UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended
March 31,June 30, 2004--------------OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period fromto
-------------------- -----------------------Commission file number 0-12255
-------YELLOW ROADWAY CORPORATION
- -------------------------------------------------------------------------------- (Exact(Exact name of registrant as specified in its charter)
Delaware 48-0948788 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 10990 Roe Avenue, Overland Park, Kansas 66211 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code)
Delaware 48-0948788 (State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
10990 Roe Avenue, Overland Park, Kansas 66211 (Address of principal executive offices) (Zip Code) (913) 696-6100
- -------------------------------------------------------------------------------- (Registrant's(Registrant’s telephone number, including area code)
No Changes
- -------------------------------------------------------------------------------- (Former(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
Xx No--- ---¨Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes
Xx No--- ---¨Indicate the number of shares outstanding of each of the
issuer'sissuer’s classes of common stock, as of the latest practicable date.
Class
Outstanding at
April 30,July 31, 2004----- -----------------------------Common Stock, $1 Par Value Per Share
48,013,85548,109,159 shares INDEX
Item Page - ---- ----PART I 1. Financial Statements Consolidated Balance Sheets - March 31, 2004 and December 31, 2003 3 Statements of Consolidated Operations - Three Months Ended March 31, 2004 and 2003 4 Statements of Consolidated Cash Flows - Three Months Ended March 31, 2004 and 2003 5 Notes to Consolidated Financial Statements 6 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 18 3. Quantitative and Qualitative Disclosures About Market Risk 25 4. Controls and Procedures 26 PART II 1. Legal Proceedings 27 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 27 3. Defaults Upon Senior Securities 27 4. Submission of Matters to a Vote of Security Holders 27 5. Other Information 27 6. Exhibits and Reports on Form 8-K 27 Signatures 292PART I - FINANCIAL INFORMATION
Yellow Roadway Corporation and Subsidiaries
(Amounts(Amounts in thousands except per share data)
(Unaudited)
March 31, December 31, 2004 2003 ------------ ------------ASSETS Current Assets: Cash and cash equivalents $ 20,688 $ 75,166 Accounts receivable, net 734,263 699,142 Prepaid expenses and other 107,249 110,128 ------------ ------------ Total current assets 862,200 884,436 ------------ ------------ Property and Equipment: Cost 2,593,109 2,538,614 Less - accumulated depreciation 1,163,099 1,135,346 ------------ ------------ Net property and equipment 1,430,010 1,403,268 ------------ ------------ Goodwill 618,532 617,313 Intangibles, net 466,903 467,114 Other assets 92,546 91,098 ------------ ------------ TOTAL ASSETS $ 3,470,191 $ 3,463,229 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 209,316 $ 260,175 Wages, vacations and employees' benefits 394,511 351,287 Other current and accrued liabilities 231,787 178,478 Asset backed securitization ("ABS") borrowings 13,000 71,500 Current maturities of long-term debt 4,506 1,757 ------------ ------------ Total current liabilities 853,120 863,197 ------------ ------------ Other Liabilities: Long-term debt, less current portion 810,104 836,082 Deferred income taxes, net 296,406 298,256 Accrued pension and postretirement 275,875 256,187 Claims and other liabilities 208,583 207,422 ------------ ------------ Total other liabilities 1,590,968 1,597,947 ------------ ------------ Shareholders' Equity: Common stock, $1 par value per share 50,352 50,146 Capital surplus 660,335 653,739 Retained earnings 384,313 366,157 Accumulated other comprehensive loss (23,106) (23,167) Unamortized restricted stock awards (4,392) (567) Treasury stock, at cost (2,238 and 2,359 shares) (41,399) (44,223) ------------ ------------ Total shareholders' equity 1,026,103 1,002,085 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,470,191 $ 3,463,229 ============ ============
June 30,
2004
December 31,
2003
Assets
Current Assets:
Cash and cash equivalents
$ 33,567 $ 75,166 Accounts receivable, net
794,278 699,142 Prepaid expenses and other
121,605 110,128 Total current assets
949,450 884,436 Property and Equipment:
Cost
2,638,092 2,538,614 Less – accumulated depreciation
1,192,490 1,135,346 Net property and equipment
1,445,602 1,403,268 Goodwill
622,152 617,313 Intangibles, net
472,381 467,114 Other assets
83,037 91,098 Total assets
$ 3,572,622 $ 3,463,229 Liabilities and Shareholders’ Equity
Current Liabilities:
Accounts payable
$ 270,673 $ 260,175 Wages, vacations and employees’ benefits
436,563 351,287 Other current and accrued liabilities
213,530 178,478 Asset backed securitization (“ABS”) borrowings
57,000 71,500 Current maturities of long-term debt
750 1,757 Total current liabilities
978,516 863,197 Other Liabilities:
Long-term debt, less current portion
734,624 836,082 Deferred income taxes, net
298,711 298,256 Accrued pension and postretirement
270,902 256,187 Claims and other liabilities
215,152 207,422 Total other liabilities
1,519,389 1,597,947 Shareholders’ Equity:
Common stock, $1 par value per share
50,455 50,146 Capital surplus
663,447 653,739 Retained earnings
431,229 366,157 Accumulated other comprehensive loss
(24,542 ) (23,167 ) Unamortized restricted stock awards
(4,862 ) (567 ) Treasury stock, at cost (2,217 and 2,359 shares)
(41,010 ) (44,223 ) Total shareholders’ equity
1,074,717 1,002,085 Total liabilities and shareholders’ equity
$ 3,572,622 $ 3,463,229 �� The accompanying notes are an integral part of these statements.
3STATEMENTS OF CONSOLIDATED OPERATIONS
Yellow Roadway Corporation and Subsidiaries
For the Three and Six Months Ended
March 31 (AmountsJune 30(Amounts in thousands except per share data)
(Unaudited)
2004 2003 ----------- -----------OPERATING REVENUE $ 1,552,135 $ 681,093 ----------- ----------- OPERATING EXPENSES: Salaries, wages and employees' benefits 993,550 438,748 Operating expenses and supplies 238,357 109,943 Operating taxes and licenses 40,565 19,767 Claims and insurance 30,013 12,724 Depreciation and amortization 40,606 20,268 Purchased transportation 167,264 67,873 Losses on property disposals, net 462 11 ----------- ----------- Total operating expenses 1,510,817 669,334 ----------- ----------- OPERATING INCOME 41,318 11,759 ----------- ----------- NONOPERATING (INCOME) EXPENSES: Interest expense 11,910 2,646 Other (120) (93) ----------- ----------- Nonoperating expenses, net 11,790 2,553 ----------- ----------- INCOME BEFORE INCOME TAXES 29,528 9,206 Income tax provision 11,372 3,580 ----------- ----------- NET INCOME $ 18,156 $ 5,626 =========== =========== AVERAGE COMMON SHARES OUTSTANDING - BASIC 47,874 29,583 AVERAGE COMMON SHARES OUTSTANDING - DILUTED 48,246 29,818 BASIC EARNINGS PER SHARE $ 0.38 $ 0.19 DILUTED EARNINGS PER SHARE $ 0.38 $ 0.19
Three Months Six Months 2004 2003 2004 2003 Operating Revenue
$ 1,674,131 $ 713,453 $ 3,226,266 $ 1,394,546 Operating Expenses:
Salaries, wages and employees’ benefits
1,031,120 458,036 2,024,670 896,784 Operating expenses and supplies
249,128 103,908 487,485 213,851 Operating taxes and licenses
43,187 19,492 83,752 39,259 Claims and insurance
36,282 10,730 66,295 23,454 Depreciation and amortization
42,982 20,818 83,588 41,086 Purchased transportation
183,384 68,106 350,648 135,979 (Gains) losses on property disposals, net
(193 ) 30 269 41 Total operating expenses
1,585,890 681,120 3,096,707 1,350,454 Operating Income
88,241 32,333 129,559 44,092 Nonoperating (Income) Expenses:
Interest expense
11,497 2,625 23,407 5,271 Other
462 (343 ) 342 (436 ) Nonoperating expenses, net
11,959 2,282 23,749 4,835 Income Before Income Taxes
76,282 30,051 105,810 39,257 Income tax provision
29,365 11,691 40,737 15,271 Net Income
$ 46,917 $ 18,360 $ 65,073 $ 23,986 Average Common Shares Outstanding – Basic
47,958 29,586 47,885 29,585 Average Common Shares Outstanding – Diluted
48,436 29,834 48,348 29,826 Basic Earnings Per Share
$ 0.98 $ 0.62 $ 1.36 $ 0.81 Diluted Earnings Per Share
$ 0.97 $ 0.62 $ 1.35 $ 0.80 The accompanying notes are an integral part of these statements.
4STATEMENTS OF CONSOLIDATED CASH FLOWS
Yellow Roadway Corporation and Subsidiaries
For the
ThreeSix Months EndedMarch 31 (AmountsJune 30(Amounts in thousands)
(Unaudited)
2004 2003 --------- ---------OPERATING ACTIVITIES: Net income $ 18,156 $ 5,626 Noncash items included in net income: Depreciation and amortization 40,606 20,268 Losses on property disposals, net 462 11 Deferred income tax provision, net (3,602) -- Changes in assets and liabilities, net: Accounts receivable (25,644) 3,013 Accounts payable (60,204) (37,076) Other working capital items 111,285 23,594 Claims and other 10,395 5,183 Other, net (1,725) (564) --------- --------- NET CASH FROM OPERATING ACTIVITIES 89,729 20,055 --------- --------- INVESTING ACTIVITIES: Acquisition of property and equipment (57,931) (26,141) Proceeds from disposal of property and equipment 350 691 Acquisition of companies (7,881) -- --------- --------- NET CASH USED IN INVESTING ACTIVITIES (65,462) (25,450) --------- --------- FINANCING ACTIVITIES: ABS borrowings, net (58,500) -- Repayment of long-term debt (22,014) (21) Proceeds from exercise of stock options 1,769 38 --------- --------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (78,745) 17 --------- --------- NET DECREASE IN CASH AND CASH EQUIVALENTS (54,478) (5,378) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 75,166 28,714 --------- --------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 20,688 $ 23,336 ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION: Income taxes paid (refunds), net $ (15,146) $ 4,832 Interest paid 8,791 1,510
2004 2003 Operating Activities:
Net income
$ 65,073 $ 23,986 Noncash items included in net income:
Depreciation and amortization
83,588 41,086 Losses on property disposals, net
269 41 Deferred income tax provision, net
(3,602 ) — Changes in assets and liabilities, net:
Accounts receivable
(85,659 ) (6,447 ) Accounts payable
(32,347 ) (43,706 ) Other working capital items
124,498 55,861 Claims and other
18,465 (2,653 ) Other, net
10,404 1,603 Net cash from operating activities
180,689 69,771 Investing Activities:
Acquisition of property and equipment
(107,043 ) (48,038 ) Proceeds from disposal of property and equipment
3,728 1,204 Acquisition of companies
(7,881 ) — Net cash used in investing activities
(111,196 ) (46,834 ) Financing Activities:
ABS borrowings, net
(14,500 ) — Repayment of long-term debt
(100,036 ) (43 ) Treasury stock purchases
— (2,921 ) Proceeds from exercise of stock options
3,444 1,124 Net cash used in financing activities
(111,092 ) (1,840 ) Net Increase (Decrease) In Cash and Cash Equivalents
(41,599 ) 21,097 Cash and Cash Equivalents, Beginning of Period
75,166 28,714 Cash and Cash Equivalents, End of Period
$ 33,567 $ 49,811 Supplemental Cash Flow Information:
Income taxes paid, net
$ 15,784 $ 4,170 Interest paid
38,893 4,491 The accompanying notes are an integral part of these statements.
5NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Yellow Roadway Corporation and Subsidiaries
(Unaudited)
1. DESCRIPTION OF BUSINESS
1. Description of Business Yellow Roadway Corporation (also referred to as
"Yellow“Yellow Roadway," "we"” “we” or"our"“our”), one of the largest transportation service providers in the world, is a holding company that through wholly owned operating subsidiaries offers its customers a wide range of asset and non-asset-based transportation services. Yellow Technologies, Inc., a captive corporate resource, providesinnovativetechnology solutions and services exclusively for Yellow Roadway companies. Our operating subsidiaries include the following:oYellow Transportation, Inc.("(“YellowTransportation"Transportation”) is a leading transportation services provider that offers a full range of regional, national and international services for the movement of industrial, commercial and retail goods, primarily through centralized management and customer facing organizations. Approximately 40 percent of Yellow Transportation shipments are completed in two days or less.oRoadway Express, Inc.("(“RoadwayExpress"Express”) is a leading transportation services provider that offers a full range of regional, national and international services for the movement of industrial, commercial and retail goods, primarily through decentralized management and customer facing organizations. Approximately 30 percent of Roadway Express shipments are completed in two days or less. Roadway Express owns 100 percent of Reimer Express Lines Ltd. located in Canada that specializes in shipments into, across and out of Canada.oRoadway Next Day Corporation is a holding company focused on business opportunities in the regional and next-day delivery lanes. Roadway Next Day Corporation owns 100 percent of New Penn Motor Express, Inc.("(“NewPenn"Penn”), which provides regional, next-day ground services through a network of facilities located in the Northeastern United States("(“U.S."”), Quebec, Canada and Puerto Rico.oMeridian IQ, Inc.("(“MeridianIQ"IQ”) is a non-asset-based global transportation management company that plans and coordinates the movement of goods throughout the world, providing customers a quick return on investment, more efficient supply-chain processes and a single source for transportation management solutions.On December 11, 2003, we successfully closed the acquisition of Roadway Corporation
("Roadway"(“Roadway”). Roadway became Roadway LLC("(“RoadwayGroup"Group”) and a subsidiary of Yellow Roadway. Consideration for the acquisition included $494 million in cash and 18.0 million shares of Yellow Roadway common stock for a total purchase price of approximately $1.1 billion. The Roadway Group has two operating segments, Roadway Express and New Penn.2. PRINCIPLES OF CONSOLIDATION
2. Principles of Consolidation The accompanying consolidated financial statements include the accounts of Yellow Roadway Corporation and its wholly owned subsidiaries. We have prepared the consolidated financial statements, without audit by independent public accountants, pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC"(“SEC”). Inmanagement'smanagement’s opinion, all normal recurring adjustments necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods included herein have been made. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted from these statements pursuant to SEC rules and regulations. Accordingly, the accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2003.3. ACQUISITIONS In accordance
3. Stock-Based Compensation Yellow Roadway has various stock-based employee compensation plans, which are described more fully in our Annual Report on Form 10-K for the year ended December 31, 2003. Yellow Roadway accounts for stock options issued under those plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. We do not reflect compensation costs in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.
We estimated the fair value per option for each option granted in the periods presented using the Black-Scholes option pricing model with the following weighted average assumptions for the three and six months ended June 30:
Three Months Six Months 2004 2003 2004 2003 Actual options granted
0 40,700 28,000 54,700 Dividend yield
n/a – % – % – % Expected volatility
n/a 46.8 % 45.2 % 46.9 % Risk-free interest rate
n/a 2.2 % 2.6 % 2.1 % Expected option life (years)
n/a 3.0 3.6 3.0 Fair value per option
n/a $ 8.91 $ 12.61 $ 8.90 The following table illustrates the effect on net income and earnings per share if Yellow Roadway had applied the fair value recognition provisions of Statement of Financial Accounting
Standard ("SFAS"Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, for the three and six months ended June 30:
Three Months Six Months (in millions except per share data)
2004 2003 2004 2003 Net income, as reported
$ 46.9 $ 18.4 $ 65.1 $ 24.0 Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects
0.4 0.6 0.9 1.1 Pro forma net income
$ 46.5 $ 17.8 $ 64.2 $ 22.9 Basic earnings per share:
Net income – as reported
$ 0.98 $ 0.62 $ 1.36 $ 0.81 Net income – pro forma
0.97 0.60 1.34 0.77 Diluted earnings per share:
Net income – as reported
0.97 0.62 1.35 0.80 Net income – pro forma
0.96 0.60 1.33 0.76 During the six months ended June 30, 2004, we issued 113,585 performance share units to certain executive officers under the long-term incentive plan implemented in 2002. According to the plan provisions, the performance share units provide the holders the right to receive one share of common stock upon vesting of one performance share unit. Fifty percent of the awarded performance share units vest three years from the date of grant and the remaining 50 percent vest six years from the date of grant. Additionally, on February 27, 2004, we issued 27,647 shares of restricted stock from the 2002 stock option plan at $31.59 per share. These shares will vest ratably over three years. The related compensation expense for the performance share units and restricted stock is included in the consolidated statements of operations ratably over the service period, defined as the performance period and vesting period combined. The performance share units and restricted stock are not reflected in the fair value or pro forma results above.
4. Acquisitions In accordance with SFAS No. 141, Business Combinations
("(“Statement No.141"141”), Yellow Roadway allocates the purchase price of its acquisitions to the tangible and intangible assets and liabilities of the acquired entity based on their fair values. We record the excess purchase price over the fair values as goodwill. The fair value assigned to intangible assets acquired is based on valuations prepared by independent third party appraisal firms using estimates and assumptions provided by management. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets("(“Statement No.142"142”), goodwill and intangible assets with indefinite useful lives are not amortized but are reviewed at least annually for impairment. An impairment loss would be recognized to the extent that the carrying amount exceeds theassets' 6assets’ fair value. Intangible assets with estimatable useful lives are amortized on a straight-line basis over their respective useful lives. ROADWAY CORPORATIONRoadway Corporation
On December 11, 2003, we closed the acquisition of Roadway. Consideration for the acquisition included $494 million in cash and 18.0 million shares of Yellow Roadway common stock for a total purchase price of approximately $1.1 billion. We initially allocated $597.0 million of the purchase price to goodwill and $461.3 million to intangible assets. Refer to our goodwill and intangibles note for further details.
In connection with the acquisition, we incurred $13.4 million of restructuring costs as a result of severance (administrative, sales and operations personnel) and relocation of workforce and contract terminations. We have recognized such costs as a liability assumed as of the acquisition date, resulting in additional goodwill. These restructuring costs consisted of $12.2 million of employee termination (including wages, health benefits and outplacement services) and relocation costs for approximately 800 employees and $1.2 million for contract terminations. All of these restructuring items will have been effectuated within one year of the acquisition in accordance with purchase accounting requirements. During the six months ended June 30, 2004, we paid $2.0 million of restructuring costs resulting in a $11.4 million accrued liability at June 30, 2004.
In accordance with Statement No. 141, we accounted for the acquisition under purchase accounting. As a result, our Statements of Consolidated Operations and Statements of Consolidated Cash Flows include results of Roadway Express and New Penn from the date of acquisition. Our
first quarterresults for the three and six months ended June 30, 2003resultsdo not reflect the operations of the Roadway Group.Pro Forma Results
The following unaudited pro forma financial information presents the combined results of operations of Yellow Roadway as if the acquisition had occurred on January 1, 2003. The unaudited pro forma financial information is not intended to represent or be indicative of the consolidated results of operations of Yellow Roadway that would have been reported had the acquisition been completed as of the date presented, and should not be taken as representative of the future consolidated results of operations of Yellow Roadway. Summarized unaudited pro forma results were as follows for the three and six months ended
March 31,June 30, 2003:
(in millions except per share data) ----------------------------------------------------------------------Operating revenue $ 1,441.4 Operating income 34.4 Income from continuing operations 12.8 Net income 12.9 Diluted earnings per share: Income from continuing operations 0.27 Net income 0.27 ----------------------------------------------------------------------
(in millions except per share data)
Three Months Six Months Operating revenue
$ 1,456.1 $ 2,897.4 Operating income
46.9 81.3 Income from continuing operations
21.8 34.5 Net income
21.5 34.4 Diluted earnings per share:
Income from continuing operations
0.46 0.72 Net income
0.45 0.72 GPS
LOGISTICSLogisticsIn
August 2003,February 2004, MIQ LLC (formerly known as Yellow GPS), a subsidiary of Meridian IQ,Yellow GPS, LLC ("Yellow GPS"), acquired certain U.S. assets of GPS Logistics, a global logistics provider. Yellow GPS assumed certain of GPS Logistics' customer, lease and other obligations and became obligated to pay GPS Logistics earnout payments if certain financial targets for the combined business of Yellow GPS are met. No earnout payments were made in the first quarter of 2004. In addition, Yellow GPS received a call option to purchase the stock of each of GPS Logistics (EU) Ltd., the related United Kingdom ("U.K.") operations of GPS Logistics, and GPS Logistics Group Ltd., the related Asian operations of GPS Logistics. In February 2004, Yellow GPSexercised and closed its option to purchase GPS Logistics (EU) Ltd.Yellow GPSMIQ LLC made a payment of $7.6 million, which is subject to upward and downward adjustments based on the financial performance ofthe U.K. business.GPS Logistics (EU) Ltd. The initial payment and acquisition expenses of $0.3 million were allocated as follows: $3.3 million to goodwill, $3.2 million to amortizable intangible assets, and $1.4 million to miscellaneous assets and liabilities. The results of GPS Logistics (EU) Ltd. have been included in our financial statements since the date of acquisition. The pro forma effect of this acquisition is not material to our results of operations. MIQ LLC also has an option to acquire the Asian business of GPS Logistics Group Ltd. (not previously acquired) at a price that varies with the performance of that business. IfYellow GPSMIQ LLC does not exercise the Asian option, it will be required to pay a deferred option price to the shareholders of GPS Logistics Group Ltd.4. GOODWILL AND INTANGIBLES
5. Goodwill and Intangibles The following table shows the amount of goodwill attributable to our operating segments with goodwill balances and changes therein:
7
Foreign Currency Translation December 31, Adjustments/ March 31, (in millions) 2003 Acquisitions Reclasses 2004 - -------------------------------------------------------------------------Roadway Express $ 474.5 $ -- $ 3.4 $ 477.9 New Penn 122.3 -- (5.5) 116.8 Meridian IQ 20.5 3.3 -- 23.8 - ------------------------------------------------------------------------- Goodwill $ 617.3 $ 3.3 $ (2.1) $ 618.5 - -------------------------------------------------------------------------
(in millions)
December 31,
2003
Acquisitions Purchase
Accounting
Reclasses /
Other
June 30,
2004Roadway Express
$ 474.5 $ — $ 68.7 $ 543.2 New Penn
122.3 — (67.0 ) 55.3 Meridian IQ
20.5 3.3 (0.1 ) 23.7 Goodwill
$ 617.3 $ 3.3 $ 1.6 $ 622.2 As the Roadway acquisition occurred in December 2003, the allocation of the purchase price included in the December 31, 2003
and the March 31, 2004Consolidated Balance Sheets was preliminary and subject to refinement.Although we doDuring the six months ended June 30, 2004, an independent asset valuation was received and certain reallocations were made related to tangible and intangible assets. In addition, the fair value of certain post-employment benefit obligations was determined by an actuary. The purchase price allocation has been modified to reflect the results of these analyses. These changes did notexpect any subsequent changes tohave a material impact on our consolidated results ofoperations or amounts allocated to goodwill, such changes could result in material adjustments to the preliminary purchase allocation. The most significant pending items include the following: finalization of independent asset valuation for the Roadway tangible and intangible assets including associated remaining lives; completion of all direct costs associated with the acquisition; updating Roadway personnel information used to calculate the pension benefit obligation; determination of the fair value of tax-related contingencies; calculation of an estimate for certain contractual obligations; and certain other refinements.operations.As of
March 31,June 30, 2004, refinements to the purchase price allocationhave not been significant.are substantially complete. We do expectsubstantially alladditional changes during the third quarter of 2004 with respect to the determination of theabove refinementsfair value of certain tax-related contingencies and certain other minor refinements. We do not expect these subsequent changes willbe completed by the endhave a material impact on our consolidated results ofsecond quarter 2004.operations.The components of amortizable intangible assets are as follows:
March 31, 2004 December 31, 2003 ------------------------ ------------------------- Weighted Average Gross Gross Life Carrying Accumulated Carrying Accumulated (in millions) (years) Amount Amortization Amount Amortization - ----------------------------------------------------------------------------------------------------------Customer related 17 $ 120.0 $ 3.3 $ 117.4 $ 1.3 Marketing related 6 0.9 0.2 0.7 0.2 Technology based 3 17.5 2.0 17.1 0.6 - ---------------------------------------------------------------------------------------------------------- Intangible assets $ 138.4 $ 5.5 $ 135.2 $ 2.1 - ----------------------------------------------------------------------------------------------------------
June 30, 2004 December 31, 2003 (in millions)
Weighted
AverageLife
(years)Gross
Carrying
AmountAccumulated
AmortizationGross
Carrying
AmountAccumulated
AmortizationCustomer related
17 $ 118.2 $ 5.1 $ 117.4 $ 1.3 Marketing related
6 0.9 0.3 0.7 0.2 Technology based
3 17.5 3.3 17.1 0.6 Intangible assets
$ 136.6 $ 8.7 $ 135.2 $ 2.1 Total marketing related intangible assets with indefinite lives were
$334.0$344.5 million atMarch 31,June 30, 2004 and $334.1 million at December 31, 2003. These intangible assets are not subject to amortization. The change between periods related to a reclassification arising from modifications to the purchase price allocation, as discussed above, and foreign currency translation adjustments.5. EMPLOYEE BENEFITS COMPONENTS OF NET PERIODIC PENSION COST
6. Employee Benefits Components of Net Periodic Pension Cost
In December 2003, the Financial Accounting Standards Board revised SFAS No. 132,
Employers'Employers’ Disclosures about Pensions and Other Postretirement Benefits("SFAS 132R"(“Statement No. 132R”).SFASStatement No. 132R requires the disclosure of the components of the net periodic pension cost recognized during interim periods. The following table sets forth the components of our pension costs for the three and six months endedMarch 31,June 30:
Three Months Six Months (in millions)
2004 2003(a) 2004 2003(a) Service cost
$ 9.7 $ 4.0 $ 19.9 $ 8.0 Interest cost
14.2 6.6 28.7 13.2 Expected return on plan assets
(13.2 ) (6.7 ) (26.5 ) (13.4 ) Amortization of net transition asset
— (0.3 ) — (0.6 ) Amortization of prior service cost
0.3 0.4 0.6 0.8 Amortization of net loss
1.2 0.5 3.0 1.0 Net periodic pension cost
$ 12.2 $ 4.5 $ 25.7 $ 9.0
(a) Data for the three and six months ended June 30, 2003 does not include Roadway Group. For the three and six months ended June 30, 2004,
and 2003, andour other postretirement costsfor the three months ended March 31, 2004:
Other Postretirement Pension Costs Costs -------------------- -------------- (in millions) 2004 2003 2004 (a) - -----------------------------------------------------------------------------Service cost $ 10.2 $ 4.0 $ 0.5 Interest cost 14.5 6.6 0.8 Expected return on plan assets (13.3) (6.7) -- Amortization of net transition asset -- (0.3) -- Amortization of prior service cost 0.3 0.4 -- Amortization of net loss 1.8 0.5 -- - ----------------------------------------------------------------------------- Net periodic pension cost $ 13.5 $ 4.5 $ 1.3 - -----------------------------------------------------------------------------(a)were $0.6 million and $1.9 million, respectively. Prior to the acquisition of Roadway, we did not providethesepostretirement benefits; therefore,other postretirement coststhere arenot presented for first quarter 2003. 8EMPLOYER CONTRIBUTIONS In our Annual Report on Form 10-Kno such amounts for theyearthree and six months endedDecember 31, 2003,June 30, 2003.Employer Contributions
On July 1, 2004, we
disclosed that we expect to contribute approximately $45contributed $22.3 million to our company-sponsored pensionplans in 2004, and this expectation has not changed. As of March 31, 2004, ourplans. We expect to make additional contributions tothe pensionthese planshave not been significant. 6. BUSINESS SEGMENTSof $20.7 million prior to December 31, 2004.
7. Business Segments Yellow Roadway reports financial and descriptive information about its reportable operating segments on a basis consistent with that used internally for evaluating segment performance and allocating resources to segments. We manage the segments separately because each requires different operating, marketing and technology strategies. We evaluate performance primarily on adjusted operating income and return on capital.
Yellow Roadway has four reportable segments, which are strategic business units that offer complementary transportation services to their customers. Yellow Transportation and Roadway Express are unionized carriers that provide comprehensive regional, national and international transportation services. New Penn is also a unionized carrier that focuses on business opportunities in the regional and next-day delivery lanes. Meridian IQ, our non-asset-based segment, provides transportation management services, domestic and international freight forwarding and multi-modal brokerage
and transportation managementservices.The accounting policies of the segments are the same as those described in the Summary of Accounting Policies note in our Annual Report on Form 10-K for the year ended December 31, 2003. We charge management fees and other corporate services to our segments based on the direct benefits received or as a percentage of revenue. Corporate
operatinglosses represent operating expenses of the holding company, including salaries, wages and benefits, along with incentive compensation and professional services, that have not been allocated to the operating segments. Corporate identifiable assets primarily refer to cash, cash equivalents and deferred debt issuance costs. Intersegment revenue relates to transportation services provided by Yellow Transportation to Meridian IQ and Roadway Express as well as charges to Yellow Transportation for use of various Meridian IQ service names.The following table summarizes our operations by business segment:
(in millions)
Yellow
Transportation
Roadway
Express
New
Penn
Meridian
IQ
Corporate/
Eliminations
Consolidated
As of June 30, 2004
Identifiable assets
$ 1,005.2 $ 2,140.6 $ 248.9 $ 114.1 $ 63.8 $ 3,572.6 As of December 31, 2003
Identifiable assets
986.5 2,002.4 340.7 79.9 53.7 3,463.2 Three months ended June 30, 2004
External revenue
791.8 767.9 64.3 50.1 — 1,674.1 Intersegment revenue
0.8 0.3 — 0.5 (1.6 ) — Operating income (loss)
45.7 36.4 9.2 0.6 (3.7 ) 88.2 Adjustments to operating income(a)
— (0.2 ) — — — (0.2 ) Adjusted operating income (loss)
45.7 36.2 9.2 0.6 (3.7 ) 88.0 Three months ended June 30, 2003(b)
External revenue
690.8 — — 22.7 — 713.5 Intersegment revenue
0.6 — — 0.5 (1.1 ) — Operating income (loss)
36.4 — — 0.1 (4.2 ) 32.3 Adjustments to operating income(a)
— — — — — — Adjusted operating income (loss)
36.4 — — 0.1 (4.2 ) 32.3 Six months ended June 30, 2004
External revenue
1,525.7 1,485.0 120.4 95.2 — 3,226.3 Intersegment revenue
1.4 0.3 — 1.1 (2.8 ) — Operating income (loss)
72.1 51.4 15.0 1.2 (10.1 ) 129.6 Adjustments to operating income(a)
0.5 (0.1 ) (0.1 ) (0.1 ) — 0.2 Adjusted operating income (loss)
72.6 51.3 14.9 1.1 (10.1 ) 129.8 Six months ended June 30, 2003(b)
External revenue
1,350.4 — — 44.1 — 1,394.5 Intersegment revenue
1.2 — — 1.2 (2.4 ) — Operating income (loss)
55.9 — — (0.8 ) (11.0 ) 44.1 Adjustments to operating income(a)
— — — — — — Adjusted operating income (loss)
55.9 — — (0.8 ) (11.0 ) 44.1
Yellow Roadway New Meridian Corporate/ (in millions) Transportation Express Penn IQ Eliminations Consolidated - ---------------------------------------------------------------------------------------------------------------------------(a) Management excludes these items when evaluating operating income and segment performance to better evaluate the results of our core operations. In the periods presented, adjustments consisted of losses (gains) on property disposals.
(b) As of March 31, 2004 Identifiable assets $ 993.9 $ 1,989.1 $ 337.5 $ 102.6 $ 47.1 $ 3,470.2 As of December 31,June 30, 2003,Identifiable assets 986.5 2,002.4 340.7 79.9 53.7 3,463.2 ThreeRoadway Express and New Penn had not been acquired; therefore segment information is not reported for the three and six months endedMarch 31, 2004 External revenue 733.8 717.1 56.1 45.1 - 1,552.1 Intersegment revenue 0.6 - - 0.6 (1.2) - Operating income (loss) 26.4 15.0 5.8 0.6 (6.5) 41.3 Adjustments to operating income(a) 0.5 - - - - 0.5 Adjusted operating income (loss) 26.9 15.0 5.8 0.6 (6.5) 41.8 Three months ended March 31, 2003(b) External revenue 659.5 - - 21.6 - 681.1 Intersegment revenue 0.6 - - 0.5 (1.1) - Operating income (loss) 19.5 - - (0.9) (6.8) 11.8 Adjustments to operating income(a) - - - - - - Adjusted operating income (loss) 19.5 - - (0.9) (6.8) 11.8 - ---------------------------------------------------------------------------------------------------------------------------June 30, 2003.(a) Management excludes these items when evaluating operating income and segment performance to better evaluate the results of our core operations. In the periods presented, adjustments consisted of losses on property disposals. (b) As of March 31, 2003, Roadway Express and New Penn had not been acquired; therefore segment information is not reported. 7. STOCK-BASED COMPENSATION Yellow Roadway has various stock-based employee compensation plans, which are described more fully in our Annual Report on Form 10-K for the year ended December 31, 2003. Yellow Roadway accounts for stock options issued under those plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. We do not reflect compensation costs in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. 9We estimated the fair value per option for each option granted in the periods presented using the Black-Scholes option pricing model with the following weighted average assumptions for the three months ended March 31:
2004 2003 - -------------------------------------------------------------------------------------------------------Actual options granted 28,000 14,000 Dividend yield -% -% Expected volatility 45.2% 47.2% Risk-free interest rate 2.6% 2.0% Expected option life (years) 3.6 3.0 Fair value per option $ 12.61 $ 8.88 - -------------------------------------------------------------------------------------------------------8. Comprehensive Income The following table illustrates the effect on net income and earnings per share if Yellow Roadway had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, for the three months ended March 31:
(in millions except per share data) 2004 2003 - --------------------------------------------------------------------------------------------------------Net income, as reported $ 18.2 $ 5.6 Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects 0.5 0.5 - -------------------------------------------------------------------------------------------------------- Pro forma net income $ 17.7 $ 5.1 - -------------------------------------------------------------------------------------------------------- Basic earnings per share: Net income - as reported $ 0.38 $ 0.19 Net income - pro forma 0.37 0.17 Diluted earnings per share: Net income - as reported 0.38 0.19 Net income - pro forma 0.37 0.17 - --------------------------------------------------------------------------------------------------------In the first quarter of 2004, Yellow Roadway issued 27,647 shares of restricted stock from the 2002 stock option plan at $31.59 per share. These shares will vest ratably over the next three years. We also issued 86,063 performance share unit awards to certain executive officers under the long-term incentive plan implemented in 2002. Fifty percent of the awarded performance share units vest three years from the date of grant and the remaining 50 percent vest six years from the date of grant. None of these shares or performance share units are reflected in the fair value or pro forma results above. 8. COMPREHENSIVE INCOMEOur comprehensive income for the periods presented includes net income and foreign currency translation adjustments. The three and six months ended
March 31,June 30, 2003 also included changes in the fair value of an interest rate swap. Comprehensive income for the three and six months endedMarch 31June 30 follows:
Three Months Six Months (in millions)
2004 2003 2004 2003 Net income
$ 46.9 $ 18.4 $ 65.1 $ 24.0 Changes in foreign currency translation adjustments
1.4 0.7 1.4 1.3 Changes in the fair value of an interest rate swap
— 0.4 — 0.7 Comprehensive income
$ 48.3 $ 19.5 $ 66.5 $ 26.0
(in millions) 2004 2003 - -------------------------------------------------------------------------------------------------------Net income $ 18.2 $ 5.6 Changes in foreign currency translation adjustments - 0.6 Changes in the fair value of an interest rate swap - 0.3 - ------------------------------------------------------------------------------------------------------- Comprehensive income $ 18.2 $ 6.5 - -------------------------------------------------------------------------------------------------------9. Rental Expenses 9. RENTAL EXPENSESYellow Roadway incurs rental expenses under
noncancelablenon-cancelable lease agreements for certain buildings and operating equipment. Rental expense is charged to"operating“operating expenses andsupplies"supplies” on the Statements of Consolidated Operations. The following table represents the actual rental expense, as reflected in operating income, incurred for the three and six months endedMarch 31:June 30:
Three Months Six Months (in millions)
2004 2003 2004 2003 Rental expense
$ 24.4 $ 9.6 $ 47.9 $ 19.2
(in millions) 2004 2003 - -------------------------------------------------------------------------------------------------------Rental expense $ 23.5 $ 9.6 - -------------------------------------------------------------------------------------------------------10. Multi-Employer Pension Plans 1010. MULTI-EMPLOYER PENSION PLANSYellow Transportation, Roadway Express and New Penn contribute to approximately 90 separate multi-employer health, welfare and pension plans for employees covered by collective bargaining agreements (approximately 77 percent of total employees). The largest of these plans, the Central States Southeast and Southwest Areas Pension Plan (the
"Central“Central StatesPlan"Plan”) provides retirement benefits to approximately 53 percent of our total employees. The amounts of these contributions are determined by contract and established in the agreements. The health and welfare plans provide health care and disability benefits to active employees and retirees. The pension plans provide defined benefits to retired participants. We recognize as net pension cost the required contribution for the period and recognize as a liability any contributions due and unpaid.Under current legislation regarding multi-employer pension plans, a termination, withdrawal or partial withdrawal from any multi-employer plan in an under-funded status would render us liable for a proportionate share of
suchthe multi-employerplans'plans’ unfunded vested liabilities. This potential unfunded pension liability also applies to our unionized competitors who contribute to multi-employer plans. Based on the limited information available from plan administrators, which we cannot independently validate, we believe that our portion of the contingent liability in the case of a full withdrawal or termination would be material to our financial position and results of operations. Yellow Transportation, Roadway Express and New Penn have no current intention of taking any action that would subject us to obligations under the legislation.Yellow Transportation, Roadway Express and New Penn each have collective bargaining agreements with their unions that stipulate the amount of contributions each company must make to union-sponsored, multi-employer pension plans. The Internal Revenue Code and related regulations establish minimum funding requirements for these plans. Under recent legislation, qualified multi-employer plans are permitted to exclude certain recent investment losses from the minimum funding formula through 2005. The Central States Plan, in particular, has informed us that its recent investment performance has adversely affected its funding levels and that the fund is seeking corrective measures to address its funding. During the benefit period of the recent legislation, the Central States Plan is expected to meet the minimum funding requirements. If any of these plans, including
(without limitation)the Central States Plan,failfails to meettheseminimum funding requirements and the trustees ofthese planssuch a plan are unable to obtainwaiversa waiver of the requirements or certain changes in how the applicable plan calculates its funding level from the Internal Revenue Service("IRS"(“IRS”) or reduce pension benefits to a level where the requirements are met, the IRS could impose an excise tax on all employers participating in these plans andrequirecontributions in excess of our contractually agreed upon rates could be required to correct the funding deficiency. If an excise tax were imposed on the participating employers and additional contributions required, it could have a material adverse impact on the financial results of Yellow Roadway.11. GUARANTEES OF THE CONTINGENT CONVERTIBLE SENIOR NOTES
11. Guarantees of the Contingent Convertible Senior Notes In August 2003, Yellow Roadway
Corporationissued 5.0 percent contingent convertible senior notes due 2023. In November 2003, we issued 3.375 percent contingent convertible senior notes due 2023 (the August and November issuances, collectively, may also be known as the"contingent“contingent convertible seniornotes"notes”). In connection with the contingent convertible senior notes, the following 100 percent owned subsidiaries of Yellow Roadway have issued guarantees in favor of the holders of the contingent convertible senior notes: Yellow Transportation, Inc., Mission Supply Company, Yellow Relocation Services, Inc., Yellow Technologies, Inc., Meridian IQ, Inc., MIQ LLC (formerly Yellow GPS,LLC,LLC), Globe.com Lines, Inc., Roadway LLC, Roadway Next Day Corporation, and Roadway Express, Inc. Each of the guarantees is full and unconditional and joint and several.The summarized consolidating financial statements are presented in lieu of separate financial statements and other related disclosures of the subsidiary guarantors and issuer because management does not believe that such separate financial statements and related disclosures would be material to investors. There are currently no significant restrictions on the ability of Yellow Roadway
Corporationor any guarantor to obtain funds from its subsidiaries by dividend or loan.The following represents summarized condensed consolidating financial information as of
March 31,June 30, 2004 and December 31, 2003 with respect to the financial position,andfor the three and six months endedMarch 31,June 30, 2004 and 2003 for results of operations and for the six months ended June 30, 2004 and 2003 for the statements of cash flows of Yellow RoadwayCorporationand its subsidiaries. The Parent column presents the financial information of Yellow Roadway,Corporation,the primary obligor of the contingent convertible senior notes. The Guarantor Subsidiaries column presents the financial information of all guarantor subsidiaries of the contingent convertible senior notes. The Non-Guarantor Subsidiaries column presents the financial information of all non-guarantor subsidiaries, including those subsidiaries governed by foreign laws,andYellow Roadway Receivables Funding Corporation, Yellow Receivables Corporation and Roadway Funding, Inc., the special-purpose entities thatmanageare ormanagedwere associated with our asset backed securitization("ABS"(“ABS”) agreements.11Condensed Consolidating Balance Sheets
Non- March 31, 2004 Guarantor Guarantor (in millions) Parent Subsidiaries Subsidiaries Eliminations Consolidated -------- ------------ ------------ ------------ ------------Cash and cash equivalents $ 1 $ 3 $ 17 $ - $ 21 Intercompany advances receivable 355 - - (355) - Accounts receivable, net 3 316 415 - 734 Prepaid expenses and other 4 94 9 - 107 -------- ------------ ------------ ------------ ------------ Total current assets 363 413 441 (355) 862 Property and equipment at cost - 2,485 108 - 2,593 Less - accumulated depreciation - 1,153 10 - 1,163 -------- ------------ ------------ ------------ ------------ Net property and equipment - 1,332 98 - 1,430 Investment in subsidiaries 1,179 116 19 (1,314) - Receivable from affiliate 29 150 - (179) - Goodwill, intangibles and other assets 39 884 255 - 1,178 -------- ------------ ------------ ----------- ------------ Total assets $ 1,610 $ 2,895 $ 813 $ (1,848) $ 3,470 ======== ============ ============ ============ ============ Intercompany advances payable $ - $ 87 $ 268 $ (355) $ - Accounts payable 3 186 20 - 209 Wages, vacations and employees' benefits 8 368 19 - 395 Other current and accrued liabilities 11 211 10 - 232 ABS borrowings - - 13 - 13 Current maturities of long-term debt 4 - - - 4 -------- ------------ ------------ ------------ ------------ Total current liabilities 26 852 330 (355) 853 Payable to affiliate - 24 155 (179) - Long-term debt, less current portion 549 261 - - 810 Deferred income taxes, net (12) 261 47 - 296 Claims and other liabilities 17 454 14 - 485 Shareholders' equity 1,030 1,043 267 (1,314) 1,026 -------- ------------ ------------ ------------ ------------ Total liabilities and shareholders' equity $ 1,610 $ 2,895 $ 813 $ (1,848) $ 3,470 ======== ============ ============ ============ ============
Non- December 31, 2003 Guarantor Guarantor (in millions) Parent Subsidiaries Subsidiaries Eliminations Consolidated -------- ------------ ------------ ------------ ------------Cash and cash equivalents $ 19 $ 20 $ 36 $ - $ 75 Intercompany advances receivable 180 4 - (184) - Accounts receivable, net 3 351 345 - 699 Prepaid expenses and other 5 97 8 - 110 -------- ------------ ------------ ------------ ------------ Total current assets 207 472 389 (184) 884 Property and equipment at cost - 2,443 96 - 2,539 Less - accumulated depreciation - 1,130 6 - 1,136 -------- ------------ ------------ ------------ ------------ Net property and equipment - 1,313 90 - 1,403 Investment in subsidiaries 1,374 131 - (1,505) - Receivable from affiliate - 150 - (150) - Goodwill, intangibles and other assets 39 884 253 - 1,176 -------- ------------ ------------ ------------ ------------ Total assets $ 1,620 $ 2,950 $ 732 $ (1,839) $ 3,463 ======== ============ ============ ============ ============ Intercompany advances payable $ - $ - $ 184 $ (184) $ - Accounts payable 12 231 17 - 260 Wages, vacations and employees' benefits 6 330 15 - 351 Other current and accrued liabilities (7) 173 12 - 178 ABS borrowings - - 72 - 72 Current maturities of long-term debt 2 - - - 2 -------- ------------ ------------ ------------ ------------ Total current liabilities 13 734 300 (184) 863 Payable to affiliate - - 150 (150) - Long-term debt, less current portion 573 263 - - 836 Deferred income taxes, net (12) 263 47 - 298 Claims and other liabilities 14 437 13 - 464 Shareholders' equity 1,032 1,253 222 (1,505) 1,002 -------- ------------ ------------ ------------ ------------ Total liabilities and shareholders' equity $ 1,620 $ 2,950 $ 732 $ (1,839) $ 3,463 ======== ============ ============ ============ ============12
June 30, 2004
(in millions)
Parent Guarantor
SubsidiariesNon-
Guarantor
Subsidiaries
Eliminations Consolidated Cash and cash equivalents
$ 9 $ 4 $ 21 $ — $ 34 Intercompany advances receivable
— 106 44 (150 ) — Accounts receivable, net
3 31 760 — 794 Prepaid expenses and other
4 110 7 — 121 Total current assets
16 251 832 (150 ) 949 Property and equipment at cost
— 2,525 113 — 2,638 Less – accumulated depreciation
— 1,181 11 — 1,192 Net property and equipment
— 1,344 102 — 1,446 Investment in subsidiaries
1,178 85 — (1,263 ) — Receivable from affiliate
137 (71 ) 11 (77 ) — Goodwill, intangibles and other assets
235 772 171 — 1,178 Total assets
$ 1,566 $ 2,381 $ 1,116 $ (1,490 ) $ 3,573 Intercompany advances payable
$ 57 $ (649 ) $ 673 $ (81 ) $ — Accounts payable
3 248 20 — 271 Wages, vacations and employees’ benefits
9 408 20 — 437 Other current and accrued liabilities
12 182 19 — 213 ABS borrowings
— — 57 — 57 Current maturities of long-term debt
1 — — — 1 Total current liabilities
82 189 789 (81 ) 979 Payable to affiliate
(25 ) 20 155 (150 ) — Long-term debt, less current portion
474 260 1 — 735 Deferred income taxes, net
(12 ) 271 40 — 299 Claims and other liabilities
20 452 13 — 485 Shareholders’ equity
1,027 1,189 118 (1,259 ) 1,075 Total liabilities and shareholders’ equity
$ 1,566 $ 2,381 $ 1,116 $ (1,490 ) $ 3,573
December 31, 2003
(in millions)
Parent Guarantor
SubsidiariesNon-
Guarantor
Subsidiaries
Eliminations Consolidated Cash and cash equivalents
$ 19 $ 20 $ 36 $ — $ 75 Intercompany advances receivable
180 4 — (184 ) — Accounts receivable, net
3 351 345 — 699 Prepaid expenses and other
5 97 8 — 110 Total current assets
207 472 389 (184 ) 884 Property and equipment at cost
— 2,443 96 — 2,539 Less – accumulated depreciation
— 1,130 6 — 1,136 Net property and equipment
— 1,313 90 — 1,403 Investment in subsidiaries
1,374 131 — (1,505 ) — Receivable from affiliate
— 150 — (150 ) — Goodwill, intangibles and other assets
39 884 253 — 1,176 Total assets
$ 1,620 $ 2,950 $ 732 $ (1,839 ) $ 3,463 Intercompany advances payable
$ — $ — $ 184 $ (184 ) $ — Accounts payable
12 231 17 — 260 Wages, vacations and employees’ benefits
6 330 15 — 351 Other current and accrued liabilities
(7 ) 173 12 — 178 ABS borrowings
— — 72 — 72 Current maturities of long-term debt
2 — — — 2 Total current liabilities
13 734 300 (184 ) 863 Payable to affiliate
— — 150 (150 ) — Long-term debt, less current portion
573 263 — — 836 Deferred income taxes, net
(12 ) 263 47 — 298 Claims and other liabilities
14 437 13 — 464 Shareholders’ equity
1,032 1,253 222 (1,505 ) 1,002 Total liabilities and shareholders’ equity
$ 1,620 $ 2,950 $ 732 $ (1,839 ) $ 3,463 Condensed Consolidating Statements of Operations
Non- For the three months ended March 31, 2004 Guarantor Guarantor (in millions) Parent Subsidiaries Subsidiaries Eliminations Consolidated -------- ------------ ------------ ------------ ------------Operating revenue $ 11 $ 1,449 $ 105 $ (13) $ 1,552 -------- ------------ ------------ ------------ ------------ Operating expenses: Salaries, wages and employees' benefits 11 930 53 - 994 Operating expenses and supplies 5 225 20 (12) 238 Operating taxes and licenses - 39 2 - 41 Claims and insurance 1 28 1 - 30 Depreciation and amortization - 37 4 - 41 Purchased transportation - 148 19 - 167 -------- ------------ ------------ ------------ ------------ Total operating expenses 17 1,407 99 (12) 1,511 -------- ------------ ------------ ------------ ------------ Operating income (loss) (6) 42 6 (1) 41 -------- ------------ ------------ ------------ ------------ Nonoperating (income) expenses: Interest expense 8 8 1 (5) 12 Other (31) 11 (11) 31 - -------- ------------ ------------ ------------ ------------ Nonoperating (income) expenses, net (23) 19 (10) 26 12 -------- ------------ ------------ ------------ ------------ Income (loss) before income taxes 17 23 16 (27) 29 Income tax provision (3) 9 5 - 11 Subsidiary earnings 22 (3) - (19) - -------- ------------ ------------ ------------ ------------ Net income (loss) $ 42 $ 11 $ 11 $ (46) $ 18 ======== ============ ============ ============ ============
Non- For the three months ended March 31, 2003 Guarantor Guarantor (in millions) Parent Subsidiaries Subsidiaries Eliminations Consolidated -------- ------------ ------------ ------------ ------------Operating revenue $ 4 $ 675 $ 6 $ (4) $ 681 -------- ------------ ------------ ------------ ------------ Operating expenses: Salaries, wages and employees' benefits 3 434 2 - 439 Operating expenses and supplies 7 100 7 (4) 110 Operating taxes and licenses - 20 - - 20 Claims and insurance - 12 - - 12 Depreciation and amortization - 20 - - 20 Purchased transportation - 65 3 - 68 -------- ------------ ------------ ------------ ------------ Total operating expenses 10 651 12 (4) 669 -------- ------------ ------------ ------------ ------------ Operating income (loss) (6) 24 (6) - 12 -------- ------------ ------------ ------------ ------------ Nonoperating (income) expenses: Interest expense 2 2 1 (2) 3 Other (1) 14 (14) 1 - -------- ------------ ------------ ------------ ------------ Nonoperating (income) expenses, net 1 16 (13) (1) 3 -------- ------------ ------------ ------------ ------------ Income (loss) before income taxes (7) 8 7 1 9 Income tax provision (2) 2 3 - 3 Subsidiary earnings 10 - - (10) - -------- ------------ ------------ ------------ ------------ Net income (loss) $ 5 $ 6 $ 4 $ (9) $ 6 ======== ============ ============ ============ ============13
For the three months ended June 30, 2004
(in millions)
Parent Guarantor
SubsidiariesNon-
Guarantor
Subsidiaries
Eliminations Consolidated Operating revenue
$ 12 $ 1,555 $ 120 $ (13 ) $ 1,674 Operating expenses:
Salaries, wages and employees’ benefits
8 965 58 — 1,031 Operating expenses and supplies
6 214 40 (11 ) 249 Operating taxes and licenses
— 40 3 — 43 Claims and insurance
1 34 1 — 36 Depreciation and amortization
— 39 4 — 43 Purchased transportation
— 162 24 (2 ) 184 Total operating expenses
15 1,454 130 (13 ) 1,586 Operating income (loss)
(3 ) 101 (10 ) — 88 Nonoperating (income) expenses:
Interest expense
8 27 10 (34 ) 11 Other
(29 ) 27 (56 ) 58 — Nonoperating (income) expenses, net
(21 ) 54 (46 ) 24 11 Income (loss) before income taxes
18 47 36 (24 ) 77 Income tax provision (benefit)
(2 ) 19 13 — 30 Subsidiary earnings
54 37 — (91 ) — Net income (loss)
$ 74 $ 65 $ 23 $ (115 ) $ 47
For the three months ended June 30, 2003
(in millions)
Parent Guarantor
SubsidiariesNon-
Guarantor
Subsidiaries
Eliminations Consolidated Operating revenue
$ 3 $ 707 $ 7 $ (3 ) $ 714 Operating expenses:
Salaries, wages and employees’ benefits
3 453 2 — 458 Operating expenses and supplies
4 96 7 (3 ) 104 Operating taxes and licenses
— 19 — — 19 Claims and insurance
— 11 — — 11 Depreciation and amortization
— 21 — — 21 Purchased transportation
— 66 2 — 68 Total operating expenses
7 666 11 (3 ) 681 Operating income (loss)
(4 ) 41 (4 ) — 33 Nonoperating (income) expenses:
Interest expense
2 — 2 (2 ) 2 Other
(1 ) 13 (15 ) 3 — Nonoperating (income) expenses, net
1 13 (13 ) 1 2 Income (loss) before income taxes
(5 ) 28 9 (1 ) 31 Income tax provision (benefit)
(2 ) 12 3 — 13 Subsidiary earnings
10 — — (10 ) — Net income (loss)
$ (7 ) $ 16 $ 6 $ (11 ) $ 18 For the six months ended June 30, 2004
(in millions)
Parent Guarantor
SubsidiariesNon-
Guarantor
SubsidiariesEliminations Consolidated Operating revenue
$ 23 $ 3,004 $ 225 $ (26 ) $ 3,226 Operating expenses:
Salaries, wages and employees’ benefits
19 1,895 111 — 2,025 Operating expenses and supplies
11 439 60 (23 ) 487 Operating taxes and licenses
— 79 5 — 84 Claims and insurance
2 62 2 — 66 Depreciation and amortization
— 76 8 — 84 Purchased transportation
— 310 43 (2 ) 351 Total operating expenses
32 2,861 229 (25 ) 3,097 Operating income (loss)
(9 ) 143 (4 ) (1 ) 129 Nonoperating (income) expenses:
Interest expense
16 35 11 (39 ) 23 Other
(60 ) 38 (67 ) 89 — Nonoperating (income) expenses, net
(44 ) 73 (56 ) 50 23 Income (loss) before income taxes
35 70 52 (51 ) 106 Income tax provision (benefit)
(5 ) 28 18 — 41 Subsidiary earnings
76 34 — (110 ) — Net income (loss)
$ 116 $ 76 $ 34 $ (161 ) $ 65
For the six months ended June 30, 2003
(in millions)
Parent Guarantor
SubsidiariesNon-
Guarantor
Subsidiaries
Eliminations Consolidated Operating revenue
$ 7 $ 1,382 $ 13 $ (7 ) $ 1,395 Operating expenses:
Salaries, wages and employees’ benefits
6 887 4 — 897 Operating expenses and supplies
11 196 14 (7 ) 214 Operating taxes and licenses
— 39 — — 39 Claims and insurance
— 23 — — 23 Depreciation and amortization
— 41 — — 41 Purchased transportation
— 131 5 — 136 Total operating expenses
17 1,317 23 (7 ) 1,350 Operating income (loss)
(10 ) 65 (10 ) — 45 Nonoperating (income) expenses:
Interest expense
4 2 3 (4 ) 5 Other
(2 ) 27 (29 ) 4 — Nonoperating (income) expenses, net
2 29 (26 ) — 5 Income (loss) before income taxes
(12 ) 36 16 — 40 Income tax provision (benefit)
(4 ) 14 6 — 16 Subsidiary earnings
32 10 — (42 ) — Net income (loss)
$ 24 $ 32 $ 10 $ (42 ) $ 24 Condensed Consolidating Statements of Cash Flows
For the six months ended June 30, 2004
(in millions)
Parent Guarantor
SubsidiariesNon-
Guarantor
SubsidiariesEliminations Consolidated Operating activities:
Net cash from (used in) operating activities
$ (52 ) $ 548 $ (286 ) $ (29 ) $ 181 Investing activities:
Acquisition of property and equipment
— (107 ) — — (107 ) Proceeds from disposal of property and equipment
— 4 — — 4 Acquisition of companies
— (8 ) — — (8 ) Net cash used in investing activities
— (111 ) — — (111 ) Financing activities:
ABS borrowings, net
— (15 ) — — (15 ) Repayment of long-term debt
— (43 ) (57 ) — (100 ) Proceeds from exercise of stock options
— 3 — — 3 Intercompany advances / repayments
42 (398 ) 328 29 1 Net cash provided by (used in) financing activities
42 (453 ) 271 29 (111 ) Net decrease in cash and cash equivalents
(10 ) (16 ) (15 ) — (41 ) Cash and cash equivalents, beginning of period
19 20 36 — 75 Cash and cash equivalents, end of period
$ 9 $ 4 $ 21 $ — $ 34
For the six months ended June 30, 2003
(in millions)
Parent Guarantor
SubsidiariesNon-
Guarantor
SubsidiariesEliminations Consolidated Operating activities:
Net cash from (used in) operating activities
$ (2 ) $ 57 $ (35 ) $ — $ 20 Investing activities:
Acquisition of property and equipment
— (26 ) — — (26 ) Proceeds from disposal of property and equipment
— 1 — — 1 Net cash used in investing activities
— (25 ) — — (25 ) Financing activities:
Repayment of long-term debt
— — — — — Intercompany advances / repayments
(5 ) (31 ) 36 — — Net cash provided by (used in) financing activities
(5 ) (31 ) 36 — — Net increase (decrease) in cash and cash equivalents
(7 ) 1 1 — (5 ) Cash and cash equivalents, beginning of period
22 2 4 — 28 Cash and cash equivalents, end of period
$ 15 $ 3 $ 5 $ — $ 23
Non- For12. Guarantees of the three months ended March 31, 2004 Guarantor Guarantor (in millions) Parent Subsidiaries Subsidiaries Eliminations Consolidated -------- ------------ ------------ ------------ ------------Operating activities: Net cash from (used in) operating activities $ 66 $ 285 $ (37) $ (224) $ 90 -------- ------------ ------------ ------------ ------------ Investing activities: Acquisition of property and equipment - (54) (3) - (57) Proceeds from disposal of property and equipment - (1) 1 - - Acquisition of companies (8) - - - (8) -------- ------------ ------------ ------------ ------------ Net cash used in investing activities (8) (55) (2) - (65) -------- ------------ ------------ ------------ ------------ Financing Activities: ABS borrowings, net - - (59) - (59) Repayment of long-term debt (22) - - - (22) Proceeds from exercise of stock options 2 - - - 2 Intercompany advances / repayments (56) (247) 79 224 - -------- ------------ ------------ ------------ ------------ Net cash provided by (used in) financing activities (76) (247) 20 224 (79) -------- ------------ ------------ ------------ ------------ Net decrease in cash and cash equivalents (18) (17) (19) - (54) Cash and cash equivalents, beginning of period 19 20 36 - 75 -------- ------------ ------------ ------------ ------------ Cash and cash equivalents, end of period $ 1 $ 3 $ 17 $ - $ 21 ======== ============ ============ ============ ============Senior Notes Due 2008
Non- For the three months ended March 31, 2003 Guarantor Guarantor (in millions) Parent Subsidiaries Subsidiaries Eliminations Consolidated -------- ------------ ------------ ------------ ------------Operating activities: Net cash from (used in) operating activities $ (2) $ 57 $ (35) $ - $ 20 -------- ------------ ------------ ------------ ------------ Investing activities: Acquisition of property and equipment - (26) - - (26) Proceeds from disposal of property and equipment - 1 - - 1 -------- ------------ ------------ ------------ ------------ Net cash used in investing activities - (25) - - (25) -------- ------------ ------------ ------------ ------------ Financing Activities: Repayment of long-term debt - - - - - Intercompany advances / repayments (5) (31) 36 - - -------- ------------ ------------ ------------ ------------ Net cash provided by (used in) financing activities (5) (31) 36 - - -------- ------------ ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents (7) 1 1 - (5) Cash and cash equivalents, beginning of period 22 2 4 - 28 -------- ------------ ------------ ------------ ------------ Cash and cash equivalents, end of period $ 15 $ 3 $ 5 $ - $ 23 ======== ============ ============ ============ ============1412. GUARANTEES OF THE SENIOR NOTES DUE 2008In connection with the senior notes due 2008 that Yellow Roadway assumed by virtue of its merger with Roadway, and in addition to the primary obligor, Roadway LLC, Yellow Roadway
Corporationand its following 100 percent owned subsidiaries have issued guarantees in favor of the holders of the senior notes due 2008: Roadway Next Day Corporation, New Penn Motor Express, Inc., Roadway Express, Inc., Roadway Reverse Logistics, Inc. and Roadway Express International, Inc. Each of the guarantees is full and unconditional and joint and several.The summarized consolidating financial statements are presented in lieu of separate financial statements and other related disclosures of the subsidiary guarantors and issuer because management does not believe that such separate financial statements and related disclosures would be material to investors. There are currently no significant restrictions on the ability of Yellow Roadway
Corporationor any guarantor subsidiary to obtain funds from its subsidiaries by dividend or loan.The following represents summarized condensed consolidating financial information of Yellow Roadway
Corporationand its subsidiaries as ofMarch 31,June 30, 2004 and December 31, 2003 with respect to the financial position,andfor the three and six months endedMarch 31,June 30, 2004, for results of operations and for the six months ended June 30, 2004 for statements of cash flows. The primary obligor column presents the financial information of Roadway LLC. The Guarantor Subsidiaries column presents the financial information of all guarantor subsidiaries of the senior notes due 2008 including Yellow Roadway, the holding company. The Non-Guarantor Subsidiaries column presents the financial information of all non-guarantor subsidiaries, including those subsidiaries that are governed by foreign laws and Yellow Roadway Receivables Funding Corporation, Yellow Receivables Corporation and Roadway Funding, Inc., the special-purpose entities thatmanageare ormanagedwere associated with our ABS agreements.Condensed Consolidating Balance Sheets
Non- March 31, 2004 Primary Guarantor Guarantor (in millions) Obligor Subsidiaries Subsidiaries Eliminations Consolidated ------- ------------ ------------ ------------ ------------Cash and cash equivalents $ - $ 8 $ 13 $ - $ 21 Intercompany advances receivable 65 390 - (455) - Accounts receivable, net - 342 392 - 734 Prepaid expenses and other - 56 51 - 107 ------- ------------ ------------ ------------ ------------ Total current assets 65 796 456 (455) 862 Property and equipment at cost - 834 1,759 - 2,593 Less - accumulated depreciation - 19 1,144 - 1,163 ------- ------------ ------------ ------------ ------------ Net property and equipment - 815 615 - 1,430 Investment in subsidiaries 597 1,214 22 (1,833) - Receivable from affiliate 650 - - (650) - Goodwill, intangibles and other assets 20 1,082 76 - 1,178 ------- ------------ ------------ ------------ ------------ Total assets $ 1,332 $ 3,907 $ 1,169 $ (2,938) $ 3,470 ======= ============ ============ ============ ============ Intercompany advances payable $ 13 $ 73 $ 369 $ (455) $ - Accounts payable - 101 108 - 209 Wages, vacations and employees' benefits 1 217 177 - 395 Other current and accrued liabilities (23) 155 100 - 232 ABS borrowings - - 13 - 13 Current maturities of long-term debt - 4 - - 4 ------- ------------ ------------ ------------ ------------ Total current liabilities (9) 550 767 (455) 853 Payable to affiliate - 621 179 (800) - Long-term debt, less current portion 248 548 14 - 810 Deferred income taxes, net (12) 204 104 - 296 Claims and other liabilities 2 357 126 - 485 Shareholders' equity 1,103 1,627 (21) (1,683) 1,026 ------- ------------ ------------ ------------ ------------ Total liabilities and shareholders' equity $ 1,332 $ 3,907 $ 1,169 $ (2,938) $ 3,470 ======= ============ ============ ============ ============15
Non- December 31, 2003 Primary Guarantor Guarantor (in millions) Obligor Subsidiaries Subsidiaries Eliminations Consolidated ------- ------------ ------------ ------------ ------------Cash and cash equivalents $ - $ 62 $ 13 $ - $ 75 Intercompany advances receivable 38 109 104 (251) - Accounts receivable, net - 329 370 - 699 Prepaid expenses and other - 39 71 - 110 ------- ------------ ------------ ------------ ------------ Total current assets 38 539 558 (251) 884 Property and equipment at cost - 812 1,727 - 2,539 Less - accumulated depreciation - 3 1,133 - 1,136 ------- ------------ ------------ ------------ ------------ Net property and equipment - 809 594 - 1,403 Investment in subsidiaries 593 1,402 8 (2,003) - Receivable from affiliate 650 - - (650) - Goodwill, intangibles and other assets 21 1,073 82 - 1,176 ------- ------------ ------------ ------------ ------------ Total assets $ 1,302 $ 3,823 $ 1,242 $ (2,904) $ 3,463 ======= ============ ============ ============ ============ Intercompany advances payable $ - $ - $ 251 $ (251) $ - Accounts payable 1 123 136 - 260 Wages, vacations and employees' benefits 1 188 162 - 351 Other current and accrued liabilities (31) 110 99 - 178 ABS borrowings - - 72 - 72 Current maturities of long-term debt - 2 - - 2 ------- ------------ ------------ ------------ ------------ Total current liabilities (29) 423 720 (251) 863 Payable to affiliate - 650 - (650) - Long-term debt, less current portion 249 573 14 - 836 Deferred income taxes, net (11) 205 104 - 298 Claims and other liabilities 1 347 116 - 464 Shareholders' equity 1,092 1,625 288 (2,003) 1,002 ------- ------------ ------------ ------------ ------------ Total liabilities and shareholders' equity $ 1,302 $ 3,823 $ 1,242 $ (2,904) $ 3,463 ======= ============ ============ ============ ============Condensed Consolidating Statements of Operations
Non- For the three months ended March 31, 2004 Primary Guarantor Guarantor (in millions) Obligor Subsidiaries Subsidiaries Eliminations Consolidated ------- ------------ ------------ ------------ ------------Operating revenue $ - $ 751 $ 814 $ (13) $ 1,552 ------- ------------ ------------ ------------ ------------ Operating expenses: Salaries, wages and employees' benefits - 491 503 - 994 Operating expenses and supplies - 127 123 (12) 238 Operating taxes and licenses - 18 23 - 41 Claims and insurance - 15 15 - 30 Depreciation and amortization - 18 23 - 41 Purchased transportation - 70 98 (1) 167 ------- ------------ ------------ ------------ ------------ Total operating expenses - 739 785 (13) 1,511 ------- ------------ ------------ ------------ ------------ Operating income (loss) - 12 29 - 41 ------- ------------ ------------ ------------ ------------ Nonoperating (income) expenses: Interest expense 3 21 6 (18) 12 Other (13) (6) 2 17 - ------- ------------ ------------ ------------ ------------ Nonoperating (income) expenses, net (10) 15 8 (1) 12 ------- ------------ ------------ ------------ ------------ Income (loss) before income taxes 10 (3) 21 1 29 Income tax provision 4 (1) 8 - 11 Subsidiary earnings 4 13 - (17) - ------- ------------ ------------ ------------ ------------ Net income (loss) $ 10 $ 11 $ 13 $ (16) $ 18 ======= ============ ============ ============ ============16Condensed Consolidating Statements of Cash Flows
Non- For the three months ended March 31, 2004 Primary Guarantor Guarantor (in millions) Obligor Subsidiaries Subsidiaries Eliminations Consolidated ------- ------------ ------------ ------------ ------------Operating activities: Net cash from (used in) operating activities $ 14 $ 79 $ (3) $ - $ 90 ------- ------------ ------------ ------------ ------------ Investing activities: Acquisition of property and equipment - (16) (41) - (57) Proceeds from disposal of property and equipment - - - - - Acquisition of companies - (8) - - (8) ------- ------------ ------------ ------------ ------------ Net cash used in investing activities - (24) (41) - (65) ------- ------------ ------------ ------------ ------------ Financing Activities: ABS borrowings, net - - (59) - (59) Repayment of long-term debt - (22) - - (22) Proceeds from exercise of stock options - 2 - - 2 Intercompany advances/repayments (14) (89) 103 - - ------- ------------ ------------ ------------ ------------ Net cash provided by (used in) financing activities (14) (109) 44 - (79) ------- ------------ ------------ ------------ ------------ Net decrease in cash and cash equivalents - (54) - - (54) Cash and cash equivalents, beginning of period - 62 13 - 75 ------- ------------ ------------ ------------ ------------ Cash and cash equivalents, end of period $ - $ 8 $ 13 $ - $ 21 ======= ============ ============ ============ ============17
June 30, 2004
(in millions)
Primary
ObligorGuarantor
SubsidiariesNon-
Guarantor
SubsidiariesEliminations Consolidated Cash and cash equivalents
$ — $ 21 $ 13 $ — $ 34 Intercompany advances receivable
71 144 (92 ) (123 ) — Accounts receivable, net
— 10 784 — 794 Prepaid expenses and other
— 78 43 — 121 Total current assets
71 253 748 (123 ) 949 Property and equipment at cost
— 858 1,780 — 2,638 Less – accumulated depreciation
— 36 1,156 — 1,192 Net property and equipment
— 822 624 — 1,446 Investment in subsidiaries
612 1225 8 (1,845 ) — Receivable from affiliate
650 — — (650 ) — Goodwill, intangibles and other assets
20 1,072 86 — 1,178 Total assets
$ 1,353 $ 3,372 $ 1,466 $ (2,618 ) $ 3,573 Intercompany advances payable
$ 8 $ (413 ) $ 528 $ (123 ) $ — Accounts payable
— 130 141 — 271 Wages, vacations and employees’ benefits
2 243 192 — 437 Other current and accrued liabilities
(16 ) 119 110 — 213 ABS borrowings
— — 57 — 57 Current maturities of long-term debt
— 1 — — 1 Total current liabilities
(6 ) 80 1,028 (123 ) 979 Payable to affiliate
— (30 ) 30 — — Long-term debt, less current portion
246 1,124 15 (650 ) 735 Deferred income taxes, net
(12 ) 208 103 — 299 Claims and other liabilities
1 349 135 — 485 Shareholders’ equity
1,124 1,641 155 (1,845 ) 1,075 Total liabilities and shareholders’ equity
$ 1,353 $ 3,372 $ 1,466 $ (2,618 ) $ 3,573
December 31, 2003
(in millions)
Primary
ObligorGuarantor
SubsidiariesNon-
Guarantor
SubsidiariesEliminations Consolidated Cash and cash equivalents
$ — $ 62 $ 13 $ — $ 75 Intercompany advances receivable
38 109 104 (251 ) — Accounts receivable, net
— 329 370 — 699 Prepaid expenses and other
— 39 71 — 110 Total current assets
38 539 558 (251 ) 884 Property and equipment at cost
— 812 1,727 — 2,539 Less – accumulated depreciation
— 3 1,133 — 1,136 Net property and equipment
— 809 594 — 1,403 Investment in subsidiaries
593 1,402 8 (2,003 ) — Receivable from affiliate
650 — — (650 ) — Goodwill, intangibles and other assets
21 1,073 82 — 1,176 Total assets
$ 1,302 $ 3,823 $ 1,242 $ (2,904 ) $ 3,463 Intercompany advances payable
$ — $ — $ 251 $ (251 ) $ — Accounts payable
1 123 136 — 260 Wages, vacations and employees’ benefits
1 188 162 — 351 Other current and accrued liabilities
(31 ) 110 99 — 178 ABS borrowings
— — 72 — 72 Current maturities of long-term debt
— 2 — — 2 Total current liabilities
(29 ) 423 720 (251 ) 863 Payable to affiliate
— 650 — (650 ) — Long-term debt, less current portion
249 573 14 — 836 Deferred income taxes, net
(11 ) 205 104 — 298 Claims and other liabilities
1 347 116 — 464 Shareholders’ equity
1,092 1,625 288 (2,003 ) 1,002 Total liabilities and shareholders’ equity
$ 1,302 $ 3,823 $ 1,242 $ (2,904 ) $ 3,463
Condensed Consolidating Statements of Operations
For the three months ended June 30, 2004
(in millions)
Primary
ObligorGuarantor
SubsidiariesNon-
Guarantor
Subsidiaries
Eliminations Consolidated Operating revenue
$ — $ 782 $ 879 $ 13 $ 1,674 Operating expenses:
Salaries, wages and employees’ benefits
— 509 522 — 1,031 Operating expenses and supplies
— 102 135 12 249 Operating taxes and licenses
— 22 21 — 43 Claims and insurance
— 16 20 — 36 Depreciation and amortization
— 20 23 — 43 Purchased transportation
— 74 109 1 184 Total operating expenses
— 743 830 13 1,586 Operating income (loss)
— 39 49 — 88 Nonoperating (income) expenses:
Interest expense
4 10 6 (9 ) 11 Other
(14 ) 16 (12 ) 10 — Nonoperating (income) expenses, net
(10 ) 26 (6 ) 1 11 Income (loss) before income taxes
10 13 55 (1 ) 77 Income tax provision
3 7 20 — 30 Subsidiary earnings
41 35 — (76 ) — Net income (loss)
$ 48 $ 41 $ 35 $ (77 ) $ 47
For the six months ended June 30, 2004
(in millions)
Primary
ObligorGuarantor
SubsidiariesNon-
Guarantor
SubsidiariesEliminations Consolidated Operating revenue
$ — $ 1,533 $ 1,693 $ — $ 3,226 Operating expenses:
Salaries, wages and employees’ benefits
— 1,000 1,025 — 2,025 Operating expenses and supplies
— 229 258 — 487 Operating taxes and licenses
— 40 44 — 84 Claims and insurance
— 31 35 — 66 Depreciation and amortization
— 38 46 — 84 Purchased transportation
— 144 207 — 351 Total operating expenses
— 1,482 1,615 — 3,097 Operating income (loss)
— 51 78 — 129 Nonoperating (income) expenses:
Interest expense
7 31 12 (27 ) 23 Other
(27 ) 10 (10 ) 27 — Nonoperating (income) expenses, net
(20 ) 41 2 — 23 Income (loss) before income taxes
20 10 76 — 106 Income tax provision
7 6 28 — 41 Subsidiary earnings
52 48 — (100 ) — Net income (loss)
$ 65 $ 52 $ 48 $ (100 ) $ 65
Condensed Consolidating Statements of Cash Flows
For the six months ended June 30, 2004
(in millions)
Primary
ObligorGuarantor
SubsidiariesNon-
Guarantor
SubsidiariesEliminations Consolidated Operating activities:
Net cash from (used in) operating activities
$ 25 $ 319 $ (162 ) $ (1 ) $ 181 Investing activities:
Acquisition of property and equipment
— — (107 ) — (107 ) Proceeds from disposal of property and equipment
— — 4 — 4 Acquisition of companies
— — (8 ) — (8 ) Net cash used in investing activities
— — (111 ) — (111 ) Financing activities:
ABS borrowings, net
— — (15 ) — (15 ) Repayment of long-term debt
— (3 ) (97 ) — (100 ) Proceeds from exercise of stock options
— — 3 — 3 Intercompany advances / repayments
(25 ) (357 ) 382 1 1 Net cash provided by (used in) financing activities
(25 ) (360 ) 273 1 (111 ) Net decrease in cash and cash equivalents
— (41 ) — — (41 ) Cash and cash equivalents, beginning of period
— 62 13 — 75 Cash and cash equivalents, end of period
$ — $ 21 $ 13 $ — $ 34 Item 2.
Management'sManagement’s Discussion and Analysis of Financial Condition and Results of OperationsManagement'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
("(“MD&A"&A”) should be read in conjunction with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements of Yellow Roadway Corporation (also referred to as"Yellow“Yellow Roadway," "we"” “we” or"our"“our”). MD&A and certain statements in the Notes to Consolidated Financial Statements include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21 of the Securities Exchange Act of 1934, as amended (each a"forward-looking statement"“forward-looking statement”). Forward-looking statements include those preceded by, followed by or include the words"should," "expects," "believes," "anticipates," "estimates"“should,” “could,” “may,” “expects,” “believes,” “anticipates,” “estimates” or similar expressions. Our actual results could differ materially from those projected by these forward-looking statements due to a number of factors, including (without limitation), inflation,labor relations (i.e. disruptions, strikes or work stoppages),inclement weather, price and availability of fuel, competitor pricing activity, expense volatility, changes in and customer acceptance of new technology, our ability to capture cost synergies from our acquisition of Roadway Corporation, changes in equity and debt markets,anda downturn in general or regional economicactivity.activity and labor relations, including (without limitation) the impact of work rules, our obligations arising out of our participation in multi-employer health, welfare and pension plans, wage requirements, employee satisfaction, work stoppages, strikes or other disruptions.On December 11, 2003, we successfully closed the acquisition of Roadway Corporation
("Roadway"(“Roadway”). Roadway became Roadway LLC("(“RoadwayGroup"Group”) and a subsidiary of Yellow Roadway. Consideration for the acquisition included $494 million in cash and 18.0 million shares of Yellow Roadway common stock for a total purchase price of approximately $1.1 billion. The Roadway Group has two operating segments, Roadway Express, Inc.("(“RoadwayExpress"Express”) and New Penn Motor Express, Inc.("(“NewPenn"Penn”).In accordance with
Statement of Financial Accounting StandardsSFAS No. 141, Business Combinations, we accounted for the acquisition under purchase accounting. As a result, our Statements of Consolidated Operations and Statements of Consolidated Cash Flows include results for Roadway Express and New Penn from the date of acquisition. Ourfirstsecond quarter 2003 results and our results for the six months ended June 30, 2003 do not reflect the operations of the Roadway Group; however, our Notes to Consolidated Financial Statements do include limited pro forma information that presents the combined results of operations of Yellow Roadway as if the Roadway acquisition had occurred at the beginning of the period presented. Management has provided the pro forma information tomore accurately comparefacilitate comparison of results among periods. The unaudited pro forma financial information is not intended to represent or be indicative of the consolidated results of operations of Yellow Roadway that would have been reported had the acquisition been completed as of the date presented and should not be taken as representative of the future consolidated results of operations of Yellow Roadway.RESULTS OF OPERATIONSResults of Operations
Our Results of Operations section focuses on the highlights and significant items that impacted our operating results during the
first quarter.second quarter as well as the year to date. Our discussion will also explain the adjustments to operating income that management excludes when internally evaluating segment performance since the items are not related to thesegments'segments’ core operations. Please refer to our Business Segments note for further discussion.YELLOW TRANSPORTATION RESULTSYellow Transportation Results
As one of our largest operating units, Yellow Transportation represented approximately 47 percent and 97 percent of our consolidated revenue in the
firstsecond quarter of 2004 and 2003, respectively, and in the six months ended June 30, 2004 and 2003, respectively. On a pro forma basis, assuming the acquisition of Roadway had occurred on January 1, 2003, Yellow Transportation revenue would have represented approximately4647 percent of our consolidated revenue in thefirstsecond quarter of 2003 and in the six months ended June 30, 2003. The table below provides summary financial information for Yellow Transportation for the three and six months endedMarch 31:June 30:
Three months Six months (in millions)
2004 2003 Percent
Change2004 2003 Percent
ChangeOperating revenue
$ 792.6 $ 691.4 14.6 % $ 1,527.1 $ 1,351.6 13.0 % Operating income
45.7 36.4 25.7 % 72.1 55.9 29.1 % Adjustments to operating income(a)
— — n/m 0.5 — n/m (b) Adjusted operating income
45.7 36.4 25.7 % 72.6 55.9 29.9 % Operating ratio
94.2 % 94.7 % 0.5pp 95.3 % 95.9 % 0.6pp (c) Adjusted operating ratio
94.2 % 94.7 % 0.5pp 95.2 % 95.9 % 0.7pp
(in millions) 2004 2003 Percent Change - ---------------------------------------------------------------------------------------------------------Operating revenue $ 734.5 $ 660.1 11.3% Operating income 26.4 19.5 35.5% Adjustments(a) Represents charges that management excludes when evaluating segment performance to operating income(a) 0.5 - n/mbetter understand our core operations (see discussion below).
(b) Adjusted operating income 26.9 19.5 37.8% Operating ratio 96.4% 97.0% 0.6ppNot meaningful.
(c) Adjusted operating ratio 96.3% 97.0% 0.7pp - ---------------------------------------------------------------------------------------------------------Percentage points. (a) Represents charges that management excludes when evaluating segment performanceThree months ended June 30, 2004 compared to
better understand our core operations (see discussion below). (b) Not meaningful. (c) Percentage points.three months ended June 30, 2003Yellow Transportation reported record
firstsecond quarter revenue in 2004 of$734.5$792.6 million, representing an increase of$74.4$101.2 million or11.314.6 percent from thefirstsecond quarter of 2003. The revenue increase resulted from a combination ofimprovingcontinued improvement in economic conditions, continued emphasis on premium services and meeting customer expectations. The two primary components of less-than-truckload("LTL"(“LTL”) revenue are tonnage, comprised of the number of shipments and the weight per shipment, and price, usually evaluated on a18per hundred weight basis. In the firstsecond quarter of 2004, Yellow Transportation LTL tonnage increased by6.69.3 percent per day, and LTL revenue per hundred weight, excluding the fuel surcharge, improved by2.82.5 percent from thefirstsecond quarter of 2003. The fuel surcharge, adjusted weekly based on a national index, represents an amount passed on to customers due to higher fuel costs and is common throughout the transportation industry.SinceBecause we receive the fuel surcharge from customersit mostly offsets the higher fuel cost,and it has a high degree of volatility, we typically evaluate our pricing excluding this surcharge.Premium services, an integral part of our strategy to offer a broad portfolio of services and meet the increasingly complex transportation needs of our customers, continued to deliver significant revenue growth. Premium services at Yellow Transportation include, among others, Exact
Express(R)Express®, an expedited and time-definite ground service with a 100 percent satisfaction guarantee; and DefiniteDelivery(R)Delivery®, a guaranteed on-time service with constant shipment monitoring and notification. In thefirstsecond quarter of 2004, total Exact Express revenue increased by65nearly 60 percent and Definite Delivery revenueincreased by 23 percent compared towas consistent with thefirstsecond quarter of 2003. Yellow Transportation also offers StandardGround(TM)Ground™ Regional Advantage, a high-speed service for shipments moving between 500 and 1,500 miles. Standard Ground Regional Advantage revenue represented approximately 24 percent of total Yellow Transportation revenue in thefirstsecond quarter of 2004 and increasedover 18nearly 11 percent from thefirstsecond quarter of 2003. This service provides higher utilization of assets by use of more direct loading and bypassing intermediate handling at distribution centers.Yellow Transportation operating income improved by
$6.9$9.3 million in thefirstsecond quarter of 2004 compared to thefirstsecond quarter of 2003. Operating income increased due to higher revenue and our continued ability to effectively balance volume and price. Increased wage and benefit rates, primarily contractual, and increased property damage and claims liability reserves, including $3.5 million specifically accrued during the second quarter of 2004 for a large accident, partially offset the operating income improvement. In addition, thefirstsecond quarter of 2003 included a$1.3$3.7 million reduction in claims and insurance expense for an insurance recovery related to two former employees falsifying claims over several years. Operating expenses as a percentage of revenue decreased in thefirstsecond quarter of 2004 by0.60.5 percentage points compared to thefirstsecond quarter of 2003, resulting in an operating ratio of96.494.2 percent. Operating ratio refers to a common industry measurement calculated by dividing acompany'scompany’s operating expenses by its operating revenue.In addition to the operating ratio, we evaluate our results based on incremental margins, or the change in operating income divided by the change in revenue. The incremental margin at Yellow Transportation from the
firstsecond quarter of 2003 to thefirstsecond quarter of 2004 was approximately109 percent. This incremental margin did not meet our 15 to 20 percentguidelinelong-term goal primarily due to the reduction in claims and insurance expense in thefirstsecond quarter of 2003, as discussed above, and increased property damage and claims liability reserves, higher performance incentive accruals and increased corporate-allocated management fees in thefirstsecond quarter of 2004. Absent the effect of the 2004 increased reserves and the 2003 insurance recovery, our incremental margin was 16 percent. In any given quarter, our incremental margin may be above or below our targeted level of 15 to 20 percent. However, over the longer-term, our expectation is to average a 15 to 20 percent incremental margin.Adjustments to operating income represent charges that management excludes when evaluating segment performance to better understand the results of our core operations. Management excludes the impact of gains and losses from the disposal of property as they reflect charges not related to the
segment'ssegment’s primary business. For the three months endedMarch 31,June 30, 2004 and 2003, adjustments to operating income were$0.5insignificant to our results of operations.Six months ended June 30, 2004 compared to six months ended June 30, 2003
Yellow Transportation revenue increased $175.5 million or 13 percent in the six months ended June 30, 2004 versus the year ago period. In the six months ended June 30, 2004, Yellow Transportation LTL tonnage increased 8.8 percent compared to the year ago period primarily due to improved economic conditions and
zero, respectively,increased penetration in premium services. In addition, LTL revenue per hundred weight, excluding the fuel surcharge, increased during the six months ended June 30, 2004 by 2.6 percent compared to the six months ended June 30, 2003.Operating income for Yellow Transportation increased $16.2 million or 29.1 percent in the six months ended June 30, 2004 as compared to the six months ended June 30, 2003. As discussed above, the increase in operating income is related to the increased revenue and
consisted entirely ofour continued success in negotiating appropriate prices for the related business volumes. Our operating income was adversely impacted by an increase in our propertygainsdamage andlosses. ROADWAY EXPRESS RESULTSclaims liability expense, in large part due to one specific accident, which increased over 50 percent. We also experienced wage and benefit increases that further offset the increase in operating income.Roadway Express Results
Three months ended June 30, 2004 compared to three months ended June 30, 2003
As one of our recently acquired subsidiaries, Roadway Express results were not included in our
firstsecond quarter 2003 results of operations, whichmakesmake 2004 results more challenging to evaluate against prior periods. In thefirstsecond quarter of 2003, Roadway Express results reflected different accounting policies, and the effect of asset and liability valuations prior to adjusting them to their fair value, as required by purchase accounting. In addition, the entity reported results based on a twelve-week period instead of a calendar quarter resulting intwo lessfive fewer business days than thefirstsecond quarter of 2004. For these reasons, management evaluates thesegment'ssegment’s results primarily based on a combination of sequential growth month over month, attainment of plan performance and comparison to adjustedfirstsecond quarter 2003 results.Roadway Express reported revenue of
$717.1$768.2 million in thefirstsecond quarter of 2004 compared to adjusted revenue of$710.2$742.4 million in thefirstsecond quarter of2003.2003, an increase of 3.5 percent. Prior yearfirstsecond quarter revenue was adjusted to reflect the current revenue recognition policy and the conversion to a calendar quarter. Roadway Express represented approximately 46 percent of our consolidated revenue in thefirstsecond quarter of 2004. On a pro forma basis, assuming the acquisition of Roadway had occurred on January 1, 2003, Roadway Express revenue would have represented approximately4951 percent of our consolidated revenue in thefirstsecond quarter of 2003. The1.0 percentrevenue increase resulted from a1.42.7 percent improvement in LTL revenue per hundred weight, excluding the fuel surcharge,significantlypartially offset by a3.02.0 percent decline in LTL tonnage perday. Duringday compared to thefirstsecond quarter of2003,2003. Although LTL business volumes are lower, Roadway Expressstill had temporary business volumes from the closure of Consolidated Freightways, contributing to the difficult comparison among periods. LTL tonnage comparisonsis experiencing an improvedeach month of the first quartertrend in2004 and we expect this trend to continue into the second quarter. Compared to the same month of the prior year,LTL tonnage per daywas down 5.5 percent in January, down 3.7 percent in February and down 2.5 percent in March. 19when comparing second quarter 2004 versus first quarter 2004. Roadway Express reported operating income of
$15.0$36.4 million in thefirstsecond quarter of 2004, which included approximately$7 thousand$.0.2 million of gains on property disposals. Operating income results exceededmanagement'smanagement’s expectations for thefirstsecond quarter of 2004, as the segment lowered operating costs in response to the lower volumes. Reduced salaries, wages andemployees'employees’ benefits contributed significantly to the favorable operating results. Efficiency improvements more than offset the increased contractual wage and benefit rates. In addition, operating expenses and supplies decreased from earlier projections despite significant fluctuations in fuel costs throughout the quarter. In thefirstsecond quarter of 2004, Roadway Express recognized$1.7$2.2 million of amortization related to intangible assets identified in the purchase price allocation. Roadway Express reported afirstsecond quarter 2004 operating ratio of97.995.3 percent compared to 98.3 percent for the second quarter of 2003 when stated on a comparable basis.Six months ended June 30, 2004 compared to six months ended June 30, 2003
Roadway Express reported revenue of $1,485.3 million for the six months ended June 30, 2004 as compared to $1,452.6 million, as adjusted, for the six months ended June 30, 2003, an increase of $32.7 million or 2.3 percent.
NEW PENN RESULTSThe prior period revenue was adjusted to reflect the current revenue recognition policy and the conversion into a six-month period versus a twenty-four week period. The increased revenue is attributed to favorable pricing changes partially offset by a 3.0 percent decline in LTL tonnage per day. Roadway Express represented approximately 46 percent of our consolidated revenue for the six months ended June 30, 2004.Roadway Express reported operating income of $51.4 million for the six months ended June 30, 2004 as compared to $33.1 million, as adjusted, for the six months ended June 30, 2003. The current period operating income significantly benefited from various cost savings initiatives. These initiatives, primarily centered on reduced salaries, wages and employees’ benefits, more than compensated for increased contractual wage and benefit rates and higher fuel costs. During the six months ended June 30, 2004, Roadway Express recognized $3.9 million of amortization of intangible assets. There was no such amount in the comparable prior year period.
New Penn Results
Three months ended June 30, 2004 compared to three months ended June 30, 2003
Similar to Roadway Express, New Penn results for the
firstsecond quarter of 2004 include purchase accounting valuations and reflect different accounting policies than thefirstsecond quarter of 2003. In addition, the entity reported prior year results based on a twelve-week period instead of a calendar quarter resulting intwo lessfive fewer business days than thefirstsecond quarter of 2004.New Penn reported revenue of
$56.1$64.3 million in thefirstsecond quarter of 2004 compared to adjusted revenue of$50.6$54.7 million in thefirstsecond quarter of 2003. Prior yearfirstsecond quarter revenue was adjusted to reflect the conversion to a calendar quarter. Due to the focus on next-day services, New Penn did not record a significant revenue recognition adjustment in thefirstsecond quarter of 2004 or thefirstsecond quarter of 2003. Please refer toManagement'sManagement’s Discussion and Analysis in our Annual Report on Form 10-K for a detailed discussion of our revenue recognition policies.New Penn represented approximately 4 percent of our consolidated revenue in the
firstsecond quarter of 2004. On a pro forma basis, assuming the acquisition of Roadway had occurred on January 1, 2003, New Penn revenue would have represented approximately 4 percent of our consolidated revenue in thefirstsecond quarter of 2003. The10.817.6 percent revenue improvement from thefirstsecond quarter of 2003 to thefirstsecond quarter of 2004 resulted primarily from a7.615.0 percent increase in LTL tonnage per day,slightly offset byand a0.20.8 percentdeclineincrease in revenue per hundred weight, excluding the fuel surcharge.RevitalizedNew Penn effectively gained profitable new customers upon the closure of a competitor, USF Red Star, on May 24, 2004. Strong sales initiatives,an improving economycoupled with one month of the USF Red Star business, andless severe winter weathercontinued improvement in thefirsteconomy in the second quarter of 2004 contributed to the tonnage growth.Operating income at New Penn was
$5.8$9.2 million in thefirstsecond quarter of 2004, including approximately$5$42 thousand of gains on property disposals. Operating income results exceededmanagement'smanagement’s expectations for thefirstsecond quarter of 2004 and significantly increased from theentity'sentity’s reported results in thefirstsecond quarter of 2003. In thefirstsecond quarter of 2004, New Penn recognized$1.1$0.8 million of amortization related to intangible assets identified in the purchase price allocation. Increased revenue combined with good costcontrols and less severe winter weather than in the first quarter of 2003,management significantly contributed to an operating ratio improvement of 5.1 percentage points from the prior year period resulting in afirstsecond quarter 2004 operating ratio of89.785.7 percent.MERIDIANSix months ended June 30, 2004 compared to six months ended June 30, 2003
New Penn reported revenue of $120.4 million and operating income of $15.0 million for the six months ended June 30, 2004. The revenue growth at New Penn is directly attributed to the increase in LTL tonnage per day in addition to one month benefit of new customers gained from the closure of USF Red Star in the Northeast. The improved economy also contributed to the strong revenue results at New Penn. The segment’s operating income also benefited from the strong revenue improvements as well as continued emphasis on cost containment and profitable growth strategies. During the six months ended June 30, 2004, New Penn recognized $1.9 million of amortization of intangible assets. There was no such amount in the comparable prior year period.
Meridian IQ
RESULTSResultsMeridian IQ is our non-asset-based segment that plans and coordinates the movement of goods throughout the world. Meridian IQ represented approximately 3 percent of our consolidated revenue in the
firstsecond quarter of 2004 and 2003 and approximately 3 percent in the six months ended June 30, 2004 and 2003. On a pro forma basis, assuming the acquisition of Roadway had occurred on January 1, 2003, Meridian IQ revenue would have represented approximately 2 percent of our consolidated revenue in thefirstsecond quarter of 2003 and approximately 2 percent in the six months ended June 30, 2003. The table below provides summary financial information for Meridian IQ for the three and six months endedMarch 31:June 30:
(in millions) 2004 2003 Percent Change - ---------------------------------------------------------------------------------------------------------Operating revenue $ 45.7 $ 22.1 106.8% Operating income 0.6 (0.9) n/m Adjustments to operating income - - - Adjusted operating income 0.6 (0.9) n/m - ---------------------------------------------------------------------------------------------------------
Three months Six months (in millions)
2004 2003 Percent
Change2004 2003 Percent
ChangeOperating revenue
$ 50.6 $ 23.2 118.4 % $ 96.3 $ 45.3 112.8 % Operating income
0.6 0.1 n/m 1.2 (0.8 ) n/m Three months ended June 30, 2004 compared to three months ended June 30, 2003
In the
firstsecond quarter of 2004, Meridian IQ revenue increased by$23.6$27.4 million or106.8118.4 percent from thefirstsecond quarter of 2003. The significant increase in revenue resulted from a combination of strong organic growth within Meridian IQ existing services and recentacquisitions, as discussed below. A firstacquisitions. Operating income also increased from $0.1 million in the second quarter of 2003operating lossto $0.6 million in the second quarter of$0.9 million turned into a first quarter 2004 operating profit of $0.6 million.2004. Increased revenueand cost containmentpartially offset by higher marketing costs produced the improved operating results.Six months ended June 30, 2004 compared to six months ended June 30, 2003
For the six months ended June 30, 2004, Meridian IQ
Acquisitions In August 2003, a subsidiary ofrevenue increased by $51.0 million or 112.8 percent from the six months ended June 30, 2003. Meridian IQYellow GPS, LLC ("Yellow GPS"), acquired certain U.S. assetshad an operating loss ofGPS Logistics, a global logistics provider. Yellow GPS assumed certain of GPS Logistics' customer, lease and other obligations and became obligated to pay GPS Logistics earnout payments if certain financial targets$0.8 million for thecombined businesssix months ended June 30, 2003 compared to an operating profit ofYellow GPS are met. No earnout payments were made in$1.2 million for thefirst quarter ofsix months ended June 30, 2004.In addition, Yellow GPS received a call option to purchaseOrganic growth within Meridian IQ and thestock of each of GPS 20Logistics (EU) Ltd., the related United Kingdom ("U.K.") operations of GPS Logistics, and GPS Logistics Group Ltd., the related Asian operations of GPS Logistics. In February 2004, Yellow GPS exercised and closed its option to purchase GPS Logistics (EU) Ltd. Yellow GPS made a payment of $7.6 million, which is subject to upward and downward adjustments based on the financial performance of the U.K. business. The initial payment and acquisition expenses of $0.3 million were allocated as follows: $3.3 million to goodwill, $3.2 million to amortizable intangible assets, and $1.4 million to miscellaneous assets and liabilities. If Yellow GPS does not exercise the Asian option, it will be required to pay a deferred option pricepositive results from recent acquisitions contributed to theshareholders of GPS Logistics Group Ltd. CONSOLIDATED RESULTSoverall improved operating results for the six months ended June 30, 2004 compared to the six months ended June 30, 2003.Consolidated Results
Our
first quarter 2004consolidated results for the three and six months ended June 30, 2004 include the results of each of the operating segments previously discussed, including Roadway Express and New Penn. Thefirst quarter 2003reported results for the three and six months ended June 30, 2003 include the former Yellow Corporation entities only, consisting of Yellow Transportation and Meridian IQ. Pro forma information provided presents the combined results of operations of Yellow Roadway as if the Roadway acquisition had occurred at the beginning of the period presented. The following discussion focuses oncorporate charges anditems that management evaluates on a consolidated basis, as segment results have been discussed previously.Three months ended June 30, 2004 compared to three months ended June 30, 2003
The table below provides summary consolidated financial information for the three months ended
March 31:June 30:
Percent Change 2003 2003 2004 vs. 2003 2004 vs. 2003 (in millions) 2004 Pro Forma Reported Pro Forma Reported - -------------------------------------------------------------------------------------------------------------------------Operating revenue $ 1,552.1 $ 1,441.4 $ 681.1 7.7% 127.9% Operating income 41.3 34.4 11.8 20.3% 251.4% Nonoperating expenses, net 11.8 12.8 2.6 (8.0)% 361.8% Income from continuing operations 18.2 12.8 5.6 42.4% 222.7% Income from discontinued operations - 0.1 - n/m n/m Net income $ 18.2 $ 12.9 $ 5.6 40.8% 222.7% - -------------------------------------------------------------------------------------------------------------------------
Percent Change (in millions)
2004 2003
Pro Forma
2003
Reported2004 vs. 2003
Pro Forma2004 vs. 2003
Reported
Operating revenue
$ 1,674.1 $ 1,456.1 $ 713.5 15.0 % 134.7 % Operating income
88.2 46.9 32.3 88.1 % 173.9 % Nonoperating expenses, net
12.0 10.8 2.3 11.1 % 421.7 % Income from continuing operations
46.9 21.8 18.4 115.1 % 155.5 % Income from discontinued operations
— (0.3 ) — n/m n/m Net income
$ 46.9 $ 21.5 $ 18.4 118.1 % 155.5 % Operating revenue in the
firstsecond quarter of 2004 increased by$110.7$218.0 million compared to pro forma revenue in thefirstsecond quarter of 2003.The revenue growth was contributed by eachEach of our operating segmentsandcontributed to the revenue growth, which resulted from a combination of improving economic conditions, increased premium services and non-asset-based acquisitions. Operating revenue increased by$871.0$960.6 million fromfirstsecond quarter 2003 reported revenue to thefirstsecond quarter of 2004, primarily due to the acquisition of Roadway Express and New Penn in addition to the improved results at Yellow Transportation and Meridian IQ.Consolidated operating income improved by
$6.9$41.3 million from pro formafirstsecond quarter 2003 operating income to thefirstsecond quarter 2004. The improved results primarily related to increased revenue and effective cost management at each of our operating segments. Reportedfirstsecond quarter 2003 operating income increased by$29.5$55.9 million compared to thefirstsecond quarter of 2004, mostly due to the acquisition of Roadway Express and New Penn, and increased revenue at Yellow Transportation and Meridian IQ. Corporate expenses in thefirstsecond quarter of 2004 decreased by$0.4$0.5 million from thefirst quarter of 2003. However, the firstsecond quarter of 2003included $4.0 million for an industry conference that we host every other year. On a comparable basis, first quarter 2004 corporate expenses increased by $3.6 million, due toas higher performance incentive accruals, based on our improved operatingresults.results, were more than offset by corporate-allocated management fees.Nonoperating expenses in the
firstsecond quarter of 2004decreasedincreased by$1.0$1.2 million from the pro forma nonoperating expenses in thefirstsecond quarter of 2003 as a result of lower interest income partially offset by lower interest expense. The lower interest expense resulted from lower average debt balances in thefirstsecond quarter of 2004thancompared to those included in the pro forma results. Reportedfirstsecond quarter 2003 interest expense increased bynearly $9.3$9.7 million in thefirstsecond quarter of 2004 due to the additional debt we either assumed or issued to consummate the Roadway acquisition, including the assumption of $225.0 million of principal senior notes issued by Roadway.Our effective tax rate for the
firstsecond quarter of 2004 was 38.5 percent compared to 38.9 percent in thefirstsecond quarter of 2003. As we record our tax provision based on our full year forecasted results, we expect this rate to approximate 38.5 percent for the remainder of the year. Variations in the rate could result from our income allocation among subsidiaries and their relative state tax rates, in addition to tax planning strategies that may be implemented throughout the year.21FINANCIAL CONDITION LIQUIDITYSix months ended June 30, 2004 compared to six months ended June 30, 2003
The table below provides summary consolidated financial information for the six months ended June 30:
Percent Change (in millions)
2004 2003
Pro Forma
2003
Reported2004 vs. 2003
Pro Forma2004 vs. 2003
Reported
Operating revenue
$ 3,226.3 $ 2,897.4 $ 1,394.5 11.4 % 134.7 % Operating income
129.6 81.3 44.1 59.4 % 173.9 % Nonoperating expenses, net
23.7 23.6 4.8 0.4 % 421.7 % Income from continuing operations
65.1 34.5 24.0 88.7 % 155.5 % Income from discontinued operations
— (0.1 ) — n/m n/m Net income
$ 65.1 $ 34.4 $ 24.0 89.2 % 155.5 % Consolidated operating revenue for the six months ended June 30, 2004 increased by $328.9 million compared to pro forma revenue in the six months ended June 30, 2003. Each of our operating segments, especially Yellow Transportation, contributed to revenue growth, which resulted from both improved economic conditions and increased premium services. Consolidated operating revenue increased by $1.8 billion from the reported revenue for the six months ended June 30, 2003 to the current comparable period primarily due to the acquisition of the Roadway Group in addition to the improved results at Yellow Transportation as previously discussed.
Consolidated operating income for the six months ended June 30, 2004 increased by $48.3 million compared to pro forma operating income for the six months ended June 30, 2003. The improved results are primarily attributable to increased consolidated revenue and the successful integration of cost reduction programs within the Roadway Group and Yellow Transportation. Consolidated operating income as reported for the six months ended June 30, 2003 increased by $85.5 million when compared to the comparable current year period due to the acquisition of the Roadway Group, as well as the previously mentioned successes within Yellow Transportation. Corporate expenses for the six months ended June 30, 2004 decreased $0.9 million versus the six months ended June 30, 2003 primarily due to increased incentive accruals related to our improved operating results and increased professional services costs which were more than offset by the higher corporate-allocated management fees and the absence of costs associated with sponsoring a trade conference that generally occurs every other year.
During the six months ended June 30, 2004, we were able to capture approximately $12.0 million of cost synergies through the cost reduction programs mentioned above. We expect further cost synergies to be realized during the balance of the year.
Consolidated nonoperating expenses for the six months ended June 30, 2004 were comparable to the pro forma amounts for the six months ended June 30, 2003 and greater than the nonoperating expenses for the six months ended June 30, 2003 by $18.9 million due to the additional debt we either assumed or issued to consummate the Roadway acquisition.
Our effective tax rate for the six months ended June 30, 2004 was 38.5 percent compared to 38.9 percent for the six months ended June 30, 2003. As discussed above, we expect this rate to approximate 38.5 percent for the remainder of the year.
Financial Condition
Liquidity
Our liquidity needs arise primarily from capital investment in new equipment, land and structures, and information technology, as well as funding working capital requirements. To provide short-term and longer-term liquidity, we maintain capacity under a
$650$525 million securedbankcredit agreement and a$200$300 million asset backed securitization("ABS"(“ABS”) agreement involving Yellow Transportation and Roadway Express accounts receivable. We believe these facilities provide adequate capacity to fund our current working capital and capital expenditurerequirements for Yellow Roadway.requirements. It is not unusual for us to have a deficit working capital position, as we can operate in this position due to rapid turnover of accounts receivable, effective cash management and ready access to funding.Secured Credit Agreement
Our secured credit agreement consists of three parts: a term loan, a letters of credit facility and a revolver loan. As of
March 31,June 30, 2004, we had$150$75 million outstanding on the term loan. As we repay the term loan, our total capacity under the secured credit agreement decreases since we cannot borrow the funds again in the future. The entire $175 million of the term loan was borrowed in December 2003 to pay a portion of the Roadway acquisition. We reduced the outstanding amount of the term loan in the first quarter of 2004 by $25 million through streamlining our cash processes and working capital management. In the second quarter of 2004 we further reduced the amount of the term loan by $75 million through cash from operations and borrowings under our more economic ABS facility. We may use the letters of credit facility for issuance of standby letters of credit and the revolver loan for short-term borrowings and additional letters of credit. Letters of credit serve primarily as collateral for our self-insurance programs, primarily in the areas ofworkers'workers’ compensation, property damage and liability claims. Collateral requirements for letters of credit and availability of surety bonds, an alternative form of self-insurance collateral, fluctuate over time with general conditions in the insurance market. The revolver loan initially provided capacity of $250 million. In conjunction with the modifications to our ABS facility in May 2004 as discussed below, the capacity of the revolver loan was reduced to $200 million.Our interest rate on the secured credit agreement is based on the London inter-bank offer rate
("LIBOR"(“LIBOR”) plus a fixed increment. We have secured the credit facility with substantially all of our domestic assets except for those assets that secure our ABS facility. Under the terms of the agreement, we must comply with certain covenants primarily relating to our interest expense, fixed charges, senior secured leverage and total leverage. In addition, the agreement limits our activities regarding acquisitions, sales of assets, dividends, share repurchases, and capital expenditures. As ofMarch 31,June 30, 2004, we were in compliance with all terms of the agreement. We do not consider these covenants overly restrictive and we believe we have considerable flexibility in operating our business in a prudent manner. Presently we are considering opportunities to replace our secured financing agreement with an unsecured credit facility containing more attractive rates and covenants. If we replace our secured financing agreement, the related deferred debt costs presently being amortized would be written off as a non-cash charge. At June 30, 2004, these costs totaled approximately $18.9 million. The following table providesa detaildetails of the outstanding components and available unused capacity under the current bank credit agreement at each period end:
(in millions) March 31, 2004 December 31, 2003 - ----------------------------------------------------------------------------------------------------Total capacity $ 650.0 $ 675.0 Term loan outstanding (150.0) (175.0) Letters of credit facility outstanding (250.0) (a) (250.0) (a) Letters of credit under revolver loan outstanding (30.3) (24.4) Revolver loan outstanding (3.0) - - ---------------------------------------------------------------------------------------------------- Available unused capacity $ 216.7 $ 225.6 - ----------------------------------------------------------------------------------------------------(a) We have an additional $1.5 million in letters of credit that are not currently covered under a credit facility.
(in millions)
June 30,
2004December 31,
2003Total capacity
$ 525.0 $ 675.0 Term loan
(75.0 ) (175.0 ) Letters of credit facility outstanding
(250.0 ) (250.0 ) Letters of credit under revolver loan outstanding
(28.8 ) (24.4 ) Available unused capacity
$ 171.2 $ 225.6 On September 30, 2002, we completed the 100 percent distribution
("(“thespin-off"spin-off”) of all of the shares of SCS Transportation, Inc.("SCST"(“SCST”) to our shareholders. As part of the spin-off, we agreed to maintain the letters of credit outstanding at the spin-off date until SCST obtained replacement letters of credit or third party guarantees. SCST agreed to use its reasonable best efforts to obtain these letters of credit or guarantees, which in many cases would allow us to obtain a release of our letters of credit. SCST also agreed to indemnify us for any claims against the letters of credit that we provide. SCST reimburses us for all fees incurred related to the remaining outstanding letters of credit. Our outstanding letters of credit atMarch 31,June 30, 2004 included $3.4 million forworkers'workers’ compensation, property damage and liability claims against SCST. We also provided a guaranteeof $5.4 million at March 31, 2004regarding certain lease obligations ofSCST.SCST at the spin-off date. The remaining lease obligations are $5.0 million at June 30, 2004.Asset Backed Securitization Facility
Our ABS facility provides us with additional liquidity and lower borrowing costs through access to the asset backed commercial paper market. By using the ABS facility, we obtain a variable rate based on the
A1A1/P1 commercial paper rate plus a fixed increment for utilization and administration fees.A1 rated commercial paper comprises approximately 90 percent of the commercial paper market, significantly increasingOn May 21, 2004, we replaced our
liquidity. 22Ourexisting ABS facility with a new ABS facility. The new ABS facility involves receivables of Yellow Transportationonlyand Roadway Express and hasaan increased limit of $300 million, up from the previous limit of $200 million. Under the terms of the agreement, Yellow Transportationprovidesand Roadway Express provide servicing of the receivables andretainsretain the associated collection risks.AlthoughThe termination date of the ABS facilityhas no stated maturity, thereisan underlying letterMay 20, 2005. Accordingly, the outstanding borrowings ofcredit$57 million as of June 30, 2004 have been classified as a current liability in the accompanying consolidated balance sheets.The new ABS facility is operated by Yellow Roadway Receivables Funding Corporation (“YRRFC”), a special purpose entity and wholly owned subsidiary of Yellow Roadway. Management will continue to evaluate the financial position of Yellow Transportation and Roadway Express including the transferred receivables and related borrowings. As a result, the Yellow Roadway consolidated financial statements and segment reporting will not be impacted by this change. However, as the receivables will be legally owned by YRRFC, separate subsidiary financial statements filed with the
administering financial institution that has a 364-day maturity.Securities and Exchange Commission due to the issuance of public debt will not reflect the transferred receivables and related borrowings.The following table provides details of the available unused capacity under the asset backed securitization funding at each period end:
(in millions)
June 30,
2004December 31,
2003Total capacity
$ 300.0 $ 200.0 Amount outstanding
(57.0 ) (71.5 ) Available unused capacity
$ 243.0 $ 128.5 Cash Flow Measurements
We use free cash flow as a measurement to manage working capital and capital expenditures. Free cash flow indicates cash available after normal capital expenditures have been funded. Free cash flow may be used to fund additional capital expenditures, to reduce outstanding debt (including current maturities),
orto invest in our growthstrategies.strategies or other prudent uses of cash. This measurement is used for internal management purposes and should not be construed as a better measurement than net cash from operating activities as defined by generally accepted accounting principles. The following table illustrates our calculation for determining free cash flow for thethreesix months endedMarch 31:June 30:
(in millions) 2004 2003 - ------------------------------------------------------------------------------------------Net cash from operating activities $ 89.7 $ 20.1 Net property and equipment acquisitions (57.6) (25.5) Proceeds from exercise of stock options 1.8 - - ------------------------------------------------------------------------------------------ Free cash flow $ 33.9 $ (5.4) - ------------------------------------------------------------------------------------------
(in millions)
2004 2003 Net cash from operating activities
$ 180.7 $ 69.8 Net property and equipment acquisitions
(103.3 ) (46.8 ) Proceeds from exercise of stock options
3.4 1.1 Free cash flow
$ 80.8 $ 24.1 The
$39.3$56.7 million increase in free cash flow from thefirstsecond quarter of 2003 to thefirstsecond quarter of 2004 resulted from increased operating cash flow of$69.6$110.9 million partially offset by increased net property and equipment acquisitions of$32.1$56.5 million. Operating cash flows increased from thefirstsecond quarter of2004 compared2003 to thefirstsecond quarter of20032004 primarily due to improved operating results of$12.5$41.1 million and other working capital fluctuations of$87.7$68.6 million,somewhatoffset byloweran increase in the change in accounts receivablecollectionsof$28.7$79.2 millionand higher accounts payable payments of $23.1 million.due to increased revenue. Other working capital fluctuations mostly related to timing differences in employee wage and benefit accruals, increased performance incentive accruals, and accrued interest and taxes. In addition, approximately$45$32 million of the fluctuation related to employee wage and benefit accruals, accrued income taxes and miscellaneous prepaids for Roadway Express and New Penn, as these entities were not included in our reported results for thefirstsecond quarter of 2003.Other items considered in evaluating free cash flow include net property and equipment acquisitions and proceeds from the exercise of stock options. In the first
quartersix months of 2004, net property and equipment acquisitions increased by$32.1$56.5 million compared to the firstquartersix months of 2003, due to a combination of increased investments inland and structuresrevenue equipment at Yellow Transportation and the impact of capital expenditures for Roadway Express and New Penn. Our proceeds received from the exercise of stock options increased by$1.8$2.3 million in the firstquartersix months of 2004 compared to the firstquartersix months of 2003 primarily due to the increase in the exercise of stock options, primarily attributable to the increase in our average common stock price duringthe first quarter of2004.CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTSContractual Obligations and Other Commercial Commitments
The following tables provide aggregated information regarding our contractual obligations and commercial commitments as of
March 31,June 30, 2004.Contractual Cash Obligations
Payments Due by Period
(in millions)
Less than 1 year 2-3 years 4-5 years After 5 years Total Balance sheet obligations:
ABS borrowings
$ 57.0 $ — $ — $ — $ 57.0 Long-term debt
0.8 7.4 299.8 406.0 714.0 Off balance sheet obligations:
Operating leases
66.4 78.8 26.5 11.2 182.9 (a) Capital expenditures
51.6 — — — 51.6 Total contractual obligations
$ 175.8 $ 86.2 $ 326.3 $ 417.2 $ 1,005.5
Payments Due by Period (in millions) Less than 1 year 2-3 years 4-5 years After 5 years Total - ----------------------------------------------------------------------------------------------------------------------------Balance sheet obligations: ABS borrowings $ 13.0 $ - $ - $ - $ 13.0 Long-term debt 4.5 7.4 374.0 406.0 791.9 Off balance sheet obligations: Operating(a) The net present value of operating leases, 71.9 83.8 28.4 12.9 197.0 (a) Capital expenditures 97.7 - - - 97.7 - ---------------------------------------------------------------------------------------------------------------------------- Total contractual obligations $ 187.1 $ 91.2 $ 402.4 $ 418.9 $1,099.6 - ----------------------------------------------------------------------------------------------------------------------------using a discount rate of 10 percent, was $155.3 million at June 30, 2004.(a) The net present value of operating leases, using a discount rate of 10 percent, was $166.7 million at March 31, 2004.On April 30, 2004, we notified Bandag, Inc. that we plan to terminate
ourthe tire lease agreementforbetween Roadway Expresswithand Bandag effective August 1, 2004. The agreement contains a provision for us to buy the remaining tire inventory.Bandag currently estimates the inventory value at approximately $37 million; however,At June 30, 2004, we havenot validated that estimate.recorded a liability of $33.5 million classified as accounts payable in the consolidated balance sheets with the related asset included in property and equipment. We believe termination of this23agreement supports both our near and long-term economic objectives and is consistent with our business policies. We do not expect the lease termination to have a material impact on our results of operations. In June 2004, we deposited with the Internal Revenue Service (“IRS”) $41.4 million ($32.3 million net of tax benefit) to stop the accrual of additional interest related to a preliminary tax settlement. The IRS challenged the timing of a deduction by Roadway Express related to prior years’ contributions to certain union pension plans. Additional state tax and interest payments of approximately $9.0 million ($7.4 million net of tax benefit) resulting from the federal adjustments are expected to be made during the second half of 2004. We had specifically established reserves related to these payments in purchase accounting and do not expect this matter to have a material impact on our results of operations.
On July 1, 2004, we contributed $22.3 million to our company-sponsored pension plans in accordance with our funding requirements. We expect to make additional contributions to these plans during the remainder of 2004 of $20.7 million.
Other Commercial Commitments
The following table reflects other commercial commitments or potential cash outflows that may result from a contingent event, such as a need to borrow short-term funds due to insufficient free cash flow.
Amount of Commitment Expiration Per Period (in millions)
Less than 1 year 2-3 years 4-5 years After 5 years Total Available line of credit
$ — $ — $ 171.2 $ — $ 171.2 Letters of credit
278.8 — — — 278.8 (a) Lease guarantees for SCST
1.7 2.4 0.9 — 5.0 Surety bonds
53.0 8.1 1.3 — 62.4 (b) Total commercial commitments
$ 333.5 $ 10.5 $ 173.4 $ — $ 517.4
Amount of Commitment Expiration Per Period (in millions) Less than 1 year 2-3 years 4-5 years After 5 years Total - ----------------------------------------------------------------------------------------------------------------------------Available line(a) Includes $1.5 million in letters of credit $ - $ - $ 216.7 $ - $ 216.7 Lettersthat are not currently covered under a credit facility.
(b) Includes $1.8 million of credit 281.8 - - - 281.8 (a) Lease guaranteessurety bonds for SCST1.7 2.6 1.1 - 5.4 Surety bonds 57.7 7.4 1.2 - 66.3 (b) - ---------------------------------------------------------------------------------------------------------------------------- Total commercial commitments $ 341.2 $ 10.0 $ 219.0 $ - $ 570.2 - ----------------------------------------------------------------------------------------------------------------------------related to workers’ compensation, property damage and liability claims.(a) Includes $1.5Outlook
At its July 2004 meeting, the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board (FASB) reached a tentative conclusion on EITF Issue No. 04-8, “The Effect of Contingently Convertible Debt of Diluted Earnings Per Share,” that would require the contingent shares issuable under our contingent convertible senior notes to be included in our diluted earnings per share calculation retroactive to the date of issuance by applying the “if converted” method under SFAS Statement No. 128, “Earnings Per Share” (Statement No. 128). We have followed the existing interpretation of Statement No. 128, which requires inclusion of the
impact of the conversion of our contingent convertible senior notes only when and if the conversion threshold, as defined, is reached. If this proposed rule is adopted, our diluted earnings per share will be lower than previously reported. We estimate this proposed rule would increase our average shares outstanding used in our calculation of diluted earnings per share by approximately 9.6 million shares. In addition, we estimate that the numerator used in
lettersthe calculation ofcredit that are not currently covered under a credit facility. (b) Includes $1.8our diluted earnings per share would increase by an amount equal to the interest cost, net of tax, on our contingent convertible senior notes. The annual interest on these notes is $17.6 million ($10.8 million net ofsurety bonds for SCST related to workers' compensation, property damage and liability claims. 24tax). Item
3.3.Quantitative and Qualitative Disclosures About Market RiskWe have exposure to a variety of market risks, including the effects of interest rates, equity prices, foreign exchange rates and fuel prices.
RISK FROM INTEREST RATES AND EQUITY PRICESRisk from Interest Rates and Equity Prices
To provide adequate funding through seasonal business cycles and minimize overall borrowing costs, we utilize both fixed rate and variable rate financial instruments with varying maturities. Given the favorable interest rate markets in 2003, we
assumedissued and entered into a significant amount of fixed-rate debt for the acquisition of Roadway. AtMarch 31,June 30, 2004, we had approximately 80 percent of our debt at fixed rates with the balance at variable rates.The table below provides information regarding our interest rate risk related to fixed-rate debt as of
March 31,June 30, 2004. Principal cash flows are stated in millions and weighted average interest rates are by contractual maturity. We estimate the fair value of our industrial development bonds by discounting the principal and interest payments at current rates available for debt of similar terms and maturity. The fair values of our principal senior notes due 2008 and contingent convertible senior notes have been calculated based on the quoted market prices atMarch 31,June 30, 2004. The market price for the contingent convertible senior notes reflects the combination of debt and equity components of the convertible instrument. We consider the fair value of variable-rate debt to approximate the carrying amount due to the fact that the interest rates are generally set for periods of three months or less, and therefore, we exclude it from the table below.
Fair (in millions) 2004 2005 2006 2007 2008 Thereafter Total Value - --------------------------------------------------------------------------------------------------------------------------Fixed-rate debt $ - $ 4.4 $ - $ - $ 227.5 $ 407.0 $ 638.9 $ 777.3 Average interest rate - 5.25% - - 8.22% 4.42% - --------------------------------------------------------------------------------------------------------------------------FOREIGN EXCHANGE RATES
2004 2005 2006 2007 2008 Thereafter Total �� Fair
ValueFixed-rate debt
(in millions)$ — $ 4.4 $ — $ — $ 227.5 $ 407.0 $ 638.9 $ 789.1 Average interest
rate— 5.25 % — — 8.22 % 4.42 % Foreign Exchange Rates
Revenue, operating expenses, assets and liabilities of our Canadian, Mexican and United Kingdom subsidiaries are denominated in local currencies, thereby creating exposure to fluctuations in exchange rates. The risks related to foreign currency exchange rates are not material to our consolidated financial position or results of operations.
FUEL PRICE VOLATILITYOn June 30, 2004, we entered into a foreign currency hedge with a notional amount of $5 million and a maturity of December 31, 2004. This instrument is to effectively hedge our exposure to foreign currency fluctuations on certain intercompany debt with GPS Logistics (EU) Ltd.Fuel Price Volatility
Yellow Transportation, Roadway Express and New Penn currently have effective fuel surcharge programs in place. As discussed under
the“Results of Operations – Yellow Transportation,Results of Operations,” these programs are well established within the industry and customer acceptance of fuel surcharges remains high.SinceBecause the amount of fuel surcharge is based on average, national diesel fuel prices and is reset weekly, our exposure to fuel price volatility is significantly reduced.25Item
4.4.Controls and ProceduresWe maintain a rigorous set of disclosure controls and procedures and internal controls designed to ensure that information required to be disclosed in our filings under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange
Commission'sCommission’s rules and forms. Our principal executive and financial officers have evaluated our disclosure controls and procedures as of the end of the period covered by this report and have determined that such disclosure controls and procedures are effective.Subsequent to the evaluation by our principal executive and financial officers, there were no significant changes in internal controls or other factors that could significantly affect internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.
26PART II - OTHER INFORMATION
Item 1. Legal Proceedings - None Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities - None Item 3. Defaults Upon Senior Securities - NoneItem 4. Submission of Matters to a Vote of Security Holders
- None Item 5. Other Information - None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 31.1 Certification of William D. Zollars pursuant to Exchange Act Rules 13a-14 and 15d-14, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Donald G. Barger, Jr. pursuant to Exchange Act Rules 13a-14 and 15d-14, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of William D. Zollars pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Donald G. Barger, Jr. pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.1 Roadway LLC and Subsidiaries Consolidated Financial Statements; Consolidated Balance Sheets as of March
(a) Annual Meeting of Shareholders on May 20, 2004.
(b) The following directors were elected with the indicated number of votes set forth below.
Nominees
For Withheld Cassandra C. Carr
41,331,222 1,204,995 Howard M. Dean
40,699,134 1,837,083 Frank P. Doyle
42,185,162 351,055 John F. Fiedler
41,484,029 1,052,188 Dennis E. Foster
41,353,965 1,182,252 John C. McKelvey
41,561,579 974,638 Phillip J. Meek
41,365,100 1,171,117 William L. Trubeck
42,026,648 509,569 Carl W. Vogt
42,196,604 339,613 William D. Zollars
41,739,261 796,956
(c) Votes were cast with respect to the approval of the Yellow Roadway 2004 Long-Term Incentive and Equity Award Plan:
For: 28,719,351
Against: 5,238,508 Abstain: 111,954
(d) Votes were cast with respect to the ratification of the appointment of KPMG LLP as independent public accountants of Yellow Roadway for 2004:
For: 41,872,179
Against: 521,727 Abstain: 142,311
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Bylaws of Yellow Roadway Corporation, as amended. 10.1 Receivables Sale Agreement, dated as of May 21, 2004, between Yellow Transportation, Inc. and Roadway Express, Inc., as the Originators; and Yellow Roadway Receivables Funding Corporation, as the Buyer. 10.2 Receivables Purchase Agreement, dated as of May 21, 2004, among Yellow Roadway Receivables Funding Corporation, as Seller; Falcon Asset Securitization Corporation, Blue Ridge Asset Funding Corporation, as Conduits; the Financial Institutions Party to the Agreement, as Committed Purchasers; Wachovia Bank, National Association, as Blue Ridge Agent; and Bank One, NA (Main Office Chicago), as Falcon Agent and as Administrative Agent. 31.1 Certification of William D. Zollars pursuant to Exchange Act Rules 13a-14 and 15d-14, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Donald G. Barger, Jr. pursuant to Exchange Act Rules 13a-14 and 15d-14, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of William D. Zollars pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Donald G. Barger, Jr. pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.1 Roadway LLC and Subsidiaries Consolidated Financial Statements; Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003, Statements of Consolidated Operations for the three and six months ended June 30, 2004 and twelve and twenty-four weeks ended June 21, 2003 and Statements of Cash Flows for the six months ended June 30, 2004 and twenty-four weeks ended June 21, 2003. 99.2 Roadway Express, Inc. and Subsidiaries Consolidated Financial Statements; Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003, Statements of Consolidated Operations for the three and six months ended June 30, 2004 and twelve and twenty-four weeks ended June 21, 2003 and Statements of Cash Flows for the six months ended June 30, 2004 and twenty-four weeks ended June 21, 2003. 99.3 Roadway Next Day Corporation and Subsidiary Consolidated Financial Statements; Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003, Statements of Consolidated Operations for the three and six months ended June 30, 2004 and twelve and twenty-four weeks ended June 21, 2003 and Statements of Cash Flows for the six months ended June 30, 2004 and twenty-four weeks ended June 21, 2003.
(b) Reports on Form 8-K On April 23, 2004,
and December 31, 2003 and Statements of Consolidated Operations and Cash Flows for the three months ended March 31, 2004 and twelve weeks ended March 29, 2003. 99.2 Roadway Express, Inc. and Subsidiaries Consolidated Financial Statements; Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003 and Statements of Consolidated Operations and Cash Flows for the three months ended March 31, 2004 and twelve weeks ended March 29, 2003. 99.3 Roadway Next Day Corporation and Subsidiary Consolidated Financial Statements; Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003 and Statements of Consolidated Operations and Cash Flows for the three months ended March 31, 2004 and twelve weeks ended March 29, 2003. (b) Reports on Form 8-K On January 30, 2004, we furnisheda Form 8-Kto the SECwas furnished under Item 12, Results of Operations and Financial Condition, in whichweYellow Roadway made availableour results of operations for the three months and twelve months ending December 31, 2003 by means of a press release. On February 5, 2004, we furnished a Form 8-K to the SEC under Item 12, Results of Operations and Financial Condition, in which we made available ourits results of operations and financial condition for the three monthsand twelve monthsendingDecemberMarch 31,2003.2004.On
FebruaryMay 11, 2004,we filed a Form 8-K/A under Item 2, Acquisition or Disposition of Assets, to make available the results of operations and financial condition of Roadway Corporation as of September 13, 2003 and December 31, 2002 and for the thirty-six weeks ended September 13, 2003 and September 7, 2002, and to make available the condensed combined pro forma balance sheet at September 30, 2003, the condensed combined pro forma statement of operations for the year ended December 31, 2002, the condensed combined pro forma statement of operations for the nine months ended September 30, 2003, and the related notes to condensed consolidated financial statements. On February 19, 2004, we fileda Form 8-Kunder Item 5, Other Events. We filed the audited consolidated financial statements of Roadway Corporation for the period January 1 to December 11, 2003 and the years ended December 31, 2002 and 2001, in order to comply with Item 210.3-10(g) of Regulation S-X regarding recently acquired subsidiary guarantors. 27On March 4, 2004, we filed a Form 8-K/A under Item 5, Other Events, to include the signature of Ernst & Young, LLP on the audited financial statements of Roadway Corporation filed under Form 8-K on February 19, 2004. On March 10, 2004, we filed a Form 8-K/A under Item 7, Financial Statements, Pro Forma Financial Information and Exhibits, to delete Note 11 regarding Impact of the Acquisition Related Charges and add a new Note 12 regarding Guarantor and Non-Guarantor Subsidiaries to certain financial statements of Roadway Corporation. On March 10, 2004, we filed a second Form 8-K/A under Item 7, Financial Statements, Pro Forma Financial Information and Exhibits, to add a new Note 8 regarding Guarantor and Non-Guarantor Subsidiaries to Roadway Corporation's financial statements for the twelve weeks ended March 29, 2003 and to add a new Note 9 regarding Guarantor and Non-Guarantor Subsidiaries to Roadway Corporation's financial statements for the twelve and twenty-four weeks ended June 21, 2003. On March 11, 2004, wewas furnisheda Form 8-K to the SECunder Item 9, Regulation FD Disclosure,in which we announced viato make available apress release that we increased our first quarterpresentation given at the Bear Stearns Global Transportation Conference on May 11, 2004.On May 20, 2004,
earnings per share guidance. On March 17, 2004, we fileda Form 8-K was filed under Item 5, Other Events, to make available unaudited pro forma financial information by quarter for 2003.On May 21, 2004, a Form 8-K was furnished under Item 9, Regulation FD Disclosure, to announce that Yellow Roadway held its annual stockholders’ meeting on May 20, 2004, and to make available the
year ended December 31, 2003. 28preliminary results of the proxy vote. On May 25, 2004, a Form 8-K was filed under Item 5, Other Events, to announce Yellow Roadway replaced its current asset backed securitization (“ABS”) facility with a new ABS facility.
On June 15, 2004, a Form 8-K was furnished under Item 9, Regulation FD Disclosure, in which Yellow Roadway announced via a press release that it increased second quarter 2004 earnings per share guidance.
On June 18, 2004, a Form 8-K was filed under Item 5, Other Events, to announce Roadway Express, a subsidiary of Yellow Roadway, had reached an oral preliminary agreement with the IRS to settle pending tax litigation regarding the timing of the Roadway Express deduction for contributions to its union pension plans.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
YELLOW ROADWAY CORPORATION -------------------------- Registrant Date: May 10, 2004 /s/ William D. Zollars ---------------------------- William D. Zollars Chairman of the Board of Directors, President & Chief Executive Officer Date: May 10, 2004 /s/ Donald G. Barger, Jr. ---------------------------- Donald G. Barger, Jr. Senior Vice President & Chief Financial Officer 29
| YELLOW ROADWAY CORPORATION | ||
| Registrant | ||
| Date: August 9, 2004 | /s/ William D. Zollars | |
| William D. Zollars | ||
Chairman of the Board of Directors, President & Chief Executive Officer | ||
| Date: August 9, 2004 | /s/ Donald G. Barger, Jr. | |
| Donald G. Barger, Jr. | ||
Senior Vice President & Chief Financial Officer | ||
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