cash used investing activities primarily reflects capital expenditures partially offset proceeds sales property equipment cash used financing activities primarily reflects payment common dividends payments capital leases repurchases common stock partially offset proceeds exercise stock options 1 noncash adjustments refer depreciation amortization deferred income taxes provision uncollectible accounts noncash income expenses operating activities significant items affecting comparison conways operating cash flows periods presented summarized 2014 compared 2013 2014 net income noncash adjustments collectively provided 367 million operating cash flow compared 2013 changes assets liabilities used 1448 million operating cash flows 2014 compared prioryear period significant comparative changes included employee benefits receivables accounts payable accrued variable compensation selfinsurance accruals employee benefits used 1545 million 2014 compared 825 million used 2013 due primarily increased funding contributions qualified defined benefit pension plans 2014 conway contributed 1423 million qualified defined benefit pension plans compared 553 million 2013 increased level funding 2014 strengthened conways balance sheet reducing cash funding needs going forward receivables used 830 million 2014 compared 129 million used 2013 variations receivables resulted changes average collection periods included impact extended payment terms certain customers increased revenue logistics freight accounts payable used 154 million 2014 compared 260 million provided 2013 variations accounts payables primarily due timing payments vendors accrued variable compensation provided 231 million 2014 compared 171 million used 2013 variations performance relative variablecompensation plan targets resulted higher variablecompensation expense accruals 2014 accruals selfinsurance provided 148 million 2014 compared 37 million used 2013 due primarily increases workers compensation employee medical benefits liabilities 2013 compared 2012 2013 net income noncash adjustments collectively provided 118 million operating cash flow compared 2012 changes assets liabilities used 248 million less operating cash flows 2013 compared prioryear period significant comparative changes included accounts payable receivables accrued variable compensation employee benefits selfinsurance accruals accounts payable receivables collectively provided 131 million 2013 compared 77 million used 2012 variations accounts payable receivables included effect lower transportationmanagement volumes logistics 2013 accrued variable compensation used 171 million 2013 compared 12 million provided 2012 variations performance relative variablecompensation plan targets resulted lower variablecompensation expense accruals 2013 employee benefits used 825 million 2013 compared 673 million used 2012 primarily due lower expense accruals defined benefit pension longterm disability plans increased funding contributions qualified defined benefit pension plans 2013 conway contributed 553 million qualified defined benefit pension plans compared 514 million 2012 accruals selfinsurance used 37 million 2013 compared 187 million used 2012 due primarily increases vehicular cargo claims liabilities investing activities significant items affecting comparison conways investing cash flows periods presented summarized 2014 compared 2013 cash used capital expenditures increased 2898 million 2014 2819 million 2013 capital expenditures periods related primarily acquisition revenue equipment proceeds sales property equipment increased 472 million 2014 142 million 2013 variations primarily due increased proceeds sale equipment truckload sale excess properties freight purchases marketable securities used 83 million cash 2014 compared 32 million cash provided sale marketable securities 2013 investments 2014 related primarily purchase variablerate demand notes 2013 compared 2012 cash used capital expenditures decreased 2819 million 2013 2931 million 2012 primarily due increased capital expenditures 2012 update conway freights fleet tractor equipment cash provided proceeds property equipment decreased 142 million 2013 208 million 2012 primarily due fewer sales excess properties 2013 proceeds marketable securities declined 32 million 2013 154 million 2012 due decreased investing activity financing activities significant items affecting comparison conways financing cash flows periods presented summarized 2014 compared 2013 cash provided exercise stock options increased 339 million 2014 208 million 2013 primarily due increases proceeds per share exercised number shares exercised payment common dividends used 287 million 2014 compared 226 million used 2013 dividends paid increased due increase dividends declared per common share third fourth quarters 2014 june 2014 conways board directors authorized repurchase 150 million conways common stock open market privately negotiated transactions time amounts management determines 2014 conway used 158 million cash repurchase shares conway common stock 2013 compared 2012 cash provided exercise stock options increased 208 million 2013 compared 36 million 2012 primarily due increases proceeds per share exercised number shares exercised conway used 161 million 2013 payment capital leases compared 290 million used 2012 payments 2012 included early payment certain capital leases scheduled mature december 2013 contractual cash obligations table summarizes contractual cash obligations conway december 31 2014 amounts table based managements estimates assumptions obligations including duration possibility renewal factors estimates assumptions actual future payments may vary reflected table certain longterm liabilities including selfinsurance accruals liabilities deferred credits reported conways consolidated balance sheets reflected table due absence stated due dates presented contractual obligations longterm debt capital leases represent principal interest payments contractual obligations operating leases represent payments lease arrangements included conways consolidated balance sheets conway agreements thirdparty service providers provide certain informationtechnology administrative accounting services payments terms agreements subject change depending quantities types services consumed presented payments reflect amounts based projections services expected consumed contracts also contain provisions allow conway terminate contract time however conway would required pay fees termination causes failure service providers perform employee benefit planrelated cash obligations table represent estimated payments conways nonqualified defined benefit pension plans postretirement medical plan december 31 2024 expected benefit payments conways qualified defined benefit pension plans included table benefits satisfied use plan assets conway estimates make 30 million contributions qualified defined benefit pension plans 2015 however contribution amount could change based variations interest rates asset returns pension protection act ppa requirements factors letters credit outstanding conways credit facilities described capital resources liquidity outlook generally required collateral support selfinsurance programs represent additional liabilities underlying selfinsurance accruals already included conways consolidated balance sheets discussion see note 5 debt financing arrangements note 6 leases note 7 income taxes note 9 employee benefit plans item 8 financial statements supplementary data capital resources liquidity outlook conways capital requirements relate primarily acquisition revenue equipment support growth andor replacement older equipment newer equipment funding capital expenditures meeting workingcapital requirements conway may utilize various sources liquidity capital including cash equivalents cash flow operations credit facilities access capital markets conway may also manage liquidity requirements cashflow generation varying timing amount capital expenditures fully discussed note 5 debt financing arrangements item 8 financial statements supplementary data conway 325 million unsecured revolving credit facility december 31 2014 cash borrowings outstanding credit facility however 1069 million letters credit outstanding leaving 2181 million available capacity additional letters credit cash borrowings december 31 2014 conway compliance revolving credit facilitys financial covenants expects remain compliance conway uncommitted unsecured credit facilities totaling 499 million december 31 2014 available support shortterm borrowings letters credit bank guarantees overdraft facilities december 31 2014 17 million cash borrowings 210 million credit commitments outstanding leaving 272 million available capacity 2015 conway anticipates capital software expenditures approximately 300 million net asset dispositions primarily acquisition tractor equipment conways actual 2015 capital expenditures may differ estimated amount depending factors availability timing delivery equipment december 31 2014 conways senior unsecured debt rated investment grade standard poors bbb fitch ratings bbb moodys baa3 standard poors fitch ratings moodys assigned outlook stable conway believes workingcapital requirements capitalexpenditure plans 2015 adequately met various sources liquidity capital including conways cash equivalents cash flow operations credit facilities access capital markets detailed note 7 income taxes item 8 financial statements supplementary data cumulative undistributed earnings conways foreign subsidiaries 324 million december 31 2014 remitted subject withholding us taxes conways 4328 million cash equivalents december 31 2014 444 million related foreign subsidiaries conway currently expect rely foreign cash cashequivalent balances source liquidity capital fund domestic operations critical accounting policies estimates preparation financial statements accordance accounting principles generally accepted us requires management adopt accounting policies make significant judgments estimates many cases alternative policies estimation techniques could used conway maintains process evaluate appropriateness accounting policies estimation techniques including discussion review audit committee board directors independent auditors accounting policies estimates may require adjustment based changing facts circumstances actual results could differ estimates conway believes accounting policies judgmental material financial statements related following • defined benefit pension plans • goodwill • income taxes • property plant equipment longlived assets • revenue recognition • selfinsurance accruals defined benefit pension plans periods presented certain employees conway subsidiaries us covered several retirement benefit plans including several qualified nonqualified defined benefit pension plans significant assumptions net periodic benefit expense income projected benefit obligation conways defined benefit pension plans depend upon number assumptions factors significant discount rate used measure present value pension obligations expected rate return plan assets funded qualified plans conway assesses plan assumptions discount rate expected rate return plan assets significant assumptions periodic basis concludes assumptions actuarial plan measurement date discount rate determining appropriate discount rate conway assisted actuaries utilize yieldcurve model based universe highgrade corporate bonds rated aa better moodys rating service model determines single equivalent discount rate applying yield curve conways expected future benefit payments discount rate used determining net periodic benefit expense income periods presented 2015 follows rate return plan assets qualified defined benefit pension plans conway sets expected return plan assets using current market expectations historical returns expected return plan assets based estimates longterm expected returns considers plans anticipated asset allocation course next year expected return includes effect actively managing plan assets net fees expenses plan assets managed pursuant longterm allocation strategy seeks mitigate plans funded status volatility increasing plans investment fixedincome investments time strategy developed analyzing variety diversified assetclass combinations conjunction projected liabilities plans result higher concentration fixedincome securities expected return plan assets declined time follows significant assumption sensitivity decrease discount rate 505 december 31 2013 420 december 31 2014 resulted 2036 million increase benefit obligation conways defined benefit pension plans sensitivity analysis shows effect net periodic benefit expense income projected benefit obligation 25 basis point change assumed discount rate funded status conways defined benefit pension plans less sensitive 25 basis point change assumed discount rate given fixedincome investments held plans would also experience corresponding change value year ended december 31 2014 conways expected return plan assets 931 million compared actual return plan assets 2113 million sensitivity analysis shows effect net periodic benefit expense income 25 basis point change expected return plan assets actuarial gains losses changes discount rate andor differences expected actual rate return plan assets may result unrecognized actuarial gains losses conways defined benefit pension plans accumulated unrecognized actuarial losses increased 5601 million december 31 2014 4412 million december 31 2013 570 million increase unrecognized actuarial loss resulted adoption updated mortality assumptions used estimate life expectancies plan participants portion unrecognized actuarial gainloss exceeds 10 greater projected benefit obligation fair value plan assets beginning year amortized recognized incomeexpense estimated average remaining life expectancy plan participants effect operating results effect defined benefit pension plans conways operating results consist primarily net effect interest cost plan obligations qualified nonqualified defined benefit pension plans expected return plan assets funded qualified defined benefit pension plans amortization gains losses conway estimates defined benefit pension plans result annual expense 42 million 2015 defined benefit pension plans conway recognized annual expense 135 million 2014 42 million 2013 96 million 2012 2014 defined benefit pension expense includes charge 160 million settlement legacy pension plan funding determining amount timing pension contributions conway considers cash position funded status measured ppa generally accepted accounting principles tax deductibility contributions among factors conway made contributions 1423 million 553 million qualified defined benefit pension plans 2014 2013 respectively conway estimates make 30 million contributions qualified defined benefit pension plans 2015 level conways annual contributions qualified pension plans subject change based variations interest rates asset returns ppa requirements factors goodwill recorded excess acquired entitys purchase price amounts assigned assets acquired including identified intangible assets liabilities assumed conway tests impairment goodwill annually measurement date november 30 whenever events occur circumstances change would likely reduce fair value reporting unit carrying amount quarter conway considers events may trigger impairment goodwill including factors changes total company market value compared underlying book value significant adverse changes may impact reporting segments underlying reporting units reporting unit goodwill impairment purposes may component reporting segment independently generates revenue discrete financial information regularly reviewed management conway considers multiple valuation methods determine fair value reporting unit methods include use publiccompany multiples precedent transactions discounted cash flow models may vary depending availability information valuation methods assumptions used determine fair value reporting units may significantly impact result key assumptions used discounted cash flow models cash flow projections involving forecasted revenue expenses capital expenditures working capital changes discount rate terminal growth rate applied projected cash flows cash flow projections developed conways annual planning process discount rate equals estimated weightedaverage cost capital reporting unit marketparticipant perspective terminal growth rates based inflation assumptions adjusted factors may impact future growth industryspecific expectations estimates assumptions may incomplete inaccurate unanticipated events circumstances result changes assumptions estimates related goodwill could material effect conways valuation result accordingly financial condition results operations conway truckload 3298 million goodwill december 31 2014 valuation conway truckload conway applied three methods publiccompany multiples discounted cash flow precedent transaction models assessment conway truckloads goodwill fair value reporting unit exceeded carrying value 22 approximately 135 million 100 basis point change assumed discount rate would result 12 million change fair value 10 change estimated operating income next five years would result 24 million change fair value changes forecasted operating results assumptions could materially affect estimated fair value conway truckload may result impairment charges future income taxes establishing deferred income tax assets liabilities conway makes judgments interpretations based enacted tax laws published tax guidance applicable operations conway periodically evaluates need valuation allowance reduce deferred tax assets realizable amounts likelihood material change conways expected realization assets dependent future taxable income future capital gains ability use tax loss credit carryforwards carrybacks final us foreign tax settlements effectiveness taxplanning strategies various relevant jurisdictions conway assesses income tax positions records tax benefits years subject examination based upon managements evaluation facts circumstances information available reporting date positions likely tax benefit sustained conway recorded largest amount tax benefit greaterthan50percent likelihood realized upon ultimate settlement taxing authority full knowledge relevant information income tax positions meet morelikelythannot criteria tax benefit recognized financial statements property plant equipment longlived assets accounting property plant equipment conway makes estimates expected useful lives expected residual values assets potential impairment based fair values assets cash flows generated assets depreciation property plant equipment estimated useful lives determination salvage values require management make judgments future events conway periodically evaluates whether changes estimated useful lives salvage values necessary ensure estimates accurately reflect economic use assets conways periodic evaluation may result changes estimated lives andor salvage values used depreciate assets affect amount periodic depreciation expense recognized ultimately gain loss disposal asset response conditions usedtrailer market conway truckload increased estimated salvage values certain trailers fourth quarter 2013 change decreased depreciation expense 62 million 13 million 2014 2013 respectively longlived assets tested impairment whenever events changes circumstances indicate carrying amount may recoverable assets held used impairment charge recognized estimated undiscounted cash flows associated asset group assets less carrying value impairment exists charge recognized difference carrying value fair value fair values determined using quoted market values discounted cash flows external appraisals applicable assets held disposal carried lower carrying value estimated net realizable value quarter conway considers events may trigger impairment longlived assets indicators impairment conway considers include factors significant decrease market value longlived asset significant change extent manner longlived asset used currentperiod losses combined history losses projection continuing losses associated use longlived asset revenue recognition conway freight recognizes revenue reporting periods based relative transit time period recognizes expense incurred conway truckload recognizes revenue related direct costs shipment delivered menlo recognizes revenue based service outputs provided customer critical revenuerelated policies estimates conway freight conway truckload include related revenue adjustments uncollectible accounts receivable critical revenuerelated policies estimates menlo include related uncollectible accounts receivable measuring service outputs provided customers gross netbasis revenue recognition conway believes revenue recognition policies appropriate use revenuerelated estimates judgments provide reasonable approximation actual revenue earned estimated revenue adjustments generally pricing assessed companies transportation industry subject subsequent adjustment due several factors including weight freightclassification verifications pricing discounts revenue adjustments estimated based largely historical experience uncollectible accounts receivable conway freight conway truckload report accounts receivable net realizable value provide allowance uncollectible accounts losses probable estimates uncollectible accounts based various judgments assumptions including revenue levels historical loss experience economic conditions aging outstanding accounts receivable menlo based size nature client base performs periodic evaluation customers creditworthiness accounts receivable portfolio recognizes expense uncollectible accounts losses probable reasonably estimable service outputs certain customer contracts menlo makes estimates measuring service outputs provided customer including services provided performancebased incentive arrangements contingent portion revenue performancebased incentive arrangements considered fixed determinable performance criteria met gross netbasis revenue recognition determining whether revenue reported gross net basis based assessment whether menlo acting principal agent transaction involves judgment based terms arrangement selfinsurance accruals conway uses combination selfinsurance programs largedeductible purchased insurance provide costs medical vehicular cargo workers compensation claims longterm portion selfinsurance accruals relates primarily workers compensation vehicular claims expected payable several years conway periodically evaluates level insurance coverage adjusts insurance levels based risk tolerance premium expense measurement classification selfinsured costs requires consideration historical cost experience demographic severity factors judgments current expected levels cost per claim retention levels methods provide estimates undiscounted liability associated claims incurred balance sheet date including estimates claims incurred reported conway believes actuarial methods appropriate measuring highly judgmental selfinsurance accruals however based magnitude claims length time incurrence claims ultimate settlement use estimation method sensitive assumptions factors described accordingly changes assumptions factors materially affect estimated liability amounts may different actual costs paid settle claims new accounting standards refer note 1 principal accounting policies item 8 financial statements supplementary data discussion recently issued accounting standards conway yet adopted forwardlooking statements certain statements included herein constitute forwardlooking statements within meaning section 21e securities exchange act 1934 amended subject number risks uncertainties relied upon predictions future events statements historical fact forwardlooking statements including • projections earnings revenue capital software expenditures weight yield volumes income financial operating items • statements plans strategies expectations objectives conways management future operations future items • statements concerning proposed new products services • statements regarding conways estimated future contributions pension plans • statements regarding payment future dividends • statements adequacy reserves • statements regarding outcome legal administrative claims proceedings may brought conway • statements regarding future economic conditions performance • statements regarding strategic acquisitions • statements estimates belief statements assumptions underlying foregoing certain forwardlooking statements identified use forwardlooking terminology believes expects may seeks approximately intends plans estimates anticipates negative terms variations terms comparable terminology discussions strategy plans intentions forwardlooking statements necessarily dependent assumptions data methods may incorrect imprecise assurance realized regard certain important factors among others addition matters discussed elsewhere document reports documents filed conway securities exchange commission could cause actual results matters differ materially discussed forwardlooking statements detailed description certain risk factors included item 1a risk factors forwardlooking statements speak date statement made subject change conway undertake obligation update revise forwardlooking statements whether result new information future events otherwise except otherwise required law item 7aitem 7 managements discussion analysis financial condition results operations managements discussion analysis financial condition results operations presented financial review management discussion pages 24 26 inclusive 1993 annual report shareholders incorporated herein reference item 8 nannannannannanitem 7a quantitative qualitative disclosures market risk 12 certain statements included incorporated reference herein constitute forwardlooking statements within meaning section 21e securities exchange act 1934 amended subject number risks uncertainties forwardlooking statements contained incorporated reference herein relied upon predictions future events certain forwardlooking statements identified use forwardlooking terminology believes expects may seeks approximately intends plans estimates anticipates negative thereof variations thereof comparable terminology discussions strategy plans intentions forward looking statements necessarily dependent assumptions data methods may incorrect imprecise may incapable realized regard following factors among others addition matters discussed elsewhere document documents incorporated reference herein could cause actual results matters differ materially forward looking statements changes general business economic conditions increasing domestic international competition pricing pressure changes fuel prices particularly light recent fuel price increases uncertainty regarding companys priority mail contract usps including uncertainties regarding companys claims contract described herein incorporated reference labor matters including changes labor costs renegotiations labor contracts risk work stoppages strikes changes governmental regulation environmental tax matters including page 17 claims made internal revenue service respect aviation excise tax aircraft maintenance tax matters discussed documents incorporated reference matters relating spinoff consolidated freightways corporation cfc regard company may subject substantial liabilities respect certain matters relating cfcs business operations including without limitation guarantees certain indebtedness cfc liabilities employmentrelated tax environmental matters including tax matters discussed documents incorporated reference although cfc general either primary secondary obligor jointly severally liable company respect matters failure pay default cfc respect obligations company may perceived liable whether cfc successfully contesting obligation reimburse company otherwise could lead substantial claims company result foregoing assurance given future results operations financial condition item 8item 7a quantitative qualitative disclosures market risk 19 item 8item 7aquantitative qualitative disclosures market risk 25 certain statements included incorporated reference herein constitute forwardlooking statements within meaning section 21e securities exchange act 1934 amended subject number risks uncertainties relied upon predictions future events statements historical fact forward looking statements including projections earnings revenues weight volumes income financial operating items statements plans strategies expectations objectives cnf management future operations future items statements concerning proposed new products services statements regarding future economic conditions performance statements estimates belief statements assumptions underlying foregoing certain forwardlooking statements identified use forwardlooking terminology believes expects may seeks approximately intends plans estimates anticipates negative terms variations terms comparable terminology discussions strategy plans intentions forward looking statements necessarily dependent assumptions data methods may incorrect imprecise assurance realized regard following factors among others addition matters discussed elsewhere document documents incorporated reference herein reports documents filed cnf securities exchange commission could cause actual results matters differ materially discussed forwardlooking statements changes general business economic conditions including slowdown global economy creditworthiness cnfs customers ability pay services rendered increasing competition pricing pressure changes fuel prices effects cessation ewas air carrier operations including expense using aircraft operated air carriers emerys north american operations also bearing cash costs ewas grounded aircraft fleet possibility substantial cash payments connection early termination aircraft leases possibility additional unusual charges costs expenses relating emerys operations existing defaults possibility future defaults aircraft leases possibility future loss business due publicity surrounding grounding ewas fleet aircraft possibility defaults cnfs 385 million credit agreement debt instruments aircraft leases including defaults resulting additional unusual charges cnfs failure perform accordance managements expectations possibility cnf may required pledge collateral secure indebtedness repay indebtedness event ratings assigned longterm senior debt credit rating agencies reduced uncertainties regarding ewas ability recover termination costs relating termination former priority mail contract usps uncertainties regarding ewas ability recover termination costs claims relating termination former express mail contract usps labor matters including grievance furloughed pilots crewmembers renegotiations labor contracts risk work stoppages strikes enforcement changes governmental regulations environmental tax matters including claims made internal revenue service respect aircraft maintenance tax matters department transportation faa department justice investigation relating emery worldwides handling hazardous materials february 2000 crash ewa aircraft related investigation litigation matters relating cnfs 1996 spinoff consolidated freightways result foregoing assurance given future financial condition cash flows results operations item 8nannanitem 7a quantitative qualitative disclosures market risk cnf exposed variety market risks including effects interest rates fuel prices foreign currency exchange rates cnf enters derivative financial instruments circumstances warrant hedge underlying asset liability future cash flow exposure form interest rate commodity currencyrelated risk additionally designated hedges high correlation underlying exposure fluctuations value derivatives offset reciprocal changes underlying exposure cnf subject effect interest rate fluctuations fair value longterm debt based fixed interest rates maturities longterm debt fluctuations market interest rates would significantly affect operating results cash flows may material effect fair value longterm debt based current interest rates offered debt similar terms maturities estimated fair value cnf’s longterm debt approximately 760 million december 31 2004 given hypothetical 10 change interest rates change fair value longterm debt would approximately 30 million fully discussed note 5 “debt financing arrangements” item 8 “financial statements supplementary data” cnf december 2002 terminated four interest rate swap derivatives designated fair value hedges fixedrate longterm debt except effect terminated interest rate swaps derivative financial instruments material effect cnf’s financial condition results operations cash flows cnf market risk changes price diesel fuel however risk associated increases fuel prices mitigated revenue fuel surcharges therefore hypothetical 10 increase price fuel would expected material adverse effect results operations assets liabilities cnf’s foreign subsidiaries denominated foreign currencies creates exposure changes foreign currency exchange rates however market risk related foreign currency exchange rates material cnf’s financial condition results operations cash flows item 8item 7a quantitative qualitative disclosures market risk conway exposed variety market risks including effects interest rates fuel prices foreign currency exchange rates conway enters derivative financial instruments circumstances warrant hedge underlying asset liability future cash flow exposure form interest rate commodity currencyrelated risk additionally designated hedges high correlation underlying exposure fluctuations value derivatives offset reciprocal changes underlying exposure fully discussed note 5 “debt financing arrangements” item 8 “financial statements supplementary data” conway december 2002 terminated four interest rate swap derivatives designated fair value hedges fixedrate longterm debt except effect terminated interest rate swaps derivative financial instruments material effect conway’s financial condition results operations cash flows interest rates conway subject effect interest rate fluctuations fair value longterm debt based fixed interest rates maturities longterm debt fluctuations market interest rates would significantly affect conway’s operating results cash flows may material effect fair value longterm debt table summarizes carrying value conway’s fixedrate longterm debt estimated fair value effect 10 hypothetical change interest rates estimated fair value estimated fair value calculated net present value principal interest payments discounted interest rates offered debt similar terms maturities december 31 2006 2005 conway held cashequivalent investments 2496 million 4968 million respectively marketable securities 1845 million 2024 million company earned 248 million 227 million investment income respectively potential change annual investment income resulting hypothetical 10 change variable interest rates december 31 2006 2005 would approximately 3 million 2 million respectively fuel conway exposed effects changes availability price diesel fuel generally fuel obtained various sources desired quantities however inability obtain fuel could material adverse effect conway freight transportation subject risk price fluctuations like ltl carriers conway freight assesses many customers fuel surcharge fuel surcharge part conway freight’s overall rate structure customers intended compensate conway freight adverse effects higher fuel costs fuel prices risen fuel surcharge increased conway freight’s yields revenue conway freight recovered higher fuel costs fuelrelated increases purchased transportation times interest customers conway freight temporarily capped fuel surcharge fixed percentage following sharp increase fuel costs aftermath hurricanes us conway freight imposed temporary cap fuel surcharge 2005 effect august 29 october 24 conway cannot predict future movement fuel prices conway freight’s ability recover higher fuel costs fuel surcharges effect changes fuel surcharges may conway freight’s overall rate structure conway freight’s operating income may adversely affected decline fuel prices lower fuel surcharges would reduce yield revenue whether fuel prices increase decrease remain constant conway’s operating income may adversely affected competitive pressures limited conway freight’s ability assess fuel surcharges foreign currency assets liabilities conway’s foreign subsidiaries denominated foreign currencies create exposure changes foreign currency exchange rates however market risk related foreign currency exchange rates material conway’s financial condition results operations cash flows report independent registered public accounting firm board directors shareholders conway inc audited accompanying consolidated balance sheets conway inc subsidiaries december 31 2006 2005 related consolidated statements operations shareholders’ equity cash flows years threeyear period ended december 31 2006 consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position conway inc subsidiaries december 31 2006 2005 results operations cash flows years threeyear period ended december 31 2006 conformity us generally accepted accounting principles discussed note 1 consolidated financial statements company adopted statement accounting standards 158 employers’ accounting defined benefit pension postretirement plan adopted december 31 2006 also audited accordance standards public company accounting oversight board united states effectiveness conway inc’s internal control financial reporting december 31 2006 based criteria established “internal control integrated framework” issued committee sponsoring organizations treadway commission coso report dated february 27 2007 expressed unqualified opinion management’s assessment effective operation internal control financial reporting kpmg llp portland oregon february 27 2007 item 8item 7a quantitative qualitative disclosures market risk conway exposed variety market risks including effects interest rates fuel prices foreign currency exchange rates conway enters derivative financial instruments circumstances warrant hedge underlying asset liability future cash flow exposure form interest rate commodity currencyrelated risk additionally designated hedges high correlation underlying exposure fluctuations value derivatives offset reciprocal changes underlying exposure fully discussed note 7 “debt financing arrangements” item 8 “financial statements supplementary data” conway december 2002 terminated four interest rate swap derivatives designated fair value hedges fixedrate longterm debt except effect terminated interest rate swaps derivative financial instruments periods presented material effect conway’s financial condition results operations cash flows interest rates conway subject effect interest rate fluctuations fair value longterm debt based fixed interest rates maturities longterm debt fluctuations market interest rates would significantly affect conway’s operating results cash flows may material effect fair value longterm debt table summarizes carrying value conway’s fixedrate longterm debt estimated fair value effect 10 hypothetical change interest rates estimated fair value estimated fair value calculated net present value principal interest payments discounted interest rates offered debt similar terms maturities conway invests cashequivalent investments marketable securities earn investment income conway’s investment income 190 million 2007 248 million 2006 227 million 2005 potential change annual investment income resulting hypothetical 10 change variable interest rates would range approximately 2 million approximately 3 million periods presented fuel conway exposed effects changes price availability diesel fuel fully discussed item 1a “risk factors” foreign currency assets liabilities conway’s foreign subsidiaries denominated foreign currencies create exposure changes foreign currency exchange rates conway currently use derivative financial instruments manage foreign currency risk report independent registered public accounting firm board directors shareholders conway inc audited accompanying consolidated balance sheets conway inc subsidiaries company december 31 2007 2006 related consolidated statements income shareholders’ equity cash flows years threeyear period ended december 31 2007 also audited company’s internal control financial reporting december 31 2007 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible consolidated financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion consolidated financial statements opinion company’s internal control financial reporting based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits consolidated financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate conway acquired cfi august 23 2007 cougar logistics september 5 2007 chic logistics october 18 2007 acquisitions management excluded acquisitions assessment effectiveness conway’s internal control financial reporting december 31 2007 acquisitions represent 347 conway’s total assets 43 conway’s revenues reported consolidated financial statements year ended december 31 2007 audit internal control financial reporting conway inc also excluded evaluation internal control financial reporting acquisitions opinion consolidated financial statements referred present fairly material respects financial position conway inc subsidiaries december 31 2007 2006 results operations cash flows years threeyear period ended december 31 2007 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting december 31 2007 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission discussed note 11 consolidated financial statements company adopted recognition disclosure provisions december 31 2006 adopted measurement date provisions january 1 2007 statement financial accounting standards 158 employers’ accounting defined benefit pension postretirement plans kpmg llp portland oregon february 27 2008 item 8item 7a quantitative qualitative disclosures market risk conway exposed variety market risks including effects interest rates fuel prices foreign currency exchange rates conway enters derivative financial instruments circumstances warrant hedge underlying asset liability future cash flow exposure form interest rate commodity currencyrelated risk additionally designated hedges high correlation underlying exposure fluctuations value derivatives offset reciprocal changes underlying exposure fully discussed note 8 “debt financing arrangements” item 8 “financial statements supplementary data” conway december 2002 terminated four interestrate swap derivatives designated fair value hedges fixedrate longterm debt except effect terminated interestrate swaps derivative financial instruments periods presented material effect conway’s financial condition results operations cash flows interest rates conway subject effect interestrate fluctuations fair value longterm debt based fixed interest rates maturities longterm debt fluctuations market interest rates would significantly affect conway’s operating results cash flows may material effect fair value longterm debt table summarizes carrying value conway’s fixedrate longterm debt estimated fair value effect 10 hypothetical change interest rates estimated fair value estimated fair value calculated net present value principal interest payments discounted interest rates offered debt similar terms maturities conway invests cashequivalent investments marketable securities earn investment income conway’s investment income 57 million 2008 190 million 2007 248 million 2006 potential change annual investment income resulting hypothetical 10 change variable interest rates would range approximately 1 million approximately 3 million periods presented fuel conway exposed effects changes price availability diesel fuel fully discussed item 1a “risk factors” foreign currency assets liabilities conway’s foreign subsidiaries denominated foreign currencies create exposure changes foreign currency exchange rates conway currently use derivative financial instruments manage foreign currency risk report independent registered public accounting firm board directors shareholders conway inc audited accompanying consolidated balance sheets conway inc subsidiaries company december 31 2008 2007 related consolidated statements income shareholders’ equity cash flows years threeyear period ended december 31 2008 also audited company’s internal control financial reporting december 31 2008 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible consolidated financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion consolidated financial statements opinion company’s internal control financial reporting based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits consolidated financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion consolidated financial statements referred present fairly material respects financial position conway inc subsidiaries december 31 2008 2007 results operations cash flows years threeyear period ended december 31 2008 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting december 31 2008 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission kpmg llp portland oregon february 27 2009 item 8item 7a quantitative qualitative disclosures market risk conway exposed variety market risks including effects interest rates fuel prices foreign currency exchange rates conway enters derivative financial instruments circumstances warrant hedge underlying asset liability future cash flow exposure form interest rate commodity currencyrelated risk additionally designated hedges high correlation underlying exposure fluctuations value derivatives offset reciprocal changes underlying exposure fully discussed note 8 “debt financing arrangements” item 8 “financial statements supplementary data” conway december 2002 terminated four interestrate swap derivatives designated fair value hedges fixedrate longterm debt except effect terminated interestrate swaps derivative financial instruments periods presented material effect conway’s financial condition results operations cash flows interest rates conway subject effect interestrate fluctuations fair value longterm debt based fixed interest rates maturities longterm debt fluctuations market interest rates would significantly affect conway’s operating results cash flows may material effect fair value longterm debt table summarizes carrying value conway’s fixedrate longterm debt estimated fair value effect 10 hypothetical change interest rates estimated fair value estimated fair value calculated net present value principal interest payments discounted interest rates offered debt similar terms maturities conway invests cashequivalent investments marketable securities earn investment income conway’s investment income 24 million 2009 57 million 2008 190 million 2007 potential change annual investment income resulting hypothetical 10 change variable interest rates would exceed 2 million periods presented fuel conway exposed effects changes price availability diesel fuel fully discussed item 1a “risk factors” conway currently use derivative financial instruments manage risk associated changes price diesel fuel foreign currency assets liabilities conway’s foreign subsidiaries denominated foreign currencies create exposure changes foreign currency exchange rates conway currently use derivative financial instruments manage foreign currency risk report independent registered public accounting firm board directors stockholders conway inc audited accompanying consolidated balance sheets conway inc company subsidiaries december 31 2009 2008 related consolidated statements operations shareholders’ equity comprehensive income loss cash flows years threeyear period ended december 31 2009 also audited company’s internal control financial reporting december 31 2009 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible consolidated financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion consolidated financial statements opinion company’s internal control financial reporting based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits consolidated financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion consolidated financial statements referred present fairly material respects financial position conway inc subsidiaries december 31 2009 2008 results operations cash flows years threeyear period ended december 31 2009 conformity us generally accepted accounting principles also opinion company maintained material respects effective internal control financial reporting december 31 2009 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission kpmg llp portland oregon february 26 2010 item 8item 7a quantitative qualitative disclosures market risk conway exposed variety market risks including effects interest rates fuel prices foreign currency exchange rates conway enters derivative financial instruments circumstances warrant hedge underlying asset liability future cash flow exposure form interest rate commodity currencyrelated risk additionally designated hedges high correlation underlying exposure fluctuations value derivatives offset reciprocal changes underlying exposure conway held material derivative financial instruments december 31 2010 interest rates conway subject effect interestrate fluctuations fair value longterm debt based fixed interest rates maturities longterm debt fluctuations market interest rates would significantly affect conway’s operating results cash flows may material effect fair value longterm debt table summarizes carrying value conway’s fixedrate longterm debt estimated fair value effect 10 hypothetical change interest rates estimated fair value estimated fair value calculated net present value principal interest payments discounted interest rates offered debt similar terms maturities conway invests cashequivalent investments marketable securities earn investment income conway’s investment income 13 million 2010 24 million 2009 57 million 2008 potential change annual investment income resulting hypothetical 10 change variable interest rates would exceed 1 million periods presented fuel conway exposed effects changes price availability diesel fuel fully discussed item 1a “risk factors” conway currently use derivative financial instruments manage risk associated changes price diesel fuel foreign currency assets liabilities conway’s foreign subsidiaries denominated foreign currencies create exposure changes foreign currency exchange rates conway currently use derivative financial instruments manage foreign currency risk report independent registered public accounting firm board directors stockholders conway inc audited accompanying consolidated balance sheets conway inc company subsidiaries december 31 2010 2009 related consolidated statements operations shareholders’ equity comprehensive income loss cash flows years threeyear period ended december 31 2010 also audited company’s internal control financial reporting december 31 2010 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible consolidated financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion consolidated financial statements opinion company’s internal control financial reporting based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits consolidated financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion consolidated financial statements referred present fairly material respects financial position conway inc subsidiaries december 31 2010 2009 results operations cash flows years threeyear period ended december 31 2010 conformity us generally accepted accounting principles also opinion company maintained material respects effective internal control financial reporting december 31 2010 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission kpmg llp portland oregon february 28 2011 item 8item 7a quantitative qualitative disclosures market risk conway exposed variety market risks including effects interest rates fuel prices foreign currency exchange rates conway enters derivative financial instruments circumstances warrant hedge underlying asset liability future cash flow exposure form interest rate commodity currencyrelated risk additionally designated hedges high correlation underlying exposure fluctuations value derivatives offset reciprocal changes underlying exposure periods presented conway held material derivative financial instruments interest rates conway invests cashequivalent investments marketable securities earn investment income conway’s investment income 09 million 2011 13 million 2010 24 million 2009 potential change annual investment income resulting hypothetical 10 change variable interest rates would significant periods presented based fixed interest rates maturities longterm debt fluctuations market interest rates would significantly affect conway’s operating results cash flows discussed fully “critical accounting policies estimates” amounts recognized pension expense accrued pension liability conway’s defined benefit pension plans depend upon number assumptions factors including discount rate used measure present value pension obligations fuel conway exposed effects changes price availability diesel fuel fully discussed item 1a “risk factors” periods presented conway used material derivative financial instruments manage risk associated changes price diesel fuel foreign currency assets liabilities conway’s foreign subsidiaries denominated foreign currencies create exposure changes foreign currency exchange rates however market risk related foreign currency exchange rates material conway’s financial condition results operations cash flows periods presented conway used material derivative financial instruments manage foreign currency risk report independent registered public accounting firm board directors stockholders conway inc audited accompanying consolidated balance sheets conway inc company subsidiaries december 31 2011 2010 related consolidated statements operations shareholders’ equity comprehensive income loss cash flows years threeyear period ended december 31 2011 also audited company’s internal control financial reporting december 31 2011 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible consolidated financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting item 9a responsibility express opinion consolidated financial statements opinion company’s internal control financial reporting based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits consolidated financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion consolidated financial statements referred present fairly material respects financial position conway inc subsidiaries december 31 2011 2010 results operations cash flows years threeyear period ended december 31 2011 conformity us generally accepted accounting principles also opinion company maintained material respects effective internal control financial reporting december 31 2011 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission kpmg llp portland oregon february 28 2012 item 8item 7a quantitative qualitative disclosures market risk conway exposed variety market risks including effects interest rates fuel prices foreign currency exchange rates conway enters derivative financial instruments circumstances warrant hedge underlying asset liability future cash flow exposure form interest rate commodity currencyrelated risk additionally designated hedges high correlation underlying exposure fluctuations value derivatives offset reciprocal changes underlying exposure periods presented conway held material derivative financial instruments interest rates conway invests cashequivalent investments marketable securities earn investment income periods presented amount investment income earned conway’s investments material based fixed interest rates maturities longterm debt fluctuations market interest rates would significantly affect conway’s operating results cash flows discussed fully “critical accounting policies estimates” amounts recognized pension expense accrued pension liability conway’s defined benefit pension plans depend upon number assumptions factors including discount rate used measure present value pension obligations fuel conway exposed effects changes price availability diesel fuel fully discussed item 1a “risk factors” periods presented conway used material derivative financial instruments manage risk associated changes price diesel fuel foreign currency assets liabilities conway’s foreign subsidiaries denominated foreign currencies create exposure changes foreign currency exchange rates however market risk related foreign currency exchange rates material conway’s financial condition results operations cash flows periods presented conway used material derivative financial instruments manage foreign currency risk report independent registered public accounting firm board directors stockholders conway inc audited accompanying consolidated balance sheets conway inc company subsidiaries december 31 2012 2011 related statements consolidated income comprehensive income loss shareholders equity cash flows years threeyear period ended december 31 2012 also audited companys internal control financial reporting december 31 2012 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso companys management responsible consolidated financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying managements report internal control financial reporting item 9a responsibility express opinion consolidated financial statements opinion companys internal control financial reporting based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits consolidated financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion consolidated financial statements referred present fairly material respects financial position conway inc subsidiaries december 31 2012 2011 results operations cash flows years threeyear period ended december 31 2012 conformity us generally accepted accounting principles also opinion company maintained material respects effective internal control financial reporting december 31 2012 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission kpmg llp portland oregon february 25 2013 item 8item 7a quantitative qualitative disclosures market risk conway exposed variety market risks including effects interest rates fuel prices foreign currency exchange rates conway enters derivative financial instruments circumstances warrant hedge underlying asset liability future cash flow exposure form interest rate commodity currencyrelated risk additionally designated hedges high correlation underlying exposure fluctuations value derivatives offset reciprocal changes underlying exposure periods presented conway held material derivative financial instruments interest rates conway invests cashequivalent investments marketable securities earn investment income periods presented amount investment income earned conway’s investments material based fixed interest rates maturities longterm debt fluctuations market interest rates would significantly affect conway’s operating results cash flows discussed fully “critical accounting policies estimates” amounts recognized pension expense accrued pension liability conway’s defined benefit pension plans depend upon number assumptions factors including discount rate used measure present value pension obligations fuel conway exposed effects changes price availability diesel fuel fully discussed item 1a “risk factors” periods presented conway used material derivative financial instruments manage risk associated changes price diesel fuel foreign currency assets liabilities conway’s foreign subsidiaries denominated foreign currencies create exposure changes foreign currency exchange rates however market risk related foreign currency exchange rates material conway’s financial condition results operations cash flows periods presented conway used material derivative financial instruments manage foreign currency risk report independent registered public accounting firm board directors shareholders conway inc audited accompanying consolidated balance sheets conway inc subsidiaries company december 31 2013 2012 related statements consolidated income comprehensive income loss shareholders’ equity cash flows years threeyear period ended december 31 2013 also audited company’s internal control financial reporting december 31 2013 based criteria established internal control integrated framework 1992 issued committee sponsoring organizations treadway commission coso company’s management responsible consolidated financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting item 9a responsibility express opinion consolidated financial statements opinion company’s internal control financial reporting based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits consolidated financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion consolidated financial statements referred present fairly material respects financial position conway inc subsidiaries december 31 2013 2012 results operations cash flows years threeyear period ended december 31 2013 conformity us generally accepted accounting principles also opinion company maintained material respects effective internal control financial reporting december 31 2013 based criteria established internal control integrated framework 1992 issued committee sponsoring organizations treadway commission coso kpmg llp portland oregon february 25 2014 item 8item 7a quantitative qualitative disclosures market risk cnf exposed variety market risks including effects interest rates fuel prices foreign currency exchange rates cnf enters derivative financial instruments circumstances warrant hedge underlying asset liability future cash flow exposure form interest rate commodity currencyrelated risk additionally designated hedges high correlation underlying exposure fluctuations value derivatives offset reciprocal changes underlying exposure interest rates cnf subject effect interest rate fluctuations fair value longterm debt based fixed interest rates maturities longterm debt fluctuations market interest rates would significantly affect operating results cash flows may material effect fair value longterm debt table summarizes carrying value cnf’s fixedrate longterm debt estimated fair value effect 10 hypothetical change interest rates estimated fair value estimated fair value calculated net present value principal interest payments discounted interest rates offered debt similar terms maturities fully discussed note 5 “debt financing arrangements” item 8 “financial statements supplementary data” cnf december 2002 terminated four interest rate swap derivatives designated fair value hedges fixedrate longterm debt except effect terminated interest rate swaps derivative financial instruments material effect cnf’s financial condition results operations cash flows fuel cnf exposed effects changes availability price diesel fuel generally fuel obtained various sources desired quantities however inability obtain fuel due fuel shortages reason could material adverse effect cnf subsidiaries primarily conway subject risk price fluctuations like ltl carriers conway assesses many customers fuel surcharge fuel surcharge part conway’s overall rate structure customers intended compensate conway adverse effects higher fuel costs fuel prices risen fuel surcharge increased conway’s yields revenue conway recovered higher fuel costs fuelrelated increases purchased transportation times interest customers conway temporarily capped fuel surcharge fixed percentage following sharp increase fuel costs aftermath hurricanes us conway imposed temporary cap fuel surcharge 2005 effect august 29 october 24 cnf cannot predict future movement fuel prices conway’s ability recover higher fuel costs fuel surcharges effect changes fuel surcharges may conway’s overall rate structure conway’s operating income would likely adversely affected rapid significant decline fuel prices lower fuel surcharges would reduce conway’s yield revenue whether fuel prices increase decrease remain constant conway’s operating income may adversely affected competitive pressures limited conway’s ability assess fuel surcharges foreign currency assets liabilities cnf’s foreign subsidiaries denominated foreign currencies create exposure changes foreign currency exchange rates however market risk related foreign currency exchange rates material cnf’s financial condition results operations cash flows report independent registered public accounting firm board directors shareholders cnf inc audited accompanying consolidated balance sheets cnf inc subsidiaries december 31 2005 2004 related consolidated statements operations shareholders’ equity cash flows years threeyear period ended december 31 2005 consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position cnf inc subsidiaries december 31 2005 2004 results operations cash flows years threeyear period ended december 31 2005 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states effectiveness cnf inc’s internal control financial reporting december 31 2005 based criteria established “internal control integrated framework” issued committee sponsoring organizations treadway commission coso report dated march 13 2006 expressed unqualified opinion management’s assessment effective operation internal control financial reporting kpmg llp kpmg llp portland oregon march 13 2006 item 8item 7a quantitative qualitative disclosures market risk conway exposed variety market risks including effects interest rates fuel prices foreign currency exchange rates conway enters derivative financial instruments circumstances warrant hedge underlying asset liability future cash flow exposure form interest rate commodity currencyrelated risk additionally designated hedges high correlation underlying exposure fluctuations value derivatives offset reciprocal changes underlying exposure periods presented conway held material derivative financial instruments interest rates conway invests cashequivalent investments marketable securities earn investment income periods presented amount investment income earned conways investments material based fixed interest rates maturities longterm debt fluctuations market interest rates would significantly affect conways operating results cash flows discussed fully critical accounting policies estimates amounts recognized pension expense accrued pension liability conways defined benefit pension plans depend upon number assumptions factors including discount rate used measure present value pension obligations fuel conway exposed effects changes price availability diesel fuel fully discussed item 1a risk factors periods presented conway used material derivative financial instruments manage risk associated changes price diesel fuel foreign currency assets liabilities conways foreign subsidiaries denominated foreign currencies create exposure changes foreign currency exchange rates however market risk related foreign currency exchange rates material conways financial condition results operations cash flows periods presented conway used material derivative financial instruments manage foreign currency risk report independent registered public accounting firm board directors stockholders conway inc subsidiaries audited accompanying consolidated balance sheets conway inc subsidiaries company december 31 2014 2013 related statements consolidated income comprehensive income shareholders’ equity cash flows years threeyear period ended december 31 2014 also audited company’s internal control financial reporting december 31 2014 based criteria established internal control integrated framework 1992 issued committee sponsoring organizations treadway commission coso company’s management responsible consolidated financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting item 9a responsibility express opinion consolidated financial statements opinion company’s internal control financial reporting based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits consolidated financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion consolidated financial statements referred present fairly material respects financial position conway inc subsidiaries december 31 2014 2013 results operations cash flows years threeyear period ended december 31 2014 conformity us generally accepted accounting principles also opinion company maintained material respects effective internal control financial reporting december 31 2014 based criteria established internal control integrated framework 1992 issued committee sponsoring organizations treadway commission coso kpmg llp portland oregon february 23 2015 item 8nan item 8 financial statements supplementary data consolidated financial statements auditors report presented pages 21 41 inclusive 1994 annual report shareholders incorporated herein reference unaudited quarterly financial data included note 12 page 39 1994 annual report shareholders incorporated herein reference item 9item 8 financial statements supplementary data consolidated financial statements auditors report presented pages 19 37 inclusive 1995 annual report shareholders incorporated herein reference unaudited quarterly financial data included note 13 page 35 1995 annual report shareholders incorporated herein reference item 9item 8 financial statements supplementary data consolidated financial statements report independent public accountants presented pages 21 40 inclusive 1996 annual report shareholders incorporated herein reference unaudited quarterly financial data included note 14 page 39 1996 annual report shareholders incorporated herein reference item 9item 8 financial statements supplementary data consolidated financial statements report independent public accountants presented pages 21 39 inclusive 1997 annual report shareholders incorporated herein reference unaudited quarterly financial data included note 15 page 39 1997 annual report shareholders incorporated herein reference item 9item 8 financial statements supplementary data consolidated financial statements report independent public accountants presented pages 24 45 inclusive 1998 annual report shareholders incorporated herein reference unaudited quarterly financial data included note 16 page 44 1998 annual report shareholders incorporated herein reference item 9item 8 financial statements supplementary data page number annual report shareholders consolidated balance sheets 14 statements consolidated income 16 statements consolidated cash flows 17 statements consolidated shareholders equity 18 notes consolidated financial statements 20 item 9item 8 financial statements supplementary data page number annual report shareholders consolidated balance sheets 20 statements consolidated income 22 statements consolidated cash flows 23 statements consolidated shareholders equity 24 notes consolidated financial statements 26 item 9item 8 financial statements supplementary data page number annual report shareholders consolidated balance sheets 28 statements consolidated operations 30 statements consolidated cash flows 31 statements consolidated shareholders equity 32 notes consolidated financial statements 3451 selected quarterly financial data 51 item 9item 8 financial statements supplementary data cnf inc consolidated balance sheets accompanying notes consolidated financial statements integral part statements cnf inc consolidated balance sheets accompanying notes consolidated financial statements integral part statements cnf inc statements consolidated operations accompanying notes consolidated financial statements integral part statements cnf inc statements consolidated cash flows accompanying notes consolidated financial statements integral part statements cnf inc statements consolidated shareholders equity accompanying notes consolidated financial statements integral part statements cnf inc notes consolidated financial statements 1 principal accounting policies basis presentation principles consolidation consolidated financial statements include accounts cnf inc subsidiaries company cnf organization cnf inc subsidiaries provide supply chain management services commercial industrial shipments land air sea throughout north america world cnf’s principal businesses consist conway transportation services conway menlo worldwide however financial reporting purposes cnf divided five reporting segments operating results conway reported one reporting segment menlo worldwide divided three reporting segments emery forwarding menlo worldwide logistics menlo worldwide also certain corporate activities results road systems trailer manufacturer reported separate cnf reporting segment conway provides regional nextday secondday deferred lessthantruckload ltl freight trucking throughout us canada mexico well expedited transportation air freight forwarding truckload brokerage services menlo worldwide formed effective 2002 includes operating results emery forwarding menlo worldwide logistics menlo worldwide reporting segments emery forwarding provides timedefinite domestic international air freight ocean forwarding services customs brokerage trade services menlo worldwide logistics develops integrated contract logistics solutions including management complex distribution networks supply chain engineering consulting menlo worldwide reporting segment includes vector scm joint venture owned cnf general motors serves lead logistics manager worldwide general motors cnf reporting segment includes operating results road systems trailer manufacturer certain cnf corporate activities discussion cnf’s discontinued operations including terminated priority mail contract us postal service usps impact 2002 1996 spinoff consolidated freightways corporation cfc refer note 2 “discontinued operations” estimates management makes estimates assumptions preparing financial statements conformity accounting principles generally accepted united states estimates assumptions affect amounts reported accompanying financial statements notes thereto actual results could differ estimates recognition revenues cnf recognizes revenue services performed persuasive evidence arrangement exists revenue amount fixed determinable collectibility probable effective january 1 2000 cnf prospectively adopted change accounting method recognition freight transportation revenue recognizes allocation freight transportation revenue reporting periods based relative transit time reporting period expenses recognized incurred previously revenue conway emery recognized freight received shipment estimated costs performing transportation service accrued revenue contracts recognized accordance contractual terms services provided cash equivalents shortterm interestbearing instruments maturities three months less date purchase considered cash equivalents trade accounts receivable net trade accounts receivable net allowances 22402000 22675000 december 31 2002 2001 respectively cnf inc notes consolidated financial statementscontinued property plant equipment property plant equipment depreciated primarily straightline basis estimated useful lives generally 25 years buildings improvements 10 years less aircraft 5 10 years tractor trailer equipment 3 10 years equipment leasehold improvements amortized shorter terms respective leases useful lives assets expenditures equipment maintenance repairs charged operating expenses incurred betterments capitalized gains losses sales equipment recorded operating expenses capitalized software capitalized software net consists costs purchase develop internaluse software amortization capitalized software computed itembyitem basis period 3 10 years depending estimated useful life software amortization expense related capitalized software 18498000 19098000 15479000 years ended december 31 2002 2001 2000 respectively goodwill intangible assets effective january 1 2002 cnf adopted sfas 142 “goodwill intangible assets” sfas 142 specifies goodwill indefinitelived intangible assets longer amortized instead subject annual impairment test accordance provisions sfas 142 cnf ceased goodwill amortization associated emery forwarding reporting segment prior adoption sfas 142 cnf amortized goodwill 102 million 2001 109 million 2000 based impairment test december 31 2002 cnf required record charge goodwill impairment cnf perform fourthquarter goodwill impairment test annual basis annual tests certain circumstances following table indicates impact net income earnings per share nonamortization provisions fas 142 applied beginning january 1 2000 impairment longlived assets cnf reviews longlived assets certain identifiable intangibles impairment whenever events circumstances indicate total amount asset may recoverable impairment loss recognized estimated future undiscounted cash flows expected result use asset eventual disposition less carrying amount asset considered cnf inc notes consolidated financial statementscontinued recoverable amount equal excess carrying amount estimated fair value charged asset corresponding expense income statement see note 3 “restructuring charges” information concerning impairment charges recognized 2001 see also “new accounting standards” income taxes cnf follows liability method accounting income taxes accrued claims costs cnf provides uninsured costs medical casualty liability vehicular cargo workers’ compensation claims costs estimated year based historical claims unfiled claims relating operations conducted december 31 actual costs may vary estimates based trends losses filed claims estimated incurred filed longterm portion accrued claims costs relate primarily workers’ compensation vehicular claims estimated payable several years cnf participates reinsurance pool reinsure mostly general liability workers’ compensation vehicular liabilities participant pool cedes losses pool assumes equivalent amount losses reinsurance relieve cnf liabilities original policy opinion management potential exposure cnf nonpayment reinsurance pool participants minimal foreign currency translation adjustments resulting translating foreign functional currency financial statements us dollars included foreign currency translation adjustment statements consolidated shareholders’ equity transaction gains losses arise exchange rate fluctuations transactions denominated currency local currency included results operations earnings loss per share eps basic eps continuing operations computed dividing reported net income loss continuing operations accounting change preferred dividends weightedaverage common shares outstanding calculation diluted eps continuing operations calculated follows cnf inc notes consolidated financial statementscontinued year ended december 31 2001 convertible securities stock options antidilutive result assumed shares related addback net loss continuing operations ifconverted method excluded calculation diluted eps securities dilutive assumed shares ifconverted method would follows stock options461040 shares series b preferred stock3794159 preferred securities subsidiary trust3125000 shares stockbased compensation described note 13 “stockbased compensation” officers nonemployee directors granted options cnf’s stock option plans purchase common stock cnf prices equal market value stock date grant cnf accounts stockbased compensation utilizing intrinsic value method accordance provisions accounting principles board opinion 25 “accounting stock issued employees” accordingly compensation expense recognized fixed option plans exercise prices employee stock options equal exceed market prices underlying stock dates grant following table sets forth effect net income loss earnings loss per share cnf applied fairvalue based method recognition provisions sfas 123 “accounting stockbased compensation” stockbased compensation pro forma effects applying sfas 123 may indicative future amounts derivative instruments hedging activities described note 9 “derivative instruments hedging activities” cnf adopted sfas 133 “accounting derivative instruments hedging activities” effective january 1 2001 30 million aftertax gain representing cumulative effect adopting new accounting standard decreased accumulated comprehensive loss equitymethod investments cnf owns majority equity interest vector scm vector joint venture general motors gm vector formed december 2000 provide logistics services gm although cnf owns majority interest vector operating results vector reported equity cnf inc notes consolidated financial statementscontinued method investment menlo worldwide reporting segment based gm’s ability control certain operating decisions addition cnf provided venture capital funding primarily 2001 2000 various companies focused developing technologybased solutions transportation industry portions cnf’s investment companies accounted cost equitymethod investments written 2002 2001 reported nonoperating losses miscellaneous net consolidated statements operations december 31 2002 cnf’s remaining net investment ventures 51 million new accounting standards june 2001 fasb issued sfas 143 “accounting asset retirement obligations” effective cnf january 1 2003 sfas 143 addresses financial accounting reporting obligations associated retirement tangible longlived assets associated asset retirement costs cnf adopt sfas 143 effective january 1 2003 anticipated material impact june 2002 fasb issued sfas 146 “accounting costs associated exit disposal activities” effective exit disposal activities initiated december 31 2002 sfas 146 adopted updates guidance eitf issue 943 sfas 146 requires liability cost associated exit disposal activity recognized liability incurred whereas eitf 943 allowed recognition liability commitment date exit plan cnf adopt sfas 146 effective january 1 2003 apply provisions sfas 146 exit disposal activities initiated adoption december 2002 fasb issued sfas 148 “accounting stockbased compensationtransition disclosure” sfas 148 amends transition disclosure provisions sfas 123 see “stockbased compensation” pro forma disclosures required sfas 148 cnf currently evaluating sfas 148 determine adopt sfas 123 account stockbased compensation using fair value method begin transition method november 2002 fasb issued interpretation 45 “guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others” fin 45 quarter ended december 31 2002 cnf adopted disclosure provisions fin 45 require increased disclosure guarantees including likelihood payment remote fin 45 also requires upon issuance guarantee guarantor must recognize liability fair value obligation assumes guarantee initial recognition measurement provisions fin 45 applied prospective basis guarantees issued modified december 31 2002 cnf evaluating effect adopting fin 45 january 2003 fasb issued interpretation 46 “consolidation variable interest entities interpretation arb 51” fin 46 fin 46 addresses consolidation business enterprises entities equity investors characteristics controlling financial interest sufficient equity risk entity finance activities without additional subordinated financial support parties variable interest entities required consolidated primary beneficiaries effectively disperse risks among parties involved primary beneficiary variable interest entity party absorbs majority entity’s expected losses receives majority expected residual returns consolidation requirements fin 46 apply immediately variable interest entities created january 31 2003 apply existing entities first fiscal year interim period beginning june 15 2003 certain new disclosure requirements apply financial statements issued january 31 2003 cnf evaluating impact adopting fin 46 reclassification certain amounts prior years’ financial statements reclassified conform currentyear presentation cnf inc notes consolidated financial statementscontinued 2 discontinued operations priority mail contract result termination priority mail contract described results operations cash flows priority mail operations segregated classified discontinued operations november 3 2000 emery worldwide airlines ewa us postal service usps announced agreement “termination agreement” terminate contract transportation sortation priority mail “priority mail contract” described claims relating amounts owed ewa priority mail contract fully settled connection payments usps ewa 2002 2001 terms termination agreement usps agreed reimburse ewa priority mail contract termination costs january 7 2001 usps paid ewa 600 million toward termination costs july 3 2002 usps paid ewa 60 million fully settle ewa’s priority mail contract termination costs resulted 2002 thirdquarter gain discontinuance 29 million net 18 million income taxes september 26 2001 ewa entered agreement usps settle claims relating underpayment amounts owed ewa priority mail contract usps “settlement agreement” settlement agreement ewa received 2350 million payment usps september 28 2001 settle nontermination claims priority mail contract well 700 million provisional payment termination costs related separate express mail contract usps claims recover costs operating contract well profit interest thereon priority mail termination agreement described unaffected settlement agreement result payment settlement agreement unbilled revenue contract fully recovered ewa third quarter 2001 recognized gain discontinuance 390 million net 249 million income taxes ewa filed claim redetermined higher prices third quarter 1999 termination priority mail contract january 7 2001 ewa recorded revenue amounts costs incurred result emery reported priority mail revenue 102 million 2001 5940 million 2000 ewa 2000 also recognized 135 million loss net 86 million income tax benefits estimated nonreimbursable costs discontinuance net current liabilities discontinued priority mail operations 32 million 56 million december 31 2002 2001 respectively included accrued liabilities consolidated balance sheets december 31 2001 net noncurrent assets discontinued priority mail operations 31 million included deferred charges assets consolidated balance sheets spinoff cfc december 2 1996 cnf completed spinoff consolidated freightways corporation “cfc” cnf’s shareholders cnf recognized 2002 thirdquarter fourthquarter losses discontinuance 130 million net 83 million income taxes 23 million net 14 million income taxes respectively connection bankruptcy cfc september 2002 detailed discussion matter see note 14 “commitments contingencies” item 7 “management’s discussion analysis” “liquidity capital resourcesdiscontinued operationsspinoff cfc” 3 restructuring charges june 2001 emery began operational restructuring align management’s estimates future business prospects domestic heavy air freight address changes market conditions deteriorated cnf inc notes consolidated financial statementscontinued due primarily slowing domestic economy loss ewa’s contracts usps transport express mail priority mail 3405 million secondquarter restructuring charge 2001 consisted primarily noncash impairment charges estimated future cash expenditures related primarily return lessors certain aircraft leased ewa based issues identified inspections conducted federal aviation administration faa august 13 2001 ewa required suspend air carrier operations part interim settlement agreement faa result ewa furloughed approximately 400 pilots crewmembers emery made arrangements continue service customers utilizing aircraft operated several air carriers primarily response faa action worsening global economic downturn emery reevaluated restructuring plan december 5 2001 cnf announced emery 2002 would become part cnf’s new menlo worldwide group supply chain services providers north america would utilize aircraft operated air carriers instead ewa operating fleet aircraft ewa would permanently cease air carrier operations connection revised restructuring plan fourth quarter 2001 emery recognized additional restructuring charges 3117 million planned disposal leased aircraft cessation ewa’s remaining operations employee separation costs 157 emery’s nonpilot employees costs connection cnf’s announcement cessation ewa’s air carrier operations december 5 2001 ewa terminated employment pilots crewmembers bringing total number terminated employees 2001 800 pilots crewmembers represented air line pilots association alpa union collective bargaining agreement subsequently alpa filed grievance behalf pilots crewmembers protesting cessation ewa’s air carrier operations emery’s use air carriers aspects alpa matters may subject binding arbitration based cnf’s current evaluation management believes addressed estimated exposure related alpa matters however assurance regard cnf cannot predict certainty ultimate outcome matters following fourthquarter restructuring charge 2001 emery’s cash flows reflected cost air carriers provide service emery’s north american customers well lease payments costs associated emery’s remaining fleet grounded aircraft however emery’s operating expenses reflected cost aircraft operated carriers included scheduled rental payments return costs relating ewa’s grounded aircraft costs accrued connection restructuring charges described suspension ewa’s air carrier operations august 13 2001 requirement interim settlement agreement faa amendments settlement agreement faa ewa’s air carrier certificate terminated december 4 2002 following table represents cumulative activity related emery’s 2001 restructuring plan 2002 emery paid 3026 million aircraft leases return costs including 2885 million costs terminating aircraft leases returning leased aircraft connection 2001 restructuring charges cnf inc notes consolidated financial statementscontinued 141 million aircraft costs including payments aircraft leased ewa operated independent thirdparty air carrier february 2003 emery negotiated early return 4 additional aircraft 2003 result estimated 24 million reduction related restructuring reserves result one aircraft 37aircraft fleet grounded connection emery’s restructuring charges remained lease february 28 2003 restructuring charges recognized emery 2001 reflect cnf’s estimate costs terminating ewa’s air carrier operations restructuring emery’s business related matters cnf believes estimate adequate cover costs based information currently available assumptions management believes reasonable circumstances however assurance actual costs differ estimate difference would recognized additional expense income period determination made 4 accrued liabilities december 31 accrued liabilities consisted following 5 debt financing arrangements december 31 longterm debt guarantees consisted following revolving credit facility cnf 385 million revolving credit facility matures july 3 2006 revolving credit facility available cash borrowings issuance letters credit cnf inc notes consolidated financial statementscontinued 385 million december 31 2002 2001 borrowings outstanding facility december 31 2002 2441 million letters credit outstanding leaving 1409 million available capacity additional letters credit cash borrowings subject compliance financial covenants customary conditions borrowing total letters credit outstanding december 31 2002 2368 million provided collateral cnf workers’ compensation vehicular selfinsurance programs borrowings agreement bear interest rate based upon specified indices plus margin dependent cnf’s credit rating december 31 2001 cnf cash borrowings outstanding agreement credit agreement contains various restrictive covenants including limitation incurrence additional indebtedness requirement specified levels consolidated net worth fixedcharge coverage due large part fourthquarter 2001 restructuring charge incurred connection cessation ewa’s air carrier operations described note 3 “restructuring charges” cnf required amend revolving credit agreement december 2001 order remain compliance financial covenants agreement amended credit agreement provides cnf’s senior unsecured longterm debt securities rated less investment grade standard poor’s moody’s cnf including principal subsidiaries required pledge accounts receivable collateral secure borrowings amounts due revolving credit facility subject specified limitations aggregate borrowings amounts due revolving credit facility exceed specified amount cnf including principal subsidiaries required provide additional collateral agent bank credit facility may reasonably request lowest investment grade rating standard poor’s moody’s “bbb” “baa3” respectively cnf’s senior unsecured longterm debt currently rated “bbb” standard poor’s stable outlook “baa3” moody’s negative outlook result reduction cnf’s senior unsecured longterm debt ratings credit rating agencies require cnf including principal subsidiaries pledge collateral secure credit facility described extent cnf including principal subsidiaries pledges collateral secure amounts due debt facility cnf including principal subsidiaries may also required pledge collateral equally ratably secure 200 million aggregate principal amounts 8 78 notes due 2010 100 million aggregate principal amount 735 notes due 2005 aggregate principal amount notes due 2009 issued cnf’s thrift stock plan described uncommitted credit facilities cnf uncommitted unsecured credit facilities totaling 913 million december 31 2002 available support letters credit bank guarantees overdraft facilities date total 666 million letters credit outstanding facilities thrift stock plan notes cnf guarantees notes issued cnf’s thrift stock plan tasp december 31 2002 498 million aggregate principal amount series tasp notes outstanding bearing interest rate 600 per annum maturing january 1 2006 620 million aggregate principal amount series b tasp notes outstanding bearing interest rate 854 per annum maturing january 1 2009 series notes contain financial covenants require cnf maintain minimum amounts net worth fixedcharge coverage holders series b notes issued cnf’s tasp right require cnf repurchase notes among things moody’s standard poor’s publicly rated cnf’s longterm senior debt less investment grade unless within 45 days cnf shall obtained guarantee letter credit permitted credit enhancement otherwise credit rating notes least “a” moody’s standard poor’s another nationally recognized rating agency selected holders notes shall maintain rating notes “a” better thereafter result decrease cnf’s longterm senior debt ratings credit rating agencies would give holders series b tasp notes right require cnf repurchase notes unless cnf able obtain appropriate credit enhancement described assurance cnf would able occurrence event condition requiring cnf inc notes consolidated financial statementscontinued cnf repay tasp notes could likely material adverse effect cnf’s financial condition cash flows results operations 8 78 notes due 2010 200 million aggregate principal amount 8 78 notes contain certain covenants limiting incurrence additional liens prior termination december 2002 cnf designated four interest rate swap derivatives fair value hedges mitigate effects interest rate volatility fair value cnf’s 8 78 notes due 2010 2002 estimated fair value fair value hedges prior termination increased 193 million 398 million offsetting equal increase carrying amount hedged fixedrate longterm debt december 2002 cnf terminated fair value hedges consistent sfas 133 398 million cumulative adjustment carrying amount 8 78 notes due 2010 accreted future earnings effective interest rate debt extinguished time unamortized fairvalue adjustment would fully recognized earnings absent terminated fair value hedges 8 78 notes due 2010 cease adjusted fluctuations fair value attributable changes interest rates including accretion fairvalue adjustment amortization discount recognized upon issuance interest expense 8 78 notes due 2010 recognized annual effective interest rate 56 735 notes due 2005 contain certain covenants limiting incurrence additional liens 2002 conway acquired real property part assumption 41 million note payable secured acquired property note payable two equal principal payments january 2003 2004 cnf’s consolidated interest expense presented statements consolidated operations net capitalized interest 455000 2002 864000 2001 4636000 2000 aggregate annual maturities sinking fund requirements longterm debt guarantees next five years ending december 31 12134000 2003 14034000 2004 112700000 2005 33600000 2006 20700000 2007 december 31 2002 2001 estimated fair value longterm debt 459251000 447208000 respectively fair values estimated based quoted market prices current rates offered debt similar terms maturities 6 leases cnf subsidiaries obligated noncancelable leases principal capital lease covers sorting facility dayton ohio hub financed city dayton ohio revenue bonds consist 46 million series bonds due february 2018 interest rate 5625 remaining 62 million due 2009 bear rates interest 605 620 call provisions cnf inc notes consolidated financial statementscontinued future minimum lease payments initial remaining noncancelable lease terms excess one year december 31 2002 follows certain operating capital leases contain financial covenants restrictive covenants require cnf maintain minimum amounts fixedcharge coverage net worth certain operating leases also contain provisions allow cnf extend leases various renewal periods rental expense operating leases comprised following december 31 2002 cnf one interest rate swap agreement designated cash flow hedge mitigate effects interest rate volatility floatingrate operating lease payments interest rate swap expires 2003 effectively converts 205 million floatingrate lease obligations fixedrate obligations interest rate differentials paid received recognized life agreement adjustments operating expense see note 9 “derivative instruments hedging activities” december 31 2002 conway party operating lease agreement intends exercise purchase option acquire revenue equipment estimated fair value 153 million anticipated equipment acquisition expected reported capital expenditure 2003 cnf inc notes consolidated financial statementscontinued 7 income taxes components provision benefit income taxes years ended december 31 follows income taxes provided foreign operations based upon various tax laws rates countries operations conducted components deferred tax assets liabilities december 31 related following deferred tax assets liabilities consolidated balance sheets classified based related asset liability creating deferred tax deferred taxes related specific asset liability classified based estimated period reversal although realization assured management believes likely deferred tax assets realized cnf inc notes consolidated financial statementscontinued income tax provision benefit varied amounts calculated applying us statutory income tax rate pretax income loss set forth following reconciliation cumulative undistributed earnings cnf’s foreign subsidiaries approximately 468 million december 31 2002 remitted subject withholding tax reinvested indefinitely respective foreign subsidiaries’ operations unless becomes advantageous tax foreign exchange reasons remit earnings therefore withholding us taxes provided amount withholding tax would payable remittance undistributed earnings would approximate 37 million august 2002 cnf entered settlement agreements irs pursuant parties settled issues related deductibility aircraft maintenance costs years 1987 2000 open issues irs examinations years 1987 1996 discussed note 14 “commitments contingenciesirs matters” cnf reversed tax provision related tax liabilities previously recognized issue resulting 250 million tax benefit third quarter 2002 8 preferred securities subsidiary trust june 11 1997 cnf trust delaware business trust wholly owned cnf issued 2500000 250 term convertible securities series tecons public gross proceeds 125 million combined proceeds issuance tecons issuance cnf common securities trust invested trust 1289 million aggregate principal amount 5 convertible subordinated debentures due june 1 2012 debentures issued cnf debentures sole assets trust holders tecons entitled receive cumulative cash distributions annual rate 250 per tecons equivalent rate 5 per annum stated liquidation amount 50 per tecons cnf guaranteed subordinated basis distributions payments due tecons extent trust funds available therefore subject certain limitations “guarantee” guarantee taken together obligations cnf debentures indenture pursuant debentures issued amended restated declaration trust including obligations pay costs fees expenses debts obligations trust respect tecons common securities trust provide full unconditional guarantee amounts due tecons debentures redeemable cash option cnf whole part june 1 2000 price equal 103125 principal amount declining annually par redeemed june 1 cnf inc notes consolidated financial statementscontinued 2005 plus accrued unpaid interest certain circumstances relating federal income tax matters debentures may redeemed cnf 100 principal plus accrued unpaid interest upon redemption debentures like aggregate liquidation amount tecons redeemed tecons stated maturity date although subject mandatory redemption upon maturity debentures june 1 2012 upon earlier redemption tecons convertible time prior close business june 1 2012 option holder shares cnf’s common stock conversion rate 125 shares cnf’s common stock tecons subject adjustment certain circumstances 9 derivative instruments hedging activities effective january 1 2001 cnf adopted sfas 133 “accounting derivative instruments hedging activities” amended sfas 137 sfas 138 sfas 133 establishes accounting reporting standards requiring every derivative instrument defined recorded balance sheet either asset liability measured fair value changes fair value recognized currently earnings unless specific hedge accounting criteria met qualifying hedges allow derivative’s gain loss offset related results hedged item income statement deferred comprehensive income loss hedged item recognized earnings cnf exposed variety market risks including effects interest rates commodity prices foreign currency exchange rates credit risk cnf enters derivative financial instruments circumstances warrant hedge underlying asset liability future cash flow exposure related risk additionally designated hedges high correlation underlying exposure fluctuations value derivatives offset reciprocal changes underlying exposure cnf formally documents hedge relationships including identifying hedge instruments hedged items well risk management objectives strategies entering hedge transaction hedge inception least quarterly thereafter cnf assesses whether derivatives effective offsetting changes either cash flows fair value hedged item derivative ceases highly effective hedge cnf discontinue hedge accounting gains losses derivative instrument would recognized earnings period longer qualifies hedge accounting derivatives designated cash flow hedges changes derivative’s fair value recognized comprehensive income loss hedged item recognized earnings change fair value resulting ineffectiveness recognized immediately earnings derivatives designated fair value hedges changes derivative’s fair value recognized earnings offset changes fair value hedged item recognized earnings extent derivative effective accordance transition provisions sfas 133 first quarter 2001 cnf recorded assets transition adjustment 206 million recognize estimated fair value interest rate swap derivatives 49 million 30 million tax transition adjustment accumulated comprehensive income loss recognize estimated fair value interest rate swap derivatives designated cash flow hedges 157 million transition adjustment longterm debt recognize estimated effect interest rate changes fair value fixedrate debt hedged interest rate swap derivatives designated fair value hedges december 31 2002 cnf held three interest rate swap derivatives initially entered cash flow hedges mitigate effects interest rate volatility floatingrate operating lease payments cnf inc notes consolidated financial statementscontinued december 31 2002 one three outstanding interest rate swap derivatives qualified hedge accounting sfas 133 december 31 2002 fair value interest rate swap designated cash flow hedge reported liability 06 million 04 million tax connection restructuring charges described ewa made payments fourth quarter 2002 settle obligation pay certain future floatingrate aircraft lease payments previously hedged two cnf’s interest rate swap derivatives consequently december 31 2002 interest rate swap derivatives qualify hedge accounting sfas 133 therefore freestanding derivatives estimated fair value freestanding derivatives based converting 626 million future notional payments floating rate fixed rate reported 39 million liability emery’s restructuring reserves december 31 2002 terminated changes estimated fair value freestanding interest rate swap derivatives reported nonoperating income expense prior termination december 2002 cnf designated four interest rate swap derivatives fair value hedges mitigate effects interest rate volatility fair value fixedrate longterm debt 2002 estimated fair value fair value hedges prior termination increased 193 million 398 million offsetting equal increase carrying amount hedged fixedrate longterm debt december 2002 cnf terminated fair value hedges accordingly cnf december 2002 received cash 310 million settlement three four interest rate swaps recognized receivable december 31 2002 fourth swap terminated december 2002 settled cash january 2003 prior termination fair value derivative instruments included assets consolidated balance sheets consistent sfas 133 398 million cumulative adjustment carrying amount longterm debt accreted future earnings effective interest rate debt extinguished time unamortized fairvalue adjustment would fully recognized earnings absent terminated fair value hedges longterm debt cease adjusted fluctuations fair value attributable changes interest rates 10 shareholders’ equity series b preferred stock 1989 board directors designated series 1100000 preferred shares series b cumulative convertible preferred stock 01 stated value held cnf thrift stock plan tasp series b preferred stock convertible common stock described note 12 “thrift stock plan” rate 471 shares share preferred stock subject antidilution adjustments certain circumstances holders series b preferred stock entitled vote common stock entitled number votes circumstances equal product 13 multiplied b number shares common stock series b preferred stock convertible record date vote holders series b preferred stock also entitled vote separately class certain matters tasp trustee required vote allocated shares based upon instructions participants unallocated shares voted proportion voting instructions received participants allocated shares accumulated comprehensive income loss sfas 130 “reporting comprehensive income” requires companies report measure changes equity except resulting investment owners distribution owners financial statement period recognized cnf disclosed comprehensive income loss statements consolidated shareholders’ equity cnf inc notes consolidated financial statementscontinued following summary components accumulated comprehensive loss 11 benefit plans pension plans cnf noncontributory defined benefit pension plan covering noncontractual employees united states cnf’s annual pension expense contributions based independent actuarial computation cnf’s funding policy evaluate tax cash position plan’s funded status maximize tax deductibility contributions year benefits plan based career average employee’s five highest consecutive annual salaries approximately 70 plan assets invested publicly traded equity securities approximately 23 invested publicly traded fixedincome securities remainder invested temporary cash investments real estate funds investment capital funds cnf also supplemental retirement program provides additional benefits compensation excluded basic plan annual pension expense programs based independent actuarial computations using assumptions consistent plan december 31 2002 2001 accrued benefit obligation 26920000 24040000 respectively net annual pension expense 4716000 2002 5540000 2001 4951000 2000 recent declines equity markets caused market value defined benefit pension plan assets decrease result accumulated benefit obligation abo cnf’s defined benefit pension plans exceeded fair value plan assets december 31 2002 accordance accounting principles generally accepted united states cnf recorded additional minimum pension liability adjustment 2002 increased accrued pension benefit cost cnf’s qualified nonqualified defined benefit pension plans 458 million increased intangible pension asset 67 million reduced shareholders’ equity 195 million netoftax increase accumulated comprehensive loss post retirement medical plan cnf retiree medical plan provides benefits noncontractual employees least 55 years age 10 years service retiree medical plan limits benefits participants eligible retire january 1 1993 defined dollar amount based age years service provide employersubsidized retiree medical benefits employees hired january 1 1993 cnf inc notes consolidated financial statementscontinued following sets forth changes pension post retirement medical benefit obligations determination accrued benefit costs included employee benefits consolidated balance sheets december 31 net periodic benefit expense years ended december 31 includes following weightedaverage assumptions discount rate compensation increase reported used calculation accrued benefit cost december 31 however assumption 95 expected longterm rate return assets reported used calculation periodic cnf inc notes consolidated financial statementscontinued pension expense 2002 2001 rather determination accrued pension benefit cost december 31 2002 2001 respectively 2003 pension expense calculated 675 discount rate 400 assumed rate compensation increase expected longterm rate return plan assets 90 declined expected return 95 used determination pension expense 2002 due primarily recent decline equity markets december 31 2002 1025 annual rate increase per capita cost covered medical benefits assumed 2003 assumed decrease gradually 55 2009 remain level thereafter 55 annual rate increase per capita cost dental vision benefits assumed 2003 assumed remain level thereafter onepercentagepoint change assumed health care cost trend rates would change aggregate service interest cost approximately 300000 accumulated benefit obligation approximately 5000000 compensation plans cnf subsidiaries adopted various plans relating achievement specific goals provide incentive compensation designated employees total compensation earned salaried participants plans 69170000 8712000 36134000 2002 2001 2000 respectively hourly participants 40202000 7308000 30612000 2002 2001 2000 respectively 12 thrift stock plan cnf sponsors cnf thrift stock plan tasp voluntary defined contribution plan leveraged esop feature noncontractual us employees 1989 tasp borrowed 150000000 purchase 986259 shares cnf’s series b cumulative convertible preferred stock issuable tasp trustee tasp satisfies cnf’s contribution requirement matching 50 first 3 participant’s basic compensation cnf contributions tasp 12841000 2002 12314000 2001 13282000 2000 form common preferred stock series b preferred stock earns dividend 1293 per share used repay tasp debt shortfall paid cash cnf dividends preferred shares deductible income tax purposes accordingly reflected net tax benefits statements consolidated operations allocation preferred stock participants’ accounts based upon ratio current year’s principal interest payments total tasp debt since cnf guarantees debt reflected longterm debt guarantees consolidated balance sheets tasp guarantees reduced principal paid share preferred stock convertible common stock upon employee ceasing participation plan rate generally equal number shares common stock could purchased 15210 less minimum conversion rate 471 shares common stock share series b preferred stock deferred compensation expense recognized preferred shares allocated participants equivalent cost preferred shares allocated tasp interest expense year reduced dividends paid tasp deferred compensation expense 7597000 7282000 6998000 recognized 2002 2001 2000 respectively december 31 2002 tasp owned 784007 shares series b preferred stock 356778 shares allocated employees december 31 2002 cnf reserved authorized unissued common stock adequate satisfy conversion feature series b preferred stock cnf inc notes consolidated financial statementscontinued 13 stockbased compensation stock options officers nonemployee directors granted options cnf’s stock option plans purchase common stock cnf prices equal market value stock date grant options granted prior june 30 1998 generally exercisable one year date grant stock option grants awarded subsequent june 30 1998 generally vest ratably four years following grant date options generally expire 10 years dates grant cnf accounts stockbased compensation utilizing intrinsic value method accordance provisions accounting principles board opinion 25 “accounting stock issued employees” pro forma information regarding net income net income per share cnf applied fair value method recognition provisions sfas 123 “accounting stockbased compensation” refer note 1 “principal accounting policiesstockbased compensation” weightedaverage grantdate fair value options granted 2002 2001 2000 1391 1171 1426 per share respectively estimated using blackscholes option pricing model following assumptions following summary stock option data cnf inc notes consolidated financial statementscontinued following summary stock options outstanding exercisable december 31 2002 restricted stock terms cnf’s stockbased compensation plans shares cnf’s common stock awarded five executive officers 2002 awarded annually directors restrictions shares issued executive officers generally expire onethird per year dependent achievement certain market prices cnf’s common stock shares valued market price cnf’s common stock date award following table summarizes information restricted stock awards years ended december 31 weightedaverage fair value shares awarded 2000 excludes 15276 shares awarded settlement pension liabilities due certain directors total compensation expense recognized restricted stock 2002 1010000 cnf reversed net compensation expense recognized restricted stock amount 3300000 2001 total compensation expense recognized restricted stock 2000 358000 december 31 2002 cnf 644513 common shares available grant stock options restricted stock stockbased incentive compensation 14 commitments contingencies irs matters august 2002 cnf entered settlement agreements irs pursuant parties settled issues related deductibility aircraft maintenance costs years 1987 2000 open issues irs examinations years 1987 1996 cnf reversed tax provision related tax liabilities previously recognized issue resulting 250 million tax benefit third quarter 2002 result settlement agreements cnf required make additional payments irs 934 million payment made respect issues 2000 certain issues remain open years 1997 2000 management believe resolution issues likely material adverse effect cnf’s financial condition cash flows results operations spinoff cfc december 2 1996 cnf completed spinoff consolidated freightways corporation “cfc” cnf’s shareholders connection spinoff cfc cnf agreed indemnify certain states insurance companies sureties failure cfc pay certain workers’ compensation cnf inc notes consolidated financial statementscontinued tax public liability claims pending september 30 1996 cases indemnities supported letters credit surety bonds cnf liable issuing bank surety company september 2002 cfc filed bankruptcy ceased us operations following commencement bankruptcy proceeding cfc ceased making payments respect workers’ compensation public liability claims cnf required take payment claims expects demands payment likely made respect remaining claims cnf estimates aggregate amount claims plus costs 250 million result cnf accrued additional reserves 2002 primarily accrued claims costs consolidated balance sheets recognized 2002 thirdquarter fourthquarter losses discontinuance 130 million net 83 million income taxes 23 million net 14 million income taxes respectively cnf intends seek reimbursement cfc bankruptcy proceeding amounts cnf pays respect claims although assurance cnf successful recovering portion payments addition cfc time spinoff remains party certain multiemployer pension plans covering current former employees cessation us operations result cfc’s “complete withdrawal” within meaning applicable federal law multiemployer plans point become obligated federal law pay share unfunded vested benefits plans possible trustees cfc’s multiemployer pension plans may assert claims cnf liable amounts owing plans result cfc’s withdrawal plans assurance claims would material detailed discussion matter see item 7 “management’s discussion analysis” “liquidity capital resourcesdiscontinued operationsspinoff cfc” result matters discussed item 7 “management’s discussion analysis” cnf provide assurance matters material adverse effect cnf’s financial condition cash flows results operations cnf defendant various lawsuits incidental businesses opinion management ultimate outcome actions material impact cnf’s financial condition cash flows results operations december 31 2002 conway committed purchase tractors totaling 276 million 15 segment reporting consistent sfas 131 “disclosures segments enterprise related information” cnf discloses segment information manner components organized making operating decisions assessing performance allocating resources cnf’s principal businesses consist conway transportation services menlo worldwide however financial reporting purposes cnf divided five reporting segments operating results conway reported one reporting segment menlo worldwide divided three reporting segments emery forwarding menlo worldwide logistics menlo worldwide menlo worldwide reporting segment includes vector scm joint venture owned cnf general motors serves lead logistics manager worldwide general motors also certain corporate activities results road systems trailer manufacturer reported cnf reporting segment cnf inc notes consolidated financial statementscontinued financial data intersegment revenue related operating income eliminated reconcile consolidated revenue operating income management evaluates segment performance primarily based revenue operating income therefore items included pretax income consisting primarily interest income expense reported segment results corporate expenses generally allocated based measurable services provided segment general corporate expenses based segment revenue capital identifiable corporate assets consist primarily deferred charges assets property equipment deferred taxes certain corporate assets used provide shared data processing administrative services allocated individual segments cnf inc notes consolidated financial statementscontinued cnf inc notes consolidated financial statementscontinued unusual andor nonrecurring items cnf’s results operations included various items affected yeartoyear comparability reported operating income loss reporting segments cnf identified “unusual andor nonrecurring” three years ended december 31 2002 items summarized table identified cnf’s management based part materiality relevant reporting segment certain items fully discussed elsewhere accompanying notes consolidated financial statements terrorist attacks emery’s operating results 2001 adversely affected terrorist attacks september 11 2001 contractors providing air carrier service emery grounded september 11 12 resume service evening september 13 response terrorist attacks us congress passed air transportation safety system stabilization act “act” 15 billion emergency economic assistance package intended mitigate financial losses air carrier industry legislation provides 5 billion direct loss reimbursement 10 billion federal loan guarantees credits expands war risk insurance coverage air carriers provides government assistance shortterm increases insurance premiums march 2002 emery received 119 million payment act resulting recognition 99 million firstquarter net gain 2002 payment made emery act subject audit emery seeking additional payments act express mail contract effective august 26 2001 usps terminated “for convenience” contract ewa transported express mail classes mail usps “express mail contract” described note 2 “discontinued operations” ewa received 700 million provisional payment usps termination costs claims related express mail contract september 26 2001 700 million provisional payment included deferred credits cnf’s cnf inc notes consolidated financial statementscontinued consolidated balance sheets december 31 2001 pending settlement usps time would used recover remaining costs related express mail contract subsequent settlement agreement usps december 17 2002 paid ewa additional 50 million settle ewa’s express mail contract termination costs including reimbursement certain aircraft assets result final 50 million settlement payment emery december 2002 fully recovered remaining express mail assets recorded 57 million net gain 2001 emery recognized revenue 1170 million transportation mail express mail contract compared 2291 million 2000 operating income express mail contract 2001 63 million compared 282 million 2000 geographic data geographic reporting freight transportation revenues allocated international locations except canada one shipment origination destination locations outside united states canada operates integrated part north america freight operations allocated 50 percent revenue either origination destination location canada location united states international location revenues contract services allocated country services performed longlived assets outside united states immaterial periods presented cnf inc notes consolidated financial statementscontinued 16 quarterly financial data cnf inc subsidiaries quarterly financial data unaudited dollars thousands except per share data cnf inc notes consolidated financial statementscontinued reduced preferred stock dividends b includes 110 million net gain 67 million tax 012 per diluted share sale properties 99 million net gain 60 million tax 011 per diluted share payment air transportation safety system stabilization act 19 million net gain 11 million tax 002 per diluted share early contract termination c includes 36 million loss 22 million tax 004 per diluted share business failure cfc includes 250 million 044 per diluted share reversal accrued taxes related settlement irs aircraft maintenance issues e includes 29 million netoftax gain 005 per diluted share final priority mail settlement 130 million netoftax loss 023 per diluted share business failure cfc f includes 57 million gain 35 million tax 006 per diluted share final express mail settlement g includes 37 million loss 22 million tax 004 per diluted share equity ventures h includes 23 million netoftax loss 004 per diluted share business failure cfc includes 3405 million loss 2139 million tax june 467 per diluted share 3117 million loss 1921 million tax december 393 per diluted share restructuring charges 47 million loss june 29 million tax 006 per diluted share legal settlement returned aircraft j includes 316 million loss 193 million tax june 040 per diluted share 63 million loss 38 million tax july 008 per diluted share 95 million loss 59 million tax december 012 per diluted share business failure customer duplicate airhaul costs 170 million 104 million tax third quarter 021 per diluted share 388 million 239 million tax fourth quarter 049 per diluted share k includes 53 million loss 33 million tax 007 per diluted share equity ventures item 9item 8 financial statements supplementary data cnf inc consolidated balance sheets accompanying notes consolidated financial statements integral part statements cnf inc consolidated balance sheets accompanying notes consolidated financial statements integral part statements cnf inc statements consolidated operations accompanying notes consolidated financial statements integral part statements cnf inc statements consolidated cash flows accompanying notes consolidated financial statements integral part statements cnf inc statements consolidated shareholders equity accompanying notes consolidated financial statements integral part statements cnf inc notes consolidated financial statements 1 principal accounting policies basis presentation principles consolidation consolidated financial statements include accounts cnf inc subsidiaries “cnf” organization cnf inc subsidiaries provide supply chain management services businesstobusiness shipments land air sea throughout world cnf’s principal businesses consist conway transportation services “conway” menlo worldwide however financial reporting purposes cnf divided five reporting segments operating results conway reported one reporting segment menlo worldwide divided three reporting segments menlo worldwide forwarding “forwarding” menlo worldwide logistics “logistics” menlo worldwide also certain corporate activities results road systems trailer manufacturer reported separate cnf reporting segment conway provides nextday secondday transcontinental freight trucking throughout us canada puerto rico mexico well expedited transportation air freight forwarding contract logistics warehousing truckload brokerage services menlo worldwide group businesses formed effective 2002 includes combined operating results forwarding logistics menlo worldwide reporting segments forwarding provides timedefinite domestic international air freight ocean forwarding services customs brokerage trade services logistics develops integrated contract logistics solutions including management complex distribution networks supply chain engineering consulting menlo worldwide reporting segment includes operating results vector scm “vector” joint venture general motors “gm” serves lead logistics manager gm cnf reporting segment includes operating results road systems trailer manufacturer certain cnf corporate activities discussion cnf’s discontinued operations including terminated priority mail contract us postal service “usps” matters relating 1996 spinoff consolidated freightways corporation “cfc” refer note 2 “discontinued operations” estimates management makes estimates assumptions preparing financial statements conformity accounting principles generally accepted united states estimates assumptions affect amounts reported accompanying financial statements notes thereto actual results could differ estimates recognition revenues cnf recognizes revenue services performed persuasive evidence arrangement exists revenue amount fixed determinable collectibility probable cnf recognizes allocation freight transportation revenue reporting periods based relative transit time reporting period expenses recognized incurred revenue contracts recognized accordance contractual terms services provided cash equivalents shortterm interestbearing instruments maturities three months less date purchase including investments municipal bonds auction rate securities commercial paper money market instruments 283491000 208000000 december 31 2003 2002 respectively considered cash equivalents cnf inc notes consolidated financial statementscontinued trade accounts receivable net trade accounts receivable net allowances 22688000 22402000 december 31 2003 2002 respectively property plant equipment property plant equipment depreciated primarily straightline basis estimated useful lives generally 25 years buildings improvements 10 years less aircraft 5 10 years tractor trailer equipment 3 10 years equipment leasehold improvements amortized shorter terms respective leases useful lives assets expenditures equipment maintenance repairs charged operating expenses incurred betterments capitalized gains losses sales equipment property recorded operating expenses capitalized software capitalized software net consists costs purchase develop internaluse software amortization capitalized software computed itembyitem basis period 3 10 years depending estimated useful life software amortization expense related capitalized software 19815000 2003 18498000 2002 19098000 2001 accumulated amortization december 31 2003 2002 82574000 70471000 respectively goodwill intangible assets effective january 1 2002 cnf adopted sfas 142 “goodwill intangible assets” sfas 142 specifies goodwill indefinitelived intangible assets amortized instead subject annual impairment test cnf utilizes thirdparty independent valuation consultant perform goodwill impairment test annual basis fourth quarter annual tests certain circumstances based impairment test december 31 2003 cnf required record charge goodwill impairment accordance provisions sfas 142 cnf ceased goodwill amortization associated forwarding reporting segment prior adoption sfas 142 forwarding amortized goodwill 102 million 2001 following table indicates impact net income loss earnings loss per share nonamortization provisions sfas 142 applied beginning january 1 2001 impairment longlived assets cnf reviews longlived assets certain identifiable intangibles impairment whenever events circumstances indicate carrying amount asset may recoverable impairment loss recognized estimated future undiscounted cash flows expected result cnf inc notes consolidated financial statementscontinued use asset eventual disposition less carrying amount asset considered recoverable amount equal excess carrying amount estimated fair value charged asset corresponding expense income statement see note 3 “restructuring plans” information concerning impairment charges recognized 2001 income taxes cnf follows liability method accounting income taxes accrued claims costs cnf provides undiscounted costs selfinsured medical casualty liability vehicular cargo workers’ compensation claims costs estimated year based historical claims unfiled claims relating operations conducted december 31 actual costs may vary estimates based trends losses filed claims estimated incurred filed longterm portion accrued claims costs relate primarily workers’ compensation vehicular claims estimated payable several years cnf participates reinsurance pool reinsure mostly workers’ compensation vehicular liabilities participant pool cedes losses pool assumes equivalent amount losses reinsurance relieve cnf liabilities original policy however opinion management potential exposure cnf nonpayment minimal foreign currency translation adjustments resulting translating foreign functional currency financial statements us dollars included foreign currency translation adjustment statements consolidated shareholders’ equity transaction gains losses arise exchange rate fluctuations transactions denominated currency local currency included results operations earnings loss per share eps basic eps continuing operations computed dividing reported net income loss continuing operations preferred stock dividends weightedaverage common shares outstanding calculation diluted eps continuing operations calculated follows cnf inc notes consolidated financial statementscontinued year ended december 31 2001 convertible securities stock options antidilutive result assumed shares related addback net loss continuing operations ifconverted method excluded calculation diluted eps securities dilutive assumed shares ifconverted method would follows stock options 461040 shares series b preferred stock 3794159 preferred securities subsidiary trust 3125000 shares stockbased compensation described note 14 “stockbased compensation” officers nonemployee directors granted options cnf’s stock option plans purchase common stock cnf prices equal market value stock date grant cnf accounts stockbased compensation utilizing intrinsic value method accordance provisions accounting principles board opinion 25 “accounting stock issued employees” accordingly compensation expense recognized fixedoption plans exercise prices employee stock options equal exceed market prices underlying stock dates grant following table sets forth effect net income loss earnings loss per share continuing operations preferred stock dividends cnf applied fairvalue based method recognition provisions sfas 123 “accounting stockbased compensation” stockbased compensation effects applying sfas 123 may indicative future amounts derivative instruments hedging activities cnf adopted sfas 133 “accounting derivative instruments hedging activities” effective january 1 2001 30 million aftertax gain representing cumulative effect adopting new accounting standard decreased accumulated comprehensive loss fully discussed note 10 “derivative instruments hedging activities” equitymethod investments discussed fully note 4 “investment unconsolidated joint venture” menlo worldwide llc owns majority equity interest vector joint venture gm accounted equitymethod investment addition cnf provided venture capital funding primarily 2001 2000 various companies focused developing technologybased solutions transportation industry cnf’s investment companies accounted cost equitymethod investments cnf inc notes consolidated financial statementscontinued written 2003 2002 2001 reported nonoperating losses miscellaneous net consolidated statements operations december 31 2003 cnf’s remaining net investment ventures 17 million new accounting standards january 2003 fasb issued interpretation 46 “consolidation variable interest entities interpretation arb 51” “fin 46” fin 46 requires specialpurpose entities designated either votinginterest entity variableinterest entity “vie” vie entity equity investors characteristics controlling financial interest sufficient equity risk vie finance activities without additional subordinated financial support parties vie required consolidated primary beneficiary effectively disperse risks among parties involved primary beneficiary vie party absorbs majority vie’s expected losses receives majority expected residual returns implementation fin 46 required periods beginning june 15 2003 however october 2003 fasb deferred effective date applying fin 46 vies created february 1 2003 end first interim period ending december 15 2003 december 2003 fasb revised fin 46 “fin 46r” incorporate certain revisions including requirement disregard certain rights determining whether entity primary beneficiary vie fin 46r cnf primary beneficiary subsidiary trust 1250 million term convertible securities “tecons” outstanding december 31 2003 result cnf required deconsolidate tecons issued june 1997 currently reported cnf’s consolidated balance sheets companyobligated mandatorily redeemable preferred securities subsidiary trust holding solely convertible debentures company quarter ending march 31 2004 cnf report 1289 million convertible subordinated debentures held subsidiary trust longterm debt also report 39 million equity ownership subsidiary trust investment may 2003 fasb issued sfas 150 “accounting certain financial instruments characteristics liabilities equity” “sfas 150” sfas 150 establishes classification standards financial instruments characteristics liabilities equity cnf adopted sfas 150 effective july 1 2003 impact reclassification certain amounts prior years’ financial statements reclassified conform currentyear presentation 2 discontinued operations priority mail contract result termination priority mail contract described results operations cash flows priority mail operations segregated classified discontinued operations november 3 2000 emery worldwide airlines “ewa” us postal service “usps” announced agreement “termination agreement” terminate contract transportation sortation priority mail “priority mail contract” described claims relating amounts owed ewa priority mail contract fully settled connection payments usps ewa 2002 2001 terms termination agreement usps agreed reimburse ewa priority mail contract termination costs january 7 2001 usps paid ewa 600 million toward termination costs july 3 2002 usps paid ewa 60 million fully settle ewa’s priority mail contract termination costs resulted 2002 thirdquarter gain discontinuance 29 million net 18 million income taxes cnf inc notes consolidated financial statementscontinued september 26 2001 ewa entered agreement usps settle claims relating underpayment amounts owed ewa priority mail contract usps “settlement agreement” settlement agreement ewa received 2350 million payment usps september 28 2001 settle nontermination claims priority mail contract well 700 million provisional payment termination costs related separate express mail contract usps claims recover costs operating contract well profit interest thereon priority mail termination agreement described unaffected settlement agreement result payment settlement agreement unbilled revenue contract fully recovered ewa third quarter 2001 recognized gain discontinuance 390 million net 249 million income taxes ewa filed claim redetermined higher prices third quarter 1999 termination priority mail contract january 7 2001 ewa recorded revenue amounts costs incurred ewa reported priority mail revenue 102 million 2001 net current liabilities discontinued priority mail operations 16 million 32 million december 31 2003 2002 respectively included accrued liabilities consolidated balance sheets spinoff cfc december 2 1996 cnf completed spinoff consolidated freightways corporation “cfc” cnf’s shareholders cnf recognized 2002 thirdquarter fourthquarter losses discontinuance 130 million net 83 million income taxes 23 million net 14 million income taxes respectively connection bankruptcy cfc september 2002 detailed discussion matter see note 15 “commitments contingencies” item 7 “management’s discussion analysis liquidity capital resources discontinued operations spinoff cfc” 3 restructuring plans 2001 restructuring plan june 2001 forwarding began operational restructuring align management’s estimates future business prospects domestic heavy air freight address changes market conditions deteriorated due primarily slowing domestic economy loss ewa’s contracts usps transport express mail priority mail 3405 million secondquarter restructuring charge 2001 consisted primarily noncash impairment charges 2780 million 625 million estimated future cash expenditures related primarily return lessors certain aircraft leased ewa based issues identified inspections conducted federal aviation administration “faa” august 13 2001 ewa required suspend air carrier operations part interim settlement agreement faa result ewa furloughed approximately 400 pilots crew members forwarding made arrangements continue service customers utilizing aircraft operated several air carriers primarily response faa action worsening global economic downturn forwarding reevaluated restructuring plan december 5 2001 cnf announced forwarding formerly known “emery” “emery forwarding” 2002 would become part cnf’s new menlo worldwide group supply chain services providers north america would utilize aircraft operated air carriers instead ewa operating fleet aircraft ewa would permanently cease air carrier operations connection revised restructuring plan fourth quarter 2001 forwarding recognized additional restructuring charges 3117 million including 3056 million planned disposal leased aircraft cessation ewa’s remaining operations costs 61 million employee separation costs 157 ewa’s nonpilot employees connection cnf’s announcement cessation ewa’s air carrier operations december 5 2001 ewa terminated employment pilots crew members bringing total number cnf inc notes consolidated financial statementscontinued terminated employees 2001 800 pilots crew members represented air line pilots association “alpa” union collective bargaining agreement subsequently alpa filed grievance behalf pilots crew members protesting cessation ewa’s air carrier operations forwarding’s use air carriers alpa matters subject binding arbitration based cnf’s current evaluation management believes provided estimated exposure related alpa matters however cnf cannot predict certainty ultimate outcome matters following fourthquarter restructuring charge 2001 forwarding’s cash flows reflected cost air carriers provide service forwarding’s north american customers well lease payments costs associated forwarding’s restructuring plan however forwarding’s operating expenses reflected cost aircraft operated carriers included scheduled rental payments return costs restructuringrelated payments expenses accrued connection restructuring charges forwarding’s restructuring reserves aircraft costs declined 348 million december 31 2003 677 million december 31 2002 due primarily aircraft lease payments return costs none 37 aircraft grounded connection forwarding’s restructuring plan remained lease december 31 2003 restructuring reserves december 31 2003 consisted primarily cnf’s estimated exposure related labor matters arbitration described well estimated remaining restructuringrelated obligations following table sets forth cumulative activity related forwarding’s 2001 restructuring plan 2003 restructuring plan response continued declines north american air freight revenue forwarding continued restructuring operations fourth quarter 2003 primarily reduce costs north american freight service center network restructuring plan forwarding closed nine service centers located markets transportation shipments service centers customers could served cost effectively cartage agents connection restructuring plan forwarding recognized 78 million charge primarily accrual future lease payments closed facilities employee termination costs connection 2003 restructuring plan forwarding made cash payments 2003 12 million employee separation costs 4 investment unconsolidated joint venture vector scm “vector” joint venture formed general motors “gm” december 2000 purpose providing logistics management services global basis gm ultimately customers addition gm although menlo worldwide llc “mw” owns majority interest vector mw’s portion vector’s operating results reported menlo worldwide reporting segment equitymethod investment based gm’s ability control certain operating decisions vector organized limited liability company elected taxed partnership therefore joint venture partners responsible cnf inc notes consolidated financial statementscontinued income taxes applicable share vector’s taxable income mw’s portion vector’s net income reported reduction operating expenses accompanying statements consolidated operations include provision income taxes incurred cnf mw’s undistributed earnings vector december 31 2003 provision cnf’s related parent income taxes 226 million reflects 63 million dividend declaration fourth quarter 2003 vector participates cnf’s centralized cash management system consequently vector’s domestic trade accounts payable paid cnf settled vector’s affiliate accounts cnf addition excess cash balances vector’s bank accounts invested cnf settled affiliate accounts result vector’s excess cash invested cnf vector’s affiliate receivable cnf december 31 2003 160 million earned interest income based rate earned cnf’s cashequivalent investments required vector agreements cnf provides vector 20 million line credit vector’s working capital expenditure requirements credit facility matures december 13 2005 vector may obtain loans annual interest rate based rate cnf pays 385 million revolving credit facility cnf provides portion 20 million credit commitment vector cnf’s guarantee 75 million uncommitted local currency overdraft facilities available vector international banks december 31 2003 58 million outstanding vector’s uncommitted local currency overdraft facilities borrowings directly payable cnf december 31 2002 vector owed 25 million uncommitted local currency overdraft facilities owed 24 million cnf line credit cnf’s capital transactions vector including cash advances vector cnf’s centralized cash management system credit facility described reported adjustments mw’s investment vector deferred charges assets cnf’s consolidated balance sheets 5 accrued liabilities accrued liabilities consisted following cnf inc notes consolidated financial statementscontinued 6 debt financing arrangements longterm debt guarantees consisted following revolving credit facility cnf 385 million revolving credit facility matures july 3 2006 revolving credit facility available cash borrowings issuance letters credit 385 million december 31 2003 2002 borrowings outstanding facility december 31 2003 2570 million letters credit outstanding leaving 1280 million available capacity additional letters credit cash borrowings subject compliance financial covenants customary conditions borrowing total letters credit outstanding december 31 2003 including uncommitted credit facilities described 2546 million provided collateral cnf workers’ compensation vehicular selfinsurance programs borrowings agreement bear interest rate based upon specified indices plus margin dependent cnf’s credit rating credit facility fee ranges 0125 0375 applied total facility 385 million based cnf’s current credit ratings credit agreement contains various restrictive covenants including limitation incurrence additional indebtedness requirement specified levels consolidated net worth fixedcharge coverage august 2003 cnf’s 385 million revolving credit facility amended exclude effect certain items calculation financial covenants amendment requirements specified levels consolidated net worth fixedcharge coverage ratio consolidated debt net worth amended exclude effect goodwill impairment charges minimum pension liability adjustments january 2004 credit agreement amended primarily remove provision would require cnf pledge assets collateral secure borrowings amounts due revolving credit facility event cnf’s senior unsecured longterm debt securities rated less investment grade standard poors moody’s uncommitted credit facilities cnf uncommitted unsecured credit facilities totaling 993 million december 31 2003 available support letters credit bank guarantees overdraft facilities date total 856 million letters credit outstanding facilities thrift stock plan notes cnf guarantees notes issued cnf’s thrift stock plan “tasp” december 31 2003 397 million aggregate principal amount series tasp notes outstanding bearing interest annual rate 600 maturing january 1 2006 620 million cnf inc notes consolidated financial statementscontinued aggregate principal amount series b tasp notes outstanding bearing interest annual rate 854 maturing january 1 2009 series notes contain financial covenants require cnf maintain minimum amounts net worth fixedcharge coverage august 2003 series notes amended exclude effect goodwill impairment charges minimum pension liability adjustments requirement specified levels consolidated net worth fixedcharge coverage holders series b notes issued cnf’s tasp right require cnf repurchase notes among things moody’s standard poor’s publicly rated cnf’s longterm senior debt less investment grade unless within 45 days cnf shall obtained guarantee letter credit permitted credit enhancement otherwise credit rating notes least “a” moody’s standard poor’s another nationally recognized rating agency selected holders notes shall maintain rating notes “a” better thereafter result decrease cnf’s longterm senior debt ratings credit rating agencies would give holders tasp notes right require cnf repurchase notes unless cnf able obtain appropriate credit enhancement described assurance cnf would able occurrence event condition requiring cnf repay tasp notes could likely material adverse effect cnf’s financial condition cash flows 8 78 notes due 2010 200 million aggregate principal amount 8 78 notes contain certain covenants limiting incurrence additional liens prior termination december 2002 cnf designated four interest rate swap derivatives fair value hedges mitigate effects interest rate volatility fair value cnf’s 8 78 notes termination december 2002 398 million estimated fair value fair value hedges offset equal increase carrying amount hedged fixedrate longterm debt consistent sfas 133 398 million cumulative adjustment carrying amount 8 78 notes accreted future earnings effective interest rate debt extinguished time unamortized fairvalue adjustment would fully recognized earnings absent terminated fair value hedges 8 78 notes cease adjusted fluctuations fair value attributable changes interest rate risk 735 notes due 2005 contain certain covenants limiting incurrence additional liens conway acquired real property 2003 2002 part assuming note payable due 2008 note payable due 2004 respectively note due 2004 secured real property cnf’s consolidated interest expense presented statements consolidated operations net capitalized interest 241000 2003 455000 2002 864000 2001 aggregate annual maturities sinking fund requirements longterm debt guarantees next five years ending december 31 14055000 2004 112700000 2005 33600000 2006 20700000 2007 24826000 2008 december 31 2003 2002 estimated fair value longterm debt 447 million 459 million respectively fair values estimated based quoted market prices current rates offered debt similar terms maturities 7 leases cnf subsidiaries obligated noncancelable leases principal capital lease covers sorting facility dayton ohio “hub” hub financed city dayton ohio revenue bonds consist 46 million series bonds due february 2018 interest rate 5625 remaining 62 million due 2009 bear rates interest 605 620 call provisions cnf inc notes consolidated financial statementscontinued future minimum lease payments initial remaining noncancelable lease terms excess one year december 31 2003 follows certain operating capital leases contain financial covenants restrictive covenants require cnf maintain minimum amounts fixedcharge coverage net worth certain operating leases also contain provisions allow cnf extend leases various renewal periods certain operating leases conway guarantees residual value tractors trailers end lease term december 31 2003 residual value guaranteed lease agreements 185 million cnf recognizes liability shortfall residual value guarantee equipment’s fair value fluctuates depending market conditions rental expense operating leases comprised following cnf inc notes consolidated financial statementscontinued 8 income taxes components provision benefit income taxes follows income taxes provided foreign operations based upon various tax laws rates countries operations conducted components deferred tax assets liabilities related following deferred tax assets liabilities consolidated balance sheets classified based related asset liability creating deferred tax deferred taxes related specific asset liability classified based estimated period reversal although realization assured management believes likely deferred tax assets realized cnf inc notes consolidated financial statementscontinued income tax provision benefit varied amounts calculated applying us statutory income tax rate pretax income loss set forth following reconciliation august 2002 cnf entered settlement agreements irs pursuant parties settled issues related deductibility aircraft maintenance costs years 1987 2000 open issues irs examinations years 1987 1996 cnf reversed tax provision related tax liabilities previously recognized issue resulting 250 million tax benefit third quarter 2002 result settlement agreements cnf required make additional payments irs 934 million payment made respect issues 2000 certain issues remain open years 1997 2000 management believe resolution issues likely material adverse effect cnf’s financial condition cash flows results operations 9 preferred securities subsidiary trust june 11 1997 cnf trust “trust” delaware business trust wholly owned cnf issued 2500000 250 term convertible securities series “tecons” public gross proceeds 125 million combined proceeds issuance tecons issuance cnf common securities trust invested trust 1289 million aggregate principal amount 5 convertible subordinated debentures due june 1 2012 “debentures” issued cnf debentures sole assets trust holders tecons entitled receive cumulative cash distributions annual rate 250 per tecons equivalent rate 5 per annum stated liquidation amount 50 per tecons cnf guaranteed subordinated basis distributions payments due tecons extent trust funds available therefore subject certain limitations “guarantee” guarantee taken together obligations cnf debentures indenture pursuant debentures issued amended restated declaration trust including obligations pay costs fees expenses debts obligations trust respect tecons common securities trust provide full unconditional guarantee amounts due tecons debentures redeemable cash option cnf whole part june 1 2000 price equal 103125 principal amount declining annually par redeemed june 1 2005 plus accrued unpaid interest certain circumstances relating federal income tax matters debentures may redeemed cnf 100 principal plus accrued unpaid interest upon redemption debentures like aggregate liquidation amount tecons redeemed tecons cnf inc notes consolidated financial statementscontinued stated maturity date although subject mandatory redemption upon maturity debentures june 1 2012 upon earlier redemption tecons convertible time prior close business june 1 2012 option holder shares cnf’s common stock conversion rate 125 shares cnf’s common stock tecons subject adjustment certain circumstances 10 derivative instruments hedging activities effective january 1 2001 cnf adopted sfas 133 “accounting derivative instruments hedging activities” sfas 133 amended establishes accounting reporting standards requiring every derivative instrument defined recorded balance sheet either asset liability measured fair value changes fair value recognized currently earnings unless specific hedge accounting criteria met qualifying hedges allow derivative’s gain loss offset related results hedged item income statement deferred comprehensive income loss hedged item recognized earnings cnf exposed variety market risks including effects interest rates commodity prices foreign currency exchange rates credit risk cnf enters derivative financial instruments circumstances warrant hedge underlying asset liability future cash flow exposure related risk additionally designated hedges high correlation underlying exposure fluctuations value derivatives offset reciprocal changes underlying exposure cnf formally documents hedge relationships including identifying hedge instruments hedged items well risk management objectives strategies entering hedge transaction hedge inception least quarterly thereafter cnf assesses whether derivatives effective offsetting changes either cash flows fair value hedged item derivative ceases highly effective hedge cnf discontinue hedge accounting gains losses derivative instrument would recognized earnings period longer qualifies hedge accounting derivatives designated cash flow hedges changes derivative’s fair value recognized comprehensive income loss hedged item recognized earnings change fair value resulting ineffectiveness recognized immediately earnings derivatives designated fair value hedges changes derivative’s fair value recognized earnings offset changes fair value hedged item recognized earnings extent derivative effective accordance transition provisions sfas 133 first quarter 2001 cnf recorded assets transition adjustment 206 million recognize estimated fair value interest rate swap derivatives 49 million 30 million tax transition adjustment accumulated comprehensive income loss recognize estimated fair value interest rate swap derivatives designated cash flow hedges 157 million transition adjustment longterm debt recognize estimated effect interest rate changes fair value fixedrate debt hedged interest rate swap derivatives designated fair value hedges december 31 2003 cnf held two interest rate swap derivatives initially entered cash flow hedges mitigate effects interest rate volatility floatingrate operating lease payments connection forwarding’s 2001 restructuring plan hedge accounting discontinued interest rate swap derivatives ewa settled floatingrate operating leases hedged interest rate swaps cnf inc notes consolidated financial statementscontinued periods subsequent december 31 2002 increases estimated fair value freestanding interest rate swap derivatives reported increases assets consolidated balance sheets nonoperating income 03 million 2003 prior termination december 2002 cnf designated four interest rate swap derivatives fair value hedges mitigate effects interest rate volatility fair value fixedrate longterm debt termination december 2002 398 million estimated fair value fair value hedges offset equal increase carrying amount hedged fixedrate longterm debt accordingly cnf december 2002 received cash 310 million settlement three four interest rate swaps recognized receivable december 31 2002 fourth swap terminated december 2002 settled cash january 2003 prior termination fair value derivative instruments included assets consolidated balance sheets consistent sfas 133 398 million cumulative adjustment carrying amount longterm debt accreted future earnings effective interest rate debt extinguished time unamortized fairvalue adjustment would fully recognized earnings absent terminated fair value hedges longterm debt cease adjusted fluctuations fair value attributable changes interest rate risk 11 shareholders’ equity series b preferred stock 1989 board directors designated series 1100000 preferred shares series b cumulative convertible preferred stock 01 stated value held cnf thrift stock plan “tasp” series b preferred stock convertible common stock described note 13 “thrift stock plan” rate 471 shares share preferred stock subject antidilution adjustments certain circumstances holders series b preferred stock entitled vote common stock entitled number votes circumstances equal product 13 multiplied b number shares common stock series b preferred stock convertible record date vote holders series b preferred stock also entitled vote separately class certain matters tasp trustee required vote allocated shares based upon instructions participants unallocated shares voted proportion voting instructions received participants allocated shares accumulated comprehensive income loss cnf reports changes equity except resulting investment owners distribution owners comprehensive income loss statements consolidated shareholders’ equity following summary components accumulated comprehensive loss cnf inc notes consolidated financial statementscontinued 12 benefit plans pension plans cnf noncontributory defined benefit pension plans “pension plans” covering noncontractual employees united states former pilot employees cnf’s annual pension expense contributions based independent actuarial computations cnf’s funding policy evaluate tax cash position pension plans’ funded status maximize tax deductibility contributions year benefits pension plans based career average employee’s five highest consecutive annual salaries ten years immediately prior retirement 2003 cnf accelerated date actuarial measurement cnf’s obligation pension plans december 31 november 30 cnf believes onemonth acceleration measurement date preferred change allows time cnf management evaluate report actuarial pension measurements well evaluate results funding decisions effect change obligation assets pension plans material cumulative effect pension expense accrued benefit cost discussed cnf changed measurement date pension plans accordingly amounts reported tables year ended december 31 2003 based measurement date november 30 2003 prioryear amounts based measurement date december 31 2002 following sets forth changes projected benefit obligation determination accrued benefit cost included employee benefits consolidated balance sheets december 31 cnf inc notes consolidated financial statementscontinued net periodic pension expense years ended december 31 includes following minimum pension liability adjustment accumulated benefit obligation pension plans exceeded fair value plan assets actuarial measurement dates 2003 2002 presented cnf recognized minimum pension liability adjustments recognize shortfall fair value assets accumulated benefit obligation pension plans december 31 2003 2002 due principally improved equity markets corresponding increase actual rate return plan assets 2003 accumulated minimum pension liability adjustments reduced 2003 resulting 110 million decline netoftax accumulated comprehensive loss shareholders’ equity cnf’s consolidated balance sheets included following accumulated minimum pension liability adjustments pension plan investment policy plan assets managed longterm strategic allocation targets developed analyzing variety diversified asset class combinations conjunction projected liability costs liability duration pension plans asset allocation studies generally conducted every 3 5 years targets reviewed determine require adjustment allocation percentages established portfolio periodically rebalanced targets manner maintains target allocation seeks minimize trading costs pension plans seek mitigate investment risk investing across within asset classes pension plans use market timing strategies currently use financial derivative instruments manage risk generally pension plans’ investment managers prohibited short selling trading margin trading warrants options except acquired result purchase another security case options sold part covered position prohibited trading commodities may trade financial futures options specifically approved cnf’s benefits administration committee designated representative cnf inc notes consolidated financial statementscontinued pension plan’s 90 overall expected longterm rate return assumption 2004 developed using return risk defined standard deviation correlation expectations return expectations created using longterm historical returns current market expectations forecasts inflation interest rates economic growth weightedaverage asset allocations pension plans follows cnf expects contribute 75 million pension plans 2004 supplemental pension plan cnf also supplemental retirement program provides additional benefits compensation excluded basic pension plans annual pension expense programs based independent actuarial computations using assumptions consistent pension plans december 31 2003 2002 accrued benefit cost 30065000 26920000 respectively net pension expense 5467000 2003 4716000 2002 5540000 2001 postretirement medical plan cnf retiree medical plan provides benefits noncontractual employees least 55 years age 10 years service “postretirement plan” postretirement plan limits benefits participants eligible retire january 1 1993 defined dollar amount based age years service provide employersubsidized retiree medical benefits employees hired january 1 1993 following sets forth changes projected benefit obligation determination accrued benefit cost postretirement plan included employee benefits consolidated balance sheets december 31 cnf inc notes consolidated financial statementscontinued net periodic benefit expense years ended december 31 includes following assumed health care cost trend rates used determine projected benefit obligation postretirement plan follows assumed health care cost trends significant effect amounts reported cnf’s postretirement benefits onepercentagepoint change assumed health care cost trend rates would change aggregate service interest cost approximately 300000 accumulated projected benefit obligation 3000000 december 2003 medicare prescription drug improvement modernization act 2003 “act” enacted us act introduced prescription drug benefit medicare well federal subsidy sponsors retiree health benefit plans provide benefit meets certain criteria cnf concluded evaluation effect new act’s benefits subsidies result postretirement benefit obligation cnf’s postretirement plan reported table reflect effects act specific authoritative guidance accounting federal subsidy pending guidance issued could require change previously reported information 2004 cnf actuaries estimate cnf pay 5 million benefit payments participants postretirement plan compensation plans cnf subsidiaries adopted various plans relating achievement specific goals provide incentive compensation designated employees total compensation earned salaried participants plans 23806000 2003 69170000 2002 8712000 2001 hourly participants 22368000 2003 40202000 2002 7308000 2001 13 thrift stock plan cnf sponsors cnf thrift stock plan “tasp” voluntary defined contribution plan leveraged esop feature noncontractual us employees 1989 tasp borrowed 150000000 purchase 986259 shares cnf’s series b cumulative convertible preferred stock issuable cnf inc notes consolidated financial statementscontinued tasp trustee cnf contributes common preferred stock tasp equal 50 participant contributions 15 tasp participant’s base compensation cnf recognized expense 13756000 2003 12841000 2002 12314000 2001 matching contributions series b preferred stock earns dividend 1293 per share used repay tasp debt shortfall paid cash cnf dividends preferred shares deductible income tax purposes accordingly reflected net tax benefits statements consolidated operations allocation preferred stock participants’ accounts based upon ratio current year’s principal interest payments total tasp debt since cnf guarantees debt reflected longterm debt guarantees consolidated balance sheets tasp guarantees reduced principal paid share preferred stock convertible common stock upon employee ceasing participation plan rate generally equal number shares common stock could purchased 15210 less minimum conversion rate 471 shares common stock share series b preferred stock deferred compensation expense recognized preferred shares allocated participants equivalent cost preferred shares allocated tasp interest expense year reduced dividends paid tasp deferred compensation expense 8036000 7597000 7282000 recognized 2003 2002 2001 respectively december 31 2003 tasp owned 763674 shares series b preferred stock 388157 shares allocated employees december 31 2003 cnf reserved authorized unissued common stock adequate satisfy conversion feature series b preferred stock 14 stockbased compensation stock options officers nonemployee directors granted options cnf’s stock option plans purchase common stock cnf prices equal market value stock date grant stock option grants generally vest ratably one four years grant date generally expire 10 years dates grant cnf accounts stockbased compensation utilizing intrinsicvalue method accordance provisions accounting principles board opinion 25 “accounting stock issued employees” pro forma information regarding net income loss earnings loss per share cnf applied fairvalue method recognition provisions sfas 123 “accounting stockbased compensation” refer note 1 “principal accounting policies stockbased compensation” weightedaverage grantdate fair value options estimated using blackscholes option pricing model summarized related valuation assumptions cnf inc notes consolidated financial statementscontinued following summary stock option data following summary stock options outstanding exercisable december 31 2003 restricted stock terms cnf’s stockbased compensation plans shares cnf’s common stock awarded selected executive officers awarded annually directors restrictions shares generally vest ratably one four years grant date restricted shares issued prior 2003 vesting generally dependent achievement certain market prices cnf’s common stock shares valued market price cnf’s common stock date award following table summarizes information restricted stock awards years ended december 31 total compensation expense recognized restricted stock 1340000 2003 1010000 2002 cnf reversed net compensation expense 3300000 recognized restricted stock 2001 cnf inc notes consolidated financial statementscontinued december 31 2003 cnf 3991874 common shares available grant stock options restricted stock stockbased incentive compensation 15 commitments contingencies spinoff cfc december 2 1996 cnf completed spinoff consolidated freightways corporation “cfc” cnf’s shareholders connection spinoff cfc cnf agreed indemnify certain states insurance companies sureties failure cfc pay certain workers’ compensation tax public liability claims pending september 30 1996 cases indemnities supported letters credit surety bonds cnf liable issuing bank surety company september 2002 cfc filed bankruptcy ceased us operations following commencement bankruptcy proceeding cfc ceased making payments respect workers’ compensation public liability claims cnf required take payment claims expects demands payment likely made respect remaining claims cnf estimates aggregate amount claims plus costs 250 million result cnf accrued additional reserves 2002 primarily accrued claims costs consolidated balance sheets recognized 2002 thirdquarter fourthquarter losses discontinuance 130 million net 83 million income taxes 23 million net 14 million income taxes respectively cnf intends seek reimbursement cfc bankruptcy proceeding amounts cnf pays respect claims although assurance cnf successful recovering portion payments addition cfc time spinoff remains party certain multiemployer pension plans covering current former employees cessation us operations result cfc’s “complete withdrawal” within meaning applicable federal law multiemployer plans point become obligated federal law pay share unfunded vested benefits plans possible trustees cfc’s multiemployer pension plans may assert claims cnf liable amounts owing plans result cfc’s withdrawal plans assurance claims would material detailed discussion matter see item 7 “management’s discussion analysis” “liquidity capital resources discontinued operations spinoff cfc” result matters discussed item 7 “management’s discussion analysis” cnf provide assurance matters material adverse effect cnf’s financial condition cash flows results operations cnf defendant various lawsuits incidental businesses opinion management ultimate outcome actions material impact cnf’s financial condition cash flows results operations 16 segment reporting cnf discloses segment information manner components organized making operating decisions assessing performance allocating resources refer note 1 “principal accounting policies organization” description cnf’s reportable segments financial data management evaluates segment performance primarily based revenue operating income loss therefore nonoperating items consisting primarily interest income expense reported cnf inc notes consolidated financial statementscontinued segment results corporate expenses generally allocated based measurable services provided segment general corporate expenses based segment revenue capital employed identifiable corporate assets consist primarily cash equivalents deferred charges assets property equipment deferred taxes certain corporate assets used provide shared data processing administrative services allocated individual segments intersegment revenue related operating income eliminated reconcile consolidated revenue operating income transactions within segments generally made cost exception intersegment revenue cnf intended reflect fair value trailers manufactured road systems sold conway cnf inc notes consolidated financial statementscontinued unusual infrequent items cnf’s results continuing operations included various income loss items affected yeartoyear comparisons reported operating income loss reporting segments materially significant unusual infrequently occurring items summarized table certain items fully discussed elsewhere accompanying notes consolidated financial statements cnf inc notes consolidated financial statementscontinued terrorist attacks forwarding’s operating results 2001 adversely affected terrorist attacks september 11 2001 contractors providing air carrier service forwarding grounded september 11 12 resume service evening september 13 response september 11 2001 terrorist attacks us congress passed air transportation safety system stabilization act “act” 15 billion emergency economic assistance package intended mitigate financial losses air carrier industry legislation provides 5 billion direct loss reimbursement financial assistance march 2002 forwarding received 119 million payment act resulting 99 million firstquarter net gain 2002 march 2003 forwarding received final payment 75 million resulting 72 million firstquarter net gain 2003 express mail contract effective august 26 2001 usps terminated “for convenience” contract ewa transported express mail classes mail usps “express mail contract” ewa received 700 million provisional payment usps termination costs claims related express mail contract september 28 2001 subsequent settlement agreement usps december 17 2002 paid ewa additional 50 million settle ewa’s express mail contract termination costs including reimbursement certain aircraft assets result final 50 million settlement payment ewa december 2002 fully recovered remaining express mail assets resulting 57 million net gain reported forwarding segment 2001 ewa recognized revenue 1170 million operating income 63 million transportation mail express mail contract reported forwarding segment geographic data geographic reporting freight transportation revenues allocated international locations except canada shipment origination destination locations outside united states canada operates integrated part north america freight operations allocated 50 percent revenue origination destination location canada revenues contract services allocated country services performed longlived assets outside united states immaterial periods presented cnf inc notes consolidated financial statementscontinued 17 quarterly financial data cnf inc subsidiaries quarterly financial data unaudited dollars thousands except per share data information regarding items materially affect yeartoyear comparisons net income continuing operations refer item 6 “selected financial data” item 7 “management’s discussion analysis” item 9item 8 financial statements supplementary data cnf inc consolidated balance sheets accompanying notes consolidated financial statements integral part statements cnf inc consolidated balance sheets accompanying notes consolidated financial statements integral part statements cnf inc statements consolidated operations accompanying notes consolidated financial statements integral part statements cnf inc statements consolidated cash flows accompanying notes consolidated financial statements integral part statements cnf inc statements consolidated shareholders’ equity accompanying notes consolidated financial statements integral part statements cnf inc notes consolidated financial statements 1 principal accounting policies organization cnf inc subsidiaries provide transportation supply chain management services wide range manufacturing industrial retail customers cnf’s principal businesses consist conway mw however financial reporting purposes cnf divided four reporting segments operating results conway reported one reporting segment mw divided two reporting segments logistics menlo worldwide consists vector joint venture gm also certain corporate activities results road systems trailer manufacturer reported separate cnf reporting segment conway provides regional nextday secondday transcontinental freight trucking throughout us canada puerto rico mexico well expedited transportation freight forwarding contract logistics warehousing truckload brokerage services mw includes combined operating results logistics menlo worldwide reporting segments logistics develops integrated contract logistics solutions including management complex distribution networks supply chain engineering consulting menlo worldwide reporting segment includes operating results vector serves lead logistics manager gm december 2004 cnf completed sale mwf result periods presented results operations net assets cash flows forwarding segment segregated reported discontinued operations fully discussed note 2 “discontinued operations” cnf reporting segment includes operating results road systems trailer manufacturer certain corporate activities principles consolidation consolidated financial statements include accounts cnf inc subsidiaries “cnf” significant intercompany accounts transactions eliminated certain amounts priorperiod financial statements reclassified conform currentyear presentation including classification auction rate securities reported availableforsale marketable securities rather cash equivalents fully discussed recognition revenues freight transportation revenue recognized upon delivery shipment delivery costs accrued incurred shipments transit revenue related delivery costs recognized based estimated percentage service completed balance sheet date estimates future billing adjustments revenue recognized time shipment certain discounts billing corrections revenue logistics contracts recognized accordance contractual terms services provided logistics’ carriermanagement revenue attributable contracts logistics manages transportation freight subcontracts actual transportation delivery products third parties logistics refers purchased transportation carriermanagement revenue reported based gross amount billed customer includes purchased transportation charges cash equivalents marketable securities cash equivalents consist shortterm interestbearing instruments maturities three months less date purchase including primarily investments commercial paper certificates deposit 281695000 december 31 2004 carrying amount cashequivalent securities approximates fair value marketable securities consist shortterm availableforsale auctionrate securities except investment equity securities sold 2004 described auctionrate securities contractual maturities greater one year however securities interest dividend rates reset every 28 days generally expected sold within one year realized unrealized gains losses auctionrate securities material periods presented material differences estimated fair values carrying values securities dates presented cnf inc notes consolidated financial statements continued 2004 cnf recognized 2867000 gain sale marketable equity securities december 31 2003 estimated fair value unrealized gain equity securities 3351000 million 2044000 respectively cnf’s financial statements realized gain estimated fair value securities reported income loss discontinued operations assets discontinued operations respectively trade accounts receivable net cnf subsidiaries report accounts receivable net realizable value provide allowance uncollectible accounts collection considered doubtful conway provides uncollectible accounts based various judgments assumptions including revenue levels historical loss experience composition outstanding accounts receivable logistics based size nature client base performs frequent periodic evaluation customers’ creditworthiness accounts receivable portfolio recognizes expense uncollectible accounts losses probable estimable trade accounts receivable net allowances 6616000 10958000 december 31 2004 2003 respectively property plant equipment property plant equipment depreciated primarily straightline basis estimated useful lives generally 25 years buildings improvements 5 10 years tractor trailer equipment 3 10 years equipment leasehold improvements amortized shorter terms respective leases useful lives assets expenditures equipment maintenance repairs charged operating expenses incurred betterments capitalized gains losses sales equipment property recorded operating expenses capitalized software capitalized software net consists certain direct internal external costs associated development internaluse software amortization capitalized software computed itembyitem basis period 3 10 years depending estimated useful life software amortization expense related capitalized software 15259000 2004 15666000 2003 13081000 2002 accumulated amortization december 31 2004 2003 71503000 62836000 respectively goodwill longlived assets cnf performs impairment analysis longlived assets whenever circumstances indicate carrying amount may recoverable assets held used impairment charge recognized estimated undiscounted cash flows associated asset group assets less carrying value impairment exists charge recognized difference carrying value fair value fair values determined using quoted market values discounted cash flows external appraisals applicable assets held disposal carried lower carrying value estimated net realizable value cnf tests recoverability goodwill annual basis fourth quarter annual tests certain circumstances fairvalue approach used test goodwill impairment charge recognized carrying amount goodwill exceeds fair value cnf utilized thirdparty independent valuation consultant perform impairment test goodwill associated forwarding reporting segment december 31 2003 based annual impairment test fourth quarter 2003 assumed improving cash flows cnf required record charge goodwill impairment fully discussed note 2 “discontinued operations” cnf committed sell mwf third quarter 2004 recognized 2605 million impairment charge write recorded book value mwf anticipated selling price less costs sell impairment charge based agreement sell mwf represented estimated writedown carrying value mwf’s goodwill longlived assets including mwf’s accumulated foreign currency translation adjustment well estimated selling costs cnf agreed accept less recorded book value mwf due primarily management’s assessment risk resource requirements associated strategic alternatives related mwf’s operations cnf inc notes consolidated financial statements continued income taxes deferred income taxes provided tax effect temporary differences tax basis assets liabilities reported amounts financial statements cnf uses liability method account income taxes requires deferred taxes recorded statutory rate effect taxes paid december 31 2004 2003 income tax receivables 266 million 360 million respectively included accounts receivable cnf’s consolidated balance sheets selfinsurance accruals cnf uses combination insurance selfinsurance programs provide costs medical casualty liability vehicular cargo workers’ compensation claims measurement costs cnf considers historical claims experience medical costs demographic severity factors assumptions selfinsurance accruals developed based estimated undiscounted cost claims including claims incurred reported balance sheet date longterm portion selfinsurance accruals relates primarily workers’ compensation vehicular claims payable several years actual costs may vary estimates cnf participates reinsurance pool reinsure mostly workers’ compensation vehicular liabilities participant pool cedes claims pool assumes equivalent amount claims reinsurance relieve cnf liabilities original policy however opinion management potential exposure cnf nonpayment minimal cnf’s liability related assumed claims 24111000 34002000 december 31 2004 2003 respectively foreign currency translation adjustments resulting translating foreign functional currency financial statements us dollars included foreign currency translation adjustment statements consolidated shareholders’ equity transaction gains losses arise exchange rate fluctuations transactions denominated currency local currency included results operations based expectations certain tax jurisdictions cnf reevaluated assumptions regarding repatriation foreign earnings related forwarding segment effective first quarter 2004 cnf concluded would longer assume indefinite reinvestment past future earnings mwf’s foreign subsidiaries accordingly cnf first quarter 2004 recorded deferred tax asset 94 million recognize associated tax effect mwf’s accumulated foreign currency translation adjustment deferred tax asset recorded assets discontinued operations consolidated balance sheets relates discontinued forwarding segment third quarter 2004 accumulated foreign currency translation adjustment associated forwarding segment included cnf’s thirdquarter impairment charge fully discussed note 2 “discontinued operations” cnf change assumptions regarding repatriation foreign earnings subsidiaries cnf inc notes consolidated financial statements continued earnings loss per share eps basic eps continuing operations computed dividing reported net income loss continuing operations preferred stock dividends weightedaverage common shares outstanding diluted eps calculated follows 2004 diluted shares reflect effect cnf’s redemption june 2004 convertible subordinated debentures fully discussed note 5 “debt financing arrangements” stockbased compensation described note 10 “stockbased compensation” officers nonemployee directors granted options cnf’s stock option plans purchase common stock cnf prices equal market value stock date grant cnf accounts stockbased compensation utilizing intrinsic value method accordance provisions accounting principles board opinion 25 “accounting stock issued employees” “apb 25” accordingly compensation expense recognized fixedoption plans exercise prices employee stock options equal exceed market prices underlying stock dates grant cnf inc notes consolidated financial statements continued table presents effect net income loss earnings loss per share cnf applied fairvalue based method recognition provisions sfas 123 “accounting stockbased compensation” effect applying sfas 123 may indicative future effect derivative instruments hedging activities cnf exposed variety market risks including effects interest rates commodity prices foreign currency exchange rates credit risk cnf enters derivative financial instruments circumstances warrant hedge underlying asset liability future cash flow exposure related risk additionally designated hedges high correlation underlying exposure fluctuations value derivatives offset reciprocal changes underlying exposure fully discussed note 5 “debt financing arrangements” cnf december 2002 terminated four interest rate swap derivatives designated fair value hedges fixedrate longterm debt except effect terminated interest rate swaps derivative financial instruments material effect cnf’s financial condition results operations cash flows equitymethod investments fully discussed note 3 “investment unconsolidated joint venture” menlo worldwide llc owns majority equity interest vector joint venture gm accounted equitymethod investment addition cnf provided venture capital funding primarily 2001 2000 various companies focused developing technologybased solutions transportation industry cnf’s investment companies accounted cost equitymethod investments written 2004 2003 2002 reported nonoperating losses miscellaneous net consolidated statements operations december 31 2004 cnf’s remaining net investment ventures 14 million new accounting standards january 2003 fasb issued interpretation 46 “consolidation variable interest entities interpretation arb 51” “fin 46” fin 46 requires specialpurpose entities designated either votinginterest entity variableinterest entity “vie” vie entity cnf inc notes consolidated financial statements continued equity investors characteristics controlling financial interest sufficient equity risk vie finance activities without additional subordinated financial support parties vie required consolidated primary beneficiary effectively disperse risks among parties involved primary beneficiary vie party absorbs majority vie’s expected losses receives majority expected residual returns implementation fin 46 required periods beginning june 15 2003 however october 2003 fasb deferred effective date applying fin 46 vie’s created february 1 2003 end first interim period ending december 15 2003 december 2003 fasb revised fin 46 “fin 46r” incorporate certain revisions including requirement disregard certain rights determining whether entity primary beneficiary vie fin 46r cnf primary beneficiary cnf trust 1 “trust” wholly owned subsidiary cnf therefore required deconsolidate trust effective quarter ended march 31 2004 accordingly cnf’s 5 convertible debentures held trust redeemed cnf june 1 2004 included longterm debt march 31 2004 prior periods restated reflect adoption fin 46r fully discussed note 5 “debt financing arrangements” item 8 “financial statements” december 2004 fasb issued sfas 123r “sharebased payment” “sfas 123r” revision sfas 123 supersedes apb 25 related implementation guidance sfas 123r eliminates alternative use apb 25’s intrinsic value method accounting provided sfas 123 originally issued requires companies recognize cost employee services received exchange awards equity instruments based grantdate fair value awards limited exceptions period employee required provide service exchange award sfas 123r also amends fasb statement 95 “statement cash flows” require benefits associated tax deductions excess recognized compensation cost reported financing cash flows rather reduction taxes paid requirement reduce net operating cash flows increase net financing cash flows periods effective date future amounts cannot estimated depend factors cannot predicted including employees exercise stock options effective date sfas 123r beginning first reporting period begins june 15 2005 cnf third quarter 2005 cnf currently assessing impact sfas 123r financial statements estimates management makes estimates assumptions preparing financial statements conformity accounting principles generally accepted united states estimates assumptions affect amounts reported accompanying financial statements notes changes estimates recognized accordance accounting rules estimate typically period new information becomes available reasonably possible actual results could materially differ estimates including related accounts receivable allowances impairment goodwill longlived assets income tax liabilities selfinsurance accruals pension plan obligations contingencies assets liabilities recognized connection restructurings dispositions 2 discontinued operations discontinued operations periods presented relate sale mwf spinoff cfc ewa terminated priority mail contract usps periods presented results operations net assets cash flows discontinued operations segregated continuing operations except otherwise noted required eitf 8724 “allocation interest discontinued operations” continuing operations allocated general corporate overhead charges previously allocated discontinued forwarding segment corporate overhead charges 169 million 2004 140 million 2003 2002 cnf inc notes consolidated financial statements continued allocated discontinued operations conway logistics reporting segments based segment revenue capital employed results discontinued operations summarized assets liabilities discontinued operations presented consolidated balance sheets captions “assets liabilities discontinued operations” consisted following menlo worldwide forwarding october 5 2004 cnf mw entered stock purchase agreement ups united parcel service america inc sell issued outstanding capital cnf inc notes consolidated financial statements continued stock mwf cnf completed sale december 19 2004 agreement excludes certain assets liabilities mwf includes certain assets liabilities cnf subsidiaries related business conducted mwf among assets liabilities excluded related ewa obligation related mwf employees covered cnf’s domestic pension postretirement medical longterm disability plans agreement cnf reimbursed actuarially determined estimate obligation related mwf employees covered cnf’s longterm disability postretirement medical plans upon completion sale mwf mw received cash consideration 150 million subject certain adjustments including adjustments cash held mwf closing mwf’s net working capital closing addition ups assumed indebtedness associated mwf business including approximately 110 million debt owed mwf connection city dayton ohio special facilities revenue refunding bonds certain capital leases debt letters credit overdraft facilities stock purchase agreement cnf agreed threeyear noncompete covenant subject certain exceptions limit cnf’s annual air freight ocean forwarding andor customs brokerage revenues 175 million cnf also agreed indemnify ups certain losses ups may incur closing sale certain limitations losses related indemnification obligations costs including future cash expenditures related sale estimated recognized time recognized future periods additional loss disposal incurred although stock purchase agreement described entered october 5 2004 decisions cnf’s management board directors thirdquarter sale negotiations ups established cnf’s commitment sell mwf september 30 2004 process evaluating several strategic alternatives mw’s forwarding segment cnf approached ups third quarter 2004 interest acquiring mwf accordingly third quarter 2004 cnf classified mwf held sale recognized 2605 million impairment charge write recorded book value mwf anticipated selling price less costs sell required sfas 144 “accounting impairment disposal longlived assets” impairment charge based agreement sell mwf described primarily represents estimated writedown carrying value mwf’s goodwill longlived assets including mwf’s accumulated foreign currency translation adjustment well estimated selling costs cnf agreed accept less recorded book value mwf due primarily management’s assessment risk resource requirements associated strategic alternatives related mwf’s operations completion sale cnf recognized fourthquarter loss disposal 158 million net 36 million tax benefit adjusted carrying value mwf exceeded total cash consideration including amounts received closing expected received future described cnf’s thirdquarter fourthquarter losses disposal mwf treated capital losses tax purposes current tax law capital losses used offset capital gains since cnf currently forecast significant taxable capital gains tax carryforward period tax benefits disposal recognized extent capital gains 2004 accordingly 410 million tax benefit recognized disposition mwf fully offset equal valuation allowance described stock purchase agreement excludes obligation related mwf employees covered certain cnfsponsored employee benefit plans including pension postretirement longterm disability plans cover noncontractual employees former employees continuing discontinued operations plans also include certain pension plans cover current former employees discontinued forwarding segment “forwarding plans” financial reporting purposes prepaid benefit cost forwarding plans reported assets discontinued operations accrued benefit cost related mwf employees covered legally separate cnfsponsored plans reported employee benefits continuing operations december 31 2004 cnf reimbursed obligation related mwf employees covered cnf’s longterm disability postretirement medical plans pending conclusion actuarially determined estimates accordingly december 31 2004 accounts receivable continuing operations included 941 million receivable cnf’s cnf inc notes consolidated financial statements continued estimate employee benefit obligations well estimate reimbursable mwf cash balance settlement cash balance subject inprocess evaluation difference estimated actual cash position december 31 2004 would recognized future periods gain loss disposal incurred described stock purchase agreement excludes assets liabilities ewa including restructuring reserves related 2001 restructuring plan ewa’s restructuring reserves decreased 338 million december 31 2004 348 million december 31 2003 primarily due payments restructuringrelated obligations partially offset proceeds sales aircraft equipment restructuring reserves december 31 2004 primarily classified accrued liabilities discontinued operations consisted primarily cnf’s estimated exposure related labor matters described well estimated remaining restructuringrelated obligations connection cessation air carrier operations 2001 ewa terminated employment pilots crew members pilots crew members represented alpa union collective bargaining agreement subsequently alpa filed grievance behalf pilots crew members protesting cessation ewa’s air carrier operations mwf’s use air carriers alpa matters subject litigation us district court depending outcome litigation may subject binding arbitration based cnf’s current evaluation management believes provided estimated exposure related alpa matters however assurance regard cnf cannot predict certainty ultimate outcome matters spinoff cfc december 2 1996 cnf completed spinoff cfc cnf’s shareholders connection spinoff cfc cnf agreed indemnify certain states insurance companies sureties failure cfc pay certain workers’ compensation tax public liability claims pending september 30 1996 cases indemnities supported letters credit surety bonds cnf liable issuing bank surety company september 2002 cfc filed bankruptcy ceased us operations following commencement bankruptcy proceeding cfc ceased making payments respect workers’ compensation public liability claims cnf required take payment claims expects demands payment likely made respect remaining claims cnf estimated aggregate amount claims plus costs 250 million result cnf accrued additional reserves primarily selfinsurance accruals consolidated balance sheets 2002 recognized loss disposal 153 million net 97 million income taxes based actual payment experience claims december 31 2004 cnf accrued additional reserves recognized loss disposal 24 million net 16 million income taxes fourth quarter 2004 cnf seeking reimbursement cfc bankruptcy proceeding amounts cnf pays respect claims although assurance cnf successful recovering portion payments priority mail contract november 3 2000 ewa usps announced agreement “termination agreement” terminate contract transportation sortation priority mail “priority mail contract” terms termination agreement usps agreed reimburse ewa priority mail contract termination costs january 7 2001 usps paid ewa 600 million toward termination costs july 3 2002 usps paid ewa 60 million fully settle ewa’s priority mail contract termination costs resulted 2002 thirdquarter gain discontinuance 29 million net 18 million income taxes 3 investment unconsolidated joint venture vector joint venture formed gm december 2000 purpose providing logistics management services global basis gm ultimately customers addition gm although mw cnf inc notes consolidated financial statements continued owns majority interest vector mw’s portion vector’s operating results reported menlo worldwide reporting segment equitymethod investment based gm’s ability control certain operating decisions vector organized limited liability company elected taxed partnership therefore joint venture partners responsible income taxes applicable share vector’s taxable income mw’s portion vector’s net income reported reduction operating expenses accompanying statements consolidated operations include provision income taxes incurred cnf mw’s undistributed earnings vector december 31 2004 december 31 2003 provision cnf’s related parent income taxes 272 million 226 million respectively vector participates cnf’s centralized cash management system consequently vector’s domestic trade accounts payable paid cnf settled vector’s affiliate accounts cnf addition excess cash balances vector’s bank accounts invested cnf settled affiliate accounts earn interest income based rate earned cnf’s cashequivalent investments result vector’s excess cash invested cnf vector’s affiliate receivable cnf december 31 2004 december 31 2003 155 million 160 million respectively required vector agreements cnf provides vector 20 million line credit vector’s working capital expenditure requirements credit facility matures december 13 2005 vector may obtain loans annual interest rate based rate cnf pays 385 million revolving credit facility december 31 2004 cnf provided portion 20 million credit commitment vector cnf’s guarantee 75 million uncommitted local currency overdraft facilities available vector international banks effective january 19 2005 amount reduced 25 million december 31 2004 balance outstanding vector’s uncommitted local currency overdraft facilities borrowings directly payable cnf december 31 2003 vector owed 58 million uncommitted local currency overdraft facilities borrowings directly payable cnf 2004 2003 vector approved cash distributions gm mw vector’s affiliate receivable cnf mw’s undistributed earnings vector december 31 2004 2003 reduced mw’s share distributions 137 million 2004 63 million 2003 cnf’s capital transactions vector including cash advances vector cnf’s centralized cash management system credit facility described reported adjustments mw’s investment vector deferred charges assets cnf’s consolidated balance sheets 4 accrued liabilities accrued liabilities consisted following cnf inc notes consolidated financial statements continued 5 debt financing arrangements longterm debt guarantees consisted following revolving credit facility cnf 385 million revolving credit facility matures july 3 2006 revolving credit facility available cash borrowings issuance letters credit 385 million december 31 2004 2003 borrowings outstanding facility december 31 2004 2297 million letters credit outstanding leaving 1553 million available capacity additional letters credit cash borrowings subject compliance financial covenants customary conditions borrowing total letters credit outstanding december 31 2004 including uncommitted credit facilities described 2593 million provided collateral cnf workers’ compensation vehicular selfinsurance programs borrowings agreement bear interest rate based upon specified indices plus margin dependent cnf’s credit rating credit facility fee ranges 0125 0375 applied total facility 385 million based cnf’s current credit ratings credit agreement guaranteed conway mwl mw certain less significant cnf subsidiaries contains various restrictive covenants including limitation incurrence additional indebtedness requirement specified levels consolidated net worth fixedcharge coverage august 2003 revolving credit facility amended exclude effect certain items calculation financial covenants amendment requirements specified levels consolidated net worth fixedcharge coverage ratio consolidated debt net worth amended exclude effect goodwill impairment charges minimum pension liability adjustments january 2004 credit agreement amended primarily remove provision would require cnf pledge assets collateral secure borrowings amounts due revolving credit facility event cnf’s senior unsecured longterm debt securities rated less investment grade standard poor’s moody’s october 2004 credit agreement amended exclude effects forwarding disposal consolidated net worth fixedcharge coverage calculations march 2005 cnf entered new fiveyear 400 million unsecured revolving credit facility replaced existing fiveyear facility new revolving facility guaranteed certain cnf’s material cnf inc notes consolidated financial statements continued domestic subsidiaries available cash borrowings issuance letters credit borrowings agreement terminates march 11 2010 bear interest rate based upon lead bank’s base rate eurodollar rate plus margin dependent either cnf’s senior debt credit ratings ratio “net debt” ie indebtedness net cash equivalents certain marketable securities earnings interest taxes depreciationamortization agreement contains two financial covenants “net debt” ratio ii fixedcharge coverage ratio also various restrictive covenants including limitations incurrence liens ii consolidations mergers asset sales iii incurrence additional subsidiary indebtedness uncommitted credit facilities cnf uncommitted unsecured credit facilities totaling 120 million december 31 2004 available support letters credit bank guarantees overdraft facilities date total 391 million letters credit outstanding facilities convertible subordinated debentures june 1 2004 cnf redeemed 1289 million aggregate principal amount 5 convertible subordinated debentures due 2012 “convertible debentures” convertible debentures redeemable cash june 1 2000 price equal 103125 principal amount declining annually par redeemed june 1 2005 cnf trust 1 “trust” trust wholly owned cnf applied proceeds redemption convertible debentures redeem cnf’s 39 million interest common stock trust 125 million term convertible securities series “tecons” trust issued public june 1997 connection redemption convertible debentures cnf recognized 27 million expenses second quarter 2004 early redemption call premium writeoff unamortized cost issuing convertible debentures prior redemption june 2004 convertible debentures reported longterm debt result cnf’s adoption first quarter 2004 revised fasb interpretation 46 “consolidation variable interest entities interpretation arb 51” “fin 46r” fin 46r cnf deemed primary beneficiary trust cnf therefore required deconsolidate trust effective quarter ended march 31 2004 prior adoption fin 46r cnf reported tecons mezzanine security cash distributions reported nonoperating expense fin 46r cnf’s consolidated financial statements periods presented reflect deconsolidation trust accordingly longterm debt interest expense reflect obligation interest cost respectively convertible debentures prior redemption also prior redemption convertible debentures cnf’s 39 million interest common securities trust reported investment deferred charges assets dividend income common securities reported cnf nonoperating income senior debentures due 2034 april 27 2004 cnf issued 300 million 670 senior debentures due 2034 private placement exchange rights proceeds 2926 million net 74 million discount connection issuance senior debentures cnf capitalized 29 million underwriting fees related debt costs amortized maturity 2034 cnf used portion proceeds redeem 1289 million cnf’s convertible debentures june 1 2004 discussed cnf intends use remaining proceeds repurchase time pay maturity 100 million 735 notes due june 2005 working capital general corporate purposes july 27 2004 cnf completed exchange registered senior debentures “senior debentures” debentures issued private placement senior debentures bear interest rate 670 per year payable semiannually may 1 november 1 year beginning november 1 2004 cnf may redeem senior debentures whole part less 30 60 days’ notice redemption price equal greater 1 principal amount redeemed 2 sum present values remaining scheduled payments principal interest senior debentures redeemed discounted redemption date semiannual basis treasury rate payable equivalent debenture plus 35 basis points senior debentures issued indenture restricts cnf’s ability certain exceptions incur debt secured liens including amortization discount recognized upon issuance cnf inc notes consolidated financial statements continued interest expense 670 senior debentures due 2034 recognized annual effective interest rate 690 thrift stock plan notes cnf guarantees notes issued cnf’s thrift stock plan “tasp” december 31 2004 277 million aggregate principal amount series tasp notes outstanding bearing interest annual rate 600 maturing january 1 2006 620 million aggregate principal amount series b tasp notes outstanding bearing interest annual rate 854 maturing january 1 2009 series notes contain financial covenants require cnf maintain minimum amounts net worth fixedcharge coverage august 2003 series notes amended exclude effect goodwill impairment charges minimum pension liability adjustments requirement specified levels consolidated net worth fixedcharge coverage note guarantee agreement holders series tasp 600 notes contains financial covenant restricting sale merger significant subsidiary third party cnf obtained waiver required holders 600 notes sale mwf remain compliance certain financial covenants agreement holders series b notes issued cnf’s tasp right require cnf repurchase notes among things moody’s standard poor’s publicly rated cnf’s longterm senior debt less investment grade unless within 45 days cnf shall obtained guarantee letter credit permitted credit enhancement otherwise credit rating notes least “a” moody’s standard poor’s another nationally recognized rating agency selected holders notes shall maintain rating notes “a” better thereafter december 31 2004 cnf’s senior unsecured debt rated investment grade moody’s baa3 standard poor’s bbb 878 notes due 2010 200 million aggregate principal amount 878 notes contain certain covenants limiting incurrence additional liens prior termination december 2002 cnf designated four interest rate swap derivatives fair value hedges mitigate effects interest rate volatility fair value cnf’s 878 notes accordingly december 2002 changes value interest rate swap derivatives recognized earnings offset changes fair value hedged fixedrate debt termination date 398 million estimated fair value fair value hedges offset equal increase carrying amount hedged fixedrate longterm debt consistent sfas 133 398 million cumulative adjustment carrying amount 8 78 notes accreted future earnings effective interest rate debt extinguished time unamortized fairvalue adjustment would fully recognized earnings absent terminated fair value hedges 878 notes cease adjusted fluctuations fair value attributable changes interest rate risk including accretion fairvalue adjustment amortization discount recognized upon issuance interest expense 878 notes due 2010 recognized annual effective interest rate 56 735 notes 735 notes due 2005 contain certain covenants limiting incurrence additional liens mortgage notes payable conway acquired real property 2003 2002 part assuming note payable due 2008 note payable due 2004 respectively remaining note due 2008 secured real property cnf’s consolidated interest expense presented statements consolidated operations net capitalized interest 173000 2004 241000 2003 455000 2002 aggregate annual maturities sinking fund requirements longterm debt guarantees next five years ending december 31 112727000 2005 15033000 2006 18635000 2007 22704000 2008 22700000 2009 cnf inc notes consolidated financial statements continued december 31 2004 2003 estimated fair value longterm debt 760 million 580 million respectively fair values estimated based current rates offered debt similar terms maturities 6 leases cnf subsidiaries obligated noncancelable operating leases certain facilities equipment vehicles future minimum lease payments initial remaining noncancelable lease terms excess one year december 31 2004 follows certain leases contain restrictive covenants including limitation incurrence additional indebtedness requirement specified levels consolidated net worth certain leases also contain provisions allow cnf extend leases various renewal periods certain operating leases conway guarantees residual value tractors trailers end lease term december 31 2004 residual value guaranteed lease agreements 185 million cnf recognizes liability shortfall residual value guarantee equipment’s fair value fluctuates depending market conditions rental expense operating leases comprised following cnf inc notes consolidated financial statements continued 7 income taxes components provision benefit income taxes follows income taxes provided foreign operations based upon various tax laws rates countries operations conducted income tax provision varied amounts calculated applying us statutory income tax rate pretax income set forth following reconciliation august 2002 cnf entered settlement agreements irs pursuant parties settled issues related irs examinations years 1987 1996 cnf reversed tax provision related tax liabilities previously recognized issue resulting 140 million tax benefit third quarter 2002 result settlement agreements cnf required make additional payments irs 934 million payment made respect issues 2000 certain issues remain open years 1997 2001 management believe resolution issues likely material adverse effect cnf’s financial condition cash flows results operations cnf inc notes consolidated financial statements continued components deferred tax assets liabilities related following deferred tax assets liabilities consolidated balance sheets classified based related asset liability creating deferred tax deferred taxes related specific asset liability classified based estimated period reversal although realization assured management believes likely deferred tax assets realized cumulative undistributed earnings cnf’s foreign subsidiaries approximately 168 million december 31 2004 remitted subject withholding tax indefinitely reinvested respective foreign subsidiaries’ operations unless becomes advantageous tax foreign exchange reasons remit earnings therefore withholding us taxes provided amount withholding tax would payable remittance undistributed earnings would approximate 08 million 8 shareholders’ equity series b preferred stock 1989 board directors designated series 1100000 preferred shares series b cumulative convertible preferred stock 01 stated value held cnf thrift stock plan “tasp” series b preferred stock convertible common stock described note 9 “benefit plans” rate 471 shares share preferred stock subject antidilution adjustments certain circumstances ranks senior company’s common stock holders series b preferred stock entitled vote common stock entitled number votes circumstances equal product 13 multiplied b number shares common stock series b preferred stock convertible record date vote holders series b preferred stock also entitled vote separately class certain matters tasp trustee required vote allocated shares based upon instructions participants unallocated shares voted proportion voting instructions received participants allocated shares accumulated comprehensive income loss cnf reports changes equity except resulting investment owners distribution owners comprehensive income loss cnf inc notes consolidated financial statements continued statements consolidated shareholders’ equity following summary components accumulated comprehensive loss 9 benefit plans employees cnf subsidiaries us covered cnf postretirement medical plan “postretirement plan” several defined benefit pension plans “pension plans” pension plans consist plan covers noncontractual employees former employees cnf’s continuing discontinued operations “cnf retirement plan” well certain pension plans cover current former employees discontinued forwarding segment “forwarding plans” fully discussed note 2 “discontinued operations” cnf completed sale mwf december 2004 accordingly amounts related legally separate forwarding plans included employee benefit disclosures related benefit expense accrued benefit cost reported discontinued operations result employee benefit plan disclosures presented provided cnf retirement plan postretirement plan collectively “the cnf benefit plans” although total amounts relating cnf benefit plans included disclosures estimated portion benefit expense relates employees mwf ewa included financial statements income loss discontinued operations based cnf’s intention retain cnf benefit plans following sale mwf obligation related employees mwf ewa covered plans included employee benefits continuing operations cnf’s consolidated balance sheets december 31 2004 2003 pension plans benefits pension plans generally based employee’s five highest consecutive amounts annual compensation earned ten years immediately prior retirement cnf’s annual pension expense contributions based independent actuarial computations cnf’s funding policy evaluate tax cash position pension plans’ funded status maximize tax deductibility contributions year cnf expects contribute 75 million pension plans 2005 assets pension plans managed longterm strategic allocation targets developed analyzing variety diversified asset class combinations conjunction projected liability costs liability duration pension plans asset allocation studies generally conducted every 3 5 years targets reviewed determine adjustments required allocation percentages established portfolio periodically rebalanced targets pension plans seek mitigate investment risk investing across within asset classes pension plans use market timing strategies currently use financial derivative instruments manage risk generally pension plans’ investment managers prohibited short selling trading margin trading warrants options except acquired result purchase another security case options sold part covered position prohibited trading commodities may trade financial futures options specifically approved cnf’s benefits administrative committee designated representative cnf inc notes consolidated financial statements continued pension plan’s 85 overall expected longterm rate return assumption 2005 developed using return risk defined standard deviation correlation expectations return expectations created using longterm historical returns current market expectations forecasts inflation interest rates economic growth weightedaverage asset allocations pension plans follows 2003 cnf accelerated date actuarial measurement cnf’s obligation pension plans december 31 november 30 cnf believes onemonth acceleration measurement date preferred change allows time cnf management evaluate report actuarial measurements well evaluate results funding decisions effect change obligation assets pension plans material cumulative effect benefit expense accrued benefit cost accordingly amounts reported tables years ended december 31 2004 2003 based measurement dates november 30 2004 2003 respectively cnf inc notes consolidated financial statements continued following sets forth changes projected benefit obligation determination accrued benefit cost cnf retirement plan december 31 net periodic pension expense years ended december 31 includes following cnf inc notes consolidated financial statements continued presentation benefit expense 10662000 11213000 9930000 2004 2003 2002 respectively relates discontinued operations described amounts segregated discontinued operations financial statements connection sale mwf benefits curtailed certain former employees accordingly projected benefit obligation cnf retirement plan reduced 469 million pension accounting rules reduction projected benefit obligation offset substantially equal reduction plan’s unrecognized actuarial loss result effect curtailment benefit expense cnf retirement plan 2004 immaterial benefit payments reflect expected future service appropriate expected paid follows estimates based assumptions future events actual benefit payments may vary estimates supplemental pension plan cnf also supplemental retirement program “supplemental pension plan” provides additional benefits compensation excluded basic pension plans annual benefit expense programs based independent actuarial computations using assumptions consistent pension plans like cnf retirement plan postretirement plan supplemental pension plan covers employees former employees cnf’s continuing discontinued operations estimated accrued benefit cost 32704000 28856000 december 31 2004 2003 respectively included employee benefits consolidated balance sheets benefit expense supplemental pension plan relates employees continuing operations 5736000 2004 4701000 2003 4024000 2002 benefit expense 928000 766000 692000 million 2004 2003 2002 respectively relates employees discontinued operations described amounts benefit expense segregated discontinued operations financial statements minimum pension liability adjustment supplemental pension plan certain pension plans accumulated benefit obligation exceeded fair value related plan assets actuarial measurement dates 2004 2003 accordingly cnf recorded minimum pension liability adjustments recognize shortfall fair value assets accumulated benefit obligation plans december 31 2004 2003 due principally improved equity markets actual rate return plan assets 2004 accumulated minimum pension liability adjustments reduced 2004 resulting cnf inc notes consolidated financial statements continued 49 million decline netoftax accumulated comprehensive loss shareholders’ equity cnf’s consolidated balance sheets included following accumulated minimum pension liability adjustments postretirement medical plan cnf’s postretirement plan provides benefits certain noncontractual employees least 55 years age 10 years service postretirement plan limits benefits participants eligible retire january 1 1993 defined dollar amount based age years service provide employersubsidized retiree medical benefits employees hired january 1 1993 2005 cnf actuaries estimate cnf pay 7 million benefit payments participants postretirement plan following sets forth changes projected benefit obligation determination accrued benefit cost postretirement plan december 31 net periodic benefit expense years ended december 31 includes following presentation benefit expense 3602000 3804000 3632000 2004 2003 2002 respectively relates discontinued operations described amounts segregated discontinued operations financial statements cnf inc notes consolidated financial statements continued benefit payments reflect expected future service appropriate expected paid follows estimates based assumptions future events actual benefit payments may vary estimates assumed health care cost trend rates used determine projected benefit obligation postretirement plan follows assumed health care cost trends significant effect amounts reported cnf’s postretirement benefits onepercentagepoint change assumed health care cost trend rates would change aggregate service interest cost approximately 200000 accumulated projected benefit obligation 6000000 december 2003 medicare prescription drug improvement modernization act 2003 “act” enacted us act introduced prescription drug benefit medicare well federal subsidy sponsors retiree health benefit plans provide prescription drug benefit least actuarially equivalent medicare’s prescription drug benefit january may 2004 fasb issued fasb staff position 1061 1062 “accounting disclosure requirements related medicare prescription drug improvement modernization act 2003” “fsp 1061” “fsp 1062” fsp 1062 cnf concluded postretirement medical plan provided actuarially equivalent benefit recognized act’s effect retrospectively date enactment cnf’s adoption fsp 1062 resulted 49 million reduction projected postretirement benefit obligation recognized reduction net periodic postretirement benefit expense future periods costs subsidized act effect adoption fsp 1062 cnf’s financial condition results operations cash flows year ended december 31 2004 significant thrift stock plan cnf sponsors cnf thrift stock plan “tasp” voluntary defined contribution plan leveraged esop feature noncontractual us employees 1989 tasp borrowed 150000000 purchase 986259 shares cnf’s series b cumulative convertible preferred stock issuable tasp trustee cnf contributes common preferred stock tasp equal 50 participant contributions 15 tasp participant’s base compensation cnf recognized expense 12576000 2004 11277000 2003 10448000 2002 matching contributions series b preferred stock earns dividend 1293 per share used repay tasp debt shortfall paid cash cnf dividends preferred shares deductible income tax purposes cnf inc notes consolidated financial statements continued accordingly reflected net tax benefits statements consolidated operations allocation preferred stock participants’ accounts based upon ratio current year’s principal interest payments total tasp debt since cnf guarantees debt reflected longterm debt guarantees consolidated balance sheets tasp guarantees reduced principal paid share preferred stock convertible common stock upon employee ceasing participation plan rate generally equal number shares common stock could purchased 15210 less minimum conversion rate 471 shares common stock share series b preferred stock deferred compensation expense recognized preferred shares allocated participants equivalent cost preferred shares allocated deferred compensation expense 8570000 8036000 7597000 recognized 2004 2003 2002 respectively december 31 2004 tasp owned 742995 shares series b preferred stock 423586 shares allocated employees december 31 2004 estimated fair value 319409 unallocated shares 81449000 december 31 2004 cnf reserved authorized unissued common stock adequate satisfy conversion feature series b preferred stock compensation plans cnf subsidiaries adopted various plans relating achievement specific goals provide incentive compensation designated employees total compensation earned salaried participants plans 58811000 2004 23445000 2003 59758000 2002 hourly participants 46477000 2004 21847000 2003 37350000 2002 10 stockbased compensation stock options officers nonemployee directors granted options cnf’s stock option plans purchase common stock cnf prices equal market value stock date grant stock option grants generally vest ratably one four years grant date generally expire 10 years dates grant cnf accounts stockbased compensation utilizing intrinsicvalue method accordance provisions accounting principles board opinion 25 “accounting stock issued employees” pro forma information regarding net income loss earnings loss per share cnf applied fairvalue method recognition provisions sfas 123 “accounting stockbased compensation” refer note 1 “principal accounting policies stockbased compensation” december 2004 fasb issued sfas 123r “sharebased payment” “sfas 123r” revision sfas 123 supersedes apb 25 related implementation guidance sfas 123r eliminates alternative use apb 25’s intrinsicvalue method accounting provided sfas 123 originally issued requires companies recognize cost employee services received exchange awards equity instruments based grantdate fair value awards limited exceptions period employee required provide service exchange award effective date sfas 123r beginning first reporting period begins june 15 2005 third quarter 2005 cnf inc notes consolidated financial statements continued weightedaverage grantdate fair value options estimated using blackscholes option pricing model summarized related valuation assumptions following summary stock option data following summary stock options outstanding exercisable december 31 2004 restricted stock terms cnf’s stockbased compensation plans shares cnf’s common stock awarded selected executive officers awarded annually directors restrictions shares generally vest ratably one four years grant date shares valued market price cnf’s common stock date award cnf inc notes consolidated financial statements continued table summarizes information restricted stock awards years ended december 31 2004 compensation expense recognized restricted stock 4675000 included 1431000 shares vested upon achievement certain performance criteria compensation expense recognized restricted stock 1340000 2003 1010000 2002 december 31 2004 restricted stock awards outstanding vest upon completion service period performance criteria therefore accounted grantdate fixedprice accounting december 31 2004 cnf 3885622 common shares available grant stock options restricted stock stockbased compensation 11 commitments contingencies spinoff cfc december 2 1996 cnf completed spinoff consolidated freightways corporation “cfc” cnf’s shareholders cfc time spinoff remains party certain multiemployer pension plans covering current former employees cessation us operations 2002 result cfc’s “complete withdrawal” within meaning applicable federal law multiemployer plans point become obligated federal law pay share unfunded vested benefits plans possible trustees cfc’s multiemployer pension plans may assert claims cnf liable amounts owing plans result cfc’s withdrawal plans assurance claims would material none pension plans asserted threatened assert claims cnf however cnf received requests information regarding spinoff cfc representatives pension funds accordance federal law cnf responded requests based advice legal counsel knowledge facts cnf believes would ultimately prevail claims made although assurance regard cnf believes amount claims asserted could material judgment cnf significant part claims could material adverse effect cnf’s financial condition results operations cash flows prior enactment april 2004 pension funding equity act 2004 multiemployer funds asserted claims cnf would statutory obligation make cash payments funds prior arbitral judicial decisions funds’ determinations facts related cfc withdrawals law effect enactment pension funding equity act 2004 cnf would longer required make payments multiemployer funds unless final decisions arbitration proceedings court upheld funds’ determinations result matters discussed cnf provide assurance matters relating spinoff cfc’s bankruptcy material adverse effect cnf’s financial condition cash flows results operations cnf inc notes consolidated financial statements continued february 2002 lawsuit filed ewa district court southern district ohio alleging violations worker adjustment retraining notification act “warn act” connection employee layoffs ultimate terminations due august 2001 grounding ewa’s airline operations shutdown airline operations december 2001 court subsequently certified lawsuit class action behalf affected employees laid august 11 august 15 2001 warn act generally requires employers give 60days notice 60days pay benefits lieu notice shutdown operations mass layoff site employment estimated range potential loss matter zero approximately 8 million cnf intends continue vigorously defend lawsuit september 2003 cnf received notice united states attorney’s office district columbia ewa considered possible civil action false claims act allegedly submitting false invoices usps payment priority mail contract ewa subsequently entered tolling agreement government order give parties time investigate allegations november 2004 cnf representatives met government discuss government’s allegations time received certain information relating government’s investigation ewa continuing investigation allegations result currently unable predict outcome matter false claims act government would entitled recover treble damages plus penalties court ultimately conclude ewa knowingly submitted false invoices usps cnf defendant various lawsuits incidental businesses opinion management ultimate outcome actions material impact cnf’s financial condition cash flows results operations 12 segment reporting cnf discloses segment information manner components organized making operating decisions assessing performance allocating resources refer note 1 “principal accounting policies organization” description cnf’s reportable segments december 2004 cnf sold mwf result periods presented results operations net assets cash flows mwf segregated discontinued operations excluded reporting segment financial data summarized prior reclassification combined operating results mwf portion operations ewa reported continuing operations forwarding segment required accounting rules continuing operations allocated certain corporate overhead charges previously allocated discontinued forwarding segment fully discussed note 2 “discontinued operations” accordingly reporting segment financial information presented reflects reclassifications periods presented financial data management evaluates segment performance primarily based revenue operating income loss therefore nonoperating items consisting primarily interest income expense reported segment results corporate expenses generally allocated based measurable services provided segment general corporate expenses based segment revenue capital employed identifiable corporate assets consist primarily cash equivalents deferred charges assets property equipment deferred taxes certain corporate assets used provide shared data processing administrative services allocated individual segments intersegment revenue related operating income eliminated reconcile consolidated revenue operating income transactions within segments generally made cost cnf inc notes consolidated financial statements continued exception intersegment revenue cnf intended reflect fair value trailers manufactured road systems sold conway cnf inc notes consolidated financial statements continued geographic data geographic reporting 50 percent freight transportation revenues allocated canadian locations origination destination location canada revenues contract services allocated country services performed longlived assets outside united states immaterial periods presented cnf inc notes consolidated financial statements continued 13 quarterly financial data unaudited cnf inc notes consolidated financial statements continued item 9item 8 financial statements supplementary data conway inc consolidated balance sheets accompanying notes consolidated financial statements integral part statements conway inc consolidated balance sheets accompanying notes consolidated financial statements integral part statements conway inc statements consolidated operations accompanying notes consolidated financial statements integral part statements conway inc statements consolidated cash flows accompanying notes consolidated financial statements integral part statements conway inc statements consolidated shareholders’ equity accompanying notes consolidated financial statements integral part statements conway inc notes consolidated financial statements 1 principal accounting policies organization term “conway” “company” refers conway inc formerly cnf inc subsidiaries conway subsidiaries provide transportation logistics supplychain management services wide range manufacturing industrial retail customers financial reporting purposes conway divided three reporting segments conway freight transportation menlo worldwide conway freight transportation primarily provides regional nextday secondday transcontinental lessthantruckload freight transportation throughout us canada puerto rico mexico well assetbased regional transcontinental fulltruckload services domestic brokerage services intermodal shipments menlo worldwide includes operating results logistics vector logistics develops contract logistics solutions including management complex distribution networks supplychain engineering consulting prior gm’s purchase mw’s membership interest vector june 23 2006 fully discussed note 3 “investment unconsolidated joint venture” vector served lead logistics manager gm december 2004 conway completed sale mwf june 2006 closed operations domestic air freight forwarding business known conway forwarding result periods presented results operations net liabilities cash flows menlo worldwide forwarding segment conway forwarding operating unit segregated reported discontinued operations fully discussed note 2 “discontinued operations” refer note 12 “segment reporting” additional discussion conway’s rebranding initiative organizational changes principles consolidation consolidated financial statements include accounts conway inc subsidiaries significant intercompany accounts transactions eliminated recognition revenues conway freight transportation generally recognizes revenue upon delivery shipments related costs delivery recognized incurred shipments transit end accounting period conway freight transportation recognizes portion revenue earned balancesheet date recognizes related delivery costs incurred estimates future billing adjustments revenue including related weight verification earned discounts recognized time shipment menlo worldwide logistics recognizes revenue accordance contractual terms services provided revenue recorded gross basis without deducting thirdparty purchased transportation costs transactions logistics acts principal revenue recorded net basis deducting purchased transportation costs transactions logistics acts agent cash equivalents marketable securities cash equivalents consist shortterm interestbearing instruments maturities three months less date purchase december 31 2006 2005 cashequivalent investments 2496 million 4968 million respectively consisted primarily commercial paper certificates deposit carrying amount cashequivalent securities approximates fair value marketable securities consist primarily shortterm availableforsale auctionrate securities variablerate demand notes auctionrate securities variablerate demand notes contractual maturities greater three months date purchase however securities interest dividend rates reset every 7 35 days generally liquidated quickly unrealized gains losses auctionrate securities variablerate demand notes material periods presented material differences estimated fair values carrying values securities dates presented trade accounts receivable net conway freight transportation reports accounts receivable net realizable value provides allowance collection considered doubtful estimates uncollectible accounts based various judgments assumptions including revenue levels historical loss experience aging outstanding accounts receivable logistics based size nature client base performs periodic evaluation customers’ creditworthiness accounts receivable portfolio recognizes expense conway inc notes consolidated financial statements continued uncollectible accounts losses probable reasonably estimable trade accounts receivable net allowances 36 million 68 million december 31 2006 2005 respectively property plant equipment property plant equipment reported historical cost depreciated primarily straightline basis estimated useful lives generally 25 years buildings improvements 5 13 years revenue equipment 3 10 years equipment leasehold improvements amortized shorter terms respective leases useful lives assets conway periodically evaluates whether changes estimated useful lives necessary ensure estimates accurately reflect economic use assets second quarter 2006 conway completed analysis equipment lives extended estimated useful lives certain trailer equipment 10 years 13 years effect change estimate material effect conway’s results operations periods presented expenditures equipment maintenance repairs charged operating expenses incurred betterments capitalized gains losses sales equipment property recorded operating expenses tires fourth quarter 2006 conway changed accounting policy tires prior change cost original replacement tires mounted new existing equipment reported current assets prepaid expense amortized based estimated usage new policy cost replacement tires expensed time tires placed service case repairs maintenance costs cost tires new revenue equipment capitalized depreciated estimated useful life related equipment conway believes new policy preferable circumstances provides precise less subjective method recognizing expenses related tires consistent industry practice conway inc notes consolidated financial statements continued sfas 154 “accounting changes error corrections” conway required report change accounting policy retrospectively applying new policy prior periods presented unless impractical determine priorperiod effect accordingly conway adjusted previously reported financial information periods presented effect accounting policy change follows cumulative effect accounting policy change january 1 2004 earliest period presented 95 million decrease retained earnings capitalized software capitalized software consists certain direct internal external costs associated internaluse software net accumulated amortization capitalized software computed itembyitem basis period 3 10 years depending estimated useful life software conway inc notes consolidated financial statements continued amortization expense related capitalized software 142 million 2006 2005 150 million 2004 accumulated amortization december 31 2006 2005 969 million 833 million respectively longlived assets conway performs impairment analysis longlived assets whenever circumstances indicate carrying amount may recoverable assets held used impairment charge recognized estimated undiscounted cash flows associated asset group assets less carrying value impairment exists charge recognized difference carrying value fair value fair values determined using quoted market values discounted cash flows external appraisals applicable assets held disposal carried lower carrying value estimated net realizable value income taxes deferred income taxes provided tax effect temporary differences tax basis assets liabilities reported amounts financial statements conway uses liability method account income taxes requires deferred taxes recorded statutory rate effect taxes paid income tax receivables 315 million included accounts receivable conway’s consolidated balance sheets december 31 2006 2005 selfinsurance accruals conway uses combination purchased insurance selfinsurance programs provide costs medical casualty liability vehicular cargo workers’ compensation claims longterm portion selfinsurance accruals relates primarily workers’ compensation vehicular claims expected payable several years conway periodically evaluates level insurance coverage adjusts insurance levels based risk tolerance premium expense measurement classification selfinsured costs requires consideration historical cost experience demographic severity factors judgments current expected levels cost per claim retention levels methods provide estimates undiscounted liability associated claims incurred balance sheet date including claims reported changes assumptions factors materially affect actual costs paid settle claims amounts may different estimates conway participates reinsurance pool reinsure portion workers’ compensation vehicular liabilities participant pool cedes claims pool assumes equivalent amount claims reinsurance relieve conway liabilities original policy however opinion management potential exposure conway nonpayment minimal december 31 2006 2005 conway recorded liability related assumed claims 265 million 187 million respectively recorded receivable reinsurance pool 231 million 140 million respectively conway recognized operating expense 02 million 2006 operating income 16 million 2005 operating expense 06 million 2004 connection participation reinsurance pool 2006 plan year conway increased participation reinsurance pool compared 2005 plan year conway’s higher participation level 2006 resulted 139 million increase amount annual premiums conway obligated pay reinsurance pool resulted similar increase unearned annual premiums reinsurance pool obligated pay conway’s prepaid premiums unearned premiums recognized ratably year unamortized amounts reported consolidated balance sheets prepaid expenses accrued liabilities respectively foreign currency translation adjustments resulting translating foreign functional currency financial statements us dollars included foreign currency translation adjustment statements consolidated shareholders’ equity transaction gains losses arise exchangerate fluctuations transactions denominated currency local currency included results operations advertising expenses advertising costs expensed incurred primarily classified selling general administrative expenses advertising expenses 97 million 2006 47 million 2005 59 million 2004 conway inc notes consolidated financial statements continued earnings loss per share eps basic eps continuing operations computed dividing reported net income loss continuing operations preferred stock dividends weightedaverage common shares outstanding diluted eps calculated follows 2004 diluted shares reflect effect conway’s redemption june 2004 convertible subordinated debentures new accounting standards june 2006 fasb issued fasb interpretation 48 “accounting uncertainty income taxes interpretation sfas 109” “fin 48” clarifies accounting uncertainty tax positions fin 48 comprehensive model company recognize measure present disclose financial statements uncertain tax positions company taken expects take tax return tax positions shall recognized financial statements likely position sustained upon examination taxing authority position meets morelikelythannot criteria measured using probabilityweighted approach largest amount tax benefit greater 50 likely realized upon settlement requires previously recognized tax positions longer meet morelikelythannot recognition threshold derecognized first subsequent financial reporting period threshold longer met fin 48 requires expanded disclosure including reconciliation unrecognized tax benefits beginning end period effective date fin 48 conway inc notes consolidated financial statements continued first fiscal year beginning december 15 2006 conway expect adoption fin 48 material effect financial statements september 2006 fasb issued sfas 157 “fair value measurements” defines fair value establishes framework measuring fair value expands disclosures fairvalue measurements sfas 157 applies accounting pronouncements require permit fairvalue measurements require new fairvalue measurements effective date sfas 157 first fiscal year beginning november 15 2007 interim periods within years conway first quarter 2008 conway expect adoption sfas 157 material effect financial statements september 2006 securities exchange commission issued staff accounting bulletin 108 “considering effects prioryear misstatements quantifying misstatements currentyear financial statements” “sab 108” addresses effects prioryear uncorrected misstatements considered quantifying misstatements currentyear financial statements sab 108 requires companies quantify misstatements using balancesheet incomestatement approaches evaluate whether either approach results quantifying error material light relevant quantitative qualitative factors sab 108 effective annual financial statements covering first fiscal year ending november 15 2006 implementation sab 108 material effect conway’s financial statements estimates management makes estimates assumptions preparing financial statements conformity accounting principles generally accepted us estimates assumptions affect amounts reported accompanying financial statements notes changes estimates recognized accordance accounting rules estimate typically period new information becomes available reasonably possible actual results could materially differ estimates including related accounts receivable allowances impairment goodwill longlived assets depreciation income tax assets liabilities selfinsurance accruals pension plan postretirement obligations contingencies assets liabilities recognized connection restructurings dispositions reclassifications revisions certain amounts priorperiod financial statements reclassified revised conform currentperiod presentation 2 discontinued operations discontinued operations periods presented relate closure conway forwarding sale mwf shutdown ewa terminated priority mail contract us postal service “usps” spinoff consolidated freightways corporation “cfc” results operations net liabilities cash flows discontinued operations segregated continuing operations except otherwise noted conway inc notes consolidated financial statements continued results discontinued operations summarized assets liabilities discontinued operations presented consolidated balance sheets assets liabilities discontinued operations consisted following conway inc notes consolidated financial statements continued conway forwarding june 2006 conway closed operations domestic air freight forwarding business known conway forwarding decision close operating unit made following management’s detailed review unit’s competitive position prospects relation conway’s longterm strategies result closure conway 2006 recognized 42 million loss net 30 million tax benefit due primarily writeoff nontransferable capitalized software assets loss related noncancelable operating leases employee severance costs mwf impairment charge process evaluating several strategic alternatives menlo worldwide’s forwarding segment conway approached ups third quarter 2004 interest acquiring mwf accordingly third quarter 2004 conway classified mwf held sale recognized 2605 million impairment charge write recorded book value mwf anticipated selling price less costs sell impairment charge based agreement sell mwf described primarily represented estimated writedown fair value mwf’s goodwill longlived assets stock purchase agreement october 2004 conway menlo worldwide llc “mw” entered stock purchase agreement ups sell issued outstanding capital stock mwf conway completed sale december 2004 fully discussed stock purchase agreement excludes certain assets liabilities mwf includes certain assets liabilities conway subsidiaries related business conducted mwf among assets liabilities excluded related ewa obligation related mwf employees covered conway’s domestic pension postretirement medical longterm disability plans agreement ups agreed pay conway amount equal mwf’s cash position december 31 2004 pay estimated present value conway’s retained obligations related mwf employees covered conway’s longterm disability postretirement medical plans agreed parties stock purchase agreement conway agreed threeyear noncompete covenant subject certain exceptions limits conway’s annual airfreight oceanforwarding andor customsbrokerage revenues 175 million december 19 2007 conway also agreed indemnify ups certain losses ups may incur closing sale certain limitations losses related indemnification obligations costs including future cash expenditures related sale previously estimated recognized future periods additional loss disposal incurred disposition mwf upon completion sale mwf december 2004 conway received cash consideration 150 million subject certain postclosing adjustments including adjustments cash held mwf closing mwf’s net working capital closing connection sale conway 2004 recognized fourthquarter loss disposal 158 million net 36 million tax benefit adjusted carrying value mwf exceeded cash consideration 2005 conway received cash ups 294 million settlement mwf cash balance 790 million agreedupon estimated present value retained obligations reimbursable longterm disability postretirement medical plans result settlement mwf cash balance revisions disposalrelated cost estimates conway 2005 reported net gain 12 million fully discussed note 7 “income taxes” conway’s disposal mwf generated capital loss tax purposes current tax law capital losses used offset capital gains december 31 2004 conway inc notes consolidated financial statements continued conway forecast significant taxable capital gains fiveyear tax carryforward period accordingly cumulative disposalrelated tax benefit fully offset valuation allowance equal amount ewa results ewa relate cessation aircarrier operations 2001 termination priority mail contract usps 2000 2005 ewa recognized net losses 90 million due primarily 102 million increase estimated exposure litigation claims related priority mail contract 2006 ewa recognized additional net losses 12 million revisions disposalrelated cost estimates ewa’s estimated loss reserves declined 40 million december 31 2006 341 million december 31 2005 due primarily litigation settlements described 100 million payment made usps settle claims related priority mail contract fully discussed note 11 “commitments contingencies” ewa’s remaining loss reserves december 31 2006 reported liabilities discontinued operations consisted conway’s estimated remaining exposure related labor matters described connection cessation aircarrier operations 2001 ewa terminated employment pilots flight crew members pilots crew members represented air line pilots association “alpa” collective bargaining agreement subsequently alpa filed grievances behalf pilots flight crew members protesting cessation ewa’s aircarrier operations mwf’s use air carriers matters subject litigation us district court state court california including litigation brought alpa former ewa pilots crew members longer represented alpa june 30 2006 ewa conway inc menlo worldwide forwarding inc “mwf inc” concluded final settlement california state court litigation terms settlement plaintiffs received cash payment 92 million ewa lawsuit dismissed prejudice cash settlement reduced equal amount estimated loss reserve applicable grievances filed alpa august 8 2006 ewa paid 109 million settle litigation brought alpa finally concluded litigation former ewa pilots flight crew members still represented alpa date remaining litigation matters subject claim former ewa pilots flight crew members longer represented alpa ordered court binding arbitration former pilots also initiated litigation federal court based management’s current evaluation conway believes provided estimated remaining exposure related litigation matters however assurance regard conway cannot predict certainty ultimate outcome matters 3 investment unconsolidated joint venture vector scm llc “vector” joint venture formed general motors “gm” december 2000 purpose providing logistics management services global basis gm customers addition gm exercise call right june 23 2006 gm exercised right purchase mw’s membership interest vector “call right” december 11 2006 independent financial advisor established fair value vector agreed upon conway gm advisor established fair value 964 million membership interests jointventure partners including fair value 848 million attributable mw’s membership interest vector result agreedupon valuation conway december 2006 recognized receivable gm 519 million amount equal 848 million fair value mw’s membership interest reduced conway’s 329 million payable vector also recognized 410 million gain amount equal 519 million receivable reduced conway’s 90 million net investment vector 19 million salerelated costs settlement date january 5 2007 conway received 519 million payment gm conway inc notes consolidated financial statements continued table summarizes conway’s net investment vector salerelated amounts balancesheet dates june 30 2006 effective date gm’s exercise call right investment vector conway’s net investment vector consisted mw’s membership interest vector reduced conway’s payable vector agreements mw’s membership interest vector consisted mw’s capital account portion vector’s undistributed earnings conway’s payable vector related vector’s participation conway’s centralized cashmanagement system conway’s investment excess cash balances vector’s bank accounts prior sale vector’s domestic trade accounts payable payroll costs paid conway excess cash balances vector’s bank accounts invested conway prior june 30 2006 transactions settled vector’s affiliate accounts conway earned interest income based rate earned conway’s cashequivalent investments marketable securities earnings vector although mw owned majority interest vector mw’s portion vector’s operating results reported equitymethod investment based gm’s ability control certain operating decisions mw’s proportionate share net income vector reported conway’s statements consolidated operations reduction operating expenses note 12 “segment reporting” reported operating income menlo worldwide reporting segment mw’s undistributed earnings consist profit loss allocated mw percentage basis mw’s portion vector’s net income include provision us federal income taxes incurred conway include provision mw’s portion vector’s income taxes foreign state income vector organized limited liability company elected taxed partnership accordingly gaap mw’s portion us federal income taxes vector’s domestic income reported conway’s tax provision mw’s portion vector’s foreign state income taxes reported operating income component equitymethod income result mw’s portion vector’s net income include provision conway inc notes consolidated financial statements continued us federal income taxes income earned conway include tax provision 25 million 2006 42 million 2005 mw’s portion vector’s foreign state income taxes 410 million gain recognized fourth quarter 2006 sale mw’s membership interest reported operating income menlo worldwide reporting segment however conway’s related parent income taxes gain offset utilization capitalloss carryforward fully discussed note 7 “income taxes” except salerelated gain described menlo worldwide’s segment results subsequent june 30 2006 include profits associated settlement businesscase activity related periods prior june 30 2006 connection profits conway december 31 2006 reported 27 million receivable gm exercise call right results mw retaining contracts involving customers gm accordingly periods subsequent june 30 2006 results contracts reported operating results menlo worldwide logistics reporting segment transition related services pursuant closing agreement gm mw conway specified transition services primarily accounting assistance compensation amounts services provided gm transition period ending march 23 2007 addition lieu transition services gm mw entered agreement mw conway provide certain informationtechnology support services agreedupon compensation period one year closing date subsequent june 30 2006 vector’s excess cash balances invested conway reported separately accrued transitionrelated payable gm december 31 2006 conway’s transitionrelated liability 05 million reported net amounts receivable vector unreimbursed costs transitionsupport services provided conway summarized financial information vector table summarizes results operations vector described menlo worldwide’s segment results prior june 30 2006 include mw’s proportionate share vector’s net income subsequent june 30 2006 include profits associated settlement businesscase activity related periods prior june 30 2006 december 31 2005 assets vector totaled 494 million including 462 million current assets liabilities 129 million including 126 million current liabilities conway inc notes consolidated financial statements continued 4 accrued liabilities accrued liabilities consisted following 5 debt financing arrangements longterm debt guarantees consisted following revolving credit facility conway 400 million revolving credit facility matures september 30 2011 revolving credit facility available cash borrowings issuance letters credit 400 million december 31 2006 2005 borrowings outstanding revolving credit facility december 31 2006 2103 million letters credit outstanding leaving 1897 million available capacity additional letters credit cash borrowings subject compliance financial covenants customary conditions borrowing total letters credit outstanding december 31 2006 provided collateral conway’s selfinsurance programs borrowings agreement bear interest rate based upon lead bank’s base rate eurodollar rate plus margin dependent either conway’s senior debt credit ratings ratio “net debt” ie indebtedness net cash equivalents certain marketable securities earnings interest taxes depreciationamortization credit facility fee ranges 007 0175 applied total facility 400 million based conway’s current credit ratings revolving facility guaranteed certain conway’s material domestic subsidiaries contains two financial covenants 1 leverage ratio 2 fixedcharge coverage ratio conway inc notes consolidated financial statements continued also various restrictive covenants including limitations 1 incurrence liens 2 consolidations mergers asset sales 3 incurrence additional subsidiary indebtedness uncommitted credit facilities conway uncommitted unsecured credit facilities totaling 350 million december 31 2006 available support letters credit bank guarantees overdraft facilities date total 172 million letters credit outstanding facilities mortgage note payable conway’s mortgage note payable due 2008 secured real property defined contribution plan notes conway guarantees notes issued conway’s retirement savings plan voluntary defined contribution retirement plan fully discussed note 9 “employee benefit plans” december 31 2006 620 million aggregate principal amount series b notes outstanding bearing interest annual rate 854 maturing january 1 2009 conway repaid remaining 150 million series notes maturity january 3 2006 holders series b notes issued conway’s defined contribution retirement plan right require conway repurchase notes among things moody’s standard poor’s publicly rated conway’s longterm senior debt less investment grade unless within 45 days conway shall obtained guarantee letter credit permitted credit enhancement otherwise credit rating notes least “a” moody’s standard poor’s another nationally recognized rating agency selected holders notes shall maintain rating notes “a” better thereafter december 31 2006 conway’s senior unsecured debt rated investment grade moody’s baa3 standard poor’s bbb 878 notes due 2010 200 million aggregate principal amount 878 notes contain certain covenants limiting incurrence additional liens prior termination december 2002 conway designated four interest rate swap derivatives fairvalue hedges mitigate effects interestrate volatility fair value conway’s 878 notes termination date 398 million estimated fair value fairvalue hedges offset equal increase carrying amount hedged fixedrate longterm debt 398 million cumulative adjustment carrying amount 878 notes accreted future earnings effective interest rate debt extinguished time unamortized fairvalue adjustment would fully recognized earnings including accretion fairvalue adjustment amortization discount recognized upon issuance interest expense 878 notes due 2010 recognized annual effective interest rate 56 senior debentures due 2034 300 million aggregate principal amount senior debentures bear interest rate 670 per year payable semiannually may 1 november 1 year conway may redeem senior debentures whole part less 30 60 days’ notice redemption price equal greater 1 principal amount redeemed 2 sum present values remaining scheduled payments principal interest senior debentures redeemed discounted redemption date semiannual basis treasury rate payable equivalent debenture plus 35 basis points senior debentures issued indenture restricts conway’s ability certain exceptions incur debt secured liens including amortization discount recognized upon issuance interest expense 670 senior debentures due 2034 recognized annual effective interest rate 690 conway’s consolidated interest expense presented statements consolidated operations net capitalized interest 917000 2006 136000 2005 173000 2004 aggregate annual maturities sinking fund requirements longterm debt guarantees next five years ending december 31 186 million 2007 227 million 2008 227 million 2009 2000 million 2010 principal payments due 2011 conway inc notes consolidated financial statements continued december 31 2006 2005 estimated fair value longterm debt 600 million 630 million respectively fair values estimated based current rates offered debt similar terms maturities 6 leases conway subsidiaries obligated noncancelable operating leases certain facilities equipment vehicles certain leases also contain provisions allow conway extend leases various renewal periods future minimum lease payments initial remaining noncancelable lease terms excess one year december 31 2006 follows future minimum lease payments table net 52 million sublease income expected received noncancelable subleases rental expense operating leases comprised following conway inc notes consolidated financial statements continued 7 income taxes components provision income taxes follows income taxes provided foreign operations based upon various tax laws rates countries operations conducted income tax provision varied amounts calculated applying us statutory income tax rate pretax income shown following reconciliation conway inc notes consolidated financial statements continued components deferred tax assets liabilities related following deferred tax assets liabilities consolidated balance sheets classified based related asset liability creating deferred tax deferred taxes related specific asset liability classified based estimated period reversal although realization assured deferred tax assets recognized management believes likely realized deferred tax assets reduced valuation allowance based available evidence likely deferred tax assets realized june 2006 october 2005 conway entered settlement agreements internal revenue service “irs” pursuant parties settled various issues related audit years 1995 2002 conway eliminated related tax liabilities previously recognized issues resulting tax benefits reduced conway’s tax provision 121 million 2006 78 million 2005 conway’s disposal mwf december 2004 generated capital loss tax purposes fully discussed note 2 “discontinued operations” current tax law capital losses used offset capital gains since conway forecast significant taxable capital gains fiveyear tax carryforward period 408 million cumulative disposalrelated tax benefit fully offset valuation allowance equal amount 2005 cumulative disposalrelated tax benefit associated valuation allowance declined 300 million december 31 2005 due primarily salerelated proceeds received ups revisions tax effect salerelated estimates 2006 cumulative disposalrelated tax benefit associated valuation allowance declined 118 million december 31 2006 due primarily capital gains recognized sale mw’s membership interest vector sale expeditedshipping portion former conway expedite brokerage business remaining 118 million capitalloss carryforwards december 31 2006 106 million expire yearend 2009 12 million expire yearend 2010 december 31 2006 conway also 79 million operatingloss carryforwards 39 million taxcredit carryforwards available reduce state foreign income taxes future years deferred conway inc notes consolidated financial statements continued tax assets reduced valuation allowance 87 million based conway’s current uncertainty whether generate sufficient state foreign taxable income fully utilize carryforwards cumulative undistributed earnings conway’s foreign subsidiaries approximately 262 million december 31 2006 remitted subject withholding tax indefinitely reinvested respective foreign subsidiaries’ operations unless becomes advantageous tax foreign exchange reasons remit earnings therefore withholding us taxes provided amount withholding tax would payable remittance undistributed earnings would approximate 13 million 8 shareholders’ equity series b preferred stock 1989 board directors designated series 1100000 preferred shares series b cumulative convertible preferred stock 01 stated value held conway retirement savings plan series b preferred stock convertible common stock described note 9 “employee benefit plans” rate 471 shares share preferred stock subject antidilution adjustments certain circumstances ranks senior conway’s common stock holders series b preferred stock entitled vote common stock entitled number votes circumstances equal product 13 multiplied b number shares common stock series b preferred stock convertible record date vote holders series b preferred stock also entitled vote separately class certain matters plan trustee required vote allocated shares based upon instructions participants unallocated shares voted proportion voting instructions received participants allocated shares accumulated comprehensive income loss conway reports changes equity except resulting investment owners distribution owners comprehensive income loss statements consolidated shareholders’ equity following summary components accumulated comprehensive loss common stock repurchase program april 24 2006 conway’s board directors authorized expanded repurchase program replaced 300 million program approved january 2005 old program conway repurchased common stock 1896 million january 1 2005 april 24 2006 additional shares repurchased program new program conway authorized repurchase additional 400 million common stock openmarket purchases privately negotiated transactions time amounts management deems appropriate end second quarter 2007 new program conway repurchased common stock 3097 million april 27 2006 december 31 2006 leaving 903 million available future repurchases common stock conway inc notes consolidated financial statements continued 9 employee benefit plans periods presented employees conway subsidiaries us covered several retirement benefit plans including defined benefit pension plans defined contribution retirement plan postretirement medical plan conway’s defined benefit pension plans include “qualified” plans eligible certain beneficial treatment internal revenue code “irc” well “nonqualified” plans meet irc criteria october 2006 conway’s board directors approved changes conway’s retirement benefits intended preserve retirement benefits earned existing employees conway’s primary qualified defined benefit pension plan “primary db plan” primary nonqualified supplemental defined benefit pension plan “supplemental db plan” expanding benefits earned defined contribution plan “primary dc plan” new supplemental defined contribution plan “supplemental dc plan” major provisions effective january 1 2007 fully discussed “pension plan amendments” adoption sfas 158 effective december 31 2006 conway adopted recognition disclosure provisions sfas 158 recognition provisions sfas 158 “employers accounting defined benefit pension postretirement plans amendment sfas 87 88 106 132r” recognition provisions sfas 158 conway required recognize overfunded underfunded status defined benefit plans asset liability respectively balance sheet december 31 2006 conway’s defined benefit pension plans funded status measured difference projected benefit obligation fair value plan assets conway’s postretirement medical plan funded status measured difference accumulated postretirement benefit obligation fair value plan assets transition provisions sfas 158 actuarial gains losses priorservice costs credits yet included net periodic benefit expense adoption date recognized shareholders’ equity components ending balance accumulated comprehensive income loss net tax future periods conway recognize changes funded status components currentperiod net periodic benefit expense component comprehensive income loss year change occurs since retrospective adoption sfas 158 prohibited different recognition provisions applied determining planrelated amounts reported conway’s consolidated balance sheets december 31 2006 2005 prior adoption recognition provisions sfas 158 conway accounted defined benefit pension plans postretirement medical plan sfas 87 “employers accounting pensions” sfas 106 “employers’ accounting postretirement benefits pensions” respectively sfas 87 required employer report additional minimum pension liability adjustment recognize shortfall fair value pension plan assets accumulated benefit obligation rather projected benefit obligation required sfas 158 sfas 87 sfas 106 liability recognized employer’s balance sheets offset unrecognized actuarial gains losses priorservice costs credits yet included net periodic benefit expense conway inc notes consolidated financial statements continued upon adoption recognition provisions sfas 158 conway recognized funded status defined benefit plans shareholders’ equity component ending balance accumulated comprehensive loss net tax net adjustment accumulated comprehensive loss represents net unrecognized actuarial losses unrecognized priorservice credits result conway recognized following adjustments december 31 2006 addition sfas 158 requires plan assets obligations measured end fiscal year rather earlier measurement date allowed current accounting standards conway currently measures plan assets obligations november 30 effective date endoffiscalyear measurementdate requirement first fiscal year ending december 15 2008 conway yet adopted measurement provisions currently assessing effect financial statements qualified defined benefit pension plans conway’s qualified defined benefit pension plans collectively “qualified pension plans” consist mostly primary db plan covers noncontractual employees former employees conway’s continuing operations well former employees discontinued operations conway’s qualified defined benefit pension plans cover former employees discontinued forwarding segment “forwarding db plans” benefits current terms primary db plan benefits generally based employee’s five highest amounts annual compensation earned ten years immediately prior retirement cessation ewa’s operations 2001 sale mwf 2004 resulted partial termination forwarding db plans result participants became fully vested material benefits accrue plans plan assets qualified pension plans managed longterm strategic allocation targets developed analyzing variety diversified asset class combinations conjunction projected liability costs liability duration qualified pension plans asset allocation studies generally conducted every 3 5 years targets reviewed determine adjustments required allocation percentages established portfolio periodically rebalanced targets qualified pension plans seek mitigate investment risk investing across asset classes qualified pension plans’ investment managers use market timing strategies use financial derivative instruments manage risk except described generally investment managers conway inc notes consolidated financial statements continued prohibited short selling trading margin trading warrants options except acquired result purchase another security case options sold part covered position qualified pension plans’ investment managers prohibited trading commodities may trade financial futures options specifically approved conway inc administrative committee designated representative assumption 85 overall expected longterm rate return 2007 developed using return risk defined standard deviation correlation expectations return expectations created using longterm historical returns current market expectations inflation interest rates economic growth conway’s annual pension expense contributions based actuarial computations actuarial plan measurement date november year conway’s funding practice evaluate tax cash position qualified pension plans’ funded status maximize tax deductibility contributions year conway currently expects contribute approximately 13 million qualified pension plans 2007 subject variation based changes interest rates asset returns nonqualified pension plans conway also sponsors supplemental db plan several unfunded nonqualified defined benefit plans collectively “nonqualified pension plans” supplemental db plan provides additional benefits certain employees affected irc limitations compensation eligible benefits available qualified primary db plan conway inc notes consolidated financial statements continued funded status defined benefit pension plans following table reports changes projected benefit obligation fair value plan assets determination amounts recognized consolidated balance sheets conway’s defined benefit pension plans december 31 conway inc notes consolidated financial statements continued amounts included accumulated comprehensive income loss yet recognized net periodic pension expense december 31 2006 consist following net periodic benefit expense years ended december 31 includes following net benefit expense associated employees discontinued operations covered defined benefit pension plans reported statements consolidated operations continuing operations 2006 reported discontinued operations 2005 2004 presentation pension expense qualified pension plans discontinued operations immaterial 2005 115 million 2004 pension expense nonqualified pension plans discontinued operations immaterial periods presented future changes carrying value net obligation related qualified pension plans including forwarding db plans recognized future periods income loss continuing operations result changes fully discussed “pension plan amendments” conway recognized curtailment loss 16 million immediate recognition unrecognized priorservice costs addition changes reduced projected benefit obligation defined benefit pension plans 420 million amortized approximately 12 years average estimated remaining years service reduction future pension expense conway inc notes consolidated financial statements continued expected benefit payments defined benefit pension plans summarized estimates based assumptions future events actual benefit payments may vary estimates defined contribution plans conway sponsors conway retirement savings plan “primary dc plan” formerly “thrift stock plan” “tasp” voluntary defined contribution plan leveraged esop feature noncontractual us employees salarydeferral feature qualified section 401k internal revenue code “irc” 1989 primary dc plan borrowed 1500 million purchase 986259 shares conway’s series b cumulative convertible preferred stock may held primary dc plan trustee another plan trustee periods presented conway made matching contributions equal 50 participant contributions 15 participant’s base compensation conway recognized expense 148 million 2006 138 million 2005 126 million 2004 matching contributions series b preferred stock earns dividend 1293 per share used pay debt service primary dc plan notes dividends preferred shares deductible income tax purposes accordingly reflected net tax benefits statements consolidated operations allocation preferred stock participants’ accounts based upon ratio current year’s principal interest payments total debt primary dc plan since conway guarantees debt reflected longterm debt guarantees consolidated balance sheets guarantees primary dc plan notes reduced principal paid share preferred stock convertible common stock upon employee ceasing participation plan upon election employee rate generally equal number shares common stock could purchased 15210 less minimum conversion rate 471 shares common stock share series b preferred stock deferred compensation expense recognized preferred shares allocated participants equivalent cost preferred shares allocated deferred compensation expense 91 million 85 million 86 million recognized 2006 2005 2004 respectively december 31 2006 primary dc plan owned 603816 shares series b preferred stock 400067 shares allocated employees december 31 2006 estimated fair value 203749 unallocated shares 474 million december 31 2006 conway reserved authorized unissued common stock adequate satisfy conversion feature series b preferred stock effective january 1 2007 conway also sponsors supplemental dc plan provide additional benefits certain employees affected irc limitations compensation eligible benefits available primary dc plan conway inc notes consolidated financial statements continued pension plan amendments october 2006 conway’s board directors approved changes conway’s retirement benefits primarily intended preserve retirement benefits earned existing employees primary db plan expanding benefits earned primary dc plan major provisions plans take effect january 1 2007 primary db plan supplemental db plan • participation plan limited employees participating december 31 2006 new employees eligible participate plan • employees participants plan december 31 2006 retain accrued benefits credited service time earned credited service capped december 31 2006 future benefit plan payments reflect participants’ eligible compensation increases 2016 benefit capped • benefits paid plan continue determined based years credited service final average pay final average eligible compensation calculated five highest years earnings past ten years preceding retirement employees retiring december 31 2016 past ten years preceding december 31 2016 • vesting rules remain unchanged primary dc plan supplemental dc plan • conway’s discretionary matching contributions employee’s 401k account double 50 first 6 percent employee’s eligible compensation 50 first 3 percent employee’s eligible compensation • addition matching contribution conway makes new basic contribution 401k accounts eligible employees equal 3 5 percent employee’s eligible compensation depending years service size contribution increasing maximum 5 contribution years service increase contribution made quarterly every succeeding year employment vests immediately • addition matching contribution basic contribution conway makes new transition contribution 401k accounts qualifying employees equals 1 3 percent employee’s eligible compensation depending employee’s combined age years service december 31 2006 contribution made quarterly every succeeding year employment vests immediately postretirement medical plan conway sponsors postretirement medical plan provides benefits certain noncontractual employees least 55 years age least 10 years service “postretirement plan” postretirement plan limits benefits participants eligible retire january 1 1993 defined dollar amount based age years service provide employersubsidized retiree medical benefits employees hired january 1 1993 conway inc notes consolidated financial statements continued following sets forth changes benefit obligation determination amounts recognized consolidated balance sheets postretirement plan december 31 december 31 2006 amounts included accumulated comprehensive income loss yet recognized net benefit expense consist net periodic benefit expense years ended december 31 includes following conway inc notes consolidated financial statements continued included presentation benefit expense 52 million 36 million 2005 2004 respectively relates discontinued operations described amounts reported discontinued operations conway’s consolidated statements operations expected benefit payments reflect expected future service appropriate summarized estimates based assumptions future events actual benefit payments may vary estimates assumed healthcare cost trend rates used determine projected benefit obligation postretirement plan follows assumed healthcare cost trends significant effect amounts reported conway’s postretirement benefits onepercentagepoint change assumed healthcare cost trend rates would change aggregate service interest cost approximately 05 million accumulated projected benefit obligation approximately 73 million compensation plans conway subsidiaries adopted various plans relating achievement specific goals provide incentive compensation designated employees total compensation earned salaried participants plans 294 million 2006 386 million 2005 571 million 2004 hourly participants 207 million 2006 298 million 2005 448 million 2004 10 sharebased compensation terms conway’s sharebased compensation plans employees directors may granted options purchase conway’s common stock cases may awarded nonvested shares conway’s common stock also known restricted stock options granted prices equal market value common stock date grant expire 10 years date grant generally stock options granted three fouryear gradedvesting terms onethird onefourth award vests year respectively stock options granted december 2004 generally threeyear gradedvesting terms stock options issued date generally fouryear gradedvesting terms certain option awards provide accelerated vesting change control defined stock option plans effective september 26 2006 conway’s compensation committee established vesting provisions new option awards provide immediate vesting unvested shares upon retirement stock options issued date generally provide conway inc notes consolidated financial statements continued vesting subsequent employee’s retirement shares nonvested stock valued market price conway’s common stock date award generally granted threeyear gradedvesting terms december 31 2006 conway 6322393 common shares available grant stock options restricted stock sharebased compensation equity plans effective january 1 2006 conway adopted provisions sfas 123r requires recognition compensation expense sharebased payment awards issued conway’s employees directors conway previously applied recognition provisions apb 25 provided required pro forma disclosures sfas 123 pro forma information periods prior adoption sfas 123r prior adoption sfas 123r conway recognize compensation expense stock option awards options exercise price equal market value underlying common stock date grant shares nonvested stock conway recognized expense using accelerated amortization method fin 28 “accounting stock appreciation rights variable stock option award plans” based estimated grantdate fair value accordance disclosures required sfas 123 amended sfas 148 “accounting stockbased compensation” conway provided pro forma disclosures periods prior adoption sfas 123r pro forma disclosures compensation expense attributable stock options shares nonvested common stock amortized straightline basis requisite service period stated award forfeitures recognized occurred table presented comparative purposes illustrates pro forma effect net income loss earnings loss per share conway applied fairvalue recognition provisions sfas 123 sharebased compensation prior january 1 2006 conway inc notes consolidated financial statements continued effect adoption sfas 123r conway adopted sfas 123r using modified prospective transition method beginning january 1 2006 modified prospective method compensation expense recognized 2006 includes 1 compensation cost sharebased payments granted prior yet vested january 1 2006 based grantdate fair value estimated accordance original provisions sfas 123 adjusted estimated forfeitures 2 compensation cost sharebased payments granted subsequent january 1 2006 based grantdate fair value estimated accordance provisions sfas 123r accordance sfas 123r compensation expense options granted subsequent january 1 2006 recorded straightline basis shorter 1 requisite service period stated award 2 period grant date award employee’s retirementeligibility date awards granted prior yet vested upon adoption sfas 123r compensation expense recognized requisite service period stated award following expense recognized sfas 123r result adopting sfas 123r conway’s basic diluted earnings per share 2006 007 lower conway continued account sharebased compensation apb 25 sfas 123r requires benefits tax deductions excess recognized compensation expense reported financing cash flow rather operating activity required apb 25 accordance sfas 123r 27 million excess tax benefits reported financing cash flows 2006 priorperiod cash flows reclassified valuation assumptions fair value stock option grant estimated using blackscholes option pricing model following summary weightedaverage assumptions used calculated weightedaverage fair value riskfree interest rate determined using us treasury zerocoupon issue remaining term equal expected life option expected life option derived binomial lattice model based historical rate voluntary exercises postvesting terminations volatility expected volatility based historical volatility conway’s common stock recent period equal expected term option conway inc notes consolidated financial statements continued sharebased payment award activity following table summarizes stockoption award activity 2006 aggregate intrinsic value reported table represents total pretax value based conway’s closing common stock price 4404 december 31 2006 would received employees directors holders exercised inthemoney stock options date aggregate intrinsic value options exercised 2006 97 million total amount cash received exercise options 122 million related tax benefit realized exercise options 43 million total unrecorded deferred compensation cost stock options net forfeitures 67 million expected recognized weightedaverage period 141 years following table summarizes nonvested stock award activity 2006 total fair value nonvested stock became vested 2006 31 million based conway’s closing common stock price vesting date total unrecorded deferred compensation cost shares nonvested stock net forfeitures 25 million expected recognized weightedaverage period 183 years connection adoption sfas 123r conway eliminated amount deferred compensation related shares nonvested stock recorded shareholder’s equity consolidated balance sheets date required sfas 123r conway also reduced equal related amount additional paidin capital common stock 11 commitments contingencies spinoff cfc december 2 1996 conway completed spinoff consolidated freightways corporation “cfc” conway’s shareholders cfc time spinoff party certain multiemployer pension plans conway inc notes consolidated financial statements continued covering current former employees cessation us operations 2002 resulted cfc’s “complete withdrawal” within meaning applicable federal law multiemployer plans point became obligated federal law pay share unfunded vested benefits plans possible trustees cfc’s multiemployer pension plans may assert claims conway liable amounts owing plans result cfc’s withdrawal plans assurance claims would material conway received requests information regarding spinoff cfc representatives pension funds accordance federal law conway responded requests conway believes would ultimately prevail claims made although assurance regard due various unknowns including possible adverse judicial decisions cases conway believes amount claims asserted could material judgment conway significant part claims could material adverse effect conway’s financial condition results operations cash flows prior enactment april 2004 pension funding equity act 2004 multiemployer funds asserted claims conway would statutory obligation make cash payments funds prior arbitral judicial decisions funds’ determinations facts related cfc withdrawals law effect enactment pension funding equity act 2004 conway would longer required make payments multiemployer funds unless final decisions arbitration proceedings court upheld funds’ determinations result matters discussed conway provide assurance matters relating spinoff cfc material adverse effect conway’s financial condition results operations cash flows february 2002 lawsuit filed ewa district court southern district ohio alleging violations worker adjustment retraining notification act “warn act” connection employee layoffs ultimate terminations due august 2001 grounding ewa’s airline operations shutdown airline operations december 2001 court subsequently certified lawsuit class action behalf affected employees laid august 11 august 15 2001 warn act generally requires employers give 60days notice 60days pay benefits lieu notice shutdown operations mass layoff site employment estimated range potential loss matter zero approximately 9 million including interest conway intends continue vigorously defend lawsuit september 2003 conway received notice us attorney’s office district columbia ewa considered possible civil action false claims act allegedly submitting false invoices usps payment priority mail contract ewa subsequently entered tolling agreement government order give parties time investigate allegations november 2006 conway paid 100 million usps settlement substantially claims relating priority mail contract amount equal previously established reserve conway defendant various lawsuits incidental businesses opinion management ultimate outcome actions material effect conway’s financial condition results operations cash flows 12 segment reporting conway discloses segment information manner components organized making operating decisions assessing performance allocating resources financial reporting purposes conway divided three reporting segments conway freight transportation menlo worldwide conway menlo worldwide consists operating results menlo worldwide logistics “logistics” vector joint conway inc notes consolidated financial statements continued venture gm accounted equitymethod investment certain corporate activities reported conway reporting segment rebranding initiative april 2006 shareholders approved management’s proposal change company’s name conway inc part strategy bring company’s operations single master brand former conway transportation services reporting segment renamed conway freight transportation several name changes made business units comprise reporting segment conway freight transportation reporting segment consists combined operating results conway freight conway transportation conway freight includes us lessthantruckload “ltl” companies formerly known conway western express conway central express conway southern express converted single conway freight logo colors also included conway freight conway canada express renamed conway canada conway mexico collectively units provide primarily nextday secondday ltl freight transportation throughout us canada mexico within integrated regionalcarrier network conway transportation primarily provides assetbased regional transcontinental fulltruckload services domestic brokerage services truckload intermodal shipments new master brand initiative conway truckload road systems trailer manufacturing company retain existing names however former conway expediting unit conway full load brokerage units renamed collectively conway expedite brokerage fully discussed expeditedshipping portion business sold july 2006 truckloadbrokerage portion business merged conway truckload september 2006 integrated logistics january 2007 fully discussed logistics continue operate existing name within corporate conway master brand conway examines global trademark issues research completed decision change menlo name conway considered integration former conway transportation business effective january 2007 logistics integrated operations truckloadbrokerage business move expected leverage logistics’ significant procurement volumes purchased transportation improve value customers improve margin earned services provided integration truckloadbrokerage business also expected expand logisticsservices opportunities access truckloadbrokerage customers leverage shared expertise logistics truckloadbrokerage professionals sale closure businesses reported discontinued operations june 2006 conway closed operations domestic air freight forwarding business known conway forwarding 2004 conway mw sold mwf ups fully discussed note 2 “discontinued operations” accordingly results operations net liabilities cash flows menlo worldwide forwarding segment conway forwarding reporting unit segregated reported discontinued operations except otherwise noted sales businesses reported continuing operations december 2006 conway recognized sale gm mw’s membership interest vector sale vector qualify discontinued operation due classification equitymethod investment accordingly 410 million gain recognized sale reported net income continuing operations menlo worldwide reporting segment fully discussed note 3 “investment unconsolidated joint venture” conway inc notes consolidated financial statements continued july 2006 conway sold expeditedshipping portion former conway expedite brokerage business connection sale panther ii transportation inc “panther” conway received proceeds 80 million recognized gain 62 million sale assets gain reported net income continuing operations conway freight transportation reporting segment agreement panther conway sold panther customer list owneroperator relationships certain equipment expeditedshipping business retained portion business involved truckload brokerage part transaction conway executed noncompete agreement panther agreed exit expeditedshipping market immediately financial data management evaluates segment performance primarily based revenue operating income loss except vector evaluated based mw’s proportionate share vector’s income taxes accordingly interest expense investment income nonoperating items reported segment results corporate expenses generally allocated based measurable services provided segment general corporate expenses based segment revenue capital employed intersegment revenue related operating income eliminated reconcile consolidated revenue operating income transactions within segments generally made cost exception intrasegment revenue road systems intended reflect fair value trailers manufactured road systems sold conway freight transportation conway inc notes consolidated financial statements continued geographic data geographic reporting freight transportation revenues allocated equally origin destination service centers revenues contract services allocated country services performed longlived assets outside united states immaterial periods presented 13 related party transactions one conway’s directors robert p wayman served executive vice president chief financial officer hewlettpackard company “hp” mr wayman retired hp effective december 31 2006 retain position hp’s board directors hp’s annual meeting shareholders march 2007 menlo worldwide conway inc notes consolidated financial statements continued logistics provides services hp large integrated logistics projects accounted revenue 2219 million 2006 2030 million 2005 1874 million 2004 december 31 2006 2005 amounts due hp 361 million 298 million respectively included trade accounts receivable net conway’s consolidated balance sheets conway’s board directors considered relevant facts circumstances relating services provided menlo worldwide logistics hp concluded services constitute material relationship mr wayman company 14 quarterly financial data conway inc quarterly financial data conway inc notes consolidated financial statements continued comparability conway’s consolidated operating income affected following accounting events • effective january 1 2006 conway adopted sfas 123r modifiedprospective method priorperiod financial statements adjusted • effective fourth quarter 2006 conway freight adopted change accounting policy tires capitalizeandamortize method expenseasincurred method change retrospectively applied priorperiod financial statements unusual income • gain 62 million fourth quarter 2006 sale assets related conway expedite • gain 410 million fourth quarter 2006 sale mw’s membership interest vector excluding gain conway june 30 2006 recognized 20 million operating income associated vector business cases inprocess june 30 2006 b comparability conway’s tax provision net income affected following • tax benefits 72 million second quarter 2006 related settlement irs previous tax filings • tax benefits 29 million third quarter 2006 utilization capitalloss carryforwards offset tax sale conway expedite • tax benefits 148 million fourth quarter 2006 utilization capitalloss carryforwards offset tax sale mw’s membership interest • tax benefits 70 million second quarter 2005 related settlement irs previous tax filings item 9item 8 financial statements supplementary data conway inc consolidated balance sheets accompanying notes consolidated financial statements integral part statements conway inc consolidated balance sheets accompanying notes consolidated financial statements integral part statements conway inc statements consolidated income accompanying notes consolidated financial statements integral part statements conway inc statements consolidated cash flows accompanying notes consolidated financial statements integral part statements conway inc statements consolidated shareholders’ equity dollars thousands except per share data conway inc statements consolidated shareholders’ equitycontinued dollars thousands except per share data conway inc notes consolidated financial statements 1 principal accounting policies organization conway inc consolidated subsidiaries “conway” “company” provide transportation logistics services wide range manufacturing industrial retail customers fully discussed note 14 “segment reporting” financial reporting purposes conway divided five reporting segments freight logistics truckload vector principles consolidation consolidated financial statements include accounts conway inc subsidiaries significant intercompany accounts transactions eliminated difference exists conway’s fiscal yearend reporting yearend certain acquired companies typically lag period one month material effect conway’s financial position results operations recognition revenues conway freight allocates revenue reporting periods based relative transit time period recognizes expense incurred business units truckload segment recognize revenue related direct costs shipment delivered estimates future billing adjustments revenue including related weight freight classification verification earned discounts recognized time shipment menlo logistics recognizes revenue accordance contractual terms services provided revenue recorded gross basis without deducting thirdparty purchased transportation costs transactions menlo logistics acts principal revenue recorded net basis deducting purchased transportation costs transactions menlo logistics acts agent cash equivalents marketable securities cash equivalents consist shortterm interestbearing instruments maturities three months less date purchase december 31 2007 2006 cashequivalent investments 1602 million 2496 million respectively consisted primarily commercial paper certificates deposit carrying amount cashequivalent securities approximates fair value marketable securities consist primarily shortterm availableforsale auctionrate securities variablerate demand notes auctionrate securities variablerate demand notes contractual maturities greater three months date purchase historically securities interest dividend rates reset every 7 35 days easily liquidated unrealized gains losses auctionrate securities variablerate demand notes material periods presented material differences estimated fair values carrying values securities dates presented december 31 2007 marketable securities included 200 million auctionrate securities subsequently sold january 2008 later january 2008 conway separately acquired 150 million additional auctionrate securities remain outstanding liquidity auctionrate securities adversely affected recent auction failures prevented investors selling securities predetermined auction dates generally occur every 7 35 days current market conditions persist conway may unable sell auctionrate securities regularly scheduled auction dates however based credit ratings securities conway expect recognize impairment loss related marketable securities trade accounts receivable net conway’s business units freight truckload segments report accounts receivable net realizable value provide allowance collection considered doubtful estimates uncollectible accounts based various judgments assumptions including revenue levels conway inc notes consolidated financial statementscontinued historical loss experience aging outstanding accounts receivable menlo logistics based size nature client base performs periodic evaluation customers’ creditworthiness accounts receivable portfolio recognizes expense uncollectible accounts losses probable reasonably estimable activity allowance uncollectible accounts presented following table property plant equipment property plant equipment reported historical cost depreciated primarily straightline basis estimated useful lives generally 25 years buildings improvements 4 13 years revenue equipment 3 10 years equipment leasehold improvements amortized shorter terms respective leases useful lives assets conway periodically evaluates whether changes estimated useful lives necessary ensure estimates accurately reflect economic use assets expenditures equipment maintenance repairs charged operating expenses incurred betterments capitalized gains losses sales equipment property recorded operating expenses associated conway’s rebranding initiative expensed incurred primarily classified maintenance expense rebranding initiative launched 2006 includes new conway logo graphic identity rebranding expenses 143 million 2007 17 million 2006 consist primarily costs rebrand conway freight’s tractors trailers tires cost replacement tires expensed time tires placed service case repairs maintenance costs cost tires new revenue equipment capitalized depreciated estimated useful life related equipment capitalized software capitalized software consists certain direct internal external costs associated internaluse software net accumulated amortization capitalized software computed itembyitem basis period 3 10 years depending estimated useful life software amortization expense related capitalized software 134 million 2007 142 million 2006 2005 accumulated amortization december 31 2007 2006 1105 million 969 million respectively intangible assets connection acquisitions cfi cougar logistics conway recognized definitelived intangible assets estimated fair value acquired customer relationships trademarks preliminary estimates fair value intangible assets amortized itembyitem basis preliminary estimates useful life fully discussed note 2 “acquisitions” estimated fair value useful life intangible assets based current estimates result revisions preliminary estimates evaluations may necessary items finalized december 31 2007 intangible assets presented net accumulated amortization 10 million recognized 2007 goodwill longlived assets conway performs impairment analysis longlived assets whenever circumstances indicate carrying amount may recoverable assets held conway inc notes consolidated financial statementscontinued used impairment charge recognized estimated undiscounted cash flows associated asset group assets less carrying value impairment exists charge recognized difference carrying value fair value fair values determined using quoted market values discounted cash flows external appraisals applicable assets held disposal carried lower carrying value estimated net realizable value goodwill amortized tested impairment annual basis frequently events changes circumstances indicate asset might impaired assessment requires comparison fair value reporting unit carrying value net assets including allocated goodwill carrying value reporting unit exceeds fair value conway must compare implied fair value reportingunit goodwill carrying amount goodwill carrying amount reportingunit goodwill exceeds implied fair value goodwill impairment loss recognized amount equal excess goodwill recorded 2007 result acquisitions fully discussed note 2 “acquisitions” tested impairment 2008 income taxes deferred income taxes provided tax effect temporary differences tax basis assets liabilities reported amounts financial statements conway uses liability method account income taxes requires deferred taxes recorded statutory rate anticipated effect taxes paid selfinsurance accruals conway uses combination purchased insurance selfinsurance programs provide costs medical casualty liability vehicular cargo workers’ compensation claims longterm portion selfinsurance accruals relates primarily workers’ compensation vehicular claims expected payable several years conway periodically evaluates level insurance coverage adjusts insurance levels based risk tolerance premium expense measurement classification selfinsured costs requires consideration historical cost experience demographic severity factors judgments current expected levels cost per claim retention levels methods provide estimates undiscounted liability associated claims incurred balance sheet date including claims reported changes assumptions factors materially affect actual costs paid settle claims amounts may different estimates conway participates reinsurance pool reinsure portion workers’ compensation vehicular liabilities participant pool cedes claims pool assumes equivalent amount claims reinsurance relieve conway liabilities original policy however opinion management potential exposure conway nonpayment minimal december 31 2007 2006 conway recorded liability related assumed claims 313 million 265 million respectively recorded receivable reinsurance pool 280 million 231 million respectively revenues related reinsurance activities reported net associated expenses classified operating expenses connection participation reinsurance pool conway recognized net effect operating results 2007 operating expense 02 million 2006 operating income 16 million 2005 foreign currency translation adjustments resulting translating foreign functional currency financial statements us dollars included foreign currency translation adjustment statements consolidated shareholders’ equity transaction gains losses arise exchangerate fluctuations transactions denominated currency functional currency included results operations advertising expenses advertising costs expensed incurred classified operating expenses advertising expenses 85 million 2007 97 million 2006 47 million 2005 conway inc notes consolidated financial statementscontinued earnings loss per share eps basic eps continuing operations computed dividing reported net income loss continuing operations preferred stock dividends weightedaverage common shares outstanding diluted eps calculated follows new accounting standards september 2006 fasb issued sfas 157 “fair value measurements” defines fair value establishes framework measuring fair value expands disclosures fairvalue measurements sfas 157 applies accounting pronouncements require permit fairvalue measurements require new fairvalue measurements effective date sfas 157 first fiscal year beginning november 15 2007 interim periods within years conway first quarter 2008 november 2007 fasb proposed oneyear deferral sfas 157’s fairvalue measurement requirement nonfinancial assets liabilities except items recognized disclosed fair value recurring basis conway expect adoption sfas 157 material effect financial statements february 2007 fasb issued sfas 159 “the fair value option financial assets financial liabilities” permits entity choose measure many financial instruments certain items fair value specified election dates subsequent unrealized gains losses items fairvalue option elected reported earnings effective date sfas 159 first fiscal year beginning november 15 2007 conway 2008 conway expect adoption sfas 159 material effect financial statements december 2007 fasb issued sfas 160 “noncontrolling interests consolidated financial statementsan amendment arb 51” new statement noncontrolling interests net assets conway inc notes consolidated financial statementscontinued subsidiaries must reported balance sheet within equity face income statement sfas 160 requires disclosure amounts consolidated net income attributable parent noncontrolling interest effective date sfas 160 first fiscal year beginning december 15 2008 interim periods within years conway first quarter 2009 conway expect adoption sfas 160 material effect financial statements december 2007 fasb issued sfas 141 revised 2007 “business combinations” “sfas 141r” statement changes acquisitiondate subsequentperiod accounting associated business acquisitions several changes potential generate greater earnings volatility connection acquisition significant provisions sfas 141r result change accounting transactions costs contingencies acquisitiondate accounting estimates new statement transaction costs transactionrelated restructuring charges expensed incurred sfas 141r certain contingent assets liabilities recognized fair value new information available acquisition amounts may subject remeasurement also adjustments acquisitiondate accounting estimates accounted adjustments priorperiod financial statements effective date sfas 141r first fiscal year beginning december 15 2008 conway 2009 conway evaluating effect adopting sfas 141r including effect acquisitions consummated 2009 thereafter effect future goodwill evaluations companies acquired prior effective date estimates management makes estimates assumptions preparing financial statements conformity gaap estimates assumptions affect amounts reported accompanying financial statements notes changes estimates recognized accordance accounting rules estimate typically period new information becomes available reasonably possible actual results could materially differ estimates including related accounts receivable allowances impairment goodwill longlived assets depreciation income tax assets liabilities selfinsurance accruals pension plan postretirement obligations contingencies assets liabilities recognized connection acquisitions restructurings dispositions reclassifications revisions certain amounts priorperiod financial statements reclassified revised conform currentperiod presentation 2 acquisitions contract freighters inc august 23 2007 conway acquired outstanding common shares transportation resources inc “tri” tri holding company contract freighters inc affiliated companies collectively “cfi” cfi truckload carrier headquartered joplin missouri provides assetbased fulltruckload freight services throughout north america including services mexico following acquisition operating results cfi reported operating results conway truckload business unit truckload reporting segment truckload reporting segment includes operating results cfi august 23 2007 december 31 2007 fully discussed note 3 “restructuring activities” conway september 2007 integrated conway truckload business unit cfi business unit connection acquisition former shareholders tri paid 40 million escrow account purpose retaining certain key executive officers cfi escrow agreement key executive officers receive pro rata payments remain employees cfi twoyear period ending conway inc notes consolidated financial statementscontinued august 23 2009 accordingly 40 million allocated purchase price value retentionrelated restricted cash equal liability key executive officers accrued ratably twoyear service period key executive officers terminate employment prior august 23 2009 unearned portion restricted cash escrow would remitted conway acquisition cfi establishes conway enterprise offers domestic international shippers diverse suite solutions including ltl fulltruckload logistics services conway expects realize number strategic benefits acquisition cfi including diversification revenue mix efficient integrated truckload operation opportunities leverage sales efforts infrastructure freight flows among conway’s ltl truckload logistics business units cougar logistics september 5 2007 menlo worldwide llc “mw” acquired outstanding common shares cougar holdings pte ltd primary subsidiary cougar express logistics collectively “cougar logistics” cougar logistics warehousing logistics distributionmanagement freightforwarding company headquartered singapore cougar logistics provides services client base asia nearly 200 global businesses personnel facilities operations 12 locations singapore malaysia thailand following acquisition operating results cougar logistics reported operating results menlo logistics business unit logistics reporting segment logistics reporting segment includes operating results cougar logistics september 5 2007 december 31 2007 acquisition cougar logistics expands menlo logistics’ operations important asiapacific region menlo logistics expects realize number strategic benefits acquisition including entry new service offerings markets expansion capabilities within existing service portfolio industryfocused groups chic logistics october 18 2007 mw acquired outstanding common shares chic holdings ltd wholly owned subsidiaries shanghai chic logistics co ltd shanghai chic supply chain management co ltd collectively “chic logistics” chic logistics wellestablished provider logistics transportationmanagement services china maintains network operating sites 78 cities following acquisition operating results chic logistics reported operating results menlo logistics business unit logistics reporting segment logistics reporting segment includes operating results chic logistics october 18 2007 december 31 2007 purchase price chic logistics subject earnout provisions could potentially increased purchase price much 290 million conway determined amounts payable earnout provisions based earnings defined agreement year ended december 31 2007 addition mw may required pay additional amount consideration october 2009 based part percentage increase earnings year ended december 31 2008 year ended december 31 2007 consideration paid provision increase purchase price allocated goodwill conway inc notes consolidated financial statementscontinued acquisition chic logistics expands menlo logistics’ operations china positions menlo logistics capitalize growth china’s domestic economy menlo logistics expects realize number strategic benefits acquisition including entry new service offerings markets expansion capabilities within existing service portfolio industryfocused groups purchase price allocation net assets acquired presentation preliminary allocation purchase price based purchase price calculated respective acquisition closing dates estimated fair value carrying amount approximates fair value assets acquired liabilities assumed date purchaseprice accounting based current estimates assets acquired liabilities assumed accordingly revisions preliminary estimates evaluations including valuations tangible intangible assets certain contingencies may necessary information received third parties items finalized conway inc notes consolidated financial statementscontinued required sfas 142 “goodwill intangible assets” intangible assets indefinite life amortized intangible assets lives definite duration amortized estimated useful lives accordingly goodwill amortized subject annual impairment test none goodwill expected deductible income tax purposes identifiable intangible assets amortized straightline basis estimated useful lives assets cfi intangibles 10 years customer relationships 2 years trademarks cougar logistics’ customerrelationship intangible amortized 5 years pro forma financial information following unaudited pro forma condensed financial information presents combined results operations conway cfi acquisition occurred beginning periods presented based conway’s assessment materiality reflect acquisition cougar logistics chic logistics unaudited pro forma condensed consolidated financial information illustrative purposes hypothetical nature purport represent conway’s financial information would acquisition occurred dates indicated results future periods unaudited financial information reflects pro forma adjustments based upon available information certain assumptions conway believes reasonable including estimates related purchasemethod fairvalue accounting adjustments effect financing transactions conforming changes accounting policies however pro forma condensed consolidated statements income continuing operations reflect pro forma adjustments expected continuing effect consolidated results beyond 12 months consummation acquisition reflect changes operations may occur including synergistic benefits may realized acquisition costs may incurred integrating operations 3 restructuring activities freight august 2007 conway freight began operational restructuring combine three regional operating companies one centralized operation improve customer experience streamline processes reorganization centralized entity intended improve customer service efficiency development uniform new pricing operational processes implementation best practices fostering innovation connection reorganization conway freight recognized 2007 restructuring charge 132 million conway inc notes consolidated financial statementscontinued conway expects reorganization substantially complete end first quarter 2008 period reorganization estimates recognize total restructuring charges approximately 16 million estimated restructuring charges consist primarily employeeseparation costs leasetermination costs assetimpairment charges employeeseparation costs primarily include severance payments retention bonuses employees notified immediate future separation accordingly related expenses recognized employees’ remaining service period following table summarizes effect restructuring activities year ended december 31 2007 conway reported employeeseparation costs salaries wages employee benefits facility costs rents leases assetimpairment charges operating expenses statements consolidated income truckload connection acquisition cfi fully discussed note 2 “acquisitions” conway september 2007 integrated conway truckload business unit cfi business unit connection integration conway closed general office conway truckload incurred 15 million thirdquarter restructuring charge 2007 primarily costs related employee separation lease termination asset impairment conway substantially completed conway truckload reorganization 2007 4 discontinued operations discontinued operations periods presented relate 1 closure freight forwarding business known conway forwarding 2006 2 sale menlo worldwide forwarding inc subsidiaries menlo worldwide expedite inc collectively “mwf” 2004 3 shutdown emery worldwide airlines inc “ewa” 2001 termination priority mail contract usps 2000 4 spinoff cfc 1996 results operations cash flows discontinued operations segregated continuing operations except otherwise noted conway inc notes consolidated financial statementscontinued results discontinued operations summarized conway forwarding june 2006 conway closed operations domestic air freight forwarding business known conway forwarding decision close business unit made following management’s review unit’s competitive position prospects relation conway’s longterm strategies result closure conway 2006 recognized net losses 42 million net 30 million tax benefits writeoff nontransferable capitalized software assets loss related noncancelable operating leases costs mwf october 2004 conway mw entered stock purchase agreement united parcel service inc “ups” sell issued outstanding capital stock mwf conway completed sale december 2004 stock purchase agreement excludes assets liabilities related ewa obligation related former mwf employees covered conway’s domestic pension postretirement medical longterm disability plans agreement ups agreed pay conway amount equal mwf’s cash position december 31 2004 pay estimated present value conway’s retained obligations related mwf employees covered conway’s longterm disability postretirement medical plans conway also agreed indemnify ups certain losses ups may incur closing sale certain limitations losses related indemnification obligations costs including future cash expenditures related sale estimated recognized future periods additional loss disposal incurred 2005 conway received cash ups 294 million settlement mwf cash balance 790 million agreedupon estimated present value retained obligations reimbursable longterm disability postretirement medical plans salesrelated amounts received ups 2005 reported proceeds investing activities continuing operations result settlement mwf cash balance revisions disposalrelated cost estimates conway 2005 reported net gain 12 million conway inc notes consolidated financial statementscontinued ewa periods presented results ewa relate adjustments loss estimates except firstquarter net gain 2007 29 million net tax 17 million relates recovery prior losses 2005 ewa’s net loss due primarily increase estimated exposure litigation claims related priority mail contract 2006 conway paid 100 million usps settlement substantially claims relating priority mail contract amount equal previously established reserve ewa’s estimated loss reserves declined 33 million december 31 2007 40 million december 31 2006 due primarily cash payment liabilities ewa’s remaining loss reserves december 31 2007 consisted conway’s estimated remaining exposure related labor matters described connection cessation aircarrier operations 2001 ewa terminated employment pilots flight crewmembers pilots crewmembers represented air line pilots association “alpa” collective bargaining agreement subsequently alpa filed grievances behalf pilots flight crewmembers protesting cessation ewa’s aircarrier operations mwf’s use air carriers matters subject litigation us district court state court california including litigation brought alpa former ewa pilots crewmembers longer represented alpa june 30 2006 ewa conway inc menlo worldwide forwarding inc “mwf inc” concluded final settlement california state court litigation terms settlement plaintiffs received cash payment 92 million ewa lawsuit dismissed prejudice cash settlement reduced equal amount ewa’s estimated loss reserve applicable grievances filed alpa august 8 2006 ewa paid 109 million settle litigation brought alpa finally concluded litigation former ewa pilots flight crewmembers still represented alpa date remaining matters also subject claim former ewa pilots flight crewmembers longer represented alpa ordered court binding arbitration former pilots also initiated litigation federal court based management’s current evaluation conway believes provided estimated remaining exposure related matters however assurance regard conway cannot predict certainty ultimate outcome matters cfc results cfc relate conway’s spinoff cfc conway’s shareholders december 2 1996 connection spinoff cfc conway agreed indemnify certain states insurance companies sureties failure cfc pay certain workers’ compensation tax public liability claims pending september 30 1996 periods presented conway’s losses related cfc due revisions estimated losses related indemnified workers’ compensation liabilities 5 sale unconsolidated joint venture vector scm llc “vector” joint venture formed general motors “gm” december 2000 purpose providing logistics management services global basis gm customers addition gm exercise call right june 2006 gm exercised right purchase conway’s membership interest vector december 2006 independent financial advisor established fair value vector agreed upon conway gm advisor established fair value 964 million membership interests jointventure partners including fair value 848 million attributable conway’s membership interest vector conway inc notes consolidated financial statementscontinued result agreedupon valuation conway december 2006 recognized receivable gm 519 million amount equal 848 million fair value conway’s membership interest reduced conway’s 329 million payable vector also recognized 410 million gain amount equal 519 million receivable reduced conway’s 90 million net investment vector 19 million salerelated costs january 2007 conway received 519 million payment gm investment vector conway’s net investment vector consisted conway’s membership interest vector reduced conway’s payable vector agreements conway’s membership interest vector consisted conway’s capital account portion vector’s undistributed earnings conway’s payable vector related vector’s participation conway’s centralized cashmanagement system conway’s investment excess cash balances vector’s bank accounts prior sale vector’s domestic trade accounts payable payroll costs paid conway excess cash balances vector’s bank accounts invested conway prior june 30 2006 transactions settled vector’s affiliate accounts conway earned interest income based rate earned conway’s cashequivalent investments marketable securities operating results vector although conway owned majority interest vector conway’s portion vector’s operating results reported equitymethod investment based gm’s ability control certain operating decisions prior sale vector conway’s proportionate share net income vector reported conway’s statements consolidated income reduction operating expenses except salerelated gain described vector’s segment results subsequent june 30 2006 included profit loss associated settlement businesscase activity related periods prior june 30 2006 connection business cases conway december 31 2006 reported 27 million receivable gm following negotiation gm first quarter 2007 businesscase receivable due gm could collected accordingly 27 million loss recognized vector reporting segment write outstanding receivable gm transition related services pursuant closing agreement gm conway specified transition services primarily accounting assistance compensation amounts services provided gm march 31 2008 addition gm conway entered agreement conway provide certain informationtechnology support services agreedupon compensation least september 30 2008 agreements menlo logistics reported revenue 109 million 2007 primarily informationtechnology services provided gm conway inc notes consolidated financial statementscontinued summarized financial information vector table summarizes results operations vector described vector’s segment results prior june 30 2006 include proportionate share vector’s net income subsequent june 30 2006 include profits associated settlement businesscase activity related periods prior june 30 2006 6 accrued liabilities accrued liabilities consisted following 7 debt financing arrangements longterm debt guarantees consisted following conway inc notes consolidated financial statementscontinued revolving credit facility conway 400 million revolving credit facility matures september 30 2011 revolving credit facility available cash borrowings issuance letters credit 400 million december 31 2007 2006 borrowings outstanding revolving credit facility december 31 2007 2133 million letters credit outstanding 1867 million available capacity additional letters credit cash borrowings subject compliance financial covenants customary conditions borrowing total letters credit outstanding december 31 2007 provided collateral conway’s selfinsurance programs borrowings agreement bear interest rate based upon lead bank’s base rate eurodollar rate plus margin dependent either conway’s senior debt credit ratings leverage ratio credit facility fee ranges 007 0175 applied total facility 400 million based conway’s current credit ratings revolving facility guaranteed certain conway’s material domestic subsidiaries contains two financial covenants leverage ratio ii fixedcharge coverage ratio also various restrictive covenants including limitations incurrence liens ii consolidations mergers asset sales iii incurrence additional subsidiary indebtedness credit facilities shortterm borrowings conway uncommitted unsecured credit facilities totaling 480 million december 31 2007 available support letters credit bank guarantees overdraft facilities date total 166 million outstanding facilities connection mw’s acquisition cougar logistics mw assumed shortterm borrowings outstanding unsecured credit facilities december 31 2007 48 million shortterm borrowings 77 million bank guarantees letters credit overdraft facilities outstanding leaving 122 million available capacity subject compliance certain restrictive covenants including limitations incurrence liens borrowings credit facilities denominated foreign currencies bear variable interest rates currently ranging 238 285 credit facility fees range 05 125 amount outstanding bank guarantees letters credit addition mw assumed 03 million shortterm borrowings acquisition chic logistics foreigncurrency denominated borrowings outstanding december 31 2007 bear interest 723 mortgage note payable conway’s mortgage note payable repaid february 2008 primary dc plan notes conway guarantees notes issued conway’s retirement savings plan voluntary defined contribution retirement plan fully discussed note 11 “employee benefit plans” 434 million outstanding series b notes 207 million repaid january 2008 leaving 227 million maturing january 2009 holders series b notes issued conway’s defined contribution retirement plan right require conway repurchase notes among things moody’s standard poor’s creditrating agencies publicly rated conway’s longterm senior debt less investment grade unless within 45 days conway shall obtained guarantee letter credit permitted credit enhancement otherwise credit rating notes least “a” moody’s standard poor’s another nationally recognized rating agency selected holders notes shall maintain rating notes “a” better thereafter promissory note connection conway’s acquisition cfi conway assumed 11 million promissory note bears interest 60 due full december 31 2009 conway inc notes consolidated financial statementscontinued 8 78 notes due 2010 200 million aggregate principal amount 8 78 notes contain certain covenants limiting incurrence additional liens prior termination december 2002 conway designated four interest rate swap derivatives fairvalue hedges mitigate effects interestrate volatility fair value conway’s 8 78 notes termination date 398 million estimated fair value fairvalue hedges offset equal increase carrying amount hedged fixedrate longterm debt 398 million cumulative adjustment carrying amount 8 78 notes accreted future earnings effective interest rate debt extinguished time unamortized fairvalue adjustment would fully recognized earnings including accretion fairvalue adjustment amortization 12 million discount recognized upon issuance interest expense 8 78 notes due 2010 recognized annual effective interest rate 56 725 senior notes due 2018 august 23 2007 conway entered agreement established 5000 million bridgeloan facility date conway borrowed 4250 million bridgeloan facility fund portion purchase price cfi december 27 2007 conway issued 4250 million 725 senior notes used net proceeds offering cash hand repay amounts outstanding bridgeloan facility connection issuance 725 senior notes conway capitalized 40 million underwriting fees related debt costs amortized effectiveinterest method 725 senior notes bear interest rate 725 per year payable semiannually january 15 july 15 year beginning july 15 2008 conway may redeem 725 senior notes whole part less 30 60days’ notice redemption price equal greater principal amount redeemed ii sum present values remaining scheduled payments principal interest notes redeemed discounted redemption date semiannual basis rate payable treasury note comparable maturity plus 50 basis points also various restrictive covenants including limitations incurrence liens ii consolidations mergers asset sales iii incurrence additional subsidiary indebtedness holders 725 senior notes right require conway repurchase notes upon occurrence change control ii investmentgrade rating two moody’s standard poor’s fitch ratings repurchase price would equal 101 aggregate principal amount notes repurchased plus accrued unpaid interest senior debentures due 2034 300 million aggregate principal amount senior debentures bear interest rate 670 per year payable semiannually may 1 november 1 year conway may redeem senior debentures whole part less 30 60days’ notice redemption price equal greater 1 principal amount redeemed 2 sum present values remaining scheduled payments principal interest senior debentures redeemed discounted redemption date semiannual basis rate payable treasury note comparable maturity plus 35 basis points senior debentures issued indenture restricts conway’s ability certain exceptions incur debt secured liens including amortization 74 million discount recognized upon issuance interest expense 670 senior debentures due 2034 recognized annual effective interest rate 690 conway’s consolidated interest expense presented statements consolidated income net capitalized interest 514000 2007 917000 2006 136000 2005 aggregate annual maturities longterm debt guarantees next five years ending december 31 227 million 2008 238 million 2009 2000 million 2010 principal payments due 2011 2012 december 31 2007 conway’s senior unsecured debt rated investment grade standard poor’s bbb fitch ratings bbb moody’s baa3 conway inc notes consolidated financial statementscontinued december 31 2007 2006 estimated fair value longterm debt 11 billion 600 million respectively fair values estimated based current rates offered debt similar terms maturities 8 leases conway subsidiaries obligated noncancelable operating leases certain facilities equipment vehicles certain leases also contain provisions allow conway extend leases various renewal periods future minimum lease payments initial remaining noncancelable lease terms excess one year december 31 2007 follows future minimum lease payments table net 34 million sublease income expected received noncancelable subleases rental expense operating leases comprised following conway inc notes consolidated financial statementscontinued 9 income taxes components provision income taxes follows income taxes provided foreign operations based upon various tax laws rates countries operations conducted conway’s incometax provision varied amounts calculated applying us statutory income tax rate pretax income shown following reconciliation conway inc notes consolidated financial statementscontinued components deferred tax assets liabilities related following deferred tax assets liabilities consolidated balance sheets classified based related asset liability creating deferred tax deferred taxes related specific asset liability classified based estimated period reversal although realization assured deferred tax assets recognized management believes likely realized deferred tax assets reduced valuation allowance based available evidence likely deferred tax assets realized income tax receivables 76 million 315 million included accounts receivable conway’s consolidated balance sheets december 31 2007 2006 respectively june 2006 october 2005 conway entered settlement agreements internal revenue service “irs” pursuant parties settled various issues related audit years 1995 2002 conway eliminated related tax liabilities previously recognized issues resulting tax benefits reduced conway’s tax provision 121 million 2006 78 million 2005 conway’s sale mwf december 2004 generated capital loss tax purposes current tax law capital losses used offset capital gains since conway forecast significant taxable capital gains fiveyear tax carryforward period 408 million cumulative salerelated tax benefit fully offset valuation allowance equal amount 2005 cumulative salerelated tax benefit associated valuation allowance declined 300 million december 31 2005 due primarily salerelated proceeds received ups revisions tax effect salerelated estimates 2006 cumulative disposalrelated tax benefit associated valuation allowance declined 118 million december 31 2006 due primarily capital gains recognized sale conway’s membership interest vector sale expeditedshipping portion former conway expedite brokerage business 2007 conway inc notes consolidated financial statementscontinued cumulative salerelated tax benefit associated valuation allowance increased 299 million december 31 2007 due primarily revision mwf’s tax basis conway initially estimated time mwf’s sale remaining 299 million capitalloss carryforwards december 31 2007 288 million expire yearend 2009 11 million expire yearend 2010 december 31 2007 conway also 88 million operatingloss carryforwards 52 million taxcredit carryforwards available reduce federal state foreign income taxes future years deferred tax assets reduced valuation allowance 110 million based conway’s current uncertainty whether generate sufficient state foreign taxable income fully utilize carryforwards cumulative undistributed earnings conway’s foreign subsidiaries approximately 466 million december 31 2007 remitted subject withholding tax indefinitely reinvested respective foreign subsidiaries’ operations becomes advantageous tax foreign exchange reasons remit earnings therefore withholding us taxes provided amount withholding tax would payable remittance undistributed earnings would approximate 20 million uncertain tax positions june 2006 fasb issued fasb interpretation 48 “accounting uncertainty income taxesan interpretation sfas 109” “fin 48” clarifies accounting uncertainty tax positions fin 48 comprehensive model company recognize measure present disclose financial statements uncertain tax positions company taken expects take tax return tax positions shall recognized financial statements likely position sustained upon examination taxing authority position meets morelikelythannot criteria measured using probabilityweighted approach largest amount tax benefit greater 50 likely realized upon settlement requires previously recognized tax positions longer meet morelikelythannot recognition threshold derecognized first subsequent financial reporting period threshold longer met conway adopted provisions fin 48 january 1 2007 adoption date conway reported gross taxaffected unrecognized tax benefits 76 million including 12 million accrued interest penalties related unrecognized tax benefits conway classifies interest penalties expense related income taxes component income tax expense adoption date conway estimated 54 million unrecognized tax benefits recognized would change effective tax rate december 31 2007 conway’s estimate gross taxaffected unrecognized tax benefits increased 152 million including 54 million accrued interest penalties due primarily liabilities assumed conway’s acquisition cfi chic logistics conway complete 2008 review preliminary exposures could quantify december 31 2007 due incomplete information provisions purchase agreements conway right indemnification sellers failure file required tax returns pay required taxes prior completion sale december 31 2007 conway estimated 37 million unrecognized tax benefits recognized would change effective tax rate year ended december 31 2007 material amount interest penalties included tax expense next 12 months reasonably possible total unrecognized tax benefits decrease range 10 13 million due settlement agreements conway expects reach various states regarding unfiled tax returns cfi conway inc notes consolidated financial statementscontinued following summarizes changes unrecognized tax benefits year excluding interest penalties normal course business conway subject examination taxing authorities throughout world exceptions conway longer subject federal examinations years 2003 longer subject state local foreign incometax examinations years 1999 however certain years remain subject examination relevant jurisdictions including years 2003 2007 federal income taxes years 1999 2007 state local foreign income taxes tax return filed statute limitations applies accordingly tax jurisdiction reaches conclusion filing requirement exist additional years may reviewed tax authority 10 shareholders’ equity series b preferred stock 1989 board directors designated series 1100000 preferred shares series b cumulative convertible preferred stock 01 stated value held conway retirement savings plan preferred stock convertible common stock described note 11 “employee benefit plans” rate 471 shares share preferred stock subject antidilution adjustments certain circumstances ranks senior conway’s common stock holders preferred stock entitled vote common stock entitled number votes circumstances equal product 13 multiplied b number shares common stock preferred stock convertible record date vote holders preferred stock also entitled vote separately class certain matters plan trustee required vote allocated shares based upon instructions participants unallocated shares voted proportion voting instructions received participants allocated shares accumulated comprehensive income loss conway reports changes equity except resulting investment owners distribution owners comprehensive income loss statements consolidated shareholders’ equity following summary components accumulated comprehensive loss conway inc notes consolidated financial statementscontinued common stock repurchase program april 24 2006 conway’s board directors authorized expanded repurchase program replaced 300 million program approved january 2005 old program conway repurchased common stock 1896 million january 1 2005 april 24 2006 additional shares repurchased program expanded program conway authorized repurchase additional 400 million common stock openmarket purchases privately negotiated transactions time amounts management deemed appropriate end second quarter 2007 program concluded june 29 2007 conway repurchased common stock amount 3995 million 11 employee benefit plans periods presented employees conway subsidiaries us covered several retirement benefit plans including defined benefit pension plans defined contribution retirement plans postretirement medical plan conway’s defined benefit pension plans include “qualified” plans eligible certain beneficial treatment internal revenue code “irc” well “nonqualified” plans meet irc criteria effective january 1 2007 conway’s board directors approved changes conway’s retirement benefits intended preserve retirement benefits earned existing employees conway’s primary qualified defined benefit pension plan “primary db plan” primary nonqualified supplemental defined benefit pension plan “supplemental db plan” expanding benefits earned defined contribution retirement plan “primary dc plan” new supplemental defined contribution retirement plan provides additional benefits certain employees affected irc limitations compensation eligible benefits available primary dc plan beginning 2007 provisions increase expense related primary dc plan eliminate future service cost associated primary db plan supplemental db plan adoption sfas 158 effective january 1 2007 conway adopted measurementdate provisions sfas 158 “employers’ accounting defined benefit pension postretirement plans amendment sfas 87 88 106 132r” require employers measure plan assets obligations end fiscal year accordingly conway changed measurement date december 31 november 30 defined benefit pension plans transition provisions sfas 158 conway recognized 213 million decrease planrelated employee benefit liabilities 83 million decline related deferred tax assets 130 million increase shareholders’ equity beginningofperiod increase shareholders’ equity consisted 26 million decline retained earnings recognize pension cost december 2006 156 million decline accumulated comprehensive loss primarily recognize effect increase planrelated discount rate 595 december 31 2006 585 november 30 2006 effective december 31 2006 conway adopted recognition disclosure provisions sfas 158 recognition provisions sfas 158 conway required recognize overfunded underfunded status defined benefit plans asset liability respectively conway inc notes consolidated financial statementscontinued defined benefit pension plans conway’s qualified defined benefit pension plans collectively “qualified pension plans” consist mostly primary db plan covers noncontractual employees former employees conway’s continuing operations well former employees discontinued operations conway’s qualified defined benefit pension plans cover former employees discontinued operations “forwarding db plans” conway also sponsors supplemental db plan several unfunded nonqualified benefit plans collectively “nonqualified pension plans” supplemental db plan provides additional benefits certain employees affected irc limitations compensation eligible benefits available qualified primary db plan benefits effective january 1 2007 new employees eligible participate primary db plan supplemental db plan employees participating december 31 2006 retain accrued benefits credited service time earned credited service capped december 31 2006 future benefit plan payments calculated five highest years earnings past ten years preceding retirement employees retiring december 31 2016 past ten years preceding december 31 2016 cessation ewa’s operations 2001 sale mwf 2004 resulted partial termination forwarding db plans result participants became fully vested material benefits accrue plans plan assets qualified pension plans managed longterm strategic allocation targets developed analyzing variety diversified assetclass combinations conjunction projected liability costs liability duration qualified pension plans asset allocation studies generally conducted every 3 5 years targets reviewed determine adjustments required allocation percentages established portfolio periodically rebalanced targets qualified pension plans seek mitigate investment risk investing across asset classes qualified pension plans’ investment managers use market timing strategies use financial derivative instruments manage risk except described paragraph generally investment managers prohibited short selling trading margin trading warrants options except acquired result purchase another security case options sold part covered position qualified pension plans’ investment managers prohibited trading commodities may trade financial futures options specifically approved conway inc administrative committee designated representative conway inc notes consolidated financial statementscontinued assumption 85 overall expected longterm rate return 2008 developed using return risk defined standard deviation correlation expectations return expectations created using longterm historical returns current market expectations inflation interest rates economic growth conway’s annual pension expense contributions based actuarial computations actuarial plan measurement date december year conway’s funding practice evaluate tax cash position qualified pension plans’ funded status maximize tax deductibility contributions year conway expect contribute qualified pension plans 2008 however could change based changes interest rates asset returns conway inc notes consolidated financial statementscontinued funded status defined benefit pension plans following table reports changes projected benefit obligation fair value plan assets determination amounts recognized consolidated balance sheets conway’s defined benefit pension plans december 31 conway inc notes consolidated financial statementscontinued amounts included accumulated comprehensive income loss yet recognized net periodic benefit expense consist following priorservice credit qualified pension plans amortized accumulated comprehensive loss 2008 32 million actuarial loss nonqualified pension plans amortized accumulated comprehensive loss 2008 15 million net periodic benefit expense income years ended december 31 includes following result plan amendments became effective january 1 2007 conway recognized curtailment loss 16 million 2006 immediate recognition unrecognized priorservice costs addition changes due amendments reduced projected benefit obligation defined benefit pension plans amortized reduction future pension expense conway inc notes consolidated financial statementscontinued 2007 changes plan assets benefit obligations recognized comprehensive income consisted following expected benefit payments defined benefit pension plans summarized estimates based assumptions future events actual benefit payments may vary estimates defined contribution retirement plan primary dc plan voluntary defined contribution plan leveraged employeestock ownership plan feature noncontractual us employees salary deferral qualified section 401k irc 1989 primary dc plan borrowed 1500 million purchase 986259 shares preferred stock may held primary dc plan trustee another plan trustee effective january 1 2007 amendments conway’s primary dc plan increased contributions made conway employees’ 401k accounts conway increased discretionary matching contributions primary dc plan 50 first six percent employees’ eligible compensation 50 first three percent eligible compensation makes additional contributions employees’ 401k accounts based years service result conway’s expense related contributions primary dc plan 844 million 2007 148 million 2006 138 million 2005 december 31 2007 2006 conway recognized accrued liabilities 219 million 14 million respectively contributions related primary dc plan preferred stock earns dividend 1293 per share used pay debt service primary dc plan notes dividends preferred shares deductible income tax purposes accordingly reflected net tax benefits statements consolidated income allocation preferred stock participants’ accounts based upon ratio current year’s principal interest payments total debt primary dc plan since conway guarantees debt reflected longterm debt guarantees consolidated balance sheets guarantees primary dc plan notes reduced principal paid conway inc notes consolidated financial statementscontinued share preferred stock convertible common stock upon employee ceasing participation plan upon election employee rate generally equal number shares common stock could purchased 15210 less minimum conversion rate 471 shares common stock share preferred stock deferred compensation expense recognized preferred shares allocated participants equivalent cost preferred shares allocated deferred compensation expense 107 million 91 million 85 million recognized 2007 2006 2005 respectively december 31 2007 primary dc plan owned 560998 shares preferred stock 424211 shares allocated employees december 31 2007 estimated fair value 136787 unallocated shares 304 million december 31 2007 conway reserved authorized unissued common stock adequate satisfy conversion feature preferred stock postretirement medical plan conway sponsors postretirement medical plan provides benefits certain noncontractual employees least 55 years age least 10 years service “postretirement plan” postretirement plan provide employersubsidized retiree medical benefits employees hired january 1 1993 following sets forth changes benefit obligation determination amounts recognized consolidated balance sheets postretirement plan december 31 conway inc notes consolidated financial statementscontinued amounts included accumulated comprehensive income loss yet recognized net periodic benefit expense consist following 2008 actuarial losses priorservice credits 04 million 12 million respectively amortized accumulated comprehensive loss net periodic benefit expense years ended december 31 includes following included presentation benefit expense 52 million 2005 relates discontinued operations reported discontinued operations conway’s consolidated statements income 2007 changes benefit obligation recognized comprehensive income consisted following conway inc notes consolidated financial statementscontinued expected benefit payments reflect expected future service appropriate summarized estimates based assumptions future events actual benefit payments may vary estimates assumed healthcare cost trend rates used determine benefit obligation follows assumed healthcare cost trends affect amounts reported conway’s postretirement benefits onepercentagepoint change assumed healthcare cost trend rates would change aggregate service interest cost approximately 05 million accumulated projected benefit obligation approximately 46 million compensation plans conway subsidiaries adopted various plans relating achievement specific goals provide incentive compensation designated employees total compensation earned salaried participants plans 306 million 2007 294 million 2006 386 million 2005 hourly participants 283 million 2007 207 million 2006 298 million 2005 12 sharebased compensation terms sharebased compensation plans conway grants various types sharebased compensation awards employees directors plans provide awards form stock options nonvested stock also known restricted stock performanceshare plan units stock options granted prices equal market value common stock date grant expire 10 years date grant generally stock options granted three fouryear gradedvesting terms onethird onefourth award vests year respectively stock options granted december 2004 generally threeyear gradedvesting terms stock options issued date generally fouryear gradedvesting terms certain option awards provide accelerated vesting change control defined stock option plans effective september 26 2006 conway’s compensation committee established vesting provisions new option awards provide immediate vesting unvested shares upon retirement stock options issued date generally provide continued vesting subsequent employee’s retirement conway inc notes consolidated financial statementscontinued shares nonvested stock valued market price conway’s common stock date award generally granted threeyear gradedvesting terms 2007 conway awarded performanceshare plan units “pspus” officerlevel employees shares valued market price conway’s common stock date award vest three years grant date certain performance criteria achieved number shares award recipients ultimately receive depends upon achievement certain performance criteria range 0 200 grant target pspus subject forfeiture award recipient leaves conway threeyear period amount expense recorded period based conway’s current estimate number shares ultimately vest december 31 2007 conway 5451220 common shares available grant stock options restricted stock sharebased compensation equity plans effective january 1 2006 conway adopted provisions sfas 123r require recognition compensation expense sharebased payment awards issued conway’s employees directors conway previously applied recognition provisions apb 25 provided required pro forma disclosures sfas 123 pro forma information periods prior adoption sfas 123r prior adoption sfas 123r conway recognize compensation expense stock option awards options exercise price equal market value underlying common stock date grant shares nonvested stock conway recognized expense using accelerated amortization method fin 28 “accounting stock appreciation rights variable stock option award plans” based estimated grantdate fair value accordance disclosures required sfas 123 amended sfas 148 “accounting stockbased compensation” conway provided pro forma disclosures periods prior adoption sfas 123r pro forma disclosures compensation expense attributable stock options shares nonvested common stock amortized straightline basis requisite service period stated award forfeitures recognized occurred conway inc notes consolidated financial statementscontinued table presented comparative purposes illustrates pro forma effect net income earnings per share conway applied fairvalue recognition provisions sfas 123 sharebased compensation prior january 1 2006 effect adoption sfas 123r conway adopted sfas 123r using modified prospective transition method beginning january 1 2006 modified prospective method compensation expense recognized periods subsequent 2005 includes 1 compensation cost sharebased payments granted prior yet vested january 1 2006 based grantdate fair value estimated accordance original provisions sfas 123 adjusted estimated forfeitures 2 compensation cost sharebased payments granted subsequent january 1 2006 based grantdate fair value estimated accordance provisions sfas 123r accordance sfas 123r compensation expense options granted subsequent january 1 2006 recorded straightline basis shorter 1 requisite service period stated award 2 period grant date award employee’s retirementeligibility date awards granted prior yet vested upon adoption sfas 123r compensation expense recognized requisite service period stated award following expense recognized sfas 123r conway inc notes consolidated financial statementscontinued sfas 123r requires benefits tax deductions excess recognized compensation expense reported financing cash flow rather operating activity required apb 25 accordance sfas 123r 06 million 27 million excess tax benefits reported financing cash flows 2007 2006 respectively cash flows 2005 reclassified valuation assumptions fair value stock option grant estimated using blackscholes optionpricing model following summary weightedaverage assumptions used calculated weightedaverage fair value riskfree interest rate determined using us treasury zerocoupon issue remaining term equal expected life option expected life option derived binomial lattice model based historical rate voluntary exercises postvesting terminations volatility expected volatility based historical volatility conway’s common stock recent period equal expected term option sharebased payment award activity following table summarizes stockoption award activity 2007 aggregate intrinsic value reported table represents total pretax value based conway’s closing common stock price 4154 december 31 2007 would received employees directors holders exercised inthemoney stock options date 2007 2006 aggregate intrinsic value exercised options 44 million 97 million respectively total amount cash received exercise options 2007 2006 82 million 122 million respectively related tax benefit realized exercise options 15 million 43 million respectively conway inc notes consolidated financial statementscontinued total unrecorded deferred compensation cost stock options net forfeitures 59 million expected recognized weightedaverage period 146 years following table summarizes nonvested stock pspus activity 2007 total fair value nonvested stock became vested 2007 2006 22 million 31 million respectively based conway’s closing common stock price vesting date total unrecorded deferred compensation cost shares nonvested stock net forfeitures 28 million expected recognized weightedaverage period 138 years total unrecorded deferred compensation associated awarded pspus reported table 41 million expected recognized weightedaverage period 200 years ultimate expense recognized vary based upon ultimate number shares vest number shares ultimately vest range 0 200 shares disclosed depending upon achievement performance criteria connection adoption sfas 123r conway eliminated deferred compensation nonvested stock recorded shareholder’s equity required sfas 123r conway also reduced equal related amount additional paidin capital common stock 13 commitments contingencies purchase commitments december 31 2007 conway entered purchase commitments acquire 754 million revenue equipment delivery 2008 addition conway entered fuel purchase commitments certain diesel fuel vendors commitments conway agreed purchase market prices specified volume fuel delivered ratably contract period expires july 2008 conway estimates purchase approximately 702 million diesel fuel commitments represent portion conway’s fuel needs contract period spinoff cfc december 2 1996 conway completed spinoff consolidated freightways corporation “cfc” conway’s shareholders cfc time spinoff party certain multiemployer pension plans covering current former employees cessation us operations 2002 resulted cfc’s “complete withdrawal” within meaning applicable federal law multiemployer plans point became obligated federal law pay share unfunded vested benefits plans conway inc notes consolidated financial statementscontinued possible trustees cfc’s multiemployer pension plans may assert claims conway liable amounts owing plans result cfc’s withdrawal plans assurance claims would material conway received requests information regarding spinoff cfc representatives pension funds accordance federal law conway responded requests conway believes would ultimately prevail claims made although assurance regard due various unknowns including possible adverse judicial decisions cases conway believes amount claims asserted could material judgment conway significant part claims could material adverse effect conway’s financial condition results operations cash flows prior enactment april 2004 pension funding equity act 2004 multiemployer funds asserted claims conway would statutory obligation make cash payments funds prior arbitral judicial decisions funds’ determinations facts related cfc withdrawals law effect enactment pension funding equity act 2004 conway would longer required make payments multiemployer funds unless final decisions arbitration proceedings court upheld funds’ determinations result matters discussed conway provide assurance matters relating spinoff cfc material adverse effect conway’s financial condition results operations cash flows february 2002 lawsuit filed ewa district court southern district ohio alleging violations worker adjustment retraining notification act “warn act” connection employee layoffs ultimate terminations due august 2001 grounding ewa’s airline operations shutdown airline operations december 2001 court subsequently certified lawsuit class action behalf affected employees laid august 11 august 15 2001 warn act generally requires employers give 60days notice 60days pay benefits lieu notice shutdown operations mass layoff site employment estimated range potential loss matter zero approximately 9 million including interest conway intends continue vigorously defend lawsuit conway defendant various lawsuits incidental businesses opinion management ultimate outcome actions material effect conway’s financial condition results operations cash flows 14 segment reporting conway discloses segment information manner business units organized making operating decisions assessing performance allocating resources financialreporting purposes conway divided following five operating segments • freight segment primarily consists operating results conway freight business unit provides regional interregional transcontinental lessthantruckload freight services throughout north america july 2006 conway sold expeditedshipping portion former conway expedite brokerage business remaining truckloadbrokerage portion business integrated menlo logistics january 2007 conway inc notes consolidated financial statementscontinued • logistics segment consists operating results menlo logistics business unit develops contractlogistics solutions including management complex distribution networks supplychain engineering consulting also provides domestic brokerage services • truckload segment includes combined operating results conway truckload business unit recently acquired cfi business unit combined businesses provide assetbased fulltruckload freight services throughout north america including services mexico • vector prior sale vector reporting segment consisted conway’s proportionate share net income vector joint venture gm purchased conway’s membership interest vector december 2006 • reporting segment consists operating results road systems trailer manufacturer certain corporate activities related income expense allocated reporting segments including results related corporate reinsurance activities corporate properties results conway truckload previously reported freight segment connection acquisition cfi fully discussed note 2 “acquisitions” new truckload segment created accordingly operating results conway truckload reported truckload segment prior periods reclassified conform current presentation conway inc notes consolidated financial statementscontinued financial data management evaluates segment performance primarily based revenue operating income loss accordingly interest expense investment income nonoperating items reported segment results corporate expenses generally allocated based measurable services provided segment general corporate expenses based segment revenue capital employed intersegment revenue related operating income eliminated reconcile consolidated revenue operating income transactions within segments generally made cost exception intersegment revenue road systems intended reflect fair value trailers manufactured road systems sold conway freight conway truckload conway inc notes consolidated financial statementscontinued geographic data geographic reporting freight transportation revenues allocated equally origin destination revenues contract services allocated country services performed longlived assets outside united states immaterial periods presented conway inc notes consolidated financial statementscontinued 15 quarterly financial data conway inc quarterly financial data unaudited dollars thousands except per share data effective august 23 2007 conway acquired contract freighters inc affiliated companies collectively “cfi” purchasemethod accounting cfi’s operating results included periods subsequent acquisition conway inc notes consolidated financial statementscontinued b comparability conway’s consolidated operating income affected following unusual income expense • gain 62 million third quarter 2006 sale assets related conway expedite • gain 410 million fourth quarter 2006 sale conway’s membership interest vector • losses 55 million 15 million related restructuring activities conway freight conway truckload respectively third quarter 2007 • loss 77 million restructuring activities conway freight fourth quarter 2007 c comparability conways tax provision net income affected following • tax benefits 72 million second quarter 2006 related settlement irs previous tax filings • tax benefits 29 million third quarter 2006 utilization capitalloss carryforwards offset tax sale conway expedite • tax benefits 148 million fourth quarter 2006 utilization capitalloss carryforwards offset tax sale conway’s membership interest vector revision results operations first quarter 2007 fourth quarter 2007 conway identified adjustments related first quarter 2007 conway determined adjustments material either first fourth quarter however accurate presentation conway elected revise results first quarter 2007 reflect immaterial adjustments presented table presented table revisions first quarter 2007 include following items • increase employee benefits expense 76 million due amendments benefit plans compensated absences • decrease incentive compensation expense 10 million due lower operating income relative incentive plan targets • decrease income tax provision 25 million resulting revisions item 9item 8 financial statements supplementary data conway inc consolidated balance sheets accompanying notes consolidated financial statements integral part statements conway inc consolidated balance sheets accompanying notes consolidated financial statements integral part statements conway inc statements consolidated income accompanying notes consolidated financial statements integral part statements conway inc statements consolidated cash flows accompanying notes consolidated financial statements integral part statements conway inc statements consolidated shareholders’ equity accompanying notes consolidated financial statements integral part statements conway inc notes consolidated financial statements 1 principal accounting policies organization conway inc consolidated subsidiaries “conway” “company” provide transportation logistics services wide range manufacturing industrial retail customers fully discussed note 15 “segment reporting” financial reporting purposes conway divided five reporting segments freight logistics truckload vector principles consolidation consolidated financial statements include accounts conway inc subsidiaries significant intercompany accounts transactions eliminated 2007 difference existed conway’s fiscal yearend reporting yearend certain acquired companies 2008 lag period eliminated longer difference conway’s fiscal yearend reporting yearend acquired companies lag period one month material effect conway’s financial condition results operations cash flows estimates management makes estimates assumptions preparing financial statements conformity accounting principles generally accepted us estimates assumptions affect amounts reported accompanying financial statements notes changes estimates recognized accordance accounting rules estimate typically period new information becomes available estimates underlying assumptions affect amounts assets liabilities reported disclosures contingent assets liabilities reported amounts revenue expenses estimates relate accounts receivable allowances impairment goodwill longlived assets depreciation income tax assets liabilities selfinsurance accruals pension plan postretirement obligations contingencies assets liabilities recognized connection acquisitions restructurings dispositions conway evaluates estimates assumptions ongoing basis using historical experience factors including current economic environment estimates assumptions adjusted facts circumstances dictate illiquid credit markets volatile equity foreigncurrency fuel markets declines consumer spending combined increase uncertainty inherent estimates assumptions changes estimates resulting continuing changes economic environment reflected financial statements future periods recognition revenues conway freight recognizes revenue reporting periods based relative transit time period recognizes expense incurred conway truckload recognizes revenue related direct costs shipment delivered estimates future billing adjustments revenue including related weight freight classification verification earned discounts recognized time shipment menlo worldwide logistics recognizes revenue accordance contractual terms services provided revenue recorded gross basis without deducting thirdparty purchased transportation costs transactions menlo worldwide logistics acts principal revenue recorded net basis deducting purchased transportation costs transactions menlo worldwide logistics acts agent certain menlo worldwide logistics’ contracts billings excess revenues recognized recorded unearned revenue unearned revenue recognized contract period services provided december 31 2008 2007 unearned revenue 151 million 31 million reported conway’s consolidated balance sheets accrued liabilities addition menlo worldwide logistics deferred certain direct incremental costs related setup logistics operations longterm contracts deferred setup costs recognized expense contract term december 31 2008 2007 deferred setup costs 145 million 10 million reported consolidated balance sheets deferred charges assets increases unearned revenue deferred set costs due primarily defense transportation coordination initiative contract cash equivalents marketable securities cash equivalents consist shortterm interestbearing instruments maturities three months less date purchase december 31 2008 2007 conway inc notes consolidated financial statements continued cashequivalent investments 2649 million 1602 million respectively consisted primarily commercial paper certificates deposit conway classifies marketable debt securities availableforsale reports fair value changes fair value availableforsale securities recognized accumulated comprehensive income loss shareholders’ equity unless unrealized loss otherthantemporary loss unrealized loss determined temporary loss recognized earnings december 31 2008 2007 conway held availableforsale marketable securities 67 million 300 million respectively december 31 2008 investments consisted mostly one longterm availableforsale auctionrate security december 31 2007 consisted shortterm auctionrate securities variablerate demand notes auctionrate securities variablerate demand notes contractual maturities greater three months date purchase interest dividend rates reset every 7 35 days due primarily liquidity issues auctionrate markets conway 2008 recorded 08 million temporary decline carrying value marketable securities fully discussed note 6 “fairvalue measurements” trade accounts receivable net conway freight conway truckload report accounts receivable net realizable value provide allowance collection considered doubtful estimates uncollectible accounts based various judgments assumptions including revenue levels historical loss experience aging outstanding accounts receivable menlo worldwide logistics based size nature client base performs periodic evaluation customers’ creditworthiness accounts receivable portfolio recognizes expense uncollectible accounts losses probable reasonably estimable activity allowance uncollectible accounts presented following table 2008 provision uncollectible accounts includes 49 million related acquisitionrelated receivable estimates billing adjustments including related weight freightclassification verifications pricing discounts also reported reduction accounts receivable activity allowance revenue adjustments presented following table property plant equipment property plant equipment reported historical cost depreciated primarily straightline basis estimated useful lives generally 25 years buildings improvements 4 13 years revenue equipment 3 10 years equipment leasehold improvements amortized shorter terms respective leases useful lives assets conway periodically evaluates whether changes estimated useful lives necessary ensure estimates accurately reflect economic use assets conway inc notes consolidated financial statements continued expenditures equipment maintenance repairs charged operating expenses incurred betterments capitalized gains losses sales equipment property recorded operating expenses associated conway’s rebranding initiative expensed incurred primarily classified maintenance expense launched 2006 rebranding initiative consisted primarily costs convert conway freight’s tractors trailers new conway graphic identity substantially completed 2008 conway recognized rebranding expenses 52 million 2008 143 million 2007 17 million 2006 tires cost replacement tires expensed time tires placed service case repairs maintenance costs cost tires new revenue equipment capitalized depreciated estimated useful life related equipment capitalized software net capitalized software consists certain direct internal external costs associated internaluse software net accumulated amortization capitalized software computed itembyitem basis period 3 10 years depending estimated useful life software amortization expense related capitalized software 144 million 2008 134 million 2007 142 million 2006 accumulated amortization december 31 2008 2007 1218 million 1105 million respectively longlived assets conway performs impairment analysis longlived assets whenever circumstances indicate carrying amount may recoverable assets held used impairment charge recognized estimated undiscounted cash flows associated asset group assets less carrying value impairment exists charge recognized difference carrying value fair value fair values determined using quoted market values discounted cash flows external appraisals applicable assets held disposal carried lower carrying value estimated net realizable value conway’s accounting policies goodwill longlived intangible assets fully discussed note 2 “acquisitions” book overdrafts september 2008 conway made change banking services resulted change classification drafts accounts payable reduction cash equivalents december 31 2008 amount drafts outstanding zerobalance sweep account exceeded cash held accounts bank resulting book overdraft 304 million december 31 2008 included accounts payable december 31 2007 317 million drafts reported accounts payable book overdrafts represent outstanding drafts yet presented bank excess recorded cash amounts represent bank overdrafts occur drafts presented bank excess cash hand would effectively loan conway income taxes deferred income taxes provided tax effect temporary differences tax basis assets liabilities reported amounts financial statements conway uses liability method account income taxes requires deferred taxes recorded statutory rate anticipated effect taxes paid selfinsurance accruals conway uses combination purchased insurance selfinsurance programs provide costs medical casualty liability vehicular cargo workers’ compensation claims longterm portion selfinsurance accruals relates primarily workers’ compensation vehicular claims expected payable several years conway periodically evaluates level insurance coverage adjusts insurance levels based risk tolerance premium expense measurement classification selfinsured costs requires consideration historical cost experience demographic severity factors judgments current expected levels cost per claim retention levels methods provide estimates undiscounted liability associated claims incurred conway inc notes consolidated financial statements continued balance sheet date including claims reported changes assumptions factors materially affect actual costs paid settle claims amounts may different estimates conway participates reinsurance pool reinsure portion workers’ compensation vehicular liabilities participant pool cedes claims pool assumes equivalent amount claims reinsurance relieve conway liabilities original policy however opinion management potential exposure conway nonpayment minimal december 31 2008 2007 conway recorded liability related assumed claims 361 million 313 million respectively recorded receivable reinsurance pool 298 million 280 million respectively revenues related reinsurance activities reported net associated expenses classified operating expenses connection participation reinsurance pool conway recognized operating income 17 million 2008 net effect operating results 2007 operating expense 02 million 2006 foreign currency translation adjustments resulting translating foreign functional currency financial statements us dollars included foreign currency translation adjustment statements consolidated shareholders’ equity transaction gains losses arise exchangerate fluctuations transactions denominated currency functional currency included results operations conway determined advances certain foreign subsidiaries indefinite nature accordingly corresponding foreign currency translation gains losses related advances included foreign currency translation adjustment statements consolidated shareholders’ equity marketing expenses marketing costs including sales promotions printed sales materials advertising expensed incurred classified operating expenses marketing expenses 89 million 2008 85 million 2007 97 million 2006 conway inc notes consolidated financial statements continued earnings loss per share eps basic eps continuing operations computed dividing reported net income continuing operations preferred stock dividends weightedaverage common shares outstanding diluted eps calculated follows new accounting standards december 2007 fasb issued sfas 160 “noncontrolling interests consolidated financial statements amendment arb 51” new statement noncontrolling interests net assets subsidiaries must reported balance sheet within equity face income statement sfas 160 requires disclosure amounts consolidated net income attributable parent noncontrolling interest effective date sfas 160 first fiscal year beginning december 15 2008 interim periods within years conway first quarter 2009 conway expect adoption sfas 160 material effect financial statements december 2007 fasb issued sfas 141revised 2007 “business combinations” “sfas 141r” statement changes acquisitiondate subsequentperiod accounting associated business acquisitions several changes potential generate greater earnings volatility connection acquisition significant provisions sfas 141r result change accounting transaction costs contingencies acquisitiondate accounting estimates new statement transaction costs transactionrelated restructuring charges expensed incurred instead included determination purchase price certain contingent assets liabilities recognized fair value new information available acquisition amounts may subject remeasurement changes contingent consideration estimates included earnings also adjustments acquisitiondate accounting estimates accounted adjustments priorperiod financial statements effective date sfas 141r first fiscal conway inc notes consolidated financial statements continued year beginning december 15 2008 conway 2009 conway evaluating effect adopting sfas 141r march 2008 fasb issued sfas 161 “disclosures derivative instruments hedging activities amendment sfas 133” statement amends expands disclosure requirements sfas 133 “accounting derivative instruments hedging activities” provide enhanced understanding entity uses derivative instruments derivative instruments related hedged items accounted sfas 133 related interpretations derivative instruments affect entity’s financial condition results operations cash flows effective date sfas 161 annual interim periods beginning november 15 2008 conway first quarter 2009 conway expect adoption sfas 161 material effect financial statements may 2008 fasb issued sfas 163 “accounting financial guarantee contracts interpretation sfas 60” statement prescribes recognition approach claim liability recognized insurer financial obligation expects claim loss exceed unearned premium revenue effective date sfas 163 annual interim periods beginning december 15 2008 conway first quarter 2009 conway expect adoption sfas 163 material effect financial statements reclassifications revisions certain amounts priorperiod financial statements reclassified revised conform currentperiod presentation 2 acquisitions contract freighters inc august 23 2007 conway acquired outstanding common shares transportation resources inc “tri” tri holding company contract freighters inc affiliated companies collectively “cfi” following acquisition cfi operating results cfi reported operating results conway’s former truckload operation truckload reporting segment september 2007 conway integrated former truckload operation cfi business unit name cfi business unit changed conway truckload january 2008 purchase price cfi 7523 million cougar logistics september 5 2007 menlo worldwide llc “mw” acquired outstanding common shares cougar holdings pte ltd primary subsidiary cougar express logistics collectively “cougar logistics” following acquisition operating results cougar logistics reported operating results menlo worldwide logistics business unit logistics reporting segment purchase price cougar logistics 287 million chic logistics october 18 2007 mw acquired outstanding common shares chic holdings ltd wholly owned subsidiaries shanghai chic logistics co ltd shanghai chic supply chain management co ltd collectively “chic logistics” following acquisition operating results chic logistics reported operating results menlo worldwide logistics business unit logistics reporting segment purchase price chic logistics 591 million purchase price chic logistics subject provisions could potentially increased purchase price conway determined amounts payable provisions based earnings subsequent acquisition conway inc notes consolidated financial statements continued pro forma financial information following unaudited pro forma condensed financial information presents combined results operations conway cfi acquisition occurred beginning periods presented based conway’s assessment significance reflect acquisition cougar logistics chic logistics unaudited pro forma condensed consolidated financial information illustrative purposes purport represent conway’s financial information would acquisition occurred dates indicated results future periods unaudited financial information reflects pro forma adjustments based upon available information certain assumptions conway believes reasonable including estimates related purchasemethod fairvalue accounting adjustments effect financing transactions conforming changes accounting policies however pro forma condensed consolidated statements income continuing operations reflect pro forma adjustments expected continuing effect consolidated results beyond 12 months consummation acquisition reflect changes operations may occur including synergistic benefits may realized acquisition costs may incurred integrating operations goodwill intangible assets excess acquired entity’s purchase price amounts assigned assets acquired including separately recognized intangible assets liabilities assumed recorded goodwill amortized assessed impairment annual basis fourth quarter frequently events changes circumstances indicate asset might impaired assessment requires comparison fair value reporting unit carrying value net assets including allocated goodwill carrying value reporting unit exceeds fair value conway must compare implied fair value reportingunit goodwill carrying amount goodwill carrying amount reportingunit goodwill exceeds implied fair value goodwill impairment loss recognized amount equal excess connection acquisitions 2007 conway recognized goodwill result annual impairment test fourth quarter 2008 conway determined goodwill related chic logistics impaired result menlo worldwide logistics recognized 318 million impairment charge valuation chic logistics conway utilized discounted cash flow model impairment primarily due decreases actual projected operating income higher discount rate reflects current economic market conditions conway concluded goodwill conway truckload cougar logistics impaired december 31 2008 conway finalized purchaseprice accounting made revisions preliminary estimates evaluations including valuations tangible intangible assets certain contingencies information received third parties accordingly conway made revisions estimated fair value net assets acquired connection purchase cfi chic logistics including 201 million increases conway inc notes consolidated financial statements continued fair values intangible assets primarily customer relationships 75 million increase related liabilities assumed foreign incometax contingencies addition adjustments made deferred taxes relating fair value assets acquired changes assets acquired liabilities assumed affect amount goodwill recorded following table shows changes carrying amounts goodwill attributable applicable segment connection acquisitions conway recognized definitelived intangible assets estimated fair value acquired customer relationships trademarks intangible assets consisted following result lower projected revenues including reduced revenue significant customer chic logistics conway evaluated fair value chic logistics’ customerrelationship intangible asset result menlo worldwide logistics recognized 60 million impairment loss fourth quarter 2008 reduce carrying amount intangible asset estimated fair value determined using income approach utilized discounted cash flow model conway inc notes consolidated financial statements continued fair value intangible assets amortized straightline basis estimated useful life amortization expense related intangible assets 54 million 2008 10 million 2007 estimated amortization expense next five years presented following table 3 restructuring activities 2007 2008 conway freight conway truckload incurred expenses connection number restructuring activities expenses reported restructuring charges statements consolidated income except otherwise noted detailed conway recognized expenses 265 million 2008 147 million 2007 expects recognize 23 million additional expense conway’s remaining liability amounts expensed yet paid 124 million december 31 2008 conway freight operational restructuring august 2007 conway freight began operational restructuring combine three regional operating companies one centralized operation improve customer experience streamline processes reorganization centralized entity intended improve customer service efficiency development uniform pricing operational processes implementation best practices conway freight completed initiative 2008 following table summarizes effect conway freight’s operational restructuring years ended december 31 2008 2007 addition amounts summarized conway recognized additional 26 million 2008 related costs consisting primarily consulting fees reported operating expenses statements consolidated income conway inc notes consolidated financial statements continued network reengineering november 2008 conway freight completed major network reengineering reduce service exceptions improve ontime delivery bring faster transit times deploying lowercost efficient service center network better aligned customer needs business volumes reengineering change conway freight’s service coverage involve closure approximately 40 service centers shipment volumes closing locations redistributed balanced among 100 nearby service centers following table summarizes effect network reengineering year ended december 31 2008 expected remaining expenses network reengineering relate primarily employee relocation expensed incurred economic workforce reduction response decline yearoveryear business volumes accelerated fourth quarter 2008 conway freight reduced workforce 1450 positions december 2008 addition reducing workforce operating locations reduction also eliminated positions conway freight’s general office administrative center included realignment area regional division structure streamline management following table summarizes effect workforce reduction year ended december 31 2008 expected remaining expenses workforce reduction relate primarily employee relocation expensed incurred conway truckload connection acquisition cfi fully discussed note 2 “acquisitions” conway september 2007 integrated former truckload operation cfi business unit connection integration conway closed general office preacquisition truckload business unit incurred 15 million restructuring charge 2007 primarily costs related employee separation lease termination asset impairment conway completed conway truckload reorganization 2007 conway inc notes consolidated financial statements continued 4 discontinued operations discontinued operations periods presented relate 1 closure conway forwarding 2006 2 sale menlo worldwide forwarding inc subsidiaries menlo worldwide expedite inc collectively “mwf” 2004 3 shutdown emery worldwide airlines inc “ewa” 2001 termination priority mail contract usps 2000 4 spinoff consolidated freightways corporation “cfc” 1996 results operations cash flows discontinued operations segregated continuing operations results discontinued operations summarized conway forwarding 2006 conway closed operations domestic air freight forwarding business known conway forwarding decision close business unit made following management’s review unit’s competitive position prospects relation conway’s longterm strategies result closure conway 2006 recognized net losses 42 million net 30 million tax benefits writeoff nontransferable capitalized software assets loss related noncancelable operating leases costs following closure results conway forwarding related adjustments loss estimates mwf 2004 conway mw sold united parcel service inc “ups” issued outstanding capital stock mwf conway agreed indemnify ups certain losses ups may incur closing sale certain limitations losses related indemnification obligations costs including future cash expenditures related sale estimated recognized future periods additional loss disposal incurred periods presented results mwf related adjustments loss estimates conway inc notes consolidated financial statements continued ewa periods presented results ewa reflect gains related recovery prior losses fully discussed adjustments loss estimates due primarily resolution labor matters 2008 ewa’s estimated loss reserves 33 million december 31 2007 eliminated described connection cessation aircarrier operations 2001 ewa terminated employment pilots flight crewmembers pilots crewmembers represented air line pilots association “alpa” collective bargaining agreement subsequently alpa filed grievances behalf pilots flight crewmembers protesting cessation ewa’s aircarrier operations mwf’s use air carriers matters subject litigation us district court state court california including litigation brought alpa former ewa pilots crewmembers longer represented alpa june 30 2006 ewa conway inc menlo worldwide forwarding inc “mwf inc” concluded final settlement california state court litigation terms settlement plaintiffs received cash payment 92 million ewa lawsuit dismissed prejudice august 8 2006 ewa paid 109 million settle us district court litigation brought alpa finally concluded litigation former ewa pilots flight crewmembers still represented alpa date cash settlements reduced equal amount ewa’s estimated loss reserve applicable grievances filed alpa two additional actions brought groups former ewa pilots flight crewmembers longer represented alpa one action brought federal court ohio february 2007 settled april 2008 627000 second action ordered court binding arbitration arbitrator granted ewa’s motion dismiss arbitration april 2008 arbitrator’s decision final accordingly 16 million gain net tax 10 million recognized eliminate previously accrued reserves associated contingency october 2008 conway one insurers entered agreement providing settlement coverage litigation brought insurer conway response conway’s request reimbursement amounts conway paid settlement actions described connection settlement agreement conway received 100 million payment november 2008 recognized gain 63 million net tax 37 million fourth quarter 2008 first quarter 2007 conway received 50 million payment insurer recognized gain 31 million net tax 19 million related recovery prior losses cfc 1996 conway completed spinoff cfc conway’s shareholders connection spinoff cfc conway agreed indemnify certain states insurance companies sureties failure cfc pay certain workers’ compensation tax public liability claims pending september 30 1996 periods presented conway’s losses related cfc due revisions estimated losses related indemnified workers’ compensation liabilities 2008 results cfc include 80 million payments received conway related cfc’s bankruptcy proceedings 80 million payment made conway terms settlement central states southeast southwest areas pension funds “central states” fully discussed note 14 “commitments contingencies” connection payments conway recognized gain 04 million net tax 02 million following cfc’s bankruptcy filing september 2002 conway filed number proofs claims cfc bankruptcy estate resulting total 358 million allowed claims estate november 2008 conway received payment 50 million respect allowed claims addition distribution received cfc bankruptcy estate october 2008 conway received payment 30 million proceeds sale assets cfc’s canadian subsidiaries included debtors cfc’s conway inc notes consolidated financial statements continued us bankruptcy proceedings terms settlement central states conway agreed instruct trustee cfc bankruptcy estate deliver central states future payments account conway’s allowed claims result conway receive distributions cfc bankruptcy estate 5 sale unconsolidated joint venture vector scm llc “vector” joint venture formed general motors “gm” 2000 purpose providing logistics management services global basis gm customers addition gm exercise call right june 2006 gm exercised right purchase conway’s membership interest vector conway december 2006 recognized receivable gm 519 million amount equal 848 million fair value conway’s membership interest reduced conway’s 329 million payable vector also recognized 410 million gain amount equal 519 million receivable reduced conway’s 90 million net investment vector 19 million salerelated costs january 2007 conway received 519 million payment gm following negotiation gm first quarter 2007 additional receivable 27 million due gm could collected accordingly 27 million loss recognized vector reporting segment write outstanding receivable gm transition related services pursuant closing agreement gm conway specified transition services primarily accounting assistance compensation amounts services provided gm december 31 2008 addition conway provides gm certain informationtechnology support services agreements menlo worldwide logistics reported revenue 112 million 2008 109 million 2007 primarily informationtechnology services provided gm summarized financial information vector table summarizes results operations vector’s segment results prior june 30 2006 include proportionate share vector’s net income subsequent june 30 2006 include profits associated settlement businesscase activity related periods prior june 30 2006 6 fairvalue measurements september 2006 fasb issued sfas 157 “fairvalue measurements” defines fair value establishes framework measuring fair value expands disclosures fairvalue measurements sfas 157 applies accounting pronouncements require permit fairvalue measurements require new fairvalue measurements february 2008 fasb issued fasb staff position sfas 1572 “fsp sfas 1572” fsp sfas 1572 delays effective date application sfas 157 nonfinancial assets liabilities except items recognized disclosed fair value recurring basis fiscal years beginning november 15 2008 interim periods within years conway first quarter 2009 conway adopted sfas 157 effective january 1 2008 except provisions delayed conway inc notes consolidated financial statements continued fsp sfas 1572 nonfinancial assets conway applied provisions sfas 157 include measured fair value impairment testing goodwill intangible assets initially measured fair value business combination measured fair value subsequent periods october 2008 fasb issued fasb staff position sfas 1573 “fsp sfas 1573” clarify application sfas 157 market financial asset active conway’s adoption fsp material effect conway’s financial statements periods presented sfas 157 requires assets liabilities reported fair value classified one following three levels level 1 quoted market prices active markets identical assets liabilities level 2 observable marketbased inputs unobservable inputs corroborated market data level 3 unobservable inputs corroborated market data following table summarizes valuation financial instruments sfas 157 levels cash equivalents consist shortterm interestbearing instruments maturities three months less date purchase carrying amount instruments approximates fair value due short maturity december 31 2008 conway’s marketable securities consisted mostly one auctionrate security par value 75 million liquidity auctionrate securities adversely affected auction failures prevented investors selling securities predetermined auction dates accordingly conway reclassified auctionrate security current marketable securities longterm marketable securities due lack quoted market prices december 31 2008 conway’s auctionrate security valued income approach utilized discounted cash flow model due primarily liquidity issues auctionrate markets fair value conway’s auctionrate security declined par december 31 2008 result conway recorded 08 million decline carrying value marketable securities equal offsetting unrealized loss accumulated comprehensive income loss conway evaluated unrealized loss concluded decline fair value temporary following table summarizes change fair values financial instruments valued using level 3 inputs conway inc notes consolidated financial statements continued 7 accrued liabilities accrued liabilities consisted following 8 debt financing arrangements longterm debt guarantees consisted following revolving credit facility conway 400 million revolving credit facility matures september 30 2011 revolving credit facility available cash borrowings issuance letters credit 400 million december 31 2008 2007 borrowings outstanding revolving credit facility december 31 2008 2081 million letters credit outstanding 1919 million available capacity additional letters credit cash borrowings subject compliance financial covenants customary conditions borrowing total letters credit outstanding december 31 2008 provided collateral conway’s selfinsurance programs conway inc notes consolidated financial statements continued borrowings agreement bear interest rate based upon lead bank’s base rate eurodollar rate plus margin dependent either conway’s senior debt credit ratings leverage ratio credit facility fee ranges 007 0175 applied total facility 400 million based conway’s current credit ratings revolving facility guaranteed certain conway’s material domestic subsidiaries contains two financial covenants leverage ratio ii fixedcharge coverage ratio also various restrictive covenants including limitations incurrence liens ii consolidations mergers asset sales iii incurrence additional subsidiary indebtedness credit facilities shortterm borrowings conway uncommitted unsecured credit facilities totaling 740 million december 31 2008 available support borrowings letters credit bank guarantees overdraft facilities date 228 million bank guarantees letters credit overdraft facilities 75 million shortterm borrowings outstanding leaving 437 million available capacity excluding noninterest bearing borrowings described weighted average interest rate shortterm borrowings 56 29 december 31 2008 december 31 2007 respectively shortterm borrowings outstanding december 31 2008 33 million noninterest bearing borrowings related credit facility menlo worldwide logistics utilizes one logistics contracts borrowings facility related amounts financial institution paid vendors behalf menlo worldwide logistics mortgage note payable conway’s mortgage note payable repaid february 2008 primary dc plan notes conway guaranteed notes issued conway’s retirement savings plan voluntary defined contribution retirement plan fully discussed note 12 “employee benefit plans” conway repaid 227 million outstanding series b notes maturity january 2009 promissory note connection conway’s acquisition cfi conway assumed 11 million promissory note bears interest 60 due full december 31 2009 878 notes due 2010 200 million aggregate principal amount 878 notes contain certain covenants limiting incurrence additional liens prior termination december 2002 conway designated four interestrate swap derivatives fairvalue hedges mitigate effects interestrate volatility fair value conway’s 878 notes termination date 398 million estimated fair value fairvalue hedges offset equal increase carrying amount hedged fixedrate longterm debt 398 million cumulative adjustment carrying amount 878 notes accreted future earnings effective interest rate debt extinguished time unamortized fairvalue adjustment would fully recognized earnings including accretion fairvalue adjustment amortization discount interest expense 878 notes due 2010 recognized annual effective interest rate 56 725 senior notes due 2018 august 2007 conway borrowed 4250 million bridgeloan facility fund portion purchase price cfi december 2007 conway issued 4250 million 725 senior notes used net proceeds offering cash hand repay amounts outstanding bridgeloan facility connection issuance 725 senior notes conway capitalized 40 million underwriting fees related debt costs amortized effectiveinterest method 725 senior notes bear interest rate 725 per year payable semiannually january 15 july 15 year conway may redeem 725 senior notes whole part less 30 60days notice redemption price equal greater principal amount redeemed ii sum present values remaining scheduled payments principal interest notes redeemed discounted redemption date semiannual basis rate payable treasury note comparable maturity plus 50 basis points also various restrictive covenants including limitations incurrence liens ii consolidations mergers asset sales iii incurrence additional subsidiary indebtedness conway inc notes consolidated financial statements continued holders 725 senior notes right require conway repurchase notes upon occurrence change control ii investmentgrade rating two moody’s standard poor’s fitch ratings repurchase price would equal 101 aggregate principal amount notes repurchased plus accrued unpaid interest senior debentures due 2034 300 million aggregate principal amount senior debentures bear interest rate 670 per year payable semiannually may 1 november 1 year conway may redeem senior debentures whole part less 30 60days notice redemption price equal greater principal amount redeemed ii sum present values remaining scheduled payments principal interest senior debentures redeemed discounted redemption date semiannual basis rate payable treasury note comparable maturity plus 35 basis points senior debentures issued indenture restricts conway’s ability certain exceptions incur debt secured liens including amortization discount interest expense 670 senior debentures due 2034 recognized annual effective interest rate 690 conway’s consolidated interest expense presented statements consolidated income net capitalized interest 645000 2008 514000 2007 917000 2006 aggregate annual maturities longterm debt guarantees next five years ending december 31 238 million 2009 2000 million 2010 principal payments due 2011 2012 2013 december 31 2008 conway’s senior unsecured debt rated investment grade standard poor’s bbb fitch ratings bbb moody’s baa3 february 27 2009 fitch ratings changed rating conway bbb december 31 2008 2007 estimated fair value longterm debt 900 million 11 billion respectively fair values estimated based current rates offered debt similar terms maturities 9 leases conway subsidiaries obligated noncancelable operating leases certain facilities equipment vehicles certain leases also contain provisions allow conway extend leases various renewal periods future minimum lease payments initial remaining noncancelable lease terms excess one year december 31 2008 follows future minimum lease payments table net 56 million sublease income expected received noncancelable subleases june 2008 menlo worldwide logistics entered agreements sell lease back two warehouses located singapore connection sale warehouses menlo worldwide logistics received 404 million remaining unamortized gain 164 million december 31 2008 classified deferred credit consolidated balance sheets amortized reduction lease expense tenyear term conway inc notes consolidated financial statements continued leases lease contains option renew additional fiveyear term future minimum payments 380 million associated leases included table rental expense operating leases comprised following 10 income taxes components provision income taxes follows income taxes provided foreign operations based upon various tax laws rates countries operations conducted components income taxes follows conway inc notes consolidated financial statements continued conway’s incometax provision varied amounts calculated applying us statutory income tax rate pretax income shown following reconciliation tax provision 2008 adversely affected primarily nondeductible goodwill impairment charge writedown acquisitionrelated receivable lower income taxes increases percentage effect permanent discrete items components deferred tax assets liabilities related following conway inc notes consolidated financial statements continued deferred tax assets liabilities consolidated balance sheets classified current noncurrent based related asset liability creating deferred tax deferred taxes related specific asset liability classified based estimated period reversal conway recorded valuation allowances 373 million 416 million december 31 2008 2007 respectively deferred tax assets principally associated capital losses net operating losses tax credits management believes likely assets realized deferred tax assets management believes likely results future operations generate taxable income sufficient amount type realize deferred tax assets income tax receivables 240 million 76 million included accounts receivable conway’s consolidated balance sheets december 31 2008 2007 respectively june 2006 october 2005 conway entered settlement agreements internal revenue service “irs” pursuant parties settled various issues related audit years 1995 2002 conway eliminated related tax liabilities previously recognized issues resulting tax benefits reduced conway’s tax provision 121 million 2006 conway’s sale mwf 2004 generated capital loss tax purposes current tax law capital losses used offset capital gains since conway forecast significant taxable capital gains fiveyear tax carryforward period 408 million cumulative salerelated tax benefit fully offset valuation allowance equal amount remaining salerelated capitalloss carryforward december 31 2008 2007 298 million 299 million respectively associated valuation allowance dates 295 million 299 million respectively remaining 298 million capitalloss carryforwards december 31 2008 287 million expire yearend 2009 11 million expire yearend 2010 december 31 2008 conway also 37 million operatingloss carryforwards 67 million taxcredit carryforwards available reduce federal state foreign income taxes future years deferred tax assets reduced valuation allowance 62 million based conway’s current uncertainty whether generate sufficient state foreign taxable income fully utilize carryforwards cumulative undistributed earnings conway’s foreign subsidiaries approximately 299 million december 31 2008 remitted subject withholding tax indefinitely reinvested respective foreign subsidiaries’ operations becomes advantageous tax foreign exchange reasons remit earnings therefore withholding us taxes provided amount withholding tax would payable remittance undistributed earnings would approximate 15 million uncertain tax positions fasb interpretation 48 “accounting uncertainty income taxes interpretation sfas 109” “fin 48” clarifies accounting uncertainty tax positions fin 48 comprehensive model company recognize measure present disclose financial statements uncertain tax positions company taken expects take tax return tax positions shall recognized financial statements likely position sustained upon examination taxing authority position meets morelikelythannot criteria measured using probabilityweighted approach largest amount tax benefit greater 50 likely realized upon settlement requires previously recognized tax positions longer meet morelikelythannot recognition threshold derecognized first subsequent financial reporting period threshold longer met conway adopted provisions fin 48 january 1 2007 adoption date conway reported gross taxaffected unrecognized tax benefits 76 million including 12 million accrued interest penalties conway inc notes consolidated financial statements continued related unrecognized tax benefits conway classifies interest penalties expense related income taxes component income tax expense adoption date conway estimated 54 million unrecognized tax benefits recognized would change effective tax rate 2007 conway’s estimate gross taxaffected unrecognized tax benefits increased 152 million including 54 million accrued interest penalties due primarily liabilities assumed conway’s acquisition cfi chic logistics 2008 estimate increased 253 million including 82 million accrued interest penalties due changes estimates liabilities assumed connection conway’s acquisition chic logistics accruals uncertain tax positions interest penalties december 31 2008 2007 conway estimated 140 million 37 million respectively unrecognized tax benefits recognized would change effective tax rate 2008 13 million interest penalties included income tax expense amount interest penalties included income tax expense material 2007 following summarizes changes unrecognized tax benefits year excluding interest penalties normal course business conway subject examination taxing authorities throughout world years subject examination relevant jurisdictions include 2005 2008 federal income taxes 2003 2008 state local income taxes 1999 2008 foreign income taxes tax return filed statute limitations applies accordingly tax jurisdiction reaches conclusion filing requirement exist additional years may reviewed tax authority conway currently audit internal revenue service tax years 2005 2007 management expect years effectively settled within next 12 months although outcome tax audits uncertain could result significant cash payments opinion management ultimate outcome audit material adverse effect conway’s financial condition results operations cash flows conway also currently audit numerous state nonus tax jurisdictions management expects next 12 months reasonably possible total unrecognized tax benefits decrease range 18 million 24 million primarily due settlement agreements conway expects reach various states regarding unfiled tax returns cfi relate periods prior conway’s acquisition conway inc notes consolidated financial statements continued 11 shareholders’ equity series b preferred stock 1989 board directors designated series 1100000 preferred shares series b cumulative convertible preferred stock 01 stated value held conway retirement savings plan preferred stock convertible common stock described note 12 “employee benefit plans” rate 471 shares share preferred stock subject antidilution adjustments certain circumstances ranks senior conway’s common stock holders preferred stock entitled vote common stock entitled number votes circumstances equal product 13 multiplied b number shares common stock preferred stock convertible record date vote holders preferred stock also entitled vote separately class certain matters plan trustee required vote allocated shares based upon instructions participants unallocated shares voted proportion voting instructions received participants allocated shares accumulated comprehensive income loss conway reports changes equity except resulting investment owners distribution owners comprehensive income loss statements consolidated shareholders’ equity following summary components accumulated comprehensive income loss common stock repurchase programs periods presented common stock repurchases 899 million 2007 3502 million 2006 made repurchase programs authorized conway’s board directors 12 employee benefit plans periods presented employees conway subsidiaries us covered several retirement benefit plans including defined benefit pension plans defined contribution retirement plans postretirement medical plan conway’s defined benefit pension plans include “qualified” plans eligible certain beneficial treatment internal revenue code “irc” well “nonqualified” plans meet irc criteria october 2006 conway’s board directors approved changes conway’s retirement benefits plans intended preserve retirement benefits earned existing employees conway’s primary qualified defined benefit pension plan “primary db plan” primary nonqualified supplemental defined benefit pension plan “supplemental db plan” expanding benefits earned primary defined contribution plan “primary dc plan” new supplemental defined contribution plan “supplemental dc plan” major provisions plan amendments increase expense related primary dc plan eliminate future service cost associated primary db plan supplemental db plan effective january 1 2007 conway inc notes consolidated financial statements continued adoption sfas 158 sfas 158 “employers’ accounting defined benefit pension postretirement plans amendment sfas 87 88 106 132r” requires employers measure plan assets obligations end fiscal year recognize overfunded underfunded status defined benefit plans asset liability respectively conway adopted recognition disclosure provisions sfas 158 effective december 31 2006 measurementdate provision effective january 1 2007 defined benefit pension plans conway’s qualified defined benefit pension plans collectively “qualified pension plans” consist mostly primary db plan covers noncontractual employees former employees conway’s continuing operations well former employees discontinued operations conway’s qualified defined benefit pension plans cover former employees discontinued operations “forwarding db plans” conway also sponsors nonqualified defined benefit pension plans collectively “nonqualified pension plans” consisting mostly supplemental db plan several unfunded nonqualified benefit plans supplemental db plan provides additional benefits certain employees affected irc limitations compensation eligible benefits available qualified primary db plan conway’s foreign subsidiaries sponsor defined benefit pension plans comparatively insignificant effect conway’s consolidated financial statements accordingly international defined benefit pension plans excluded disclosures benefits effective january 1 2007 new employees eligible participate primary db plan supplemental db plan employees participating december 31 2006 retain accrued benefits credited service time earned credited service capped december 31 2006 future benefit plan payments calculated five highest years earnings past ten years preceding retirement employees retiring december 31 2016 past ten years preceding december 31 2016 cessation ewa’s operations 2001 sale mwf 2004 resulted partial termination forwarding db plans result participants became fully vested material benefits accrue plans plan assets qualified pension plans managed longterm strategic allocation targets developed analyzing variety diversified assetclass combinations conjunction projected liability costs liability duration qualified pension plans asset allocation studies generally conducted every 3 5 years targets reviewed determine adjustments required allocation percentages established portfolio periodically rebalanced targets qualified pension plans seek mitigate investment risk investing across asset classes qualified pension plans’ investment managers use market timing strategies use financial derivative instruments manage risk except financial futures options instruments specifically approved conway inc administrative committee designated representative generally investment managers prohibited short selling trading margin trading commodities warrants options except acquired result purchase another security case options sold part covered position conway inc notes consolidated financial statements continued assumption 85 overall expected longterm rate return 2009 developed using return risk defined standard deviation correlation expectations return expectations created using longterm historical returns current market expectations inflation interest rates economic growth conway’s annual pension expense contributions based actuarial computations actuarial plan measurement date december year conway’s funding practice evaluate tax cash position qualified pension plans’ funded status maximize tax deductibility contributions year conway expects make minimum contribution 238 million qualified pension plans 2009 however could change based changes interest rates asset returns employee retirement income security act “erisa” requirements conway inc notes consolidated financial statements continued funded status defined benefit pension plans following table reports changes projected benefit obligation fair value plan assets determination amounts recognized consolidated balance sheets conway’s defined benefit pension plans december 31 conway inc notes consolidated financial statements continued amounts included accumulated comprehensive income loss yet recognized net periodic benefit expense consist following actuarial loss priorservice credit qualified pension plans amortized accumulated comprehensive income loss 2009 159 million 10 million respectively actuarial loss nonqualified pension plans amortized accumulated comprehensive income loss 2009 06 million following plan amendments january 1 2007 participants longer considered active result amounts amortized expense income estimated average remaining life expectancy 327 years inactive plan participants conway inc notes consolidated financial statements continued net periodic benefit expense income amounts recognized comprehensive income loss years ended december 31 includes following expected benefit payments defined benefit pension plans summarized estimates based assumptions future events actual benefit payments may vary estimates conway inc notes consolidated financial statements continued defined contribution retirement plan conway retirement savings plan “primary dc plan” voluntary defined contribution plan leveraged employeestock ownership plan feature noncontractual us employees salary deferral qualified section 401k irc 1989 primary dc plan borrowed 1500 million purchase 986259 shares preferred stock may held primary dc plan trustee another plan trustee conway’s expense primary dc plan 901 million 2008 882 million 2007 159 million 2006 december 31 2008 2007 conway recognized accrued liabilities 218 million 219 million respectively contributions related primary dc plan preferred stock earns dividend 1293 per share used pay debt service primary dc plan notes dividends preferred shares deductible income tax purposes accordingly reflected net tax benefits statements consolidated income allocation preferred stock participants’ accounts based upon ratio current year’s principal interest payments total debt primary dc plan since conway guarantees debt reported consolidated balance sheets guarantees primary dc plan notes reduced principal paid january 2009 conway repaid remaining 227 million outstanding primary dc plan notes result remaining unallocated shares allocated participants’ accounts 2009 share preferred stock convertible common stock upon employee ceasing participation plan upon election employee rate generally equal number shares common stock could purchased 15210 less minimum conversion rate 471 shares common stock share preferred stock deferred compensation expense recognized preferred shares allocated participants equivalent cost preferred shares allocated deferred compensation expense 104 million 107 million 91 million recognized 2008 2007 2006 respectively december 31 2008 primary dc plan owned 523911 shares preferred stock 455305 shares allocated employees december 31 2008 estimated fair value 68606 unallocated shares 113 million december 31 2008 conway reserved authorized unissued common stock adequate satisfy conversion feature preferred stock periods presented conway’s contributions primary dc plan include contributions cash allocations conway preferred stock openmarket purchases conway common stock cash contributions conway beginning january 2009 contributions form conway common stock made repurchased common stock also referred treasury stock reducing amount cash contributions made conway postretirement medical plan conway sponsors postretirement medical plan provides health benefits certain noncontractual employees least 55 years age least 10 years service “postretirement plan” postretirement plan provide employersubsidized retiree medical benefits employees hired january 1 1993 conway inc notes consolidated financial statements continued following sets forth changes benefit obligation determination amounts recognized consolidated balance sheets postretirement plan december 31 amounts included accumulated comprehensive income loss yet recognized net periodic benefit expense consist following 2009 priorservice credits 12 million amortized accumulated comprehensive income loss conway inc notes consolidated financial statements continued net periodic benefit expense amounts recognized comprehensive income loss years ended december 31 includes following expected benefit payments reflect expected future service appropriate summarized estimates based assumptions future events actual benefit payments may vary estimates assumed healthcare cost trend rates used determine benefit obligation follows assumed healthcare cost trends affect amounts reported conway’s postretirement benefits onepercentagepoint change assumed healthcare cost trend rates would change aggregate service interest cost approximately 03 million accumulated projected benefit obligation approximately 36 million conway inc notes consolidated financial statements continued longterm disability plan conway sponsors longterm disability plan provide postemployment benefits active fulltime employees unable return work due covered injury sickness qualified disabilities covered employees receive monetary benefits specified disabilityrelated medical costs portion lost wage salary income employees hired prior july 1 2003 generally receive benefits age 65 benefit payments employees hired date generally limited 36month period conway selfinsured substantial portion benefit payments made longterm disability plan amount recognized expense liability conway’s longterm disability plan depends expected timing benefit payments discount rate used measure present value future benefit payments conway’s discount rate riskfree rate based us treasury bonds maturities approximate timing future benefit payments based primarily fluctuating market conditions riskfree discount rate used measure obligation declined 155 december 31 2008 345 december 31 2007 conway’s consolidated balance sheets longterm currentportion longterm disabilityplan obligation reported employee benefits accrued liabilities respectively december 31 2008 longterm currentportion obligation 321 million 136 million respectively december 31 2007 291 million 115 million respectively expense associated longterm disability plan 167 million 2008 66 million 2007 57 million 2006 compensation plans conway subsidiaries adopted various plans relating achievement specific goals provide incentive compensation designated employees total compensation earned salaried participants plans 103 million 2008 306 million 2007 294 million 2006 hourly participants 28 million 2008 283 million 2007 207 million 2006 13 sharebased compensation terms sharebased compensation plans conway grants various types sharebased compensation awards employees directors plans provide awards form stock options nonvested stock also known restricted stock performanceshare plan units stock options granted prices equal market value common stock date grant expire 10 years date grant generally stock options granted threeyear gradedvesting terms onethird award vests year certain option awards provide accelerated vesting result change control qualifying retirement death disability defined stock option plans effective september 26 2006 conway’s compensation committee established vesting provisions new option awards provide immediate vesting unvested shares upon retirement stock options issued date generally provide continued vesting subsequent employee’s retirement shares nonvested stock valued market price conway’s common stock date award awards granted directors generally granted threeyear gradedvesting terms awards granted employees generally vest three years award date performanceshare plan units “pspus” valued market price conway’s common stock date award vest three years grant date certain performance criteria achieved total number shares award recipients may collectively receive depends upon achievement certain performance criteria one threeyear period 2007 award subject forfeiture award recipient leaves conway threeyear period 2008 award allows pro rata vesting award recipient leaves conway result death disability qualifying retirement amount expense recorded period based conway’s current estimate number awards ultimately vest conway inc notes consolidated financial statements continued december 31 2008 conway 4519290 common shares available grant stock options nonvested stock sharebased compensation equity plans conway recognizes expense straightline basis shorter 1 requisite service period stated award 2 period grant date award employee’s retirementeligibility date following expense recognized sharebased compensation valuation assumptions fair value stock option grant estimated using blackscholes optionpricing model following summary weightedaverage assumptions used calculated weightedaverage fair value riskfree interest rate determined using us treasury zerocoupon issue remaining term equal expected life option expected life option derived binomial lattice model based historical rate voluntary exercises postvesting terminations volatility expected volatility based historical volatility conway’s common stock recent period equal expected term option sharebased payment award activity following table summarizes stockoption award activity 2008 conway inc notes consolidated financial statements continued aggregate intrinsic value reported table represents total pretax value based conway’s closing common stock price 2660 december 31 2008 would received employees directors holders exercised inthemoney stock options date 2008 2007 2006 aggregate intrinsic value exercised options 54 million 44 million 97 million respectively total amount cash received exercise options 2008 2007 2006 101 million 82 million 122 million respectively related tax benefit realized exercise options 21 million 15 million 43 million respectively total unrecorded deferred compensation cost stock options net forfeitures 53 million expected recognized weightedaverage period 146 years following table summarizes nonvested stock pspus activity 2008 total fair value nonvested stock vested 2008 2007 2006 24 million 22 million 31 million respectively based conway’s closing common stock price vesting date total unrecorded deferred compensation cost shares nonvested stock net forfeitures 62 million expected recognized weightedaverage period 165 years 2008 conway determined performance criteria pspu awards would met result conway recognize expense pspu awards 2008 reversed expense previously recognized 2007 2008 award oneyear measurement period forfeited 2008 outstanding shares december 31 2007 relate 2007 award threeyear measurement period number awards ultimately vest range 0 200 awards outstanding depending upon achievement performance criteria 14 commitments contingencies spinoff cfc december 2 1996 conway completed 100 spinoff consolidated freightways corporation “cfc” conway’s shareholders cfc time spinoff party certain multiemployer pension plans covering current former employees cfc’s cessation us operations connection filing bankruptcy 2002 deemed resulted cfc’s “complete withdrawal” within meaning applicable federal law multiemployer plans subsequently assessed claims “withdrawal liabilities” cfc demanding cfc pay approximately 400 million determined cfc’s share unfunded vested benefits obligations plans multiemployer funds assessing liability cfc central states southeast southwest areas pension fund “central states” assessed withdrawal liability approximately 319 million new york states teamsters conference pension retirement fund “ny fund” assessed withdrawal liability approximately 319 million approximately 198 million recognized allowed claim cfc bankruptcy proceeding conway inc notes consolidated financial statements continued central states july 2008 central states advised conway wished meet conway discuss possible assessment withdrawal liability conway resolve uncertainties created central states’ contact conway filed arbitration demand federal lawsuit august 2008 pension fund october 2008 conway received demand letter central states notifying conway assertion withdrawal liability amount 662 million payable term approximately 11 years december 2008 conway inc entered settlement release agreement central states terms agreement conway agreed pay central states sum 80 million addition instruct trustee cfc bankruptcy estate deliver central states future payments account conway’s allowed claims bankruptcy estate agreement provides release central states claims conway related contributions central states pension fund withdrawal liability extinguishment 662 million withdrawal liability assessment made central states conway also agreed dismiss prejudice federal lawsuit withdraw arbitration demand settlement agreement constitute admission liability conway person obligation released agreement ny fund conway received requests information 2002 2003 regarding spinoff cfc ny fund complied requests providing last requested documents may 2003 late 2008 five years conway responded requests representatives ny fund advised conway ny fund may seek hold conway liable withdrawal liability connection conway’s 1996 spinoff cfc conway advised informally ny fund’s counsel ny fund’s withdrawal liability claim february 2003 interest date exceeded 29 million also appears ny fund reserving right assert presumably lieu addition 29 million claim “complete withdrawal” occurred date conway sold former subsidiary ups 2004 amount withdrawal liability measurable date although conway informed adequate information available estimate amount withdrawal liability claim december 2004 january 16 2009 order resolve uncertainties created ny fund’s recent contacts conway filed arbitration demand federal lawsuit ny fund february 24 2009 conway entered settlement release agreement ny fund terms agreement conway agreed pay ny fund sum 425000 agreement provides release ny fund claims conway related contributions ny fund pension fund withdrawal liability conway also agreed dismiss prejudice federal lawsuit withdraw arbitration demand settlement agreement constitute admission liability conway person obligation released agreement conway continues believe actions connection cfc spinoff proper continue vigorously defend claims brought multiemployer pension funds seeking hold conway responsible cfc’s withdrawal liabilities however assurance outcome litigation given uncertainties inherent proceedings including possible application adverse judicial decisions rendered unrelated matters involving conway result matters discussed conway provide assurance matters relating spinoff cfc material adverse effect conway’s financial condition results operations cash flows february 2002 lawsuit filed ewa district court southern district ohio alleging violations worker adjustment retraining notification act “warn act” connection employee layoffs ultimate terminations due august 2001 grounding ewa’s airline operations conway inc notes consolidated financial statements continued shutdown airline operations december 2001 court subsequently certified lawsuit class action behalf affected employees laid august 11 august 15 2001 warn act generally requires employers give 60days notice 60days pay benefits lieu notice shutdown operations mass layoff site employment estimated range potential loss matter zero approximately 9 million including accrued interest lawsuit tried early january 2009 parties awaiting decision court conway defendant various lawsuits incidental businesses opinion management ultimate outcome actions material effect conway’s financial condition results operations cash flows 15 segment reporting conway discloses segment information manner business units organized making operating decisions assessing performance allocating resources financial reporting purposes conway divided following five reporting segments • freight segment consists primarily operating results conway freight business unit provides regional interregional transcontinental lessthantruckload freight services throughout north america • logistics segment consists operating results menlo worldwide logistics business unit develops contractlogistics solutions including management complex distribution networks supplychain engineering consulting also provides multimodal freight brokerage services logistics segment includes results chic logistics cougar logistics periods subsequent acquisition second half 2007 • truckload segment includes operating results conway truckload business unit conway truckload provides assetbased fulltruckload freight services throughout north america including services mexico following acquisition cfi august 2007 operating results cfi reported operating results conway’s former truckload operation truckload reporting segment • vector prior sale vector reporting segment consisted conway’s proportionate share net income vector joint venture gm purchased conway’s membership interest vector december 2006 • reporting segment consists operating results road systems trailer manufacturer certain corporate activities related income expense allocated reporting segments financial data management evaluates segment performance primarily based revenue operating income loss accordingly interest expense investment income nonoperating items reported segment results corporate expenses generally allocated based measurable services provided segment general corporate expenses based segment revenue capital employed intersegment revenue related operating income eliminated reconcile consolidated revenue operating income transactions reporting segments generally made cost except intersegment revenue road systems intended reflect fair value trailers manufactured road systems sold conway freight conway truckload conway inc notes consolidated financial statements continued conway inc notes consolidated financial statements continued geographic data geographic reporting freight transportation revenues allocated equally origin destination revenues contract services allocated country services performed longlived assets outside united states immaterial periods presented conway inc notes consolidated financial statements continued 16 quarterly financial data conway inc quarterly financial data unaudited comparability conway’s consolidated operating income affected following unusual income expense • loss 52 million connection operational restructuring including 26 million restructuring charges 26 million costs conway freight first quarter 2008 conway inc notes consolidated financial statements continued • loss 213 million restructuring activities conway freight fourth quarter 2008 • charges 378 million impairment goodwill intangible assets 49 million writedown acquisitionrelated receivable 31 million acquisitionrelated integration costs menlo worldwide logistics fourth quarter 2008 • losses 55 million 15 million related restructuring activities conway freight conway truckload respectively third quarter 2007 • loss 77 million restructuring activities conway freight fourth quarter 2007 b comparability conway’s tax provision net income affected following • tax provision fourth quarter 2008 reflects nondeductible goodwill impairment charges writedown acquisitionrelated receivable menlo worldwide logistics c effective august 23 2007 conway acquired contract freighters inc affiliated companies collectively “cfi” purchasemethod accounting cfi’s operating results included periods subsequent acquisition item 9item 8 financial statements supplementary data conway inc consolidated balance sheets accompanying notes consolidated financial statements integral part statements conway inc consolidated balance sheets accompanying notes consolidated financial statements integral part statements conway inc statements consolidated operations accompanying notes consolidated financial statements integral part statements conway inc statements consolidated cash flows accompanying notes consolidated financial statements integral part statements conway inc statements consolidated shareholders’ equity accompanying notes consolidated financial statements integral part statements conway inc notes consolidated financial statements 1 principal accounting policies organization conway inc consolidated subsidiaries “conway” “company” provide transportation logistics services wide range manufacturing industrial retail customers fully discussed note 15 “segment reporting” financial reporting purposes conway divided five reporting segments freight logistics truckload vector principles consolidation consolidated financial statements include accounts conway inc subsidiaries significant intercompany accounts transactions eliminated estimates management makes estimates assumptions preparing financial statements conformity accounting principles generally accepted us estimates assumptions affect amounts reported accompanying financial statements notes changes estimates recognized accordance accounting rules estimate typically period new information becomes available estimates underlying assumptions affect amounts assets liabilities reported disclosures contingent assets liabilities reported amounts revenue expenses estimates relate revenuerelated adjustments impairment goodwill longlived assets amortization depreciation income tax assets liabilities selfinsurance accruals pension plan postretirement obligations contingencies assets liabilities recognized connection acquisitions restructurings dispositions conway evaluates estimates assumptions ongoing basis using historical experience factors including current economic environment estimates assumptions adjusted facts circumstances dictate volatility financial markets changing levels economic activity increase uncertainty inherent estimates assumptions changes estimates resulting continuing changes economic environment reflected financial statements future periods recognition revenues conway freight recognizes revenue reporting periods based relative transit time period recognizes expense incurred conway truckload recognizes revenue related direct costs shipment delivered estimates future billing adjustments revenue including related weight freightclassification verification pricing discounts recognized time shipment september 2009 conway freight obtained precise previously unavailable correctionactivity data accordingly revised assumptions time period recognition revenue subsequent revenue adjustments result change accounting estimate freight segment allowance revenue adjustments increased revenue operating income decreased 54 million 2009 change estimate adversely affected net loss applicable common shareholders 33 million 007 per diluted share 2009 futureperiod effect change accounting estimate immaterial menlo worldwide logistics recognizes revenue proportionalperformance model based service outputs delivered customer revenue recorded gross basis without deducting thirdparty purchased transportation costs transactions menlo worldwide logistics acts principal revenue recorded net basis deducting purchased transportation costs transactions menlo worldwide logistics acts agent certain menlo worldwide logistics’ contracts billings excess revenues recognized recorded unearned revenue unearned revenue recognized contract period services provided december 31 2009 2008 unearned revenue 165 million 151 million reported conway’s consolidated balance sheets accrued liabilities addition menlo worldwide logistics deferred certain direct incremental costs related setup logistics operations longterm contracts deferred setup costs recognized expense contract term deferred setup costs 145 million december 31 2009 2008 reported consolidated balance sheets deferred charges assets cash equivalents marketable securities cash equivalents consist shortterm interestbearing instruments maturities three months less date purchase december 31 2009 2008 cashequivalent investments 4509 million 2649 million respectively consisted primarily commercial paper moneymarket funds certificates deposit conway classifies marketable debt securities availableforsale reports fair value changes fair value availableforsale securities recognized accumulated comprehensive income loss shareholders’ equity unless unrealized loss otherthantemporary loss portion unrealized loss determined temporary portion loss recognized earnings conway held availableforsale marketable securities 67 million december 31 2009 2008 respectively consisted mostly one longterm availableforsale auctionrate security fully discussed note 6 “fairvalue measurements” trade accounts receivable net conway freight conway truckload report accounts receivable net realizable value provide allowance collection considered doubtful estimates uncollectible accounts based various judgments assumptions including revenue levels historical loss experience aging outstanding accounts receivable menlo worldwide logistics based size nature client base performs periodic evaluation customers’ creditworthiness accounts receivable portfolio recognizes expense uncollectible accounts losses probable reasonably estimable activity allowance uncollectible accounts presented following table 2008 provision uncollectible accounts included 49 million related acquisitionrelated receivable estimates billing adjustments including related weight freightclassification verifications pricing discounts also reported reduction accounts receivable activity allowance revenue adjustments presented following table property plant equipment property plant equipment reported historical cost depreciated primarily straightline basis estimated useful lives generally 25 years buildings improvements 4 13 years revenue equipment 3 10 years equipment leasehold improvements assets acquired capital leases amortized shorter terms respective leases useful lives assets resulting expense reported depreciation expense 1751 million 2009 1884 million 2008 1527 million 2007 conway periodically evaluates whether changes estimated useful lives necessary ensure estimates accurately reflect economic use assets january 2009 conway freight extended estimated useful life tractors 8 years 7 years result change 2009 depreciation expense net loss applicable common shareholders decreased 111 million 67 million 014 per diluted share respectively january 2010 conway freight extended estimated useful life tractors 10 years 8 years extended estimated useful life trailers 14 years 13 years also effective 2010 conway truckload extended estimated useful life tractors 6 years 4 years decreased associated estimated salvage values result changes depreciation expense expected decline 100 million 2010 expenditures equipment maintenance repairs charged operating expenses incurred betterments capitalized gains losses sales equipment property recorded operating expenses associated conway’s rebranding initiative expensed incurred primarily classified maintenance expense launched 2006 rebranding initiative consisted primarily costs convert conway freight’s tractors trailers new conway graphic identity completed 2008 conway recognized rebranding expense 52 million 2008 143 million 2007 tires cost replacement tires expensed time tires placed service case repairs maintenance costs cost tires new revenue equipment capitalized depreciated estimated useful life related equipment capitalized software net capitalized software consists certain direct internal external costs associated internaluse software net accumulated amortization capitalized software computed itembyitem basis period 3 10 years depending estimated useful life software amortization expense related capitalized software 129 million 2009 144 million 2008 134 million 2007 accumulated amortization december 31 2009 2008 1340 million 1218 million respectively longlived assets conway performs impairment analysis longlived assets whenever circumstances indicate carrying amount may recoverable assets held used impairment charge recognized estimated undiscounted cash flows associated asset group assets less carrying value impairment exists charge recognized difference carrying value fair value fair values determined using quoted market values discounted cash flows external appraisals applicable assets held disposal carried lower carrying value estimated net realizable value conway’s accounting policies goodwill longlived intangible assets fully discussed note 2 “acquisitions” book overdrafts book overdrafts represent outstanding drafts yet presented bank excess recorded cash amounts represent bank overdrafts occur drafts presented bank excess cash conway’s bank account would effectively loan conway december 31 2009 2008 book overdrafts 357 million 304 million respectively included accounts payable income taxes deferred income taxes provided tax effect temporary differences tax basis assets liabilities reported amounts financial statements conway uses liability method account income taxes requires deferred taxes recorded statutory rate anticipated effect taxes paid selfinsurance accruals conway uses combination purchased insurance selfinsurance programs provide costs medical casualty liability vehicular cargo workers’ compensation claims longterm portion selfinsurance accruals relates primarily workers’ compensation vehicular claims expected payable several years conway periodically evaluates level insurance coverage adjusts insurance levels based risk tolerance premium expense measurement classification selfinsured costs requires consideration historical cost experience demographic severity factors judgments current expected levels cost per claim retention levels methods provide estimates undiscounted liability associated claims incurred balance sheet date including claims reported changes assumptions factors materially affect actual costs paid settle claims amounts may different estimates conway participates reinsurance pool reinsure portion workers’ compensation vehicular liabilities participant pool cedes claims pool assumes equivalent amount claims reinsurance relieve conway liabilities original policy however opinion management potential exposure conway nonpayment minimal december 31 2009 2008 con way recorded liability related assumed claims 421 million 361 million respectively recorded receivable reinsurance pool 358 million 298 million respectively revenues related reinsurance activities reported net associated expenses classified operating expenses connection participation reinsurance pool conway recognized operating income 40 million 2009 17 million 2008 net effect operating results 2007 foreign currency translation adjustments resulting translating foreign functional currency financial statements us dollars included foreign currency translation adjustment statements consolidated shareholders’ equity transaction gains losses arise exchangerate fluctuations transactions denominated currency functional currency included results operations reported miscellaneous net statements consolidated operations conway determined advances certain foreign subsidiaries indefinite nature accordingly corresponding foreign currency translation gains losses related advances included foreign currency translation adjustment statements consolidated shareholders’ equity marketing expenses marketing costs including sales promotions printed sales materials advertising expensed incurred classified operating expenses marketing expenses 97 million 2009 89 million 2008 85 million 2007 earnings loss per share eps basic eps continuing operations computed dividing reported net income loss continuing operations preferred stock dividends weightedaverage common shares outstanding diluted eps calculated follows computation diluted eps potential common shares dilutive included potential common shares dilutive reduce earnings per share increase loss per share options nonvested stock convertible preferred stock included computation result antidilutive loss applicable common shareholders reported 2009 conway adopted fsp eitf 0361 requires unvested sharebased payment awards contain nonforfeitable rights dividends dividend equivalents treated participating securities computation earnings per share pursuant twoclass method adoption fsp material effect conway’s financial statements new accounting standards june 2009 fasb issued accounting standards update “asu” 200901 “the fasb codification hierarchy gaap” statement establishes fasb accounting standards codification “codification” single source authoritative nongovernmental us generally accepted accounting principles “gaap” although codification change gaap substantially reorganizes literature requires enterprises revise gaap references contained financialstatement disclosures conway’s adoption asu 200901 effective july 1 2009 material effect financial statements june 2009 fasb issued sfas 166 “accounting transfers financial assets amendment sfas 140” sfas 167 “amendments fasb interpretation 46r” sfas 166 sfas 167 codified “transfers servicing” “consolidations” topics codification respectively sfas 166 modifies accounting transfers financial assets eliminates concept qualifying specialpurpose entity creates stringent conditions reporting transfer portion financial asset sale sfas 167 changes accounting rules improve financial reporting enterprises involved variableinterest entity “vie” primarily statement eliminates existing provision excludes certain specialpurpose entities consolidation requirements also establishes principlesbased criteria determining whether vie consolidated statements effective first fiscal year beginning november 15 2009 interim periods within annual reporting period conway first quarter 2010 conway expect adoption sfas 166 sfas 167 material effect financial statements october 2009 fasb issued asu 200913 “multideliverable revenue arrangements consensus fasb emerging issues task force” asu 200913 codified “revenue recognition” topic codification details requirements must met entity recognize revenue sale delivered item part multipleelement arrangement items yet delivered asu 200913 addresses determine whether arrangement involving multiple deliverables contains one unit accounting arrangement consideration allocated among separate units accounting one current requirements objective reliable evidence standalone selling price undelivered items must supported either vendorspecific objective evidence “vsoe” thirdparty evidence asu 200913 modifies current gaap amending objective reliable evidence threshold allow use estimated selling price vsoe exist asu 200913 deliverables would expected meet separation criteria frequently asu 200913 effective fiscal years beginning june 15 2010 conway apply guidance prospectively revenue arrangements entered materially modified january 1 2011 reclassifications certain amounts priorperiod financial statements reclassified conform currentperiod presentation 2 acquisitions contract freighters inc august 2007 conway acquired outstanding common shares transportation resources inc “tri” tri holding company contract freighters inc affiliated companies collectively “cfi” following acquisition cfi operating results cfi reported operating results conway’s former truckload operation truckload reporting segment september 2007 conway integrated former truckload operation cfi business unit name cfi business unit changed conway truckload january 2008 purchase price cfi 7523 million cougar logistics september 2007 menlo worldwide llc “mw” acquired outstanding common shares cougar holdings pte ltd primary subsidiary cougar express logistics collectively “cougar logistics” following acquisition operating results cougar logistics reported logistics reporting segment purchase price cougar logistics 287 million chic logistics october 2007 mw acquired outstanding common shares chic holdings ltd wholly owned subsidiaries shanghai chic logistics co ltd shanghai chic supply chain management co ltd collectively “chic logistics” following acquisition operating results chic logistics reported logistics reporting segment purchase price chic logistics 591 million pro forma financial information following unaudited pro forma condensed financial information presents combined results operations conway cfi acquisition occurred beginning period presented based conway’s assessment significance reflect acquisition cougar logistics chic logistics unaudited pro forma condensed consolidated financial information illustrative purposes purport represent conway’s financial information would acquisition occurred date indicated results future periods goodwill intangible assets goodwill recorded excess acquired entity’s purchase price amounts assigned assets acquired including separately recognized intangible assets liabilities assumed goodwill amortized assessed impairment annual basis fourth quarter frequently events changes circumstances indicate asset might impaired assessment requires comparison fair value reporting unit carrying value net assets including allocated goodwill carrying value reporting unit exceeds fair value conway must compare implied fair value reportingunit goodwill carrying amount goodwill carrying amount reportingunit goodwill exceeds implied fair value goodwill impairment loss recognized amount equal excess following table shows changes gross carrying amounts goodwill attributable applicable segment 2009 conway evaluated conway truckload’s goodwill impairment prior annual measurement date due primarily worsening truckload market conditions lower profit projections conway truckload decline conway’s market capitalization first quarter 2009 first quarter 2009 conway determined goodwill associated conway truckload impaired result conway truckload recognized 1348 million impairment charge reduce carrying amount goodwill implied fair value impairment charge primarily due lower projected revenues operating income discount rate reflected economic market conditions measurement date valuation conway truckload conway applied two equally weighted methods publiccompany multiples discounted cash flow model key assumptions used discounted cash flow model cash flow projections involving forecasted revenues expenses capital expenditures working capital changes discount rate terminal growth rate applied projected future cash flows discount rate equal estimated weightedaverage cost capital reporting unit marketparticipant perspective terminal growth rate based inflation assumptions adjusted factors may impact future growth industryspecific expectations result annual impairment test fourth quarter 2008 conway determined goodwill related chic logistics impaired result menlo worldwide logistics recognized 318 million impairment charge valuation chic logistics conway utilized discounted cash flow model impairment primarily due decreases actual projected operating income higher discount rate reflected economic market conditions measurement date 2008 conway finalized purchaseprice accounting made revisions preliminary estimates evaluations including valuations tangible intangible assets certain contingencies information received third parties accordingly conway made revisions estimated fair value net assets acquired connection purchase cfi chic logistics including 201 million increases fair values intangible assets primarily customer relationships 75 million increase related liabilities assumed foreign incometax contingencies addition adjustments made deferred taxes relating fair value assets acquired changes assets acquired liabilities assumed affected amount goodwill recorded connection acquisitions conway recognized definitelived intangible assets estimated fair value acquired customer relationships trademarks intangible assets consisted following fourth quarter 2008 conway evaluated fair value chic logistics’ customerrelationship intangible asset due lower projected revenues including reduced revenue significant customer result menlo worldwide logistics recognized 60 million impairment loss reduce carrying amount intangible asset estimated fair value determined using income approach utilized discounted cash flow model fair value intangible assets amortized straightline basis estimated useful life amortization expense related intangible assets 44 million 2009 54 million 2008 10 million 2007 estimated amortization expense next five years presented following table 3 restructuring activities periods presented conway incurred expenses connection number restructuring activities expenses reported restructuring charges statements consolidated operations detailed conway recognized restructuring charges 29 million 2009 239 million 2008 147 million 2007 expects recognize 19 million additional expense 2010 conway’s remaining liability amounts expensed yet paid 79 million december 31 2009 remaining liability relates primarily operating lease commitments expected payable several years employeeseparation costs expected paid 2010 conway outsourcing initiative 2009 part ongoing effort reduce costs improve efficiencies conway initiated project outsource significant portion informationtechnology infrastructure function small portion administrative accounting functions conway expects outsourcing initiative substantially complete end third quarter 2010 following table summarizes effect outsourcing initiative year ended december 31 2009 expected remaining expenses 19 million exclude transition implementation ongoing serviceprovider costs expected incurred connection outsourcing initiative 2009 conway allocated corporate outsourcing charges 26 million 08 million freight logistics segment respectively conway freight operational restructuring august 2007 conway freight began operational restructuring combine three regional operating companies one centralized operation improve customer experience streamline processes reorganization centralized entity intended improve customer service efficiency development uniform pricing operational processes implementation best practices conway freight completed initiative 2008 following table summarizes effect conway freight’s operational restructuring years ended december 31 2009 2008 2007 network reengineering november 2008 conway freight completed major network reengineering reduce service exceptions improve ontime delivery bring faster transit times deploying lowercost efficient service center network better aligned customer needs business volumes reengineering change conway freight’s service coverage involve closure 40 service centers shipment volumes closing locations redistributed balanced among 100 nearby service centers following table summarizes effect network reengineering years ended december 31 2009 2008 economic workforce reduction response decline yearoveryear business volumes accelerated fourth quarter 2008 conway freight reduced workforce 1450 positions december 2008 addition reducing workforce operating locations reduction also eliminated positions conway freight’s general office administrative center included realignment area regional division structure streamline management following table summarizes effect workforce reduction years ended december 31 2009 2008 conway truckload connection acquisition cfi fully discussed note 2 “acquisitions” conway september 2007 integrated former truckload operation cfi business unit connection integration conway closed general office preacquisition truckload business unit incurred 15 million restructuring charge 2007 primarily costs related employee separation lease termination asset impairment conway completed conway truckload reorganization 2007 4 discontinued operations discontinued operations periods presented relate 1 closure conway forwarding 2006 2 sale menlo worldwide forwarding inc subsidiaries menlo worldwide expedite inc collectively “mwf” 2004 3 shutdown emery worldwide airlines inc “ewa” 2001 termination priority mail contract usps 2000 4 spinoff consolidated freightways corporation “cfc” 1996 results operations cash flows discontinued operations segregated continuing operations results discontinued operations summarized conway forwarding 2006 conway closed operations domestic air freight forwarding business known conway forwarding periods presented results conway forwarding related adjustments loss estimates mwf 2004 conway mw sold united parcel service inc “ups” issued outstanding capital stock mwf conway agreed indemnify ups certain losses ups may incur closing sale certain limitations losses related indemnification obligations costs including future cash expenditures related sale estimated recognized future periods additional loss disposal incurred periods presented results mwf related adjustments loss estimates ewa periods presented results ewa reflect gains related recovery prior losses fully discussed adjustments loss estimates connection cessation aircarrier operations 2001 ewa terminated employment pilots flight crewmembers 2008 ewa settled remaining legal actions brought pilots crewmembers 06 million recognized 16 million gain net tax 10 million eliminate previously recorded accrued liability conway received payments insurers 100 million 2008 50 million 2007 related recovery prior losses result recognized gains 63 million net tax 37 million 2008 31 million net tax 19 million 2007 cfc 1996 conway completed spinoff cfc conway’s shareholders connection spinoff cfc conway agreed indemnify certain states insurance companies sureties failure cfc pay certain workers’ compensation tax public liability claims pending september 30 1996 periods presented conway’s loss related cfc due revisions estimated losses related indemnified workers’ compensation liabilities 2008 results cfc include 80 million payments received conway related cfc’s bankruptcy proceedings 80 million payment made conway terms 2008 settlement central states southeast southwest areas pension funds “central states” settlement central states related claims asserted cfc unpaid pension liabilities connection payments conway recognized gain 04 million net tax 02 million 5 sale unconsolidated joint venture vector scm llc “vector” joint venture formed general motors “gm” 2000 purpose providing logistics management services global basis gm customers addition gm june 2006 gm exercised right purchase conway’s membership interest vector conway december 2006 recognized receivable gm 519 million also recognized 410 million gain january 2007 conway received 519 million payment gm following negotiation gm first quarter 2007 conway determined additional receivable 27 million due gm could collected accordingly 27 million loss recognized vector reporting segment write outstanding receivable gm 6 fairvalue measurements assets liabilities reported fair value classified one following three levels within fairvalue hierarchy level 1 quoted market prices active markets identical assets liabilities level 2 observable marketbased inputs unobservable inputs corroborated market data level 3 unobservable inputs corroborated market data financial assets measured fair value recurring basis following table summarizes valuation financial instruments within fairvalue hierarchy cash equivalents consist shortterm interestbearing instruments primarily commercial paper moneymarket funds certificates deposit maturities three months less date purchase december 31 2009 weightedaverage remaining maturity cash equivalents less one month moneymarket funds reflect net asset value classified level 1 instruments within fairvalue hierarchy due lack quoted market prices identical instruments commercial paper certificates deposit generally valued using published interest rates instruments similar terms maturities accordingly classified level 2 instruments within fairvalue hierarchy based short maturities carrying amount cash equivalents approximates fair value conway’s marketable security consists one auctionrate security valued income approach utilized discounted cash flow model following table summarizes change fair values conway’s auctionrate security valued using level 3 inputs due primarily changes interestrate benchmarks fair value conway’s auctionrate security increased 04 million 2009 conway recorded cumulative 04 million decline carrying value auctionrate security equal offsetting unrealized loss accumulated comprehensive loss shareholders’ equity conway evaluated unrealized loss concluded decline fair value otherthantemporary nonfinancial assets measured fair value recurring basis conway measured fair value reporting units goodwill part goodwill impairment test inputs used measure fair value reporting units within level 3 fairvalue hierarchy fairvalue methods applied conway fully discussed note 2 “acquisitions” 7 accrued liabilities accrued liabilities consisted following 8 debt financing arrangements longterm debt guarantees consisted following revolving credit facility conway 400 million revolving credit facility matures september 30 2011 revolving credit facility available cash borrowings issuance letters credit 400 million december 31 2009 2008 borrowings outstanding credit facility december 31 2009 1887 million letters credit outstanding 2113 million available capacity additional letters credit cash borrowings subject compliance financial covenants customary conditions borrowing total letters credit outstanding december 31 2009 provided collateral conway’s selfinsurance programs borrowings agreement bear interest rate based upon lead bank’s base rate eurodollar rate plus margin dependent either conway’s senior debt credit ratings leverage ratio credit facility fee ranges 007 0175 applied total facility 400 million based conway’s current credit ratings revolving facility guaranteed certain conway’s material domestic subsidiaries contains two financial covenants leverage ratio ii fixedcharge coverage ratio also various restrictive covenants including limitations incurrence liens ii consolidations mergers asset sales iii incurrence additional subsidiary indebtedness credit facilities shortterm borrowings december 31 2009 conway 243 million bank guarantees letters credit overdraft facilities outstanding credit facilities conway shortterm borrowings 103 million 75 million december 31 2009 2008 respectively excluding noninterest bearing borrowings described weightedaverage interest rate shortterm borrowings 49 56 december 31 2009 december 31 2008 respectively shortterm borrowings outstanding december 31 2009 2008 noninterest bearing borrowings 39 million 33 million respectively related credit facility menlo worldwide logistics utilizes one logistics contracts borrowings facility related amounts financial institution paid vendors behalf menlo worldwide logistics primary dc plan notes conway guaranteed notes issued conway’s retirement savings plan voluntary defined contribution retirement plan fully discussed note 12 “employee benefit plans” conway repaid 227 million outstanding series b notes maturity january 2009 promissory note connection conway’s acquisition cfi conway assumed 11 million promissory note renewed december 2009 14 million interest rate 261 878 notes due 2010 200 million aggregate principal amount 878 notes contain certain covenants limiting incurrence additional liens prior termination december 2002 conway designated four interestrate swap derivatives fairvalue hedges mitigate effects interestrate volatility fair value conway’s 878 notes termination date 398 million estimated fair value fairvalue hedges offset equal increase carrying amount hedged fixedrate longterm debt 398 million cumulative adjustment carrying amount 878 notes accreted future earnings effective interest rate debt extinguished time unamortized fairvalue adjustment would fully recognized earnings including accretion fairvalue adjustment amortization discount interest expense 878 notes due 2010 recognized annual effective interest rate 56 725 senior notes due 2018 august 2007 conway borrowed 4250 million bridgeloan facility fund portion purchase price cfi december 2007 conway issued 4250 million 725 senior notes used net proceeds offering cash hand repay amounts outstanding bridgeloan facility connection issuance 725 senior notes conway capitalized 40 million underwriting fees related debt costs amortized effectiveinterest method 725 senior notes bear interest rate 725 per year payable semiannually january 15 july 15 year conway may redeem 725 senior notes whole part less 30 60days notice redemption price equal greater principal amount redeemed ii sum present values remaining scheduled payments principal interest notes redeemed discounted redemption date semiannual basis rate payable treasury note comparable maturity plus 50 basis points also various restrictive covenants including limitations incurrence liens ii consolidations mergers asset sales including amortization underwriting fees related debt costs interest expense 725 senior notes due 2018 recognized annual effective interest rate 737 holders 725 senior notes right require conway repurchase notes upon occurrence change control ii investmentgrade rating two moody’s standard poor’s fitch ratings repurchase price would equal 101 aggregate principal amount notes repurchased plus accrued unpaid interest senior debentures due 2034 300 million aggregate principal amount senior debentures bear interest rate 670 per year payable semiannually may 1 november 1 year conway may redeem senior debentures whole part less 30 60days notice redemption price equal greater principal amount redeemed ii sum present values remaining scheduled payments principal interest senior debentures redeemed discounted redemption date semiannual basis rate payable treasury note comparable maturity plus 35 basis points senior debentures issued indenture restricts conway’s ability certain exceptions incur debt secured liens including amortization discount interest expense 670 senior debentures due 2034 recognized annual effective interest rate 690 aggregate annual maturities longterm debt next five years ending december 31 2000 million 2010 14 million 2011 principal payments due 2012 2013 2014 december 31 2009 conway’s senior unsecured debt rated investment grade standard poor’s bbb fitch ratings bbb moody’s baa3 agency assigning outlook “negative” december 31 2009 2008 estimated fair value longterm debt 970 million 900 million respectively fair values estimated based current rates offered debt similar terms maturities 9 leases conway subsidiaries obligated noncancelable leases certain facilities equipment vehicles certain leases also contain provisions allow conway extend leases various renewal periods fourth quarter 2009 conway acquired tractors capitallease agreements ranging term three five years portion capitallease agreements relate tractors previously owned conway truckload saleleaseback arrangements involving tractors conway received 173 million sale proceeds capitallease agreements conway guarantees residual value tractors end lease term stated amounts residualvalue guarantees included minimum lease payments connection capital leases conway reported 500 million revenue equipment 07 million accumulated depreciation consolidated balance sheets december 31 2009 future minimum lease payments initial remaining noncancelable lease terms excess one year december 31 2009 follows future minimum lease payments table net 26 million sublease income expected received noncancelable subleases june 2008 menlo worldwide logistics entered agreements sell lease back two warehouses located singapore connection sale warehouses menlo worldwide logistics received 404 million remaining unamortized gain 159 million december 31 2009 classified deferred credit consolidated balance sheets amortized reduction lease expense tenyear term leases lease contains option renew additional fiveyear term future minimum payments associated leases included table rental expense operating leases comprised following 10 income taxes components provision income taxes follows income taxes provided foreign operations based upon various tax laws rates countries operations conducted components income loss income taxes follows conway’s income tax provision varied amounts calculated applying us statutory income tax rate pretax income loss shown following reconciliation components deferred tax assets liabilities related following deferred tax assets liabilities consolidated balance sheets classified current noncurrent based related asset liability creating deferred tax deferred taxes related specific asset liability classified based estimated period reversal conway recorded valuation allowances 112 million 373 million december 31 2009 2008 respectively deferred tax assets principally associated capital losses net operating losses tax credits management concluded assets fail meet morelikelythannot threshold realization deferred tax assets management believes likely results future operations generate taxable income sufficient amount type realize deferred tax assets income tax receivables 27 million 240 million included accounts receivable conway’s consolidated balance sheets december 31 2009 2008 respectively conway’s sale mwf 2004 generated capital loss tax purposes current tax law capital losses used offset capital gains since conway forecast significant taxable capital gains fiveyear tax carryforward period 408 million cumulative salerelated tax benefit fully offset valuation allowance equal amount remaining salerelated capitalloss carryforward december 31 2008 298 million associated valuation allowance 295 million 2009 287 million capitalloss carryforward expired remaining capitalloss carryforward december 31 2009 11 million expire 2010 01 million expire 2014 december 31 2009 conway also 83 million operatingloss carryforwards 59 million taxcredit carryforwards available reduce federal state foreign income taxes future years deferred tax assets reduced valuation allowance 90 million based conway’s current uncertainty whether generate sufficient state foreign taxable income fully utilize carryforwards cumulative undistributed earnings conway’s foreign subsidiaries approximately 369 million december 31 2009 remitted subject withholding tax indefinitely reinvested respective foreign subsidiaries’ operations becomes advantageous tax foreign exchange reasons remit earnings therefore withholding us taxes provided amount withholding tax would payable remittance undistributed earnings would approximately 2 million uncertain tax positions conway recognizes tax positions financial statements likely position sustained upon examination taxing authority position meets morelikelythannot criteria measured using probabilityweighted approach largest amount tax benefit greater 50 likely realized upon settlement previously recognized tax positions longer meet morelikelythannot recognition threshold derecognized first subsequent financial reporting period threshold longer met 2008 conway’s estimate gross taxaffected unrecognized tax benefits increased 253 million including 82 million accrued interest penalties due changes estimates liabilities assumed connection mw’s acquisition chic logistics accruals uncertain tax positions interest penalties 2009 estimate decreased 220 million including 72 million accrued interest penalties due primarily settlements state taxing authorities december 31 2009 2008 conway estimated 12 million 14 million respectively unrecognized tax benefits recognized would change effective tax rate 2009 01 million interest penalties included income tax expense 2008 13 million interest penalties included income tax expense following summarizes changes unrecognized tax benefits year excluding interest penalties normal course business conway subject examination taxing authorities throughout world years subject examination relevant jurisdictions include 2005 2009 federal income taxes 2003 2009 state local income taxes 2002 2009 foreign income taxes tax return filed statute limitations applies accordingly tax jurisdiction reaches conclusion filing requirement exist additional years may reviewed tax authority conway currently audit internal revenue service tax years 2005 2007 management expects years effectively settled within next 12 months although outcome tax audits uncertain could result significant cash payments opinion management ultimate outcome audit material adverse effect conway’s financial condition results operations cash flows conway also currently audit numerous state foreign tax jurisdictions management expects next 12 months reasonably possible total unrecognized tax benefits decrease range 4 million 5 million primarily due settlement agreements conway expects reach various tax authorities lapses statute limitations 11 shareholders’ equity series b preferred stock 1989 board directors designated series 1100000 preferred shares series b cumulative convertible preferred stock 01 stated value held primary defined contribution retirement plan second quarter 2009 conway exercised right redeem shares preferred stock outstanding june 30 2009 fully discussed note 12 “employee benefit plans” accumulated comprehensive loss conway reports changes equity except resulting investment owners distribution owners comprehensive income loss statements consolidated shareholders’ equity following summary components accumulated comprehensive loss common stock repurchase programs periods presented common stock repurchases 899 million 2007 made repurchase program authorized conway’s board directors 12 employee benefit plans periods presented employees conway subsidiaries us covered several retirement benefit plans including defined benefit pension plans defined contribution retirement plans postretirement medical plan conway’s defined benefit pension plans include “qualified” plans eligible certain beneficial treatment internal revenue code “irc” well “nonqualified” plans meet irc criteria adoption sfas 158 sfas 158 “employers’ accounting defined benefit pension postretirement plans amendment sfas 87 88 106 132r” requires employers measure plan assets obligations end fiscal year recognize overfunded underfunded status defined benefit plans asset liability respectively conway adopted recognition disclosure provisions sfas 158 effective december 31 2006 measurementdate provision effective january 1 2007 defined benefit pension plans conway’s qualified defined benefit pension plans collectively “qualified pension plans” consist mostly primary qualified defined benefit pension plan “primary db plan” covers noncontractual employees former employees conway’s continuing operations well former employees discontinued operations conway’s qualified defined benefit pension plans cover former employees discontinued operations “forwarding db plans” conway also sponsors nonqualified defined benefit pension plans collectively “nonqualified pension plans” consisting mostly primary nonqualified supplemental defined benefit pension plan “supplemental db plan” several unfunded nonqualified benefit plans supplemental db plan provides additional benefits certain employees affected irc limitations compensation eligible benefits available qualified primary db plan conway’s foreign subsidiaries sponsor defined benefit pension plans comparatively insignificant effect conway’s consolidated financial statements accordingly international defined benefit pension plans excluded disclosures benefits effective april 30 2009 conway amended primary db plan permanently curtail benefits associated future increases employee compensation prior amendment future retirement benefits considered participants’ eligible compensation increases 2016 result april 2009 amendment earlier amendment january 2007 additional benefits accrue plan alreadyaccrued benefits adjusted future increases compensation benefits supplemental db plan also curtailed effective april 30 2009 connection curtailments conway remeasured planrelated assets liabilities april 30 2009 cessation ewa’s operations 2001 sale mwf 2004 resulted partial termination forwarding db plans result participants became fully vested material benefits accrue plans plan assets investment policies strategies assets qualified pension plans managed longterm strategic allocation targets developed analyzing variety diversified assetclass combinations conjunction projected liability costs liability duration qualified pension plans asset allocation studies generally conducted every 3 5 years targets reviewed determine adjustments required allocation percentages established portfolio periodically rebalanced targets qualified pension plans seek mitigate investment risk investing across asset classes conway’s current overall investment strategy achieve mix approximately 69 percent investments equity securities 26 percent fixedincome securities 5 percent real estate target allocations equity securities include 39 percent us large companies 10 percent us small companies 20 percent international companies investments equity securities allocated growth valuestyle investment strategies diversified across industries investment managers investments fixedincome securities consist primarily highquality us corporate debt instruments variety industries conway’s investments equity fixedincome securities consist individual securities held managed separate accounts well commingled investment funds conway’s overall investment strategy include percentage allocation cash equivalents however conway’s cash management policies require minimum level cash provide payment benefits eligible plan expenses additionally level cash equivalents may reflect uninvested balance manager’s allocated portfolio balance “uninvested cash” typically held shortterm fund invests moneymarket instruments including commercial paper liquid shortterm interestbearing instruments conway’s investment policies allow investment managers use market timing strategies financial derivative instruments manage risk except financial futures options instruments specifically approved conway inc administrative committee designated representative generally investment managers prohibited short selling trading margin trading commodities warrants options except acquired result purchase another security case options sold part covered position conway’s investment policies also restrict investment managers accumulating concentrations issuer country industry segment assumption 85 overall expected longterm rate return 2010 developed using asset allocation return risk defined standard deviation correlation expectations return expectations created using longterm historical returns current market expectations inflation interest rates economic growth categories fairvalue measurements plan assets following table summarizes fair value conway’s pension plan assets within fairvalue hierarchy funds publicly traded readily determinable fair values accordingly valued net asset value per share underlying investments funds consist primarily publicly traded securities quoted market prices b publicly traded equity securities valued closing market prices c corporatedebt instruments generally valued using observable bidask spreads brokerprovided pricing fair value private real estate fund based fair values underlying assets consist commercial residential properties valued using periodic appraisals following table summarizes change fair value pension assets valued using level 3 inputs funding conway’s funding practice evaluate tax cash position qualified pension plans’ funded status maximize tax deductibility contributions year conway expects make discretionary contribution 250 million qualified pension plans 2010 however could change based variations interest rates asset returns pension protection act requirements factors funded status defined benefit pension plans following table reports changes projected benefit obligation fair value plan assets determination amounts recognized consolidated balance sheets conway’s defined benefit pension plans december 31 amounts included accumulated comprehensive loss yet recognized net periodic benefit expense consist following actuarial loss qualified pension plans nonqualified pension plans amortized accumulated comprehensive loss 2010 89 million 05 million respectively net periodic benefit expense income amounts recognized comprehensive income loss years ended december 31 includes following expected benefit payments defined benefit pension plans summarized estimates based assumptions future events actual benefit payments may vary estimates defined contribution retirement plans conway’s defined contribution retirement plans consist mostly primary defined contribution retirement plan “primary dc plan” covers noncontractual us employees primary dc plan voluntary defined contribution plan leveraged employeestock ownership plan feature noncontractual us employees salary deferral qualified section 401k irc prior implementation conway’s costreduction actions fully discussed conway made “matching” contributions equal 50 first six percent employees’ eligible compensation made additional discretionary contributions employees’ 401k accounts additional contributions based employees’ years service consisted “basic” contribution ranged 3 5 eligible compensation “transition” contribution ranged 1 3 eligible compensation conway’s expense primary dc plan 450 million 2009 901 million 2008 882 million 2007 december 31 2009 2008 conway recognized accrued liabilities 105 million 218 million respectively contributions related primary dc plan periods presented conway’s contributions primary dc plan included allocations conway preferred stock contributions cash conway common stock effective january 2009 contributions form conway common stock made repurchased common stock also referred treasury stock rather openmarket purchases cash contributed conway 2009 conway used 733219 shares repurchased common stock fund 233 million contributions primary dc plan preferred stock earned annual dividend 1293 per share used pay debt service primary dc plan notes dividends preferred shares deductible income tax purposes accordingly reflected net tax benefits statements consolidated operations allocation preferred stock participants’ accounts based upon ratio current year’s principal interest payments total debt primary dc plan since conway guaranteed debt reported consolidated balance sheets guarantees primary dc plan notes reduced principal paid january 2009 conway repaid remaining 227 million outstanding primary dc plan notes result remaining unallocated shares eligible allocated participants’ accounts 2009 second quarter 2009 conway exercised right redeem shares preferred stock outstanding june 30 2009 share preferred stock converted common stock rate equal number shares common stock could purchased 15210 accordingly 938 million 2202937 shares repurchased common stock issued convert redeem 750 million 493220 shares outstanding preferred stock 188 million difference historical cost repurchased common stock converted preferred stock recorded reduction additional paidin capital common shareholder’s equity also redemption date 40 million 93636 shares repurchased common stock used pay commonstock equivalent thenaccrued 32 million cash dividend preferred stock 08 million difference recorded reduction additional paidin capital common shareholders’ equity deferred compensation expense recognized preferred shares allocated participants equivalent cost preferred shares allocated deferred compensation expense 104 million 104 million 107 million recognized 2009 2008 2007 respectively postretirement medical plan conway sponsors postretirement medical plan provides health benefits certain noncontractual employees least 55 years age least 10 years service “postretirement plan” postretirement plan provide employersubsidized retiree medical benefits employees hired january 1 1993 following sets forth changes benefit obligation determination amounts recognized consolidated balance sheets postretirement plan december 31 amounts included accumulated comprehensive loss yet recognized net periodic benefit expense consist following 2010 priorservice credits 12 million amortized accumulated comprehensive loss net periodic benefit expense amounts recognized comprehensive income loss years ended december 31 includes following expected benefit payments reflect expected future service appropriate summarized estimates based assumptions future events actual benefit payments may vary estimates assumed healthcare cost trend rates used determine benefit obligation follows assumed healthcare cost trends affect amounts reported conway’s postretirement benefits onepercentagepoint change assumed healthcare cost trend rates would material effect aggregate service interest cost would change accumulated projected benefit obligation 31 million longterm disability plan conway sponsors longterm disability plan provide postemployment benefits active fulltime employees unable return work due covered injury sickness qualified disabilities covered employees receive monetary benefits specified disabilityrelated medical costs portion lost wage salary income employees hired prior july 1 2003 generally receive benefits age 65 benefit payments employees hired date generally limited 36month period conway uses combination purchased insurance selfinsurance benefit payments made longterm disability plan amount recognized expense conway’s longterm disability plan depends premiums paid expected timing benefit payments discount rate used measure present value future benefit payments conway’s discount rate riskfree rate based us treasury bonds maturities approximate timing future benefit payments riskfree discount rate used measure obligation increased 257 december 31 2009 155 december 31 2008 conway’s expense associated longterm disability plan 91 million 2009 167 million 2008 66 million 2007 conway’s consolidated balance sheets longterm current portions longterm disability plan obligation reported employee benefits accrued liabilities respectively december 31 2009 longterm current portions obligation 282 million 114 million respectively december 31 2008 321 million 136 million respectively costreduction actions response economic conditions conway march 2009 announced several measures reduce costs conserve cash costreduction measures addition actions conway took fourth quarter 2008 included workforce reductions network reengineering suspension meritbased pay increases reductions capital expenditures spending cuts measures announced march 2009 substantially consist suspension curtailment employee benefits reduction salaries wages detailed salaries wages effective march 29 2009 salaries wages certain employees reduced 5 including corporate sharedservices employees conway freight road systems business units compensated absences effective april 1 2009 compensatedabsences benefit suspended conway freight prior suspension employees’ currentyear service earned compensatedabsences benefit eligible use subsequent year period suspension compensatedabsences benefits earned currentyear service however employees may use previously vested benefits also effective march 8 2009 menlo worldwide logistics reduced compensatedabsences benefit 25 defined contribution plan effective april 26 2009 employer contributions conway’s primary defined contribution retirement plan suspended limited matching transition contributions suspended basic contribution limited 3 employee’s eligible compensation effective july 2009 basic contributions made repurchased conway common stock defined benefit pension plan effective april 30 2009 conway amended primary defined benefit pension plan permanently curtail benefits associated future increases employee compensation prior amendment future retirement benefits considered participants’ eligible compensation increases 2016 13 sharebased compensation terms sharebased compensation plans conway grants various types sharebased compensation awards employees directors plans provide awards form stock options nonvested stock also known restricted stock performanceshare plan units “pspus” stock appreciation rights stock options granted prices equal market value common stock date grant expire 10 years date grant stock options granted threeyear gradedvesting terms onethird award vests year certain option awards provide accelerated vesting result change control qualifying retirement death disability defined stock option plans shares nonvested stock valued market price conway’s common stock date award awards granted directors generally granted threeyear gradedvesting terms awards granted employees generally vest three years award date nonvested stock awards provide accelerated vesting result change control death disability defined award agreement awards allow prorata vesting award recipient leaves conway due qualifying retirement vesting period december 31 2009 conway 3139073 common shares available grant stock options nonvested stock sharebased compensation equity plans conway recognizes expense straightline basis shorter 1 requisite service period stated award 2 period grant date award employee’s retirementeligibility date award contains acceleratedvesting provision following expense recognized sharebased compensation valuation assumptions fair value stock option grant estimated using blackscholes optionpricing model following summary weightedaverage assumptions used calculated weightedaverage fair value riskfree interest rate determined using us treasury zerocoupon issue remaining term equal expected life option expected life option derived binomial lattice model based historical rate voluntary exercises postvesting terminations volatility expected volatility based historical volatility conway’s common stock recent period equal expected term option sharebased payment award activity following table summarizes stockoption award activity 2009 aggregate intrinsic value reported table represents total pretax value based conway’s closing common stock price 3491 december 31 2009 would received employees directors holders exercised inthemoney stock options date 2009 2008 2007 aggregate intrinsic value exercised options 20 million 54 million 44 million respectively total amount cash received exercise options 2009 2008 2007 42 million 101 million 82 million respectively related tax benefit realized exercise options 08 million 21 million 15 million respectively total unrecorded deferred compensation cost stock options net forfeitures 52 million expected recognized weightedaverage period 150 years following table summarizes nonvested stock pspus activity 2009 total fair value nonvested stock vested 2009 2008 2007 14 million 24 million 22 million respectively based conway’s closing common stock price vesting date total unrecorded deferred compensation cost shares nonvested stock net forfeitures 77 million expected recognized weightedaverage period 170 years conway determined performance criteria pspu awards would met result 2008 conway reversed expense previously recognized recognize expense pspu awards 2009 outstanding award threeyear measurement period expired forfeited 2009 14 commitments contingencies ewa february 2002 lawsuit filed ewa district court southern district ohio alleging violations worker adjustment retraining notification act “warn act” connection employee layoffs ultimate terminations due august 2001 grounding ewa’s airline operations shutdown airline operations december 2001 court subsequently certified lawsuit class action behalf affected employees laid august 11 august 15 2001 warn act generally requires employers give 60days notice 60days pay benefits lieu notice shutdown operations mass layoff site employment estimated range potential loss matter zero approximately 11 million including accrued interest lawsuit tried early january 2009 september 28 2009 court issued decision favor ewa plaintiffs appealed judgment menlo worldwide llc “mw” asserted claims sellers chic holdings alleging inaccurate books records misstatement revenue similar matters related presale financial performance chic businesses pursuing legal equitable remedies available mw currently exists 9 million holdback escrow mw may apply award breach warranty purchase agreement ultimate outcome matter uncertain resulting award recognized received conway defendant various lawsuits incidental businesses opinion management ultimate outcome actions material effect conway’s financial condition results operations cash flows 15 segment reporting conway discloses segment information manner business units organized making operating decisions assessing performance allocating resources periods presented conway divided following five reporting segments • freight segment consists operating results conway freight business unit provides regional interregional transcontinental lessthantruckload freight services throughout north america • logistics segment consists operating results menlo worldwide logistics business unit develops contractlogistics solutions including management complex distribution networks supplychain engineering consulting also provides multimodal freight brokerage services logistics segment includes results chic logistics cougar logistics periods subsequent acquisition second half 2007 • truckload segment consists operating results conway truckload business unit provides assetbased fulltruckload freight services throughout north america following acquisition cfi august 2007 operating results cfi reported operating results conway’s former truckload operation truckload reporting segment • vector prior sale vector reporting segment consisted conway’s proportionate share net income vector joint venture gm • reporting segment consists operating results road systems trailer manufacturer certain corporate activities related income expense allocated reporting segments financial data management evaluates segment performance primarily based revenue operating income loss accordingly interest expense investment income nonoperating items reported segment results corporate expenses generally allocated based measurable services provided segment general corporate expenses based segment revenue intersegment revenue related operating income loss eliminated reconcile consolidated revenue operating income loss transactions segments generally based negotiated prices geographic data geographic reporting freight transportation revenues allocated equally origin destination revenues contract services allocated country services performed longlived assets outside united states immaterial periods presented 16 quarterly financial data conway inc quarterly financial data comparability conway’s consolidated operating income loss affected following unusual income expense • goodwill impairment charge 1348 million conway truckload first quarter 2009 • change accounting estimate conway freight increased allowance revenue adjustments decreased revenue operating income 54 million third quarter 2009 • loss 213 million restructuring activities conway freight fourth quarter 2008 • charges 378 million impairment goodwill intangible assets 49 million writedown acquisitionrelated receivable 31 million acquisitionrelated integration costs menlo worldwide logistics fourth quarter 2008 b comparability conway’s income tax provision benefit affected following • first quarter 2009 reflects nondeductible goodwill impairment charge conway truckload • fourth quarter 2008 reflects nondeductible goodwill impairment charge writedown acquisitionrelated receivable menlo worldwide logistics item 9item 8 financial statements supplementary data conway inc consolidated balance sheets accompanying notes consolidated financial statements integral part statements conway inc consolidated balance sheets continued accompanying notes consolidated financial statements integral part statements conway inc statements consolidated operations accompanying notes consolidated financial statements integral part statements conway inc statements consolidated cash flows accompanying notes consolidated financial statements integral part statements conway inc statements consolidated shareholders’ equity accompanying notes consolidated financial statements integral part statements conway inc notes consolidated financial statements 1 principal accounting policies organization conway inc consolidated subsidiaries “conway” “company” provide transportation logistics services wide range manufacturing industrial retail customers fully discussed note 14 “segment reporting” financial reporting purposes conway divided four reporting segments freight logistics truckload principles consolidation consolidated financial statements include accounts conway inc subsidiaries significant intercompany accounts transactions eliminated estimates management makes estimates assumptions preparing financial statements conformity accounting principles generally accepted us estimates assumptions affect amounts reported accompanying financial statements notes changes estimates recognized accordance accounting rules estimate typically period new information becomes available estimates underlying assumptions affect amounts assets liabilities reported disclosures contingent assets liabilities reported amounts revenue expenses estimates relate revenuerelated adjustments impairment goodwill longlived assets amortization depreciation income tax assets liabilities selfinsurance accruals pension plan postretirement obligations contingencies assets liabilities recognized connection acquisitions restructurings dispositions conway evaluates estimates assumptions ongoing basis using historical experience factors including current economic environment estimates assumptions adjusted facts circumstances dictate volatility financial markets changing levels economic activity increase uncertainty inherent estimates assumptions changes estimates resulting continuing changes economic environment reflected financial statements future periods recognition revenues conway freight recognizes revenue reporting periods based relative transit time period recognizes expense incurred conway truckload recognizes revenue related direct costs shipment delivered estimates future billing adjustments revenue including related weight freightclassification verification pricing discounts recognized time shipment menlo worldwide logistics recognizes revenue proportionalperformance model based service outputs delivered customer revenue recorded gross basis without deducting thirdparty purchased transportation costs transactions menlo worldwide logistics acts principal revenue recorded net basis deducting purchased transportation costs transactions menlo worldwide logistics acts agent certain menlo worldwide logistics’ contracts billings excess revenues recognized recorded unearned revenue unearned revenue recognized contract period services provided december 31 2010 2009 unearned revenue 136 million 165 million reported conway’s consolidated balance sheets accrued liabilities addition menlo worldwide logistics deferred certain direct incremental costs related setup logistics operations longterm contracts deferred setup costs recognized expense contract term december 31 2010 2009 deferred setup costs 134 million 145 million reported consolidated balance sheets deferred charges assets cash equivalents marketable securities cash equivalents consist shortterm interestbearing instruments maturities three months less date purchase december 31 2010 2009 cashequivalent investments 3881 million 4509 million respectively consisted primarily commercial paper moneymarket funds certificates deposit conway classifies marketable debt securities availableforsale reports fair value changes fair value availableforsale securities recognized accumulated comprehensive income loss shareholders’ equity unless unrealized loss otherthantemporary loss portion unrealized loss determined temporary portion loss recognized earnings december 31 2010 2009 conway held one longterm availableforsale marketable security reported fair value 60 million 67 million respectively fully discussed note 5 “fairvalue measurements” trade accounts receivable net conway freight conway truckload report accounts receivable net realizable value provide allowance collection considered doubtful estimates uncollectible accounts based various judgments assumptions including revenue levels historical loss experience aging outstanding accounts receivable menlo worldwide logistics based size nature client base performs periodic evaluation customers’ creditworthiness accounts receivable portfolio recognizes expense uncollectible accounts losses probable reasonably estimable activity allowance uncollectible accounts presented following table 2008 provision uncollectible accounts included 49 million acquisitionrelated receivable estimates billing adjustments including related weight freightclassification verifications pricing discounts also reported reduction accounts receivable activity allowance revenue adjustments presented following table property plant equipment property plant equipment reported historical cost depreciated primarily straightline basis estimated useful lives generally 25 years buildings improvements 4 14 years revenue equipment 3 10 years equipment leasehold improvements assets acquired capital leases amortized shorter terms respective leases useful lives assets resulting expense reported depreciation expense 1789 million 2010 1751 million 2009 1884 million 2008 conway periodically evaluates whether changes estimated useful lives necessary ensure estimates accurately reflect economic use assets conway’s periodic evaluation conducted first quarter 2010 estimated useful lives revenue equipment extended response planned capital expenditure levels result revised estimates january 2010 conway freight extended estimated useful life tractors 10 years 8 years extended estimated useful life trailers 14 years 13 years also effective january 2010 conway truckload extended estimated useful life tractors 6 years 4 years decreased associated estimated salvage values june 2010 conway board directors approved accelerated fleet replacement program conway truckload expected replace nearly entire tractor fleet 2012 change estimated useful lives tractors 4 years based planned replacement cycles fleet replacement program returns current 6year life 4year life 2012 also impacts associated estimated salvage values depending units scheduled replaced result combined changes 2010 depreciation expense declined 68 million net income available common shareholders increased 42 million 008 per diluted share expenditures equipment maintenance repairs charged operating expenses incurred betterments capitalized gains losses sales equipment property recorded operating expenses tires cost replacement tires expensed time tires placed service case repairs maintenance costs cost tires new revenue equipment capitalized depreciated estimated useful life related equipment capitalized software net capitalized software consists certain direct internal external costs associated internaluse software net accumulated amortization capitalized software computed itembyitem basis period 3 10 years depending estimated useful life software amortization expense related capitalized software 103 million 2010 129 million 2009 144 million 2008 accumulated amortization december 31 2010 2009 1407 million 1340 million respectively longlived assets conway performs impairment analysis longlived assets whenever circumstances indicate carrying amount may recoverable assets held used impairment charge recognized estimated undiscounted cash flows associated asset group assets less carrying value impairment exists charge recognized difference carrying value fair value fair values determined using quoted market values discounted cash flows external appraisals applicable assets held disposal carried lower carrying value estimated net realizable value conway’s accounting policies goodwill longlived intangible assets fully discussed note 2 “goodwill intangible assets” book overdrafts book overdrafts represent outstanding drafts yet presented bank excess recorded cash amounts represent bank overdrafts occur drafts presented bank excess cash conway’s bank account would effectively loan conway december 31 2010 2009 book overdrafts 242 million 357 million respectively included accounts payable income taxes deferred income taxes provided tax effect temporary differences tax basis assets liabilities reported amounts financial statements conway uses liability method account income taxes requires deferred taxes recorded statutory rate anticipated effect taxes paid selfinsurance accruals conway uses combination largedeductible purchased insurance selfinsurance programs provide costs medical vehicular cargo workers’ compensation claims longterm portion selfinsurance accruals relates primarily workers’ compensation vehicular claims expected payable several years conway periodically evaluates level insurance coverage adjusts insurance levels based risk tolerance premium expense measurement classification selfinsured costs requires consideration historical cost experience demographic severity factors judgments current expected levels cost per claim retention levels methods provide estimates undiscounted liability associated claims incurred balance sheet date including claims reported accordingly changes assumptions factors materially affect estimated liability amounts may different actual costs paid settle claims conway participates reinsurance pool reinsure portion workers’ compensation vehicular liabilities participant pool cedes claims pool assumes equivalent amount claims reinsurance relieve conway liabilities original policy however opinion management potential exposure conway nonpayment minimal december 31 2010 2009 conway recorded liability related assumed claims 498 million 421 million respectively recorded receivable reinsurance pool 447 million 358 million respectively revenues related reinsurance activities reported net associated expenses classified operating expenses connection participation reinsurance pool conway recognized operating income 41 million 2010 40 million 2009 17 million 2008 foreign currency translation adjustments resulting translating foreign functional currency financial statements us dollars included foreign currency translation adjustment statements consolidated shareholders’ equity transaction gains losses arise exchangerate fluctuations transactions denominated currency functional currency included results operations reported miscellaneous net statements consolidated operations conway determined advances certain foreign subsidiaries indefinite nature accordingly corresponding foreign currency translation gains losses related advances included foreign currency translation adjustment statements consolidated shareholders’ equity marketing expenses marketing costs including sales promotions printed sales materials advertising expensed incurred classified operating expenses marketing expenses 96 million 2010 97 million 2009 89 million 2008 earnings loss per share eps basic eps continuing operations computed dividing reported net income loss continuing operations preferred stock dividends weightedaverage common shares outstanding diluted eps calculated follows computation diluted eps potential common shares dilutive included potential common shares dilutive reduce earnings per share increase loss per share stock options nonvested stock convertible preferred stock included computation result antidilutive loss applicable common shareholders reported new accounting standards october 2009 fasb issued accounting standards update “asu” 200913 “multideliverable revenue arrangements consensus fasb emerging issues task force” asu 200913 codified “revenue recognition” topic fasb accounting standards codification details requirements must met entity recognize revenue sale delivered item part multipleelement arrangement items yet delivered asu 200913 addresses determine whether arrangement involving multiple deliverables contains one unit accounting arrangement consideration allocated among separate units accounting one current requirements objective reliable evidence standalone selling price undelivered items must supported either vendorspecific objective evidence “vsoe” thirdparty evidence asu 200913 modifies current gaap amending objective reliable evidence threshold allow use estimated selling price vsoe exist asu 200913 deliverables would expected meet separation criteria frequently asu 200913 effective fiscal years beginning june 15 2010 conway apply guidance prospectively revenue arrangements entered materially modified january 1 2011 conway expect adoption asu 200913 material effect financial statements reclassifications certain amounts priorperiod financial statements reclassified conform currentperiod presentation 2 goodwill intangible assets goodwill recorded excess acquired entity’s purchase price amounts assigned assets acquired including separately recognized intangible assets liabilities assumed goodwill amortized assessed impairment annual basis fourth quarter frequently events changes circumstances indicate asset might impaired assessment requires comparison fair value reporting unit carrying value net assets including allocated goodwill carrying value reporting unit exceeds fair value conway must compare implied fair value reportingunit goodwill carrying amount goodwill carrying amount reportingunit goodwill exceeds implied fair value goodwill impairment loss recognized amount equal excess following table shows changes gross carrying amounts goodwill attributable applicable segment first quarter 2009 conway evaluated goodwill impairment prior annual measurement date due primarily deteriorating truckload market conditions lower profit projections conway truckload decline conway’s market capitalization first quarter 2009 conway determined goodwill associated conway truckload impaired result conway truckload recognized 1348 million impairment charge reduce carrying amount goodwill implied fair value impairment charge primarily due lower projected revenues operating income future years discount rate reflected adverse economic market conditions measurement date connection annual impairment test fourth quarter 2010 conway concluded goodwill conway truckload impaired december 31 2010 valuation conway truckload conway applied two equally weighted methods publiccompany multiples discounted cash flow model key assumptions used discounted cash flow model cash flow projections involving forecasted revenues expenses capital expenditures working capital changes discount rate terminal growth rate applied projected future cash flows discount rate equal estimated weightedaverage cost capital reporting unit marketparticipant perspective terminal growth rate based inflation assumptions adjusted factors may impact future growth industryspecific expectations third quarter 2010 conway evaluated goodwill associated chic logistics due primarily continued operating losses lowerthanforecasted operating results chic logistics reporting unit conway determined goodwill related chic logistics impaired result menlo worldwide logistics recognized 164 million impairment charge reduce carrying amount goodwill zero impairment primarily due decrease projected operating income future years valuation chic logistics conway utilized discounted cash flow model intangible assets fair value intangible assets amortized straightline basis estimated useful life amortization expense related intangible assets 33 million 2010 44 million 2009 54 million 2008 intangible assets consisted following first quarter 2010 fourth quarter 2008 conway evaluated fair value chic logistics’ customerrelationship intangible asset due lower projected revenues customers comprising customer relationship intangible asset result menlo worldwide logistics recognized impairment losses 28 million 2010 60 million 2008 reduce carrying amount intangible asset estimated fair value determined using income approach utilized discounted cash flow model impairment charge 2010 reduced carrying amount chic logistics’ intangible asset zero estimated amortization expense next five years presented following table 3 restructuring activities periods presented conway incurred expenses connection number restructuring activities expenses reported restructuring charges statements consolidated operations detailed conway recognized restructuring charges 50 million 2010 29 million 2009 239 million 2008 expects recognize 29 million additional expense 2011 conway’s remaining liability amounts expensed yet paid 40 million december 31 2010 remaining liability relates primarily employeeseparation costs expected paid 2011 operating lease commitments expected paid several years conway outsourcing initiative 2009 part ongoing effort reduce costs improve efficiencies conway initiated project outsource significant portion informationtechnology infrastructure function small portion administrative accounting functions conway expect incur additional restructuring charges outsourcing initiative following table summarizes effect outsourcing initiative years ended december 31 2010 2009 2010 conway allocated corporate outsourcing charges 19 million 06 million freight logistics segments respectively compared 26 million 08 million respectively 2009 consolidation executive offices 2010 effort closely align corporate functions better support business conway initiated project consolidate executive offices located san mateo california ann arbor michigan result office san mateo closed office ann arbor serve conway’s principal executive office conway expects consolidation substantially complete end second quarter 2011 following table summarizes effect initiative year ended december 31 2010 conway allocated charges associated consolidation executive offices 18 million 04 million 03 million freight truckload logistics segments respectively conway freight operational restructuring august 2007 conway freight began operational restructuring combine three regional operating companies one centralized operation improve customer experience streamline processes reorganization centralized entity intended improve customer service efficiency development uniform pricing operational processes implementation best practices conway freight completed initiative 2008 connection operational restructuring conway recognized expense 34 million 2008 remaining liability amounts expensed yet paid 08 million december 31 2010 network reengineering november 2008 conway freight completed major network reengineering reduce service exceptions improve ontime delivery bring faster transit times deploying lowercost efficient service center network better aligned customer needs business volumes reengineering change conway freight’s service coverage involve closure 40 service centers shipment volumes closing locations redistributed balanced among 100 nearby service centers connection network reengineering conway recognized 16 million net adjustments reduced expense 2009 compared expense 150 million 2008 remaining liability amounts expensed yet paid 03 million december 31 2010 economic workforce reduction december 2008 conway freight reduced workforce 1450 positions workforce reduction response decline yearoveryear business volumes accelerated fourth quarter 2008 addition reducing workforce operating locations reduction also eliminated positions conway freight’s general office administrative center included realignment area regional division structure streamline management connection economic workforce reduction conway recognized expense 11 million 2009 55 million 2008 remaining liability december 31 2010 4 discontinued operations discontinued operations periods presented relate primarily shutdown emery worldwide airlines inc “ewa” 2001 results ewa reflect gain recovery prior losses fully discussed adjustments loss estimates connection cessation aircarrier operations 2001 ewa terminated employment pilots flight crewmembers 2008 ewa settled remaining legal actions brought pilots crewmembers 06 million recognized 16 million gain net tax 10 million eliminate previously recorded accrued liability also 2008 conway received 100 million payment insurers related recovery prior losses result recognized gain 63 million net tax 37 million 5 fairvalue measurements assets liabilities reported fair value classified one following three levels within fairvalue hierarchy level 1 quoted market prices active markets identical assets liabilities level 2 observable marketbased inputs unobservable inputs corroborated market data level 3 unobservable inputs corroborated market data financial assets measured fair value recurring basis following table summarizes valuation financial instruments within fairvalue hierarchy cash equivalents consist shortterm interestbearing instruments primarily commercial paper moneymarket funds certificates deposit maturities three months less date purchase moneymarket funds reflect published net asset value classified level 1 instruments within fairvalue hierarchy commercial paper certificates deposit generally valued using published interest rates instruments similar terms maturities accordingly classified level 2 instruments within fairvalue hierarchy december 31 2010 average remaining maturity cash equivalents less one month based short maturities carrying amount cash equivalents approximates fair value conway holds one auctionrate security valued income approach utilizes discounted cash flow model following table summarizes change fair values conway’s auctionrate security valued using level 3 inputs periods presented fair value conway’s auctionrate security varied due primarily changes interestrate benchmarks conway recorded cumulative 04 million decline carrying value auctionrate security equal offsetting unrealized loss accumulated comprehensive loss shareholders’ equity conway evaluated unrealized loss concluded decline fair value otherthantemporary nonfinancial assets measured fair value recurring basis conway measured fair value reporting units goodwill part goodwill impairment test inputs used measure fair value reporting units within level 3 fairvalue hierarchy fairvalue methods applied conway fully discussed note 2 “goodwill intangible assets” 6 accrued liabilities accrued liabilities consisted following 7 debt financing arrangements longterm debt consisted following revolving credit facility november 2010 conway entered fouryear 325 million unsecured revolving credit facility replaced existing 400 million facility new revolving facility terminates november 4 2014 available cash borrowings issuance letters credit december 31 2010 cash borrowings outstanding credit facility however 1822 million letters credit outstanding leaving 1428 million available capacity additional letters credit cash borrowings subject compliance financial covenants customary conditions borrowing letters credit outstanding december 31 2010 provided collateral conway’s selfinsurance programs agreement standby letter credit fees equal margin dependent upon conway’s leverage ratio cash borrowings bear interest rate based upon libor lead bank’s base rate case plus margin dependent conway’s leverage ratio credit facility fee ranges 025 045 applied total facility 325 million based conway’s leverage ratio revolving facility guaranteed certain conway’s material domestic subsidiaries contains two financial covenants leverage ratio ii fixedcharge coverage ratio also various restrictive covenants including limitations incurrence liens ii consolidations mergers asset sales iii incurrence additional subsidiary indebtedness credit facilities shortterm borrowings december 31 2010 conway 249 million bank guarantees letters credit overdraft facilities outstanding credit facilities conway shortterm borrowings 186 million 103 million december 31 2010 2009 respectively excluding noninterest bearing borrowings described weightedaverage interest rate shortterm borrowings 49 december 31 2010 december 31 2009 shortterm borrowings outstanding december 31 2010 2009 noninterest bearing borrowings 49 million 39 million respectively related credit facility menlo worldwide logistics utilizes one logistics contracts borrowings facility related amounts financial institution paid vendors behalf menlo worldwide logistics 878 notes due 2010 conway repaid 2000 million outstanding may 2010 725 senior notes due 2018 725 senior notes bear interest rate 725 per year payable semiannually january 15 july 15 year conway may redeem 725 senior notes whole part less 30 60days notice redemption price equal greater principal amount redeemed ii sum present values remaining scheduled payments principal interest notes redeemed discounted redemption date semiannual basis rate payable treasury note comparable maturity plus 50 basis points also various restrictive covenants including limitations incurrence liens ii consolidations mergers asset sales including amortization underwriting fees related debt costs interest expense 725 senior notes due 2018 recognized annual effective interest rate 737 holders 725 senior notes right require conway repurchase notes upon occurrence change control ii investmentgrade rating two moody’s standard poor’s fitch ratings repurchase price would equal 101 aggregate principal amount notes repurchased plus accrued unpaid interest senior debentures due 2034 300 million aggregate principal amount senior debentures bear interest rate 670 per year payable semiannually may 1 november 1 year conway may redeem senior debentures whole part less 30 60days notice redemption price equal greater principal amount redeemed ii sum present values remaining scheduled payments principal interest senior debentures redeemed discounted redemption date semiannual basis rate payable treasury note comparable maturity plus 35 basis points senior debentures issued indenture restricts conway’s ability certain exceptions incur debt secured liens including amortization discount interest expense 670 senior debentures due 2034 recognized annual effective interest rate 690 aggregate annual maturities longterm debt next five years ending december 31 14 million 2011 following 2011 conway principal payments due 2018 december 31 2010 2009 estimated fair value longterm debt 790 million 970 million respectively fair values estimated based current rates offered debt similar terms maturities 8 leases conway subsidiaries obligated noncancelable leases certain facilities equipment vehicles certain leases also contain provisions allow conway extend leases various renewal periods 2010 2009 conway acquired tractors conway freight conway truckload various capitallease agreements lease terms ranging three five years extending 2015 agreements conway guarantees residual value tractors end lease term stated amounts residualvalue guarantees included minimum lease payments portion capitallease agreements relates tractors previously owned conway truckload saleleaseback arrangements involving tractors conway received sale proceeds 204 million 2010 173 million 2009 connection capital leases conway reported 1056 million 500 million revenue equipment 138 million 07 million accumulated depreciation consolidated balance sheets december 31 2010 2009 respectively future minimum lease payments initial remaining noncancelable lease terms excess one year december 31 2010 follows future minimum lease payments table net 48 million sublease income expected received noncancelable subleases june 2008 menlo worldwide logistics entered agreements sell lease back two warehouses located singapore connection sale warehouses menlo worldwide logistics received 404 million remaining unamortized gain 149 million december 31 2010 classified deferred credit consolidated balance sheets amortized reduction lease expense tenyear term leases lease contains option renew additional fiveyear term future minimum payments associated leases included table rental expense operating leases comprised following 9 income taxes components provision income taxes follows income taxes provided foreign operations based upon various tax laws rates countries operations conducted components income loss income taxes follows conway’s income tax provision varied amounts calculated applying us statutory income tax rate pretax income loss shown following reconciliation components deferred tax assets liabilities related following deferred tax assets liabilities consolidated balance sheets classified current noncurrent based related asset liability creating deferred tax deferred taxes related specific asset liability classified based estimated period reversal conway recorded valuation allowances 127 million 112 million december 31 2010 2009 respectively deferred tax assets principally associated capital losses net operating losses tax credits management concluded assets fail meet morelikelythannot threshold realization deferred tax assets management believes likely results future operations generate taxable income sufficient amount type realize deferred tax assets income tax receivables 412 million 27 million included accounts receivable conway’s consolidated balance sheets december 31 2010 2009 respectively december 2010 tax relief unemployment insurance reauthorization job creation act 2010 signed law new law contains provision allows 100 bonus depreciation certain capital expenditures incurred september 9 2010 december 31 2011 result provision conway able deduct substantial portion 2011 capital expenditures 2011 december 31 2010 conway 156 million operatingloss carryforwards 63 million taxcredit carryforwards available reduce federal state foreign income taxes future years deferred tax assets reduced valuation allowance 117 million based conway’s current uncertainty whether generate sufficient state foreign taxable income fully utilize carryforwards cumulative undistributed earnings conway’s foreign subsidiaries approximately 388 million december 31 2010 remitted subject withholding tax indefinitely reinvested respective foreign subsidiaries’ operations becomes advantageous tax foreign exchange reasons remit earnings therefore withholding us taxes provided amount withholding tax would payable remittance undistributed earnings would approximately 2 million uncertain tax positions conway recognizes tax positions financial statements likely position sustained upon examination taxing authority position meets morelikelythannot criteria measured using probabilityweighted approach largest amount tax benefit greater 50 likely realized upon settlement previously recognized tax positions longer meet morelikelythannot recognition threshold derecognized first subsequent financial reporting period threshold longer met 2009 estimate decreased 220 million including 72 million accrued interest penalties due primarily settlements state taxing authorities 2010 estimate decreased 159 million including 61 million accrued interest penalties due primarily foreign tax settlements lapse statute limitations december 31 2010 2009 conway estimated 8 million 12 million respectively unrecognized tax benefits recognized would change effective tax rate 2010 06 million interest penalties included income tax expense 2009 01 million interest penalties included income tax expense following summarizes changes unrecognized tax benefits year excluding interest penalties conway subject examination federal income taxes 2005 2010 internal revenue service “irs” issued revenue agent’s report tax years 2005 2007 proposing certain adjustments one relates primarily treatment certain payments retirees former employees mwf conway sale mwf united parcel service inc 2004 conway disagrees proposed adjustment contesting irs administrative appeals process conway met irs appeals division 2010 conway cannot settle matter irs appeals process conway litigate conway anticipates appeals process litigation could take extended period time resolve although timing income tax audit resolution negotiation taxing authorities highly uncertain conway anticipate significant change total amount unrecognized income tax benefits within next 12 months conway believes provided adequate reserves related matters contained tax periods open examination however conway experience unfavorable outcome matter could material effect financial condition results operations cash flows conway also subject examination state local foreign jurisdictions 2003 2010 conway currently audit numerous state foreign tax jurisdictions management expects next 12 months reasonably possible total unrecognized tax benefits decrease range 16 million 37 million primarily due settlement agreements conway expects reach various tax authorities lapses statute limitations 10 shareholders’ equity accumulated comprehensive loss conway reports changes equity except resulting investment owners distribution owners comprehensive income loss statements consolidated shareholders’ equity following summary components accumulated comprehensive loss common stock offering may 2010 conway sold 4300000 shares repurchased common stock also referred treasury stock underwritten public offering price 3500 per share net proceeds offering 1433 million deducting underwriting discount direct costs 428 million difference net proceeds 1861 million historical cost treasury stock recorded reduction retained earnings common shareholders’ equity series b preferred stock 1989 board directors designated series 1100000 preferred shares series b cumulative convertible preferred stock 01 stated value held primary defined contribution retirement plan preferred stock earned annual dividend 1293 per share used pay debt service related retirement plan debt dividends preferred shares deductible income tax purposes accordingly reflected net tax benefits statements consolidated operations second quarter 2009 conway exercised right redeem shares preferred stock outstanding june 30 2009 share preferred stock converted common stock rate equal number shares common stock could purchased 15210 accordingly 938 million 2202937 shares treasury stock issued convert redeem 750 million 493220 shares outstanding preferred stock 188 million difference historical cost treasury stock converted preferred stock recorded reduction additional paidin capital common shareholder’s equity also redemption date 40 million 93636 shares treasury stock used pay commonstock equivalent thenaccrued 32 million cash dividend preferred stock 08 million difference recorded reduction additional paidin capital common shareholders’ equity 11 employee benefit plans periods presented certain employees conway subsidiaries us covered several retirement benefit plans including defined benefit pension plans defined contribution retirement plans postretirement medical plan conway’s defined benefit pension plans include “qualified” plans eligible certain beneficial treatment internal revenue code “irc” well “nonqualified” plans meet irc criteria defined benefit pension plans conway’s qualified defined benefit pension plans collectively “qualified pension plans” consist mostly primary qualified defined benefit pension plan “primary db plan” covers noncontractual employees former employees conway’s continuing operations well former employees discontinued operations conway’s qualified defined benefit pension plans cover former employees discontinued operations conway also sponsors nonqualified defined benefit pension plans collectively “nonqualified pension plans” consisting mostly primary nonqualified supplemental defined benefit pension plan “supplemental db plan” several unfunded nonqualified benefit plans supplemental db plan provides additional benefits certain employees affected irc limitations compensation eligible benefits available qualified primary db plan conway’s foreign subsidiaries sponsor defined benefit pension plans comparatively insignificant effect conway’s consolidated financial statements accordingly international defined benefit pension plans excluded disclosures benefits effective april 30 2009 conway amended primary db plan supplemental db plan permanently curtail benefits associated future increases employee compensation prior amendment future retirement benefits considered participants’ eligible compensation increases 2016 result april 2009 amendment earlier amendment january 2007 additional benefits accrue plans alreadyaccrued benefits adjusted future increases compensation connection curtailments conway remeasured planrelated assets liabilities april 30 2009 plan assets investment policies strategies assets qualified pension plans managed longterm strategic allocation targets seek mitigate investment risk investing across asset classes targets developed analyzing variety diversified assetclass combinations conjunction projected liability costs liability duration qualified pension plans asset allocation studies conducted needed targets reviewed determine adjustments required 2010 conway changed allocation targets lower percentage investments equity securities increase percentage investments fixed income securities allocation percentages established portfolio periodically rebalanced targets conway’s current overall investment strategy achieve mix approximately 55 percent investments equity securities 42 percent fixedincome securities 3 percent real estate target allocations equity securities include 27 percent us large companies 8 percent us small companies 20 percent international companies investments equity securities allocated growth valuestyle investment strategies diversified across industries investment managers investments fixedincome securities consist primarily highquality us corporate debt instruments variety industries conway’s investments equity fixedincome securities consist individual securities held managed separate accounts well commingled investment funds conway’s overall investment strategy include percentage allocation cash equivalents however conway’s cash management policies require minimum level cash provide payment benefits eligible plan expenses additionally level cash equivalents may reflect uninvested balance manager’s allocated portfolio balance “uninvested cash” typically held shortterm fund invests moneymarket instruments including commercial paper liquid shortterm interestbearing instruments conway’s investment policies allow investment managers use markettiming strategies financial derivative instruments manage risk except financial futures options instruments specifically approved conway inc administrative committee designated representative generally investment managers prohibited short selling trading margin trading commodities warrants options except acquired result purchase another security case options sold part covered position conway’s investment policies also restrict investment managers accumulating concentrations issuer country industry segment assumption 80 overall expected longterm rate return 2011 developed using asset allocation return risk defined standard deviation correlation expectations return expectations created using longterm historical returns current market expectations inflation interest rates economic growth categories fairvalue measurements plan assets following table summarizes fair value conway’s pension plan assets within fairvalue hierarchy funds publicly traded readily determinable fair values accordingly valued net asset value per share underlying investments funds consist primarily publicly traded securities quoted market prices b publicly traded equity securities valued closing market prices c corporatedebt instruments generally valued using observable bidask spreads brokerprovided pricing lowduration fund valued published net asset value per share e fair value private real estate fund based fair values underlying assets consist commercial residential properties valued using periodic appraisals following table summarizes change fair value pension assets valued using level 3 inputs funding conway’s funding practice evaluate tax cash position qualified pension plans’ funded status maximize tax deductibility contributions year conway estimates make 35 million 50 million contributions qualified pension plans 2011 however could change based variations interest rates asset returns pension protection act requirements factors funded status defined benefit pension plans following table reports changes projected benefit obligation fair value plan assets determination amounts recognized consolidated balance sheets conway’s defined benefit pension plans december 31 amounts included accumulated comprehensive loss yet recognized net periodic benefit expense consist following actuarial loss qualified pension plans nonqualified pension plans amortized accumulated comprehensive loss 2011 110 million 06 million respectively net periodic benefit expense income amounts recognized comprehensive income loss years ended december 31 includes following expected benefit payments defined benefit pension plans summarized estimates based assumptions future events actual benefit payments may vary estimates defined contribution retirement plans conway’s defined contribution retirement plans consist mostly primary defined contribution retirement plan “primary dc plan” covers noncontractual us employees primary dc plan voluntary defined contribution plan leveraged employeestock ownership plan feature noncontractual us employees salary deferral qualified section 401k irc prior implementation conway’s costreduction actions fully discussed conway made “matching” contributions equal 50 first six percent employees’ eligible compensation made additional discretionary contributions employees’ 401k accounts additional contributions based employees’ years service consisted “basic” contribution ranged 3 5 eligible compensation “transition” contribution ranged 1 3 eligible compensation conway’s expense primary dc plan 367 million 2010 450 million 2009 901 million 2008 december 31 2010 2009 conway accrued liabilities 104 million 105 million respectively contributions related primary dc plan periods presented conway’s contributions primary dc plan included allocations conway preferred stock contributions cash conway common stock effective january 2009 common stock contributions made treasury stock rather openmarket purchases cash contributed conway 2010 2009 conway used 1130515 shares 733219 shares respectively treasury stock fund 368 million 233 million respectively contributions primary dc plan second quarter 2009 conway exercised right redeem shares preferred stock outstanding june 30 2009 fully discussed note 10 “shareholders’ equity” prior redemption allocation preferred stock participants’ accounts based upon ratio current year’s principal interest payments total planrelated debt deferred compensation expense recognized preferred shares allocated participants equivalent cost preferred shares allocated deferred compensation expense 104 million recognized 2009 2008 postretirement medical plan conway sponsors postretirement medical plan provides health benefits certain noncontractual employees least 55 years age least 10 years service “postretirement plan” postretirement plan provide employersubsidized retiree medical benefits employees hired january 1 1993 march 2010 patient protection affordable care act modified health care education reconciliation act signed law certain provisions legislation eliminated future tax deductions expenditures reimbursed medicare part retiree drug subsidy program elimination tax deduction resulted 23 million incometax charge first quarter 2010 effect provisions legislation included determination benefit obligation actuarial plan measurement date december 31 2010 without material impact liability following sets forth changes benefit obligation determination amounts recognized consolidated balance sheets postretirement plan december 31 amounts included accumulated comprehensive loss yet recognized net periodic benefit expense consist following 2011 priorservice credits 12 million amortized accumulated comprehensive loss net periodic benefit expense amounts recognized comprehensive income loss years ended december 31 includes following expected benefit payments reflect expected future service appropriate summarized estimates based assumptions future events actual benefit payments may vary estimates assumed healthcare cost trend rates used determine benefit obligation follows assumed healthcare cost trends affect amounts reported conway’s postretirement benefits onepercentagepoint change assumed healthcare cost trend rates would material effect aggregate service interest cost would change accumulated projected benefit obligation 31 million longterm disability plan conway sponsors longterm disability plan provide postemployment benefits active fulltime employees unable return work due covered injury sickness qualified disabilities covered employees receive monetary benefits specified disabilityrelated medical costs portion lost wage salary income employees hired prior july 1 2003 generally receive benefits age 65 benefit payments employees hired date generally limited 36month period conway uses combination purchased insurance selfinsurance benefit payments made longterm disability plan amount recognized expense conway’s longterm disability plan depends premiums paid expected timing benefit payments discount rate used measure present value future benefit payments conway’s discount rate riskfree rate based us treasury bonds maturities approximate timing future benefit payments riskfree discount rate used measure obligation decreased 209 december 31 2010 257 december 31 2009 conway’s expense associated longterm disability plan 113 million 2010 91 million 2009 167 million 2008 conway’s consolidated balance sheets longterm current portions longterm disability plan obligation reported employee benefits accrued liabilities respectively december 31 2010 longterm current portions obligation 221 million 114 million respectively december 31 2009 longterm current portions obligation 282 million 114 million respectively costreduction actions response economic conditions march 2009 conway announced several measures reduce costs conserve cash detailed measures announced march 2009 substantially consisted suspension curtailment employee benefits reduction salaries wages salaries wages effective march 2009 salaries wages certain employees reduced 5 including corporate sharedservices employees conway freight road systems business units effective january 2010 conway restored onehalf salary wage reductions conway restored remaining onehalf salary wage reductions effective january 2011 compensated absences effective april 2009 compensatedabsences benefit suspended conway freight period suspension compensatedabsences benefits earned currentyear service however employees could use previously vested benefits also effective march 2009 menlo worldwide logistics reduced compensatedabsences benefit 25 effective april 2010 conway freight menlo worldwide logistics reinstated compensatedabsences benefits defined contribution plan effective april 2009 employer contributions conway’s primary dc plan suspended limited matching transition contributions suspended basic contribution limited 3 employee’s eligible compensation 12 sharebased compensation terms sharebased compensation plans conway grants various types sharebased compensation awards employees directors plans provide awards form stock options nonvested stock also known restricted stock performanceshare plan units stock appreciation rights “sars” conway recognizes expense straightline basis shorter 1 requisite service period stated award 2 period grant date award employee’s retirementeligibility date award contains acceleratedvesting provision following expense recognized sharebased compensation result executive severances thirdquarter 2010 conway modified terms outstanding awards four executives modification resulted immediate vesting certain awards result conway recognized 11 million expense fair value stock option sar grant estimated using blackscholes optionpricing model considers riskfree interest rate expected award term volatility dividend yield riskfree interest rate determined using us treasury zerocoupon issue remaining term equal expected term award expected term award derived binomial lattice model based historical rate voluntary exercises postvesting terminations volatility expected volatility based historical volatility conway’s common stock recent period equal expected term award december 31 2010 conway 2785354 common shares available grant stock options nonvested stock sharebased compensation equity plans stock options stock options granted prices equal market value common stock date grant expire 10 years date grant stock options granted threeyear gradedvesting terms onethird award vests year certain option awards provide accelerated vesting result change control qualifying retirement death disability defined stock option plans following table summarizes stockoption activity 2010 aggregate intrinsic value reported table represents total pretax value based conway’s closing common stock price 3657 december 31 2010 would received employees directors holders exercised inthemoney stock options date 2010 2009 2008 aggregate intrinsic value exercised options 19 million 20 million 54 million respectively total amount cash received exercise options 2010 2009 2008 35 million 42 million 101 million respectively related tax benefit realized exercise options 08 million 08 million 21 million respectively total unrecorded deferred compensation cost stock options net forfeitures 15 million expected recognized weightedaverage period 080 years following summary weightedaverage assumptions used blackscholes optionpricing model calculated weightedaverage grantdate fair value nonvested stock shares nonvested stock valued market price conway’s common stock date award awards granted directors generally granted threeyear gradedvesting terms awards granted employees generally vest three years award date nonvested stock awards provide accelerated vesting result change control death disability defined award agreement awards allow prorata vesting award recipient leaves conway due qualifying retirement vesting period following table summarizes nonvested stock activity 2010 total fair value nonvested stock vested 2010 2009 2008 33 million 14 million 24 million respectively based conway’s closing common stock price vesting date total unrecorded deferred compensation cost shares nonvested stock net forfeitures 92 million expected recognized weightedaverage period 139 years stock appreciation rights 2010 conway awarded cashsettled sars eligible employees sars granted stock price grant date threeyear gradedvesting term awards provide accelerated vesting employee ceases employment due retirement death disability change control defined sar agreement sars liabilityclassified awards result conway remeasures fair value awards reporting period awards settled vesting period compensation cost recognized based proportionate amount service rendered date conway recognize changes fair value vesting period compensation cost current period ultimate expense recognized sars equal intrinsic value settlement conway’s accrued liability 29 million cashsettled sars determined using weightedaverage fair value 1641 per sar december 31 2010 following table summarizes sar activity 2010 aggregate intrinsic value reported table represents total pretax value based conway’s closing common stock price 3657 december 31 2010 would received employees directors holders exercised inthemoney sars date 2010 conway paid 01 million settle exercised sars realized tax benefit 01 million total unrecorded deferred compensation cost sars net forfeitures 62 million expected recognized weightedaverage period 200 years following summary weightedaverage assumptions used blackscholes optionpricing model calculated weightedaverage grantdate fair value 13 commitments contingencies purchase obligations connection outsourcing initiative conway entered agreements thirdparty service providers first quarter 2010 payments thirdparty providers estimated 240 million 2011 2016 agreements expected expire payments terms agreements subject change depending quantities types services consumed estimated payments reflect amounts based projections services expected consumed contracts also contain provisions allow conway terminate contract time however conway would required pay additional fees termination causes failure service providers perform conway elected convenience terminate contract outsourced informationtechnology services december 31 2010 termination fee would approximately 39 million compared approximately 34 million conway elects terminate contract december 31 2011 mw menlo worldwide llc “mw” asserted claims sellers chic holdings alleging inaccurate books records misstatement revenue similar matters related presale financial performance chic businesses pursuing legal equitable remedies available mw currently exists 9 million holdback escrow mw may apply award breach warranty purchase agreement ultimate outcome matter uncertain resulting award recognized received ewa february 2002 lawsuit filed ewa district court southern district ohio alleging violations worker adjustment retraining notification act “warn act” connection employee layoffs ultimate terminations due august 2001 grounding ewa’s airline operations shutdown airline operations december 2001 court subsequently certified lawsuit class action behalf affected employees laid august 11 august 15 2001 warn act generally requires employers give 60days notice 60days pay benefits lieu notice shutdown operations mass layoff site employment lawsuit tried early january 2009 september 28 2009 court issued decision favor ewa plaintiffs appealed judgment district court’s decision affirmed february 16 2011 conway defendant various lawsuits incidental businesses opinion management ultimate outcome actions material effect conway’s financial condition results operations cash flows 14 segment reporting conway discloses segment information manner business units organized making operating decisions assessing performance allocating resources periods presented conway divided following four reporting segments • freight segment consists operating results conway freight business unit provides regional interregional transcontinental lessthantruckload freight services throughout north america • logistics segment consists operating results menlo worldwide logistics business unit develops contractlogistics solutions including management complex distribution networks supplychain engineering consulting also provides multimodal freight brokerage services • truckload segment consists operating results conway truckload business unit provides assetbased fulltruckload freight services throughout north america • reporting segment consists operating results road systems trailer manufacturer certain corporate activities related income expense allocated reporting segments financial data management evaluates segment performance primarily based revenue operating income loss accordingly investment income interest expense nonoperating items reported segment results corporate expenses generally allocated based measurable services provided segment general corporate expenses based segment revenue intersegment revenue related operating income loss eliminated reconcile consolidated revenue operating income loss transactions segments generally based negotiated prices geographic data geographic reporting freight transportation revenues allocated equally origin destination revenues contract services allocated country services performed longlived assets outside united states immaterial periods presented 15 quarterly financial data conway inc quarterly financial data comparability conway’s consolidated operating income affected following unusual income expense • goodwill impairment charge 164 million menlo worldwide logistics third quarter 2010 • goodwill impairment charge 1348 million conway truckload first quarter 2009 • change accounting estimate conway freight increased allowance revenue adjustments decreased revenue operating income 54 million third quarter 2009 b comparability conway’s income tax provision benefit affected following • third quarter 2010 reflects nondeductible goodwill impairment charge menlo worldwide logistics • first quarter 2009 reflects nondeductible goodwill impairment charge conway truckload item 9item 8 financial statements supplementary data conway inc consolidated balance sheets accompanying notes consolidated financial statements integral part statements conway inc consolidated balance sheets accompanying notes consolidated financial statements integral part statements conway inc statements consolidated operations accompanying notes consolidated financial statements integral part statements conway inc statements consolidated cash flows accompanying notes consolidated financial statements integral part statements conway inc statements consolidated shareholders equity comprehensive income loss dollars thousands except per share data accompanying notes consolidated financial statements integral part statements conway inc notes consolidated financial statements 1 principal accounting policies organization conway inc consolidated subsidiaries “conway” “company” provide transportation logistics services wide range manufacturing industrial retail customers fully discussed note 13 “segment reporting” financial reporting purposes conway divided four reporting segments freight logistics truckload principles consolidation consolidated financial statements include accounts conway inc subsidiaries significant intercompany accounts transactions eliminated estimates management makes estimates assumptions preparing financial statements conformity accounting principles generally accepted us estimates assumptions affect amounts reported accompanying financial statements notes changes estimates recognized accordance accounting rules estimate typically period new information becomes available estimates underlying assumptions affect amounts assets liabilities reported disclosures contingent assets liabilities reported amounts revenue expenses estimates relate revenuerelated adjustments impairment goodwill longlived assets amortization depreciation income tax assets liabilities selfinsurance accruals pension plan postretirement obligations contingencies assets liabilities recognized connection acquisitions restructurings dispositions conway evaluates estimates assumptions ongoing basis using historical experience factors including current economic environment estimates assumptions adjusted facts circumstances dictate volatility financial markets changing levels economic activity increase uncertainty inherent estimates assumptions changes estimates resulting continuing changes economic environment reflected financial statements future periods recognition revenues conway freight recognizes revenue reporting periods based relative transit time period recognizes expense incurred conway truckload recognizes revenue related direct costs shipment delivered estimates future billing adjustments revenue including related weight freightclassification verification pricing discounts recognized time shipment menlo worldwide logistics recognizes revenue proportionalperformance model based service outputs delivered customer revenue recorded gross basis without deducting thirdparty purchased transportation costs transactions menlo worldwide logistics acts principal revenue recorded net basis deducting purchased transportation costs transactions menlo worldwide logistics acts agent certain menlo worldwide logistics contracts billings excess revenues recognized recorded unearned revenue unearned revenue recognized contract period services provided december 31 2011 2010 unearned revenue 166 million 136 million reported conway’s consolidated balance sheets accrued liabilities addition menlo worldwide logistics deferred certain direct incremental costs related setup logistics operations longterm contracts deferred setup costs recognized expense contract term december 31 2011 2010 deferred setup costs 157 million 134 million reported consolidated balance sheets deferred charges assets cash equivalents marketable securities cash equivalents consist shortterm interestbearing instruments maturities three months less date purchase december 31 2011 2010 cashequivalent investments 3985 million 3881 million respectively consisted primarily commercial paper certificates deposit moneymarket funds conway classifies marketable debt securities availableforsale reports fair value changes fair value availableforsale securities recognized accumulated comprehensive income loss shareholders’ equity unless unrealized loss otherthantemporary loss portion unrealized loss determined temporary portion loss recognized earnings december 31 2011 conway held 133 million variablerate demand notes variablerate demand notes contractual maturities greater three months date purchase however securities interest rates reset every 5 7 days generally liquidated quickly additionally december 31 2011 december 31 2010 conway held 54 million 60 million respectively longterm marketable securities consisted one auctionrate security fully discussed note 4 “fairvalue measurements” trade accounts receivable net conway freight conway truckload report accounts receivable net realizable value provide allowance collection considered doubtful estimates uncollectible accounts based various judgments assumptions including revenue levels historical loss experience aging outstanding accounts receivable menlo worldwide logistics based size nature client base performs periodic evaluation customers’ creditworthiness accounts receivable portfolio recognizes expense uncollectible accounts losses probable reasonably estimable activity allowance uncollectible accounts presented following table estimates billing adjustments including related weight freightclassification verifications pricing discounts also reported reduction accounts receivable activity allowance revenue adjustments presented following table property plant equipment property plant equipment reported historical cost depreciated primarily straightline basis estimated useful lives generally 25 years buildings 4 14 years revenue equipment 3 10 years equipment leasehold improvements assets acquired capital leases amortized shorter terms respective leases useful lives assets resulting expense reported depreciation expense 1914 million 2011 1789 million 2010 1751 million 2009 expenditures equipment maintenance repairs charged operating expenses incurred betterments capitalized gains losses sales equipment property recorded operating expenses tires cost replacement tires expensed time tires placed service case repairs maintenance costs cost tires new revenue equipment capitalized depreciated estimated useful life related equipment capitalized software net capitalized software consists certain direct internal external costs associated internaluse software net accumulated amortization capitalized software computed itembyitem basis depending estimated useful life software currently 3 7 years amortization expense related capitalized software 79 million 2011 103 million 2010 129 million 2009 accumulated amortization december 31 2011 2010 1484 million 1407 million respectively longlived assets conway performs impairment analysis longlived assets whenever circumstances indicate carrying amount may recoverable assets held used impairment charge recognized estimated undiscounted cash flows associated asset group assets less carrying value impairment exists charge recognized difference carrying value fair value fair values determined using quoted market values discounted cash flows external appraisals applicable assets held disposal carried lower carrying value estimated net realizable value conway’s accounting policies goodwill longlived intangible assets fully discussed note 2 “goodwill intangible assets” book overdrafts book overdrafts represent outstanding drafts yet presented bank excess recorded cash amounts represent bank overdrafts occur drafts presented bank excess cash conway’s bank account would effectively loan conway december 31 2011 2010 book overdrafts 385 million 242 million respectively included accounts payable selfinsurance accruals conway uses combination purchased insurance selfinsurance programs provide costs medical casualty liability vehicular cargo workers’ compensation claims longterm portion selfinsurance accruals relates primarily workers’ compensation vehicular claims expected payable several years conway periodically evaluates level insurance coverage adjusts insurance levels based risk tolerance premium expense measurement classification selfinsured costs requires consideration historical cost experience demographic severity factors judgments current expected levels cost per claim retention levels methods provide estimates undiscounted liability associated claims incurred balance sheet date including claims reported changes assumptions factors materially affect actual costs paid settle claims amounts may different estimates conway participates reinsurance pool reinsure portion workers’ compensation claims participant pool cedes claims pool assumes equivalent amount claims reinsurance relieve conway liabilities original policy however opinion management potential exposure conway nonpayment minimal december 31 2011 2010 conway recorded liability related assumed claims 577 million 498 million respectively recorded receivable reinsurance pool 440 million 447 million respectively revenues related reinsurance activities reported net associated expenses classified operating expenses connection participation reinsurance pool conway recognized operating loss 44 million 2011 operating income 41 million 2010 40 million 2009 foreign currency translation adjustments resulting translating foreign functional currency financial statements us dollars included foreign currency translation adjustment statements consolidated shareholders’ equity transaction gains losses arise exchangerate fluctuations transactions denominated currency functional currency included results operations reported miscellaneous net statements consolidated operations conway determined advances certain foreign subsidiaries indefinite nature accordingly corresponding foreign currency translation gains losses related advances included foreign currency translation adjustment statements consolidated shareholders’ equity marketing expenses marketing costs including sales promotions printed sales materials advertising expensed incurred classified operating expenses marketing expenses 42 million 2011 96 million 2010 97 million 2009 earnings loss per share eps basic eps computed dividing reported net income loss preferred stock dividends weightedaverage common shares outstanding diluted eps calculated follows computation diluted eps potential common shares dilutive included potential common shares dilutive reduce earnings per share increase loss per share stock options nonvested stock convertible preferred stock included computation result antidilutive loss applicable common shareholders reported new accounting standards june 2011 fasb issued accounting standards update “asu” 201105 “presentation comprehensive income” asu codified “comprehensive income” topic fasb accounting standards codification eliminates option present components comprehensive income part statement shareholders’ equity instead entities required present net income comprehensive income either single continuous statement two separate consecutive statements addition items reclassified comprehensive income net income must presented face financial statements accounting guidance asu 201105 effective fiscal years interim periods within years beginning december 15 2011 requires full retrospective application conway currently reports comprehensive income statement shareholders’ equity upon adoption conway required present net income comprehensive income comprehensive income accordance amended standards september 2011 fasb issued asu 201108 “testing goodwill impairment” asu codified “intangibles goodwill other” topic fasb accounting standards codification allows entity first perform qualitative assessment determine whether necessary perform twostep goodwill impairment test required previous standard entity longer required calculate fair value reporting unit unless entity determines based qualitative assessment likely fair value less carrying amount amendments applied prospectively effective annual interim goodwill impairment tests performed fiscal years beginning december 15 2011 early adoption fiscal year 2011 annual tests permitted conway believe standard material effect financial statements reclassifications certain amounts priorperiod financial statements reclassified conform currentperiod presentation 2 goodwill intangible assets goodwill following table shows changes gross carrying amounts goodwill attributable applicable segment conway assesses goodwill impairment annual basis fourth quarter frequently events changes circumstances indicate asset might impaired first quarter 2009 conway evaluated goodwill impairment prior annual measurement date primarily due deteriorating truckload market conditions lower profit projections conway truckload decline conway’s market capitalization first quarter 2009 conway determined goodwill associated conway truckload impaired result conway truckload recognized 1348 million impairment charge reduce carrying amount goodwill implied fair value impairment charge primarily due lower projected revenues operating income future years discount rate reflected adverse economic market conditions measurement date valuation conway truckload conway applied two equally weighted methods publiccompany multiples discounted cash flow model key assumptions used discounted cash flow model cash flow projections involving forecasted revenues expenses capital expenditures working capital changes discount rate terminal growth rate applied projected future cash flows discount rate equal estimated weightedaverage cost capital reporting unit marketparticipant perspective terminal growth rate based inflation assumptions adjusted factors may impact future growth industryspecific expectations third quarter 2010 conway evaluated goodwill associated chic logistics primarily due continued operating losses lowerthanforecasted operating results chic logistics reporting unit conway determined goodwill related chic logistics impaired result menlo worldwide logistics recognized 164 million impairment charge reduce carrying amount goodwill zero impairment primarily due decrease projected operating income future years valuation chic logistics conway utilized discounted cash flow model connection annual impairment test fourth quarter 2011 conway concluded goodwill reporting units impaired december 31 2011 intangible assets fair value intangible assets amortized straightline basis estimated useful life amortization expense related intangible assets 33 million 2011 33 million 2010 44 million 2009 intangible assets consisted following first quarter 2010 conway evaluated fair value chic logistics’ customerrelationship intangible asset due lower projected revenues customers comprising customerrelationship intangible asset result menlo worldwide logistics recognized 28 million impairment loss reduced carrying amount intangible asset zero conway’s remaining customerrelationship intangible asset relates conway truckload business unit estimated amortization expense next five years presented following table purchaseprice dispute menlo worldwide llc “mw” asserted claims sellers chic logistics mw acquired 2007 alleging inaccurate books records misstatement revenue similar matters related presale financial performance chic logistics october 17 2011 mw sellers entered agreement sellers agreed pay mw 100 million adjustment original purchase price settle dispute fourth quarter 2011 mw received full settlement amount recognized corresponding gain 100 million fully discussed entire amount goodwill associated chic logistics previously written 3 restructuring activities periods presented conway incurred expenses connection number restructuring activities expenses reported restructuring charges statements consolidated operations detailed conway recognized restructuring charges 20 million 2011 50 million 2010 29 million 2009 expect incur additional expense 2012 connection activities conway outsourcing initiative 2009 part ongoing effort reduce costs improve efficiencies conway initiated project outsource significant portion informationtechnology infrastructure function small portion administrative accounting functions conway completed initiative 2010 connection outsourcing initiative conway recognized expense 25 million 2010 34 million 2009 consolidation executive offices 2010 effort closely align corporate functions better support business conway initiated project consolidate executive offices located san mateo california ann arbor michigan consolidation substantially completed second quarter 2011 executive office san mateo closed conway expect incur additional restructuring charges consolidation executive offices following table summarizes effect initiative year ended december 31 2011 conway freight network reengineering november 2008 conway freight completed major network reengineering reduce service exceptions improve ontime delivery bring faster transit times deploying lowercost efficient service center network better aligned customer needs business volumes reengineering change conway freight’s service coverage involve closure 40 service centers shipment volumes closing locations redistributed balanced among 100 nearby service centers periods presented conway recognized 16 million net adjustments reduced expense 2009 economic workforce reduction december 2008 conway freight reduced workforce 1450 positions workforce reduction response decline yearoveryear business volumes accelerated fourth quarter 2008 addition reducing workforce operating locations reduction also eliminated positions conway freight’s general office administrative center included realignment area regional division structure streamline management periods presented conway recognized expense 11 million 2009 4 fairvalue measurements assets liabilities reported fair value classified one following three levels within fairvalue hierarchy level 1 quoted market prices active markets identical assets liabilities level 2 observable marketbased inputs unobservable inputs corroborated market data level 3 unobservable inputs corroborated market data financial assets measured fair value recurring basis following table summarizes valuation financial instruments within fairvalue hierarchy cash equivalents consist shortterm interestbearing instruments primarily commercial paper certificates deposit moneymarket funds maturities three months less date purchase current marketable securities consist variablerate demand notes moneymarket funds reflect published net asset value classified level 1 instruments commercial paper certificates deposit variablerate demand notes generally valued using published interest rates instruments similar terms maturities accordingly classified level 2 instruments december 31 2011 weightedaverage remaining maturity cash equivalents less one month based short maturities carrying amount cash equivalents approximates fair value conway holds one auctionrate security valued income approach utilizes discounted cash flow model following table summarizes change fair values conway’s auctionrate security valued using level 3 inputs periods presented fair value conway’s auctionrate security varied primarily due changes interestrate benchmarks conway recorded cumulative 04 million decline carrying value auctionrate security equal offsetting unrealized loss accumulated comprehensive loss shareholders’ equity conway evaluated unrealized loss concluded decline fair value otherthantemporary nonfinancial assets measured fair value nonrecurring basis 2009 2010 conway measured implied fair value reportingunit goodwill part goodwill impairment tests inputs used measure fair value reporting units within level 3 fairvalue hierarchy fairvalue methods applied conway fully discussed note 2 “goodwill intangible assets” 5 accrued liabilities accrued liabilities consisted following 6 debt financing arrangements longterm debt consisted following revolving credit facility august 2011 conway amended 325 million revolving credit facility extend maturity date november 4 2014 august 2 2016 december 31 2011 cash borrowings outstanding credit facility however 1741 million letters credit outstanding leaving 1509 million available capacity additional letters credit cash borrowings subject compliance financial covenants customary conditions borrowing letters credit outstanding december 31 2011 provided collateral conway’s selfinsurance programs agreement standby letter credit fees equal margin dependent upon conway’s leverage ratio cash borrowings bear interest rate based upon libor lead bank’s base rate case plus margin dependent conway’s leverage ratio credit facility fee ranges 025 045 applied total facility 325 million based conway’s leverage ratio revolving facility guaranteed certain conway’s material domestic subsidiaries contains two financial covenants leverage ratio ii fixedcharge coverage ratio also various restrictive covenants including limitations incurrence liens ii consolidations mergers asset sales iii incurrence additional subsidiary indebtedness credit facilities shortterm borrowings december 31 2011 conway 299 million bank guarantees letters credit overdraft facilities outstanding credit facilities conway shortterm borrowings 145 million 186 million december 31 2011 2010 respectively excluding noninterest bearing borrowings described weightedaverage interest rate shortterm borrowings 71 december 31 2011 49 december 31 2010 shortterm borrowings outstanding december 31 2011 2010 noninterest bearing borrowings 62 million 49 million respectively related credit facility menlo worldwide logistics utilizes one logistics contracts borrowings facility related amounts financial institution paid vendors behalf menlo worldwide logistics 725 senior notes due 2018 725 senior notes bear interest rate 725 per year payable semiannually january 15 july 15 year conway may redeem 725 senior notes whole part less 30 60days notice redemption price equal greater principal amount redeemed ii sum present values remaining scheduled payments principal interest notes redeemed discounted redemption date semiannual basis rate payable treasury note comparable maturity plus 50 basis points also various restrictive covenants including limitations incurrence liens ii consolidations mergers asset sales including amortization underwriting fees related debt costs interest expense 725 senior notes due 2018 recognized annual effective interest rate 737 holders 725 senior notes right require conway repurchase notes upon occurrence change control ii investmentgrade rating two moody’s standard poor’s fitch ratings repurchase price would equal 101 aggregate principal amount notes repurchased plus accrued unpaid interest senior debentures due 2034 300 million aggregate principal amount senior debentures bear interest rate 670 per year payable semiannually may 1 november 1 year conway may redeem senior debentures whole part less 30 60days notice redemption price equal greater principal amount redeemed ii sum present values remaining scheduled payments principal interest senior debentures redeemed discounted redemption date semiannual basis rate payable treasury note comparable maturity plus 35 basis points senior debentures issued indenture restricts conway’s ability certain exceptions incur debt secured liens including amortization discount interest expense 670 senior debentures due 2034 recognized annual effective interest rate 690 aggregate annual maturities longterm debt 2012 06 million following 2012 conway principal payments due 2018 december 31 2011 2010 estimated fair value longterm debt 770 million 790 million respectively 2011 fair values estimated using brokerprovided pricing 2010 fair values estimated based current rates offered debt similar terms maturities 7 leases conway subsidiaries obligated noncancelable leases certain facilities equipment vehicles certain leases also contain provisions allow conway extend leases various renewal periods 2010 2009 conway acquired tractors conway freight conway truckload various capitallease agreements lease terms ranging three five years extending 2015 agreements conway guarantees residual value tractors end lease term stated amounts residualvalue guarantees included minimum lease payments portion capitallease agreements relates tractors previously owned conway truckload saleleaseback arrangements involving tractors conway received sale proceeds 204 million 2010 173 million 2009 connection capital leases conway reported 1053 million 1056 million revenue equipment 319 million 138 million accumulated depreciation consolidated balance sheets december 31 2011 2010 respectively future minimum lease payments initial remaining noncancelable lease terms excess one year december 31 2011 follows future minimum lease payments table net 64 million sublease income expected received noncancelable subleases remaining unamortized gain resulting past saleleaseback transactions 130 million december 31 2011 reported liabilities deferred credits consolidated balance sheets amortized reduction lease expense 2018 corresponding lease terms expire rental expense operating leases comprised following 8 income taxes income tax provision components provision income taxes follows income taxes provided foreign operations based upon various tax laws rates countries operations conducted components income loss income taxes follows conway’s income tax provision varied amounts calculated applying us statutory income tax rate pretax income loss shown following reconciliation current deferred income tax balances components deferred tax assets liabilities related following deferred tax assets liabilities consolidated balance sheets classified current noncurrent based related asset liability creating deferred tax deferred taxes related specific asset liability classified based estimated period reversal december 31 2011 conway federal tax loss carryforward 1144 million federal tax loss carryforward expire 20 years addition federal tax loss carryforward carryforwards including state tax credits foreign taxes creditable federal tax state foreign tax losses capital losses may create future benefits resulting benefit future use tax losses 576 million tax credit carryforwards provide benefit 69 million capital losses provide 07 million conway anticipate future state foreign taxable income allow realization full benefits management concluded assets fail meet morelikelythannot threshold realization combined future tax benefits 652 million therefore offset valuation allowance 175 million deferred tax assets management believes likely results future operations generate taxable income sufficient amount type realize deferred tax assets december 2010 tax relief unemployment insurance reauthorization job creation act 2010 signed law allows 100 bonus depreciation certain capital expenditures made september 9 2010 december 31 2011 result conway deducted substantial portion 2011 capital expenditures 2011 tax year new law also allows 50 bonus depreciation certain capital expenditures made december 31 2011 january 1 2013 result provision conway may deduct substantial portion 2012 capital expenditures 2012 tax year deferred taxes provided cumulative undistributed earnings conway’s foreign subsidiaries 293 million december 31 2011 remitted subject withholding us taxes amounts indefinitely reinvested respective foreign subsidiaries’ operations becomes advantageous tax foreign exchange reasons remit earnings determination amount unrecognized deferred income tax liability temporary difference practicable income tax receivables 48 million 412 million included accounts receivable conway’s consolidated balance sheets december 31 2011 2010 respectively uncertain tax positions conway recognizes tax positions financial statements likely position sustained upon examination taxing authority position meets morelikelythannot criteria measured using probabilityweighted approach largest amount tax benefit greater 50 likely realized upon settlement previously recognized tax positions longer meet morelikelythannot recognition threshold derecognized first subsequent financial reporting period threshold longer met 2010 estimate uncertain tax positions decreased 159 million including 61 million accrued interest penalties primarily due settlements state taxing authorities 2011 estimate increased 174 million including 67 million accrued interest penalties primarily due current year uncertain tax positions internal revenue service “irs” audit settlement fully discussed december 31 2011 2010 conway estimated 87 million 80 million respectively unrecognized tax benefits recognized would change effective tax rate 2011 08 million interest penalties included income tax expense 2010 06 million interest penalties included income tax expense following summarizes changes unrecognized tax benefits year excluding interest penalties normal course business conway subject examination taxing authorities throughout world result examinations conway maintains ongoing discussions negotiations relating tax matters taxing authorities various jurisdictions conway subject examination federal income taxes tax years 2008 forward 2011 irs began audit 2008 2010 periods objective bringing conway compliance assurance program “cap” 2013 cap designed make audits effective efficient current federal tax return filed approved irs 2011 conway settled disputed issue irs arose 2005 2007 audit cycle issue primarily related treatment character certain payments conway made retirees former employees menlo worldwide forwarding inc subsidiaries “mwf” since 2004 sale mwf united parcel service inc conway irs agreed settlement recharacterize portion payments capital losses recharacterized portion may deducted may used offset capital gains result conway paid taxes interest 18 million 2011 additional 2005 2007 liability conway recorded remaining liability 08 million 2008 2010 additionally valuation allowance 33 million representing balance settlement recorded 2011 deferred tax assets separate mitigating factor conway realized capital gains sales property 2011 gains may offset capital loss carryovers generating 18 million tax refund conway also subject examination state local foreign jurisdictions 2004 2010 conway currently audit many state foreign tax jurisdictions management expects next 12 months reasonably possible total unrecognized tax benefits decrease range 54 million 74 million decrease primarily due settlement agreements conway expects reach various tax authorities lapses statutes limitations 9 shareholders’ equity accumulated comprehensive loss changes equity except resulting investments owners distributions owners reported comprehensive income loss statements consolidated shareholders’ equity following summary components accumulated comprehensive loss common stock offering may 2010 conway sold 4300000 shares repurchased common stock also referred treasury stock underwritten public offering price 3500 per share net proceeds offering 1433 million deducting underwriting discount direct costs 428 million difference net proceeds 1861 million historical cost treasury stock recorded reduction retained earnings shareholders’ equity series b preferred stock conway’s series b cumulative convertible preferred stock held primary defined contribution retirement plan preferred stock earned annual dividend 1293 per share used pay debt service related retirement plan debt dividends preferred shares deductible income tax purposes accordingly reflected net tax benefits statements consolidated operations second quarter 2009 conway exercised right redeem shares preferred stock outstanding june 30 2009 share preferred stock converted common stock rate equal number shares common stock could purchased 15210 accordingly 938 million 2202937 shares treasury stock issued convert redeem 750 million 493220 shares outstanding preferred stock 188 million difference historical cost treasury stock converted preferred stock recorded reduction additional paidin capital common stock shareholder’s equity also redemption date 40 million 93636 shares treasury stock used pay commonstock equivalent thenaccrued 32 million cash dividend preferred stock 08 million difference recorded reduction additional paidin capital common stock shareholders’ equity 10 employee benefit plans periods presented certain employees conway subsidiaries us covered several retirement benefit plans including defined benefit pension plans defined contribution retirement plans postretirement medical plan conway’s defined benefit pension plans include “qualified” plans eligible certain beneficial treatment internal revenue code “irc” well “nonqualified” plans meet irc criteria defined benefit pension plans conway’s qualified defined benefit pension plans collectively “qualified pension plans” consist mostly primary qualified defined benefit pension plan “primary db plan” covers noncontractual employees former employees conway’s continuing operations well former employees discontinued operations conway’s qualified defined benefit pension plans cover former employees discontinued operations conway also sponsors nonqualified defined benefit pension plans collectively “nonqualified pension plans” consisting mostly primary nonqualified supplemental defined benefit pension plan “supplemental db plan” several unfunded nonqualified benefit plans supplemental db plan provides additional benefits certain employees affected irc limitations compensation eligible benefits available qualified primary db plan conway’s foreign subsidiaries sponsor defined benefit pension plans comparatively insignificant effect conway’s consolidated financial statements accordingly international defined benefit pension plans excluded disclosures benefits effective april 30 2009 conway amended primary db plan supplemental db plan permanently curtail benefits associated future increases employee compensation prior amendment future retirement benefits considered participants’ eligible compensation increases 2016 result april 2009 amendment earlier amendment january 2007 additional benefits accrue plans alreadyaccrued benefits adjusted future increases compensation connection curtailments conway remeasured planrelated assets liabilities april 30 2009 plan assets investment policies strategies assets qualified pension plans managed pursuant longterm allocation strategy seeks mitigate plans’ funded status volatility increasing plans’ investment fixedincome investments time strategy developed analyzing variety diversified assetclass combinations conjunction projected liabilities qualified pension plans 2011 plans lowered percentage investments equity securities increased percentage investments fixedincome securities plans’ current investment strategy achieve mix approximately 55 investments equity securities 42 fixedincome securities 3 real estate target allocations equity securities include 27 us large companies 8 us small companies 20 international companies investments equity securities allocated growthand valuestyle investment strategies diversified across industries investment managers investments fixedincome securities consist primarily highquality us corporate debt instruments variety industries plans’ investments equity fixedincome securities consist individual securities held managed separate accounts well commingled investment funds plans’ investment strategy include meaningful longterm investment allocation cash equivalents however plan’s cash allocation may rise periodically response timing considerations regarding contributions investments payment benefits eligible plan expenses additionally level cash equivalents may reflect uninvested balance manager’s allocated portfolio balance “uninvested cash” typically held shortterm fund invests moneymarket instruments including commercial paper liquid shortterm interestbearing instruments plans’ investment policy allow investment managers use markettiming strategies financial derivative instruments speculative purposes investment managers use financial derivative instruments manage risk generally investment managers prohibited short selling trading margin trading commodities warrants options except acquired result purchase another security case options sold part covered position conway’s investment policies also restrict investment managers accumulating concentrations issuer country industry segment assumption 765 overall expected longterm rate return 2012 developed using asset allocation return risk defined standard deviation correlation expectations return expectations created using longterm historical returns current market expectations inflation interest rates economic growth categories fairvalue measurements plan assets following table summarizes fair value conway’s pension plan assets within fairvalue hierarchy funds publicly traded readily determinable fair values accordingly valued net asset value per share underlying investments funds consist primarily publicly traded securities quoted market prices b publicly traded equity securities valued closing market prices c us government securities valued quoted market price corporatedebt instruments generally valued using observable bidask spreads brokerprovided pricing lowduration fund valued published net asset value per share e fair value private real estate fund based fair values underlying assets consist commercial residential properties valued using periodic appraisals following table summarizes change fair value pension assets valued using level 3 inputs funding conway’s funding practice evaluate tax cash position well qualified pension plans’ funded status determining planned contributions conway estimates contribute 51 million qualified pension plans 2012 however could change based variations interest rates asset returns pension protection act requirements factors funded status defined benefit pension plans following table reports changes projected benefit obligation fair value plan assets determination amounts recognized consolidated balance sheets conway’s defined benefit pension plans december 31 amounts included accumulated comprehensive loss yet recognized net periodic benefit expense consist following actuarial loss qualified pension plans nonqualified pension plans amortized accumulated comprehensive loss 2012 193 million 09 million respectively net periodic benefit expense income defined benefit pension plans net periodic benefit expense income amounts recognized comprehensive income loss years ended december 31 includes following expected benefit payments defined benefit pension plans summarized estimates based assumptions future events actual benefit payments may vary estimates defined contribution retirement plans conway’s defined contribution retirement plans consist mostly primary defined contribution retirement plan “primary dc plan” covers noncontractual us employees participating plan december 31 2009 prior implementation conway’s costreduction actions announced march 2009 conway made “matching” contributions equal 50 first six percent employees’ eligible compensation made additional discretionary contributions employees’ 401k accounts primary dc plan additional contributions based employees’ years service consisted “basic” contribution ranged 3 5 eligible compensation “transition” contribution ranged 1 3 eligible compensation effective april 2009 “matching” “transition” contributions suspended “basic” contribution limited 3 employee’s eligible compensation conway prospectively reinstated “basic” “transition” contributions defined contribution retirement plan prior levels fourth quarter 2011 “matching” contributions reinstated conway’s expense defined contribution retirement plans 382 million 2011 367 million 2010 450 million 2009 december 31 2011 2010 conway accrued liabilities 147 million 104 million respectively contributions related defined contribution retirement plans periods presented conway’s contributions included allocations conway preferred stock contributions cash conway common stock january 2009 june 2011 common stock contributions made treasury stock rather openmarket purchases cash contributed conway 2011 2010 2009 conway used 461151 shares 1130515 shares 733219 shares respectively treasury stock fund 173 million 368 million 233 million respectively contributions defined contributions retirement plans second quarter 2009 conway exercised right redeem shares preferred stock outstanding june 30 2009 fully discussed note 9 “shareholders’ equity” prior redemption allocation preferred stock participants’ accounts based upon ratio current year’s principal interest payments total planrelated debt deferred compensation expense recognized preferred shares allocated participants equivalent cost preferred shares allocated deferred compensation expense 104 million recognized 2009 postretirement medical plan conway sponsors postretirement medical plan provides health benefits certain noncontractual employees least 55 years age least 10 years service “postretirement plan” postretirement plan provide employersubsidized retiree medical benefits employees hired january 1 1993 march 2010 patient protection affordable care act modified health care education reconciliation act signed law certain provisions legislation eliminated future tax deductions expenditures reimbursed medicare part retiree drug subsidy program elimination tax deduction resulted 23 million incometax charge first quarter 2010 effect provisions legislation included determination benefit obligation actuarial plan measurement date december 31 2010 without material impact liability funded status postretirement medical plan following sets forth changes benefit obligation determination amounts recognized consolidated balance sheets postretirement plan december 31 amounts included accumulated comprehensive loss yet recognized net periodic benefit expense consist following 2012 priorservice credits 12 million amortized accumulated comprehensive loss net periodic benefit expense postretirement medical plan net periodic benefit expense amounts recognized comprehensive income loss years ended december 31 includes following expected benefit payments reflect expected future service appropriate summarized estimates based assumptions future events actual benefit payments may vary estimates assumed healthcare cost trend rates used determine benefit obligation follows assumed healthcare cost trends affect amounts reported conway’s postretirement benefits onepercentagepoint change assumed healthcare cost trend rates would material effect aggregate service interest cost would change accumulated projected benefit obligation approximately 3 million 11 sharebased compensation terms sharebased compensation plans conway grants various types sharebased compensation awards employees directors plans provide awards form stock options nonvested stock also known restricted stock performanceshare plan units stock appreciation rights “sars” conway recognizes expense straightline basis shorter 1 requisite service period stated award 2 period grant date award employee’s retirementeligibility date award contains acceleratedvesting provision following expense recognized sharebased compensation result executive severances thirdquarter 2010 conway modified terms outstanding awards four executives modification resulted immediate vesting certain awards result conway recognized 11 million expense fair value stock option sar grant estimated using blackscholes optionpricing model considers riskfree interest rate expected award term volatility dividend yield riskfree interest rate determined using us treasury zerocoupon issue remaining term equal expected term award expected term award derived binomial lattice model based historical rate voluntary exercises postvesting terminations volatility expected volatility based historical volatility conway’s common stock recent period equal expected term award december 31 2011 conway 1933604 common shares available grant stock options nonvested stock sharebased compensation equity plans shares issued conway’s balance authorized common stock options stock options granted prices equal market value common stock date grant expire 10 years date grant stock options granted threeyear gradedvesting terms onethird award vests year certain option awards provide accelerated vesting result change control qualifying retirement death disability defined stock option plans following table summarizes stockoption activity 2011 aggregate intrinsic value reported table represents total pretax value would received employees directors holders exercised inthemoney stock options december 31 2011 2010 2009 aggregate intrinsic value exercised options 35 million 19 million 20 million respectively total amount cash received exercise options 2011 2010 2009 55 million 35 million 42 million respectively related tax benefit realized exercise options 14 million 08 million 08 million respectively december 31 2011 total unrecorded deferred compensation cost stock options net forfeitures 52 million expected recognized weightedaverage period 193 years following summary weightedaverage assumptions used blackscholes optionpricing model calculated weightedaverage grantdate fair value nonvested stock shares nonvested stock valued market price conway’s common stock date award awards granted directors generally granted threeyear gradedvesting terms awards granted employees generally vest three years award date nonvested stock awards provide accelerated vesting result change control death disability defined award agreement awards allow prorata vesting award recipient leaves conway due qualifying retirement vesting period following table summarizes nonvested stock activity 2011 total fair value nonvested stock vested 2011 2010 2009 54 million 33 million 14 million respectively based conway’s closing common stock price vesting date december 31 2011 total unrecorded deferred compensation cost shares nonvested stock net forfeitures 116 million expected recognized weightedaverage period 165 years stock appreciation rights 2010 conway awarded cashsettled sars eligible employees sars granted stock price grant date threeyear gradedvesting term awards provide accelerated vesting employee ceases employment due retirement death disability change control defined sar agreement sars liabilityclassified awards result conway remeasures fair value awards reporting period awards settled vesting period compensation cost recognized based proportionate amount service rendered date conway recognize changes fair value vesting period compensation cost current period ultimate expense recognized sars equal intrinsic value settlement conway’s accrued liability cashsettled sars 31 million 29 million december 31 2011 2010 determined using weightedaverage fair value 1085 1641 per sar december 31 2011 2010 respectively following table summarizes sar activity 2011 aggregate intrinsic value reported table represents total pretax value would received employees holders exercised inthemoney sars december 31 2011 2010 conway paid 06 million 01 million settle exercised sars realized tax benefit 02 million 01 million respectively december 31 2011 total unrecorded deferred compensation cost sars net forfeitures 16 million expected recognized weightedaverage period 100 years following summary weightedaverage assumptions used blackscholes optionpricing model calculated weightedaverage grantdate fair value 12 commitments contingencies purchase obligations connection outsourcing initiative conway entered agreements thirdparty service providers first quarter 2010 payments thirdparty providers estimated 232 million 2012 2016 agreements expected expire payments terms agreements subject change depending quantities types services consumed contracts also contain provisions allow conway terminate contract time however conway would required pay additional fees termination causes failure service providers perform conway elected convenience terminate contract outsourced informationtechnology services december 31 2011 termination fee would approximately 34 million compared approximately 28 million conway elects terminate contract december 31 2012 emery worldwide airlines inc february 2002 lawsuit filed emery worldwide airlines inc “ewa” district court southern district ohio alleging violations worker adjustment retraining notification act “warn act” connection employee layoffs ultimate terminations due august 2001 grounding ewa’s airline operations shutdown airline operations december 2001 court subsequently certified lawsuit class action behalf affected employees laid august 11 august 15 2001 warn act generally requires employers give 60 days notice 60days pay benefits lieu notice shutdown operations mass layoff site employment lawsuit tried early january 2009 september 28 2009 court issued decision favor ewa plaintiffs appealed judgment district court’s decision affirmed february 16 2011 plaintiffs’ petitions rehearing appellate court’s decision denied orders dated march 4 2011 march 9 2011 plaintiffs filed petition supreme court june 7 2011 arguing lower courts wrong ruling right jury trial warn act case plaintiffs contended split circuit courts issue supreme court review case resolve split conway filed opposition petition july 14 2011 october 3 2011 supreme court denied plaintiff’s petition case completed conway defendant various lawsuits incidental businesses opinion management ultimate outcome actions material effect conway’s financial position results operations cash flows 13 segment reporting conway discloses segment information manner business units organized making operating decisions assessing performance allocating resources periods presented conway divided following four reporting segments • freight segment consists operating results conway freight business unit provides regional interregional transcontinental lessthantruckload freight services throughout north america • logistics segment consists operating results menlo worldwide logistics business unit develops contractlogistics solutions including management complex distribution networks supplychain engineering consulting also provides multimodal freight brokerage services • truckload segment consists operating results conway truckload business unit provides assetbased fulltruckload freight services throughout north america • reporting segment consists operating results road systems trailer manufacturer certain corporate activities related income expense allocated reporting segments financial data management evaluates segment performance primarily based revenue operating income loss accordingly investment income interest expense nonoperating items reported segment results corporate expenses generally allocated based measurable services provided segment general corporate expenses based segment revenue intersegment revenue related operating income loss eliminated reconcile consolidated revenue operating income loss transactions segments generally based negotiated prices geographic data geographic reporting freight transportation revenues allocated equally origin destination revenues contract services allocated country services performed longlived assets outside united states immaterial periods presented 14 quarterly financial data conway inc quarterly financial data unaudited dollars thousands except per share data comparability conways consolidated operating income affected following unusual income expense gain 100 million fourth quarter 2011 resulting purchaseprice adjustment settle dispute associated 2007 acquisition chic logistics goodwill impairment charge 164 million menlo worldwide logistics third quarter 2010 b comparability conways income tax provision benefit affected following first quarter 2011 reflects 59 million charge connection irs audit settlement third quarter 2010 reflects nondeductible goodwill impairment charge menlo worldwide logistics item 9item 8 financial statements supplementary data conway inc consolidated balance sheets accompanying notes consolidated financial statements integral part statements conway inc consolidated balance sheets accompanying notes consolidated financial statements integral part statements conway inc statements consolidated income accompanying notes consolidated financial statements integral part statements accompanying notes consolidated financial statements integral part statements conway inc statements consolidated cash flows accompanying notes consolidated financial statements integral part statements conway inc statements consolidated shareholders equity accompanying notes consolidated financial statements integral part statements conway inc notes consolidated financial statements 1 principal accounting policies organization conway inc consolidated subsidiaries “conway” “company” provide transportation logistics services wide range manufacturing industrial retail customers fully discussed note 13 “segment reporting” financial reporting purposes conway divided four reporting segments freight logistics truckload principles consolidation consolidated financial statements include accounts conway inc subsidiaries significant intercompany accounts transactions eliminated estimates management makes estimates assumptions preparing financial statements conformity accounting principles generally accepted us estimates assumptions affect amounts reported accompanying financial statements notes changes estimates recognized accordance accounting rules estimate typically period new information becomes available estimates underlying assumptions affect amounts assets liabilities reported disclosures contingent assets liabilities reported amounts revenue expenses estimates relate revenuerelated adjustments impairment goodwill longlived assets amortization depreciation income taxes selfinsurance accruals pension plan postretirement obligations contingencies assets liabilities recognized connection acquisitions restructurings dispositions conway evaluates estimates assumptions ongoing basis using historical experience factors including current economic environment estimates assumptions adjusted facts circumstances dictate volatility financial markets changing levels economic activity increase uncertainty inherent estimates assumptions changes estimates resulting continuing changes economic environment reflected financial statements future periods recognition revenues conway freight recognizes revenue reporting periods based relative transit time period recognizes expense incurred conway truckload recognizes revenue related direct costs shipment delivered estimates future billing adjustments revenue including related weight freightclassification verification pricing discounts recognized time shipment menlo worldwide logistics recognizes revenue proportionalperformance model based service outputs delivered customer menlo worldwide logistics records revenue gross basis without deducting thirdparty purchased transportation costs transactions acts principal menlo worldwide logistics records revenue net basis deducting purchased transportation costs transactions acts agent certain menlo worldwide logistics contracts billings excess revenues recognized recorded unearned revenue unearned revenue recognized contract period services provided december 31 2012 2011 unearned revenue 169 million 166 million reported conway’s consolidated balance sheets accrued liabilities addition menlo worldwide logistics deferred certain direct incremental costs related setup logistics operations longterm contracts deferred setup costs recognized expense contract term december 31 2012 2011 deferred setup costs 152 million 157 million reported consolidated balance sheets deferred charges assets cash equivalents marketable securities cash equivalents consist shortterm interestbearing instruments maturities three months less date purchase december 31 2012 2011 cashequivalent investments 3783 million 3985 million respectively consisted primarily commercial paper certificates deposit moneymarket funds conway classifies marketable debt securities availableforsale reports fair value changes fair value availableforsale securities recognized comprehensive income loss unless unrealized loss otherthantemporary loss portion unrealized loss determined temporary portion loss recognized earnings december 31 2012 december 31 2011 conway held 32 million 133 million respectively variablerate demand notes contractual maturities greater three months date purchase however securities interest rates reset every 5 7 days generally liquidated quickly also 2012 conway sold longterm marketable security auctionrate security fully discussed note 4 “fairvalue measurements” december 31 2011 security balance 54 million trade accounts receivable net conway freight conway truckload report accounts receivable net realizable value provide allowance losses probable estimates uncollectible accounts based various judgments assumptions including revenue levels historical loss experience aging outstanding accounts receivable menlo worldwide logistics based size nature client base performs periodic evaluation customers’ creditworthiness accounts receivable portfolio recognizes expense uncollectible accounts losses probable reasonably estimable activity allowance uncollectible accounts presented following table estimates billing adjustments including related weight freightclassification verifications pricing discounts also reported reduction accounts receivable activity allowance revenue adjustments presented following table property plant equipment property plant equipment reported historical cost depreciated primarily straightline basis estimated useful lives generally 25 years buildings 4 14 years revenue equipment 3 10 years equipment leasehold improvements assets acquired capital leases amortized shorter terms respective leases useful lives assets resulting expense reported depreciation expense 2049 million 2012 1914 million 2011 1789 million 2010 expenditures equipment maintenance repairs charged operating expenses incurred betterments capitalized gains losses sales equipment property recorded operating expenses tires cost replacement tires expensed time tires placed service case repairs maintenance costs cost tires new revenue equipment capitalized depreciated estimated useful life related equipment capitalized software net capitalized software consists certain direct internal external costs associated internaluse software net accumulated amortization capitalized software computed itembyitem basis depending estimated useful life software currently 3 7 years amortization expense related capitalized software 83 million 2012 79 million 2011 103 million 2010 accumulated amortization december 31 2012 2011 1559 million 1484 million respectively longlived assets conway performs impairment analysis longlived assets whenever circumstances indicate carrying amount may recoverable assets held used impairment charge recognized estimated undiscounted cash flows associated asset group assets less carrying value impairment exists charge recognized difference carrying value fair value fair values determined using quoted market values discounted cash flows external appraisals applicable assets held disposal carried lower carrying value estimated net realizable value conway’s accounting policies goodwill longlived intangible assets fully discussed note 2 “goodwill intangible assets” book overdrafts book overdrafts represent outstanding drafts yet presented bank excess recorded cash amounts represent bank overdrafts occur drafts presented bank excess cash conway’s bank account would effectively loan conway december 31 2012 2011 book overdrafts 430 million 385 million respectively included accounts payable selfinsurance accruals conway uses combination purchased insurance selfinsurance programs provide costs medical casualty liability vehicular cargo workers’ compensation claims longterm portion selfinsurance accruals relates primarily workers’ compensation vehicular claims expected payable several years conway periodically evaluates level insurance coverage adjusts insurance levels based risk tolerance premium expense measurement classification selfinsured costs requires consideration historical cost experience demographic severity factors judgments current expected levels cost per claim retention levels methods provide estimates undiscounted liability associated claims incurred balance sheet date including claims reported changes assumptions factors materially affect actual costs paid settle claims amounts may different estimates conway participates reinsurance pool reinsure portion workers’ compensation claims company participates pool cedes claims pool assumes equivalent amount claims reinsurance relieve conway liabilities original policy however opinion management potential exposure conway nonpayment minimal december 31 2012 2011 conway recorded liability related assumed claims 576 million 577 million respectively recorded receivable reinsurance pool 396 million 440 million respectively revenues related reinsurance activities reported net associated expenses classified operating expenses connection participation reinsurance pool conway recognized operating loss 25 million 2012 operating loss 44 million 2011 operating income 41 million 2010 foreign currency translation adjustments resulting translating foreign functional currency financial statements us dollars included foreign currency translation adjustment statements consolidated comprehensive income loss transaction gains losses arise exchangerate fluctuations transactions denominated currency functional currency included results operations reported miscellaneous net statements consolidated income conway determined advances certain foreign subsidiaries indefinite nature accordingly corresponding foreign currency translation gains losses related advances included foreign currency translation adjustment statements consolidated comprehensive income loss earnings per share eps basic eps computed dividing reported net income loss weightedaverage common shares outstanding diluted eps calculated follows computation diluted eps potential common shares dilutive included potential common shares dilutive reduce earnings per share increase loss per share noncash investing financing activities investing financing activities reported statements consolidated cash flows due noncash nature summarized new accounting standards february 2013 fasb issued accounting standards update “asu” 201302 “reporting amounts reclassified accumulated comprehensive income” asu codified “comprehensive income” topic fasb accounting standards codification requires additional disclosures amounts reclassified comprehensive income including effect net income accounting guidance asu 201302 effective fiscal years interim periods within years beginning december 15 2012 provides prospective application upon adoption conway required make additional disclosures effect reclassification adjustments net income may include crossreferencing disclosures currently required accounting principles generally accepted us 2012 conway adopted related “comprehensive income” standards presenting components comprehensive income loss statements consolidated comprehensive income loss including separate disclosure reclassification adjustments reclassifications certain amounts priorperiod financial statements reclassified conform currentperiod presentation 2 goodwill intangible assets goodwill following table shows changes gross carrying amounts goodwill attributable applicable segment conway assesses goodwill impairment annual basis fourth quarter frequently events changes circumstances indicate asset might impaired third quarter 2010 conway evaluated goodwill associated chic logistics primarily due continued operating losses lowerthanforecasted operating results chic logistics reporting unit conway determined goodwill related chic logistics impaired result menlo worldwide logistics recognized 164 million impairment charge reduce carrying amount goodwill zero impairment primarily due decrease projected operating income future years valuation chic logistics conway utilized discounted cash flow model connection annual impairment test fourth quarter 2012 conway concluded goodwill reporting units impaired december 31 2012 intangible assets intangible assets amortized straightline basis estimated useful life amortization expense related intangible assets 30 million 2012 33 million 2011 33 million 2010 intangible assets consisted following first quarter 2010 conway evaluated fair value chic logistics’ customerrelationship intangible asset due lower projected revenues customers comprising customerrelationship intangible asset result menlo worldwide logistics recognized 28 million impairment loss reduced carrying amount intangible asset zero conway’s remaining customerrelationship intangible asset relates conway truckload business unit estimated amortization expense next five years presented following table purchaseprice dispute menlo worldwide llc “mw” asserted claims sellers chic logistics mw acquired 2007 alleging inaccurate books records misstatement revenue similar matters related presale financial performance chic logistics 2011 mw sellers entered agreement sellers agreed pay mw 100 million adjustment original purchase price settle dispute mw received full settlement amount 2011 recognized corresponding gain 100 million entire amount goodwill associated chic logistics previously written 3 restructuring activities periods presented conway incurred expenses connection restructuring activities expenses reported restructuring charges statements consolidated income detailed conway recognized restructuring charges 20 million 2011 50 million 2010 corporate restructuring activities related costs incurred reporting segment note 13 segment reporting discusses methods used allocate corporate costs reporting segments outsourcing initiative 2009 part ongoing effort reduce costs improve efficiencies conway initiated project outsource significant portion informationtechnology infrastructure function small portion administrative accounting functions conway completed initiative 2010 periods presented conway recognized expense 25 million 2010 consolidation executive offices 2010 effort closely align corporate functions better support business conway initiated project consolidate executive offices located san mateo california ann arbor michigan consolidation substantially completed second quarter 2011 executive office san mateo closed connection consolidation executive offices conway recognized expense 20 million 2011 25 million 2010 4 fairvalue measurements assets liabilities reported fair value classified one following three levels within fairvalue hierarchy level 1 quoted market prices active markets identical assets liabilities level 2 observable marketbased inputs unobservable inputs corroborated market data level 3 unobservable inputs corroborated market data financial assets measured fair value recurring basis following table summarizes valuation financial instruments within fairvalue hierarchy cash equivalents consist shortterm interestbearing instruments primarily commercial paper certificates deposit moneymarket funds maturities three months less date purchase current marketable securities consist variablerate demand notes moneymarket funds reflect published net asset value classified level 1 instruments commercial paper certificates deposit variablerate demand notes generally valued using published interest rates instruments similar terms maturities accordingly classified level 2 instruments december 31 2012 weightedaverage remaining maturity cash equivalents less one month based short maturities carrying amount cash equivalents approximates fair value level 3 investments consisted one auctionrate security december 31 2011 valued income approach utilized discounted cash flow model investment sold third quarter 2012 following table summarizes change fair value conways auctionrate security valued using level 3 inputs nonfinancial assets measured fair value nonrecurring basis 2010 conway measured implied fair value reportingunit goodwill part goodwill impairment tests inputs used measure fair value reporting units within level 3 fairvalue hierarchy fairvalue methods applied conway fully discussed note 2 “goodwill intangible assets” 5 accrued liabilities accrued liabilities consisted following 6 debt financing arrangements longterm debt consisted following revolving credit facility conway 325 million revolving credit facility matures august 2 2016 december 31 2012 cash borrowings outstanding credit facility however 1385 million letters credit outstanding leaving 1865 million available capacity additional letters credit cash borrowings subject compliance financial covenants customary conditions borrowing letters credit outstanding december 31 2012 provided collateral conway’s selfinsurance programs agreement standby letter credit fees equal margin dependent upon conway’s leverage ratio cash borrowings bear interest rate based upon libor lead bank’s base rate case plus margin dependent conway’s leverage ratio credit facility fee ranges 025 045 applied total facility 325 million based conway’s leverage ratio revolving facility guaranteed certain conway’s material domestic subsidiaries contains two financial covenants leverage ratio ii fixedcharge coverage ratio also various restrictive covenants including limitations incurrence liens ii consolidations mergers asset sales iii incurrence additional subsidiary indebtedness credit facilities shortterm borrowings december 31 2012 conway 175 million bank guarantees letters credit overdraft facilities outstanding credit facilities conway shortterm borrowings 70 million 145 million december 31 2012 2011 respectively excluding noninterest bearing borrowings described weightedaverage interest rate shortterm borrowings 55 december 31 2012 71 december 31 2011 shortterm borrowings outstanding december 31 2012 2011 noninterest bearing borrowings 42 million 62 million respectively related credit facility menlo worldwide logistics utilizes one logistics contracts borrowings facility related amounts financial institution paid vendors behalf menlo worldwide logistics 725 senior notes due 2018 725 senior notes bear interest rate 725 per year payable semiannually january 15 july 15 year conway may redeem 725 senior notes whole part less 30 60days notice redemption price equal greater principal amount redeemed ii sum present values remaining scheduled payments principal interest notes redeemed discounted redemption date semiannual basis rate payable treasury note comparable maturity plus 50 basis points also various restrictive covenants including limitations incurrence liens ii consolidations mergers asset sales including amortization underwriting fees related debt costs interest expense 725 senior notes due 2018 recognized annual effective interest rate 737 holders 725 senior notes right require conway repurchase notes upon occurrence change control ii investmentgrade rating two moody’s standard poor’s fitch ratings repurchase price would equal 101 aggregate principal amount notes repurchased plus accrued unpaid interest senior debentures due 2034 300 million aggregate principal amount senior debentures bear interest rate 670 per year payable semiannually may 1 november 1 year conway may redeem senior debentures whole part less 30 60days notice redemption price equal greater principal amount redeemed ii sum present values remaining scheduled payments principal interest senior debentures redeemed discounted redemption date semiannual basis rate payable treasury note comparable maturity plus 35 basis points senior debentures issued indenture restricts conway’s ability certain exceptions incur debt secured liens including amortization discount interest expense 670 senior debentures due 2034 recognized annual effective interest rate 690 aggregate annual maturities longterm debt next five years ending december 31 06 million 2016 following 2016 conway principal payments due 2018 december 31 2012 2011 estimated fair value longterm debt 817 million 770 million respectively periods presented fair values estimated using brokerprovided pricing 7 leases conway subsidiaries obligated noncancelable leases certain facilities equipment vehicles certain leases also contain provisions allow conway extend leases various renewal periods conway acquired tractors conway freight conway truckload various capitallease agreements lease terms ranging three five years extending 2015 agreements conway guarantees residual value tractors end lease term stated amounts residualvalue guarantees included minimum lease payments portion capitallease agreements relates tractors previously owned conway truckload saleleaseback arrangements involving tractors conway received sale proceeds 204 million 2010 connection capital leases conway reported 779 million 1053 million revenue equipment 333 million 319 million accumulated depreciation consolidated balance sheets december 31 2012 2011 respectively future minimum lease payments initial remaining noncancelable lease terms excess one year december 31 2012 follows future minimum lease payments table net 71 million sublease income expected received noncancelable subleases remaining unamortized gain resulting past saleleaseback transactions 117 million december 31 2012 reported liabilities deferred credits consolidated balance sheets amortized reduction lease expense 2018 corresponding lease terms expire rental expense operating leases comprised following 8 income taxes income tax provision components provision income taxes follows income taxes provided foreign operations based upon various tax laws rates countries operations conducted components income loss income taxes follows conway’s income tax provision varied amounts calculated applying us statutory income tax rate pretax income shown following reconciliation current deferred income tax balances components deferred tax assets liabilities related following deferred tax assets liabilities consolidated balance sheets classified current noncurrent based related asset liability creating deferred tax deferred taxes related specific asset liability classified based estimated period reversal december 31 2012 conway federal tax loss carryforward 825 million federal tax loss carryforward expire 2031 addition federal tax loss carryforward carryforwards including state tax credits foreign taxes creditable federal tax state foreign tax losses may create future benefits resulting benefit future use tax losses 491 million tax credit carryforwards provide benefit 91 million conway anticipate future state foreign taxable income allow realization full benefits management concluded assets fail meet morelikelythannot threshold realization combined future tax benefits 583 million therefore offset valuation allowance 191 million deferred tax assets management believes likely results future operations generate taxable income sufficient amount type realize deferred tax assets december 2010 tax relief unemployment insurance reauthorization job creation act 2010 signed law allowed 100 bonus depreciation certain capital expenditures made september 9 2010 december 31 2011 resulting conway deducting substantial portion 2011 capital expenditures 2011 tax year act also allows 50 bonus depreciation certain capital expenditures made december 31 2011 january 1 2013 result provision conway deducted substantial portion 2012 capital expenditures 2012 tax year january 2013 american taxpayer relief act 2012 enacted part act extended alternativefuel credit 2012 2013 tax years result conway record discrete benefit 33 million first quarter 2013 recognize effect credit associated 2012 tax year alternativefuel credit 2013 tax year recognized course 2013 american taxpayer relief act also extends 50 bonus depreciation certain capital expenditures 2013 tax year conway may deduct substantial amount 2013 capital expenditures 2013 tax year deferred taxes provided cumulative undistributed earnings conway’s foreign subsidiaries 330 million december 31 2012 remitted subject withholding us taxes amounts indefinitely reinvested respective foreign subsidiaries’ operations becomes advantageous tax foreign exchange reasons remit earnings determination amount unrecognized deferred income tax liability temporary difference practicable income tax receivables 66 million 48 million included accounts receivable conway’s consolidated balance sheets december 31 2012 2011 respectively uncertain tax positions conway recognizes tax positions financial statements likely position sustained upon examination taxing authority position meets morelikelythannot criteria measured using probabilityweighted approach largest amount tax benefit greater 50 likely realized upon settlement previously recognized tax positions longer meet morelikelythannot recognition threshold derecognized first subsequent financial reporting period threshold longer met 2011 estimate uncertain tax positions increased 174 million including 67 million accrued interest penalties primarily due current year uncertain tax positions internal revenue service irs audit settlement fully discussed 2012 estimate decreased 150 million including 53 million accrued interest penalties primarily due lapse statute limitations settlements various taxing authorities fully discussed december 31 2012 2011 conway estimated 82 million 87 million respectively unrecognized tax benefits recognized would change effective tax rate 2012 13 million reversal interest penalties included income tax expense 2011 08 million interest penalties included income tax expense following summarizes changes unrecognized tax benefits year excluding interest penalties normal course business conway subject examination taxing authorities throughout world result examinations conway maintains ongoing discussions negotiations relating tax matters taxing authorities various jurisdictions conway subject examination federal income taxes tax years 2008 forward 2011 irs began audit 2008 2010 periods objective bringing conway compliance assurance program “cap” 2013 cap designed make audits effective efficient current federal tax return filed approved irs 2012 irs finished field audit 2008 2010 tax years issue emerged resulted increase estimate uncertain tax positions 2012 conway contesting issue irs taken issue irs appeals division 2011 conway settled disputed issue irs arose 2005 2007 audit cycle issue primarily related treatment character certain payments conway made retirees former employees menlo worldwide forwarding inc subsidiaries “mwf” since 2004 sale mwf united parcel service inc conway irs agreed settlement recharacterize portion payments capital losses recharacterized portion may deducted may used offset capital gains conway also subject examination state local foreign jurisdictions 2003 2011 conway currently audit many state foreign tax jurisdictions management expects next 12 months reasonably possible total unrecognized tax benefits decrease 43 million decrease primarily due settlement agreements conway expects reach various tax authorities lapses statutes limitations 9 shareholders’ equity accumulated comprehensive loss changes equity except resulting investments owners distributions owners reported statements consolidated comprehensive income loss following summary components accumulated comprehensive loss common stock offering may 2010 conway sold 4300000 shares repurchased common stock also referred treasury stock underwritten public offering price 3500 per share net proceeds offering 1433 million deducting underwriting discount direct costs 428 million difference net proceeds 1861 million historical cost treasury stock recorded reduction retained earnings shareholders’ equity 10 employee benefit plans periods presented certain employees conway subsidiaries us covered several retirement benefit plans including defined benefit pension plans defined contribution retirement plans postretirement medical plan defined benefit pension plans conway’s defined benefit pension plans include qualified plans eligible certain beneficial treatment internal revenue code “irc” well nonqualified plans meet irc criteria conway’s qualified defined benefit pension plans collectively “qualified pension plans” consist mostly primary qualified defined benefit pension plan “primary db plan” covers noncontractual employees former employees conway’s continuing operations well former employees discontinued operations conway’s qualified defined benefit pension plans cover former employees discontinued operations conways nonqualified defined benefit pension plans collectively “nonqualified pension plans” consisting mostly primary nonqualified supplemental defined benefit pension plan “supplemental db plan” supplemental db plan provides additional benefits certain employees affected irc limitations compensation eligible benefits available qualified primary db plan conways foreign subsidiaries sponsor defined benefit pension plans international defined benefit pension plans excluded disclosures due immateriality benefits result plan amendments previous years additional benefits accrue plans alreadyaccrued benefits adjusted future increases compensation 2012 result actuarial equivalence review conway amended defined benefit pension plans increasing expected benefits paid funded status defined benefit pension plans following table reports changes projected benefit obligation fair value plan assets determination amounts recognized consolidated balance sheets conway’s defined benefit pension plans december 31 amounts included accumulated comprehensive loss yet recognized net periodic benefit expense consist following amounts accumulated comprehensive loss expected recognized components net periodic benefit cost 2013 follows net periodic benefit expense income defined benefit pension plans net periodic benefit expense income amounts recognized comprehensive income loss years ended december 31 includes following expected benefit payments defined benefit pension plans summarized estimates based assumptions future events actual benefit payments may vary estimates plan assets investment policies strategies assets qualified pension plans managed pursuant longterm allocation strategy seeks mitigate plans funded status volatility increasing plans exposure fixed income investments time strategy developed analyzing variety diversified assetclass combinations conjunction projected liabilities qualified pension plans 2012 plans lowered percentage investments equity securities increased percentage investments fixedincome securities plans current investment strategy achieve mix approximately 48 fixedincome securities 44 investments equity securities 5 hedge fund 3 real estate investments fixedincome securities consist primarily highquality us corporate debt instruments variety industries target allocations equity securities include 24 us large companies 6 us small companies 14 international companies investments equity securities allocated growth valuestyle investment strategies diversified across industries investment managers plans investments fixedincome equity securities consist individual securities held managed separate accounts well commingled investment funds plans investment strategy include meaningful longterm investment allocation cash equivalents however plans cash allocation may rise periodically response timing considerations regarding contributions investments payment benefits eligible plan expenses additionally level cash equivalents may reflect uninvested balance managers allocated portfolio balance “uninvested cash” typically held shortterm fund invests moneymarket instruments including commercial paper liquid shortterm interestbearing instruments plans investment policy allow investment managers use markettiming strategies financial derivative instruments speculative purposes investment managers use financial derivative instruments manage risk generally investment managers prohibited short selling trading margin trading commodities warrants options except acquired result purchase another security case options sold part covered position conways investment policies also restrict investment managers accumulating concentrations issuer country industry segment assumption 710 overall expected longterm rate return 2013 developed using asset allocation return risk defined standard deviation correlation expectations return expectations created using longterm historical returns current market expectations inflation interest rates economic growth categories fairvalue measurements plan assets following table summarizes fair value conway’s pension plan assets within fairvalue hierarchy funds publicly traded readily determinable fair values accordingly valued net asset value per share underlying investments funds consist primarily publicly traded securities quoted market prices b publicly traded equity securities valued closing market prices c us government securities valued quoted market price corporatedebt instruments generally valued using observable bidask spreads brokerprovided pricing publicly traded lowduration fund valued published net asset value per share e fair value private real estate fund based fair values underlying assets consist commercial residential properties valued using periodic appraisals fund maintains redemption plan whereby redemption requests must received writing 45 days prior end quarter fund unable satisfy redemption requests partial redemptions may made prorated basis f fair value hedge fund based fair value underlying assets consists individual equities convertible securities futures forward contracts currency forwards swaps highyield debt portfolios options derivative instruments cash valued monthly administrator engaged fund following table summarizes change fair value level 3 pension assets funding conways funding practice evaluate tax cash position well qualified pension plans funded status determining planned contributions conway estimates contribute 55 million qualified pension plans 2013 however could change based variations interest rates asset returns pension protection act requirements factors defined contribution retirement plans conway’s expense defined contribution retirement plans 508 million 2012 384 million 2011 369 million 2010 fourth quarter 2011 conway reinstated certain contributions defined contribution retirement plans prior levels previously suspended second quarter 2009 part costsavings initiative periods presented conway’s contributions included cash conway common stock january 2009 june 2011 common stock contributions made repurchased common stock also referred treasury stock 2011 2010 conway used 461151 shares 1130515 shares respectively treasury stock fund 173 million 368 million contributions postretirement medical plan conway sponsors postretirement medical plan provides health benefits certain noncontractual employees least 55 years age least 10 years service “postretirement plan” postretirement plan provide employersubsidized retiree medical benefits employees hired january 1 1993 funded status postretirement medical plan following sets forth changes benefit obligation determination amounts recognized consolidated balance sheets postretirement plan december 31 amounts included accumulated comprehensive loss yet recognized net periodic benefit expense consist following 2013 priorservice credits 11 million amortized accumulated comprehensive loss net periodic benefit expense postretirement medical plan net periodic benefit expense amounts recognized comprehensive income loss years ended december 31 includes following expected benefit payments reflect expected future service appropriate summarized estimates based assumptions future events actual benefit payments may vary estimates assumed healthcare cost trend rates used determine benefit obligation follows assumed healthcare cost trends affect amounts recognized conway’s postretirement benefits sensitivity changes assumed healthcare cost trends follows 11 sharebased compensation terms sharebased compensation plans conway grants various types sharebased compensation awards employees directors plans provide awards form nonvested stock also known restricted stock performanceshare plan units pspus stock options stock appreciation rights “sars” conway recognizes expense straightline basis shorter 1 requisite service period stated award 2 period grant date award employee’s retirementeligibility date award contains acceleratedvesting provision following expense recognized sharebased compensation result executive severances thirdquarter 2010 conway modified terms outstanding awards four executives modification resulted immediate vesting certain awards result conway recognized 11 million expense fair value stock option sar grant estimated using blackscholes optionpricing model considers riskfree interest rate expected award term volatility dividend yield riskfree interest rate determined using us treasury zerocoupon issue remaining term equal expected term award expected term award derived binomial lattice model based historical rate voluntary exercises postvesting terminations volatility expected volatility based historical volatility conway’s common stock recent period equal expected term award december 31 2012 conway 4069637 common shares available grant stock options nonvested stock sharebased compensation equity plans shares issued conway’s balance authorized common stock nonvested stock awards granted directors prior 2012 generally threeyear gradedvesting terms granted 2012 generally vest one year award date awards granted employees generally vest three years award date nonvested stock awards provide accelerated vesting result change control death disability defined award agreement awards allow prorata vesting award recipient leaves conway due qualifying retirement vesting period shares nonvested stock eligible dividends valued market price conways common stock date award awards eligible dividends valued market price conway’s common stock date award reduced present value dividends received vesting period following table summarizes nonvested stock activity 2012 total fair value nonvested stock vested 2012 2011 2010 110 million 54 million 33 million respectively based conway’s closing common stock price vesting date december 31 2012 total unrecorded deferred compensation cost shares nonvested stock net forfeitures 116 million expected recognized weightedaverage period 156 years performanceshare plan units pspus vest three years grant date certain performance criteria achieved number shares award recipients ultimately receive range 0 200 grant target depending achievement relative performance criteria pspus subject forfeiture award recipient ceases active fulltime employee prior end threeyear period subject cases early vesting upon specified events including death disability award recipient termination employment following change control conway awards allow prorata vesting award recipient leaves conway due qualifying retirement vesting period pspus valued market price conways common stock date award reduced present value dividends received threeyear vesting period amount expense recorded period based conways current estimate number shares ultimately vest following table summarizes pspu activity 2012 december 31 2012 total unrecorded deferred compensation cost shares pspus net forfeitures 54 million expected recognized weightedaverage period 210 years stock options stock options granted prices equal market value common stock date grant expire 10 years date grant stock options granted threeyear gradedvesting terms onethird award vests year certain option awards provide accelerated vesting result change control qualifying retirement death disability defined stock option plans following table summarizes stock option activity 2012 aggregate intrinsic value reported table represents total pretax value would received employees directors holders exercised inthemoney stock options december 31 2012 following table summarizes stock option exercise activity december 31 2012 total unrecorded deferred compensation cost stock options net forfeitures 26 million expected recognized weightedaverage period 110 years following summary weightedaverage assumptions used blackscholes optionpricing model calculated weightedaverage grantdate fair value stock appreciation rights cashsettled sars granted stock price grant date threeyear gradedvesting term awards provide accelerated vesting employee ceases employment due retirement death disability change control defined sar agreement sars liabilityclassified awards result conway remeasures fair value awards reporting period awards settled vesting period compensation cost recognized based proportionate amount service rendered date conway recognize changes fair value vesting period compensation cost current period ultimate expense recognized sars equal intrinsic value settlement conway’s accrued liability cashsettled sars 36 million 31 million december 31 2012 2011 determined using weightedaverage fair value 743 1085 per sar december 31 2012 2011 respectively following table summarizes sar activity 2012 following table summarizes sar exercise activity december 31 2012 total unrecorded deferred compensation cost sars net forfeitures 02 million expected recognized january 2013 sars become fully vested following summary weightedaverage assumptions used blackscholes optionpricing model grant date calculated weightedaverage fair value 12 commitments contingencies outsourcing contracts conway agreements thirdparty service providers outsource significant portion informationtechnology infrastructure function small portion administrative accounting functions payments terms agreements subject change depending quantities types services consumed contracts also contain provisions allow conway terminate contract time however conway would required pay additional fees termination causes failure service providers perform california wage hour conway defendant several class action lawsuits alleging violations state californias wage hour laws plaintiffs allege conway failed pay certain drivers compensable time certain drivers provided required meal breaks rest breaks plaintiffs seek recover unspecified monetary damages penalties interest attorneys fees two primary cases jorge r quezada v conway inc dba conway freight quezada case jose alberto fonseca pina et al v conway freight inc et al pina case quezada case initially filed february 2009 san mateo county superior court removed us district court california northern district pina case initially filed november 2009 monterey county superior court removed us district court california northern district agreement parties march 2010 pina case quezada case deemed related transferred judge april 12 2012 court granted plaintiffs request class certification pina case limited number issues october 15 2012 court granted plaintiffs request class certification quezada case granted summary judgment certain issues conway denied liability respect claims intends vigorously defend case conway plans appeal class certification summary judgment rulings given nature status claims conway cannot yet determine amount reasonable range potential loss conway defendant various lawsuits incidental businesses opinion management ultimate outcome actions material effect conway’s financial condition results operations cash flows 13 segment reporting conway discloses segment information manner business units organized making operating decisions assessing performance allocating resources periods presented conway divided following four reporting segments • freight segment consists operating results conway freight business unit provides regional interregional transcontinental lessthantruckload freight services throughout north america • logistics segment consists operating results menlo worldwide logistics business unit develops contractlogistics solutions including management complex distribution networks supplychain engineering consulting also provides multimodal freight brokerage services • truckload segment consists operating results conway truckload business unit provides assetbased fulltruckload freight services throughout north america • reporting segment consists operating results road systems trailer manufacturer certain corporate activities related income expense allocated reporting segments financial data management evaluates segment performance primarily based revenue operating income loss accordingly investment income interest expense nonoperating items reported segment results corporate expenses generally allocated based measurable services provided segment general corporate expenses based segment revenue intersegment revenue related operating income loss eliminated reconcile consolidated revenue operating income transactions segments generally based negotiated prices geographic data geographic reporting freight transportation revenues allocated equally origin destination revenues contract services allocated country services performed longlived assets outside united states immaterial periods presented 14 quarterly financial data conway inc quarterly financial data unaudited comparability conways consolidated operating income affected following unusual income expense b comparability conways income tax provision affected following item 9item 8 financial statements supplementary data conway inc consolidated balance sheets accompanying notes consolidated financial statements integral part statements conway inc consolidated balance sheets accompanying notes consolidated financial statements integral part statements conway inc statements consolidated income accompanying notes consolidated financial statements integral part statements accompanying notes consolidated financial statements integral part statements conway inc statements consolidated cash flows accompanying notes consolidated financial statements integral part statements conway inc statements consolidated shareholders equity accompanying notes consolidated financial statements integral part statements conway inc notes consolidated financial statements 1 principal accounting policies organization conway inc consolidated subsidiaries “conway” “company” provide transportation logistics supplychain management services wide range manufacturing industrial retail customers fully discussed note 12 “segment reporting” financial reporting purposes conway divided three reporting segments freight logistics truckload principles consolidation consolidated financial statements include accounts conway subsidiaries significant intercompany accounts transactions eliminated estimates management makes estimates assumptions preparing financial statements conformity accounting principles generally accepted us estimates assumptions affect amounts reported accompanying financial statements notes changes estimates recognized accordance accounting rules estimate typically period new information becomes available estimates underlying assumptions affect amounts assets liabilities reported disclosures contingent assets liabilities reported amounts revenue expenses estimates relate revenuerelated adjustments impairment goodwill longlived assets amortization depreciation income taxes selfinsurance accruals pension plan postretirement obligations contingencies assets liabilities recognized connection acquisitions restructurings dispositions conway evaluates estimates assumptions ongoing basis using historical experience factors including current economic environment estimates assumptions adjusted facts circumstances dictate volatility financial markets changing levels economic activity increase uncertainty inherent estimates assumptions changes estimates resulting continuing changes economic environment reflected financial statements future periods recognition revenue conway freight recognizes revenue reporting periods based relative transit time period recognizes expense incurred estimates future billing adjustments revenue including related weight freightclassification verification pricing discounts recognized time shipment conway truckload recognizes revenue related direct costs shipment delivered menlo worldwide logistics menlo recognizes revenue based service outputs provided customer menlo records revenue gross basis without deducting thirdparty purchased transportation costs transactions acts principal menlo records revenue net basis deducting purchased transportation costs transactions acts agent recognizing revenue services provided performancebased incentive arrangements contingent portion revenue considered fixed determinable performance criteria met certain menlo contracts billings excess revenue recognized recorded unearned revenue unearned revenue recognized contract period services provided december 31 2013 2012 unearned revenue 121 million 169 million reported conway’s consolidated balance sheets within accrued liabilities addition menlo deferred certain recoverable direct incremental costs related setup logistics operations longterm contracts deferred setup costs recognized expense contract term december 31 2013 2012 deferred setup costs 99 million 152 million reported consolidated balance sheets within deferred charges assets cash equivalents marketable securities cash equivalents consist shortterm interestbearing instruments maturities three months less date purchase december 31 2013 2012 cashequivalent investments 4412 million 3783 million consisted primarily commercial paper certificates deposit moneymarket funds conway classifies marketable debt securities availableforsale reports fair value changes fair value availableforsale securities recognized comprehensive income loss unless unrealized loss otherthantemporary loss portion unrealized loss determined temporary portion loss recognized earnings 2013 conway liquidated remaining variablerate demand notes december 31 2012 conway held 32 million variablerate demand notes trade accounts receivable net conway freight conway truckload report accounts receivable net realizable value provide allowance losses probable estimates uncollectible accounts based various judgments assumptions including revenue levels historical loss experience aging outstanding accounts receivable menlo based size nature client base performs periodic evaluation customers’ creditworthiness accounts receivable portfolio recognizes expense uncollectible accounts losses probable reasonably estimable activity allowance uncollectible accounts presented following table estimates billing adjustments including related weight freightclassification verifications pricing discounts also reported reduction accounts receivable activity allowance revenue adjustments presented following table property plant equipment property plant equipment reported historical cost depreciated primarily straightline basis estimated useful lives generally 25 years buildings 4 14 years revenue equipment 3 10 years equipment leasehold improvements assets acquired capital leases amortized shorter terms respective leases useful lives assets resulting expense reported depreciation expense 2212 million 2013 2049 million 2012 1914 million 2011 response recent conditions usedtrailer market conway truckload increased estimated salvage values certain trailers fourth quarter 2013 change decreased depreciation expense 13 million 2013 expected decrease 2014 depreciation expense 73 million expenditures equipment maintenance repairs charged operating expenses incurred betterments capitalized gains losses sales equipment property recorded operating expenses tires maintenance cost replacement tires expensed time tires placed service case repairs maintenance costs cost tires new revenue equipment capitalized depreciated estimated useful life related equipment capitalized software net capitalized software consists certain direct internal external costs associated internaluse software net accumulated amortization capitalized software computed itembyitem basis depending estimated useful life software currently 3 years 7 years amortization expense related capitalized software 72 million 2013 83 million 2012 79 million 2011 accumulated amortization december 31 2013 2012 1587 million 1559 million respectively longlived assets conway performs impairment analysis longlived assets whenever circumstances indicate carrying amount may recoverable assets held used impairment charge recognized estimated undiscounted cash flows associated asset group assets less carrying value impairment exists charge recognized difference carrying value fair value fair values determined using quoted market values discounted cash flows external appraisals applicable assets held disposal carried lower carrying value estimated net realizable value conway’s accounting policies goodwill longlived intangible assets fully discussed note 2 “goodwill intangible assets” book overdrafts book overdrafts represent outstanding drafts yet presented bank excess recorded cash amounts represent bank overdrafts occur drafts presented bank excess cash conway’s bank account would effectively loan conway december 31 2013 2012 book overdrafts 408 million 430 million respectively included accounts payable selfinsurance accruals conway uses combination purchased insurance selfinsurance programs provide costs medical casualty liability vehicular cargo workers’ compensation claims longterm portion selfinsurance accruals relates primarily workers’ compensation vehicular claims expected payable several years conway periodically evaluates level insurance coverage adjusts insurance levels based risk tolerance premium expense measurement classification selfinsured costs requires consideration historical cost experience demographic severity factors judgments current expected levels cost per claim retention levels methods provide estimates undiscounted liability associated claims incurred balance sheet date including estimates claims incurred reported changes assumptions factors materially affect actual costs paid settle claims amounts may different estimates conway participates reinsurance pool reinsure portion workers’ compensation claims company participates pool cedes claims pool assumes equivalent amount claims reinsurance relieve conway liabilities original policy however opinion management potential exposure conway nonpayment minimal december 31 2013 2012 conway recorded liability related assumed claims 592 million 650 million respectively recorded receivable reinsurance pool 381 million 396 million respectively revenue related reinsurance activities reported net associated expenses classified operating expenses connection participation reinsurance pool conway recognized operating income 22 million 2013 operating loss 25 million 2012 operating loss 44 million 2011 foreign currency translation adjustments resulting translating foreign functional currency financial statements us dollars included foreign currency translation adjustment statements consolidated comprehensive income loss transaction gains losses arise exchangerate fluctuations transactions denominated currency functional currency included results operations reported miscellaneous net statements consolidated income conway determined advances certain foreign subsidiaries indefinite nature accordingly corresponding foreign currency translation gains losses related advances included foreign currency translation adjustment statements consolidated comprehensive income loss earnings per share eps basic eps computed dividing reported net income loss weightedaverage common shares outstanding diluted eps calculated follows noncash investing financing activities investing financing activities reported statements consolidated cash flows due noncash nature summarized new accounting standards march 2013 fasb issued asu 201305 parents accounting cumulative translation adjustment upon derecognition certain subsidiaries groups assets within foreign entity investment foreign entity asu codified foreign currency matters topic fasb accounting standards codification resolves differing views practice whether deconsolidation guidance consolidation topic fasb accounting standards codification impacts guidance foreign currency matters topic regard release cumulative translation adjustment earnings asu complete substantially complete liquidation foreign entity required release cumulative translation adjustment transactions occurring within foreign entity however transactions impacting parents investments foreign entity cumulative translation adjustment released earnings manner consistent deconsolidation guidance consolidation topic accounting guidance asu 201305 applied prospectively effective fiscal years interim periods within years beginning december 15 2013 conway believe standard material effect financial statements reclassifications certain amounts priorperiod financial statements reclassified conform currentperiod presentation 2 goodwill intangible assets goodwill following table shows changes gross carrying amounts goodwill attributable applicable segment conway assesses goodwill impairment annual basis fourth quarter frequently events changes circumstances indicate asset might impaired connection annual impairment test fourth quarter 2013 conway concluded goodwill reporting units impaired december 31 2013 intangible assets intangible assets amortized straightline basis estimated useful life amortization expense related intangible assets 24 million 2013 30 million 2012 33 million 2011 intangible assets consisted following conway’s customerrelationship intangible asset relates conway truckload business unit estimated amortization expense next five years presented following table purchaseprice dispute menlo worldwide llc “mw” asserted claims sellers chic logistics mw acquired 2007 alleging inaccurate books records misstatement revenue similar matters related presale financial performance chic logistics 2011 mw sellers entered agreement sellers agreed pay mw 100 million adjustment original purchase price settle dispute mw received full settlement amount 2011 recognized corresponding gain 100 million entire amount goodwill associated chic logistics previously written 3 fairvalue measurements assets liabilities reported fair value classified one following three levels within fairvalue hierarchy level 1 quoted market prices active markets identical assets liabilities level 2 observable marketbased inputs unobservable inputs corroborated market data level 3 unobservable inputs corroborated market data financial assets measured fair value recurring basis following table summarizes valuation financial instruments within fairvalue hierarchy cash equivalents consist shortterm interestbearing instruments primarily commercial paper certificates deposit money market funds maturities three months less date purchase december 31 2012 current marketable securities consisted variablerate demand notes moneymarket funds reflect published net asset value classified level 1 instruments commercial paper certificates deposit variablerate demand notes generally valued using published interest rates instruments similar terms maturities accordingly classified level 2 instruments december 31 2013 weightedaverage remaining maturity cash equivalents less one month based short maturities carrying amount cash equivalents approximates fair value level 3 investments consisted one auctionrate security december 31 2011 valued income approach utilized discounted cash flow model investment sold third quarter 2012 following table summarizes change fair value conways auctionrate security valued using level 3 inputs 4 accrued liabilities accrued liabilities consisted following 5 debt financing arrangements longterm debt consisted following revolving credit facility conway 325 million revolving credit facility matures june 28 2018 2013 conway amended credit facility extend maturity date august 2 2016 june 28 2018 amended facility also includes revised pricing lowers conways cost utilizing facility financial covenants available credit provided conway facility unchanged amendment december 31 2013 cash borrowings outstanding credit facility however 1093 million letters credit outstanding leaving 2157 million available capacity additional letters credit cash borrowings subject compliance financial covenants customary conditions borrowing letters credit outstanding december 31 2013 provided collateral conway’s selfinsurance programs agreement standby letter credit fees equal margin dependent upon conway’s leverage ratio cash borrowings bear interest rate based upon libor lead bank’s base rate case plus margin dependent conway’s leverage ratio credit facility fee ranges 018 035 applied total facility 325 million based conway’s leverage ratio revolving facility guaranteed certain conway’s material domestic subsidiaries contains two financial covenants leverage ratio ii fixedcharge coverage ratio also various restrictive covenants including limitations incurrence liens ii consolidations mergers asset sales iii incurrence additional subsidiary indebtedness credit facilities shortterm borrowings december 31 2013 conway 299 million bank guarantees letters credit overdraft facilities outstanding credit facilities conway shortterm borrowings 16 million 70 million december 31 2013 2012 respectively excluding noninterest bearing borrowings described weightedaverage interest rate shortterm borrowings 55 december 31 2012 shortterm borrowings outstanding december 31 2013 2012 noninterest bearing borrowings 16 million 42 million respectively related credit facility menlo utilizes one logistics contracts borrowings facility related amounts financial institution paid vendors behalf menlo 725 senior notes due 2018 725 senior notes bear interest rate 725 per year payable semiannually january 15 july 15 year conway may redeem 725 senior notes whole part less 30 60days notice redemption price equal greater principal amount redeemed ii sum present values remaining scheduled payments principal interest notes redeemed discounted redemption date semiannual basis rate payable treasury note comparable maturity plus 50 basis points also various restrictive covenants including limitations incurrence liens ii consolidations mergers asset sales including amortization underwriting fees related debt costs interest expense 725 senior notes due 2018 recognized annual effective interest rate 737 holders 725 senior notes right require conway repurchase notes upon occurrence change control ii investmentgrade rating two moody’s standard poor’s fitch ratings repurchase price would equal 101 aggregate principal amount notes repurchased plus accrued unpaid interest 670 senior debentures due 2034 300 million aggregate principal amount senior debentures bear interest rate 670 per year payable semiannually may 1 november 1 year conway may redeem senior debentures whole part less 30 60days notice redemption price equal greater principal amount redeemed ii sum present values remaining scheduled payments principal interest senior debentures redeemed discounted redemption date semiannual basis rate payable treasury note comparable maturity plus 35 basis points senior debentures issued indenture restricts conway’s ability certain exceptions incur debt secured liens including amortization discount interest expense 670 senior debentures due 2034 recognized annual effective interest rate 690 aggregate annual maturities longterm debt next five years ending december 31 06 million 2016 4250 million 2018 following 2018 conway principal payments due 2034 december 31 2013 2012 estimated fair value longterm debt 806 million 817 million respectively periods presented longterm debt classified level 2 instrument fair values estimated using brokerprovided pricing 6 leases conway subsidiaries obligated noncancelable leases certain facilities equipment vehicles certain leases also contain provisions allow conway extend leases various renewal periods certain capitallease agreements conway guarantees residual value tractors end lease term stated amounts residualvalue guarantees included minimum lease payments connection capital leases conway reported 689 million 779 million revenue equipment 390 million 333 million accumulated depreciation consolidated balance sheets december 31 2013 2012 respectively future minimum lease payments initial remaining noncancelable lease terms excess one year december 31 2013 follows remaining unamortized gain resulting past saleleaseback transactions 93 million december 31 2013 reported liabilities deferred credits consolidated balance sheets amortized reduction lease expense 2024 corresponding lease terms expire rental expense operating leases comprised following 7 income taxes income tax provision components provision income taxes follows income taxes provided foreign operations based upon various tax laws rates countries operations conducted components income taxes follows conway’s income tax provision varied amounts calculated applying us statutory income tax rate pretax income shown following reconciliation current deferred income tax balances components deferred tax assets liabilities related following deferred tax assets liabilities consolidated balance sheets classified current noncurrent based related asset liability creating deferred tax deferred taxes related specific asset liability classified based estimated period reversal december 31 2013 conway federal tax loss carryforward 415 million federal tax loss carryforward fully expire 2031 addition federal tax loss carryforward carryforwards including state tax credits foreign taxes creditable federal tax state foreign tax losses may create future benefits resulting benefit future use tax losses including domestic foreign 393 million tax credit carryforwards provide benefit 100 million conway anticipate future state foreign taxable income allow realization full benefits management concluded assets fail meet morelikelythannot threshold realization combined future tax benefits 493 million therefore offset valuation allowance 254 million deferred tax assets management believes likely results future operations generate taxable income sufficient amount type realize deferred tax assets certain capital expenditures made september 9 2010 december 31 2013 eligible bonus depreciation accordance provision us tax law conway deducted substantial portion capital expenditures made 2010 2013 tax years also january 2013 american taxpayer relief act 2012 enacted extended alternativefuel credit 2012 2013 tax years conway recorded discrete benefit 33 million first quarter 2013 recognize effect credit associated 2012 tax year alternativefuel credit 2013 tax year recognized course 2013 deferred taxes provided cumulative undistributed earnings conway’s foreign subsidiaries 299 million december 31 2013 remitted subject withholding us taxes amounts indefinitely reinvested respective foreign subsidiaries’ operations becomes advantageous tax foreign exchange reasons remit earnings determination amount unrecognized deferred income tax liability temporary difference practicable income tax receivables 106 million 66 million included accounts receivable conway’s consolidated balance sheets december 31 2013 2012 respectively uncertain tax positions conway recognizes tax positions financial statements likely position sustained upon examination taxing authority position meets morelikelythannot criteria measured using probabilityweighted approach largest amount tax benefit greater 50 likely realized upon settlement previously recognized tax positions longer meet morelikelythannot recognition threshold derecognized first subsequent financial reporting period threshold longer met 2012 estimate uncertain tax positions decreased 150 million including 53 million accrued interest penalties primarily due lapse statute limitations settlements various taxing authorities fully discussed 2013 estimate decreased 119 million including 35 million accrued interest penalties primarily due lapse statute limitations settlements various taxing authorities fully discussed december 31 2013 2012 conway estimated 65 million 82 million respectively unrecognized tax benefits recognized would change effective tax rate 2013 18 million reversal interest penalties included income tax expense compared 13 million 2012 following summarizes changes unrecognized tax benefits year excluding interest penalties normal course business conway subject examination taxing authorities throughout world result examinations conway maintains ongoing discussions negotiations relating tax matters taxing authorities various jurisdictions conway subject examination federal income taxes tax years 2008 forward 2013 conway entered compliance assurance program “cap” cap designed make audits effective efficient current federal tax return filed approved internal revenue service irs 2012 irs finished field audit 2008 2010 tax years issue emerged resulted increase estimate uncertain tax positions 2012 conway settled issue 2013 payment liability occur 2014 2011 conway settled disputed issue irs arose 2005 2007 audit cycle issue primarily related treatment character certain payments conway made retirees former employees menlo worldwide forwarding inc subsidiaries “mwf” since 2004 sale mwf conway irs agreed settlement recharacterize portion payments capital losses recharacterized portion may deducted may used offset capital gains conway also subject examination state local foreign jurisdictions 2003 2012 conway currently audit many state foreign tax jurisdictions management expects next 12 months reasonably possible total unrecognized tax benefits decrease 18 million decrease primarily due settlement agreements conway expects reach various tax authorities lapses applicable statutes limitations 8 shareholders’ equity accumulated comprehensive loss changes equity except resulting investments owners distributions owners reported statements consolidated comprehensive income loss following summary components accumulated comprehensive loss see note 9 employee benefit plans additional information concerning conways employee benefit plans including amounts reported net periodic benefit expense income 9 employee benefit plans periods presented certain employees conway subsidiaries us covered several retirement benefit plans including defined benefit pension plans defined contribution retirement plans postretirement medical plan defined benefit pension plans conway’s defined benefit pension plans include qualified plans eligible certain beneficial treatment internal revenue code “irc” well nonqualified plans meet irc criteria conway’s qualified defined benefit pension plans collectively “qualified pension plans” consist mostly primary qualified defined benefit pension plan “primary db plan” covers noncontractual employees former employees conway’s continuing operations well former employees discontinued operations conway’s qualified defined benefit pension plans cover former employees discontinued operations conways nonqualified defined benefit pension plans collectively “nonqualified pension plans” consist mostly primary nonqualified supplemental defined benefit pension plan “supplemental db plan” supplemental db plan provides additional benefits certain employees affected irc limitations compensation eligible benefits available qualified primary db plan conways foreign subsidiaries sponsor defined benefit pension plans international defined benefit pension plans excluded disclosures due immateriality benefits result plan amendments previous years additional benefits accrue plans alreadyaccrued benefits adjusted future increases compensation 2012 result actuarial equivalence review conway amended defined benefit pension plans increasing expected benefits paid funded status defined benefit pension plans following table reports changes projected benefit obligation fair value plan assets determination amounts recognized consolidated balance sheets conway’s defined benefit pension plans december 31 amounts included accumulated comprehensive loss yet recognized net periodic benefit expense consist following amounts accumulated comprehensive loss expected recognized components net periodic benefit cost 2014 follows net periodic benefit expense income defined benefit pension plans net periodic benefit expense income amounts recognized comprehensive income loss years ended december 31 includes following expected benefit payments defined benefit pension plans summarized estimates based assumptions future events actual benefit payments may vary estimates plan assets investment policies strategies assets qualified pension plans managed pursuant longterm allocation strategy seeks mitigate plans funded status volatility increasing plans exposure fixedincome investments time strategy developed analyzing variety diversified assetclass combinations conjunction projected liabilities qualified pension plans 2013 plans lowered percentage investments equity securities increased percentage investments fixedincome securities plans current investment strategy achieve mix approximately 69 fixedincome securities 31 investments equity securities end 2014 investments fixedincome securities consist primarily highquality us corporate government debt instruments variety industries target allocations equity securities include 16 us large companies 3 us small companies 12 international companies investments equity securities allocated growth valuestyle investment strategies diversified across industries investment managers plans’ investments fixedincome equity securities consist individual securities held managed separate accounts well commingled investment funds plans investment strategy include meaningful longterm investment allocation cash equivalents however plans cash allocation may rise periodically response timing considerations regarding contributions investments payment benefits eligible plan expenses additionally level cash equivalents may reflect uninvested balance managers allocated portfolio balance “uninvested cash” typically held shortterm fund invests moneymarket instruments including commercial paper liquid shortterm interestbearing instruments plans investment policy allow investment managers use markettiming strategies financial derivative instruments speculative purposes however financial derivative instruments used manage risk achieve stated investment objectives regarding duration yield curve credit equity exposures generally investment managers prohibited short selling trading margin trading commodities warrants options except acquired result purchase another security case options sold part covered position conways investment policies also restrict investment managers accumulating concentrations issuer country industry segment assumption 653 overall expected longterm rate return 2014 developed using asset allocation return risk defined standard deviation correlation expectations return expectations created using longterm historical returns current market expectations inflation interest rates economic growth categories fairvalue measurements plan assets following table summarizes fair value conway’s pension plan assets within fairvalue hierarchy funds publicly traded readily determinable fair values accordingly valued net asset value per share underlying investments funds consist primarily publicly traded securities quoted market prices c publicly traded equity securities valued closing market prices us government securities valued quoted market price corporatedebt instruments generally valued using observable bidask spreads brokerprovided pricing e fair value private real estate fund based fair values underlying assets consist commercial residential properties valued using periodic appraisals fund maintains redemption plan whereby redemption requests must received writing 45 days prior end quarter fund unable satisfy redemption requests partial redemptions may made prorated basis f fair value hedge fund based fair value underlying assets consists individual equities convertible securities futures forward contracts currency forwards swaps highyield debt portfolios options derivative instruments cash valued monthly following table summarizes change fair value level 3 pension assets funding conways funding practice evaluate tax cash position well qualified pension plans funded status determining planned contributions conway estimates contribute 59 million qualified pension plans 2014 however could change based variations interest rates asset returns pension protection act requirements factors defined contribution retirement plans conway’s cost defined contribution retirement plans 553 million 2013 508 million 2012 384 million 2011 fourth quarter 2011 conway reinstated certain contributions defined contribution retirement plans prior levels previously suspended second quarter 2009 part costsavings initiative first quarter 2013 additional contributions implemented employees hired january 1 2010 periods presented conway’s contributions included cash conway common stock january 2009 june 2011 common stock contributions made repurchased common stock also referred treasury stock 2011 conway used 461151 shares treasury stock fund 173 million contributions postretirement medical plan conway sponsors postretirement medical plan provides health benefits certain noncontractual employees least 55 years age least 10 years service “postretirement plan” postretirement plan provide employersubsidized retiree medical benefits employees hired january 1 1993 october 31 2013 conway amended postretirement plan provide set benefit certain retirees least 65 years age effective 2014 accordingly remeasurement performed reducing projected benefit obligation 283 million offsetting priorservice credit 192 million actuarial gain 91 million recognized comprehensive income loss funded status postretirement medical plan following sets forth changes benefit obligation determination amounts recognized consolidated balance sheets postretirement plan december 31 amounts included accumulated comprehensive loss yet recognized net periodic benefit expense consist following amounts accumulated comprehensive loss expected recognized components net periodic benefit cost follows net periodic benefit expense postretirement medical plan net periodic benefit expense amounts recognized comprehensive income loss years ended december 31 includes following expected benefit payments reflect expected future service appropriate summarized estimates based assumptions future events actual benefit payments may vary estimates assumed healthcare cost trend rates used determine benefit obligation follows assumed healthcare cost trends affect amounts recognized conway’s postretirement benefits sensitivity changes assumed healthcare cost trends follows 10 sharebased compensation terms sharebased compensation plans conway grants various types sharebased compensation awards employees directors plans provide awards form nonvested stock also known restricted stock performanceshare plan units pspus stock options stock appreciation rights “sars” conway recognizes expense straightline basis shorter 1 requisite service period stated award 2 period grant date award employee’s retirementeligibility date award contains acceleratedvesting provision awards gradedvesting terms recognize expense straightline basis requisite service period entire award following expense recognized sharebased compensation fair value stock option sar grant estimated using blackscholes optionpricing model considers riskfree interest rate expected award term volatility dividend yield riskfree interest rate determined using us treasury zerocoupon issue remaining term equal expected term award expected term award derived binomial lattice model based historical rate voluntary exercises postvesting terminations volatility expected volatility based historical volatility conway’s common stock recent period equal expected term award board directors authorized issuance 7637432 shares common stock grant stock options nonvested stock sharebased compensation equity plans 3391554 available december 31 2013 nonvested stock awards granted directors prior 2012 generally threeyear gradedvesting terms granted 2012 generally vest one year award date awards granted employees generally vest three years award date nonvested stock awards provide accelerated vesting result change control death disability defined award agreement awards allow prorata vesting award recipient leaves conway due qualifying retirement vesting period shares nonvested stock eligible dividends valued market price conways common stock date award awards eligible dividends valued market price conway’s common stock date award reduced present value dividends received vesting period following table summarizes nonvested stock activity 2013 weightedaverage grantdate fair value per share nonvested stock awards granted employees 2012 2011 3037 3241 respectively weightedaverage grantdate fair value per share nonvested stock awards granted directors 2012 2011 3375 3811 respectively total fair value nonvested stock vested 2013 2012 2011 94 million 110 million 54 million respectively based conway’s closing common stock price vesting date december 31 2013 total unrecorded deferred compensation cost shares nonvested stock net forfeitures 105 million expected recognized weightedaverage period 172 years performanceshare plan units pspus vest three years grant date certain performance criteria achieved number shares award recipients ultimately receive range 0 200 grant target depending achievement relative performance criteria pspus subject forfeiture award recipient ceases active fulltime employee prior end threeyear period subject cases early vesting upon specified events including death disability award recipient termination employment following change control conway awards allow prorata vesting award recipient leaves conway due qualifying retirement vesting period pspus valued market price conways common stock date award reduced present value dividends received threeyear vesting period amount expense recorded period based conways current estimate number shares ultimately vest following table summarizes pspu activity 2013 weightedaverage grantdate fair value per share pspus granted 2012 2967 december 31 2013 total unrecorded deferred compensation cost shares pspus net forfeitures 82 million expected recognized weightedaverage period 178 years stock options stock options granted prices equal market value common stock date grant expire 10 years date grant stock options granted threeyear gradedvesting terms onethird award vests year certain option awards provide accelerated vesting result change control qualifying retirement death disability defined stock option plans following table summarizes stock option activity 2013 aggregate intrinsic value reported table represents total pretax value would received employees directors holders exercised inthemoney stock options december 31 2013 following table summarizes stock option exercise activity december 31 december 31 2013 total unrecorded deferred compensation cost stock options net forfeitures 02 million expected recognized weightedaverage period 075 years following summary weightedaverage assumptions used blackscholes optionpricing model calculated weightedaverage grantdate fair value december 31 stock appreciation rights cashsettled sars granted stock price grant date threeyear gradedvesting term awards provide accelerated vesting employee ceases employment due retirement death disability change control defined sar agreement sars granted 2010 became fully vested january 2013 vesting period compensation cost recognized based proportionate amount service rendered date sars liabilityclassified awards result conway remeasures fair value awards reporting period awards settled conway recognize changes fair value vesting period compensation cost current period ultimate expense recognized sars equal intrinsic value settlement conway’s accrued liability cashsettled sars 43 million 36 million december 31 2013 2012 determined using weightedaverage fair value 1513 743 per sar december 31 2013 2012 respectively following table summarizes sar activity 2013 following table summarizes sar exercise activity december 31 11 commitments contingencies service contracts conway agreements thirdparty service providers provide certain informationtechnology administrative accounting services payments terms agreements subject change depending quantities types services consumed contracts also contain provisions allow conway terminate contract time however conway would required pay fees termination causes failure service providers perform california wage hour conway defendant several classaction lawsuits alleging violations state californias wage hour laws plaintiffs allege conway failed pay certain drivers compensable time certain drivers provided required meal breaks rest breaks plaintiffs seek recover unspecified monetary damages penalties interest attorneys fees two primary cases jorge r quezada v conway inc dba conway freight quezada case jose alberto fonseca pina et al v conway freight inc et al pina case quezada case initially filed february 2009 san mateo county superior court removed us district court california northern district pina case initially filed november 2009 monterey county superior court removed us district court california northern district agreement parties march 2010 pina case quezada case deemed related transferred judge april 12 2012 court granted plaintiffs request class certification pina case limited number issues october 15 2012 court granted plaintiffs request class certification quezada case granted summary judgment certain issues class certification rulings address whether conway ultimately held liable quezada case trial currently scheduled april 2014 conway continues challenge certification class cases contends plaintiffs claims preempted federal law substantiated facts conway denied liability respect claims intends vigorously defend cases multiple factors prevent conway able estimate amount potential loss excess accrued liability may result matter including 1 conway vigorously defending believes number meritorious legal defenses 2 early stage cases unresolved questions fact could important resolution matters accordingly conway cannot estimate amount range potential loss excess accrued liability menlo receivable dispute menlo filed received asset preservation order ningxia high court china april 2013 connection unpaid accounts receivable balance order secures customers assets equivalent unpaid accounts receivable balance following customers failure pay 61 million within agreedupon terms menlo fourth quarter 2012 became less confident ability collect full amount outstanding receivable balance result menlo recorded allowance 23 million fourth quarter 2012 connection action menlo seized coal inventory customer provided two shareholders personal guarantees menlo event customer fails pay unpaid accounts receivable balance selling assets including coal inventory second quarter 2013 new information came menlos attention caused menlo question whether could continue recognize portion outstanding receivable balance including information raised uncertainty regarding menlos ability realize value sale secured assets customer accordingly menlo wrote entire receivable june 2013 proceeds sales customer assets recognized future periods occur unclaimedproperty audits conway currently audited eight states primarily state delaware compliance unclaimedproperty laws property subject review audit process generally includes unclaimed securities unclaimed payments refunds employees vendors customers state federal escheat laws generally require companies report remit unclaimed property states conway believes procedures place comply laws audits conway securities completed third quarter 2013 material findings remaining audits continue 2014 given current stage remaining audits conway cannot estimate amount range potential loss conway defendant various lawsuits incidental businesses opinion management ultimate outcome actions material effect conway’s financial condition results operations cash flows 12 segment reporting conway discloses segment information manner business units organized making operating decisions assessing performance allocating resources periods presented conway divided following three reporting segments • freight segment consists operating results conway freight business unit provides regional interregional transcontinental lessthantruckload freight services throughout north america • logistics segment consists operating results menlo business unit develops contractlogistics solutions including management complex distribution networks supplychain engineering consulting also provides multimodal freightbrokerage services • truckload segment consists operating results conway truckload business unit provides assetbased fulltruckload freight services throughout north america prior years reporting segment consisted operating results conways trailer manufacturer certain corporate activities related income expense allocated reporting segments beginning first quarter 2013 former segment reported corporate eliminations order reconcile segment results consolidated totals years presented reflect change reporting segment structure financial data management evaluates segment performance primarily based revenue operating income loss accordingly investment income interest expense nonoperating items reported segment results corporate expenses generally allocated based measurable services provided segment general corporate expenses based segment revenue beginning first quarter 2013 defined benefit pension plan costs longer allocated corporate reporting segments amount defined benefit pension cost retained corporate eliminations 42 million 2013 prior periods amount defined benefit pension cost allocated corporate three reporting segments 96 million 2012 04 million 2011 intersegment revenue related operating income loss eliminated reconcile consolidated revenue operating income transactions segments generally based negotiated prices geographic data geographic reporting freight transportation revenue allocated equally origin destination revenue contract services allocated country services performed longlived assets outside united states immaterial periods presented 13 quarterly financial data conway inc quarterly financial data unaudited comparability conways consolidated operating income affected following unusual income expense gain 56 million conway corporate second quarter 2013 sale property charge 37 million logistics second quarter 2013 increased reserve international accounts receivable gain 39 million conway freight second quarter 2012 sale excess properties item 9item 8 financial statements supplementary data cnf inc consolidated balance sheets accompanying notes consolidated financial statements integral part statements cnf inc consolidated balance sheets accompanying notes consolidated financial statements integral part statements cnf inc statements consolidated operations accompanying notes consolidated financial statements integral part statements cnf inc statements consolidated cash flows accompanying notes consolidated financial statements integral part statements cnf inc statements consolidated shareholders’ equity accompanying notes consolidated financial statements integral part statements cnf inc notes consolidated financial statements 1 principal accounting policies organization cnf inc subsidiaries provide transportation logistics supply chain management services wide range manufacturing industrial retail customers financial reporting purposes cnf divided three reporting segments conway menlo worldwide cnf conway provides regional nextday secondday transcontinental freight trucking throughout us canada puerto rico mexico well expedited transportation freight forwarding truckload brokerage services menlo worldwide includes operating results logistics vector logistics develops contract logistics solutions including management complex distribution networks supply chain engineering consulting vector serves lead logistics manager gm provides logistics services customers lesser degree cnf reporting segment includes operating results road systems trailer manufacturer certain corporate activities december 2004 cnf completed sale mwf result periods presented results operations net liabilities cash flows forwarding segment segregated reported discontinued operations fully discussed note 2 “discontinued operations” principles consolidation consolidated financial statements include accounts cnf inc subsidiaries “cnf” significant intercompany accounts transactions eliminated recognition revenues freight transportation revenue recognized upon delivery shipment delivery costs accrued incurred shipments transit revenue related delivery costs recognized based estimated percentage service completed balance sheet date estimates future billing adjustments revenue recognized time shipment certain discounts billing corrections revenue logistics contracts recognized accordance contractual terms services provided revenue recorded gross basis without deducting thirdparty purchased transportation costs contracts logistics acts principal substantial risks rewards ownership revenue recorded net basis deducting purchased transportation costs contracts logistics acts agent without substantial risks rewards ownership cash equivalents marketable securities cash equivalents consist shortterm interestbearing instruments maturities three months less date purchase december 31 2005 2004 cashequivalent investments 496800000 287995000 respectively consisted primarily commercial paper certificates deposit carrying amount cashequivalent securities approximates fair value marketable securities consist primarily shortterm availableforsale auctionrate securities variablerate demand notes auctionrate securities variablerate demand notes contractual maturities greater three months date purchase however securities interest dividend rates reset every 7 35 days generally liquidated quickly realized unrealized gains losses auctionrate securities variablerate demand notes material periods presented material differences estimated fair values carrying values securities dates presented trade accounts receivable net cnf subsidiaries report accounts receivable net realizable value provide allowance uncollectible accounts collection considered doubtful conway provides uncollectible accounts based various judgments assumptions including revenue levels historical loss experience composition outstanding accounts receivable logistics based size nature client base performs frequent periodic evaluation customers’ creditworthiness accounts receivable portfolio recognizes expense uncollectible accounts losses probable reasonably estimable trade accounts receivable net allowances 7056000 6616000 december 31 2005 2004 respectively property plant equipment property plant equipment depreciated primarily straightline basis estimated useful lives generally 25 years buildings improvements 5 12 years revenue equipment 3 10 years equipment leasehold improvements amortized shorter terms respective leases useful lives assets expenditures equipment maintenance repairs charged operating expenses incurred betterments capitalized gains losses sales equipment property recorded operating expenses capitalized software capitalized software net consists certain direct internal external costs associated development internaluse software amortization capitalized software computed itembyitem basis period 3 10 years depending estimated useful life software amortization expense related capitalized software 14432000 2005 15259000 2004 15666000 2003 accumulated amortization december 31 2005 2004 85575000 71503000 respectively goodwill longlived assets cnf performs impairment analysis longlived assets whenever circumstances indicate carrying amount may recoverable assets held used impairment charge recognized estimated undiscounted cash flows associated asset group assets less carrying value impairment exists charge recognized difference carrying value fair value fair values determined using quoted market values discounted cash flows external appraisals applicable assets held disposal carried lower carrying value estimated net realizable value prior writedown goodwill described cnf tested recoverability goodwill annual basis fourth quarter annual tests certain circumstances cnf utilized thirdparty valuation consultant perform impairment test goodwill associated forwarding reporting segment december 31 2003 based fairvalue approach based annual impairment test fourth quarter 2003 assumed improving cash flows cnf required record charge goodwill impairment fully discussed note 2 “discontinued operations” cnf committed sell mwf third quarter 2004 recognized 2605 million impairment charge write recorded book value mwf anticipated selling price less costs sell impairment charge based agreement sell mwf represented estimated writedown carrying value mwf’s goodwill longlived assets including mwf’s accumulated foreign currency translation adjustment well estimated selling costs cnf agreed accept less recorded book value mwf due primarily management’s assessment risk resource requirements associated strategic alternatives related mwf’s operations income taxes deferred income taxes provided tax effect temporary differences tax basis assets liabilities reported amounts financial statements cnf uses liability method account income taxes requires deferred taxes recorded statutory rate effect taxes paid december 31 2005 2004 income tax receivables 315 million 266 million respectively included accounts receivable cnf’s consolidated balance sheets selfinsurance accruals cnf uses combination insurance selfinsurance programs provide costs medical casualty liability vehicular cargo workers’ compensation claims measurement costs cnf considers historical claims experience medical costs demographic severity factors assumptions selfinsurance accruals developed based estimated undiscounted cost claims including claims incurred reported balance sheet date longterm portion selfinsurance accruals relates primarily workers’ compensation vehicular claims payable several years actual costs may vary estimates cnf participates reinsurance pool reinsure portion workers’ compensation vehicular liabilities participant pool cedes claims pool assumes equivalent amount claims reinsurance relieve cnf liabilities original policy however opinion management potential exposure cnf nonpayment minimal december 31 2005 2004 cnf recorded liability related assumed claims 187 million 241 million respectively recorded receivable reinsurance pool 140 million 166 million respectively cnf recognized operating income 16 million 2005 operating expense 06 million 41 million 2004 2003 respectively connection participation reinsurance pool foreign currency translation adjustments resulting translating foreign functional currency financial statements us dollars included foreign currency translation adjustment statements consolidated shareholders’ equity transaction gains losses arise exchange rate fluctuations transactions denominated currency local currency included results operations earnings loss per share eps basic eps continuing operations computed dividing reported net income loss continuing operations preferred stock dividends weightedaverage common shares outstanding diluted eps calculated follows 2004 diluted shares reflect effect cnf’s redemption june 2004 convertible subordinated debentures derivative instruments hedging activities cnf exposed variety market risks including effects interest rates commodity prices foreign currency exchange rates cnf enters derivative financial instruments circumstances warrant hedge underlying asset liability future cash flow exposure related risk additionally designated hedges high correlation underlying exposure fluctuations value derivatives offset reciprocal changes underlying exposure fully discussed note 5 “debt financing arrangements” cnf december 2002 terminated four interest rate swap derivatives designated fair value hedges fixedrate longterm debt except effect terminated interest rate swaps derivative financial instruments material effect cnf’s financial condition results operations cash flows stockbased compensation described note 10 “stockbased compensation” employees nonemployee directors granted options cnf’s stock option plans purchase common stock cnf prices equal market value stock date grant cnf accounts stockbased compensation utilizing intrinsic value method accordance provisions accounting principles board opinion 25 “accounting stock issued employees” “apb 25” accordingly compensation expense recognized fixedoption plans exercise prices employee stock options equal market prices underlying stock dates grant table sets forth effect net income loss earnings loss per share cnf applied fairvalue based method recognition provisions sfas 123 “accounting stockbased compensation” stockbased compensation purposes proforma disclosure value options estimated using blackscholes option pricing model amortized ratably vesting periods actual value ultimately realized employee may significantly different estimated value determined grant date new accounting standards december 2004 fasb issued sfas 123r “sharebased payment” “sfas 123r” revision sfas 123 supersedes apb 25 related implementation guidance sfas 123r eliminates alternative use apb 25’s intrinsic value method accounting provided sfas 123 originally issued requires companies recognize cost employee services received exchange awards equity instruments based grantdate fair value awards limited exceptions period employee required provide service exchange award sfas 123r also amends fasb statement 95 “statement cash flows” require benefits associated tax deductions excess recognized compensation cost reported financing cash flows rather reduction taxes paid requirement reduce net operating cash flows increase net financing cash flows periods effective date effective date sfas 123r beginning first interim annual reporting period first fiscal year beginning june 15 2005 cnf first quarter 2006 adoption sfas 123r cnf concluded continue use blackscholes model estimating fair value stock options granted apply modified prospective transition method past sharebased awards outstanding unvested effective adoption date january 1 2006 modified prospective transition method cnf recognize associated expense remaining vesting period based fair values previously determined disclosed part proforma disclosures presented estimated annual compensation expense related unvested stock options 2006 approximately 007 per diluted common share however calculation total compensation expense sharebased awards effective date sfas 123r cannot known time affected number future shares awarded may different calculation proforma compensation expense sfas 123 presented table estimates management makes estimates assumptions preparing financial statements conformity accounting principles generally accepted us estimates assumptions affect amounts reported accompanying financial statements notes changes estimates recognized accordance accounting rules estimate typically period new information becomes available reasonably possible actual results could materially differ estimates including related accounts receivable allowances impairment goodwill longlived assets depreciation income tax liabilities selfinsurance accruals pension plan obligations contingencies assets liabilities recognized connection restructurings dispositions reclassification revisions certain amounts priorperiod financial statements reclassified revised conform currentperiod presentation 2005 periods presented cnf separately disclosed operating investing financing portions cash flows attributable discontinued operations prior periods reported single amount 2005 periods presented cnf reclassified certain costs selling general administrative expenses operating expenses 2004 2003 costs 605 million 568 million reported prior periods selling general administrative expenses appropriately classified accompanying financial statements operating expenses 2005 classification variablerate demand notes 2004 financial statements revised conform currentperiod presentation previously investments variablerate demand notes recorded cash equivalents rather marketable securities based provisions allowed cnf quickly liquidate securities however based remaining contractual maturities exceed three months cnf 2005 classified investments shortterm marketable securities cnf’s consolidated balance sheets december 31 2005 813 million variablerate demand notes classified shortterm marketable securities december 31 2004 revised classification securities decreased cash equivalents 400 million increased marketable securities equal amount cnf’s consolidated cash flows 2004 revised classification increased net cash used investing activities 400 million 2003 affected 2 discontinued operations discontinued operations periods presented relate sale mwf shutdown ewa terminated priority mail contract us postal service “usps” spinoff consolidated freightways corporation “cfc” results operations net liabilities cash flows discontinued operations segregated continuing operations except otherwise noted required eitf 8724 “allocation interest discontinued operations” periods prior disposition mwf 2004 continuing operations allocated general corporate overhead charges previously allocated discontinued forwarding segment corporate overhead charges 169 million 2004 140 million 2003 allocated discontinued operations conway logistics based segment revenue capital employed results discontinued operations summarized assets liabilities discontinued operations presented consolidated balance sheets captions “assets liabilities discontinued operations” consisted following impairment charge october 5 2004 cnf menlo worldwide llc “mw” entered stock purchase agreement ups sell issued outstanding capital stock mwf cnf completed sale december 19 2004 fully discussed although stock purchase agreement entered october 5 2004 decisions cnf’s management board directors thirdquarter sale negotiations ups established cnf’s commitment sell mwf september 30 2004 process evaluating several strategic alternatives menlo worldwide’s forwarding segment cnf approached ups third quarter 2004 interest acquiring mwf accordingly third quarter 2004 cnf classified mwf held sale recognized 2605 million impairment charge write recorded book value mwf anticipated selling price less costs sell impairment charge based agreement sell mwf described primarily represents estimated writedown fair value mwf’s goodwill longlived assets including mwf’s accumulated foreign currency translation adjustment well estimated selling costs stock purchase agreement stock purchase agreement excludes certain assets liabilities mwf includes certain assets liabilities cnf subsidiaries related business conducted mwf among assets liabilities excluded related ewa obligation related mwf employees covered cnf’s domestic pension postretirement medical longterm disability plans agreement ups agreed pay cnf amount equal mwf’s cash position december 31 2004 pay estimated present value cnf’s retained obligations related mwf employees covered cnf’s longterm disability postretirement medical plans agreed parties stock purchase agreement cnf agreed threeyear noncompete covenant subject certain exceptions limit cnf’s annual air freight ocean forwarding andor customs brokerage revenues 175 million cnf’s 2007 fiscal year cnf also agreed indemnify ups certain losses ups may incur closing sale certain limitations losses related indemnification obligations costs including future cash expenditures related sale estimated recognized time recognized future periods additional loss disposal incurred disposition mwf upon completion sale mwf december 19 2004 cnf received cash consideration 150 million subject certain postclosing adjustments including adjustments cash held mwf closing mwf’s net working capital closing connection sale cnf 2004 recognized fourthquarter loss disposal 158 million net 36 million tax benefit adjusted carrying value mwf exceeded cash consideration including amounts received closing expected received future thirdquarter impairment charge fourthquarter loss disposal resulted total salerelated charges 2763 million 2004 following settlement mwf cash balance march 2005 cnf received cash 294 million recognized additional firstquarter net loss disposal 98 million primarily recognize difference actual cash received cnf’s estimate cash position december 31 2004 accrue additional estimated transaction costs remainder 2005 cnf reported 110 million net gain additional adjustments estimated disposition loss including 90 million thirdquarter net gain recognize increase estimate deferred tax assets associated employee benefit obligations retained cnf fully discussed “ excluded assets liabilities” cnf’s disposal mwf generated capital loss tax purposes current tax law capital losses used offset capital gains since cnf forecast significant taxable capital gains fiveyear tax carryforward period 408 million cumulative disposalrelated tax benefit december 31 2004 fully offset valuation allowance equal amount 2005 cumulative disposalrelated tax benefit associated valuation allowance declined 300 million december 31 2005 due primarily thirdquarter salerelated proceeds received ups revisions tax effect salerelated estimates partially offset firstquarter disposalrelated capital loss excluded assets liabilities described stock purchase agreement excludes cnf retained obligations related mwf employees covered certain cnfsponsored employee benefit plans including domestic pension postretirement medical longterm disability plans cover noncontractual employees former employees continuing operations well discontinued forwarding segment collectively “cnf benefit plans” stock purchase agreement ups agreed pay cnf estimated present value cnf’s retained obligations related mwf employees covered cnf’s longterm disability postretirement medical plans “reimbursable plans” accordingly cnf december 2004 recorded accounts receivable estimate present value retained obligations reimbursable plans agreement reached august 2005 ups paid 790 million cnf agreedupon estimated present value retained obligations reimbursable plans carrying value obligations december 31 2005 substantially equal cash reimbursement ups present value estimated thirdparty actuary cnf’s annual november 30 actuarial measurement date based cnf’s intention retain obligation related employees mwf ewa covered cnf benefit plans obligation included employee benefits continuing operations cnf’s consolidated balance sheets december 31 2005 2004 stock purchase agreement also excludes cnf retained net prepaid benefit cost related certain pension plans cover former employees discontinued forwarding segment “forwarding plans” cnf’s consolidated balance sheets prepaid benefit cost related forwarding plans reported assets discontinued operations december 31 2004 based cnf’s decision retain obligations completion salerelated adjustments 2005 reclassified employee benefits continuing operations december 31 2005 future changes carrying value retained obligations cnf benefit plans prepaid benefit cost forwarding plans recognized future periods income loss continuing operations ewa results ewa relate cessation aircarrier operations 2001 termination priority mail contract usps 2000 2005 ewa recognized net losses 90 million due primarily increases estimated exposure litigation restructuringrelated obligations ewa’s estimated loss reserves increased 341 million december 31 2005 338 million december 31 2004 due primarily losses described partially offset cash settlement restructuringrelated obligations ewa’s remaining loss reserves december 31 2005 reported liabilities discontinued operations consisted mostly cnf’s estimated exposure related labor matters described litigationrelated losses fully discussed note 11 “commitments contingencies” connection cessation aircarrier operations 2001 ewa terminated employment pilots crew members pilots crew members represented air line pilots association “alpa” union collective bargaining agreement subsequently alpa filed grievance behalf pilots crew members protesting cessation ewa’s aircarrier operations mwf’s use air carriers alpa matters subject litigation us district court depending outcome litigation may subject binding arbitration based cnf’s current evaluation management believes provided estimated exposure related alpa matters however assurance regard cnf cannot predict certainty ultimate outcome matters 3 investment unconsolidated joint venture vector joint venture formed gm december 2000 purpose providing logistics management services global basis gm customers addition gm although mw owns majority interest vector mw’s portion vector’s operating results reported menlo worldwide reporting segment equitymethod investment based gm’s ability control certain operating decisions vector organized limited liability company elected taxed partnership us joint venture partners responsible income taxes applicable share vector’s us federal taxable income accordingly mw’s portion us federal income taxes vector’s domestic income reported cnf’s tax provision cnf’s foreign tax credits related vector’s foreign income also reflected cnf’s tax provision foreign tax jurisdictions vector rather joint venture partners responsible income taxes foreign income accordance gaap mw’s portion vector’s income taxes foreign income reported operating income component equitymethod income rather cnf’s tax provision mw’s portion vector’s net income reported reduction operating expenses accompanying statements consolidated operations include provision us federal income taxes income earned cnf include 42 million provision 2005 mw’s portion vector’s income taxes foreign income mw’s undistributed earnings vector december 31 2005 2004 provision cnf’s related parent income taxes 236 million 272 million respectively vector participates cnf’s centralized cash management system consequently vector’s domestic trade accounts payable paid cnf settled vector’s affiliate accounts cnf addition excess cash balances vector’s bank accounts invested cnf settled affiliate accounts earn interest income based rate earned cnf’s cashequivalent investments marketable securities result vector’s excess cash invested cnf’s payable vector december 31 2005 2004 220 million 155 million respectively required vector agreements cnf provides vector line credit vector’s working capital expenditure requirements credit facility vector may obtain loans annual interest rate based rate cnf pays 400 million revolving credit facility maturity december 13 2005 20 million line credit replaced 10 million line credit matures december 13 2008 december 31 2005 cnf provided portion 10 million credit commitment vector cnf’s guarantee 18 million uncommitted local currency overdraft facilities available vector international banks december 31 2005 2004 balance outstanding vector’s uncommitted local currency overdraft facilities borrowings directly payable cnf 2005 2004 vector approved cash distributions gm mw vector’s affiliate receivable cnf mw’s undistributed earnings vector december 31 2005 2004 reduced mw’s share distributions 197 million 2005 137 million 2004 cnf’s capital transactions vector including cash advances vector cnf’s centralized cash management system credit facility described reported adjustments mw’s investment vector deferred charges assets cnf’s consolidated balance sheets 4 accrued liabilities accrued liabilities consisted following 5 debt financing arrangements longterm debt guarantees consisted following revolving credit facility cnf 400 million revolving credit facility matures march 11 2010 400 million revolving facility cnf entered march 2005 replaced 385 million revolving credit facility revolving credit facility available cash borrowings issuance letters credit 400 million december 31 2005 2004 borrowings outstanding cnf’s revolving credit facility december 31 2005 2151 million letters credit outstanding leaving 1849 million available capacity additional letters credit cash borrowings subject compliance financial covenants customary conditions borrowing total letters credit outstanding december 31 2005 provided collateral cnf’s selfinsurance programs borrowings agreement bear interest rate based upon lead bank’s base rate eurodollar rate plus margin dependent either cnf’s senior debt credit ratings ratio “net debt” ie indebtedness net cash equivalents certain marketable securities earnings interest taxes depreciationamortization credit facility fee ranges 010 025 applied total facility 400 million based cnf’s current credit ratings revolving facility guaranteed certain cnf’s material domestic subsidiaries contains two financial covenants leverage ratio ii fixedcharge coverage ratio also various restrictive covenants including limitations incurrence liens ii consolidations mergers asset sales iii incurrence additional subsidiary indebtedness uncommitted credit facilities cnf uncommitted unsecured credit facilities totaling 350 million december 31 2005 available support letters credit bank guarantees overdraft facilities date total 157 million letters credit outstanding facilities senior debentures due 2034 senior debentures bear interest rate 670 per year payable semiannually may 1 november 1 year cnf may redeem senior debentures whole part less 30 60 days’ notice redemption price equal greater 1 principal amount redeemed 2 sum present values remaining scheduled payments principal interest senior debentures redeemed discounted redemption date semiannual basis treasury rate payable equivalent debenture plus 35 basis points senior debentures issued indenture restricts cnf’s ability certain exceptions incur debt secured liens including amortization discount recognized upon issuance interest expense 670 senior debentures due 2034 recognized annual effective interest rate 690 thrift stock plan notes cnf guarantees notes issued cnf’s thrift stock plan “tasp” december 31 2005 150 million aggregate principal amount series tasp notes outstanding bearing interest annual rate 600 maturing january 1 2006 620 million aggregate principal amount series b tasp notes outstanding bearing interest annual rate 854 maturing january 1 2009 january 3 2006 remaining 150 million series tasp notes repaid holders series b notes issued cnf’s tasp right require cnf repurchase notes among things moody’s standard poor’s publicly rated cnf’s longterm senior debt less investment grade unless within 45 days cnf shall obtained guarantee letter credit permitted credit enhancement otherwise credit rating notes least “a” moody’s standard poor’s another nationally recognized rating agency selected holders notes shall maintain rating notes “a” better thereafter december 31 2005 cnf’s senior unsecured debt rated investment grade moody’s baa3 standard poor’s bbb february 1 2006 standard poor’s raised cnf’s senior unsecured debt rating “bbb” “bbb” 878 notes due 2010 200 million aggregate principal amount 878 notes contain certain covenants limiting incurrence additional liens prior termination december 2002 cnf designated four interest rate swap derivatives fair value hedges mitigate effects interest rate volatility fair value cnf’s 878 notes accordingly december 2002 changes value interest rate swap derivatives recognized earnings offset changes fair value hedged fixedrate debt termination date 398 million estimated fair value fair value hedges offset equal increase carrying amount hedged fixedrate longterm debt 398 million cumulative adjustment carrying amount 878 notes accreted future earnings effective interest rate debt extinguished time unamortized fairvalue adjustment would fully recognized earnings absent terminated fair value hedges 878 notes cease adjusted fluctuations fair value attributable changes interest rate risk including accretion fairvalue adjustment amortization discount recognized upon issuance interest expense 878 notes due 2010 recognized annual effective interest rate 56 mortgage note payable conway’s mortgage note payable due 2008 secured real property 735 notes cnf used portion proceeds senior debentures repay 100 million 735 notes maturity june 1 2005 cnf’s consolidated interest expense presented statements consolidated operations net capitalized interest 136000 2005 173000 2004 241000 2003 aggregate annual maturities sinking fund requirements longterm debt guarantees next five years ending december 31 15033000 2006 18635000 2007 22704000 2008 22700000 2009 200000000 2010 december 31 2005 2004 estimated fair value longterm debt 630 million 760 million respectively fair values estimated based current rates offered debt similar terms maturities 6 leases cnf subsidiaries obligated noncancelable operating leases certain facilities equipment vehicles future minimum lease payments initial remaining noncancelable lease terms excess one year december 31 2005 follows certain leases contain restrictive covenants including limitation incurrence additional indebtedness requirement specified levels consolidated net worth certain leases also contain provisions allow cnf extend leases various renewal periods certain operating leases conway guarantees residual value tractors trailers end lease term december 31 2005 residual value guaranteed lease agreements 41 million cnf recognizes liability shortfall residual value guarantee equipment’s fair value fluctuates depending market conditions rental expense operating leases comprised following 7 income taxes components provision income taxes follows income taxes provided foreign operations based upon various tax laws rates countries operations conducted income tax provision varied amounts calculated applying us statutory income tax rate pretax income set forth following reconciliation 2005 cnf entered settlement agreement irs pursuant parties settled various issues related audit years 1999 2001 cnf reversed tax provision related tax liabilities previously recognized issues resulting 78 million tax benefit 2005 components deferred tax assets liabilities related following deferred tax assets liabilities consolidated balance sheets classified based related asset liability creating deferred tax deferred taxes related specific asset liability classified based estimated period reversal although realization assured deferred tax assets recognized management believes likely realized deferred tax assets reduced valuation allowance based available evidence likely deferred tax assets realized fully discussed note 2 “discontinued operations” cnf’s disposal mwf generated capital loss tax purposes current tax law capital losses used offset capital gains since cnf forecast significant taxable capital gains fiveyear tax carryforward period 408 million cumulative disposalrelated tax benefit december 31 2004 fully offset valuation allowance equal amount 2005 cumulative disposalrelated tax benefit associated valuation allowance declined 300 million december 31 2005 due primarily thirdquarter salerelated proceeds received ups revisions tax effect salerelated estimates partially offset firstquarter disposalrelated capital loss cnf operating loss tax credit carryforwards available reduce state foreign income taxes future years december 31 2005 cnf provided 63 million valuation allowance based current uncertainty whether cnf generate sufficient state foreign taxable income fully utilize tax credits operating losses cumulative undistributed earnings cnf’s foreign subsidiaries approximately 228 million december 31 2005 remitted subject withholding tax indefinitely reinvested respective foreign subsidiaries’ operations unless becomes advantageous tax foreign exchange reasons remit earnings therefore withholding us taxes provided amount withholding tax would payable remittance undistributed earnings would approximate 11 million 8 shareholders’ equity series b preferred stock 1989 board directors designated series 1100000 preferred shares series b cumulative convertible preferred stock 01 stated value held cnf thrift stock plan “tasp” series b preferred stock convertible common stock described note 9 “benefit plans” rate 471 shares share preferred stock subject antidilution adjustments certain circumstances ranks senior cnf’s common stock holders series b preferred stock entitled vote common stock entitled number votes circumstances equal product 13 multiplied b number shares common stock series b preferred stock convertible record date vote holders series b preferred stock also entitled vote separately class certain matters tasp trustee required vote allocated shares based upon instructions participants unallocated shares voted proportion voting instructions received participants allocated shares accumulated comprehensive income loss cnf reports changes equity except resulting investment owners distribution owners comprehensive income loss statements consolidated shareholders’ equity following summary components accumulated comprehensive loss common stock repurchase program january 2005 cnf’s board directors authorized twoyear stock repurchase program providing repurchase 300 million common stock open market purchases privately negotiated transactions december 31 2005 cnf repurchased total 3055000 shares cost 1491 million cnf generally expects remaining purchases made ratably throughout remainder program 9 benefit plans employees cnf subsidiaries us covered several defined benefit pension plans postretirement medical plan “postretirement plan” pension plans consist plan covers noncontractual employees former employees continuing discontinued operations “retirement plan” certain pension plans cover former employees discontinued forwarding segment “forwarding plans” fully discussed note 2 “discontinued operations” cnf completed sale mwf december 2004 retained obligations related mwf employees covered retirement plan postretirement plan well net prepaid benefit cost related forwarding plans connection sale mwf benefits curtailed certain former employees covered retirement plan postretirement plan accordingly effects curtailment material reported presentations retirement plan benefits retirement plan generally based employee’s five highest consecutive amounts annual compensation earned ten years immediately prior retirement cnf’s annual pension expense contributions based actuarial computations actuarial plan measurement date november year cnf’s funding policy evaluate tax cash position retirement plan’s funded status maximize tax deductibility contributions year cnf currently estimates contribute 75 million retirement plan 2006 subject variation based changes interest rates asset returns assets retirement plan managed longterm strategic allocation targets developed analyzing variety diversified asset class combinations conjunction projected liability costs liability duration retirement plan asset allocation studies generally conducted every 3 5 years targets reviewed determine adjustments required allocation percentages established portfolio periodically rebalanced targets retirement plan seeks mitigate investment risk investing across within asset classes retirement plan use market timing strategies currently use financial derivative instruments manage risk except described generally retirement plan’s investment managers prohibited short selling trading margin trading warrants options except acquired result purchase another security case options sold part covered position retirement plan prohibited trading commodities may trade financial futures options specifically approved cnf’s benefits administrative committee designated representative retirement plan’s assumption 85 overall expected longterm rate return 2006 developed using return risk defined standard deviation correlation expectations return expectations created using longterm historical returns current market expectations forecasts inflation interest rates economic growth weightedaverage asset allocations retirement plan follows cnf’s consolidated balance sheets obligation related employees mwf ewa covered retirement plan included employee benefits continuing operations december 31 2005 2004 based cnf’s intention retain plan following sale mwf cnf’s statements consolidated operations benefit expense associated employees covered retirement plan reported continuing operations except estimated portion benefit expense relates employees mwf ewa reported discontinued operations however future changes carrying value obligation related retirement plan recognized future periods income loss continuing operations following sets forth changes projected benefit obligation determination prepaid accrued benefit cost cnf retirement plan december 31 net periodic pension expense years ended december 31 includes following presentation benefit expense related discontinued operations immaterial 2005 10662000 11213000 2004 2003 respectively expected benefit payments reflect expected future service appropriate summarized estimates based assumptions future events actual benefit payments may vary estimates forwarding plans described forwarding plans include employees discontinued forwarding segment cessation ewa’s operations 2001 sale mwf 2004 resulted partial termination forwarding plans result participants became fully vested additional benefits accrue plans december 31 2005 2004 projected benefit obligation related forwarding plans 53563000 50244000 respectively prepaid benefit cost 19557000 18697000 respectively prepaid benefit cost related forwarding plans reported assets discontinued operations december 31 2004 based cnf’s decision retain obligations completion salerelated adjustments 2005 reclassified employee benefits continuing operations december 31 2005 cnf’s statements consolidated operations immaterial benefit expense associated forwarding plans reported discontinued operations however future changes carrying value prepaid benefit cost related forwarding plans recognized future periods income loss continuing operations supplemental pension plan cnf also unfunded nonqualified supplemental retirement program “supplemental pension plan” provides additional benefits compensation excluded basic retirement plan benefit expense programs based actuarial computations using assumptions consistent retirement plan december 31 2005 2004 projected benefit obligation related supplemental pension plan 67161000 56926000 respectively accrued benefit cost reported employee benefits consolidated balance sheets 35337000 32704000 respectively like retirement plan postretirement plan supplemental pension plan covers employees former employees continuing discontinued operations cnf’s consolidated statements operations benefit expense supplemental pension plan relates employees continuing operations 5819000 2005 5736000 2004 4701000 2003 benefit expense 693000 928000 766000 2005 2004 2003 respectively relates employees discontinued operations segregated discontinued operations minimum pension liability adjustment certain pension plans accumulated benefit obligation exceeded fair value related plan assets actuarial measurement dates 2005 2004 accordingly cnf recorded minimum pension liability adjustments accumulated comprehensive loss shareholders’ equity recognize shortfall fair value assets accumulated benefit obligation plans december 31 2005 2004 due primarily remeasurement accumulated benefit obligation lower discount rate 2005 netoftax accumulated additional minimum pension liability adjustment increased 21495000 cnf’s consolidated balance sheets included following accumulated minimum pension liability adjustments postretirement medical plan cnf’s postretirement plan provides benefits certain noncontractual employees least 55 years age 10 years service postretirement plan limits benefits participants eligible retire january 1 1993 defined dollar amount based age years service provide employersubsidized retiree medical benefits employees hired january 1 1993 following sets forth changes projected benefit obligation determination accrued benefit cost postretirement plan december 31 net periodic benefit expense years ended december 31 includes following presentation benefit expense 4331000 3602000 3804000 2005 2004 2003 respectively relates discontinued operations described amounts segregated discontinued operations cnf’s consolidated statements operations expected benefit payments reflect expected future service appropriate summarized estimates based assumptions future events actual benefit payments may vary estimates assumed health care cost trend rates used determine projected benefit obligation postretirement plan follows assumed health care cost trends significant effect amounts reported cnf’s postretirement benefits onepercentagepoint change assumed health care cost trend rates would change aggregate service interest cost approximately 400000 accumulated projected benefit obligation approximately 7000000 thrift stock plan cnf sponsors cnf thrift stock plan “tasp” voluntary defined contribution plan leveraged esop feature noncontractual us employees 1989 tasp borrowed 150000000 purchase 986259 shares cnf’s series b cumulative convertible preferred stock issuable tasp trustee cnf contributes common preferred stock tasp equal 50 participant contributions 15 tasp participant’s base compensation cnf recognized expense 13840000 2005 12576000 2004 11277000 2003 matching contributions series b preferred stock earns dividend 1293 per share used repay tasp debt shortfall paid cash cnf dividends preferred shares deductible income tax purposes accordingly reflected net tax benefits statements consolidated operations allocation preferred stock participants’ accounts based upon ratio current year’s principal interest payments total tasp debt since cnf guarantees debt reflected longterm debt guarantees consolidated balance sheets tasp guarantees reduced principal paid share preferred stock convertible common stock upon employee ceasing participation plan upon election employee rate generally equal number shares common stock could purchased 15210 less minimum conversion rate 471 shares common stock share series b preferred stock deferred compensation expense recognized preferred shares allocated participants equivalent cost preferred shares allocated deferred compensation expense 8489000 8570000 8036000 recognized 2005 2004 2003 respectively december 31 2005 tasp owned 641359 shares series b preferred stock 377762 shares allocated employees december 31 2005 estimated fair value 263597 unallocated shares 69360000 december 31 2005 cnf reserved authorized unissued common stock adequate satisfy conversion feature series b preferred stock compensation plans cnf subsidiaries adopted various plans relating achievement specific goals provide incentive compensation designated employees total compensation earned salaried participants plans 38793000 2005 57515000 2004 23445000 2003 hourly participants 29815000 2005 44806000 2004 21847000 2003 10 stockbased compensation stock options officers nonemployee directors granted options cnf’s stock option plans purchase common stock cnf prices equal market value stock date grant stock option grants generally vest ratably one four years grant date generally expire 10 years dates grant cnf accounts stockbased compensation utilizing intrinsicvalue method accordance provisions accounting principles board opinion 25 “accounting stock issued employees” rather fairvalue provisions sfas 123 “accounting stockbased compensation” refer note 1 “principal accounting policies stockbased compensation” presentation pro forma net income loss earnings loss per share sfas 123 well description effect adoption sfas 123r “sharebased payment” effective january 1 2006 fair value option grant estimated using blackscholes option pricing model following summary weightedaverage assumptions used calculated weightedaverage fair value following summary stock option data following summary stock options outstanding exercisable december 31 2005 restricted stock terms cnf’s stockbased compensation plans unvested shares cnf’s common stock awarded selected executive officers awarded annually directors shares generally vest ratably one four years grant date shares valued market price cnf’s common stock date award table summarizes information restricted stock awards years ended december 31 compensation expense recognized restricted stock 2031000 2005 4675000 2004 1340000 2003 2004 compensation expense included 1431000 shares vested upon achievement certain performance criteria december 31 2005 restricted stock awards outstanding vest upon completion service period performance criteria therefore accounted grantdate fixedprice accounting december 31 2005 cnf 3599838 common shares available grant stock options restricted stock stockbased compensation 11 commitments contingencies spinoff cfc december 2 1996 cnf completed spinoff consolidated freightways corporation “cfc” cnf’s shareholders cfc time spinoff party certain multiemployer pension plans covering current former employees cessation us operations 2002 resulted cfc’s “complete withdrawal” within meaning applicable federal law multiemployer plans point became obligated federal law pay share unfunded vested benefits plans possible trustees cfc’s multiemployer pension plans may assert claims cnf liable amounts owing plans result cfc’s withdrawal plans assurance claims would material cnf received requests information regarding spinoff cfc representatives pension funds accordance federal law cnf responded requests cnf believes would ultimately prevail claims made although assurance regard cnf believes amount claims asserted could material judgment cnf significant part claims could material adverse effect cnf’s financial condition results operations cash flows prior enactment april 2004 pension funding equity act 2004 multiemployer funds asserted claims cnf would statutory obligation make cash payments funds prior arbitral judicial decisions funds’ determinations facts related cfc withdrawals law effect enactment pension funding equity act 2004 cnf would longer required make payments multiemployer funds unless final decisions arbitration proceedings court upheld funds’ determinations result matters discussed cnf provide assurance matters relating spinoff cfc material adverse effect cnf’s financial condition results operations cash flows purchase commitments december 31 2005 conway obligated purchase commitments acquire 181 million revenue equipment delivery 2006 subsequent december 31 2005 conway entered additional agreements acquire 918 million revenue equipment also delivered 2006 february 2002 lawsuit filed ewa district court southern district ohio alleging violations worker adjustment retraining notification act “warn act” connection employee layoffs ultimate terminations due august 2001 grounding ewa’s airline operations shutdown airline operations december 2001 court subsequently certified lawsuit class action behalf affected employees laid august 11 august 15 2001 warn act generally requires employers give 60days notice 60days pay benefits lieu notice shutdown operations mass layoff site employment estimated range potential loss matter zero approximately 8 million cnf intends continue vigorously defend lawsuit september 2003 cnf received notice us attorney’s office district columbia ewa considered possible civil action false claims act allegedly submitting false invoices usps payment priority mail contract ewa subsequently entered tolling agreement government order give parties time investigate allegations november 2004 cnf representatives met government discuss government’s allegations time received certain information relating government’s investigation addition cnf behalf ewa conducted investigation allegations false claims act government would entitled recover treble damages plus penalties court ultimately conclude ewa knowingly submitted false invoices usps based cnf’s current evaluation management believes provided estimated exposure related allegations however assurance regard cnf cannot predict certainty outcome matter cnf defendant various lawsuits incidental businesses opinion management ultimate outcome actions material impact cnf’s financial condition results operations cash flows 12 segment reporting cnf discloses segment information manner components organized making operating decisions assessing performance allocating resources refer note 1 “principal accounting policies organization” description cnf’s reportable segments december 2004 cnf sold mwf result periods presented results operations net liabilities cash flows mwf segregated discontinued operations excluded reporting segment financial data summarized prior reclassification combined operating results mwf portion operations ewa reported continuing operations forwarding segment required accounting rules continuing operations allocated certain corporate overhead charges previously allocated discontinued forwarding segment fully discussed note 2 “discontinued operations” accordingly reporting segment financial information presented reflects reclassifications periods presented april 2005 conway logistics integrated logistics result periods presented operating results conway logistics reclassified conform currentperiod presentation financial data management evaluates segment performance primarily based revenue operating income loss except vector evaluated based mw’s proportionate share vector’s income taxes accordingly interest expense investment income nonoperating items reported segment results corporate expenses generally allocated based measurable services provided segment general corporate expenses based segment revenue capital employed identifiable corporate assets consist primarily cash equivalents deferred charges assets property equipment deferred taxes certain corporate assets used provide shared data processing administrative services allocated individual segments intersegment revenue related operating income eliminated reconcile consolidated revenue operating income transactions within segments generally made cost exception intersegment revenue cnf intended reflect fair value trailers manufactured road systems sold conway geographic data geographic reporting approximately 50 percent freight transportation revenues allocated origin destination service centers revenues contract services allocated country services performed longlived assets outside united states immaterial periods presented cnf inc subsidiaries quarterly financial data unaudited cnf’s results continuing operations included various income loss items affected comparability reported operating income loss reporting segments materially significant items affecting comparability net income continuing operations periods reported described note item 7 “management’s discussion analysis” includes tax benefits 70 million reversal accrued taxes related settlement irs previous tax filings item 9item 8 financial statements supplementary data conway inc consolidated balance sheets accompanying notes consolidated financial statements integral part statements conway inc consolidated balance sheets accompanying notes consolidated financial statements integral part statements conway inc statements consolidated income accompanying notes consolidated financial statements integral part statements conway inc statements consolidated comprehensive income accompanying notes consolidated financial statements integral part statements conway inc statements consolidated cash flows accompanying notes consolidated financial statements integral part statements conway inc statements consolidated shareholders equity accompanying notes consolidated financial statements integral part statements conway inc notes consolidated financial statements 1 principal accounting policies organization conway inc consolidated subsidiaries conway company provide transportation logistics supplychain management services wide range manufacturing industrial retail customers conways business units operate regional interregional transcontinental lessthantruckload fulltruckload freight transportation contract logistics supplychain management multimodal freight brokerage trailer manufacturing fully discussed note 12 segment reporting financial reporting purposes conway divided three reporting segments freight logistics truckload principles consolidation consolidated financial statements include accounts conway subsidiaries significant intercompany accounts transactions eliminated estimates management makes estimates assumptions preparing financial statements conformity accounting principles generally accepted us estimates assumptions affect amounts reported accompanying financial statements notes changes estimates recognized accordance accounting rules estimate typically period new information becomes available estimates underlying assumptions affect amounts assets liabilities reported disclosures contingent assets liabilities reported amounts revenue expenses estimates relate revenuerelated adjustments impairment goodwill longlived assets amortization depreciation income taxes selfinsurance accruals pension plan postretirement obligations contingencies assets liabilities recognized connection acquisitions restructurings dispositions conway evaluates estimates assumptions ongoing basis using historical experience factors including current economic environment estimates assumptions adjusted facts circumstances dictate volatility financial markets changing levels economic activity increase uncertainty inherent estimates assumptions changes estimates resulting continuing changes economic environment reflected financial statements future periods recognition revenue conway freight recognizes revenue reporting periods based relative transit time period recognizes expense incurred estimates future billing adjustments revenue including related weight freightclassification verification pricing discounts recognized time shipment conway truckload recognizes revenue related direct costs shipment delivered menlo logistics menlo recognizes revenue based service outputs provided customer menlo records revenue gross basis without deducting thirdparty purchased transportation costs transactions acts principal menlo records revenue net basis deducting purchased transportation costs transactions acts agent recognizing revenue services provided performancebased incentive arrangements contingent portion revenue considered fixed determinable performance criteria met certain menlo contracts billings excess revenue recognized recorded unearned revenue unearned revenue recognized contract period services provided december 31 2014 2013 unearned revenue 82 million 121 million reported conways consolidated balance sheets within accrued liabilities respectively addition menlo deferred certain recoverable direct incremental costs related setup logistics operations longterm contracts deferred setup costs recognized expense contract term december 31 2014 2013 deferred setup costs 47 million 99 million reported consolidated balance sheets within deferred charges assets respectively cash equivalents marketable securities cash equivalents consist shortterm interestbearing instruments maturities three months less date purchase december 31 2014 2013 cashequivalent investments 3855 million 4412 million respectively consisted primarily commercial paper certificates deposit moneymarket funds conway classifies marketable debt securities availableforsale reports fair value changes fair value availableforsale securities recognized comprehensive income loss unless unrealized loss otherthantemporary loss portion unrealized loss determined temporary portion loss recognized earnings december 31 2014 conway held 83 million variablerate demand notes conway held marketable securities december 31 2013 trade accounts receivable net conway freight conway truckload report accounts receivable net realizable value provide allowance losses probable estimates uncollectible accounts based various judgments assumptions including revenue levels historical loss experience aging outstanding accounts receivable menlo based size nature client base performs periodic evaluation customers creditworthiness accounts receivable portfolio recognizes expense uncollectible accounts losses probable reasonably estimable activity allowance uncollectible accounts presented following table estimates billing adjustments including related weight freightclassification verifications pricing discounts also reported reduction accounts receivable activity allowance revenue adjustments presented following table property plant equipment property plant equipment reported historical cost depreciated straightline basis estimated useful lives generally 25 years buildings 4 14 years revenue equipment 3 10 years equipment leasehold improvements assets acquired capital leases amortized shorter terms respective leases useful lives assets resulting expense reported depreciation expense 2324 million 2014 2212 million 2013 2049 million 2012 response conditions usedtrailer market conway truckload increased estimated salvage values certain trailers fourth quarter 2013 effect change estimate decreased depreciation expense increased operating income 62 million 13 million 2014 2013 respectively result change net income 2014 increased 38 million basic diluted earnings per share increased 007 006 per share respectively expenditures equipment maintenance repairs charged operating expenses incurred betterments capitalized gains losses sales equipment property recorded operating expenses tires maintenance cost replacement tires expensed time tires placed service case repairs maintenance costs cost tires new revenue equipment capitalized depreciated estimated useful life related equipment capitalized software net capitalized software consists certain direct internal external costs associated internaluse software net accumulated amortization capitalized software computed itembyitem basis depending estimated useful life software currently 3 years 7 years amortization expense related capitalized software 79 million 2014 72 million 2013 83 million 2012 accumulated amortization december 31 2014 2013 1610 million 1587 million respectively longlived assets conway performs impairment analysis longlived assets whenever circumstances indicate carrying amount may recoverable assets held used impairment charge recognized estimated undiscounted cash flows associated asset group assets less carrying value impairment exists charge recognized difference carrying value fair value fair values determined using quoted market values discounted cash flows external appraisals applicable assets held disposal carried lower carrying value estimated net realizable value conways accounting policies goodwill longlived intangible assets fully discussed note 2 goodwill intangible assets book overdrafts book overdrafts represent outstanding drafts yet presented bank excess recorded cash particular bank amounts represent bank overdrafts occur drafts presented bank excess cash conways bank account would effectively loan conway december 31 2014 2013 book overdrafts 288 million 408 million respectively included accounts payable selfinsurance accruals conway uses combination selfinsurance programs purchased insurance provide costs medical casualty liability vehicular cargo workers compensation claims longterm portion selfinsurance accruals relates primarily workers compensation vehicular claims expected payable several years conway periodically evaluates level insurance coverage adjusts insurance levels based risk tolerance premium expense measurement classification selfinsured costs requires consideration historical cost experience demographic severity factors judgments current expected levels cost per claim retention levels methods provide estimates undiscounted liability associated claims incurred balance sheet date including estimates claims incurred reported changes assumptions factors materially affect actual costs paid settle claims amounts may different estimates conway participates reinsurance pool reinsure portion workers compensation claims company participates pool cedes premiums claims pool assumes premiums claims pool reinsurance relieve conway liabilities original policy however opinion management potential exposure conway nonpayment reinsured losses minimal december 31 2014 2013 conway recorded liability related assumed claims 574 million 592 million respectively recorded receivable reinsurance pool 433 million 381 million respectively revenue related reinsurance activities reported net associated expenses classified operating expenses connection participation reinsurance pool conway recognized operating income 61 million 2014 operating income 22 million 2013 operating loss 25 million 2012 foreign currency translation adjustments resulting translating foreign functional currency financial statements us dollars included foreign currency translation adjustment statements consolidated comprehensive income loss transaction gains losses arise exchangerate fluctuations transactions denominated currency functional currency included statements consolidated income within miscellaneous net conway recognized foreign exchange losses 60 million 14 million 03 million 2014 2013 2012 respectively conway determined advances certain foreign subsidiaries indefinite nature accordingly corresponding foreign currency gains losses related advances included foreign currency translation adjustment statements consolidated comprehensive income loss earnings per share eps basic eps calculated dividing reported net income loss weightedaverage common shares outstanding diluted eps calculated follows new accounting standards may 2014 financial accounting standards board fasb issued accounting standards update asu 201409 revenue contracts customers asu codified revenue recognition topic fasb accounting standards codification requires revenue recognized upon transfer promised goods services customers amount reflects consideration entity expects entitled exchange goods services standard also requires disclosures sufficient describe nature amount timing uncertainty revenue cash flows arising customer contracts standard effective fiscal years interim periods within years beginning december 15 2016 applied either retrospectively prior reporting period presented cumulative effect initially applying standard recognized date adoption conway plans adopt standard first quarter 2017 conway currently evaluating method application potential impact financial statements related disclosures 2 goodwill intangible assets goodwill following table shows changes gross carrying amounts goodwill conway assesses goodwill impairment annual basis fourth quarter frequently events changes circumstances indicate asset might impaired connection annual impairment test fourth quarter 2014 conway concluded goodwill reporting units impaired december 31 2014 intangible assets intangible assets amortized straightline basis estimated useful life amortization expense related intangible assets 24 million 2014 24 million 2013 30 million 2012 intangible assets consisted following conways customerrelationship intangible asset relates conway truckload business unit estimated future amortization expense presented years ended december 31 following table 3 fairvalue measurements assets liabilities reported fair value classified one following three levels within fairvalue hierarchy level 1 quoted market prices active markets identical assets liabilities level 2 observable marketbased inputs unobservable inputs corroborated market data level 3 unobservable inputs corroborated market data financial assets measured fair value recurring basis following table summarizes valuation financial instruments within fairvalue hierarchy cash equivalents consist shortterm interestbearing instruments primarily commercial paper certificates deposit money market funds maturities three months less date purchase december 31 2014 current marketable securities consisted variablerate demand notes moneymarket funds reflect published net asset value classified level 1 instruments commercial paper certificates deposit variablerate demand notes generally valued using published interest rates instruments similar terms maturities accordingly classified level 2 instruments december 31 2014 weightedaverage remaining maturity cash equivalents less one month based short maturities carrying amount cash equivalents approximates fair value 4 accrued liabilities accrued liabilities consisted following 5 debt financing arrangements longterm debt consisted following revolving credit facility conway 325 million revolving credit facility matures june 28 2018 december 31 2014 cash borrowings outstanding credit facility however 1069 million letters credit outstanding leaving 2181 million available capacity additional letters credit cash borrowings subject compliance financial covenants customary conditions borrowing letters credit outstanding december 31 2014 provided collateral conways selfinsurance programs agreement standby letter credit fees equal margin dependent upon conways leverage ratio cash borrowings bear interest rate based upon libor lead banks base rate case plus margin dependent conways leverage ratio credit facility fee ranges 018 035 applied total facility 325 million based conways leverage ratio revolving facility guaranteed certain conways material domestic subsidiaries contains two financial covenants leverage ratio ii fixedcharge coverage ratio also various restrictive covenants including limitations incurrence liens ii consolidations mergers asset sales iii incurrence additional subsidiary indebtedness credit facilities shortterm borrowings december 31 2014 conway 210 million bank guarantees letters credit overdraft facilities outstanding credit facilities conway shortterm borrowings 17 million 16 million december 31 2014 2013 respectively excluding noninterest bearing borrowings described weightedaverage interest rate shortterm borrowings 482 december 31 2014 shortterm borrowings outstanding december 31 2014 2013 noninterest bearing borrowings 13 million 16 million respectively related credit facility menlo utilizes one logistics contracts borrowings facility related amounts financial institution paid vendors behalf menlo 725 senior notes due 2018 725 senior notes bear interest rate 725 per year payable semiannually january 15 july 15 year conway may redeem 725 senior notes whole part less 30 60days notice redemption price equal greater principal amount redeemed ii sum present values remaining scheduled payments principal interest notes redeemed discounted redemption date semiannual basis rate payable treasury note comparable maturity plus 50 basis points also various restrictive covenants including limitations incurrence liens ii consolidations mergers asset sales including amortization underwriting fees related debt costs interest expense 725 senior notes due 2018 recognized annual effective interest rate 737 holders 725 senior notes right require conway repurchase notes upon occurrence change control ii investmentgrade rating two moodys standard poors fitch ratings repurchase price would equal 101 aggregate principal amount notes repurchased plus accrued unpaid interest 670 senior debentures due 2034 300 million aggregate principal amount senior debentures bear interest rate 670 per year payable semiannually may 1 november 1 year conway may redeem senior debentures whole part less 30 60days notice redemption price equal greater principal amount redeemed ii sum present values remaining scheduled payments principal interest senior debentures redeemed discounted redemption date semiannual basis rate payable treasury note comparable maturity plus 35 basis points senior debentures issued indenture restricts conways ability certain exceptions incur debt secured liens including amortization discount interest expense 670 senior debentures due 2034 recognized annual effective interest rate 690 aggregate annual maturities longterm debt next five years ending december 31 06 million 2016 4250 million 2018 following 2018 conway principal payments due 2034 december 31 2014 2013 estimated fair value longterm debt 832 million 806 million respectively periods presented longterm debt classified level 2 instrument fair values estimated using average prices provided multiple brokers 6 leases conway subsidiaries obligated noncancelable leases certain facilities equipment vehicles certain leases also contain provisions allow conway extend leases various renewal periods certain capitallease agreements conway guarantees residual value tractors end lease term stated amounts residualvalue guarantees included minimum lease payments connection capital leases conway reported 733 million 689 million revenue equipment 501 million 390 million accumulated depreciation consolidated balance sheets december 31 2014 2013 respectively additionally conway reported 100 million equipment 15 million accumulated depreciation consolidated balance sheets december 31 2014 future minimum lease payments initial remaining noncancelable lease terms excess one year december 31 2014 follows remaining unamortized gain resulting past saleleaseback transactions 77 million december 31 2014 reported liabilities deferred credits consolidated balance sheets amortized reduction lease expense 2024 corresponding lease terms expire rental expense operating leases comprised following 7 income taxes income tax provision components provision income taxes follows income taxes provided foreign operations based upon various tax laws rates countries operations conducted components income taxes follows conways income tax provision varied amounts calculated applying us statutory income tax rate pretax income shown following reconciliation fourth quarter 2014 conway changed rate uses value deferred tax assets liabilities change rate effect shown exclusively related change forwardlooking estimate average state income tax rate many factors went evaluating estimate rate including changes individual state income tax rates changes geographic distribution conways business operations us different nature operations certain jurisdictions current deferred income tax balances components deferred tax assets liabilities related following deferred tax assets liabilities consolidated balance sheets classified current noncurrent based related asset liability creating deferred tax deferred taxes related specific asset liability classified based estimated period reversal december 31 2014 conway federal tax loss carryforward carryforwards including state tax credits foreign taxes creditable federal tax state foreign tax losses may create future benefits resulting potential benefit future use tax losses including domestic foreign 229 million tax credit carryforwards provide potential benefit 108 million conway anticipate certain future state foreign taxable income allow realization full benefits management concluded assets fail meet morelikelythannot threshold realization light combined future tax benefits 337 million offset valuation allowance 260 million deferred tax assets management believes likely results future operations generate taxable income sufficient amount type realize deferred tax assets certain capital expenditures made september 9 2010 december 31 2014 eligible bonus depreciation accordance provision us tax law conway deducted substantial portion capital expenditures made 2010 2014 tax years additionally alternativefuel credit extended 2014 tax increase prevention act 2014 also january 2013 american taxpayer relief act 2012 extended alternativefuel credit 2012 2013 tax years conway recorded discrete benefit 33 million first quarter 2013 recognize effect credit associated 2012 tax year alternativefuel credit 2013 tax year recognized course 2013 deferred taxes provided cumulative undistributed earnings conways foreign subsidiaries 324 million december 31 2014 remitted subject withholding us taxes amounts indefinitely reinvested respective foreign subsidiaries operations becomes advantageous tax foreign exchange reasons remit earnings determination amount unrecognized deferred income tax liability temporary difference practicable uncertain tax positions conway recognizes tax positions financial statements likely position sustained upon examination taxing authority position meets morelikelythannot criteria measured using probabilityweighted approach largest amount tax benefit greater 50 likely realized upon settlement previously recognized tax positions longer meet morelikelythannot recognition threshold derecognized first subsequent financial reporting period threshold longer met 2014 2013 estimate uncertain tax positions decreased 81 million 119 million respectively including 31 million 35 million accrued interest penalties primarily due lapse statute limitations settlements various taxing authorities fully discussed december 31 2014 2013 conway estimated 37 million 65 million respectively unrecognized tax benefits recognized would change effective tax rate 2014 04 million reversal interest penalties included income tax expense compared 18 million 2013 following summarizes changes unrecognized tax benefits year excluding interest penalties normal course business conway subject examination taxing authorities throughout world result examinations conway maintains ongoing discussions negotiations relating tax matters taxing authorities various jurisdictions conway subject examination federal income taxes tax years 2008 forward 2013 conway entered compliance assurance program cap designed make audits effective efficient current federal tax return filed current year approved internal revenue service irs 2012 irs finished field audit 2008 2010 tax years issue emerged resulted increase estimate uncertain tax positions 2012 conway settled issue 2013 paid related liability 2014 conway also subject examination state local foreign jurisdictions 2004 2013 conway currently audit several state foreign tax jurisdictions management expects material change unrecognized tax benefits due expected increases substantially offset lapses applicable statutes limitations 8 shareholders equity accumulated comprehensive loss changes equity except resulting investments owners distributions owners reported statements consolidated comprehensive income loss following summary components accumulated comprehensive loss see note 9 employee benefit plans additional information concerning conways employee benefit plans including amounts reported net periodic benefit expense income common stock repurchase program cash dividend june 2014 conways board directors authorized repurchase 150 million conways common stock open market purchases privately negotiated transactions time amounts management determines december 31 2014 conway repurchased total 355000 shares cost 168 million shares repurchased 2014 10 million settled first quarter 2015 july 29 2014 conways board directors increased quarterly dividend paid shareholders 10 cents per common share 15 cents per common share quarterly dividend payment subject review approval conways board directors 9 employee benefit plans periods presented certain employees conway subsidiaries us covered several retirement benefit plans including defined benefit pension plans defined contribution retirement plans postretirement medical plan defined benefit pension plans conways defined benefit pension plans include qualified plans eligible certain beneficial treatment internal revenue code irc well nonqualified plans meet irc criteria conways qualified defined benefit pension plans collectively qualified pension plans consist mostly primary qualified defined benefit pension plan primary db plan conways qualified defined benefit pension plans collectively legacy db plans relate former businesses fourth quarter 2014 conway settled obligation one legacy db plans combination singlepremium nonparticipating annuity lumpsum payments accordingly conway recognized 362 million reduction plan obligation related assets 160 million settlement loss conways nonqualified defined benefit pension plans collectively nonqualified pension plans consist mostly primary nonqualified supplemental defined benefit pension plan supplemental db plan supplemental db plan provides additional benefits certain employees affected irc limitations compensation eligible benefits available qualified primary db plan conways foreign subsidiaries sponsor defined benefit pension plans international defined benefit pension plans excluded disclosures due immateriality benefits result plan amendments previous years additional benefits accrue plans alreadyaccrued benefits adjusted future increases compensation funded status defined benefit pension plans following table reports changes projected benefit obligation fair value plan assets determination amounts recognized consolidated balance sheets conways defined benefit pension plans december 31 actuarial loss 2014 primarily due decrease discount rate also included impact updated mortality assumptions used estimate life expectancies plan participants amounts included accumulated comprehensive loss yet recognized net periodic benefit expense consist following amounts accumulated comprehensive loss expected recognized components net periodic benefit cost 2015 follows net periodic benefit expense income defined benefit pension plans net periodic benefit expense income amounts recognized comprehensive income loss years ended december 31 includes following expected benefit payments defined benefit pension plans summarized estimates based assumptions future events actual benefit payments may vary estimates plan assets investment policies strategies assets qualified pension plans managed pursuant longterm allocation strategy seeks mitigate plans funded status volatility increasing plans exposure fixed income investments time strategy developed analyzing variety diversified assetclass combinations conjunction projected liabilities qualified pension plans 2014 plans lowered percentage investments equity securities increased percentage investments fixedincome securities plans current investment strategy achieve mix approximately 76 fixedincome securities 24 investments equity securities target allocations fixedincome securities includes 7 global opportunistic fixedincome target allocations equity securities include 12 us large companies 2 us small companies 10 international companies investments equity securities allocated growth valuestyle investment strategies diversified across industries investment managers investments fixedincome securities consist primarily highquality us global corporate government debt instruments variety industries plans investments equity fixedincome securities consist individual securities held managed separate accounts well commingled investment funds plans investment strategy include meaningful longterm investment allocation cash equivalents however plans cash allocation may rise periodically response timing considerations regarding contributions investments payment benefits eligible plan expenses additionally level cash equivalents may reflect uninvested balance managers allocated portfolio balance uninvested cash typically held shortterm fund invests moneymarket instruments including commercial paper liquid shortterm interestbearing instruments plans investment policy allow investment managers use markettiming strategies financial derivative instruments speculative purposes however financial derivative instruments used manage risk achieve stated investment objectives regarding duration yield curve credit equity exposures generally investment managers prohibited short selling trading margin trading commodities warrants options except acquired result purchase another security case options sold part covered position conways investment policies also restrict investment managers accumulating concentrations issuer country industry segment assumption 515 overall expected longterm rate return 2015 developed using asset allocation return risk defined standard deviation correlation expectations return expectations created using longterm historical returns current market expectations inflation interest rates economic growth categories fairvalue measurements plan assets following table summarizes fair value conways pension plan assets within fairvalue hierarchy funds publicly traded readily determinable fair values accordingly valued net asset value per share underlying investments funds consist primarily publicly traded securities quoted market prices b gains sp 500 futures held separately managed account c publicly traded equity securities valued closing market prices global us debt securities valued quoted market price corporatedebt instruments generally valued using observable bidask spreads brokerprovided pricing e fair value private real estate fund based fair values underlying assets consist commercial residential properties valued using periodic appraisals fund maintains redemption plan whereby redemption requests must received writing 45 days prior end quarter fund unable satisfy redemption requests partial redemptions may made prorated basis f fair value hedge fund based fair value underlying assets consists individual equities convertible securities futures forward contracts currency forwards swaps highyield debt portfolios options derivative instruments cash valued monthly administrator engaged fund following table summarizes change fair value pension assets valued using level 3 inputs full redemption assets invested hedge fund made 2014 however hold requirement requires portion assets withheld final completion funds audit remaining assets 27 million invested hedge fund cash equivalents funding conways funding practice evaluate tax cash position well qualified pension plans funded status determining planned contributions conway estimates contribute 30 million qualified pension plans 2015 however could change based variations interest rates asset returns pension protection act requirements factors defined contribution retirement plans conways cost defined contribution retirement plans 563 million 2014 553 million 2013 508 million 2012 postretirement medical plan conway sponsors postretirement medical plan provides health benefits certain noncontractual employees least 55 years age least 10 years service postretirement plan postretirement plan provide employersubsidized retiree medical benefits employees hired january 1 1993 october 31 2013 conway amended postretirement plan provide set benefit certain retirees least 65 years age effective 2014 accordingly remeasurement performed reducing projected benefit obligation 283 million offsetting priorservice credit 192 million actuarial gain 91 million recognized comprehensive income loss funded status postretirement medical plan following sets forth changes benefit obligation determination amounts recognized consolidated balance sheets postretirement plan december 31 amounts included accumulated comprehensive loss yet recognized net periodic benefit expense consist following amounts accumulated comprehensive loss expected recognized components net periodic benefit cost follows net periodic benefit expense postretirement medical plan net periodic benefit expense amounts recognized comprehensive income loss years ended december 31 includes following expected benefit payments reflect expected future service appropriate summarized estimates based assumptions future events actual benefit payments may vary estimates assumed healthcare cost trend rates used determine benefit obligation follows assumed healthcare cost trends affect amounts recognized conways postretirement benefits onepercentagepoint change assumed healthcare cost trend rate would material effect service interest cost components net periodic benefit costs accumulated postretirement benefit obligation 10 sharebased compensation terms sharebased compensation plans conway grants various types sharebased compensation awards employees directors plans provide awards form nonvested stock also known restricted stock performanceshare plan units pspus stock options stock appreciation rights sars conway recognizes expense straightline basis shorter 1 requisite service period stated award 2 period grant date award employees retirementeligibility date award contains acceleratedvesting provision awards gradedvesting terms recognize expense straightline basis requisite service period entire award following expense recognized sharebased compensation fair value stock option sar grant estimated using blackscholes optionpricing model considers riskfree interest rate expected award term volatility dividend yield riskfree interest rate determined using us treasury zerocoupon issue remaining term equal expected term award expected term award derived binomial lattice model based historical rate voluntary exercises postvesting terminations volatility expected volatility based historical volatility conways common stock recent period equal expected term award board directors authorized issuance 7637432 shares common stock grant stock options nonvested stock sharebased compensation equity plans 2687677 available december 31 2014 new shares issued conways balance authorized common stock satisfy stock option exercises vesting awards nonvested stock awards granted directors prior 2012 generally threeyear gradedvesting terms granted 2012 generally vest one year award date awards granted employees generally vest three years award date nonvested stock awards provide accelerated vesting result change control death disability defined award agreement awards allow prorata vesting award recipient leaves conway due qualifying retirement vesting period shares nonvested stock eligible dividends valued market price conways common stock date award awards eligible dividends valued market price conways common stock date award reduced present value dividends received vesting period following table summarizes nonvested stock activity 2014 weightedaverage grantdate fair value per share nonvested stock awards granted employees 2013 2012 3319 3037 respectively weightedaverage grantdate fair value per share nonvested stock awards granted directors 2013 2012 3460 3375 respectively total fair value nonvested stock vested 2014 2013 2012 114 million 94 million 110 million respectively based conways closing common stock price vesting date december 31 2014 total unrecorded deferred compensation cost shares nonvested stock net forfeitures 98 million expected recognized weightedaverage period 165 years performanceshare plan units pspus vest three years grant date certain performance criteria achieved number shares award recipients ultimately receive range 0 200 grant target depending achievement relative performance criteria pspus subject forfeiture award recipient ceases active fulltime employee prior end threeyear period subject cases early vesting upon specified events including death disability award recipient termination employment following change control conway awards allow prorata vesting award recipient leaves conway due qualifying retirement vesting period pspus valued market price conways common stock date award reduced present value dividends received threeyear vesting period amount expense recorded period based conways current estimate number shares ultimately vest following table summarizes pspu activity 2014 weightedaverage grantdate fair value per share pspus granted 2013 2012 3241 2967 respectively december 31 2014 total unrecorded deferred compensation cost shares pspus net forfeitures 104 million expected recognized weightedaverage period 177 years stock options stock options granted prices equal market value common stock date grant expire 10 years date grant stock options granted threeyear gradedvesting terms onethird award vests year certain option awards provide accelerated vesting result change control qualifying retirement death disability defined stock option plans following table summarizes stock option activity 2014 aggregate intrinsic value reported table represents total pretax value would received employees directors holders exercised inthemoney stock options december 31 2014 following table summarizes stock option exercise activity december 31 following summary weightedaverage assumptions used blackscholes optionpricing model calculated weightedaverage grantdate fair value december 31 stock appreciation rights cashsettled sars granted stock price grant date threeyear gradedvesting term awards provide accelerated vesting employee ceases employment due retirement death disability change control defined sar agreement sars granted 2010 became fully vested january 2013 vesting period compensation cost recognized based proportionate amount service rendered date sars liabilityclassified awards result conway remeasures fair value awards reporting period awards settled conway recognize changes fair value vesting period compensation cost current period ultimate expense recognized sars equal intrinsic value settlement conways accrued liability cashsettled sars 22 million 43 million december 31 2014 2013 determined using weightedaverage fair value 2097 1513 per sar december 31 2014 2013 respectively following table summarizes sar activity 2014 following table summarizes sar exercise activity december 31 11 commitments contingencies service contracts conway agreements vendors provide certain informationtechnology administrative accounting services payments terms agreements subject change depending quantities types services consumed contracts also contain provisions allow conway terminate contract time however conway would required pay fees termination causes failure service providers perform california wage hour conway defendant several classaction lawsuits alleging violations state californias wage hour laws plaintiffs allege conway failed pay certain drivers compensable time certain drivers provided required meal breaks rest breaks plaintiffs seek recover unspecified monetary damages penalties interest attorneys fees primary case jose alberto fonseca pina et al v conway freight inc et al pina case pina case initially filed november 2009 monterey county superior court removed us district court california northern district april 12 2012 court granted plaintiffs request class certification pina case limited number issues class certification ruling address whether conway ultimately held liable conway challenged certification class case contends plaintiffs claims preempted federal law substantiated facts conway denied liability respect claims intends vigorously defend case multiple factors prevent conway able estimate amount potential loss excess accrued liability may result matter including 1 conway vigorously defending believes number meritorious legal defenses 2 stage case unresolved questions fact could important resolution matters conway recently settled related case jorge r quezada v conway inc dba conway freight quezada case notice settlement provided class members case january 9 2015 court granted final approval settlement conway adequately accrued matter unclaimedproperty audits conway currently audited several states primarily state delaware compliance unclaimedproperty laws property subject review audit process generally includes unclaimed securities unclaimed payments refunds employees shareholders vendors customers state federal escheat laws generally require companies report remit unclaimed property states conway believes procedures place comply laws audits conway securities payments completed third quarter 2013 second quarter 2014 respectively material findings remaining audit refunds continue 2015 given current stage remaining audit conway cannot estimate amount range potential loss conway defendant various lawsuits incidental businesses opinion management ultimate outcome actions material effect conways financial condition results operations cash flows 12 segment reporting conway discloses segment information manner business units organized making operating decisions assessing performance allocating resources periods presented conway divided following three reporting segments • freight segment consists operating results conway freight business unit provides regional interregional transcontinental lessthantruckload freight services throughout north america • logistics segment consists operating results menlo business unit develops contractlogistics solutions including management complex distribution networks supplychain engineering consulting also provides multimodal freightbrokerage services • truckload segment consists operating results conway truckload business unit provides assetbased fulltruckload freight services throughout north america prior 2013 former segment consisted operating results conways trailer manufacturer certain corporate activities related income expense allocated reporting segments beginning first quarter 2013 intersegment eliminations combined segment reported corporate eliminations order reconcile segment results consolidated totals periods presented reflect change reporting segment structure financial data management evaluates segment performance primarily based revenue operating income loss accordingly investment income interest expense nonoperating items reported segment results corporate expenses generally allocated based measurable services provided segment general corporate expenses based segment revenue beginning 2013 costs associated defined benefit pension plans longer allocated reporting segments instead included corporate eliminations corporate costs amount defined benefit pension cost retained corporate eliminations 135 million 42 million years ended december 31 2014 2013 respectively 2012 costs included results freight logistics truckload reporting segments total 96 million intersegment revenue related operating income loss eliminated reconcile consolidated revenue operating income transactions segments generally based negotiated prices geographic data geographic reporting freight transportation revenue allocated equally origin destination revenue contract services allocated country services performed longlived assets outside united states immaterial periods presented 13 quarterly financial data conway inc quarterly financial data unaudited comparability conways consolidated operating income affected following unusual income expense gain 34 million freight second quarter 2014 sale property charge 160 million corporate eliminations fourth quarter 2014 settlement legacy pension plan gain 56 million corporate eliminations second quarter 2013 sale administrative property charge 37 million logistics second quarter 2013 increased reserve international accounts receivable b comparability conways tax provision net income affected following tax benefit 54 million fourth quarter 2014 decline incremental rate state taxes c sum quarterly earnings per share may equal annual amounts due differences weightedaverage number shares outstanding respective period item 9item 8 financial statements supplementary data consolidated financial statements auditors report presented pages 27 33 inclusive 1993 annual report shareholders incorporated herein reference unaudited quarterly financial data included note 12 page 45 1993 annual report shareholders incorporated herein reference item 9 nannannannannannannannanitem 15 exhibits financial statement schedules reports form 8k 1 financial statements 2 financial statement schedule report independent auditors financial statement schedule iivaluation qualifying accounts 3 exhibits filed connection report incorporated herein reference exhibit index pages 76 79 incorporated herein reference b reports form 8k one report form 8k dated may 30 2002 filed quarter ended june 30 2002 reported change auditors arthur andersen llp kpmg llp one report form 8k dated august 12 2002 filed quarter ended september 30 2002 reported item 9 announcement cnf submitted securities exchange commission sec statements oath principal executive officer principal financial officer accordance sec’s june 27 2002 order requiring filing sworn statements pursuant section 21a1 securities exchange act 1934 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused form 10k annual report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated march 21 2003 donald e moffitt donald e moffitt chairman board march 21 2003 gregory l quesnel gregory l quesnel president chief executive officer director march 21 2003 robert alpert robert alpert director march 21 2003 kevin burns kevin burns director march 21 2003 margaret g gill margaret g gill director march 21 2003 robert jaunich ii robert jaunich ii director march 21 2003 w keith kennedy jr w keith kennedy jr director march 21 2003 michael j murray michael j murray director march 21 2003 john c pope john c pope director march 21 2003 robert rogers robert rogers director march 21 2003 william j schroeder william j schroeder director march 21 2003 robert p wayman robert p wayman director certification chief executive officer chief financial officer pursuant section 302 sarbanesoxley act 2002 gregory l quesnel certify 1 reviewed annual report form 10k cnf inc 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrant’s certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrant’s disclosure controls procedures date within 90 days prior filing date annual report “evaluation date” c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrant’s certifying officers disclosed based recent evaluation registrant’s auditors audit committee registrant’s board directors persons performing equivalent functions significant deficiencies design operation internal controls could adversely affect registrant’s ability record process summarize report financial data identified registrant’s auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrant’s internal controls 6 registrant’s certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses march 21 2003 gregory l quesnel gregory l quesnel chief executive officer chutta ratnathicam certify 1 reviewed annual report form 10k cnf inc 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrant’s certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrant’s disclosure controls procedures date within 90 days prior filing date annual report “evaluation date” c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrant’s certifying officers disclosed based recent evaluation registrant’s auditors audit committee registrant’s board directors persons performing equivalent functions significant deficiencies design operation internal controls could adversely affect registrant’s ability record process summarize report financial data identified registrant’s auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrant’s internal controls 6 registrant’s certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses report independent auditors board directors shareholders cnf inc audited accompanying consolidated balance sheet cnf inc subsidiaries december 31 2002 related consolidated statements operations shareholders’ equity cash flows year ended consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audit consolidated financial statements cnf inc subsidiaries december 31 2001 years twoyear period ended december 31 2001 audited auditors ceased operations auditors’ report dated january 25 2002 except respect increase unsecured revolving credit facility discussed note 5 date february 22 2002 consolidated financial statements unqualified revision restatement described notes 1 15 respectively consolidated financial statements included explanatory paragraph described change company’s method accounting recognition intransit freight transportation revenue conducted audit accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provides reasonable basis opinion 2002 consolidated financial statements referred present fairly material respects financial position cnf inc subsidiaries december 31 2002 results operations cash flows year ended conformity accounting principles generally accepted united states america discussed consolidated financial statements cnf inc subsidiaries december 31 2001 years twoyear period ended december 31 2001 audited auditors ceased operations described note 1 consolidated financial statements consolidated financial statements revised include transitional disclosures required statement financial accounting standards 142 goodwill intangible assets sfas 142 adopted company january 1 2002 described note 15 consolidated financial statements company changed composition reportable segments 2002 amounts 2001 2000 consolidated financial statements relating reportable segments restated conform 2002 composition reportable segments audited adjustments applied restate disclosures reportable segments reflected 2001 2000 consolidated financial statements opinion sfas 142 transitional disclosures 2001 2000 note 1 consolidated financial statements appropriate adjustments applied restate 2001 2000 reportable segment disclosures note 15 consolidated financial statements appropriate properly applied however engaged audit review apply procedures 2001 2000 consolidated financial statements cnf inc subsidiaries respect disclosures adjustments accordingly express opinion form assurance 2001 2000 consolidated financial statements taken whole san francisco california january 24 2003 except respect negotiated return leased aircraft discussed note 3 date february 3 2003 report independent public accountants board directors shareholders cnf inc audited accompanying consolidated balance sheet cnf inc delaware corporation subsidiaries december 31 2001 2000 related consolidated statement operations shareholders’ equity cash flows three years period ended december 31 2001 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position cnf inc subsidiaries december 31 2001 2000 results operations cash flows three years period ended december 31 2002 conformity accounting principles generally accepted united states explained note 1 consolidated financial statements effective january 1 2000 company changed method accounting recognition intransit freight transportation revenue arthur andersen llp arthur andersen llp san francisco california january 25 2002 except respect increase unsecured revolving credit facility discussed note 5 date february 22 2002 copy report previously issued arthur andersen llp report reissued arthur andersen llp arthur andersen llp independent accountants cnf inc may 30 2002 representatives arthur andersen llp available provide consent required incorporation reference report financial statements cnf inc appearing annual report registration statements filed cnf inc securities exchange commission currently effective securities act 1933 arthur andersen llp consented incorporation reference report investors able recover arthur andersen llp section 11 securities act 1933 untrue statements material fact contained financial statements audited arthur andersen llp contained report omissions state material fact required stated therein independent auditors’ report financial statement schedule board directors shareholders cnf inc date january 24 2003 except respect negotiated return leased aircraft discussed note 3 date february 3 2003 reported consolidated balance sheet cnf inc subsidiaries december 31 2002 related statements operations shareholders’ equity cash flows year ended included form 10k year ended december 31 2002 connection audit aforementioned consolidated financial statements also audited related consolidated financial statement schedule form 10k year ended december 31 2002 financial statement schedule responsibility company’s management responsibility express opinion financial statement schedule based audit financial statement schedule years twoyear period ended december 31 2001 audited auditors ceased operations auditors’ reports dated january 25 2002 financial statement schedule unqualified opinion financial statement schedule year ended december 31 2002 considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth herein consolidated financial statements cnf inc subsidiaries december 31 2001 years twoyear period ended december 31 2001 audited auditors ceased operations described note 1 consolidated financial statements consolidated financial statements revised include transitional disclosures required statement financial accounting standards 142 goodwill intangible assets sfas 142 adopted company january 1 2002 described note 15 consolidated financial statements company changed composition reportable segments 2002 amounts 2001 2000 financial statements relating reportable segments restated conform 2002 composition reportable segments audited adjustments applied restate disclosures reportable segments reflected 2001 2000 financial statements opinion sfas 142 transitional disclosures 2001 2000 note 1 consolidated financial statements appropriate adjustments applied restate 2001 2000 reportable segment disclosures note 15 consolidated financial statements appropriate properly applied however engaged audit review apply procedures 2001 2000 consolidated financial statements financial statement schedule cnf inc respect disclosures adjustments accordingly express opinion form assurance 2001 2000 consolidated financial statements taken whole january 24 2003 except respect negotiated return leased aircraft discussed note 3 date february 3 2003 independent public accountants’ report financial statement schedule shareholders board directors cnf inc audited accordance auditing standards generally accepted united states consolidated financial statements included cnf inc’s 2001 annual report shareholders incorporated reference form 10k issued report thereon dated january 25 2002 except respect increase unsecured revolving credit facility discussed note 5 date february 22 2002 audit made purpose forming opinion statements taken whole schedule iivaluation qualifying accounts page s2 responsibility company’s management presented purposes complying securities exchange commission’s rules part basic financial statements schedule subjected auditing procedures applied audit basic financial statements opinion fairly states material respects financial data required set forth therein relation basic financial statements taken whole arthur andersen llp arthur andersen llp san francisco california january 25 2002 copy report previously issued arthur andersen llp report reissued arthur andersen llp arthur andersen llp independent accountants cnf inc may 30 2002 representatives arthur andersen llp available provide consent required incorporation reference report financial statements cnf inc appearing annual report registration statements filed cnf inc securities exchange commission currently effective securities act 1933 arthur andersen llp consented incorporation reference report investors able recover arthur andersen llp section 11 securities act 1933 untrue statements material fact contained financial statements audited arthur andersen llp contained report omissions state material fact required stated therein schedule ii cnf inc valuation qualifying accounts three years ended december 31 2002 dollars thousands description allowance uncollectible accounts allowance costs discontinued operations restructuring reserves index exhibits item 15a3 remaining exhibits omitted either 1 neither required applicable 2 required information included consolidated financial statements notes thereto footnotes exhibit index previously filed securities exchange commission incorporated herein reference incorporated reference indicated reports filed securities act 1934 amended emery air freight corporation file 13893 designates contract compensation plan management directorsitem 15 exhibits financial statement schedules reports form 8k 1 financial statements 2 financial statement schedule report independent auditors financial statement schedule ii valuation qualifying accounts 3 exhibits filed connection report incorporated herein reference exhibit index pages 77 80 incorporated herein reference b reports form 8k october 20 2003 cnf filed report form 8k file item 12 cnf’s press release presenting cnf’s thirdquarter results november 25 2003 cnf filed report form 8k file item 5 announcement united states district judge granted cnf’s motion dismiss entirety complaint filed former executives consolidated freightways corporation “cfc” seeking recover reduced pension benefits stemming 2002 bankruptcy closure cfc signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused form 10k annual report signed behalf undersigned thereunto duly authorized signatures pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated report independent auditors board directors shareholders cnf inc audited accompanying consolidated balance sheets cnf inc subsidiaries december 31 2003 2002 related consolidated statements operations shareholders’ equity cash flows years ended consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audits consolidated financial statements cnf inc subsidiaries december 31 2001 year ended audited auditors ceased operations auditors’ report dated january 25 2002 except respect increase unsecured revolving credit facility discussed note 5 date february 22 2002 consolidated financial statements unqualified revision described note 1 restatement segment disclosures note 16 consolidated financial statements included explanatory paragraph described change company’s method accounting recognition intransit freight transportation revenue conducted audits accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion 2003 2002 consolidated financial statements referred present fairly material respects financial position cnf inc subsidiaries december 31 2003 2002 results operations cash flows years ended conformity accounting principles generally accepted united states america discussed consolidated financial statements cnf inc subsidiaries december 31 2001 year ended audited auditors ceased operations described note 1 consolidated financial statements consolidated financial statements revised include transitional disclosures required statement financial accounting standards 142 goodwill intangible assets sfas 142 adopted company january 1 2002 company changed composition reportable segments 2002 amounts 2001 consolidated financial statements relating reportable segments restated conform 2003 2002 composition reportable segments audited adjustments applied restate disclosures reportable segments reflected 2001 consolidated financial statements opinion sfas 142 transitional disclosures 2001 note 1 consolidated financial statements appropriate adjustments applied restate 2001 reportable segment disclosures note 16 consolidated financial statements appropriate properly applied however engaged audit review apply procedures 2001 consolidated financial statements cnf inc subsidiaries respect disclosures adjustments accordingly express opinion form assurance 2001 consolidated financial statements taken whole kpmg llp kpmg llp san francisco california january 26 2004 report independent public accountants board directors shareholders cnf inc audited accompanying consolidated balance sheet cnf inc delaware corporation subsidiaries december 31 2001 2000 related consolidated statement operations shareholders’ equity cash flows three years period ended december 31 2001 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position cnf inc subsidiaries december 31 2001 2000 results operations cash flows three years period ended december 31 2002 conformity accounting principles generally accepted united states explained note 1 consolidated financial statements effective january 1 2000 company changed method accounting recognition intransit freight transportation revenue arthur andersen llp arthur andersen llp san francisco california january 25 2002 except respect increase unsecured revolving credit facility discussed note 5 date february 22 2002 copy report previously issued arthur andersen llp report reissued arthur andersen llp arthur andersen llp independent accountants cnf inc may 30 2002 representatives arthur andersen llp available provide consent required incorporation reference report financial statements cnf inc appearing annual report registration statements filed cnf inc securities exchange commission currently effective securities act 1933 arthur andersen llp consented incorporation reference report investors able recover arthur andersen llp section 11 securities act 1933 untrue statements material fact contained financial statements audited arthur andersen llp contained report omissions state material fact required stated therein independent auditors’ report financial statement schedule board directors shareholders cnf inc date january 26 2004 reported consolidated balance sheets cnf inc subsidiaries december 31 2003 2002 related statements operations shareholders’ equity cash flows years ended included form 10k year ended december 31 2003 connection audits aforementioned consolidated financial statements also audited related consolidated financial statement schedule form 10k years ended december 31 2003 2002 financial statement schedule responsibility company’s management responsibility express opinion financial statement schedule based audits financial statement schedule year ended december 31 2001 audited auditors ceased operations auditors’ reports dated january 25 2002 financial statement schedule unqualified opinion financial statement schedule years ended december 31 2003 2002 considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein consolidated financial statements cnf inc subsidiaries december 31 2001 year ended audited auditors ceased operations described note 1 consolidated financial statements consolidated financial statements revised include transitional disclosures required statement financial accounting standards 142 goodwill intangible assets sfas 142 adopted company january 1 2002 described note 16 consolidated financial statements company changed composition reportable segments 2002 amounts 2001 financial statements relating reportable segments restated conform 2003 2002 composition reportable segments audited adjustments applied restate disclosures reportable segments reflected 2001 financial statements opinion sfas 142 transitional disclosures 2001 note 1 consolidated financial statements appropriate adjustments applied restate 2001 reportable segment disclosures note 16 consolidated financial statements appropriate properly applied however engaged audit review apply procedures 2001 consolidated financial statements financial statement schedule cnf inc respect disclosures adjustments accordingly express opinion form assurance 2001 consolidated financial statements taken whole kpmg llp kpmg llp san francisco california january 26 2004 independent public accountants’ report financial statement schedule shareholders board directors cnf inc audited accordance auditing standards generally accepted united states consolidated financial statements included cnf inc’s 2001 annual report shareholders incorporated reference form 10k issued report thereon dated january 25 2002 except respect increase unsecured revolving credit facility discussed note 5 date february 22 2002 audit made purpose forming opinion statements taken whole schedule iivaluation qualifying accounts page s2 responsibility company’s management presented purposes complying securities exchange commission’s rules part basic financial statements schedule subjected auditing procedures applied audit basic financial statements opinion fairly states material respects financial data required set forth therein relation basic financial statements taken whole arthur andersen llp arthur andersen llp san francisco california january 25 2002 copy report previously issued arthur andersen llp report reissued arthur andersen llp arthur andersen llp independent accountants cnf inc may 30 2002 representatives arthur andersen llp available provide consent required incorporation reference report financial statements cnf inc appearing annual report registration statements filed cnf inc securities exchange commission currently effective securities act 1933 arthur andersen llp consented incorporation reference report investors able recover arthur andersen llp section 11 securities act 1933 untrue statements material fact contained financial statements audited arthur andersen llp contained report omissions state material fact required stated therein schedule ii cnf inc valuation qualifying accounts three years ended december 31 2003 dollars thousands description allowance uncollectible accounts written net recoveries allowance costs discontinued operations restructuring reserves index exhibits item 153 footnotes exhibit index previously filed securities exchange commission incorporated herein reference incorporated reference indicated reports filed securities act 1934 amended emery air freight corporation file 13893 designates contract compensation plan management directorsitem 15 exhibits financial statement schedules 1 financial statements 2 financial statement schedule report independent auditors financial statement schedule ii valuation qualifying accounts 3 exhibits filed connection report incorporated herein reference exhibit index pages 78 82 incorporated herein reference report independent registered public accounting firm board directors shareholders cnf inc audited accompanying consolidated balance sheets cnf inc subsidiaries december 31 2004 2003 related consolidated statements operations shareholders’ equity cash flows years threeyear period ended december 31 2004 consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position cnf inc subsidiaries december 31 2004 2003 results operations cash flows years threeyear period ended december 31 2004 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states effectiveness cnf inc’s internal control financial reporting december 31 2004 based criteria established “internal control integrated framework” issued committee sponsoring organizations treadway commission coso report dated march 14 2005 expressed unqualified opinion management’s assessment effective operation internal control financial reporting kpmg llp kpmg llp portland oregon march 14 2005 report independent registered public accounting firm financial schedule board directors shareholders cnf inc date march 14 2005 reported consolidated balance sheets cnf inc subsidiaries december 31 2004 2003 related consolidated statements operations shareholders’ equity cash flows years threeyear period ended december 31 2004 included form 10k year ended december 31 2004 connection audits aforementioned consolidated financial statements also audited related consolidated financial statement schedule form 10k years ended december 31 2004 2003 2002 financial statement schedule responsibility company’s management responsibility express opinion financial statement schedule based audits opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein kpmg llp kpmg llp portland oregon march 14 2005 schedule ii cnf inc valuation qualifying accounts three years ended december 31 2004 description allowance uncollectible accounts written net recoveries signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused form 10k annual report signed behalf undersigned thereunto duly authorized cnf inc registrant w keith kennedy jr w keith kennedy jr interim chief executive officer march 14 2005 chutta ratnathicam chutta ratnathicam senior vice president chief financial officer march 14 2005 kevin coel kevin coel vice president controller march 14 2005 signatures pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated w keith kennedy jr w keith kennedy jr chairman board interim chief executive officer march 14 2005 margaret g gill margaret g gill director march 14 2005 robert jaunich ii robert jaunich ii director march 14 2005 michael j murray michael j murray director march 14 2005 john c pope john c pope director march 14 2005 robert rogers robert rogers director march 14 2005 william j schroeder william j schroeder director march 14 2005 peter w stott peter w stott director march 14 2005 robert p wayman robert p wayman director march 14 2005 chelsea c white iii chelsea c white iii director march 14 2005 index exhibits item 153 exhibit 3 articles incorporation bylaws 4 instruments defining rights security holders including debentures 10 material contracts 12 computation ratios earnings fixed charges 21 significant subsidiaries cnf 23 consent independent public auditors 31 certification officers pursuant section 302 sarbanesoxley act 2002 32 certification officers pursuant section 906 sarbanesoxley act 2002 99 additional documents footnotes exhibit index previously filed securities exchange commission incorporated herein reference designates contract compensation plan management directorsitem 15 exhibits financial statement schedules report independent registered public accounting firm board directors shareholders conway inc date february 27 2007 reported consolidated balance sheets conway inc subsidiaries december 31 2006 2005 related consolidated statements operations shareholders’ equity cash flows years threeyear period ended december 31 2006 included form 10k year ended december 31 2006 connection audits aforementioned consolidated financial statements also audited related consolidated financial statement schedule form 10k years ended december 31 2006 2005 2004 financial statement responsibility company’s management responsibility express opinion financial statement schedule based audits opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein discussed note 1 consolidated financial statements company adopted statement accounting standards 158 employers’ accounting defined benefit pension postretirement plan adopted december 31 2006 kpmg llp portland oregon february 27 2007 schedule ii conway inc valuation qualifying accounts three years ended december 31 2006 description allowance uncollectible accounts written net recoveries signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized conway inc registrant douglas w stotlar douglas w stotlar president chief executive officer february 27 2007 kevin c schick kevin c schick senior vice president chief financial officer february 27 2007 kevin coel kevin coel vice president controller february 27 2007 signature pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated index exhibits item 153 footnotes exhibit index previously filed securities exchange commission incorporated herein reference designates contract compensation plan management directorsitem 15 exhibits financial statement schedules page 1 financial statements report independent registered public accounting firm kpmg llp consolidated balance sheets december 31 2007 2006 statements consolidated income years ended december 31 2007 2006 2005 statements consolidated cash flows years ended december 31 2007 2006 2005 statements consolidated shareholders’ equity years ended december 31 2007 2006 2005 notes consolidated financial statements 2 financial statement schedule iivaluation qualifying accounts omitted allowance uncollectible accounts required information included note 1 “principal accounting policies” item 8 “financial statements supplementary data” 3 exhibits filed connection report incorporated herein reference exhibit index pages 91 96 incorporated herein reference signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized signatures pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated index exhibits item 153 instruments defining rights security holders longterm debt conway inc subsidiaries financial statements required filed form 10k total amount securities authorized instrument less 10 total assets conway inc subsidiaries consolidated basis filed exhibits form 10k conway agrees furnish copy applicable instrument securities exchange commission upon request footnotes exhibit index previously filed securities exchange commission incorporated herein reference designates contract compensation plan management directorsitem 15 exhibits financial statement schedules signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized conway inc registrant douglas w stotlar douglas w stotlar president chief executive officer february 27 2009 stephen l bruffett stephen l bruffett senior vice president chief financial officer february 27 2009 kevin coel kevin coel vice president controller february 27 2009 signatures pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated w keith kennedy jr w keith kennedy jr chairman board february 27 2009 douglas w stotlar douglas w stotlar director february 27 2009 john j anton john j anton director february 27 2009 william r corbin william r corbin director february 27 2009 margaret g gill margaret g gill director february 27 2009 robert jaunich ii robert jaunich ii director february 27 2009 henry h mauz jr henry h mauz jr director february 27 2009 michael j murray michael j murray director february 27 2009 john c pope john c pope director february 27 2009 robert rogers robert rogers director february 27 2009 william j schroeder william j schroeder director february 27 2009 peter w stott peter w stott director february 27 2009 chelsea c white iii chelsea c white iii director february 27 2009 index exhibits item 153 exhibit 2 plan acquisition reorganization arrangement liquidation succession 21 conway inc plan discontinuance conway forwarding item 205 conway’s report form 8k filed june 5 2006 22 conway inc plan reorganization conway freight inc item 701 conway’s report form 8k filed august 22 2007 23 conway inc plan reorganization conway freight inc item 205 conway’s report form 8k filed november 3 2008 24 conway inc plan reorganization conway freight inc item 205 conway’s report form 8k filed december 8 2008 3 articles incorporation bylaws 31 conway inc certificate incorporation amended april 18 2006 exhibit 31 conway’s form 10q quarter ended march 31 2006 32 conway inc bylaws amended april 23 2007 exhibit 32 conway’s form 10q quarter ended march 31 2007 4 instruments defining rights security holders including debentures 41 certificate designations series b cumulative convertible preferred stock exhibit 41 filed form se dated may 25 1989 42 form indenture cnf transportation inc bank one trust company national association exhibit 4di conway’s form 8k dated march 3 2000 43 form security 878 notes due 2010 issued cnf transportation inc exhibit 4i conway’s form 8k dated march 3 2000 44 supplemental indenture 1 dated april 30 2004 indenture dated march 8 2000 cnf inc issuer bank new york na successor trustee relating 670 senior debentures due 2034 filed exhibit 42 form s4 dated june 4 2004 45 form global 670 senior debentures due 2034 included exhibit 42 form s4 dated june 4 2004 46 400 million credit agreement dated march 11 2005 among conway inc various financial institutions exhibit 49 conway’s form 10k year ended december 31 2004 47 amendment 1 dated september 30 2006 400 million credit agreement dated march 11 2005 exhibit 993 conway’s report form 8k filed september 29 2006 48 subsidiary guaranty agreement dated march 11 2005 made conway transportation services inc menlo worldwide llc menlo logistics inc favor banks referred 46 exhibit 410 conway’s form 10k year ended december 31 2004 49 form indenture dated december 27 2007 conway inc issuer bank new york trust company na trustee exhibit 41 conway’s report form 8k filed december 27 2007 410 form 725 senior notes due 2018 exhibit 43 conway’s report form 8k filed december 27 2007 instruments defining rights security holders longterm debt conway inc subsidiaries financial statements required filed form 10k total amount securities authorized instrument less 10 total assets conway inc subsidiaries consolidated basis filed exhibits form 10k conway agrees furnish copy applicable instrument securities exchange commission upon request 10 material contracts 101 distribution agreement consolidated freightways inc consolidated freightways corporation dated november 25 1996 exhibit 1034 conway’s form 10k year ended december 31 1996 102 employee benefit matters agreement consolidated freightways inc consolidated freightways corporation dated december 2 1996 exhibit 1033 conway’s form 10k year ended december 31 1996 103 transition services agreement cnf service company inc consolidated freightways corporation dated december 2 1996 exhibit conway’s form 10k year ended december 31 1996 104 tax sharing agreement consolidated freightways inc consolidated freightways corporation dated december 2 1996 exhibit conway’s form 10k year ended december 31 1996 105 stock purchase agreement cnf inc menlo worldwide llc united parcel service dated october 5 2004 exhibit 991 conway’s form 8k dated october 6 2004 106 amendment 1 dated december 17 2004 stock purchase agreement cnf inc menlo worldwide llc united parcel service dated october 5 2004 exhibit 991 conway’s form 8k dated december 21 2004 107 transition services agreement cnf inc menlo worldwide llc united parcel service date october 5 2004 exhibit 991 conway’s form 8k dated october 6 2004 108 summary certain compensation arrangements exhibit 103 conway’s form 10q quarter ended march 31 2005 109 summary certain compensation arrangements exhibit 109 conway’s form 10k year ended december 31 2005 1010 summary material executive employee agreements item 101 conway’s report form 8k filed june 6 2005 1011 conway inc 1997 equity incentive plan 2006 amendment restatement exhibit 997 conway’s report form 8k filed december 6 2005 1012 restricted stock award agreement conway inc douglas w stotlar dated december 17 2004 exhibit 1075 conway’s form 10k year ended december 31 2004 1013 stock option agreement conway inc douglas w stotlar dated december 17 2004 exhibit 1076 conway’s form 10k year ended december 31 2004 1014 form stock option agreement exhibit 9910 conway’s report form 8k filed december 6 2005 1015 form restricted stock award agreement exhibit 9911 conway’s report form 8k filed december 6 2005 1016 supplemental retirement plan dated january 1 1990 exhibit 1031 conway’s form 10k year ended december 31 1993 1017 conway inc nonqualified executive benefit plans trust agreement 2004 restatement dated december 30 2004 conway inc wachovia bank na exhibit 105 conway’s form 10q quarter ended march 31 2005 1018 form conway inc tier severance agreement exhibit 991 conway’s report form 8k filed december 6 2005 1019 form subsidiary tier severance agreement exhibit 992 conway’s report form 8k filed december 6 2005 1020 form conway inc tier ii severance agreement exhibit 993 conway’s report form 8k filed december 6 2005 1021 form subsidiary tier ii severance agreement exhibit 994 conway’s report form 8k filed december 6 2005 1022 form tier ii vector scm llc agreement exhibit 995 conway’s report form 8k filed december 6 2005 1023 amended restated executive severance plan exhibit 996 conway’s report form 8k filed december 6 2005 1024 directors’ 24hour accidental death dismemberment plan exhibit 1032 conway’s form 10k year ended december 31 1993 1025 directors’ business travel insurance plan exhibit 1036 conway’s form 10k year ended december 31 1993 1026 emery air freight plan retirees effective october 31 1987 exhibit 423 emery air freight corporation quarterly report form 10q ended september 30 1987 1027 summary material executive employee relocation package item 101 conway’s report form 8k filed august 25 2006 1028 amended form stock option agreement exhibit 992 conway’s report form 8k filed september 29 2006 1029 summary revisions incentive compensation value management plan awards item 101 c conway’s report form 8k filed september 29 2006 1030 summary executive stock ownership guidelines item 101 conway’s report form 8k filed september 29 2006 1031 summary changes conway’s pension retirement benefits programs exhibit 991 conway’s report form 8k filed october 17 2006 1032 summary directors stock ownership guidelines item 701 conway’s report form 8k filed december 7 2006 1033 summary directors compensation arrangements item 701 conway’s report form 8k filed december 7 2006 1034 summary certain compensation arrangements item 502 conway’s report form 8k filed january 31 2007 1035 form performance share plan unit grant agreement exhibit 993 conway’s report form 8k filed january 31 2007 1036 agreement plan merger dated july 13 2007 among company seattle acquisition corporation missouri corporation wholly owned subsidiary company transportation resources inc missouri corporation shareholders’ agent defined therein principal shareholders defined therein exhibit 101 conway’s form 10q quarter ended june 30 2007 1037 separation agreement general release conway freight inc david mcclimon effective september 28 2007 exhibit 99 conway’s report form 8k filed october 1 2007 1038 severance agreement dated august 23 2007 herbert j schmidt contract freighters inc exhibit 107 conway’s form 10q quarter ended september 30 2007 1039 stock purchase agreement purchase chic holdings limited menlo worldwide llc various sellers dated september 7 2007 exhibit 108 conway’s form 10q quarter ended september 30 2007 1040 form performance share plan unit grant agreement exhibit 991 conway’s report form 8ka filed february 1 2008 1041 form restricted stock award agreement officers conway exhibit 992 conway’s report form 8k filed january 30 2008 1042 summary certain compensation agreements item 502 conway’s report form 8k filed january 30 2008 1043 summary material executive relocation package item 502 conway’s report form 8k filed may 29 2008 1044 summary certain compensation agreements item 502 conway’s report form 8k filed august 14 2008 1045 amendments executive severance agreements item 502 conway’s report form 8k filed september 25 2008 1046 settlement release agreement conway inc central states item 101 conway’s report form 8k filed december 31 2008 1047 summary certain compensation agreements item 502 conway’s report form 8k filed january 29 2009 1048 form restricted stock unit grant agreement exhibit 99 conway’s report form 8k filed january 29 2009 1049 conway inc amended restated 2003 equity incentive plan nonemployee directors amended restated december 2008 1050 conway inc deferred compensation plan nonemployee directors amended restated december 2008 1051 conway inc 2005 deferred compensation plan nonemployee directors amended restated december 2008 1052 conway inc 2006 equity incentive plan amended restated december 2008 1053 conway inc 1993 deferred compensation plan executives key employees amended restated december 2008 1054 conway inc 2005 deferred compensation plan executives key employees amended restated december 2008 1055 conway inc executive incentive compensation plan amended restated december 2008 1056 conway inc value management plan 2008 amendment restatement 1057 conway inc 2005 supplemental excess retirement plan amended restated december 2008 1058 conway inc supplemental retirement savings plan amended restated december 2008 12 computation ratios earnings fixed charges 21 significant subsidiaries conway inc 23 consent independent registered public accounting firm 31 certification officers pursuant section 302 sarbanesoxley act 2002 32 certification officers pursuant section 906 sarbanesoxley act 2002 99 additional documents 991 conway inc 2009 notice annual meeting proxy statement filed form def 14a portions referenced herein incorporated form 10k portions required therefore “filed” part form 10k footnotes exhibit index previously filed securities exchange commission incorporated herein reference designates contract compensation plan management directorsitem 15 exhibits financial statement schedules 1 financial statements 2 financial statement schedule ii valuation qualifying accounts omitted allowance uncollectible accounts allowance revenue adjustments required information included note 1 “principal accounting policies” item 8 “financial statements supplementary data” 3 exhibits filed connection report incorporated herein reference exhibit index pages 87 91 incorporated herein reference signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized signatures pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated index exhibits item 153 footnotes exhibit index previously filed securities exchange commission incorporated herein reference designates contract compensation plan management directorsitem 15 exhibits financial statement schedules 1 financial statements 2 financial statement schedule ii valuation qualifying accounts omitted allowance uncollectible accounts allowance revenue adjustments required information included note 1 “principal accounting policies” item 8 “financial statements supplementary data” 3 exhibits filed connection report incorporated herein reference exhibit index pages 78 81 incorporated herein reference signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized conway inc registrant douglas w stotlar douglas w stotlar president chief executive officer february 28 2011 stephen l bruffett stephen l bruffett executive vice president chief financial officer february 28 2011 kevin coel kevin coel senior vice president controller february 28 2011 signatures pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated w keith kennedy jr w keith kennedy jr chairman board february 28 2011 douglas w stotlar douglas w stotlar director february 28 2011 john j anton john j anton director february 28 2011 william r corbin william r corbin director february 28 2011 robert jaunich ii robert jaunich ii director february 28 2011 michael j murray michael j murray director february 28 2011 edith r perez edith r perez director february 28 2011 john c pope john c pope director february 28 2011 william j schroeder william j schroeder director february 28 2011 peter w stott peter w stott director february 28 2011 chelsea c white iii chelsea c white iii director february 28 2011 index exhibits item 153 footnotes exhibit index previously filed securities exchange commission incorporated herein reference designates contract compensation plan management directorsitem 15 exhibits financial statement schedules signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized signatures pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated index exhibits item 153item 15 exhibits financial statement schedules signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated index exhibitsitem 15 exhibits financial statement schedules signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated index exhibitsitem 15 exhibits financial statement schedules 1 financial statements report independent registered public accounting firm kpmg llp dated march 13 2006 consolidated balance sheets december 31 2005 statements consolidated operations years ended december 31 2005 2004 2003 statements consolidated cash flows years ended december 31 2005 2004 2003 statements consolidated shareholders’ equity years ended december 31 2005 2004 2003 notes consolidated financial statements 2 financial statement schedule report independent auditors financial statement schedule ii valuation qualifying accounts 3 exhibits filed connection report incorporated herein reference exhibit index pages 75 77 incorporated herein reference report independent registered public accounting firm board directors shareholders cnf inc date march 13 2006 reported consolidated balance sheets cnf inc subsidiaries december 31 2005 2004 related consolidated statements operations shareholders’ equity cash flows years threeyear period ended december 31 2005 included form 10k year ended december 31 2005 connection audits aforementioned consolidated financial statements also audited related consolidated financial statement schedule form 10k years ended december 31 2005 2004 2003 financial statement schedule responsibility company’s management responsibility express opinion financial statement schedule based audits opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein kpmg llp kpmg llp portland oregon march 13 2006 schedule ii cnf inc valuation qualifying accounts three years ended december 31 2005 description allowance uncollectible accounts written net recoveries signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized signatures pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated index exhibits item 153 footnotes exhibit index previously filed securities exchange commission incorporated herein reference designates contract compensation plan management directorsitem 15 exhibits financial statement schedules signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated index exhibitsnan