Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2005
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-12255
YELLOW ROADWAY CORPORATION
(Exact name of registrant as specified in its charter)
| 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 telephone number, including area code)
No Changes
(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 x No ¨
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Outstanding at October 31, 2005 | |
Common Stock, $1 Par Value Per Share | 58,070,095 shares |
Table of Contents
2
Table of Contents
PART I - FINANCIAL INFORMATION
Yellow Roadway Corporation and Subsidiaries
(Amounts in thousands except per share data)
September 30, 2005 | December 31, 2004 | |||||||
| (Unaudited) | ||||||||
Assets | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 57,474 | $ | 106,489 | ||||
Accounts receivable, net | 1,249,604 | 778,596 | ||||||
Prepaid expenses and other | 221,401 | 168,356 | ||||||
Total current assets | 1,528,479 | 1,053,441 | ||||||
Property and Equipment: | ||||||||
Cost | 3,611,559 | 2,672,289 | ||||||
Less – accumulated depreciation | 1,352,767 | 1,249,571 | ||||||
Net property and equipment | 2,258,792 | 1,422,718 | ||||||
Goodwill | 1,195,883 | 632,141 | ||||||
Intangibles, net | 705,555 | 468,310 | ||||||
Other assets | 107,945 | 50,559 | ||||||
Total assets | $ | 5,796,654 | $ | 3,627,169 | ||||
Liabilities and Shareholders’ Equity | ||||||||
Current Liabilities: | ||||||||
Accounts payable | $ | 358,847 | $ | 307,089 | ||||
Wages, vacations and employees’ benefits | 528,199 | 427,731 | ||||||
Other current and accrued liabilities | 431,339 | 210,519 | ||||||
Asset-backed securitization (“ABS”) borrowings | 456,000 | — | ||||||
Current maturities of contingently convertible notes | — | 250,000 | ||||||
Current maturities of long-term debt | 4,439 | 4,400 | ||||||
Total current liabilities | 1,778,824 | 1,199,739 | ||||||
Other Liabilities: | ||||||||
Long-term debt, less current portion | 1,170,483 | 403,535 | ||||||
Deferred income taxes, net | 373,844 | 319,839 | ||||||
Claims and other liabilities | 578,587 | 489,865 | ||||||
Commitments and contingencies | ||||||||
Shareholders’ Equity: | ||||||||
Common stock, $1 par value per share | 60,177 | 51,303 | ||||||
Preferred stock, $1 par value per share | — | — | ||||||
Capital surplus | 1,163,584 | 694,504 | ||||||
Retained earnings | 761,767 | 550,484 | ||||||
Accumulated other comprehensive loss | (31,265 | ) | (33,159 | ) | ||||
Unamortized restricted stock awards | (19,726 | ) | (10,479 | ) | ||||
Treasury stock, at cost (2,093 and 2,066 shares) | (39,621 | ) | (38,462 | ) | ||||
Total shareholders’ equity | 1,894,916 | 1,214,191 | ||||||
Total liabilities and shareholders’ equity | $ | 5,796,654 | $ | 3,627,169 | ||||
The accompanying notes are an integral part of these statements.
3
Table of Contents
STATEMENTS OF CONSOLIDATED OPERATIONS
Yellow Roadway Corporation and Subsidiaries
For the Three and Nine Months Ended September 30
(Amounts in thousands except per share data)
(Unaudited)
| Three Months | Nine Months | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
Operating Revenue | $ | 2,491,650 | $ | 1,767,082 | $ | 6,258,457 | $ | 4,993,348 | ||||||||
Operating Expenses: | ||||||||||||||||
Salaries, wages and employees’ benefits | 1,450,548 | 1,083,027 | 3,721,462 | 3,107,697 | ||||||||||||
Operating expenses and supplies | 412,949 | 251,261 | 1,002,998 | 738,746 | ||||||||||||
Purchased transportation | 274,568 | 196,070 | 686,552 | 546,718 | ||||||||||||
Depreciation and amortization | 75,800 | 43,158 | 180,848 | 126,746 | ||||||||||||
Other operating expenses | 110,147 | 73,833 | 274,272 | 223,880 | ||||||||||||
(Gains) losses on property disposals, net | 1,638 | (859 | ) | (346 | ) | (590 | ) | |||||||||
Acquisition and executive severance charges | 9,213 | — | 10,077 | — | ||||||||||||
Total operating expenses | 2,334,863 | 1,646,490 | 5,875,863 | 4,743,197 | ||||||||||||
Operating Income | 156,787 | 120,592 | 382,594 | 250,151 | ||||||||||||
Nonoperating (Income) Expenses: | ||||||||||||||||
Interest expense | 19,949 | 11,041 | 42,753 | 34,448 | ||||||||||||
Write off of deferred debt issuance costs | — | 18,279 | — | 18,279 | ||||||||||||
Other | (943 | ) | 364 | (1,488 | ) | 706 | ||||||||||
Nonoperating expenses, net | 19,006 | 29,684 | 41,265 | 53,433 | ||||||||||||
Income Before Income Taxes | 137,781 | 90,908 | 341,329 | 196,718 | ||||||||||||
Income tax provision | 52,496 | 34,999 | 130,046 | 75,736 | ||||||||||||
Net Income | $ | 85,285 | $ | 55,909 | $ | 211,283 | $ | 120,982 | ||||||||
Average Common Shares Outstanding – Basic | 57,994 | 48,204 | 53,177 | 47,993 | ||||||||||||
Average Common Shares Outstanding – Diluted | 60,194 | 48,778 | 56,018 | 48,492 | ||||||||||||
Basic Earnings Per Share | $ | 1.47 | $ | 1.16 | $ | 3.97 | $ | 2.52 | ||||||||
Diluted Earnings Per Share | $ | 1.42 | $ | 1.15 | $ | 3.77 | $ | 2.50 | ||||||||
The accompanying notes are an integral part of these statements.
4
Table of Contents
STATEMENTS OF CONSOLIDATED CASH FLOWS
Yellow Roadway Corporation and Subsidiaries
For the Nine Months Ended September 30
(Amounts in thousands)
(Unaudited)
| 2005 | 2004 | |||||||
Operating Activities: | ||||||||
Net income | $ | 211,283 | $ | 120,982 | ||||
Noncash items included in net income: | ||||||||
Depreciation and amortization | 180,848 | 126,746 | ||||||
Deferred debt issuance cost write off | — | 18,279 | ||||||
Gains on property disposals, net | (346 | ) | (590 | ) | ||||
Deferred income tax provision, net | 9,373 | (11,161 | ) | |||||
Changes in assets and liabilities, net: | ||||||||
Accounts receivable | (139,053 | ) | (123,958 | ) | ||||
Accounts payable | (43,990 | ) | (31,401 | ) | ||||
Other working capital items | (20,351 | ) | 118,256 | |||||
Claims and other | 51,062 | 49,884 | ||||||
Other, net | 7,510 | 7,626 | ||||||
Net cash provided by operating activities | 256,336 | 274,663 | ||||||
Investing Activities: | ||||||||
Acquisition of property and equipment | (231,644 | ) | (155,165 | ) | ||||
Proceeds from disposal of property and equipment | 18,366 | 12,867 | ||||||
Acquisition of companies, net of cash acquired | (754,120 | ) | (10,463 | ) | ||||
Investment in affiliate | (46,043 | ) | — | |||||
Other | 2,075 | — | ||||||
Net cash used in investing activities | (1,011,366 | ) | (152,761 | ) | ||||
Financing Activities: | ||||||||
ABS borrowings, net | 456,000 | (2,500 | ) | |||||
Issuance (repayment) of long-term debt | 249,978 | (175,044 | ) | |||||
Debt issuance costs | (4,256 | ) | (2,843 | ) | ||||
Proceeds from exercise of stock options | 4,293 | 9,321 | ||||||
Net cash provided by (used in) financing activities | 706,015 | (171,066 | ) | |||||
Net Decrease In Cash and Cash Equivalents | (49,015 | ) | (49,164 | ) | ||||
Cash and Cash Equivalents, Beginning of Period | 106,489 | 75,166 | ||||||
Cash and Cash Equivalents, End of Period | $ | 57,474 | $ | 26,002 | ||||
The accompanying notes are an integral part of these statements.
5
Table of Contents
STATEMENT OF CONSOLIDATED SHAREHOLDERS’ EQUITY
Yellow Roadway Corporation and Subsidiaries
For the Nine Months Ended September 30
(Amounts in thousands except per share data)
(Unaudited)
| 2005 | ||||
Common Stock | ||||
Beginning balance | $ | 51,303 | ||
Issuance of common stock for USF acquisition | 9,020 | |||
Other, net | (146 | ) | ||
Ending balance | $ | 60,177 | ||
Capital Surplus | ||||
Beginning balance | $ | 694,504 | ||
Issuance of equity awards, net | 19,668 | |||
Issuance of common stock for USF acquisition | 439,105 | |||
Employer contribution to 401(k) plan | 6,189 | |||
Stock option exercises | 4,159 | |||
Other, net | (41 | ) | ||
Ending balance | $ | 1,163,584 | ||
Retained Earnings | ||||
Beginning balance | $ | 550,484 | ||
Net income | 211,283 | |||
Ending balance | $ | 761,767 | ||
Accumulated Other Comprehensive Loss | ||||
Beginning balance | $ | (33,159 | ) | |
Foreign currency translation adjustment, net of tax | 1,894 | |||
Ending balance | $ | (31,265 | ) | |
Unamortized Equity Awards | ||||
Beginning balance | $ | (10,479 | ) | |
Issuance of equity awards, net | (17,424 | ) | ||
Amortization of equity awards | 8,177 | |||
Ending balance | $ | (19,726 | ) | |
Treasury Stock, At Cost | ||||
Beginning balance | $ | (38,462 | ) | |
Other, net | (1,159 | ) | ||
Ending balance | (39,621 | ) | ||
Total Shareholders’ Equity | $ | 1,894,916 | ||
The accompanying notes are an integral part of these statements.
6
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Yellow Roadway Corporation and Subsidiaries
(Unaudited)
| 1. | Description of Business |
Yellow Roadway Corporation (also referred to as “Yellow Roadway,” “we” or “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 transportation services. Our operating subsidiaries include the following:
| • | Yellow Transportation, Inc. (“Yellow 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 45% of Yellow Transportation shipments are completed in two days or less. |
| • | Roadway Express, Inc. (“Roadway 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 regionalized management and customer facing organizations. Approximately 30% of Roadway Express shipments are completed in two days or less. Roadway Express owns 100% of Reimer Express Lines Ltd. (“Reimer”), located in Canada, that specializes in shipments into, across and out of Canada. |
| • | YRC Regional Transportation, Inc. (“Regional Transportation”) is a holding company for our transportation service providers focused on business opportunities in the regional and next-day delivery markets. Regional Transportation includes the results of New Penn Motor Express, Inc. (“New Penn”), USF Holland Inc., USF Reddaway Inc. and USF Bestway Inc., which provide regional, next-day ground services through a network of facilities located across the United States (“U.S.”); Quebec, Canada; Mexico and Puerto Rico and USF Glen Moore Inc., which provides truckload services throughout the U.S. |
| • | Meridian IQ, Inc. (“Meridian IQ”) is a logistics 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. Meridian IQ also includes the business of USF Logistics Services Inc. following our acquisition of USF Corporation. |
| 2. | Principles of Consolidation |
The accompanying consolidated financial statements include the accounts of Yellow Roadway and its wholly owned subsidiaries. Investments in non-majority owned affiliates are accounted for on the equity method. Management makes estimates and assumptions that affect the amounts reported in the financial statements and notes. Actual results could differ from those estimates. 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”). In management’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, 2004.
| 3. | Acquisitions and Investments |
In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations (“SFAS No. 141”), we allocate the purchase price of our acquisitions to the tangible and intangible assets and liabilities of the acquired entity based on their fair values. We record the excess of the 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 (“SFAS No. 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 the assets’ fair value. Intangible assets with definite useful lives are amortized on a straight-line basis over their respective useful lives.
7
Table of Contents
The operating results of the following acquisitions are included in our consolidated results of operations from the dates of acquisition through September 30, 2005.
USF Corporation
On May 24, 2005, Yellow Roadway completed the acquisition of USF Corporation (“USF”), headquartered in Chicago, IL, through the merger (the “Merger”) of a wholly owned subsidiary of Yellow Roadway with and into USF, resulting in USF becoming a wholly owned subsidiary of Yellow Roadway. USF, a leader in the transportation industry, specializes in delivering comprehensive supply chain management solutions, including high-value next-day, regional and national less-than-truckload (“LTL”) transportation, third-party logistics, and premium regional and national truckload transportation. The company serves the North American market, including the United States, Canada and Mexico, as well as the U.S. territories of Puerto Rico and Guam under the following brands: USF Holland, USF Reddaway, USF Bestway, USF Glen Moore and USF Logistics. The acquisition further advances Yellow Roadway as one of the leading transportation services companies in the world. The combined entity offers customers a broad range of transportation services including next day, inter-regional, national and international capabilities.
Pursuant to the Merger, each share of common stock of USF was converted into the right to receive $29.25 in cash and 0.31584 shares of Yellow Roadway common stock resulting in consideration of approximately $835 million in cash and 9 million shares for a total purchase price of $1.3 billion. The purchase price also included approximately $14.1 million for investment banking, legal and accounting fees that Yellow Roadway incurred to consummate the acquisition, resulting in total cash consideration of $742 million, net of cash acquired. The cash portion of the merger consideration was financed with a combination of proceeds from the issuance of floating rate notes, borrowings under our ABS facility, and cash on hand.
The allocation of the total consideration for the USF acquisition is as follows (in millions):
Current assets, net of cash acquired of $106.9 million | $ | 357.3 | ||
Property and equipment | 792.7 | |||
Goodwill | 561.3 | |||
Intangible assets | 238.7 | |||
Other assets | 21.6 | |||
Current liabilities | (367.7 | ) | ||
Long-term debt | (272.2 | ) | ||
Other liabilities | (141.0 | ) | ||
Net assets acquired | $ | 1,190.7 | ||
The purchase price allocation has been prepared on a preliminary basis, and changes are expected as an appraisal of both tangible and intangible assets is completed and additional information becomes available.
Of the estimated $238.7 million of acquired intangible assets, $159.1 million was assigned to trade names that are not subject to amortization. The remaining $79.6 million of acquired intangible assets has a weighted-average useful life of approximately thirteen years. The intangible assets that make up that amount include customer relationships of $71.4 million (fourteen-year weighted average useful life) and computer software of $8.2 million (five-year weighted average useful life). The $561.3 million of goodwill was assigned to the Regional Transportation and Meridian IQ segments in the amounts of $480.0 million and $81.3 million, respectively. None of the goodwill is expected to be deductible for tax purposes.
In connection with the acquisition and our overall business strategy, on June 20, 2005 we announced the planned shut down of USF Dugan Inc., effective July 11, 2005. Additionally, we have significantly reduced the personnel requirements in Chicago, IL, USF’s former headquarters. As a result of these planned events, we incurred $33.0 million of restructuring costs as a result of severance (administrative, sales and operations personnel primarily from USF Dugan and the USF corporate office) and contract terminations. We have recognized these costs as a liability assumed as of the acquisition date, resulting in additional goodwill. These restructuring costs consisted of $24.4 million of employee termination (including wages, health benefits and outplacement services) for approximately 1,250 employees and $8.6 million for contract terminations and other miscellaneous costs. All of these restructuring items will have been effectuated within one year of the acquisition in accordance with purchase accounting requirements. During the nine months ended September 30, 2005, we paid $25.7 million of restructuring costs resulting in a $7.3 million accrued liability at September 30, 2005.
8
Table of Contents
The following unaudited pro forma data summarizes the results of operations for the periods indicated as if the USF acquisition had occurred as of the beginning of the periods presented for the three and nine months ended September 30.
| Three Months | Nine Months | |||||||||||
(in millions except per share data) | 2005 | 2004 | 2005 | 2004 | ||||||||
Revenue | $ | 2,491.7 | $ | 2,349.2 | $ | 7,216.7 | $ | 6,804.1 | ||||
Net income | 85.3 | 65.1 | 192.1 | 130.3 | ||||||||
Diluted earnings per share | $ | 1.42 | $ | 1.13 | $ | 3.16 | $ | 2.27 | ||||
The pro forma data gives effect to actual operating results prior to the acquisition and adjustments to interest expense and amortization expense, net of tax. Included in the pro forma results for the nine months ended September 30, 2005 is approximately $18.3 million ($11.0 million net of tax) of acquisition charges incurred by USF that are considered unusual. 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 dates presented, and should not be taken as representative of the future consolidated results of operations of Yellow Roadway.
GPS Asia
In March 2005, Meridian IQ exercised and closed its option to purchase GPS Logistics Group Ltd., the Asian operations of GPS Logistics, Inc., and in turn, made a payment of $5.7 million ($3.2 million net of cash acquired). Under the terms of the purchase agreement, this payment is subject to subsequent upward and downward adjustments based on the financial performance of the Asia business through March 2007. Additional earn out payments could be required based on the financial performance of the Asia business during the period March 2007 to March 2009. The pro forma effect of this acquisition is not material to our results of operations.
JHJ
On September 1, 2005, Yellow Roadway Corporation completed the purchase of a 50% equity interest in JHJ International Transportation Co., Ltd., (“JHJ”) a Shanghai, China-based freight forwarder, with a purchase price of $46 million including transaction costs. Included in the Meridian IQ segment, the Company accounts for it’s ownership in JHJ using the equity method of accounting. As of September 30, 2005, the excess of the Company’s investment over the Company’s interest in JHJ’s equity is approximately $37 million.
| 4. | Goodwill and Intangibles |
Goodwill is recognized for the excess of the purchase price over the fair value of tangible and identifiable intangible net assets of businesses acquired. In accordance with SFAS No. 142, we review goodwill at least annually for impairment based on a fair value approach.
The following table shows the amount of goodwill attributable to our operating segments with goodwill balances and changes therein:
(in millions) | Roadway Express | Regional Transportation | Meridian IQ | Total | ||||||||||
Balances at December 31, 2004 | $ | 545.2 | $ | 58.6 | $ | 28.3 | $ | 632.1 | ||||||
Goodwill resulting from acquisitions | — | 480.0 | 83.9 | 563.9 | ||||||||||
Changes in foreign currency exchange rates | 0.5 | — | (0.6 | ) | (0.1 | ) | ||||||||
Balances at September 30, 2005 | $ | 545.7 | $ | 538.6 | $ | 111.6 | $ | 1,195.9 | ||||||
9
Table of Contents
The components of amortizable intangible assets are as follows:
Weighted Average Life | September 30, 2005 | December 31, 2004 | ||||||||||||
(in millions) | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | ||||||||||
Customer related | 15 | $ | 196.3 | $ | 16.1 | $ | 118.2 | $ | 9.0 | |||||
Marketing related | 6 | 1.0 | 0.5 | 1.0 | 0.4 | |||||||||
Technology based | 4 | 25.5 | 10.7 | 17.5 | 6.1 | |||||||||
Intangible assets | $ | 222.8 | $ | 27.3 | $ | 136.7 | $ | 15.5 | ||||||
Total marketing related intangible assets with indefinite lives, primarily tradenames, were $507.2 million at September 30, 2005 and $346.9 million at December 31, 2004. Certain foreign currency translation adjustments are also reflected in the intangible amounts. These intangible assets are not subject to amortization, but are subjected to annual impairment tests.
| 5. | Debt and Financing |
Total debt consisted of the following:
(in millions) | September 30, 2005 | December 31, 2004 | ||||||
ABS borrowings, secured by accounts receivable | $ | 456.0 | $ | — | ||||
Floating rate notes | 150.0 | — | ||||||
USF senior notes | 270.6 | — | ||||||
Senior notes due 2008 | 240.4 | 244.0 | ||||||
Contingent convertible senior notes | 400.0 | 400.0 | ||||||
Revolving credit facility | 100.0 | — | ||||||
Other | 13.9 | 13.9 | ||||||
Total debt | $ | 1,630.9 | $ | 657.9 | ||||
ABS borrowings | (456.0 | ) | — | |||||
Current maturities | (4.4 | ) | (254.4 | ) | ||||
Long-term debt | $ | 1,170.5 | $ | 403.5 | ||||
Floating Rate Notes
On May 24, 2005, we completed the private placement of $150 million in aggregate principal amount of senior floating rate notes due 2008 (the “Floating Rate Notes”) that bear interest at a floating rate based on the London Interbank Offered Rate (“LIBOR”) plus 1.375% payable quarterly in arrears (3.79% at September 30, 2005). The Floating Rate Notes contain affirmative covenants similar to our credit agreement, yet does not require any financial covenants. We used the proceeds from the $150 million private placement as a part of the financing for the acquisition of USF. The notes were later exchanged for registered notes as a part of an exchange offer in June 2005.
The Floating Rate Notes represent senior unsecured obligations of the Company and rankpari passu in right of payment with all other present and future senior indebtedness of the Company. The Floating Rate Notes are jointly and severally guaranteed by certain of our current domestic subsidiaries and have certain call features which allow us to redeem the notes at par anytime after November 15, 2006.
USF Senior Notes
As part of our acquisition of USF and by virtue of the merger agreement, we assumed $150 million aggregate principal amount of 8.5% senior notes due April 15, 2010, and $100 million aggregate principal amount of 6.5% senior notes due May 1, 2009 (collectively “USF Senior Notes”). The USF Senior Notes were revalued as part of purchase accounting and assigned a fair value of $272.2 million on May 24, 2005, with $18.6 million fair value adjustment to the 2010 notes and $3.6 million fair value adjustment to the 2009 notes. The premium over the face value of the USF Senior Notes is being amortized as a reduction to interest expense over the remaining life of the notes.
10
Table of Contents
Asset Backed Securitization Facility
On May 24, 2005, we amended our asset-backed securitization (“ABS”) facility by entering into a Second Amended and Restated Receivables Purchase Agreement. Under the terms of this agreement, the ABS facility now involves receivables of USF Holland and USF Reddaway, two operating companies of USF acquired May 24, 2005, in addition to the previously included receivables of Yellow Transportation and Roadway Express. In addition, the facility has an increased limit of $650 million, up from the previous limit of $450 million, and now provides a letter of credit sublimit of $325 million. The interest rate continues to be a variable rate based on A1/P1 rated commercial paper, plus a fixed increment for utilization. No other material changes were made to the agreement. Upon finalization of the amended agreement on May 24, 2005, we borrowed $550 million from the facility to fund a portion of the USF purchase price.
Credit Agreement
On May 19, 2005, we entered into an Amended and Restated Credit Agreement with certain banks, expiring May 18, 2010, that provides a $850 million senior unsecured revolving credit facility, including sublimits available for borrowings under certain foreign currencies. This agreement amends and restates our existing Credit Agreement, dated as of September 10, 2004, that provided, among other things, a revolving facility of $500 million. The new agreement also provides for letters of credit to be issued that would, in turn, reduce the borrowing capacity. As of September 30, 2005, $100 million was outstanding under the new agreement.
Amounts borrowed under the credit agreement bear interest at LIBOR plus 0.60% (3.81% at September 30, 2005). Additionally, we are obligated to a facility fee of 0.15% of the total commitment. In accordance with the terms of the agreement, we must comply with certain performance covenants. As of September 30, 2005, we were in compliance with all terms of the agreement.
Future maturities of total debt for the years ending December 31 are as follows:
(in millions) | |||
2005 | $ | 4.4 | |
2006 | 456.0 | ||
2007 | — | ||
2008 | 377.5 | ||
2009 | 101.0 | ||
Thereafter | 656.0 | ||
Total | $ | 1,594.9 | |
| 6. | Stock-Based Compensation |
We have 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, 2004. We account 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 have not granted any options during the three or the nine months ended September 30, 2005. We estimated the fair value per option for each option granted during the nine months ended September 30, 2004 using the Black-Scholes option pricing model with the following weighted average assumptions:
Nine Months Ended September 30, 2004 | ||||
Actual options granted | 28,000 | |||
Dividend yield | — | % | ||
Expected volatility | 45.2 | % | ||
Risk-free interest rate | 2.6 | % | ||
Expected option life (years) | 3.6 | |||
Fair value per option | $ | 12.61 | ||
11
Table of Contents
The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, for the three and nine months ended September 30:
| Three Months | Nine Months | |||||||||||
(in millions except per share data) | 2005 | 2004 | 2005 | 2004 | ||||||||
Net income, as reported | $ | 85.3 | $ | 55.9 | $ | 211.3 | $ | 121.0 | ||||
Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | 0.2 | 0.4 | 0.7 | 1.3 | ||||||||
Pro forma net income | $ | 85.1 | $ | 55.5 | $ | 210.6 | $ | 119.7 | ||||
Basic earnings per share: | ||||||||||||
Net income – as reported | $ | 1.47 | $ | 1.16 | $ | 3.97 | $ | 2.52 | ||||
Net income – pro forma | 1.47 | 1.15 | 3.96 | 2.49 | ||||||||
Diluted earnings per share: | ||||||||||||
Net income – as reported | 1.42 | 1.15 | 3.77 | 2.50 | ||||||||
Net income – pro forma | 1.41 | 1.14 | 3.76 | 2.47 | ||||||||
During the nine months ended September 30, 2005, we recorded the issuance of 329,413 share units and 8,975 shares of restricted stock to certain executive officers, key employees and our board of directors under our long-term incentive and equity award plan. The weighted-average grant-date fair value of these awards was $58.39 per unit. According to the plan provisions, the share units provide the holders the right to receive one share of common stock upon vesting of one share unit. With respect to 172,859 units awarded, the vesting provision states that 50% of the awarded performance share units will vest three years from the date of grant, and the remaining 50% will vest six years from the date of grant. With respect to 155,024 units, the entire award vests on the third anniversary of the date of grant.
The related compensation expense for the share units and restricted stock discussed above 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.
| 7. | Employee Benefits |
Components of Net Periodic Pension and Other Postretirement Cost
The following table sets forth the components of our pension costs for the three and nine months ended September 30:
| Three Months | Nine Months | |||||||||||||||
(in millions) | 2005 | 2004 | 2005 | 2004 | ||||||||||||
Service cost | $ | 10.8 | $ | 9.7 | $ | 32.1 | $ | 29.6 | ||||||||
Interest cost | 15.2 | 14.2 | 45.2 | 42.9 | ||||||||||||
Expected return on plan assets | (14.0 | ) | (13.2 | ) | (41.8 | ) | (39.7 | ) | ||||||||
Amortization of prior service cost | 0.3 | 0.4 | 1.1 | 1.0 | ||||||||||||
Amortization of net loss | 2.7 | 1.2 | 8.0 | 4.2 | ||||||||||||
Net periodic pension cost | $ | 15.0 | $ | 12.3 | $ | 44.6 | $ | 38.0 | ||||||||
The following table sets forth the components of our other postretirement costs for the three and nine months ended September 30:
| Three Months | Nine Months | ||||||||||||
(in millions) | 2005 | 2004 | 2005 | 2004 | |||||||||
Service cost | $ | — | $ | 0.5 | $ | 0.6 | $ | 1.4 | |||||
Interest cost | 0.2 | 0.8 | 1.8 | 2.4 | |||||||||
Amortization of prior service cost | — | — | 0.2 | — | |||||||||
Amortization of net gain | — | — | (0.2 | ) | — | ||||||||
Other postretirement cost | $ | 0.2 | $ | 1.3 | $ | 2.4 | $ | 3.8 | |||||
12
Table of Contents
Employer Contributions
We expect to contribute a total of $49.9 million to our pension plans in 2005. For the nine months ended September 30, 2005, our contributions to the pension plans have approximated $49.5 million.
| 8. | Earnings Per Share |
Dilutive securities, consisting of options to purchase our common stock, included in the calculation of diluted weighted average common shares were 600,000 and 667,000 for the three and nine months ended September 30, 2005 and 574,000 and 499,000 for the three and nine months ended September 30, 2004. In addition, dilutive securities related to our net share settle contingent convertible notes were 1,600,000 and 2,174,000 for the three and nine months ended September 30, 2005. There were no such comparable amounts for the three and nine months ended September 30, 2004.
| 9. | Business Segments |
We report financial and descriptive information about our 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.
We have four reportable segments, which are strategic business units that offer complementary transportation services to their customers. Yellow Transportation and Roadway Express are carriers that provide comprehensive regional, national and international transportation services. Regional Transportation is comprised of carriers that focus primarily on business opportunities in the regional and next-day delivery markets. Meridian IQ, our logistics segment, provides domestic and international freight forwarding, warehousing and cross-dock services, multi-modal brokerage services, and transportation management services.
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, 2004. The USF accounting policies have been conformed to Yellow Roadway effective as of May 25, 2005. We charge management fees and other corporate services to our segments based on the direct benefits received or as a percentage of revenue. Corporate operating losses represent operating expenses of the holding company, including salaries, wages and benefits, along with incentive compensation and professional services for all periods presented. Corporate identifiable assets primarily refer to cash, cash equivalents, technology assets and deferred debt issuance costs. Intersegment revenue relates to transportation services between our segments, 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 | Regional Transportation | Meridian IQ | Corporate/ Eliminations | Consolidated | |||||||||||||||
As of September 30, 2005 | |||||||||||||||||||||
Identifiable assets | $ | 1,073.9 | $ | 2,126.4 | $ | 2,174.8 | $ | 278.4 | $ | 143.2 | $ | 5,796.7 | |||||||||
As of December 31, 2004 | |||||||||||||||||||||
Identifiable assets | 1,030.4 | 2,110.4 | 248.9 | 108.0 | 129.5 | 3,627.2 | |||||||||||||||
Three months ended September 30, 2005 | |||||||||||||||||||||
External revenue | 891.2 | 857.3 | 601.8 | 141.4 | — | 2,491.7 | |||||||||||||||
Intersegment revenue | 1.3 | 1.1 | 4.8 | 0.5 | (7.7 | ) | — | ||||||||||||||
Operating income (loss) | 73.5 | 58.2 | 27.8 | 6.3 | (9.0 | ) | 156.8 | ||||||||||||||
Adjustments to operating income(a) | (0.4 | ) | 1.9 | 5.0 | — | 4.3 | 10.8 | ||||||||||||||
Adjusted operating income (loss)(b) | 73.1 | 60.1 | 32.8 | 6.3 | (4.7 | ) | 167.6 | ||||||||||||||
Three months ended September 30, 2004 | |||||||||||||||||||||
External revenue | 828.3 | 811.7 | 70.7 | 56.4 | — | 1,767.1 | |||||||||||||||
Intersegment revenue | 0.7 | 0.7 | — | 0.6 | (2.0 | ) | — | ||||||||||||||
Operating income (loss) | 63.7 | 52.1 | 10.2 | 1.1 | (6.5 | ) | 120.6 | ||||||||||||||
Adjustments to operating income(a) | (1.3 | ) | 0.3 | 0.1 | 0.1 | — | (0.8 | ) | |||||||||||||
Adjusted operating income (loss)(b) | 62.4 | 52.4 | 10.3 | 1.2 | (6.5 | ) | 119.8 | ||||||||||||||
Nine months ended September 30, 2005 | |||||||||||||||||||||
External revenue | 2,532.0 | 2,453.4 | 980.7 | 292.4 | — | 6,258.5 | |||||||||||||||
Intersegment revenue | 2.8 | 2.6 | 5.8 | 1.6 | (12.8 | ) | — | ||||||||||||||
Operating income (loss) | 190.8 | 146.5 | 55.7 | 10.9 | (21.3 | ) | 382.6 | ||||||||||||||
Adjustments to operating income(a) | (2.9 | ) | 2.4 | 5.4 | — | 4.8 | 9.7 | ||||||||||||||
Adjusted operating income (loss)(b) | 187.9 | 148.9 | 61.1 | 10.9 | (16.5 | ) | 392.3 | ||||||||||||||
Nine months ended September 30, 2004 | |||||||||||||||||||||
External revenue | 2,354.0 | 2,296.6 | 191.1 | 151.6 | — | 4,993.3 | |||||||||||||||
Intersegment revenue | 2.1 | 1.1 | — | 1.7 | (4.9 | ) | — | ||||||||||||||
Operating income (loss) | 135.8 | 103.5 | 25.2 | 2.3 | (16.6 | ) | 250.2 | ||||||||||||||
Adjustments to operating income(a) | (0.8 | ) | 0.2 | — | — | — | (0.6 | ) | |||||||||||||
Adjusted operating income (loss)(b) | 135.0 | 103.7 | 25.2 | 2.3 | (16.6 | ) | 249.6 | ||||||||||||||
| (a) | Management excludes these items when evaluating operating income and segment performance to better evaluate the results of our core operations. In the 2005 periods presented, adjustments consisted of losses (gains) on property disposals, acquisition charges and executive severance charges. In the 2004 periods presented, adjustments consisted of losses (gains) on property disposals. |
| (b) | This measurement is used for internal management purposes and should not be construed as a better measurement than operating income as defined by generally accepted accounting principles. |
13
Table of Contents
| 10. | Comprehensive Income |
Our comprehensive income for the periods presented includes net income and foreign currency translation adjustments. Comprehensive income for the three and nine months ended September 30 follows:
| Three Months | Nine Months | |||||||||||
(in millions) | 2005 | 2004 | 2005 | 2004 | ||||||||
Net income | $ | 85.3 | $ | 55.9 | $ | 211.3 | $ | 121.0 | ||||
Other comprehensive income, net of tax: | ||||||||||||
Changes in foreign currency translation adjustments | 3.6 | 2.9 | 1.9 | 1.5 | ||||||||
Comprehensive income | $ | 88.9 | $ | 58.8 | $ | 213.2 | $ | 122.5 | ||||
| 11. | Rental Expenses |
We incur rental expenses under non-cancelable lease agreements for certain buildings and operating equipment. Rental expense is included in “operating expenses and 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 nine months ended September 30:
| Three Months | Nine Months | |||||||||||
(in millions) | 2005 | 2004 | 2005 | 2004 | ||||||||
Rental expense | $ | 31.5 | $ | 23.6 | $ | 89.4 | $ | 71.5 | ||||
| 12. | Multi-Employer Pension Plans |
Yellow Transportation, Roadway Express, New Penn, USF Bestway, USF Holland and USF Reddaway contribute to approximately 90 separate multi-employer health, welfare and pension plans for employees covered by collective bargaining agreements (approximately 69% of our total employees). The largest of these plans, the Central States Southeast and Southwest Areas Pension Plan (the “Central States Plan”) provides retirement benefits to approximately 37% 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 law 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 the multi-employer 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 from all of the multi-employer pension plans to which we contribute or from one or more plans that provide benefits to a significant number of our employees would be material to our financial position and results of operations. Yellow Transportation, Roadway Express and the applicable subsidiaries of Regional Transportation have no current intention of taking any action that would subject us to obligations under the legislation.
14
Table of Contents
Yellow Transportation, Roadway Express, New Penn, USF Bestway, USF Holland and USF Reddaway 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 (the “Code”) and related regulations establish minimum funding requirements for these plans. The Central States Plan, in particular, has informed us that investment performance has adversely affected its funding levels and that the fund is seeking corrective measures to address its funding. If any of these multi-employer pension plans, including the Central States Plan, fail to meet minimum funding requirements and the trustees of such a plan are unable to obtain a waiver of the requirements or certain changes in how the applicable plan calculates its funding level from the Internal Revenue Service (“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. These excise taxes are not contributed to the deficient funds, but rather are deposited in the United States general treasury funds. To avoid these taxes, contributions in excess of our contractually agreed upon rates could be necessary to correct the funding deficiency. If the IRS imposed an excise tax on the participating employers or we pay additional contributions in amounts sufficient to avoid the tax, either of these actions could have a material adverse impact on the financial results of Yellow Roadway.
The Central States Plan has applied for, and the IRS has granted, an extension on the amortization of its unfunded liabilities through 2014, subject to Central States Plan improving its funding levels during that period and certain other conditions. Assuming that the Central States Plan meets these conditions, it is expected to meet the minimum funding requirements, as the IRS has modified them, through at least 2014. Absent the benefit of the amortization extension that the IRS has granted to the Central States Plan, the Company believes that the plan would not meet the minimum funding requirements that the Code and related regulations require.
| 13. | Certain Commitments, Contingencies and Uncertainties |
In 2004, USF Red Star, a USF subsidiary that operated in the Northeastern U.S, was shut down. Due to the shutdown, USF, now our wholly owned subsidiary, is subject to withdrawal liability under the Multi-Employer Pension Plan Amendment Act of 1980 (as amended, “MEPPA”) for up to 14 multi-employer pension plans. Based on information that USF has recently received from these plans, Yellow Roadway estimates that USF Red Star could be liable for up to approximately $85 million. However, Yellow Roadway also estimates that approximately $20 million of this liability could be abated because of contributions that Yellow Transportation, Roadway Express, New Penn and USF Holland made to certain of these 14 plans. Thus, at the purchase date we reserved approximately $65 million for the liabilities. During the three months ended September 30, 2005, we made payments of approximately $5 million resulting in a reserve of approximately $60 million at September 30, 2005. We have recognized these liabilities as an obligation assumed on the acquisition date of USF, resulting in additional goodwill. See Note 3. The expected annual cash flow relative to this liability is approximately $12 million until further resolution. USF is entitled to review and contest liability assessments that various funds provided as well as determine whether additional abatement might be available as a result of other Yellow Roadway business units who make contributions to these plans. The final withdrawal liability may be adjusted when further information is available as we negotiate with the pension plans to agree on the correct calculation of withdrawal liability amounts and as sufficient information becomes available to determine the available abatement of the liability under MEPPA, including any necessary arbitration or litigation with the affected pension plans. The timing of any funding of USF Red Star’s withdrawal liabilities to any particular fund will depend upon agreement with the fund on the ultimate amount of the liability, the conclusion of any arbitration or litigation to settle any disputes and the determination at the end of a plan year of whether abatement is applicable. MEPPA provides that certain interim payments may be required until these events occur. MEPPA also provides that any ultimate withdrawal liability payments may be made in a lump sum or over a period of time.
In November 2004, the Teamsters National Freight Industry Negotiating Committee (the “Teamsters”) filed a complaint against USF, USF Red Star and USF Holland in the United States District Court for the Eastern District of Pennsylvania. In connection with the shut down of USF Red Star, the Teamsters claimed certain violations of the National Labor Relations Act (the “NLRA”), alleging (among other things) that the shut down was in breach of USF Red Star’s labor contract. The Teamsters asked for unspecified damages. Additionally, the Teamsters filed a class action suit on behalf of the employees of USF Red Star alleging violations of the federal Worker Adjustment and Retraining Notification Act (“WARN Act”), seeking 60 days back compensation for USF Red Star employees due to allegedly shutting down USF Red Star without adequate notice under the WARN Act. We have vigorously contested this lawsuit. The Teamsters also requested the National Labor Relations Board (“NLRB”) to issue a complaint against USF, USF Red Star and USF Holland for allegedly unfair labor practices for these same allegations. We vigorously contested these allegations as well. The NLRB has not issued a complaint in this matter.
Including the Teamsters WARN action mentioned above, either or both of USF or USF Red Star are currently named in five class action lawsuits alleging violations of the federal WARN Act. These suits have been consolidated into one action in the
15
Table of Contents
United States District Court for the Eastern District of Pennsylvania. The plaintiffs in these suits are seeking 60 days back compensation for USF Red Star employees due to allegedly shutting down Red Star without adequate notice under the WARN Act. We have vigorously contested these lawsuits.
USF Red Star has sued the Teamsters in connection with their strike on USF Red Star in the Northern District of New York, alleging that the strike was in breach of Teamsters’ labor contract and that the strike was illegal secondary conduct under the NLRA, intending to pressure USF Dugan to allow organizing efforts at USF Dugan to succeed. USF Red Star sought unspecified damages from the Teamsters in connection with this lawsuit.
The Teamsters, USF, USF Holland, USF Red Star and the WARN class action plaintiffs have tentatively settled all of these disputes arising out of the USF Red Star shutdown. Pursuant to the tentative settlement, USF Red Star would pay the WARN Act plaintiffs $7 million; the WARN Act plaintiffs would release USF Red Star, USF Holland and USF from any further liability; the unfair labor practice charges before the NLRB would be withdrawn; and certain related labor grievances would be settled. The tentative settlement is subject to final approval of the court. We have recognized this settlement obligation as a liability assumed on the acquisition date of USF, resulting in additional goodwill. See Note 3.
In December 2003, Idealease Services, Inc. (“Idealease”) filed a complaint against USF Logistics in the Circuit Court of Cook County in Chicago, Illinois. Idealease was asking the court to require USF Logistics to specifically perform an alleged contractual obligation to buy back from Idealease a fleet of vehicles following the cessation of a customer’s business operations. In the interim, Idealease sold the vehicles and asked USF Logistics to pay Idealease the difference between the sale price of the vehicles and the price schedule set forth on the parties’ contract, approximately $4.9 million. Alternatively, Idealease contended that USF Logistics was liable for the unpaid lease payments of approximately $11.5 million, which remained payable because certain riders to the lease agreement are invalid due to a lack of consideration. In October 2005, USF Logistics orally settled this dispute for an agreement to pay $3 million. We will recognize the settlement obligation as a liability assumed on the acquisition date of USF, resulting in additional goodwill. See Note 3.
During June 2005, USF Reddaway entered into a four year labor agreement with its unionized employees at certain of its Oregon and Washington facilities.
16
Table of Contents
| 14. | Guarantees of the Contingent Convertible Senior Notes and Senior Floating Rate Notes |
In August 2003, we issued 5.0% contingent convertible senior notes due 2023. In November 2003, we issued 3.375% contingent convertible senior notes due 2023 (the August and November issuances, collectively, may also be known as the “contingent convertible senior notes”). In December 2004, we completed exchange offers pursuant to which holders of the contingent convertible senior notes could exchange their notes for an equal amount of new net share settled contingent convertible senior notes. Substantially all notes were exchanged as a part of the exchange offers. In May 2005, we completed the private placement of $150 million in aggregate principal amount of senior floating rate notes due 2008. In connection with the net share settled contingent convertible senior notes and the floating rate notes, the following 100% owned subsidiaries of Yellow Roadway have issued guarantees in favor of the holders of the net share settled contingent convertible senior notes and the floating rate notes: Yellow Transportation, Inc., Mission Supply Company, Yellow Relocation Services, Inc., Yellow Roadway Technologies, Inc., Meridian IQ, Inc., MIQ LLC (formerly Yellow GPS, 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 or any guarantor to obtain funds from its subsidiaries by dividend or loan.
The following represents summarized condensed consolidating financial information as of September 30, 2005 and
December 31, 2004 with respect to the financial position, for the three and nine months ended September 30, 2005 and 2004 for results of operations, and for the nine months ended September 30, 2005 and 2004 for the statements of cash flows of Yellow Roadway and its subsidiaries. The Parent column presents the financial information of Yellow Roadway, the primary obligor of the contingent convertible senior notes and the floating rate notes. The Guarantor Subsidiaries column presents the financial information of all guarantor subsidiaries of the net share settled contingent convertible senior notes and the floating rate notes. The Non-Guarantor Subsidiaries column presents the financial information of all non-guarantor subsidiaries, including those subsidiaries governed by foreign laws, and Yellow Roadway Receivables Funding Corporation, Yellow Receivables Corporation and Roadway Funding, Inc., the special-purpose entities that are or were associated with our ABS agreements.
Condensed Consolidating Balance Sheets
September 30, 2005 (in millions) | Parent | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||
Cash and cash equivalents | $ | 11 | $ | 9 | $ | 37 | $ | — | $ | 57 | ||||||||
Intercompany advances receivable | — | (84 | ) | 84 | — | — | ||||||||||||
Accounts receivable, net | 3 | 39 | 1,218 | (10 | ) | 1,250 | ||||||||||||
Prepaid expenses and other | 5 | 152 | 56 | 8 | 221 | |||||||||||||
Total current assets | 19 | 116 | 1,395 | (2 | ) | 1,528 | ||||||||||||
Property and equipment | — | 3,015 | 597 | — | 3,612 | |||||||||||||
Less – accumulated depreciation | — | 1,303 | 50 | — | 1,353 | |||||||||||||
Net property and equipment | — | 1,712 | 547 | — | 2,259 | |||||||||||||
Investment in subsidiaries | 2,703 | 171 | — | (2,874 | ) | — | ||||||||||||
Receivable from affiliate | (290 | ) | 694 | 77 | (481 | ) | — | |||||||||||
Goodwill, intangibles and other assets | 266 | 1,716 | 377 | (349 | ) | 2,010 | ||||||||||||
Total assets | $ | 2,698 | $ | 4,409 | $ | 2,396 | $ | (3,706 | ) | $ | 5,797 | |||||||
Intercompany advances payable | $ | 456 | $ | (743 | ) | $ | 486 | $ | (199 | ) | $ | — | ||||||
Accounts payable | 4 | 281 | 74 | — | 359 | |||||||||||||
Wages, vacations and employees’ benefits | 10 | 459 | 59 | — | 528 | |||||||||||||
Other current and accrued liabilities | (29 | ) | 323 | 179 | (41 | ) | 432 | |||||||||||
Current maturities of long-term debt | — | 4 | 456 | — | 460 | |||||||||||||
Total current liabilities | 441 | 324 | 1,254 | (240 | ) | 1,779 | ||||||||||||
Payable to affiliate | (113 | ) | 174 | 581 | (642 | ) | — | |||||||||||
Long-term debt, less current portion | 650 | 520 | — | — | 1,170 | |||||||||||||
Deferred income taxes, net | — | 270 | 99 | 5 | 374 | |||||||||||||
Claims and other liabilities | 23 | 574 | 52 | (70 | ) | 579 | ||||||||||||
Commitments and contingencies | — | — | — | — | — | |||||||||||||
Shareholders’ equity | 1,697 | 2,547 | 410 | (2,759 | ) | 1,895 | ||||||||||||
Total liabilities and shareholders’ equity | $ | 2,698 | $ | 4,409 | $ | 2,396 | $ | (3,706 | ) | $ | 5,797 | |||||||
17
Table of Contents
December 31, 2004 (in millions) | Parent | Guarantor Subsidiaries | Non- Guarantor | Eliminations | Consolidated | ||||||||||||||
Cash and cash equivalents | $ | 82 | $ | 7 | $ | 17 | $ | — | $ | 106 | |||||||||
Intercompany advances receivable | — | 484 | — | (484 | ) | — | |||||||||||||
Accounts receivable, net | 3 | 14 | 762 | — | 779 | ||||||||||||||
Prepaid expenses and other | 4 | 149 | 15 | — | 168 | ||||||||||||||
Total current assets | 89 | 654 | 794 | (484 | ) | 1,053 | |||||||||||||
Property and equipment at cost | — | 2,541 | 131 | — | 2,672 | ||||||||||||||
Less – accumulated depreciation | — | 1,231 | 18 | — | 1,249 | ||||||||||||||
Net property and equipment | — | 1,310 | 113 | — | 1,423 | ||||||||||||||
Investment in subsidiaries | 1,162 | 97 | — | (1,259 | ) | — | |||||||||||||
Receivable from affiliate | 8 | 127 | 39 | (174 | ) | — | |||||||||||||
Goodwill, intangibles and other assets | 218 | 953 | 180 | (200 | ) | 1,151 | |||||||||||||
Total assets | $ | 1,477 | $ | 3,141 | $ | 1,126 | $ | (2,117 | ) | $ | 3,627 | ||||||||
Intercompany advances payable | $ | — | $ | — | $ | 684 | $ | (684 | ) | $ | — | ||||||||
Accounts payable | 8 | 276 | 23 | — | 307 | ||||||||||||||
Wages, vacations and employees’ benefits | 17 | 391 | 20 | — | 428 | ||||||||||||||
Other current and accrued liabilities | 17 | 183 | 10 | — | 210 | ||||||||||||||
Current maturities of long-term debt | 250 | 4 | — | — | 254 | ||||||||||||||
Total current liabilities | 292 | 854 | 737 | (684 | ) | 1,199 | |||||||||||||
Payable to affiliate | — | 16 | 158 | (174 | ) | — | |||||||||||||
Long-term debt, less current portion | 150 | 254 | — | — | 404 | ||||||||||||||
Deferred income taxes, net | (5 | ) | 286 | 39 | — | 320 | |||||||||||||
Claims and other liabilities | 18 | 457 | 15 | — | 490 | ||||||||||||||
Commitments and contingencies | — | — | — | — | — | ||||||||||||||
Shareholders’ equity | 1,022 | 1,274 | 177 | (1,259 | ) | 1,214 | |||||||||||||
Total liabilities and shareholders’ equity | $ | 1,477 | $ | 3,141 | $ | 1,126 | $ | (2,117 | ) | $ | 3,627 | ||||||||
Condensed Consolidating Statements of Operations | |||||||||||||||||||
For the three months ended September 30, 2005 (in millions) | Parent | Guarantor Subsidiaries | Non- Guarantor | Eliminations | Consolidated | ||||||||||||||
Operating revenue | $ | 15 | $ | 2,130 | $ | 445 | $ | (98 | ) | $ | 2,492 | ||||||||
Operating expenses: | |||||||||||||||||||
Salaries, wages and employees’ benefits | 12 | 1,232 | 220 | (13 | ) | 1,451 | |||||||||||||
Operating expenses and supplies | 9 | 392 | 86 | (74 | ) | 413 | |||||||||||||
Purchased transportation | — | 196 | 86 | (8 | ) | 274 | |||||||||||||
Depreciation and amortization | — | 57 | 19 | — | 76 | ||||||||||||||
Other operating expenses | — | 98 | 17 | (3 | ) | 112 | |||||||||||||
Acquisition and executive severance charges | 4 | 1 | 4 | — | 9 | ||||||||||||||
Total operating expenses | 25 | 1,976 | 432 | (98 | ) | 2,335 | |||||||||||||
Operating income (loss) | (10 | ) | 154 | 13 | — | 157 | |||||||||||||
Nonoperating (income) expenses: | |||||||||||||||||||
Interest expense | 10 | 8 | 21 | (19 | ) | 20 | |||||||||||||
Other | (6 | ) | 48 | (52 | ) | 9 | (1 | ) | |||||||||||
Nonoperating (income) expenses, net | 4 | 56 | (31 | ) | (10 | ) | 19 | ||||||||||||
Income (loss) before income taxes | (14 | ) | 98 | 44 | 10 | 138 | |||||||||||||
Income tax provision (benefit) | (4 | ) | 41 | 20 | (4 | ) | 53 | ||||||||||||
Net income (loss) | $ | (10 | ) | $ | 57 | $ | 24 | $ | 14 | $ | 85 | ||||||||
18
Table of Contents
For the three months ended September 30, 2004 (in millions) | Parent | Guarantor Subsidiaries | Non- Guarantor | Eliminations | Consolidated | ||||||||||||||
Operating revenue | $ | 11 | $ | 1,642 | $ | 128 | $ | (14 | ) | $ | 1,767 | ||||||||
Operating expenses: | |||||||||||||||||||
Salaries, wages and employees’ benefits | 9 | 1,012 | 62 | — | 1,083 | ||||||||||||||
Operating expenses and supplies | 8 | 232 | 23 | (12 | ) | 251 | |||||||||||||
Purchased transportation | — | 174 | 23 | (1 | ) | 196 | |||||||||||||
Depreciation and amortization | — | 39 | 4 | — | 43 | ||||||||||||||
Other operating expenses | — | 69 | 4 | — | 73 | ||||||||||||||
Total operating expenses | 17 | 1,526 | 116 | (13 | ) | 1,646 | |||||||||||||
Operating income (loss) | (6 | ) | 116 | 12 | (1 | ) | 121 | ||||||||||||
Nonoperating (income) expenses: | |||||||||||||||||||
Interest expense | 6 | 19 | 10 | (24 | ) | 11 | |||||||||||||
Other | 64 | 11 | (28 | ) | (28 | ) | 19 | ||||||||||||
Nonoperating (income) expenses, net | 70 | 30 | (18 | ) | (52 | ) | 30 | ||||||||||||
Income (loss) before income taxes | (76 | ) | 86 | 30 | 51 | 91 | |||||||||||||
Income tax provision (benefit) | (9 | ) | 34 | 11 | (1 | ) | 35 | ||||||||||||
Net income (loss) | $ | (67 | ) | $ | 52 | $ | 19 | $ | 52 | $ | 56 | ||||||||
For the nine months ended September 30, 2005 (in millions) | Parent | Guarantor Subsidiaries | Non- Guarantor | Eliminations | Consolidated | ||||||||||||||
Operating revenue | $ | 45 | $ | 5,544 | $ | 918 | $ | (249 | ) | $ | 6,258 | ||||||||
Operating expenses: | |||||||||||||||||||
Salaries, wages and employees’ benefits | 35 | 3,254 | 450 | (18 | ) | 3,721 | |||||||||||||
Operating expenses and supplies | 25 | 1,009 | 180 | (211 | ) | 1,003 | |||||||||||||
Purchased transportation | — | 522 | 179 | (14 | ) | 687 | |||||||||||||
Depreciation and amortization | — | 147 | 34 | — | 181 | ||||||||||||||
Other operating expenses | 1 | 245 | 33 | (5 | ) | 274 | |||||||||||||
Acquisition and executive severance charges | 5 | 1 | 4 | — | 10 | ||||||||||||||
Total operating expenses | 66 | 5,178 | 880 | (248 | ) | 5,876 | |||||||||||||
Operating income (loss) | (21 | ) | 366 | 38 | (1 | ) | 382 | ||||||||||||
Nonoperating (income) expenses: | |||||||||||||||||||
Interest expense | 24 | 19 | 45 | (45 | ) | 43 | |||||||||||||
Other | (20 | ) | 113 | (129 | ) | 34 | (2 | ) | |||||||||||
Nonoperating (income) expenses, net | 4 | 132 | (84 | ) | (11 | ) | 41 | ||||||||||||
Income (loss) before income taxes | (25 | ) | 234 | 122 | 10 | 341 | |||||||||||||
Income tax provision (benefit) | (4 | ) | 93 | 48 | (7 | ) | 130 | ||||||||||||
Net income (loss) | $ | (21 | ) | $ | 141 | $ | 74 | $ | 17 | $ | 211 | ||||||||
19
Table of Contents
For the nine months ended September 30, 2004 (in millions) | Parent | Guarantor Subsidiaries | Non- Guarantor | Eliminations | Consolidated | |||||||||||||||
Operating revenue | $ | 34 | $ | 4,646 | $ | 353 | $ | (40 | ) | $ | 4,993 | |||||||||
Operating expenses: | ||||||||||||||||||||
Salaries, wages and employees’ benefits | 28 | 2,907 | 173 | — | 3,108 | |||||||||||||||
Operating expenses and supplies | 19 | 671 | 84 | (35 | ) | 739 | ||||||||||||||
Purchased transportation | — | 484 | 66 | (3 | ) | 547 | ||||||||||||||
Depreciation and amortization | — | 115 | 12 | — | 127 | |||||||||||||||
Other operating expenses | 3 | 210 | 9 | — | 222 | |||||||||||||||
Total operating expenses | 50 | 4,387 | 344 | (38 | ) | 4,743 | ||||||||||||||
Operating income (loss) | (16 | ) | 259 | 9 | (2 | ) | 250 | |||||||||||||
Nonoperating (income) expenses: | ||||||||||||||||||||
Interest expense | 22 | 54 | 21 | (63 | ) | 34 | ||||||||||||||
Other | 4 | 49 | (95 | ) | 61 | 19 | ||||||||||||||
Nonoperating (income) expenses, net | 26 | 103 | (74 | ) | (2 | ) | 53 | |||||||||||||
Income (loss) before income taxes | (42 | ) | 156 | 83 | — | 197 | ||||||||||||||
Income tax provision (benefit) | (16 | ) | 62 | 29 | 1 | 76 | ||||||||||||||
Net income (loss) | $ | (26 | ) | $ | 94 | $ | 54 | $ | (1 | ) | $ | 121 | ||||||||
Condensed Consolidating Statements of Cash Flows | ||||||||||||||||||||
For the nine months ended September 30, 2005 (in millions) | Parent | Guarantor Subsidiaries | Non- Guarantor | Eliminations | Consolidated | |||||||||||||||
Operating activities: | ||||||||||||||||||||
Net cash provided by (used in) operating activities | $ | (51 | ) | $ | 285 | $ | 18 | $ | 4 | $ | 256 | |||||||||
Investing activities: | ||||||||||||||||||||
Acquisition of property and equipment | — | (185 | ) | (46 | ) | — | (231 | ) | ||||||||||||
Proceeds from disposal of property and equipment | — | 16 | 2 | — | 18 | |||||||||||||||
Acquisition of companies | (805 | ) | 45 | 6 | — | (754 | ) | |||||||||||||
Investment in affiliate | (46 | ) | — | — | — | (46 | ) | |||||||||||||
Other | — | — | 2 | — | 2 | |||||||||||||||
Net cash used in investing activities | (851 | ) | (124 | ) | (36 | ) | — | (1,011 | ) | |||||||||||
Financing activities: | ||||||||||||||||||||
ABS borrowings, net | — | — | 456 | — | 456 | |||||||||||||||
Issuance of long-term debt | 250 | — | — | — | 250 | |||||||||||||||
Debt issuance costs | (4 | ) | — | — | — | (4 | ) | |||||||||||||
Proceeds from exercise of stock options | 4 | — | — | — | 4 | |||||||||||||||
Cash dividends paid to shareholders | — | 7 | (7 | ) | — | — | ||||||||||||||
Intercompany advances / repayments | 581 | (166 | ) | (411 | ) | (4 | ) | — | ||||||||||||
Net cash provided by (used in) financing activities | 831 | (159 | ) | 38 | (4 | ) | 706 | |||||||||||||
Net increase (decrease) in cash and cash equivalents | (71 | ) | 2 | 20 | — | (49 | ) | |||||||||||||
Cash and cash equivalents, beginning of period | 82 | 7 | 17 | — | 106 | |||||||||||||||
Cash and cash equivalents, end of period | $ | 11 | $ | 9 | $ | 37 | $ | — | $ | 57 | ||||||||||
20
Table of Contents
For the nine months ended September 30, 2004 (in millions) | Parent | Guarantor Subsidiaries | Non- Guarantor | Eliminations | Consolidated | ||||||||||||||
Operating activities: | |||||||||||||||||||
Net cash provided by (used in) operating activities | $ | (2 | ) | $ | 567 | $ | (290 | ) | $ | — | $ | 275 | |||||||
Investing activities: | |||||||||||||||||||
Acquisition of property and equipment | — | (139 | ) | (16 | ) | — | (155 | ) | |||||||||||
Proceeds from disposal of property and equipment | — | 11 | 1 | — | 12 | ||||||||||||||
Investment in subsidiary | — | (17 | ) | 17 | — | ||||||||||||||
Acquisition of companies | (11 | ) | 1 | — | — | (10 | ) | ||||||||||||
Net cash used in investing activities | (11 | ) | (144 | ) | 2 | — | (153 | ) | |||||||||||
Financing activities: | |||||||||||||||||||
ABS borrowings, net | — | — | (2 | ) | — | (2 | ) | ||||||||||||
Repayment of long-term debt | (175 | ) | — | — | — | (175 | ) | ||||||||||||
Debt issuance cost | (3 | ) | — | — | — | (3 | ) | ||||||||||||
Proceeds from stock options | 9 | — | — | — | 9 | ||||||||||||||
Intercompany advances / repayments | 172 | (436 | ) | 264 | — | — | |||||||||||||
Net cash provided by (used in) financing activities | 3 | (436 | ) | 262 | — | (171 | ) | ||||||||||||
Net decrease in cash and cash equivalents | (10 | ) | (13 | ) | (26 | ) | — | (49 | ) | ||||||||||
Cash and cash equivalents, beginning of period | 19 | 20 | 36 | — | 75 | ||||||||||||||
Cash and cash equivalents, end of period | $ | 9 | $ | 7 | $ | 10 | $ | — | $ | 26 | |||||||||
21
Table of Contents
| 15. | Guarantees of the Senior Notes Due 2008 |
In 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 and its following 100% 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 or any guarantor subsidiary to obtain funds from its subsidiaries by dividend or loan.
The following represents summarized condensed consolidating financial information of Yellow Roadway and its subsidiaries as of September 30, 2005 and December 31, 2004 with respect to the financial position, for the three and nine months ended September 30, 2005 and 2004 for results of operations, and for the nine months ended September 30, 2005 and 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 that are or were associated with our ABS agreements.
Condensed Consolidating Balance Sheets
September 30, 2005 (in millions) | Primary Obligor | Guarantor Subsidiaries | Non- Guarantor | Eliminations | Consolidated | |||||||||||||
Cash and cash equivalents | $ | — | $ | 19 | $ | 38 | $ | — | $ | 57 | ||||||||
Intercompany advances receivable | — | (24 | ) | 24 | — | — | ||||||||||||
Accounts receivable, net | — | 16 | 1,244 | (10 | ) | 1,250 | ||||||||||||
Prepaid expenses and other | 11 | 76 | 134 | — | 221 | |||||||||||||
Total current assets | 11 | 87 | 1,440 | (10 | ) | 1,528 | ||||||||||||
Property and equipment | — | 892 | 2,720 | — | 3,612 | |||||||||||||
Less – accumulated depreciation | — | 112 | 1,241 | — | 1,353 | |||||||||||||
Net property and equipment | — | 780 | 1,479 | — | 2,259 | |||||||||||||
Investment in subsidiaries | — | 2,703 | 24 | (2,727 | ) | — | ||||||||||||
Receivable from affiliate | 118 | (250 | ) | 132 | — | — | ||||||||||||
Goodwill, intangibles and other assets | 656 | 1,291 | 911 | (848 | ) | 2,010 | ||||||||||||
Total assets | $ | 785 | $ | 4,611 | $ | 3,986 | $ | (3,585 | ) | $ | 5,797 | |||||||
Intercompany advances payable | $ | — | $ | 91 | $ | 119 | $ | (210 | ) | $ | — | |||||||
Accounts payable | — | 101 | 258 | — | 359 | |||||||||||||
Wages, vacations and employees’ benefits | — | 233 | 295 | — | 528 | |||||||||||||
Other current and accrued liabilities | 11 | 94 | 327 | — | 432 | |||||||||||||
Current maturities of long-term debt | — | — | 460 | — | 460 | |||||||||||||
Total current liabilities | 11 | 519 | 1,459 | (210 | ) | 1,779 | ||||||||||||
Payable to affiliate | — | 537 | 113 | (650 | ) | — | ||||||||||||
Long-term debt, less current portion | 240 | 650 | 280 | — | 1,170 | |||||||||||||
Deferred income taxes, net | (9 | ) | 218 | 165 | — | 374 | ||||||||||||
Claims and other liabilities | — | 317 | 262 | — | 579 | |||||||||||||
Commitments and contingencies | — | — | — | — | — | |||||||||||||
Shareholders’ equity | 543 | 2,370 | 1,707 | (2,725 | ) | 1,895 | ||||||||||||
Total liabilities and shareholders’ equity | $ | 785 | $ | 4,611 | $ | 3,986 | $ | (3,585 | ) | $ | 5,797 | |||||||
22
Table of Contents
December 31, 2004 (in millions) | Primary Obligor | Guarantor Subsidiaries | Non- Guarantor | Eliminations | Consolidated | |||||||||||||||
Cash and cash equivalents | $ | — | $ | 89 | $ | 17 | $ | — | $ | 106 | ||||||||||
Intercompany advances receivable | 76 | 542 | — | (618 | ) | — | ||||||||||||||
Accounts receivable, net | — | (1 | ) | 780 | — | 779 | ||||||||||||||
Prepaid expenses and other | 11 | 69 | 88 | — | 168 | |||||||||||||||
Total current assets | 87 | 699 | 885 | (618 | ) | 1,053 | ||||||||||||||
Property and equipment | — | 876 | 1,796 | — | 2,672 | |||||||||||||||
Less – accumulated depreciation | — | 70 | 1,179 | — | 1,249 | |||||||||||||||
Net property and equipment | — | 806 | 617 | — | 1,423 | |||||||||||||||
Investment in subsidiaries | 671 | 57 | 1 | (729 | ) | — | ||||||||||||||
Receivable from affiliate | 650 | (12 | ) | 12 | (650 | ) | — | |||||||||||||
Goodwill, intangibles and other assets | 6 | 1,045 | 100 | — | 1,151 | |||||||||||||||
Total assets | $ | 1,414 | $ | 2,595 | $ | 1,615 | $ | (1,997 | ) | $ | 3,627 | |||||||||
Intercompany advances payable | $ | — | $ | — | $ | 618 | $ | (618 | ) | $ | — | |||||||||
Accounts payable | — | 123 | 184 | — | 307 | |||||||||||||||
Wages, vacations and employees’ benefits | — | 238 | 190 | — | 428 | |||||||||||||||
Other current and accrued liabilities | (16 | ) | 130 | 96 | — | 210 | ||||||||||||||
Current maturities of long-term debt | — | 250 | 4 | — | 254 | |||||||||||||||
Total current liabilities | (16 | ) | 741 | 1,092 | (618 | ) | 1,199 | |||||||||||||
Payable to affiliate | — | 626 | 24 | (650 | ) | — | ||||||||||||||
Long-term debt, less current portion | 244 | 150 | 10 | — | 404 | |||||||||||||||
Deferred income taxes, net | (9 | ) | 212 | 117 | — | 320 | ||||||||||||||
Claims and other liabilities | — | 334 | 156 | — | 490 | |||||||||||||||
Commitments and contingencies | ||||||||||||||||||||
Shareholders’ equity | 1,195 | 532 | 216 | (729 | ) | 1,214 | ||||||||||||||
Total liabilities and shareholders’ equity | $ | 1,414 | $ | 2,595 | $ | 1,615 | $ | (1,997 | ) | $ | 3,627 | |||||||||
Condensed Consolidating Statements of Operations | ||||||||||||||||||||
For the three months ended September 30, 2005 (in millions) | Primary Obligor | Guarantor Subsidiaries | Non- Guarantor | Eliminations | Consolidated | |||||||||||||||
Operating revenue | $ | — | $ | 906 | $ | 1,663 | $ | (77 | ) | $ | 2,492 | |||||||||
Operating expenses: | ||||||||||||||||||||
Salaries, wages and employees’ benefits | — | 531 | 920 | — | 1,451 | |||||||||||||||
Operating expenses and supplies | — | 168 | 319 | (74 | ) | 413 | ||||||||||||||
Purchased transportation | — | 84 | 193 | (3 | ) | 274 | ||||||||||||||
Depreciation and amortization | — | 21 | 55 | — | 76 | |||||||||||||||
Other operating expenses | — | 39 | 73 | — | 112 | |||||||||||||||
Acquisition and executive severance charges | — | 4 | 5 | — | 9 | |||||||||||||||
Total operating expenses | — | 847 | 1,565 | (77 | ) | 2,335 | ||||||||||||||
Operating income | — | 59 | 98 | — | 157 | |||||||||||||||
Nonoperating (income) expenses: | ||||||||||||||||||||
Interest expense | 3 | 24 | 26 | (33 | ) | 20 | ||||||||||||||
Other | (13 | ) | 8 | (19 | ) | 23 | (1 | ) | ||||||||||||
Nonoperating (income) expenses, net | (10 | ) | 32 | 7 | (10 | ) | 19 | |||||||||||||
Income before income taxes | 10 | 27 | 91 | 10 | 138 | |||||||||||||||
Income tax provision | 4 | 12 | 34 | 3 | 53 | |||||||||||||||
Net income | $ | 6 | $ | 15 | $ | 57 | $ | 7 | $ | 85 | ||||||||||
23
Table of Contents
For the three months ended September 30, 2004 (in millions) | Primary Obligor | Guarantor Subsidiaries | Non- Guarantor | Eliminations | Consolidated | |||||||||||||
Operating revenue | $ | — | $ | 845 | $ | 923 | $ | (1 | ) | $ | 1,767 | |||||||
Operating expenses: | ||||||||||||||||||
Salaries, wages and employees’ benefits | — | 547 | 536 | — | 1,083 | |||||||||||||
Operating expenses and supplies | — | 112 | 140 | (1 | ) | 251 | ||||||||||||
Purchased transportation | — | 79 | 117 | — | 196 | |||||||||||||
Depreciation and amortization | — | 20 | 23 | — | 43 | |||||||||||||
Other operating expenses | — | 34 | 39 | — | 73 | |||||||||||||
Total operating expenses | — | 792 | 855 | (1 | ) | 1,646 | ||||||||||||
Operating income | — | 53 | 68 | — | 121 | |||||||||||||
Nonoperating (income) expenses: | ||||||||||||||||||
Interest expense | 3 | 8 | 13 | (13 | ) | 11 | ||||||||||||
Other | (13 | ) | 34 | (15 | ) | 13 | 19 | |||||||||||
Nonoperating (income) expenses, net | (10 | ) | 42 | (2 | ) | — | 30 | |||||||||||
Income before income taxes | 10 | 11 | 70 | — | 91 | |||||||||||||
Income tax provision | 4 | 5 | 26 | — | 35 | |||||||||||||
Net income | $ | 6 | $ | 6 | $ | 44 | $ | — | $ | 56 | ||||||||
For the nine months ended September 30, 2005 (in millions) | Primary Obligor | Guarantor Subsidiaries | Non- Guarantor | Eliminations | Consolidated | ||||||||||||||
Operating revenue | $ | — | $ | 2,593 | $ | 3,884 | $ | (219 | ) | $ | 6,258 | ||||||||
Operating expenses: | |||||||||||||||||||
Salaries, wages and employees’ benefits | — | 1,563 | 2,158 | — | 3,721 | ||||||||||||||
Operating expenses and supplies | — | 462 | 751 | (210 | ) | 1,003 | |||||||||||||
Purchased transportation | — | 244 | 451 | (8 | ) | 687 | |||||||||||||
Depreciation and amortization | — | 62 | 119 | — | 181 | ||||||||||||||
Other operating expenses | — | 108 | 166 | — | 274 | ||||||||||||||
Acquisition and executive severance charges | — | 5 | 5 | — | 10 | ||||||||||||||
Total operating expenses | — | 2,444 | 3,650 | (218 | ) | 5,876 | |||||||||||||
Operating income | — | 149 | 234 | (1 | ) | 382 | |||||||||||||
Nonoperating (income) expenses: | |||||||||||||||||||
Interest expense | 10 | 63 | 55 | (85 | ) | 43 | |||||||||||||
Other | (40 | ) | 27 | (63 | ) | 74 | (2 | ) | |||||||||||
Nonoperating (income) expenses, net | (30 | ) | 90 | (8 | ) | (11 | ) | 41 | |||||||||||
Income before income taxes | 30 | 59 | 242 | 10 | 341 | ||||||||||||||
Income tax provision | 11 | 28 | 91 | — | 130 | ||||||||||||||
Net income | $ | 19 | $ | 31 | $ | 151 | $ | 10 | $ | 211 | |||||||||
24
Table of Contents
For the nine months ended September 30, 2004 (in millions) | Primary Obligor | Guarantor Subsidiaries | Non- Guarantor | Eliminations | Consolidated | |||||||||||||||
Operating revenue | $ | — | $ | 2,378 | $ | 2,616 | $ | (1 | ) | $ | 4,993 | |||||||||
Operating expenses: | ||||||||||||||||||||
Salaries, wages and employees’ benefits | — | 1,547 | 1,561 | — | 3,108 | |||||||||||||||
Operating expenses and supplies | — | 341 | 399 | (1 | ) | 739 | ||||||||||||||
Purchased transportation | — | 223 | 324 | — | 547 | |||||||||||||||
Depreciation and amortization | — | 58 | 69 | — | 127 | |||||||||||||||
Other operating expenses | — | 105 | 117 | — | 222 | |||||||||||||||
Total operating expenses | — | 2,274 | 2,470 | (1 | ) | 4,743 | ||||||||||||||
Operating income | — | 104 | 146 | — | 250 | |||||||||||||||
Nonoperating (income) expenses: | ||||||||||||||||||||
Interest expense | 10 | 39 | 25 | (40 | ) | 34 | ||||||||||||||
Other | (40 | ) | 44 | (25 | ) | 40 | 19 | |||||||||||||
Nonoperating (income) expenses, net | (30 | ) | 83 | — | — | 53 | ||||||||||||||
Income before income taxes | 30 | 21 | 146 | — | 197 | |||||||||||||||
Income tax provision | 11 | 11 | 54 | — | 76 | |||||||||||||||
Net income | $ | 19 | $ | 10 | $ | 92 | $ | — | $ | 121 | ||||||||||
Condensed Consolidating Statements of Cash Flows | ||||||||||||||||||||
For the nine months ended September 30, 2005 (in millions) | Parent | Guarantor Subsidiaries | Non- Guarantor | Eliminations | Consolidated | |||||||||||||||
Operating activities: | ||||||||||||||||||||
Net cash provided (used in) operating activities | $ | 42 | $ | 25 | $ | 192 | $ | (3 | ) | $ | 256 | |||||||||
Investing activities: | ||||||||||||||||||||
Acquisition of property and equipment | — | (53 | ) | (178 | ) | — | (231 | ) | ||||||||||||
Proceeds from disposal of property and equipment | — | 5 | 13 | — | 18 | |||||||||||||||
Acquisition of companies | — | (806 | ) | 52 | — | (754 | ) | |||||||||||||
Investment in affiliate | — | (46 | ) | — | — | (46 | ) | |||||||||||||
Other | — | — | 2 | — | 2 | |||||||||||||||
Net cash used in investing activities | — | (900 | ) | (111 | ) | — | (1,011 | ) | ||||||||||||
Financing activities: | ||||||||||||||||||||
ABS borrowings, net | — | — | 456 | — | 456 | |||||||||||||||
Issuance of long-term debt | — | 250 | — | — | 250 | |||||||||||||||
Debt issuance costs | — | (4 | ) | — | — | (4 | ) | |||||||||||||
Proceeds from exercise of stock options | — | 4 | — | — | 4 | |||||||||||||||
Cash dividends paid to shareholders | — | 7 | (7 | ) | — | — | ||||||||||||||
Intercompany advances / repayments | (42 | ) | 548 | (509 | ) | 3 | — | |||||||||||||
Net cash provided by (used in) financing activities | (42 | ) | 805 | (60 | ) | 3 | 706 | |||||||||||||
Net increase (decrease) in cash and cash equivalents | — | (70 | ) | 21 | — | (49 | ) | |||||||||||||
Cash and cash equivalents, beginning of period | — | 89 | 17 | — | 106 | |||||||||||||||
Cash and cash equivalents, end of period | $ | — | $ | 19 | $ | 38 | $ | — | $ | 57 | ||||||||||
25
Table of Contents
For the nine months ended September 30, 2004 (in millions) | Primary Obligor | Guarantor Subsidiaries | Non- Guarantor | Eliminations | Consolidated | ||||||||||||||
Operating activities: | |||||||||||||||||||
Net cash provided by (used in) operating activities | $ | 48 | $ | 276 | $ | (49 | ) | $ | — | $ | 275 | ||||||||
Investing activities: | |||||||||||||||||||
Acquisition of property and equipment | — | (62 | ) | (93 | ) | — | (155 | ) | |||||||||||
Proceeds from disposal of property and equipment | — | 9 | 3 | — | 12 | ||||||||||||||
Acquisition of companies | — | — | (10 | ) | — | (10 | ) | ||||||||||||
Net cash used in investing activities | — | (53 | ) | (100 | ) | — | (153 | ) | |||||||||||
Financing activities: | |||||||||||||||||||
ABS borrowings, net | — | — | (2 | ) | — | (2 | ) | ||||||||||||
Repayment of long-term debt | — | (4 | ) | (171 | ) | — | (175 | ) | |||||||||||
Debt issuance cost | — | (3 | ) | — | — | (3 | ) | ||||||||||||
Proceeds from exercise of stock options | — | — | 9 | — | 9 | ||||||||||||||
Intercompany advances / repayments | (48 | ) | (208 | ) | 256 | — | — | ||||||||||||
Net cash provided by (used in) financing activities | (48 | ) | (215 | ) | 92 | — | (171 | ) | |||||||||||
Net increase (decrease) in cash and cash equivalents | — | 8 | (57 | ) | — | (49 | ) | ||||||||||||
Cash and cash equivalents, beginning of period | — | 8 | 67 | — | 75 | ||||||||||||||
Cash and cash equivalents, end of period | $ | — | $ | 16 | $ | 10 | $ | — | $ | 26 | |||||||||
26
Table of Contents
| 16. | Guarantees of the Senior Notes Due 2009 and 2010 |
In connection with the senior notes due 2009 and 2010 that Yellow Roadway assumed by virtue of its merger with USF, and in addition to the primary obligor, USF, Yellow Roadway and its following 100% owned subsidiaries have issued guarantees in favor of the holders of the senior notes due 2009 and 2010: USF Sales Corporation, USF Holland Inc., USF Bestway Inc., USF Bestway Leasing Inc., USF Reddaway Inc., USF Dugan Inc., USF Glen Moore Inc., USF Distribution Services Inc., USF Logistic Services Inc. and IMUA Handling Corporation. 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 or any guarantor subsidiary to obtain funds from its subsidiaries by dividend or loan.
The following represents summarized condensed consolidating financial information of Yellow Roadway and its subsidiaries as of September 30, 2005 with respect to the financial position, for the three and nine months ended September 30, 2005 for results of operations, and for the nine months ended September 30, 2005 for statement of cash flows. The primary obligor column presents the financial information of USF Corporation. The Guarantor Subsidiaries column presents the financial information of all guarantor subsidiaries of the senior notes due 2009 and 2010 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 that are or were associated with our ABS agreements.
Condensed Consolidating Balance Sheet
September 30, 2005 (in millions) | Primary Obligor | Guarantor Subsidiaries | Non- Guarantor | Eliminations | Consolidated | ||||||||||||||
Cash and cash equivalents | $ | (1 | ) | $ | 27 | $ | 31 | $ | — | $ | 57 | ||||||||
Accounts receivable, net | 2 | 87 | 1,160 | 1 | 1,250 | ||||||||||||||
Prepaid expenses and other | 3 | 57 | 153 | 8 | 221 | ||||||||||||||
Total current assets | 4 | 171 | 1,344 | 9 | 1,528 | ||||||||||||||
Property and equipment | 39 | 778 | 2,795 | — | 3,612 | ||||||||||||||
Less – accumulated depreciation | — | 34 | 1,319 | — | 1,353 | ||||||||||||||
Net property and equipment | 39 | 744 | 1,476 | — | 2,259 | ||||||||||||||
Investment in subsidiaries | 161 | 2,703 | 9 | (2,873 | ) | — | |||||||||||||
Receivable from affiliate | 529 | (296 | ) | 247 | (480 | ) | — | ||||||||||||
Goodwill, intangibles and other assets | 570 | 392 | 1,246 | (198 | ) | 2,010 | |||||||||||||
Total assets | $ | 1,303 | $ | 3,714 | $ | 4,322 | $ | (3,542 | ) | $ | 5,797 | ||||||||
Intercompany advances payable | $ | (6 | ) | $ | 225 | $ | (36 | ) | $ | (183 | ) | $ | — | ||||||
Accounts payable | 1 | 81 | 277 | — | 359 | ||||||||||||||
Wages, vacations and employees’ benefits | 1 | 105 | 422 | — | 528 | ||||||||||||||
Other current and accrued liabilities | 45 | 67 | 362 | (42 | ) | 432 | |||||||||||||
Current maturities of long-term debt | — | — | 460 | — | 460 | ||||||||||||||
Total current liabilities | 41 | 478 | 1,485 | (225 | ) | 1,779 | |||||||||||||
Payable to affiliate | — | 307 | 184 | (491 | ) | — | |||||||||||||
Long-term debt, less current portion | 271 | 650 | 249 | — | 1,170 | ||||||||||||||
Deferred income taxes, net | (76 | ) | 122 | 323 | 5 | 374 | |||||||||||||
Claims and other liabilities | 109 | 27 | 526 | (83 | ) | 579 | |||||||||||||
Commitments and contingencies | — | — | — | — | — | ||||||||||||||
Shareholders’ equity | 958 | 2,130 | 1,555 | (2,748 | ) | 1,895 | |||||||||||||
Total liabilities and shareholders’ equity | $ | 1,303 | $ | 3,714 | $ | 4,322 | $ | (3,542 | ) | $ | 5,797 | ||||||||
27
Table of Contents
Condensed Consolidating Statements of Operations
For the three months ended September 30, 2005 (in millions) | Primary Obligor | Guarantor Subsidiaries | Non- Guarantor | Eliminations | Consolidated | |||||||||||||||
Operating revenue | $ | 10 | $ | 612 | $ | 1,968 | $ | (98 | ) | $ | 2,492 | |||||||||
Operating expenses: | ||||||||||||||||||||
Salaries, wages and employees’ benefits | 4 | 354 | 1,106 | (13 | ) | 1,451 | ||||||||||||||
Operating expenses and supplies | 2 | 120 | 365 | (74 | ) | 413 | ||||||||||||||
Purchased transportation | — | 55 | 227 | (8 | ) | 274 | ||||||||||||||
Depreciation and amortization | 1 | 24 | 51 | — | 76 | |||||||||||||||
Other operating expenses | 4 | 32 | 79 | (3 | ) | 112 | ||||||||||||||
Acquisition and executive severance charges | 1 | 8 | — | — | 9 | |||||||||||||||
Total operating expenses | 12 | 593 | 1,828 | (98 | ) | 2,335 | ||||||||||||||
Operating income (loss) | (2 | ) | 19 | 140 | — | 157 | ||||||||||||||
Nonoperating (income) expenses: | ||||||||||||||||||||
Interest expense | 4 | 10 | 26 | (20 | ) | 20 | ||||||||||||||
Other | — | 16 | (27 | ) | 10 | (1 | ) | |||||||||||||
Nonoperating (income) expenses, net | 4 | 26 | (1 | ) | (10 | ) | 19 | |||||||||||||
Income (loss) before income taxes | (6 | ) | (7 | ) | 141 | 10 | 138 | |||||||||||||
Income tax provision | — | 2 | 55 | (4 | ) | 53 | ||||||||||||||
Net income (loss) | $ | (6 | ) | $ | (9 | ) | $ | 86 | $ | 14 | $ | 85 | ||||||||
For the nine months ended September 30, 2005 (in millions) | Primary Obligor | Guarantor Subsidiaries | Non- Guarantor | Eliminations | Consolidated | |||||||||||||||
Operating revenue | $ | 9 | $ | 910 | $ | 5,588 | $ | (249 | ) | $ | 6,258 | |||||||||
Operating expenses: | ||||||||||||||||||||
Salaries, wages and employees’ benefits | 5 | 531 | 3,203 | (18 | ) | 3,721 | ||||||||||||||
Operating expenses and supplies | 3 | 188 | 1,022 | (210 | ) | 1,003 | ||||||||||||||
Purchased transportation | — | 79 | 622 | (14 | ) | 687 | ||||||||||||||
Depreciation and amortization | 3 | 33 | 145 | — | 181 | |||||||||||||||
Other operating expenses | 4 | 49 | 227 | (6 | ) | 274 | ||||||||||||||
Acquisition and executive severance charges | 1 | 9 | — | — | 10 | |||||||||||||||
Total operating expenses | 16 | 889 | 5,219 | (248 | ) | 5,876 | ||||||||||||||
Operating income (loss) | (7 | ) | 21 | 369 | (1 | ) | 382 | |||||||||||||
Nonoperating (income) expenses: | ||||||||||||||||||||
Interest expense | 5 | 21 | 61 | (44 | ) | 43 | ||||||||||||||
Other | (7 | ) | (6 | ) | (23 | ) | 34 | (2 | ) | |||||||||||
Nonoperating (income) expenses, net | (2 | ) | 15 | 38 | (10 | ) | 41 | |||||||||||||
Income (loss) before income taxes | (5 | ) | 6 | 331 | 9 | 341 | ||||||||||||||
Income tax provision | — | 5 | 132 | (7 | ) | 130 | ||||||||||||||
Net income (loss) | $ | (5 | ) | $ | 1 | $ | 199 | $ | 16 | $ | 211 | |||||||||
28
Table of Contents
Condensed Consolidating Statement of Cash Flows
For the nine months ended September 30, 2005 (in millions) | Primary Obligor | Guarantor Subsidiaries | Non- Guarantor | Eliminations | Consolidated | |||||||||||||||
Operating activities: | ||||||||||||||||||||
Net cash provided by (used in) operating activities | $ | (35 | ) | $ | 2 | $ | 285 | $ | 4 | $ | 256 | |||||||||
Investing activities: | ||||||||||||||||||||
Acquisition of property and equipment | (1 | ) | (68 | ) | (162 | ) | — | (231 | ) | |||||||||||
Proceeds from disposal of property and equipment | — | 3 | 15 | — | 18 | |||||||||||||||
Acquisition of companies | 34 | (803 | ) | 15 | — | (754 | ) | |||||||||||||
Investment in affiliate | — | (46 | ) | — | — | (46 | ) | |||||||||||||
Other | — | — | 2 | — | 2 | |||||||||||||||
Net cash used in investing activities | 33 | (914 | ) | (130 | ) | — | (1,011 | ) | ||||||||||||
Financing activities: | ||||||||||||||||||||
ABS borrowings, net | — | — | 456 | — | 456 | |||||||||||||||
Issuance of long-term debt | — | 250 | — | — | 250 | |||||||||||||||
Debt issuance costs | — | (4 | ) | — | — | (4 | ) | |||||||||||||
Proceeds from exercise of stock options | — | 4 | — | — | 4 | |||||||||||||||
Intercompany advances / repayments | 1 | 607 | (604 | ) | (4 | ) | — | |||||||||||||
Net cash provided by (used in) financing activities | 1 | 857 | (148 | ) | (4 | ) | 706 | |||||||||||||
Net increase (decrease) in cash and cash equivalents | (1 | ) | (55 | ) | 7 | — | (49 | ) | ||||||||||||
Cash and cash equivalents, beginning of period | — | 82 | 24 | — | 106 | |||||||||||||||
Cash and cash equivalents, end of period | $ | (1 | ) | $ | 27 | $ | 31 | $ | — | $ | 57 | |||||||||
29
Table of Contents
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&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 Roadway,” “we” or “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 statements include those preceded by, followed by or include the words “should,” “could,” “may,” “expect,” “believe,” “estimate” 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, inclement weather, price and availability of fuel, sudden changes in the cost of fuel or the index upon which the Company bases its fuel surcharge, competitor pricing activity, expense volatility, ability to capture cost synergies from acquisitions, the Company’s ability to improve productivity results at its Roadway Express subsidiary and its resulting effect on efficiencies, service and yield, changes in equity and debt markets, a downturn in general or regional economic activity, effects of a terrorist attack, and labor relations, including (without limitation), the impact of work rules, work stoppages, strikes or other disruptions, any obligations to multi-employer health, welfare and pension plans, wage requirements and employee satisfaction.
Results of Operations
Our Results of Operations section focuses on the highlights and significant items that impacted our operating results during the third 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 because the items are not related to the segments’ core operations. Please refer to our Business Segments note for further discussion.
Yellow Transportation Results
Yellow Transportation represented approximately 36% and 47% of our consolidated revenue in the third quarter of 2005 and 2004, respectively, and 40% and 47% in the nine months ended September 30, 2005 and 2004, respectively. The table below provides summary financial information for Yellow Transportation for the three and nine months ended September 30:
| Three months | Nine months | |||||||||||||||||||||
(in millions) | 2005 | 2004 | Percent Change | 2005 | 2004 | Percent Change | ||||||||||||||||
Operating revenue | $ | 892.5 | $ | 829.0 | 7.7 | % | $ | 2,534.8 | $ | 2,356.1 | 7.6 | % | ||||||||||
Operating income | 73.5 | 63.7 | 15.4 | % | 190.8 | 135.8 | 40.5 | % | ||||||||||||||
Adjustments to operating income(a) | (0.4 | ) | (1.3 | ) | n/m | (2.9 | ) | (0.8 | ) | n/m | (b) | |||||||||||
Adjusted operating income(d) | 73.1 | 62.4 | 17.1 | % | 187.9 | 135.0 | 39.2 | % | ||||||||||||||
Operating ratio | 91.8 | % | 92.3 | % | 0.5 | pp | 92.5 | % | 94.2 | % | 1.7 | pp(c) | ||||||||||
Adjusted operating ratio | 91.8 | % | 92.5 | % | 0.7 | pp | 92.6 | % | 94.3 | % | 1.7 | pp | ||||||||||
| (a) | Represents charges that management excludes when evaluating segment performance to better understand our core operations (see discussion below). |
| (b) | Not meaningful. |
| (c) | Percentage points. |
| (d) | This measurement is used for internal management purposes and should not be construed as a better measurement than operating income as defined by generally accepted accounting principles. |
Three months ended September 30, 2005 compared to three months ended September 30, 2004
Yellow Transportation reported third quarter 2005 revenue of $892.5 million, representing an increase of $63.5 million or 7.7% from the third quarter of 2004. The revenue increase resulted from higher fuel surcharge revenue and a continued emphasis on premium services. The fuel surcharge is common throughout our industry and represents an amount that we charge to customers that adjusts with changing fuel prices. We base our fuel surcharge on a published national index and adjust it weekly. Material changes in the index or our cost of fuel can positively or negatively impact our revenue and operating income. Fuel surcharge is an accepted and important component of the overall pricing of our services to our customers. Without an industry accepted fuel surcharge program, our base pricing for our transportation services would require changes. We believe the distinction between base rates & fuel surcharge has been blurring overtime & in the pricing continium it has become difficult to clearly separate all the different factors that influence the price that our customers are willing to pay.
30
Table of Contents
The increase in Yellow Transportation revenue is reflected by the improvement in less-than-truckload (“LTL”) revenue per hundred weight of $23.00/cwt for the three months ended September 30, 2005 versus $21.45/cwt for the three months ended September 30, 2004, a 7.2% increase compared to the prior year quarter. LTL revenue per hundred weight excluding fuel surcharge increased 0.5% or $20.39/cwt for the three months ended September 30, 2005 versus $20.29/cwt for the three months ended September 30, 2004 compared to the prior year quarter. In the third quarter of 2005, LTL shipments declined by 0.9% per day while LTL weight per shipment increased 1.1% compared to the third quarter of 2004.
The successful implementation of a next day service offering in the first quarter of 2005 has continued to deliver excellent operational performance. Additionally, 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®, an expedited and time-definite ground service with a 100% satisfaction guarantee. Exact Express revenue increased in the third quarter of 2005 as compared to the third quarter of 2004 by 16.4%. Yellow Transportation also added a new premium service offering for expedited direct air cargo shipments late in the third quarter of 2005.
Yellow Transportation operating income improved by $9.8 million or 15.4% in the third quarter of 2005 compared to the third quarter of 2004. Operating income increased due to higher revenue, including fuel surcharge revenue, synergy activities, and our continued ability to effectively balance volume and price. Increased wage and benefit rates, primarily contractual labor rates, and increased purchased transportation partially offset these improvements. Operating expenses as a percentage of revenue decreased in the third quarter of 2005 by 0.5 percentage points compared to the third quarter of 2004, resulting in an operating ratio of 91.8%. Operating ratio refers to a common industry measurement calculated by dividing a company’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 adjusted operating income divided by the change in revenue. The adjusted incremental margin at Yellow Transportation from the third quarter of 2004 to the third quarter of 2005 was approximately 17% which is in line with our 15 to 20% long-term expectation. In any given quarter, our incremental margin may be above or below our expected level of 15 to 20%. However, over the longer-term, our expectation is to average a 15 to 20% 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’s primary business. For the three months ended September 30, 2005 and 2004, adjustments to operating income were ($0.4) million and ($1.3) million.
Nine months ended September 30, 2005 compared to nine months ended September 30, 2004
Yellow Transportation revenue increased $178.7 million or 7.6% in the nine months ended September 30, 2005 versus the year ago period. The revenue increase resulted from higher fuel surcharge revenue and a continued emphasis on premium services. Comparing that same period, LTL revenue per hundred weight increased 8.4% ($22.74/cwt for the nine months ended September 30, 2005 versus $20.98/cwt for the nine months ended September 30, 2004), LTL revenue per hundred weight excluding fuel surcharge increased 2.5% ($20.54/cwt for the nine months ended September 30, 2005 versus $20.04/cwt for the nine months ended September 30, 2004), LTL shipments per day declined 1.0% and LTL weight per shipment increased by 0.1%.
Operating income for Yellow Transportation increased $55.0 million or 40.5% in the nine months ended September 30, 2005 as compared to the nine months ended September 30, 2004. As discussed above, the increase in operating income is related to the increased revenue, including fuel surcharge revenue, synergy activities, and our continued success in negotiating appropriate prices for the related business volumes, as well as a large accident accrual in the prior year that did not recur in the current year. Our operating income was adversely impacted by wage and benefit increases and increased purchased transportation. Despite the cost increases, operating expenses as a percentage of revenue decreased for the first nine months of 2005 by 1.7 percentage points compared to the first nine months of 2004, resulting in an operating ratio of 92.5 percent for year-to-date 2005.
Roadway Express Results
Roadway Express represented approximately 34% and 46% of our consolidated revenue in the third quarter of 2005 and 2004, respectively, and 39% and 46% in the nine months ended September 30, 2005 and 2004, respectively. The table below provides summary financial information for Roadway Express for the three and nine months ended September 30:
| Three months | Nine months | |||||||||||||||||||||
(in millions) | 2005 | 2004 | Percent Change | 2005 | 2004 | Percent Change | ||||||||||||||||
Operating revenue | $ | 858.4 | $ | 812.4 | 5.7 | % | $ | 2,456.0 | $ | 2,297.7 | 6.9 | % | ||||||||||
Operating income | 58.2 | 52.1 | 11.8 | % | 146.5 | 103.5 | 41.6 | % | ||||||||||||||
Adjustments to operating income(a) | 1.9 | 0.3 | n/m | 2.4 | 0.2 | n/m | (b) | |||||||||||||||
Adjusted operating income(d) | 60.1 | 52.4 | 14.6 | % | 148.9 | 103.7 | 43.6 | % | ||||||||||||||
Operating ratio | 93.2 | % | 93.6 | % | 0.4 | pp | 94.0 | % | 95.5 | % | 1.5 | pp(c) | ||||||||||
Adjusted operating ratio | 93.0 | % | 93.5 | % | 0.5 | pp | 93.9 | % | 95.5 | % | 1.6 | pp(c) | ||||||||||
| (a) | Represents charges that management excludes when evaluating segment performance to better understand our core operations (see discussion below). |
| (b) | Not meaningful. |
| (c) | Percentage points. |
| (d) | This measurement is used for internal management purposes and should not be construed as a better measurement than operating income as defined by generally accepted accounting principles. |
31
Table of Contents
Three months ended September 30, 2005 compared to three months ended September 30, 2004
Roadway Express reported third quarter 2005 revenue of $858.4 million, representing an increase of $46.0 million or 5.7% from the third quarter of 2004. The revenue increase resulted from improved yield including fuel surcharges and continued emphasis on premium products. Roadway Express also has a fuel surcharge program that is substantially similar to that of Yellow Transportation. LTL revenue per hundred weight of $24.80/cwt for the three months ended September 30, 2005 increased 6.9% compared to $23.21/cwt for the three months ended September 30, 2004. LTL revenue per hundred weight excluding fuel surcharge of $22.19/cwt for the three months ended September 30, 2005 increased 0.3% compared to $22.12/cwt for the three months ended September 30, 2004. In the third quarter of 2005, LTL shipments declined by 3.0% per day while LTL weight per shipment increased 1.4% compared to the third quarter of 2004.
Roadway Express reported operating income of $58.2 million for the third quarter, an improvement of 11.8%, or $6.1 million over the third quarter of 2004. Variable expenses were in line with the volumes experienced during the quarter. Increases in yield, fuel surcharge revenue, synergy activities, and controlled operating expenses also favorably contributed to the overall results but were partially offset by lower efficiencies, tonnage per trip and higher expected cargo claims and transportation costs. In September 2005, the President of Roadway Express retired and a successor was immediately appointed. No adverse impact to Roadway Express operating results took place as a result of this transition. However, at the consolidated level, the Company incurred $4.0 million of executive severance charges related to this transition. Roadway Express reported a third quarter operating ratio of 93.2%, a 0.4 percentage point improvement over the third quarter of 2004.
For the three months ended September 30, 2005, adjustments to operating income were $1.9 million which included gains and losses from the disposal of property and costs due to hurricane damage.
Nine months ended September 30, 2005 compared to nine months ended September 30, 2004
Roadway Express reported revenue of $2,456.0 million for the nine months ended September 30, 2005 compared to $2,297.7 million in the comparable period in 2004, an increase of 6.9%. The revenue increase was primarily due to a 7.0% increase in overall revenue per hundred weight driven by a 6.9% increase in LTL revenue per hundred weight ($24.33/cwt for the nine months ended September 30, 2005 versus $22.75/cwt for the nine months ended September 30, 2004). LTL revenue per hundred weight excluding fuel surcharge of $22.14/cwt for the nine months ended September 30, 2005 increased 2.0% compared to $21.71/cwt for the nine months ended September 30, 2004. Premium services, which also contributed to the revenue growth, grew 33.3% compared to the same period of 2004. Fuel surcharge also drove a portion of the increase in revenue.
For the nine months ended September 30, 2005, Roadway Express reported operating income of $146.5 million, an improvement of 41.6%, or $43.0 million. The improvement in operating income was driven by improved yield, fuel surcharge revenue and significant synergy benefits, partially offset by lower efficiencies and tonnage per trip than expected related to the implementation of operational changes. Transportation costs were unfavorably impacted by a reduction in rail usage. Instead, more costly alternatives were employed to provide better service to our customers. The segment also experienced higher cargo claims than were anticipated, but these claim costs were offset by favorable trends in insurance and other claims. Roadway Express reported an operating ratio of 94.0%, 1.5 percentage points better than the comparable period of 2004.
Regional Transportation Results
Regional Transportation represented approximately 24% and 4% of our consolidated revenue in the third quarter of 2005 and 2004, respectively, and 16% and 4% in the nine months ended September 30, 2005 and 2004, respectively. This segment includes the
32
Table of Contents
results of New Penn and, effective May 25, 2005, the results of the LTL and truckload (“TL”) operating companies of USF. The amounts presented below for 2004 include only the results of New Penn. The table below provides summary financial information for Regional Transportation for the three and nine months ended September 30:
| Three months | Nine months | |||||||||||||||
(in millions) | 2005 | 2004 | 2005 | 2004 | ||||||||||||
Operating revenue | $ | 606.6 | $ | 70.7 | $ | 986.5 | $ | 191.1 | ||||||||
Operating income | 27.8 | 10.2 | 55.7 | 25.2 | ||||||||||||
Adjustments to operating income(a) | 5.0 | 0.1 | 5.4 | — | ||||||||||||
Adjusted operating income(b) | 32.8 | 10.3 | 61.1 | 25.2 | ||||||||||||
Operating ratio | 95.4 | % | 85.4 | % | 94.4 | % | 86.8 | % | ||||||||
Adjusted operating ratio | 94.6 | % | 85.4 | % | 93.8 | % | 86.8 | % | ||||||||
| (a) | Represents charges that management excludes when evaluating segment performance to better understand our core operations (see discussion below). |
| (b) | This measurement is used for internal management purposes and should not be construed as a better measurement than operating income as defined by generally accepted accounting principles. |
Three months ended September 30, 2005 compared to three months ended September 30, 2004
Due to the acquisition date of May 24, 2005, USF results were not included in our third quarter 2004 results of operations, which make 2005 results more difficult to evaluate against prior periods. In the third quarter of 2004, Regional Transportation results reflected only those results related to the operations of New Penn. Due the lack of comparability, management evaluates the segment’s results primarily based on a combination of sequential growth month over month and attainment of plan performance.
Regional Transportation reported revenue of $606.6 million in the third quarter of 2005 compared to reported revenue of $70.7 million in the third quarter of 2004. The revenue increase resulted from the USF acquisition, organic growth and increased revenue from fuel surcharge compared to the third quarter of 2004. Regional Transportation also has a fuel surcharge program that is substantially similar to that of our other operating companies. Additionally, the segment experienced a 10.4% improvement in tonnage per day (of which 10.5% is LTL tonnage) and a 6.0% increase in LTL revenue per hundred weight ($12.28/cwt for the three months ended September 30, 2005 versus $11.58/cwt for the three months ended September 30, 2004). Excluding fuel surcharge the increase was 1.4% or $10.99/cwt for the three months ended September 30, 2005 compared to $10.84/cwt for the three months ended September 30, 2004. These statistics exclude USF Dugan which ceased operations in July 2005.
Regional Transportation reported operating income of $27.8 million in the third quarter of 2005, which was unfavorably impacted by approximately $4.2 million of operating loss related to the shut down of USF Dugan and $0.8 million related to acquisition costs. Operating income met management’s expectations, as the segment managed costs in line with volumes and implemented sales initiatives to continue to reach new markets. Regional Transportation reported a third quarter 2005 operating ratio of 95.4% compared to 85.4% for the third quarter of 2004.
Nine months ended September 30, 2005 compared to nine months ended September 30, 2004
Regional Transportation reported revenue of $986.5 million for the nine months ended September 30, 2005 as compared to $191.1 million, for the nine months ended September 30, 2004. The increased revenue, including higher fuel surcharge revenue, is primarily attributed to the USF acquisition and sales growth initiatives.
Regional Transportation reported operating income of $55.7 million for the nine months ended September 30, 2005 as compared to $25.2 million, for the nine months ended September 30, 2004. The current period operating income reflects the contribution from the USF acquisition, higher fuel surcharge revenue and continued cost management.
Meridian IQ Results
Meridian IQ represented approximately 6% and 3% of our consolidated revenue in the third quarter of 2005 and 2004, respectively, and 5% and 3% in the nine months ended September 30, 2005 and 2004, respectively. This segment includes the results of Meridian IQ and, effective May 25, 2005, the results of the USF Logistics group of entities (“USFL”). The amounts presented below for 2004 include only the results of Meridian IQ. The table below provides summary financial information for Meridian IQ for the three and nine months ended September 30:
| Three months | Nine months | |||||||||||||||
(in millions) | 2005 | 2004 | Percent Change | 2005 | 2004 | Percent Change | ||||||||||
Operating revenue | $ | 141.9 | $ | 57.0 | n/m | $ | 294.0 | $ | 153.3 | n/m | ||||||
Operating income | 6.3 | 1.1 | n/m | 10.9 | 2.3 | n/m | ||||||||||
33
Table of Contents
Three months ended September 30, 2005 compared to three months ended September 30, 2004
In the third quarter of 2005, Meridian IQ revenue increased by $84.9 million or 149.1% from the third quarter of 2004. The significant increase in revenue resulted from a combination of recent acquisitions, with $64.0 million or 75.3% of the improvement attributable to USFL, and strong organic growth within Meridian IQ existing services. Operating income also increased from $1.1 million in the third quarter of 2004 to $6.3 million in the third quarter of 2005. The improved operating results are reflective of the increased revenue and scalability. The USFL operations contributed $3.1 million of operating income for the quarter.
Nine months ended September 30, 2005 compared to nine months ended September 30, 2004
In the first nine months of 2005, Meridian IQ revenue increased by $140.7 million or 91.8% from the first nine months of 2004. As previously mentioned, the significant increase in revenue resulted from both strong organic growth and recent acquisitions, including $89.9 million in revenue attributable to USFL. Operating income also increased from $2.3 million in the first nine months of 2004 to $10.9 million in the first nine months of 2005, resulting from the strong revenue growth and scalability. USFL contributed $4.2 million of operating income for the nine months ended September 30, 2005.
Consolidated Results
Our consolidated results for the three and nine months ended September 30, 2005 and 2004 include the results of each of the operating segments previously discussed. The following discussion focuses on items that management evaluates on a consolidated basis, as segment results have been discussed previously.
The table below provides summary consolidated financial information for the three and nine months ended September 30:
| Three months | Nine months | |||||||||||||||||
(in millions) | 2005 | 2004 | Percent Change | 2005 | 2004 | Percent Change | ||||||||||||
Operating revenue | $ | 2,491.7 | $ | 1,767.1 | 41.0 | % | $ | 6,258.5 | $ | 4,993.3 | 25.3 | % | ||||||
Operating income | 156.8 | 120.6 | 30.0 | % | 382.6 | 250.2 | 52.9 | % | ||||||||||
Nonoperating expenses, net | 19.0 | 29.7 | (36.0 | )% | 41.3 | 53.4 | (22.7 | )% | ||||||||||
Net income | $ | 85.3 | $ | 55.9 | 52.6 | % | $ | 211.3 | $ | 121.0 | 74.6 | % | ||||||
Three months ended September 30, 2005 compared to three months ended September 30, 2004
Each of our operating segments contributed to the revenue growth, which resulted from a combination of favorable economic conditions, increased fuel surcharge revenue, increased premium services and the USF acquisition. Operating revenue increased by $724.6 million from third quarter 2004 to the third quarter of 2005 of which the USF companies contributed $595.8 million.
Operating income increased $36.2 million for the three months ended September 30, 2005 versus the comparable year ago period, of which the USF companies contributed $19.3 million. Operating income also benefited from increased revenue and the corresponding incremental margins at our pre-existing operating segments. Corporate expenses in the third quarter of 2005 increased by $2.8 million from the third quarter of 2004 due to increased salaries and benefits among corporate personnel and increased professional services of which is partially offset by a decrease in incentive compensation expense, insurance expense and corporate allocated management fees. Included in consolidated operating income are executive severance charges of $4.0 million and expenses of $0.2 million related to the USF acquisition.
Nonoperating expenses decreased due to the write-off of deferred debt costs in the third quarter of 2004 of $18.3 million with no comparable amount in 2005 offset by an increase in interest expense as a result of our increased debt level as compared to 2004.
Our effective tax rate for the third quarter of 2005 was 38.1% compared to 38.5% in the third quarter of 2004. As we record our tax provision based on our full year forecasted results, we expect this rate to remain unchanged 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 in the balance of the year.
34
Table of Contents
Nine months ended September 30, 2005 compared to nine months ended September 30, 2004
Consolidated operating revenue increased by $1,265.2 million during the nine months ended September 30, 2005 as compared to the year ago period. All of our operating companies contributed to the increase as did the USF acquisition which contributed $863.3 of operating revenue.
Consolidated operating income increased by $132.4 million during the nine months ended September 30, 2005 as compared to the year ago period, of which the USF companies contributed $29.2 million. Yellow Transportation, Roadway Express and New Penn had strong improvements in their operating ratio which led to the consolidated increased operating income. Corporate expenses for the nine months ended September 30, 2005 increased as compared to the nine months ended September 30, 2004 by $11.7 million due to salaries and benefits related to additional personnel within the corporate group to support our overall growth, increased professional services fees associated with the compliance with Section 404 of the Sarbanes-Oxley Act of 2002 and certain acquisition costs, partially offset by a decrease in insurance expense and corporate-allocated management fees. Our consolidated operating income was also unfavorably impacted by executive severance charges of $4.0 million and acquisition expenses of $0.8 million.
Nonoperating expenses decreased in the nine months ended September 30, 2005 versus the year ago period due to the write-off of deferred debt costs in the third quarter of 2004 of $18.3 million offset by an increase in interest expense in the third quarter of 2005 related to the additional borrowings.
Our effective tax rate for the nine months ended September 30, 2005 was 38.1% compared to 38.5% for the nine months ended September 30, 2004. We expect our rate to remain at 38.1% for the remainder of 2005.
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 an $850 million unsecured credit agreement and a $650 million asset-backed securitization (“ABS”) agreement involving Yellow Transportation, Roadway Express, USF Holland and USF Reddaway accounts receivable. Each of these agreements is more fully described in the Notes to Consolidated Financial Statements. We believe these facilities provide adequate capacity to fund our current working capital and capital expenditure requirements.
The following table provides details of the outstanding components and available unused capacity under the current bank credit agreement and ABS agreement at each period end:
(in millions) | September 30, 2005 | December 31, 2004 | ||||||
Capacity: | ||||||||
Revolving loan | $ | 850.0 | $ | 500.0 | ||||
ABS facility | 650.0 | 450.0 | ||||||
Total capacity | 1,500.0 | 950.0 | ||||||
Usage: | ||||||||
Letters of credit | (403.4 | ) | (275.4 | ) | ||||
Revolving loan | (100.0 | ) | — | |||||
ABS usage for cash borrowings | (456.0 | ) | — | |||||
ABS usage for captive insurance company (see below) | (69.8 | ) | — | |||||
Total usage | (1,029.2 | ) | (275.4 | ) | ||||
Available unused capacity | $ | 470.8 | $ | 674.6 | ||||
In August 2005, the Company finalized the formation of YRC Assurance Co. Ltd. (“Assurance”), a captive insurance company domiciled in Bermuda and a wholly owned and consolidated subsidiary of Yellow Roadway. Assurance provides insurance services to certain wholly owned subsidiaries of Yellow Roadway. As a part of the formation of Assurance, certain qualifying investments were made by Assurance as defined by Bermuda regulations. These investments included taking an ownership position in certain receivables that secure our ABS facility. As a result, as shown above our capacity under the ABS facility is reduced by Assurance’s investment in receivables of $69.8 million.
35
Table of Contents
Contingent Convertible Notes
On September 30, 2005, the conversion triggers with respect to the contingent convertible senior notes had not been met. Accordingly, based on the stated maturity date, this obligation of $400 million has been classified as a long-term liability on the accompanying consolidated balance sheets as of September 30, 2005. The future balance sheet classification of this liability will be monitored at each quarterly reporting date and will be determined based on an analysis of the various conversion rights.
Stock Repurchase Program
In September 2005, our Board of Directors approved a stock repurchase program that authorizes the Company to repurchase up to $50 million of its common stock. During the nine months ended September 30, 2005, no such shares have been purchased.
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), to invest in our growth 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 the nine months ended September 30:
(in millions) | 2005 | 2004 | ||||||
Net cash from operating activities | $ | 256.3 | $ | 274.7 | ||||
Net property and equipment additions | (213.3 | ) | (142.3 | ) | ||||
Proceeds from exercise of stock options | 4.3 | 9.3 | ||||||
Free cash flow | $ | 47.3 | $ | 141.7 | ||||
The $94.4 million decrease in free cash flow from the first nine months of 2004 to the first nine months of 2005 resulted primarily from a decrease in other working capital items of $138.6 million, a decrease in accounts receivable collections of $15.1 million and a decrease in accounts payable of $12.6 million all of which is offset by an increase in net income of $90.3 million. Other working capital fluctuations primarily related to a $93.6 million change in employee wage and benefit accruals, $25.7 million of payments related to the USF restructuring during 2005, $7.5 million additional pension contribution during 2005, and a $14.7 million change in prepaids.
Other items considered in evaluating free cash flow include net property and equipment additions and proceeds from the exercise of stock options. In the first nine months of 2005, net property and equipment additions increased by $71.0 million compared to the first nine months of 2004. Gross property and equipment additions for the first nine months of 2005 were $231.6 million versus $155.2 million for the first nine months of 2004. Our proceeds received from the exercise of employee and director stock options decreased by $5.0 million in the first nine months of 2005 compared to the first nine months of 2004.
Investing activities during the nine months ended September 30, 2005, also included the acquisition of USF for total cash consideration of $742 million (net of cash acquired) and an investment in JHJ of $46 million. This activity is described in detail in footnote 3 in the notes to the consolidated financial statements.
We had significant financing activity during the nine months ended September 30, 2005, primarily as a result of the USF acquisition. This activity is described in detail in footnote 5 in the notes to the consolidated financial statements.
Contractual Obligations and Other Commercial Commitments
The following tables provide aggregated information regarding our contractual obligations and commercial commitments as of September 30, 2005. Most of these obligations and commitments have been discussed in detail either in the preceding paragraphs or the notes to the financial statements. The tables do not include expected pension funding as disclosed separately in the previous section.
36
Table of Contents
Contractual Cash Obligations
(in millions) | Less than 1 year | Payments Due By Period | Total | |||||||||||||
| 2-3 years | 4-5 years | After 5 years | ||||||||||||||
Balance sheet obligations: | ||||||||||||||||
ABS borrowings | $ | 456.0 | $ | — | $ | — | $ | — | $ | 456.0 | ||||||
Long-term debt including interest | 21.5 | 137.9 | 580.4 | 910.0 | 1,649.8 | |||||||||||
Off balance sheet obligations: | ||||||||||||||||
Operating leases | 64.5 | 156.3 | 65.6 | 18.8 | 305.2 | (a) | ||||||||||
Capital expenditures | 113.9 | — | — | — | 113.9 | |||||||||||
Total contractual obligations | $ | 655.9 | $ | 294.2 | $ | 646.0 | $ | 928.8 | $ | 2,524.9 | ||||||
| (a) | The net present value of operating leases, using a discount rate of 10 percent, was $277.2 million at September 30, 2005. |
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.
(in millions) | Amount of Commitment Expiration Per Period | Total | |||||||||||||
| Less than 1 year | 2-3 years | 4-5 years | After 5 years | ||||||||||||
Available line of credit | $ | — | $ | — | $ | 346.6 | $ | — | $ | 346.6 | |||||
Letters of credit | 403.4 | — | — | — | 403.4 | ||||||||||
Lease guarantees | 0.4 | 2.0 | 0.4 | — | 2.8 | ||||||||||
Surety bonds | 76.2 | 1.8 | 0.5 | — | 78.5 | ||||||||||
Total commercial commitments | $ | 480.0 | $ | 3.8 | $ | 347.5 | $ | — | $ | 831.3 | |||||
37
Table of Contents
Item 3.Quantitative and Qualitative Disclosures About Market Risk
We have exposure to a variety of market risks, including the effects of interest rates, foreign exchange rates and fuel prices.
Risk from Interest Rates
To provide adequate funding through seasonal business cycles and minimize overall borrowing costs, we historically utilized both fixed rate and variable rate financial instruments with varying maturities. At September 30, 2005, we had approximately 56% of our outstanding debt at fixed rates. If interest rates for our variable rate long-term debt had averaged 10% more during the quarter, our interest expense would have increased, and income before taxes would have decreased by $0.7 million for the quarter ended September 30, 2005.
The table below provides information regarding our interest rate risk related to fixed-rate debt as of September 30, 2005. Principal cash flows are stated in millions and weighted average interest rates are by contractual maturity. The fair values of our senior notes due 2008, USF senior notes and contingent convertible senior notes have been calculated based on the quoted market prices at September 30, 2005. The market price for the contingent convertible senior notes reflects the combination of debt and equity components of the convertible instrument.
(in millions) | 2005 | 2006 | 2007 | 2008 | 2009 | Thereafter | Total | Fair Value | ||||||||||||||||||||
Fixed-rate debt | $ | 4.4 | $ | — | $ | — | $ | 227.5 | $ | 101.0 | $ | 556.0 | $ | 888.9 | $ | 1,042.4 | ||||||||||||
Average interest rate | 5.25 | % | — | — | 8.22 | % | 6.5 | % | 5.52 | % | ||||||||||||||||||
Foreign Exchange Rates
Revenue, operating expenses, assets and liabilities of our subsidiaries located in Asia, Canada, Mexico, Europe and Peru 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. On September 30, 2005, we entered into a foreign currency hedge with a notional amount of $6.9 million and a maturity of December 31, 2005. This instrument is to effectively hedge our exposure to foreign currency fluctuations on certain intercompany debt with GPS Logistics (EU) Ltd., a wholly owned subsidiary.
Fuel Price Volatility
Yellow Transportation, Roadway Express and Regional Transportation currently have effective fuel surcharge programs in place. As discussed under “Results of Operations – Yellow Transportation,” these programs are well established within the industry and customer acceptance of fuel surcharges remains high. Because 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.
38
Table of Contents
Item 4.Controls and Procedures
We maintain a rigorous set of disclosure controls and procedures designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’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 the Company’s disclosure controls and procedures are effective.
There were no changes in the Company’s internal control over financial reporting that occurred during the fiscal quarter ended September 30, 2005 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
39
Table of Contents
| 10.1 | Employment Agreement dated December 15, 1999 between Yellow Roadway Corporation and William D. Zollars, as amended by Amendment Number One to Employment Agreement dated December 15, 1999 between Yellow Roadway Corporation and William D. Zollars. | |
| 10.2 | Amendment No. 1 to Yellow Corporation Pension Plan, amended and restated as of January 1, 2004. | |
| 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. | |
40
Table of Contents
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: November 9, 2005 | /s/ William D. Zollars | |
| William D. Zollars | ||
Chairman of the Board of Directors, President & Chief Executive Officer | ||
| Date: November 9, 2005 | /s/ Donald G. Barger, Jr. | |
| Donald G. Barger, Jr. | ||
| Senior Vice President & Chief Financial Officer | ||
41