EXHIBIT 13.1
Yellow Corporation
2002 Annual Report
to Shareholders
[BACKGROUND PHOTO OF MALE EMPLOYEE]
I AM THE NEW YELLOW.
Yellow Corporation 2002 Annual Report
[YELLOW LOGO]
I am one of more than 23,000 employees
who make global commerce work by
connecting people, places, and information.
I transport goods for some 400,000 customers.
And I deliver on the promise of a new kind
of transportation services provider.
I automate transportation systems.
I connect a customer's materials and
finished products with critical,
time-sensitive data to streamline every
link in the supply chain.
[BACKGROUND PHOTO OF FEMALE OFFICE EMPLOYEE]
I AM A DRIVER OF NEW ECONOMIES.
I know how to combine a best-in-class
transportation network with state-of-the-art
technology to deliver not just transportation,
but transportation solutions.
I create peace of mind for my customers
and make transportation management
a source of competitive advantage.
[BACKGROUND PHOTO OF MALE EMPLOYEE ON FORKLIFT]
I AM A PRODUCTIVITY SPARKPLUG.
I run one of the most sophisticated
networks of trucks, trains, planes,
and ships anywhere on the planet.
I manage logistics for
thousands of deliveries a day-
seven days a week, 365 days a year.
[BACKGROUND PHOTO OF FEMALE EMPLOYEE DISPATCHER]
I AM COMMAND CENTRAL.
I serve my customers and do what it takes
to exceed their expectations.
I anticipate the challenges, from weather
to customs to delivery times.
I ensure that each shipment arrives, intact,
where it needs to be, when it needs to be there.
I work with a sense of urgency.
[BACKGROUND PHOTO OF FEMALE EMPLOYEE IN FRONT OF CITY SKYLINE]
I AM RELENTLESS.
I manage a transportation network using
state-of-the-art technology.
I know the location of every
shipment with pinpoint accuracy.
Technology enables me to deliver shipments,
manage information, and improve
my customer's experience.
[BACKGROUND PHOTO OF MALE EMPLOYEE IN FRONT OF WORLD MAP]
I AM A NETWORK.
I do what it takes to enable global
commerce by handling all the
complex challenges of
getting goods from where they are
to where they need to be--across town,
around the country, and
throughout the world.
[BACKGROUND PHOTO OF MALE EMPLOYEE IN FRONT OF TRUCKING FLEET]
I AM A GLOBAL FORCE.
WE ARE THE NEW YELLOW.
Together, we are the new Yellow(R)-
a comprehensive transportation services provider.
We operate across the full transportation spectrum
from the database to the delivery point.
THREE COMPONENTS. ONE COMPANY.
We are a new kind of transportation partner.
And when people say to us,
"I didn't know you could do that,"
we have a simple answer: Yes We Can(R).
[CORE PURPOSE OVERLAPPING GRAPHIC BOXES]
Meridian IQ
Yellow
Transportation
Core
Purpose
Yellow
Technologies
ONE COMPANY. ONE CORE PURPOSE.
The Yellow organization is united by our core purpose:
making global commerce work by connecting
people, places, and information.
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YELLOW TRANSPORTATION
The mission of Yellow Transportation, our largest subsidiary, is to be the
leading provider of guaranteed, time-definite, defect-free, hassle-free
transportation services for business customers worldwide. We provide regional,
national, and international transportation and related services to some 400,000
customers by applying a wealth of resources: a transportation network backed by
state-of-the-art tracking and system management technology, the best people in
the industry, and superior customer service. We offer a comprehensive set of
transportation solutions, delivered by a team of technology-enabled customer
service professionals and through our web site, MyYellow.com. We've compiled a
superb track record of quality, reliability, and safety. We can get the job
done--and we do.
MERIDIAN IQ
By combining people, processes, and technology, Meridian IQ plans and
coordinates the movement of goods throughout the world. We deliver discipline
and efficiency to our customers' transportation processes through a complete
range of global transportation management services. Our web-native technology
allows companies to automate and enhance shipment planning, optimization, and
administration, while improving connectivity with their suppliers and customers.
Meridian IQ can manage inbound and outbound transportation on a global scale on
behalf of our customers. Our services range from complete transportation
solution design, implementation, and execution to brokerage and international
forwarding services that facilitate the movement of goods by any mode, anytime,
anywhere in the world. Ultimately, we improve our customers' supply chain
performance in pursuit of our vision: to be the recognized leader in global
transportation management services.
YELLOW TECHNOLOGIES
The 300-plus professionals of Yellow Technologies focus on a vital mission: to
provide innovative information solutions and exceptional technology services
that create a competitive advantage for Yellow businesses. We apply technology
to manage our transportation network more efficiently and to serve customers
more effectively. Yellow Technologies reflects our conviction that information
lies at the heart of any transportation challenge.
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A BROAD PORTFOLIO OF SERVICE OFFERINGS
COMPREHENSIVE DOMESTIC COVERAGE
Standard Ground (TM) features extensive reach with direct delivery points
throughout North America. Standard Ground (TM) Regional Advantage offers fast
regional service in major metro-to-metro markets. Our growing NAFTA service
provides dedicated capabilities for shipments to and from Mexico and Canada.
GUARANTEED TIME-DEFINITE SOLUTIONS
Our Exact Express(R) service provides expedited, time-definite shipping using a
seamless combination of air and ground transportation resources and a commitment
to nothing less than 100 percent customer satisfaction-guaranteed. We also
provide guaranteed on-time service at standard transit times with continuous
shipment monitoring and proactive notification through our Definite Delivery(R)
service.
SPECIALIZED SERVICES
Yellow offers an array of focused services to meet specialized transportation
needs including Exhibit Services, Chemical Services, Return Goods Management,
Temperature-Controlled Shipping, and Multi-Modal and Specialized Equipment
Capabilities.
[EXACT EXPRESS LOGO] [DEFINITE DELIVERY LOGO] [STANDARD GROUND LOGO]
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ONE-STOP SHOPPING FOR YELLOW CUSTOMERS
GLOBAL TRANSPORTATION SERVICES
Yellow offers a complete range of global transportation management services for
companies worldwide. From design and implementation to planning and execution of
orders and shipments, Meridian IQ (TM) and Yellow Global (R) improve
connectivity with suppliers and trade partners. Our experienced transportation
management professionals coordinate the movement of shipments anywhere in the
world, via any mode, at any time.
TRANSPORTATION MANAGEMENT TOOLS
Yellow also provides a wealth of services designed to make the management of
transportation more efficient and more effective. Our 24/7 Customer Service
Centers use the latest technology to provide up-to-the-minute support. The
Yellow web site, MyYellow(R).com, is used by more than 100,000 customers to log
in, order, and track shipments. PowerTMS, our web-native transportation
management system delivered by Meridian IQ, handles everything from order
management to compliance monitoring and provides enhanced visibility for the
entire process.
[YELLOW GLOBAL LOGO] [MYYELLOW.COM LOGO] [MERIDIAN IQ LOGO]
19
DEAR SHAREHOLDER,
Yellow Corporation had an excellent year in 2002, and we are optimistic about
our future. As a result of our operating excellence and strategic progress, we
outperformed a struggling economy and a falling stock market. In fact, when I
reflect on the years since our turnaround began in 1997, I can say with
confidence that the "New Yellow" is continuing to move from vision to reality.
We enter 2003 with a focused strategy, a strong balance sheet, an outstanding
operating platform, and a dedicated and talented team. Our competitive position
has improved, and we are poised for growth.
WHAT THE NEW YELLOW ACCOMPLISHED
Our results for 2002 will have been thoroughly digested by the time this report
reaches shareholders, and highlights are interspersed throughout this letter and
detailed throughout the report. But a few metrics are worth noting here:
Earnings per share from continuing operations, excluding unusual items, nearly
doubled from $0.56 to $1.03. Operating income, excluding unusual items,
increased from $43.6 million to $55.3 million. And operating revenue increased
4.8 percent to $2.62 billion.
Our impressive performance has been driven by the Yellow strategy implemented
over the last several years, from a company operating in the less-than-truckload
market segment to a global transportation services and solutions provider backed
by a dedicated technology team. Our set of services and solutions broadened
during the year, and the company as a whole became more focused after the
spin-off of SCS Transportation (a Yellow subsidiary consisting of regional
companies, Saia Motor Freight Line and Jevic Transportation).
The spin-off was important for three reasons. First, it enabled us to accelerate
growth as we pursue a more focused strategy. Second, it generated substantial
capital, complemented by the capital we raised in a very successful equity
offering in the second quarter. We used most of that capital to repay $237
million in debt- a reduction of 66 percent. We will use the additional capacity
we created to accelerate our future growth. Third, the spin-off has benefited
our shareholders, creating additional market value for
20
[3D BAR CHART]
1999 2000 2001 2002
411 382 361 124
Yellow Total Debt (dollars in millions)
21
[3D BAR CHART]
1999 2000 2001 2002
YELL Market Cap 427 527 673 802
SCST Market Cap 145
Yellow Market Capitalization (dollars in millions)
22
the combined companies. Our balance sheet is strong, and we ended the year with
a clear focus, a solid strategy, and growing momentum.
Part of that momentum can be attributed to the demise of one of our competitors,
Consolidated Freightways, which closed in September. This closure created a
market opportunity of $1.5 billion and, through focused planning and excellent
execution, Yellow captured an immediate increase in profitable business. We're
aggressively but prudently building market share in this industry.
Just as important as the opportunity to grow, of course, is the necessity of
profitability. Here we made great progress in 2002-one reason that our income
growth outpaced revenue growth so significantly. Today, approximately 80 percent
of our cost structure is variable, which means we are much more flexible in our
ability to respond to market changes. We will continue to work hard on improving
the bottom line by controlling costs, managing our customer mix, and increasing
our emphasis on higher-growth, higher-margin premium services such as Exact
Express. Not coincidentally, Exact Express grew by 36 percent in a flat economy,
a testament to our penetration strategy.
Yellow continued to earn public recognition for its quality, technology, and
performance. In 2002, Yellow Transportation was recertified under ISO 9001:
2000, an important assessment of quality; significantly, this new certification
is a comprehensive measure of our overall operations. Our customers take comfort
from the quality they experience when dealing with Yellow, but this recognition
also provides an objective assessment of the quality we've built into our
business and that our people apply to their jobs every day.
In a tribute to our growing international capabilities, Yellow Global received
the President's "E" Award from the U.S. Department of Commerce for excellence in
export service--the nation's highest honor for exporting firms and service
organizations. Yellow continued to earn recognition for its technology prowess;
in InfoWeek magazine, we were ranked No. 8 on its list of the 500 top companies
for innovation in technology. And for the third year in a row, Yellow was
honored to be on Fortune magazine's list of "America's Most Admired Companies,"
where we were rated No. 1 in our industry for innovation and quality.
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Finally, we salute four drivers whose excellence has been recognized on a
national scale. Veteran Yellow driver James March, from Lancaster, Pennsylvania,
was the Grand Champion in the 2002 ATA Driving Championships. That marks the
second year in a row a Yellow driver has won the Grand Champion title--an
incredible achievement. Three other Yellow drivers also excelled in the events:
Dave Murphy (Boise, Idaho) and Neil Nogues (Manchester, New Hampshire) placed
first and second, respectively, in their classes. And Charlie Brown (Kansas
City, Missouri) won the competition's Professional Excellence Award for the
driver who exemplifies the highest level of professionalism and a strong
commitment to safety. While we believe every Yellow driver represents our
commitment to safety and professionalism, these four drivers' achievements are
especially noteworthy.
WHAT THE NEW YELLOW IS TODAY: ONE-STOP SHOPPING
As previously noted, the spin-off of SCS Transportation resulted in a more
focused Yellow Corporation, and the New Yellow today consists of two operating
companies, Yellow Transportation and Meridian IQ, supported by Yellow
Technologies. Together, these companies enable us to focus on our core purpose:
making global commerce work by connecting people, places, and information.
At the heart of our company is asset-based Yellow Transportation: the people,
infrastructure, and systems that help our customers get their shipments to
destinations around the world on time. For the last several years, we have
broadened the capabilities of Yellow Transportation, and now have a full range
of transportation services used by some 400,000 customers: one-stop shopping.
Every Yellow Transportation service is backed by an experienced team of
technology-enabled professionals--an incredibly important ingredient in customer
satisfaction and peace of mind. Today, more than 100,000 customers are using
MyYellow.com to place orders, track shipments, and manage billing.
Those familiar with transportation services know our business has grown in
complexity, particularly with respect to the challenge of
24
[LINE GRAPH]
Yellow Stock Performance (in dollars)
25
supply-chain management. Meridian IQ, launched in the first quarter of 2002,
provides complete transportation management solutions and state-of-the-art
technology to customers looking for supply-chain improvements and faster ROI.
Meridian IQ offers choices to business customers through flexible, scalable
web-native technology that helps them manage transportation services or allows
them to outsource the function entirely. Customers can get a Meridian IQ
solution up and running in as little as two months, considerably faster than
most competitive offerings. This growing component of the Yellow family adds
value through a seamless blending of people, expertise, and systems. As a
non-asset-based company, Meridian IQ responds to customer needs and challenges
with great speed and flexibility and will provide Yellow Corporation access to
better margins, accelerated growth, and improved return on capital.
We have consistently talked about the increased importance of the technology
component in transportation services. Our third Yellow subsidiary, Yellow
Technologies, consists of the people and the technologies that enable all our
employees to do their jobs better, to serve our customers more effectively, and
to make the business of transportation more efficient.
Three distinct components; one powerful company. That's the New Yellow. And
here's how we are going to take advantage of the opportunities we see before us.
WHAT THE NEW YELLOW WILL ACCOMPLISH
There are multiple growth opportunities ahead for Yellow. An economic
turnaround, when it occurs, will serve as a catalyst for growth. We can't
control the economy, but we can respond to economic and industry opportunities
and focus on building revenue, enhancing the bottom line, and expanding
shareholder value.
Today's Yellow Corporation has fully embraced the concept of one- stop shopping
for customers. Our much broader portfolio of services is providing more value
for our customers and, as a result, creating better returns for Yellow.
Value-added services--such as Exact Express--have
26
generated higher growth, and offer higher margins than our more traditional
services. Meridian IQ enables us to offer customers a comprehensive
transportation management solution. We'll continue to add premium services as we
identify opportunities for growth, and we'll continue to improve our efficiency
so we can deliver better service that will exceed customer expectations.
Everyone at Yellow Corporation is excited and optimistic about the future of our
company. We are excited because we see an industry that is continuing to evolve
and is still absolutely essential to the global economy. Yellow is also
continuing to transform itself to provide leadership in this critical industry.
We are optimistic because of our many strengths. Those strengths include a
comprehensive portfolio of service offerings, a global network that offers
reliability, speed, and best-in-class technology, and one of the strongest
financial positions in our history. We are also optimistic because of our team
of 23,000 people, dedicated to exceeding customer expectations. They truly bring
our "Yes We Can" attitude to life.
Thanks to Yellow employees for a job well done in 2002, thanks to our customers
for their loyalty, and thanks to our shareholders for their confidence and
support.
/s/ William D. Zollars
William D. Zollars [PHOTO OF WILLIAM D. ZOLLARS]
Chairman of the Board,
President and Chief Executive Officer
Yellow Corporation
27
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
Yellow Corporation (also referred to as "Yellow," "we" or "our") is a holding
company that through wholly owned operating subsidiaries offers its customers a
wide range of asset and non-asset-based transportation services integrated by
technology. Yellow Transportation, Inc. (Yellow Transportation) offers a full
range of regional, national and international services for the movement of
industrial, commercial and retail goods. Meridian IQ, LLC (Meridian IQ) is a
non-asset global transportation management company that plans and coordinates
the movement of goods worldwide to provide customers a single source for
transportation management solutions. Yellow Technologies, Inc. provides
innovative technology solutions and services exclusively for Yellow companies.
The following management's discussion and analysis explains the main factors
impacting our results of operations, liquidity and capital expenditures and the
critical accounting policies of Yellow. This information should be read in
conjunction with the accompanying financial statements and notes to the
financial statements.
Forward-Looking Statements
This entire annual report encompassing management's discussion and analysis and
certain statements in the Notes to Consolidated Financial Statements includes
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," "expects,"
"believes," "anticipates," "estimates" or similar expressions. Our actual
results could differ materially from those projected by these forward-looking
statements due to a number of factors, including without limitation, inflation,
labor relations, inclement weather, price and availability of fuel, competitor
pricing activity, expense volatility, changes in and customer acceptance of new
technology, changes in equity and debt markets and a downturn in general or
regional economic activity.
2002 Highlights
We initiated several strategic events that resulted in positive and significant
changes in 2002. The following either supported our strategic initiatives to
enhance our financial position, focused on our growth strategies or impacted the
business environment in which we operate.
Equity Offering
In April, we completed an equity offering of 3.9 million shares at a price of
$25.50 per share. We received $93.8 million of net proceeds from the offering.
The net proceeds were used to repay debt in order to provide capacity for
investments in our growth strategies.
28
Meridian IQ Acquisitions
In July, Meridian IQ announced that it had acquired selected assets, consisting
primarily of customer contracts, of Clicklogistics, Inc. (Clicklogistics) for
nominal cash consideration. Clicklogistics provides non-asset transportation and
logistics management services.
In August, Meridian IQ completed the acquisition of MegaSys, Inc. (MegaSys), a
Greenwood, Indiana based provider of non-asset transportation and logistics
management services, for approximately $17 million. The acquisition price
primarily related to $9.3 million of goodwill and $7.1 million of identifiable
intangible assets. As part of the acquisition, Meridian IQ negotiated an earnout
arrangement, which provides for contingent consideration to be paid by Meridian
IQ upon MegaSys generating cash flow levels in excess of an established rate of
return through December 31, 2005. If reached, the earnout amount could increase
the purchase price up to an additional $18 million. We believe the acquisition
supports our plans to grow our non-asset-based business and be a single-source
transportation provider.
Continued Consolidation Within the Industry
On September 3, the trend of consolidation within the less-than-truckload (LTL)
industry continued when Consolidated Freightways, Inc. (CF) announced it was
filing for Chapter 11 bankruptcy. CF was the third largest national LTL carrier
with 2001 annual revenue of approximately $2 billion. Yellow Transportation
followed a disciplined and proactive approach regarding the acquisition of the
former CF business by evaluating each consumer relationship based on return on
investment and available capacity. As a result of this strategic approach,
Yellow Transportation had revenue growth on an annualized basis of approximately
$300 million, with incremental margin increases on that revenue base of at least
20 percent, while maintaining its quality of service. Future revenue and margin
results could vary depending on the economy and the retention of former CF
customers.
Spin-Off of SCS Transportation, Inc.
On September 30, we successfully completed the 100 percent distribution (the
spin-off ) of all of the shares of SCS Transportation, Inc. (SCST) to our
shareholders. Shares were distributed on the basis of one share of SCST common
stock for every two shares of Yellow common stock. As part of the spin-off
agreement, SCST paid Yellow approximately $114 million in cash and assumed debt
of $16 million for a total dividend of $130 million. We used the proceeds to
reduce debt and pay fees associated with the spin-off.
We do not anticipate future obligations or liabilities in addition to those
already recorded in our financial statements related to the spin-off. As a
result of the spin-off, our financial statements have
29
Management's Discussion and Analysis of
Financial Condition and Results of Operations
been reclassified to reflect SCST as discontinued operations for all periods
presented. Results of operations discussed below will focus on results from
continuing operations unless otherwise stated.
Stronger Financial Position
We believe that each of the events above improved our financial strength and
position in the market place. We reduced our total debt, including ABS
borrowings, since December 31, 2001 by $237 million, resulting in a balance of
$124 million at December 31, 2002. A leading financial indicator in our
industry, debt to capitalization net of available cash, was a solid 21.0 percent
as of December 31, 2002, an improvement over last year's 41.1 percent. We
believe our strong financial position allows us to compete more effectively
during economic downturns and invest in our strategic initiatives. Refer to the
Financial Condition section for further details of our liquidity and capital
expenditures.
Results of Operations
Consolidated Results
The following table summarizes the Statement of Consolidated Operations for the
three years ended December 31:
Percent Change
--------------
(in millions) 2002 2001 2000 2002 vs. 2001 2001 vs. 2000
---- ---- ---- ------------- -------------
Operating Revenue $2,624.1 $2,505.1 $2,799.1 4.8% (10.5)%
Operating Income 46.9 38.2 126.7 22.8% (69.9)%
Nonoperating
Expenses, net 9.3 20.8 21.6 (55.3)% (3.7)%
Income from
Continuing Operations 24.0 10.6 61.6 126.4% (82.8)%
Income (Loss) from
Discontinued Operations (117.9) 4.7 6.4 n/m(1) (26.6)%
Net Income (Loss) $ (93.9) $ 15.3 $ 68.0 (713.7)% (77.5)%
(1) Not meaningful.
2002 compared to 2001
Our 2002 operating revenue improved over 2001, primarily as a result of
increased volumes at Yellow Transportation from growth in premium services and
increased market share from the
30
CF closure. We also recognized additional revenue with a full year of Meridian
IQ activity, including the acquisitions of Clicklogistics and MegaSys.
Operating income in 2002 included $8.4 million of unusual charges mostly related
to the spin-off of SCST. Spin-off charges represented bank fees and external
legal and accounting services. Operating income also included higher corporate
expenses in 2002 mostly related to increased incentive compensation accruals of
$2.7 million and professional services of $1.6 million. These costs along with
the spin-off charges of $6.9 million are included under "Corporate" in the
Business Segments footnote.
Nonoperating expenses improved by $11.5 million in 2002 as a result of lower
interest charges on variable-rate debt and financing costs for our asset backed
securitization (ABS) obligations, due to both lower interest rates and lower
average borrowings. In addition, nonoperating costs in 2001 included a loss of
$5.7 million for our equity investment in Transportation.com. Since September
2001, when we acquired the remaining ownership in Transportation.com, results
for this entity have been consolidated under Meridian IQ and reported as
operating income or losses.
Our effective tax rate on continuing operations for 2002 was 36.2 percent
compared to 39.0 percent in 2001. The lower tax rate resulted from a variety of
factors, including decreased nondeductible business expenses and the
implementation of prudent tax planning strategies. Our notes to the financial
statements provide an analysis of the income tax provision and the effective tax
rate.
Our net loss of $93.9 million for 2002 occurred due to the impairment of
goodwill associated with Jevic Transportation, Inc. ( Jevic) and the spin-off of
SCST. We recorded a non-cash charge of $75.2 million in the first quarter of
2002 for the impairment of goodwill related to the acquisition of Jevic. In the
third quarter of 2002, we recorded a non-cash charge of $52.6 million for the
difference between the carrying value of SCST and the fair value, as determined
by the market capitalization of SCST at the spin-off date. Due to the non-cash
nature of the charges, neither charge resulted in tax benefits. As a result of
the spin-off, both non-cash charges and income from operations of $9.9 million
for SCST are reflected in discontinued operations on our Statement of
Consolidated Operations for 2002.
2001 compared to 2000
Our 11 percent decline in operating revenue from 2000 to 2001 resulted from a
significant decrease in volumes at Yellow Transportation. The variances between
2001 and 2000 were compounded even further due to the strength of the 2000
economic environment and our record profitability in that year. The 2001
economic slowdown was characterized by a large drop-off in business volumes in a
short period of time. The significant drop in volumes, resulting in our lowest
tonnage since 1987, created excess capacity in the industry and increased
pressure on pricing.
31
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Operating income in 2001 included $5.4 million of unusual charges mostly related
to reorganization costs along with property gains and losses. The fluctuation in
unusual charges between years reduced operating income by $19.8 million, since
2000 included unusual benefits of $14.4 million as a result of significant net
property gains. The net property gains in 2000 primarily consisted of a $20.7
million pretax gain on the sale of real estate property in New York and a $6.5
million pretax loss on obsolete computer aided dispatch technology, both at
Yellow Transportation.
Yellow Transportation Results
The table below provides summary information for Yellow Transportation for the
three years ended December 31:
Percent Change
--------------
(in millions) 2002 2001 2000 2002 vs. 2001 2001 vs. 2000
---- ---- ---- ------------- -------------
Operating Revenue $ 2,547.1 $ 2,492.3 $ 2,777.8 2.2% (10.3)%
Operating Income 70.6 55.9 141.8 26.3% (60.6)%
Operating Ratio 97.2% 97.8% 94.9% 0.6pp (2.9)pp
2002 compared to 2001
As discussed under our consolidated results, Yellow Transportation realized
increased volumes in 2002 over 2001 as a result of its premium services and
market share growth from the CF closure in September. Our LTL shipment volumes
increased by 2.3 percent in 2002 from 2001. Prior to the CF closure, volumes
were flat in 2002 compared to 2001. A primary indicator of pricing, LTL revenue
per hundred weight excluding fuel surcharge, was up 1.9 percent in 2002 compared
to 2001. The increase in volume and price resulted from a disciplined approach
to reviewing customer mix and specific yield management efforts.
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 produce favorable operating results. Premium services at
Yellow Transportation include, among others, Exact Express(R), expedited and
time-definite ground service with a 100 percent satisfaction guarantee; and
Definite Delivery(R), a guaranteed on-time service with constant shipment
monitoring and notification. Consolidated Exact Express(R) revenue increased by
36 percent and Definite Delivery(R) revenue increased by 26 percent in 2002 from
2001. Yellow Transportation also offers Standard Ground(TM) Regional Advantage,
a high-speed service for shipments moving between 500 and 1,500 miles. Standard
Ground(TM) Regional Advantage revenue represented more than 23 percent of total
Yellow Transportation revenue in 2002. This service provides higher utilization
of assets by more direct loading and bypassing intermediate handling at
distribution centers.
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Yellow Transportation realized improved operating income of $14.7 million from
2001 to 2002, despite increased costs for wages and benefits, workers'
compensation and bad debt expense in 2002. Contractual wage and benefit
increases combined with higher volumes impacted expense by over $37 million.
Improved productivity and a variance in the labor mix partially offset the
increased wages. In addition, effective cost management over operating supplies
and administrative costs reduced expense by approximately $18 million from 2001.
As a result of increased costs per claim and longer duration of cases over the
past several years, the projected ultimate costs of workers' compensation claims
was higher than originally anticipated. This occurred despite the continued
improvement of safety statistics at Yellow Transportation in 2002 compared to
2001. Workers' compensation expense increased by $16.0 million in 2002 from
2001. Yellow Transportation added additional resources to manage these claims.
Bad debt expense also had a negative impact on Yellow Transportation results,
increasing by $11.5 million in 2002 from 2001. The increase resulted from a
trend of additional write-offs partially due to the negative impact of the
economy on certain customers and their ability to pay. Yellow Transportation
added additional collection personnel and enhanced its credit policies regarding
new and continuing customers.
2001 compared to 2000
Yellow Transportation operating revenue in 2001 declined significantly from 2000
due to the weak economy. The impact of a 13.5 percent decrease in shipment
volumes from 2000 to 2001 was only partially offset by a 2.9 percent improvement
in revenue per hundred weight. A general rate increase averaging 4.9 percent
went into effect August 1, 2001 on approximately half of the revenue base not
covered by contracts. The increase, partially offset by discounting and a
decreasing fuel surcharge, was the primary factor for the improved revenue per
hundred weight.
In 2001, Yellow Transportation completed implementation of a new high-speed
network started in 2000. Standard Ground(TM) Regional Advantage service made
Yellow competitive with regional carriers in two- and three-day service lanes.
The new network created operational efficiencies and the service generated
positive feedback from customers.
Effective cost management and lower business volumes allowed Yellow
Transportation to reduce operating expenses by approximately 75 percent of the
decrease in revenue for 2001. As LTL networks traditionally have high fixed
costs, this reduction was a significant improvement from prior years. Lower
business volumes and an aggressive, proactive program of staff reductions in
both the labor and management ranks resulted in 7.0 percent lower salaries,
wages and benefits expense, more than offsetting wage and benefit cost
increases. Curtailing discretionary spending and modifying operating procedures
to improve load average and increase direct loading achieved further savings.
33
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Meridian IQ Results
Meridian IQ was formed in January of 2002, and formally launched in March, as
the Yellow platform for non-asset-based transportation services. Meridian IQ
provides a wide range of transportation solutions and offers the following
services: International Forwarding and Customs Brokerage by arranging for the
administration, transportation and delivery of goods to over 88 countries;
Multi-modal Brokerage Services by providing companies with access to volume
capacity and specialized equipment; Domestic Forwarding and Expedited Services
through arranging guaranteed, time definite transportation for companies within
North America; and Transportation Solutions and Technology Management using
web-native systems enabling customers to manage their transportation needs.
Due to the recent formation of Meridian IQ, we evaluated 2002 results based on
sequential growth month over month. Net operating revenue for 2002 was $81.8
million and operating losses were $2.7 million. Meridian IQ had consistent
revenue and operating income improvement, with modestly profitable results in
the second half of 2002. Meridian IQ results were consistent with our
expectations for this newly formed entity.
In September 2001, we completed the acquisition of the remaining ownership in
Transportation.com from our venture capital partners. Prior to the acquisition,
we accounted for our investment in Transportation.com as an unconsolidated joint
venture under the equity method of accounting. Accordingly, nonoperating
expenses included losses of $5.7 million and $3.3 million in 2001 and 2000,
respectively. As of the acquisition date, we consolidated Transportation.com, as
well as our other non-asset-based services, under Meridian IQ.
Financial Condition
Liquidity
Our liquidity needs arise primarily from capital investment in new equipment,
land and structures, and information technology, as well as funding working
capital requirements. To provide short-term and longer-term liquidity, we
maintain capacity under a bank credit agreement and an ABS agreement involving
Yellow Transportation accounts receivable. We believe these facilities provide
adequate capacity to fund current working capital and capital expenditure
requirements. It is not unusual for us to have a deficit working capital
position, as we can operate in this position due to rapid turnover of accounts
receivable, effective cash management and ready access to funding.
34
Bank Credit Agreement
We maintain a $300 million bank credit agreement scheduled to expire in April
2004. In addition to funding short-term liquidity needs, we also use the
facility to provide letters of credit that reduce available borrowings under the
credit agreement. Letters of credit serve as collateral for our self-insurance
programs, primarily in the areas of workers' compensation and bodily injury and
property damage. Collateral requirements for letters of credit increased
significantly in 2002 as insurance providers responded to the events of
September 11, 2001 and the bankruptcies of several large companies. In addition,
the availability of surety bonds, an alternative form of self-insurance
collateral, decreased due to the same factors. The price and availability of
surety bonds fluctuates over time with general conditions in the insurance
market. In 2002, the lack of availability of surety bonds resulted in the need
for us to issue additional letters of credit. The following table summarizes the
availability under the bank credit agreement as of December 31 for each period
presented:
(in millions) 2002 2001
------- -------
Total capacity $ 300.0 $ 300.0
Outstanding borrowings -- (85.0)
Letters of credit (146.2) (89.9)
------- -------
Available unused capacity $ 153.8 $ 125.1
======= =======
Our outstanding letters of credit at December 31, 2002 included $10.6 million
for property damage and workers' compensation claims against SCST. Yellow agreed
to maintain the letters of credit outstanding at the spin-off date until SCST
obtained replacement letters of credit or third party guarantees. SCST agreed to
use its reasonable best efforts to obtain these letters of credit or guarantees,
which in many cases would allow Yellow to obtain a release of its letters of
credit. SCST also agreed to indemnify Yellow for any claims against the letters
of credit provided by Yellow. SCST reimburses Yellow for all fees incurred
related to the remaining outstanding letters of credit. We also provide a
guarantee of $6.6 million regarding certain lease obligations of SCST.
Asset Backed Securitization Facility
Our ABS facility provides us with additional liquidity and lower borrowing costs
through access to the asset backed commercial paper market (ABCP). By using the
ABS facility, we obtain a variable rate based on the A1 commercial paper rate
plus a fixed increment for utilization and administration fees. A1 rated
commercial paper comprises more than 90 percent of the commercial paper market,
significantly increasing our liquidity. We averaged a rate of 2.3 percent on the
ABS facility in 2002.
35
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Process for the ABS
Borrowing under our ABS facility involves two primary steps. In the first step,
Yellow Transportation sells an ongoing pool of receivables to a special purpose
entity, Yellow Receivables Corporation (YRC). YRC is a wholly owned consolidated
subsidiary of Yellow Transportation designed to isolate the receivables for
bankruptcy purposes.
As the second step, YRC transfers the receivables to a conduit administered by a
large financial institution. The conduit bundles the receivables from Yellow and
numerous unrelated companies and then sells them to investors as ABCP. The
conduit receives the proceeds from investors and forwards them to YRC who then
forwards the proceeds to Yellow Transportation. Repayments of these obligations,
along with related charges, occur in the reverse sequence of the steps just
described.
The table below provides the borrowing and repayment activity, as well as the
resulting balances, for the years ending December 31 of each period presented:
(in millions) 2002 2001
------- -------
ABS obligations outstanding at January 1 $ 141.5 $ 177.0
Transfer of receivables to conduit (borrowings) 421.5 152.0
Redemptions from conduit (repayments) (513.0) (187.5)
------- -------
ABS obligations outstanding at December 31 $ 50.0 $ 141.5
======= =======
Our ABS facility involves receivables of Yellow Transportation only and has a
limit of $200 million. Under the terms of the agreement, Yellow Transportation
provides servicing of the receivables and retains the associated collection
risks. Although the facility has no stated maturity, there is an underlying
letter of credit with the administering financial institution that has a 364-day
maturity.
Accounting for the ABS
Prior to December 31, 2002, activity under the ABS facility was treated as a
sale of assets for financial reporting purposes. As a result, we did not reflect
the receivables sold by YRC to the conduit and the related ABS obligations on
our Consolidated Balance Sheets. However, we provided this information in the
notes to the financial statements and management's discussion and analysis when
discussing our financial position.
36
On December 31, 2002, we amended the ABS agreement to provide YRC the right to
repurchase, at any time, 100 percent of the receivable interests held by the
conduit. Prior to the amendment, the right to repurchase receivable interests
was limited to instances when ABS borrowings were below $10 million, or 5
percent of the $200 million limit. The amendment does not alter the costs
associated with operating the ABS facility. Due to the amendment, we will
reflect the ABS activity as a financing activity rather than a sale of assets.
This will result in changes to our financial reporting as summarized in the
following table:
At December 31, 2002 and Prior to the December 31,
Financial Statement for the periods thereafter 2002 amendment
- ------------------- -------------------------- -------------------------
Consolidated Receivables transferred Receivables sold by YRC
Balance Sheets will be reflected under to the conduit were not
"Accounts receivable" reflected
Consolidated Amounts borrowed will be Amounts borrowed were
Balance Sheets reflected as current not reflected
liabilities
under "ABS borrowings"
Statements of ABS facility charges will Reflected as "ABS facility
Consolidated Operations be reflected as "Interest charges" in nonoperating
expense" expenses
Statements of Financing activities will Operating activities were
Consolidated Cash Flows increase by the amount of increased by the amount of
ABS borrowings and receivables sold and
decrease by the amount decreased by the amount
of repayments of repayments
We believe that reflecting the assets and liabilities associated with the ABS
facility on our financial statements makes it easier for investors to understand
our financial position. If the ABS had been reflected on our December 31, 2001
balance sheet, accounts receivable would have been $266.4 million compared to
the December 31, 2002 balance of $327.9 million. Total debt including the ABS
obligations would have been $361.5 million at December 31, 2001 compared to
$124.3 million at December 31, 2002.
37
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Free Cash Flow
We use free cash flow as a measurement to manage working capital and capital
expenditures. Free cash flow indicates excess cash available to fund additional
capital expenditures, to reduce outstanding debt, or to invest in our growth
strategies. 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 years ended
December 31:
(in millions) 2002 2001
------- -------
Net cash from operating activities $ 43.1 $ 88.3
Net change in operating activities of discontinued (17.3) (76.1)
operations
Accounts receivable securitizations, net 91.5 35.5
Net property and equipment acquisitions (82.8) (81.4)
Proceeds from stock options 13.7 16.6
------- -------
Free cash flow $ 48.2 $ (17.1)
======= =======
The improvement of $65.3 million in free cash flow from 2001 to 2002 resulted
primarily from increases in income from continuing operations of $13.4 million,
claims and insurance of $18.1 million, accounts payable of $19.6 million and
other working capital fluctuations of $136.0 million. Increased accounts
receivable, resulting from higher revenue levels in 2002 compared to 2001, of
$93.7 million mostly offset the improvements. Deferred income taxes also reduced
free cash flow by $15.3 million from 2001 to 2002. The remaining variance of
$12.8 million largely consisted of changes in stock option proceeds and equity
investments.
Other working capital fluctuations resulted primarily from performance incentive
accruals, income tax refunds and prefunded benefit contributions. Incentive
accruals accounted for $44.0 million of the fluctuation between 2001 and 2002.
Due to favorable operating results in 2000, cash incentives of $30.0 million
were paid in 2001, causing a decrease in our free cash flow. In 2002, we did not
pay cash incentives related to 2001 operating results but did accrue $14.0
million, payable in early 2003, for 2002 performance. We increased the funding
of our prefunded benefit contribution by $15.0 million in 2001 from 2000. We
also accrued a receivable for income tax refunds of $10.5 million in 2001 that
we received in 2002, resulting in a $21.0 million variance.
The items discussed above impact net cash from operating activities in addition
to free cash flow. Other variances included in net cash from operating
activities were changes in accounts receivable securitizations related to our
ABS facility and net operating activities of discontinued operations. In 2001,
we reduced ABS obligations by $35.5 million. In 2002, we reduced ABS obligations
by $91.5
38
million, thereby repaying $56.0 million more in 2002 than 2001. Changes in
operating activities of discontinued operations relate to SCST activity until
the spin-off. The variance primarily results from nine months of activity
compared to twelve months and changes in accounts receivable and accounts
payable of approximately $33 million.
Nonunion Pension Obligations
We provide defined benefit pension plans for employees not covered by collective
bargaining agreements, or approximately 4,000 employees. Increases in our
pension benefit obligations combined with market losses in 2002 and 2001 have
negatively impacted the funded status of our plans, resulting in additional
funding and expense over the next several years. Due to these same factors, we
recorded an adjustment in 2002 to shareholders' equity of $30.8 million, net of
tax of $17.2 million, to reflect the minimum liability associated with the
plans. As we record the additional pension expense, we expect the minimum
liability reflected in shareholders' equity to decrease, as reflected in the
table below. Using our current plan assumptions of a 9.0 percent return on
assets and discount rate of 6.75 percent, we either recorded or expect to record
the following:
Shareholders'
Cash Pension Equity Increase/
(in millions) Funding Expense (Decrease)
------- ------- ----------------
2002 Actual $11.5 $14.4 $(30.8)
2003 Expected 35.0 24.0 2.5
2004 Expected 25.0 28.8 5.9
Credit Ratings
We have investment grade credit ratings, with stable outlooks, of Baa3 from
Moody's and BBB from Standard & Poor's. We expect to maintain investment grade
status for the foreseeable future. However, in the unlikely event we were to be
rated below investment grade, no ratings-driven triggers exist that would have
an immediate or material adverse impact on our liquidity.
Capital Expenditures
Our capital expenditures focus primarily on the replacement of revenue
equipment, land and structures, and additional investments in information
technology and acquisitions. As reflected on our Consolidated Balance Sheets,
our business remains capital intensive with significant investments in terminal
facilities and a fleet of tractors and trailers. We determine the amount and
timing of capital expenditures based on numerous factors, including anticipated
growth, economic conditions, new or expanded services, regulatory actions and
availability of financing.
39
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The table below summarizes our actual net capital expenditures by type:
(in millions) 2002 2001 2000
- ------------- ---- ---- ----
Revenue equipment $ 72 $ 58 $ 72
Land, structures and technology 11 23 (1)
Acquisitions 18 20 5
---- ---- -----
Total excluding discontinued $101 $101 $ 76
Discontinued operations 24 20 59
---- ---- -----
Total $125 $121 $ 135
==== ==== =====
Capital expenditures for 2002 included the Meridian IQ acquisitions of MegaSys
and Clicklogistics for a total of $18 million. We expect 2003 capital spending
to approximate $100 to $110 million, including about $65 million for replacement
of revenue equipment. Our philosophy is to consistently fund capital
expenditures even during economic downturns while still generating free cash
flow. We believe our strong financial condition and access to capital, as they
exist today, are adequate to fund our anticipated capital expenditures and
future growth opportunities.
Our expectation regarding our ability to fund our capital expenditures out of
existing financing facilities and cash flow is only our forecast regarding this
matter. This forecast may be substantially different from actual results. In
addition to the factors previously described in "Forward-Looking Statements",
the following factors could affect levels of capital expenditures: the accuracy
of our estimates regarding our spending requirements; the occurrence of any
unanticipated acquisition opportunities; changes in our strategic direction; and
the need to replace any unanticipated losses in capital assets.
Contractual Obligations and Other Commercial Commitments
The following tables provide aggregated information regarding our contractual
obligations and commercial commitments as of December 31, 2002. Most of these
obligations and commitments have been discussed in detail either in the
preceding paragraphs or the notes to the financial statements.
40
Contractual Cash Obligations
Payments Due by Period
-------------------------------------------------
Less than 2-3 4-5 After
(in millions) 1 year years years 5 years Total
- ------------- ------ ----- ----- ------- -----
Balance sheet obligations:
ABS borrowings $ 50.0 $ -- $ -- $ -- $ 50.0
Long-term debt 24.3 32.5 7.0 10.5 74.3
Off-balance sheet obligations:
Operating leases 26.2 31.6 7.1 5.6 70.5(1)
------ ------ ------ ------ ------
Total contractual
obligations $100.5 $ 64.1 $ 14.1 $ 16.1 $194.8
====== ====== ====== ====== ======
(1) The net present value of operating leases, using a discount rate of 10
percent, was $56.3 million at December 31, 2002.
Other Commercial Commitments
The following table reflects other commercial commitments or potential cash
outflows that may result from a contingent event.
Amount of Commitment Expiration Per Period
------------------------------------------
Less
than After
(in millions) 1 year 2-3 years 4-5 years 5 years Total
- ------------- ------ --------- --------- ------- -----
Available line of credit $ -- $153.8(1) $ -- $ -- $153.8
Letters of credit 146.2 -- -- -- 146.2
Lease guarantees for SCST 3.1 2.5 1.0 -- 6.6
Surety bonds 54.7 0.3 1.2 -- 56.2
------ ------ ------ ------ ------
Total commercial
commitments $204.0 $156.6 $ 2.2 $ -- $362.8
====== ====== ====== ====== ======
(1) The line of credit renews in April 2004. Although we have no assurance we
will be able to renew the facility, we expect to begin the renewal process
well in advance of the expiration and we believe other sources of funding
are readily available.
41
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Market Risk Position
We have exposure to a variety of market risks, including the effects of interest
rates, foreign currency exchange rates and fuel prices.
Interest Rate Risk
To provide adequate funding through seasonal business cycles and minimize
overall borrowing costs, we utilize both fixed rate and variable rate financial
instruments with varying maturities. At December 31, 2002, we had approximately
40 percent of our debt at variable rates with the balance at fixed rates. We use
an interest rate swap to hedge our exposure to variable interest rates. We
hedged 100 percent of our variable debt under the swap agreement at December 31,
2002.
The table below provides information regarding our interest rate risk as of
December 31, 2002. For fixed-rate debt, principal cash flows are stated in
millions and weighted average interest rates are by contractual maturity. The
fair value of fixed-rate debt has been estimated by discounting the principal
and interest payments at current rates available for debt of similar terms and
maturity. The fair value of variable-rate debt is estimated to approximate the
carrying amounts due to the fact that the interest rates are generally set for
periods of three months or less, and is excluded from the following table. For
the interest rate swap, the table presents the notional amount and contractual
interest rate.
There- Fair
(in millions) 2003 2004 2005 2006 2007 after Total Value
- ------------- ---- ---- ---- ---- ---- ----- ----- -----
Fixed-rate debt $ 24.3 $ 16.1 $ 16.4 $ 7.0 $ 0.0 $ 10.5 $ 74.3 $ 81.5
Average interest rate 6.00% 6.77% 6.58% 6.71% -- 6.06%
Interest rate swap:
Notional amount $ 50.0(1) -- -- -- -- -- $ 50.0 $ 52.3
Avg. pay rate (fixed) 6.06% -- -- -- -- --
Avg. receive rate
(variable) 1.38% -- -- -- --
(1) Interest rate swap on the ABS facility. The variable rate is based on the
3-month LIBOR as of December 31, 2002.
Foreign Currency Exchange Rates
Revenue, operating expenses, assets and liabilities of our Canadian and Mexican
subsidiaries are denominated in local currencies, thereby creating exposure to
fluctuations in exchange rates. The risks related to foreign currency exchange
rates are not material to our consolidated financial position or results of
operations.
42
Fuel Price Volatility
Yellow Transportation has an effective fuel surcharge program in place. These
programs are well established within the industry and customer acceptance of
fuel surcharges remains high. Since 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.
Critical Accounting Policies
Preparation of our financial statements requires accounting policies that
involve significant estimates and judgments regarding the amounts included in
the financial statements and disclosed in the accompanying notes to the
financial statements. We continually review the appropriateness of our
accounting policies and the accuracy of our estimates. Even with a thorough
process, estimates must be adjusted based on changing circumstances and new
information. Management has identified the policies described below as requiring
significant judgment and having a potential material impact to our financial
statements.
Revenue Reserves
We consider revenue-related reserves critical policies based on their
significance in evaluating our financial performance by management and
investors. We have an extensive system that allows us to accurately capture,
record and control all relevant information necessary to effectively manage our
revenue reserves. For shipments in transit, Yellow Transportation records
revenue based on the percentage of service completed as of the period end and
accrues delivery costs as incurred. Meridian IQ recognizes revenue upon the
completion of services. In certain logistics transactions where Meridian IQ acts
as an agent, revenue is recorded on a net basis. Net revenue represents revenue
charged to customers less third party transportation costs. Where Meridian IQ
acts as principal, it records revenue from these transactions on a gross basis,
without deducting transportation costs. Management believes these policies most
accurately reflect revenue as earned.
Our revenue-related reserves involve three primary estimates, shipments in
transit, rerate reserves, and uncollectible accounts.
Shipments In Transit
We assign pricing to bills of lading at the time of shipment based on the
weight, general classification of the product, the shipping destination and
individual customer discounts. At the end of each period, we estimate the amount
of revenue earned on shipments in transit based on actual shipments picked up
and scheduled delivery dates. We calculate a percentage of completion using this
data and
43
Management's Discussion and Analysis of
Financial Condition and Results of Operations
the day of the week on which the period ends. Management believes this provides
a reasonable estimation of the revenues actually earned. Revenue deferred for
shipments in transit amounted to $22.2 million and $18.8 million at December 31,
2002 and 2001, respectively.
Rerate Reserves
At various points throughout our process, incorrect ratings could be identified
based on many factors, including weight verifications or updated customer
discounts. Although the majority of rerating occurs in the same month as the
original rating, a portion occurs during the following periods. We accrue a
liability for rerating based on historical trends. At December 31, 2002 and
2001, our financial statements included a rerate reserve of $12.0 million and
$14.1 million, respectively.
Uncollectible Accounts
We record an allowance for doubtful accounts primarily based on historical
uncollectible amounts. We also take into account known factors surrounding
specific customers and overall collection trends. Our process involves
performing ongoing credit evaluations of customers, including the market in
which they operate and the overall economic conditions. Historical trends are
continually reviewed with adjustments made to the allowance for doubtful
accounts as appropriate. Our allowance for doubtful accounts totaled $15.7
million and $7.7 million as of December 31, 2002 and 2001, respectively.
Claims and Insurance
We are self-insured up to certain limits for workers' compensation, cargo loss
and damage, property damage and liability claims. We measure the liabilities
associated with these claims primarily through actuarial methods performed by an
independent third party. Actuarial methods include estimates for the
undiscounted liability for claims reported and for claims incurred but not
reported. These estimates are based on historical loss experience and judgments
about the present and expected levels of costs per claim and the time required
to settle claims. Actual claims may vary from these estimates due to a number of
factors, including but not limited to, accident frequency and severity, claims
management, changes in healthcare costs and overall economic conditions. For
workers' compensation claims, we discount the actuarial calculations to present
value based on the U.S. Treasury rate, at the date of occurrence, for maturities
that match the expected payout of the liabilities. As of December 31, 2002 and
2001, we had $115.2 million and $110.3 million accrued for claims and insurance,
including a present value for workers' compensation claims of $80.5 million and
$75.4 million, respectively.
Pension Cost
Yellow and Yellow Transportation sponsor defined benefit pension plans for
employees not covered by collective bargaining agreements. Meridian IQ does not
offer a defined benefit pension plan and
44
instead offers retirement benefits through a contributory 401(k) savings plan.
We account for pension benefits using actuarial methods based on numerous
estimates, including employee turnover, mortality and retirement ages, expected
return on plan assets, discount rates, and future salary increases. The most
critical of these factors, due to their potential impact on pension cost, are
discussed in more detail below.
Return on Plan Assets
The return on plan assets represents a long-term assumption of our portfolio
performance that can impact our pension expense and cash funding requirements.
With $249 million of plan assets, a 50-basis-point decrease in the return rate
would increase annual pension expense by approximately $1.4 million and increase
cash funding requirements by $31.0 million over a five year period.
We believe our 2002 expected rate of return of 9.0% accurately represents our
investment portfolio that has performed to this level over time. Although plan
investments are subject to short-term market volatility, we believe they are
well diversified and closely managed. Our asset allocation as of December 31,
2002 consisted of 65 percent in equities, including 50 percent domestic and 15
percent international, and 35 percent in fixed-income securities. This
allocation is consistent with the long-term asset allocation for the plan. We
will continue to review our expected long-term rate of return on an annual basis
and revise appropriately. Refer to our discussion of "Nonunion Pension
Obligations" under the Financial Condition section for details of actual and
anticipated pension charges.
Discount Rate
The discount rate refers to the interest rate used to discount the estimated
future benefit payments earned to their present value, also referred to as the
benefit obligation. The discount rate allows us to calculate what it would cost
to settle the pension obligations as of the measurement date, December 31, and
impacts the following year's pension cost. We determine the discount rate based
on high-grade corporate bonds with principal payments and maturities that
approximate our expected benefit payments.
Although the discount rate used requires little judgment, changes in the rate
can significantly impact our pension cost. For example, a 50-basis-point
decrease in our discount rate would increase annual pension expense by
approximately $6.4 million, assuming all other factors remain constant. Changes
in the discount rate do not have a direct impact on cash funding requirements.
The discount rate can fluctuate considerably over periods depending on overall
economic conditions that impact long-term corporate bond yields. As of December
31, 2002 and 2001, we used a discount rate of 6.75 percent and 7.25 percent,
respectively.
45
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Future Salary Increases
We make assumptions of future salary increases for plan participants based on
general inflation and cost of living expectations. As pension benefits are based
on participants earned wages, estimated levels of our future performance also
factor into the calculation. We believe these increases require less judgment
than other pension estimates but can have a significant impact on our future
pension cost. Our 2002 assumed rate of future annual increases of 4.5 percent
reflects our recent experience and remains consistent with prior years.
Property and Equipment
We capitalize property and equipment in accordance with current accounting
standards, including replacements and improvements when such costs extend the
useful life of the asset. Maintenance and repairs are charged to expense as
incurred. Depreciation on capital assets is computed using the straight-line
method and ranges from 3 to 40 years. Management makes assumptions regarding
future conditions in determining estimated useful lives and potential salvage
values. These assumptions impact the amount of depreciation expense recognized
in the period and any gain or loss once the asset is disposed.
New Accounting Pronouncements
Statement of Financial Accounting Standards (SFAS) No. 143
On January 1, 2003, we will adopt SFAS No. 143, Accounting for Asset Retirement
Obligations (Statement No. 143). Statement No. 143 requires that the fair value
of a liability for an asset retirement obligation be recognized in the period in
which it is incurred. We do not expect adoption of Statement No. 143 to have a
material impact on our financial position or results of operations.
SFAS No. 146
On January 1, 2003, we will adopt SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities (Statement No. 146). Statement No. 146 requires
the recognition of a liability for costs associated with an exit or disposal
activity at the time the liability is incurred. Previous accounting standards
required liability recognition at the date of an entity's commitment to an exit
plan. Based on current strategic plans, we do not expect adoption of Statement
No. 146 to have a material impact on our financial position or results of
operations.
46
SFAS No. 148
On December 15, 2002, we adopted the disclosure provisions of SFAS No. 148,
Accounting for Stock Based Compensation - Transition and Disclosure (Statement
No. 148). Statement No. 148 amends SFAS No. 123, Accounting for Stock Based
Compensation (Statement No. 123), to provide alternative methods of transition
for entities that voluntarily change to the fair value based method of
accounting for stock-based employee compensation. It also amends the disclosure
provisions of Statement No. 123 to require prominent and interim disclosures
regarding the pro forma effects on reported net income in regards to stock-based
compensation.
Outlook
Economic Forecast
Economists estimate that the economy is moving toward firmer ground but expect
it to remain flat for most of 2003. Management expects our pricing environment
to remain competitive, yet stable, during 2003. We will continue to focus on
cost control, productivity improvements and value-added services. By leveraging
the additional business volumes resulting from the CF closure, premium services
and Meridian IQ, we are well positioned to take advantage of improved economic
conditions when they occur.
Labor Negotiations
The National Master Freight Agreement covering Yellow Transportation
collective-bargaining employees expires on March 31, 2003. Yellow Transportation
began formal labor negotiations with the International Brotherhood of Teamsters
in October 2002, with a goal to renegotiate the agreement prior to its
expiration. Failure to reach an agreement prior to the expiration of the
contract could have a significant impact on our financial condition and results
of operations. The agreement covers approximately 80 percent of Yellow
Transportation employees.
Regulatory Changes
In October 2002, the Environmental Protection Agency issued new engine emission
standards that apply to heavy-duty vehicles. Yellow Transportation is testing
several units for fuel economy, reliability and performance standards. As Yellow
Transportation uses tractors an average of seven years over the road and then
converts them to city use for another seven to eight years, the emission
standards are not expected to have a material impact on our capital expenditures
or operating expenses in 2003.
47
Financial Summary
Yellow Corporation and Subsidiaries
(in thousands except per share data) 2002
- ------------------------------------ ----
For the Year (a)
Operating revenue $ 2,624,148
Operating income 46,864
Interest expense 7,211
ABS facility charges 2,576
Income from continuing operations (after tax) 23,973
Net income (loss) (93,902)
Unusual items expense (income) 8,435
Depreciation and amortization expense 79,334
Net capital expenditures, excluding discontinued operations 82,830
Net cash from operating activities, excluding discontinued operations 25,808
Free cash flow 48,182
-----------
At Year-End
Net property and equipment 564,976
Total assets 1,042,985
Long-term debt, less current portion 50,024
Total debt, including ABS facility 124,285
Total shareholders' equity 359,958
-----------
Measurements
Diluted per share data:
Income from continuing operations 0.84
Net income (loss) (3.31)
Average common shares outstanding - diluted 28,371
Return on committed capital, excluding discontinued operations 7.1%
Debt to capitalization 21.0%
Shareholders' equity per share $ 12.17
Common stock price range:
High 32.21
Low 18.31
-----------
Other Data
Average number of employees 23,000
Yellow Transportation operating ratio 97.2%
===========
48
2001 2000 1999 1998
---- ---- ---- ----
(b) (c)
$ 2,505,070 $ 2,799,131 $2,632,337 $ 2,492,617
38,195 126,747 76,026 60,188
8,437 10,131 6,086 2,656
7,996 10,052 8,252 4,355
10,589 61,605 38,746 32,017
15,301 68,018 50,915 (28,669)
5,415 (14,372) 341 (4,287)
76,977 78,587 76,904 83,980
81,435 70,689 96,169 49,469
12,189 151,592 206,705 134,636
(17,108) 45,887 19,639 61,252
- ----------- ----------- ---------- -----------
559,532 554,150 547,139 535,589
1,285,777 1,308,477 1,325,583 1,105,685
213,745 136,645 274,015 156,988
361,526 382,437 411,407 200,065
490,989 459,776 409,380 371,252
- ----------- ----------- ---------- -----------
0.43 2.49 1.54 1.19
0.62 2.74 2.02 (1.06)
24,679 24,787 25,168 26,920
5.8% 15.3% 11.4% 7.4%
41.1% 44.0% 48.9% 32.5%
$ 19.75 $ 19.32 $ 16.44 $ 14.46
27.57 22.13 19.63 29.88
15.50 13.81 14.38 9.69
- ----------- ----------- ---------- -----------
30,000 32,900 31,200 29,700
97.8% 94.9% 96.7% 97.3%
=========== =========== ========== ===========
- ----------
Notes
(a) In 2002, the company completed the spin-off of SCS Transportation, Inc.
(SCST). Financial Summary data has been reclassified for all periods
presented to disclose SCST as a discontinued operation.
(b) In September 2001, the company completed its acquisition of
Transportation.com. The results of operations include Transportation.com
from the acquisition date.
(c) In 1998, the company sold Preston Trucking Company, Inc. All selected
financial data has been restated to disclose Preston Trucking as a
discontinued operation.
49
Consolidated Balance Sheets
Yellow Corporation and Subsidiaries December 31, 2002 and 2001
(in thousands except per share data) 2002 2001
- ------------------------------------ ---- ----
Assets
Current Assets:
Cash and cash equivalents $ 28,714 $ 19,214
Accounts receivable, less allowances of $15,731 and $7,695 327,913 124,880
Prepaid expenses and other 68,726 75,858
Current assets of discontinued operations -- 92,458
----------- -----------
Total current assets 425,353 312,410
----------- -----------
Property and equipment, net of accumulated
depreciation of $1,114,120 and $1,096,766 564,976 559,532
Goodwill and other assets 52,656 15,345
Noncurrent assets of discontinued operations -- 398,490
----------- -----------
Total assets $ 1,042,985 $ 1,285,777
=========== ===========
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 114,989 $ 97,528
Wages, vacations, and employees' benefits 159,998 103,990
Other current and accrued liabilities 101,111 96,740
ABS borrowings 50,000 --
Current maturities of long-term debt 24,261 6,281
Current liabilities of discontinued operations -- 64,669
----------- -----------
Total current liabilities 450,359 369,208
----------- -----------
Long-term debt, less current portion 50,024 213,745
Claims and other liabilities 182,644 144,194
Noncurrent liabilities of discontinued operations -- 67,641
Commitments and contingencies
Shareholders' Equity:
Common stock, $1 par value per share-authorized 120,000 shares,
issued 31,825 and 31,028 shares 31,825 31,028
Capital surplus 80,610 41,689
Retained earnings 325,474 537,496
Accumulated other comprehensive loss (35,596) (6,252)
Unamortized restricted stock awards (1,053) --
Treasury stock, at cost (2,244 and 6,163 shares) (41,302) (112,972)
----------- -----------
Total shareholders' equity 359,958 490,989
----------- -----------
Total liabilities and shareholders' equity $ 1,042,985 $ 1,285,777
=========== ===========
The notes to consolidated financial statements are an integral part of these
statements.
50
Statements of Consolidated Operations
Yellow Corporation and Subsidiaries for the years ended December 31
(in thousands except per share data) 2002 2001 2000
- ------------------------------------ ---- ---- ----
Operating Revenue $ 2,624,148 $ 2,505,070 $ 2,799,131
----------- ----------- -----------
Operating Expenses:
Salaries, wages and employees' benefits 1,717,382 1,638,662 1,767,926
Operating expenses and supplies 385,522 398,054 431,336
Operating taxes and licenses 75,737 75,637 81,259
Claims and insurance 57,197 56,999 61,535
Depreciation and amortization 79,334 76,977 78,587
Purchased transportation 253,677 215,131 266,113
Unusual items expense (income) 8,435 5,415 (14,372)
----------- ----------- -----------
Total operating expenses 2,577,284 2,466,875 2,672,384
----------- ----------- -----------
Operating Income 46,864 38,195 126,747
----------- ----------- -----------
Nonoperating (Income) Expenses:
Interest expense 7,211 8,437 10,131
ABS facility charges 2,576 7,996 10,052
Interest income (843) (1,198) (1,003)
Loss on equity method investment -- 5,741 3,329
Other, net 334 (140) (889)
----------- ----------- -----------
Nonoperating expenses, net 9,278 20,836 21,620
----------- ----------- -----------
Income From Continuing Operations
Before Income Taxes 37,586 17,359 105,127
Income Tax Provision 13,613 6,770 43,522
----------- ----------- -----------
Income From Continuing Operations 23,973 10,589 61,605
----------- ----------- -----------
Income (loss) from discontinued operations, net (117,875) 4,712 6,413
----------- ----------- -----------
Net Income (Loss) $ (93,902) $ 15,301 $ 68,018
----------- ----------- -----------
Average Common Shares Outstanding - Basic 28,004 24,376 24,649
----------- ----------- -----------
Average Common Shares Outstanding - Diluted 28,371 24,679 24,787
----------- ----------- -----------
Basic Earnings (Loss) Per Share:
Income from continuing operations $ 0.86 $ 0.44 $ 2.50
Income (loss) from discontinued operations (4.21) 0.19 0.26
----------- ----------- -----------
Net income (loss) $ (3.35) $ 0.63 $ 2.76
----------- ----------- -----------
Diluted Earnings (Loss) Per Share:
Income from continuing operations $ 0.84 $ 0.43 $ 2.49
Income (loss) from discontinued operations (4.15) 0.19 0.25
----------- ----------- -----------
Net income (loss) $ (3.31) $ 0.62 $ 2.74
=========== =========== ===========
The notes to consolidated financial statements are an integral part of
these statements.
51
Statements of Consolidated Cash Flows
Yellow Corporation and Subsidiaries for the years ended December 31
(in thousands) 2002 2001 2000
--------- --------- ---------
Operating Activities:
Net income (loss) $ (93,902) $ 15,301 $ 68,018
Noncash items included in net income (loss):
Depreciation and amortization 79,334 76,977 78,587
Loss (income) from discontinued operations 117,875 (4,712) (6,413)
Loss on equity method investment -- 5,741 3,329
Deferred income tax provision 1,449 16,746 9,606
(Gains) losses from property disposals, net 425 (186) (14,372)
Changes in assets and liabilities, net:
Accounts receivable (49,633) 44,041 (7,885)
Accounts receivable securitizations (91,500) (35,500) 42,000
Accounts payable 5,928 (13,704) 7,116
Other working capital items 38,468 (97,532) (14,257)
Claims and other 14,386 (3,742) (11,107)
Other 2,978 8,759 (3,030)
Net change in operating activities of
discontinued operations 17,250 76,106 74,157
--------- --------- ---------
Net cash from operating activities 43,058 88,295 225,749
--------- --------- ---------
Investing Activities:
Acquisition of property and equipment (86,337) (88,022) (100,577)
Proceeds from disposal of property and equipment 3,507 6,587 29,888
Acquisition of companies (18,042) (14,300) --
Other -- (5,830) (5,114)
Net capital expenditures of discontinued operations (24,372) (19,619) (59,034)
--------- --------- ---------
Net cash used in investing activities (125,244) (121,184) (134,837)
--------- --------- ---------
Financing Activities:
Unsecured bank credit lines, net (85,000) 25,000 (40,000)
Repayment of long-term debt (44,600) (10,412) (31,045)
Dividend from subsidiary upon spin-off 113,790 -- --
Proceeds from exercise of stock options 13,704 16,638 6,984
Treasury stock purchases -- -- (24,997)
Proceeds from issuance of common stock 93,792 -- --
--------- --------- ---------
Net cash provided by (used in) financing activities 91,686 31,226 (89,058)
--------- --------- ---------
Net Increase (Decrease) In Cash and Cash Equivalents 9,500 (1,663) 1,854
Cash and Cash Equivalents, Beginning Of Year 19,214 20,877 19,023
--------- --------- ---------
Cash and Cash Equivalents, End Of Year $ 28,714 $ 19,214 $ 20,877
========= ========= =========
The notes to consolidated financial statements are an integral part of these
statements.
52
Statements of Consolidated Shareholders' Equity
Yellow Corporation and Subsidiaries for the years ended December 31
(in thousands) 2002 2001 2000
--------- --------- ---------
Common Stock
Beginning balance $ 31,028 $ 29,959 $ 29,437
Exercise of stock options 737 1,063 516
Other 60 6 6
--------- --------- ---------
Ending Balance 31,825 31,028 29,959
--------- --------- ---------
Capital Surplus
Beginning balance 41,689 23,304 16,063
Exercise of stock options, including tax benefits 15,296 18,286 7,130
Equity offering and other 23,625 99 111
--------- --------- ---------
Ending balance 80,610 41,689 23,304
--------- --------- ---------
Retained Earnings
Beginning balance 537,496 522,195 454,177
Stock dividend to SCST shareholders (118,120) -- --
Net income (loss) (93,902) 15,301 68,018
--------- --------- ---------
Ending balance 325,474 537,496 522,195
--------- --------- ---------
Accumulated Other Comprehensive Loss
Beginning balance (6,252) (2,710) (2,322)
Change in minimum pension liability adjustment (30,848) -- --
Changes in foreign currency translation adjustments 73 (616) (388)
Changes in the fair value of interest rate swaps 1,431 (2,926) --
--------- --------- ---------
Ending balance (35,596) (6,252) (2,710)
--------- --------- ---------
Unamortized Restricted Stock Awards
Beginning balance -- -- --
Issuance of restricted stock awards (1,458) -- --
Amortization of restricted stock awards 405 -- --
--------- --------- ---------
Ending balance (1,053) -- --
--------- --------- ---------
Treasury Stock, At Cost
Beginning balance (112,972) (112,972) (87,975)
Treasury stock purchases -- -- (24,997)
Equity offering - reissuance of treasury stock 71,670 -- --
--------- --------- ---------
Ending balance (41,302) (112,972) (112,972)
--------- --------- ---------
Total Shareholders' Equity $ 359,958 $ 490,989 $ 459,776
========= ========= =========
The notes to consolidated financial statements are an integral part of
these statements.
53
Statements of Comprehensive Income
Yellow Corporation and Subsidiaries for the years ended December 31
(in thousands) 2002 2001 2000
--------- --------- ---------
Net income (loss) $ (93,902) $ 15,301 $ 68,018
Other comprehensive income (loss), net of tax:
Change in minimum pension liability adjustment (30,848) -- --
Changes in foreign currency translation adjustments 73 (616) (388)
Changes in the fair value of interest rate swaps 1,431 (2,926) --
--------- --------- ---------
Comprehensive income (loss) $(123,246) $ 11,759 $ 67,630
========= ========= =========
The notes to consolidated financial statements are an integral part of these
statements.
Notes to Consolidated Financial Statements
Yellow Corporation and Subsidiaries
Description of Business
Yellow Corporation (also referred to as "Yellow" or "the company") is a holding
company that through wholly owned operating subsidiaries offers its customers a
wide range of asset and non-asset-based transportation services integrated by
technology. Yellow Transportation, Inc. (Yellow Transportation) offers a full
range of regional, national, and international services for the movement of
industrial, commercial and retail goods. Meridian IQ, LLC (Meridian IQ) is a
non-asset global transportation management company that plans and coordinates
the movement of goods worldwide to provide customers a single source for
transportation management solutions. Yellow Technologies, Inc. provides
innovative technology solutions and services exclusively for Yellow Corporation
companies.
On September 30, 2002, the company completed the 100 percent distribution (the
spin-off) of all of its shares of SCS Transportation, Inc. (SCST) to Yellow
shareholders of record on September 3, 2002. SCST provides regional overnight
and second-day less-than-truckload (LTL) and selected truckload (TL)
transportation services through two subsidiaries, Saia Motor Freight Line, Inc.
(Saia) and Jevic Transportation, Inc. (Jevic). Shares were distributed on the
basis of one share of SCST common stock for every two shares of Yellow common
stock. As a result of the spin-off, the company's financial statements have been
reclassified to reflect SCST as discontinued operations for all periods
presented.
54
Principles of Consolidation and Summary of Accounting Policies
The accompanying consolidated financial statements include the accounts of
Yellow Corporation and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Management makes estimates and assumptions that affect the amounts reported in
the financial statements and footnotes. Actual results could differ from those
estimates.
Accounting policies refer to specific accounting principles and the methods of
applying those principles to fairly present the company's financial position and
results of operations in accordance with generally accepted accounting
principles. The policies discussed below include those that management has
determined to be the most appropriate in preparing the company's financial
statements and are not discussed in a separate footnote.
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits and highly liquid investments
purchased with maturities of three months or less.
Concentration of Credit Risks
The company sells services and extends credit based on an evaluation of the
customer's financial condition, without requiring collateral. Exposure to losses
on receivables is principally dependent on each customer's financial condition.
The company monitors its exposure for credit losses and maintains allowances for
anticipated losses.
Revenue Recognition
For shipments in transit, Yellow Transportation records revenue based on the
percentage of service completed as of the period end and accrues delivery costs
as incurred. Meridian IQ recognizes revenue upon the completion of services. In
certain logistics transactions where Meridian IQ acts as an agent, revenue is
recorded on a net basis. Net revenue represents revenue charged to customers
less third party transportation costs. Where Meridian IQ acts as principal, it
records revenue from these transactions on a gross basis, without deducting
transportation costs. Management believes these policies most accurately reflect
revenue as earned.
Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable, accounts
payable and short-term borrowings approximates their fair value due to the
short-term nature of these instruments.
Effective January 1, 2001, the company adopted Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities,
as amended (Statement No. 133). As a result of the adoption of Statement No.
133, the company recognizes all derivative financial instruments as either
assets or liabilities at their fair value.
55
Notes to Consolidated Financial Statements
Yellow Corporation and Subsidiaries
In December 2000, the company entered into a three-year interest rate swap
agreement (the swap) to hedge a portion of its variable rate debt. Pursuant to
the agreement, the company pays a fixed rate of 6.06 percent and receives a
variable three-month London interbank offer rate (LIBOR) on a notional amount of
$50 million. The company has designated this interest rate contract as a hedge
of the company's exposure to a portion of its variable-rate, asset backed
securitization (ABS) financing. At December 31, 2002, approximately 40 percent
of the company's debt was variable rate with the swap hedged against the entire
variable amount. The company recorded a $22 thousand gain in 2002 and a $34
thousand loss in 2001 in other net nonoperating expense representing the
ineffectiveness of the correlation between the hedge and the ABS financing rate.
At December 31, 2002 and 2001, accumulated other comprehensive loss included a
$1.5 million and $2.9 million, respectively, unrealized loss on the interest
rate contract. The company recognizes the differential paid under the contract
designated as a hedge as adjustments to interest expense. These adjustments
approximated $2.1 million in 2002 and $0.8 million in 2001 in additional
interest expense.
Unusual Items
Unusual items included in income from continuing operations for the years ended
December 31 are detailed in the following table:
(in thousands) 2002 2001 2000
-------- -------- --------
Property (gains)/losses $ 425 $ (186) $(14,372)
Spin-off charges 6,940 -- --
Reorganization costs 1,026 4,901 --
Other 44 700 --
-------- -------- --------
Total unusual items expense (income) $ 8,435 $ 5,415 $(14,372)
======== ======== ========
Spin-off charges included bank fees and external legal and accounting services.
Reorganization costs were primarily associated with the reorganization of Yellow
Transportation and Transportation.com. These charges included employee
separation costs and lease termination and rent costs. The net property gains in
2000 primarily consisted of a $20.7 million pretax gain on the sale of real
estate property in New York and a $6.5 million pretax loss on obsolete computer
aided dispatch technology, both at Yellow Transportation.
56
Claims and Insurance Accruals
Claims and insurance accruals, both current and long-term, reflect the estimated
cost of claims for workers' compensation, cargo loss and damage, and bodily
injury and property damage that insurance does not cover. The company includes
these costs in claims and insurance expense except for workers' compensation,
which the company includes in salaries, wages, and employees' benefits.
The company bases reserves for workers' compensation primarily upon actuarial
analyses prepared by independent actuaries. These reserves are discounted to
present value using a risk-free rate at the date of occurrence. The risk-free
rate is the U.S. Treasury rate for maturities that match the expected payout of
workers' compensation liabilities. The process of determining reserve
requirements utilizes historical trends and involves an evaluation of accident
frequency and severity, claims management, and changes in health care costs, but
not certain future administrative costs. The effect of future inflation for
costs is implicitly considered in the actuarial analyses. Adjustments to
previously established reserves are included in operating results. At December
31, 2002 and 2001, estimated future payments for workers' compensation claims
aggregated $98.6 million and $93.9 million, respectively. The present value of
these estimated future payments was $80.5 million at December 31, 2002 and $75.4
million at December 31, 2001.
Stock-Based Compensation
The company has various stock-based employee compensation plans, which are
described more fully in the Stock Compensation Plans note. The company accounts
for those plans under the recognition and measurement principles of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
25). The company does not reflect compensation cost in net income, as all
options that the company granted under those plans had an exercise price equal
to the market value of the underlying common stock on the date of grant.
Option Value Information
The pro forma calculations in the table below were estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions.
Dividend yield - % - % - %
Expected volatility 39.0% 36.8% 36.2%
Risk-free interest rate 2.6% 4.2% 5.9%
Expected option life (years) 3 3 3
Fair value per option $ 7.81 $ 6.04 $ 4.85
57
Notes to Consolidated Financial Statements
Yellow Corporation and Subsidiaries
Pro Forma Information
The following table illustrates the effect on income from continuing operations,
net income and earnings per share if the company had applied the fair value
recognition provisions of Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (Statement No. 123).
(in thousands except per share data) 2002 2001 2000
---------- ---------- ----------
Net income (loss) - as reported $ (93,902) $ 15,301 $ 68,018
Less: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (1,364) (2,141) (1,741)
---------- ---------- ----------
Pro forma net income (loss) $ (95,266) $ 13,160 $ 66,277
---------- ---------- ----------
Basic earnings (loss) per share:
Income from continuing operations - as reported $ 0.86 $ 0.44 $ 2.50
Income from continuing operations - pro forma 0.81 0.35 2.43
Net income (loss) - as reported (3.35) 0.63 2.76
Net income (loss) - pro forma (3.40) 0.54 2.69
Diluted earnings (loss) per share:
Income from continuing operations - as reported $ 0.84 $ 0.43 $ 2.49
Income from continuing operations - pro forma 0.79 0.34 2.42
Net income (loss) - as reported (3.31) 0.62 2.74
Net income (loss) - pro forma (3.36) 0.53 2.67
========== ========== ==========
Impairment of Long-Lived Assets
If facts and circumstances indicate that the carrying value of identifiable
intangibles and long-lived assets may be impaired, the company would perform an
evaluation of recoverability. If an evaluation were required, the company would
compare the estimated future undiscounted cash flows associated with the asset
to the asset's carrying amount to determine if a write-down is required.
Reclassifications
The company has made certain reclassifications to the prior year consolidated
financial statements to conform to the current presentation.
58
Preferred Stock
The Certificate of Incorporation authorizes the Board of Directors, at its
discretion, to issue up to 750,000 shares of Series A $10 preferred stock with a
$1 par value per share, and 4,250,000 shares of preferred stock with a $1 par
value per share. As of December 31, 2002, none of these shares have been issued.
Supplemental Cash Flow Information
The company provides the following supplemental cash flow information for the
years ended December 31:
(in thousands) 2002 2001 2000
------- ------- -------
Income taxes paid, net $ 8,272 $ 5,268 $47,813
Interest paid $11,518 $16,628 $19,761
Supplemental cash flow information includes cash paid on behalf of SCST until
the spin-off date.
Discontinued Operations
As required under Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, the company
evaluated the carrying value of SCST against the fair value, as determined by
the market capitalization of SCST at the spin-off date. The following table
presents the net assets (carrying value) of SCST at the spin-off date compared
to the fair value as determined by the market capitalization:
<Table>
<Caption>
(in thousands) September 30, 2002
------------------
Cash $ 2,383
Accounts receivable 99,233
Other current assets 18,158
Net property, plant and equipment and other assets 314,610
Accounts payable and accrued expenses (64,275)
Long-term debt (130,000)
Other liabilities (69,342)
------------------
Total net assets (carrying value) $ 170,767
Fair value at spin-off (118,120)
------------------
Non-cash loss on disposal of SCST $ (52,647)
==================
</Table>
Notes to Consolidated Financial Statements
Yellow Corporation and Subsidiaries
Summarized results of operations related to SCST (as reported in discontinued
operations) are as follows for the nine months ended September 30, 2002 and the
years ended December 31, 2001 and 2000:
(in thousands except per share data) 2002 2001 2000
--------- --------- ---------
Operating revenue $ 581,181 $ 771,581 $ 789,009
Operating expenses 559,751 752,423 763,227
--------- --------- ---------
Operating income 21,430 19,158 25,782
Nonoperating expenses, net 4,735 7,992 9,221
--------- --------- ---------
Income before income taxes 16,695 11,166 16,561
Provision for income taxes 6,748 6,454 8,864
--------- --------- ---------
Income from continuing operations 9,947 4,712 7,697
Loss on disposal of SCST (52,647) -- --
Cumulative effect of change in
accounting for goodwill (75,175) -- --
--------- --------- ---------
Income (loss) from discontinued operations $(117,875) $ 4,712 $ 7,697
========= ========= =========
Discontinued operations basic earnings
(loss) per share:
Income from continuing operations $ 0.35 $ 0.19 $ 0.31
Loss on disposal of SCST (1.88) -- --
Cumulative effect of change in
accounting for goodwill (2.68) -- --
--------- --------- ---------
Income (loss) from discontinued operations $ (4.21) $ 0.19 $ 0.31
--------- --------- ---------
Discontinued operations diluted earnings
(loss) per share:
Income from continuing operations $ 0.35 $ 0.19 $ 0.31
Loss on disposal of SCST (1.85) -- --
Cumulative effect of change in
accounting for goodwill (2.65) -- --
--------- --------- ---------
Income (loss) from discontinued operations $ (4.15) $ 0.19 $ 0.31
========= ========= =========
The company did not charge to discontinued operations the management fees and
other corporate services that it previously allocated to SCST, as the company
continues to incur a majority of the expense. The company allocated interest
expense to discontinued operations based on the overall
60
effective borrowing rate of Yellow applied to the debt reduction realized by
Yellow from the spin-off. Interest expense included in discontinued operations
was $4.6 million for the nine months ended September 30, 2002, and $8.0 million
and $9.4 million for the years ended December 31, 2001 and 2000, respectively.
Goodwill amortization expense included in discontinued operations was zero for
2002, and $3.0 million and $2.6 million for 2001 and 2000, respectively.
In July 1999, Preston Trucking Company (a former segment of the company sold in
1998) ceased operations and commenced a liquidation of its assets under federal
bankruptcy regulations. The company recorded a charge to discontinued operations
of $1.3 million net of tax benefit of $0.7 million in 2000 to settle pending
liabilities associated with the bankruptcy. Income from discontinued operations,
as shown on the Statements of Consolidated Operations, in 2000 consists of $7.7
million in income related to SCST and $1.3 million in losses related to Preston
Trucking Company. Yellow does not anticipate any material change in the loss
from disposition of the discontinued operations.
Prepaid Expenses and Other
Items classified as prepaid expenses and other consisted of the following at
December 31:
(in thousands) 2002 2001
------- -------
Fuel and Operating Supplies $11,039 $12,341
Prefunded benefit contribution 40,005 40,015
Other prepaid expenses 17,682 23,502
------- -------
Prepaid expenses and other $68,726 $75,858
======= =======
Goodwill and Other Assets
Items classified as goodwill and other assets consisted of the following at
December 31:
(in thousands) 2002 2001
------- -------
Goodwill $20,491 $10,600
Intangibles 7,696 495
Other assets 24,469 4,250
------- -------
Goodwill and other assets $52,656 $15,345
======= =======
Additional information on goodwill can be found in the Goodwill and Intangibles
footnote.
61
Notes to Consolidated Financial Statements
Yellow Corporation and Subsidiaries
Property and Equipment
Property and equipment consisted of the following at December 31:
(in thousands) 2002 2001
----------- -----------
Land $ 93,783 $ 92,878
Structures 516,006 516,070
Revenue equipment 825,606 801,652
Technology equipment and software 141,723 138,765
Other 101,978 106,933
----------- -----------
$ 1,679,096 $ 1,656,298
Less - Accumulated depreciation (1,114,120) (1,096,766)
----------- -----------
Net property and equipment $ 564,976 $ 559,532
=========== ===========
For the years ended December 31, 2002, 2001, and 2000, depreciation expense was
$78.9 million, $76.9 million, and $78.6 million, respectively.
Yellow carries property and equipment at cost less accumulated depreciation.
Yellow computes depreciation using the straight-line method based on the
following service lives:
Years
-----
Structures 10-40
Revenue equipment 3-14
Technology equipment and software 3-5
Other 3-15
The company charges maintenance and repairs to expense as incurred. The company
capitalizes replacements and improvements when these costs extend the useful
life of the asset.
The company's investment in technology equipment and software consists primarily
of advanced customer service and freight management equipment and related
software. Yellow capitalizes certain costs associated with developing or
obtaining internal-use software. Capitalizable costs include external direct
costs of materials and services utilized in developing or obtaining the
software, payroll, and payroll-related costs for employees directly associated
with the project. For the years ended December 31, 2002, 2001, and 2000, the
company capitalized $1.3 million, $2.2 million, and $3.2 million, respectively,
which were primarily payroll and payroll-related costs.
62
Accounts Payable
Items classified as accounts payable consisted of the following at December 31:
(in thousands) 2002 2001
-------- --------
Checks outstanding in excess of bank balances $ 63,685 $ 51,104
Accounts payable 51,304 46,424
-------- --------
Accounts payable $114,989 $ 97,528
======== ========
Other Current and Accrued Liabilities
Items classified as other current and accrued liabilities consisted of the
following at December 31:
(in thousands) 2002 2001
-------- --------
Accrued income taxes $ 8,179 $ --
Deferred income taxes, net 16,751 23,346
Claims and insurance accruals 44,045 46,347
Other current and accrued liabilities 32,136 27,047
-------- --------
Other current and accrued liabilities $101,111 $ 96,740
======== ========
Claims and Other Liabilities
Items classified as claims and other liabilities consisted of the following at
December 31:
(in thousands) 2002 2001
-------- --------
Deferred income taxes, net $ 25,657 $ 33,868
Pension liability 71,151 34,237
Claims and other liabilities 85,836 76,089
-------- --------
Claims and other liabilities $182,644 $144,194
======== ========
63
Notes to Consolidated Financial Statements
Yellow Corporation and Subsidiaries
Debt and Financing
At December 31, debt consisted of the following:
(in thousands) 2002 2001
-------- --------
Unsecured credit agreement $ -- $ 85,000
ABS borrowings 50,000 --(1)
Unsecured medium-term notes 55,250 77,250
Industrial development bonds 18,900 18,900
SCST debt -- 38,834
Capital leases and other 135 42
-------- --------
Total debt $124,285 $220,026
ABS borrowings 50,000 --(1)
Current maturities 24,261 6,281
-------- --------
Long-term debt $ 50,024 $213,745
======== ========
(1) Prior to the December 31, 2002 amendment of the ABS agreement, ABS
borrowings were not reflected on the balance sheets of the company. At December
31, 2001, $141.5 million was outstanding under the ABS facility.
Variable-Rate Debt
The company has a $300 million unsecured credit agreement with a group of banks,
which expires April 2004. Yellow may use the agreement for additional short-term
borrowings and for the issuance of standby letters of credit. Interest on
borrowings is based on LIBOR, which was 1.38 percent and 2.44 percent at
December 31, 2002 and 2001, respectively. The company pays a fixed increment
over these rates. Under the terms of the agreement, among other restrictions,
the company must maintain a minimum consolidated net worth and total debt must
be no greater than a specified ratio of earnings before interest, income taxes,
depreciation and amortization, and rents, as defined. At December 31, 2002 and
2001, the company was in compliance with all terms of this credit agreement. The
following table provides the components of the available unused capacity under
the bank credit agreement at December 31:
(in thousands) 2002 2001
--------- ---------
Total capacity $ 300,000 $ 300,000
Outstanding borrowings -- (85,000)
Letters of credit (146,200) (89,900)
--------- ---------
Available unused capacity $ 153,800 $ 125,100
========= =========
64
The company also maintains an ABS agreement that allows it to transfer an
ongoing pool of receivables to a conduit administered by an independent
financial institution (the conduit). Under the terms of the agreement, the
company may transfer Yellow Transportation trade receivables to a special
purpose entity, Yellow Receivables Corporation (YRC). YRC is a wholly owned
consolidated subsidiary of Yellow Transportation designed to isolate the
receivables for bankruptcy purposes. The conduit must purchase from YRC an
undivided ownership interest in those receivables. The percentage ownership
interest in receivables purchased by the conduit may increase or decrease over
time, depending on the characteristics of the receivables, including delinquency
rates and debtor concentrations.
The company services the receivables transferred to YRC and receives a servicing
fee, which company management has determined approximates market compensation
for these services. The conduit pays YRC the face amount of the undivided
interest at the time of purchase. On a periodic basis, this sales price is
adjusted, resulting in payments by YRC to the conduit of an amount that varies
based on the interest rate on certain of the conduit's liabilities and the
length of time the sold receivables remain outstanding.
Prior to December 31, 2002, financing obtained under the ABS facility was
treated as a sale of assets and the sold receivables and related obligations
were not reflected on the Consolidated Balance Sheets. The right to repurchase
receivable interests was limited to instances when ABS obligations were below
$10 million. As of December 31, 2002, the ABS agreement was amended to provide
YRC the right to repurchase, at any time, 100 percent of the receivable
interests held by the conduit. Due to the amendment, the receivables transferred
and the related borrowings are reflected on the Consolidated Balance Sheet as of
December 31, 2002. The amendment does not alter the costs associated with
operating the ABS facility.
The ABS facility provides additional liquidity and lower borrowing costs through
access to the asset backed commercial paper market. By using the ABS facility,
the company obtains a variable rate based on the A1 commercial paper rate plus a
fixed increment for utilization and administration fees. A1 rated commercial
paper comprises more than 90 percent of the commercial paper market,
significantly increasing the liquidity. Yellow averaged a rate of 2.3 percent on
the ABS facility in 2002.
The ABS facility involves receivables of Yellow Transportation only and has a
limit of $200 million. Under the terms of the agreement, Yellow Transportation
retains the associated collection risks. Although the facility has no stated
maturity, the company has an underlying letter of credit with the administering
financial institution that has a 364-day maturity.
65
Notes to Consolidated Financial Statements
Yellow Corporation and Subsidiaries
The table below provides the borrowing and repayment activity, as well as the
resulting balances, for the years ending December 31 of each period presented:
(in thousands) 2002 2001
--------- ---------
ABS obligations outstanding at January 1 $ 141,500 $ 177,000
Transfer of receivables to conduit (borrowings) 421,500 152,000
Redemptions from conduit (repayments) (513,000) (187,500)
--------- ---------
ABS obligations outstanding at December 31 $ 50,000 $ 141,500
========= =========
The company's loss on the sale of receivables under the ABS facility to the
conduit was $2.6 million in 2002, $8.0 million in 2001, and $10.1 million in
2000. These charges are reflected as ABS facility charges on the Statements of
Consolidated Operations.
Fixed-Rate Debt
Medium-term notes have scheduled maturities through 2008 with fixed interest
rates ranging from 6.0 percent to 7.8 percent.
The company has loan guarantees, mortgages, and lease contracts in connection
with the issuance of industrial development bonds (IDBs) used to acquire,
construct or expand terminal facilities. Rates on these bonds range from 5.0
percent to 6.1 percent, with principal payments due through 2010.
The principal maturities of long-term debt, including current maturities, for
the next five years and thereafter are as follows:
(in thousands) Medium-Term Notes IDBs Other Total
- -------------- ----------------- --------- ------- ---------
2003 $ 19,250 $ 5,000 $ 11 $ 24,261
2004 16,000 -- 124 16,124
2005 12,000 4,400 -- 16,400
2006 7,000 -- -- 7,000
2007 -- -- -- --
Thereafter 1,000 9,500 -- 10,500
--------- -------- ------- ---------
Total $ 55,250 $ 18,900 $ 135 $ 74,285
========= ======== ======= =========
66
Based on the borrowing rates currently available to the company for debt with
similar terms and remaining maturities, the fair value of fixed-rate debt at
December 31, 2002 and 2001, was approximately $81.5 million and $114.2 million,
respectively. The carrying amount of such fixed-rate debt at December 31, 2002
and 2001 was $74.3 million and $108.8 million, respectively.
Other Debt
SCST debt at December 31, 2001 consisted of subordinated debentures of $16.3
million, fixed and variable-rate mortgages of $11.6 million and $5.0 million,
respectively, and variable-rate term notes of $5.9 million. SCST assumed the
subordinated debentures of $16.3 million and the remaining debt was paid off as
part of the spin-off.
Employee Benefits
Retirement Plans
Yellow Corporation and Yellow Transportation provide defined benefit pension
plans for employees not covered by collective bargaining agreements
(approximately 4,000 employees). Meridian IQ does not offer a defined benefit
pension plan and instead offers retirement benefits through a contributory
401(k) savings plan, as discussed later in this section. Pension plan benefits
are based on years of service and the employees' final average earnings. The
company's funding policy is to contribute the minimum required tax-deductible
contribution for the year while taking into consideration any variable Pension
Benefit Guarantee Corporation premium. In 2000, the pension plan was amended to
provide for the payment of unreduced benefits, at early retirement, for a
participant whose combination of age and vested service equals 85 years or
greater. Approximately 35 percent of the plans' assets are invested in fixed
income securities, 50 percent in U.S. equities, and 15 percent in international
equities. Neither the company nor its subsidiaries sponsor a postretirement
health care benefit plan.
67
Notes to Consolidated Financial Statements
Yellow Corporation and Subsidiaries
The following table sets forth the plans' funded status:
(in thousands) 2002 2001
--------- ---------
Change in benefit obligation:
Benefit obligation at beginning of year $ 356,035 $ 309,029
Service cost 15,772 14,496
Interest cost 25,595 23,427
Plan amendment 907 1,660
Actuarial loss 30,906 19,167
Benefits paid (11,512) (11,744)
--------- ---------
Benefit obligation at end of year $ 417,703 $ 356,035
--------- ---------
Change in plan assets:
Fair value of plan assets at beginning of year $ 274,602 $ 269,765
Actual return on plan assets (26,381) (12,864)
Employer contributions 12,012 29,445
Benefits paid (11,512) (11,744)
--------- ---------
Fair value of plan assets at end of year $ 248,721 $ 274,602
--------- ---------
Funded status $(168,982) $ (81,433)
Unrecognized transition asset (1,344) (2,235)
Unrecognized prior service cost 13,579 13,985
Unrecognized net actuarial loss 121,850 38,444
--------- ---------
Accrued benefit cost $ (34,897) $ (31,239)
========= =========
Amounts recognized in the Consolidated Balance Sheets at December 31 are as
follows:
(in thousands) 2002 2001
-------- --------
Accrued pension liability, net $(34,897) $(31,239)
Minimum pension liability (61,629) --
Intangible asset 13,579 --
Accumulated other comprehensive loss (pretax) 48,050 --
-------- --------
Accrued benefit cost $(34,897) $(31,239)
======== ========
68
The following table provides the components of net pension cost:
(in thousands) 2002 2001 2000
-------- -------- --------
Net pension cost:
Service cost $ 15,772 $ 14,496 $ 11,326
Interest cost 25,595 23,427 21,733
Expected return on plan assets (25,139) (21,010) (20,742)
Amortization of unrecognized net transition assets (2,380) (2,384) (2,388)
Amortization of prior service costs 1,438 1,304 1,113
-------- -------- --------
Net pension cost $ 15,286 $ 15,833 $ 11,042
======== ======== ========
Weighted average assumptions at December 31:
Discount rate 6.75% 7.25% 7.50%
Rate of increase in compensation levels 4.50% 4.50% 4.50%
Expected rate of return on assets 9.00% 9.00% 9.00%
======== ======== ========
Increases in the company's pension benefit obligations combined with market
losses in 2002 and 2001 have negatively impacted the funded status of the
pension plans, resulting in additional funding and expense over the next several
years. Due to these same factors, the company recorded an adjustment in 2002 to
shareholders' equity of $30.8 million, net of tax of $17.2 million, to reflect
the minimum liability associated with the plans.
Multi-Employer Plans
Yellow Transportation contributes to multi-employer health, welfare and pension
plans for employees covered by collective bargaining agreements (approximately
80 percent of 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.
The company contributed and charged to expense the following amounts to these
plans:
(in thousands) 2002 2001 2000
-------- -------- --------
Health and welfare $156,081 $150,012 $154,730
Pension 159,018 157,148 167,772
-------- -------- --------
Total $315,099 $307,160 $322,502
======== ======== ========
69
Notes to Consolidated Financial Statements
Yellow Corporation and Subsidiaries
Under current legislation regarding multi-employer pension plans, a termination,
withdrawal or partial withdrawal from any multi-employer plan that is in an
under-funded status would render the company liable for a proportionate share of
such multi-employer plans' unfunded vested liabilities. This potential unfunded
pension liability also applies to the company's unionized competitors who
contribute to multi-employer plans. Based on the limited information available
from plan administrators, which the company cannot independently validate, the
company believes that its portion of the contingent liability in the case of a
full withdrawal or termination would be material to its financial position and
results of operations. Yellow Transportation has no current intention of taking
any action that would subject the company to obligations under the legislation.
Yellow Transportation has collective bargaining agreements with its unions that
stipulate the amount of contributions Yellow Transportation makes to
multi-employer pension plans. The Internal Revenue Code and Internal Revenue
Service regulations also establish minimum funding requirements for
multi-employer pension plans and a process to address the plans' funding if it
fails to meet those requirements.
401(k) Savings Plans
The company and its operating subsidiaries each sponsor defined contribution
plans, primarily for employees not covered by collective bargaining agreements.
The plans principally consist of contributory 401(k) savings plans and
noncontributory profit sharing plans. Plans provided by Yellow Corporation and
Yellow Transportation consist of both a fixed matching percentage and a
discretionary amount. The nondiscretionary company match for these plans equals
25 percent of the first six percent of an eligible employee's contributions.
Discretionary contributions for both the 401(k) savings plan and profit sharing
plans are determined annually by the Board of Directors. The 401(k) savings plan
offered by Meridian IQ provides a fixed matching percentage of 75 percent of the
first six percent of an eligible employee's contributions with no option for
discretionary contributions. Contributions for each of the three years in the
period ended December 31, 2002, were not material to the operations of the
company.
The company's employees covered under collective bargaining agreements can also
participate in a contributory 401(k) plan. There are no employer contributions
to the plan.
Performance Incentive Awards
The company and its operating subsidiaries each provide annual performance
incentive awards to nonunion employees, which are based primarily on actual
operating results achieved compared to targeted operating results. Income from
continuing operations in 2002, 2001, and 2000 includes performance incentive
expense for nonunion employees of $15.6 million, $2.9 million, and $38.7
million, respectively. Yellow pays performance incentive awards for a year
primarily in the first quarter of the following year.
70
Executive Performance Plan
The company implemented a long-term incentive plan in 2002. This plan replaced
the use of stock options as the exclusive vehicle for delivering long-term
incentive compensation potential to the company's executive officers. Awards
under the plan can be made in cash and performance share units at the discretion
of the Board of Directors and are expected to vest over three years from the
date of grant. The plan utilizes a phased implementation schedule that allows
for one-third of the typical award in the first year of implementation,
two-thirds in the second year, and the full award in the third year. In 2002,
award amounts were based primarily on the company's return on committed capital
compared to the Standard and Poor's Small Cap 600. Income from continuing
operations in 2002 includes performance incentive accruals for executives of
$2.0 million.
Stock Compensation Plans
The company has reserved 4.8 million shares of its common stock for issuance to
key management personnel of the company and its operating subsidiaries under
five stock option plans. The plans generally permit grants of nonqualified stock
options and grants of stock options coupled with a grant of stock appreciation
rights (SARs). In addition, the company has reserved 200,000 shares of its
common stock for issuance to its Board of Directors. Under the plans, the
exercise price of each option equals the closing market price of the company's
common stock on the date of grant. The options vest ratably, generally over a
period of four years, and expire ten years from the date of the grant. The 1992
plan also permits the issuance of restricted stock. In 2002, Yellow issued
56,300 shares of restricted stock from the 1992 plan at $25.90 per share that
clif vest over three years.
The company implemented a new stock option plan in 2002 which reserves 1.0
million of the 4.8 million shares discussed above. This plan permits the
issuance of restricted stock and restricted stock units, as well as options,
SARs, and performance stock and performance stock unit awards. The maximum
cumulative number of shares that can be awarded in any form other than options
or SARs is 200,000 shares. Yellow did not issue any restricted stock or SARs
from this plan during 2002.
The outstanding stock options of Yellow were adjusted to reflect the impact of
the spin-off. For employees who continued employment with Yellow, the option
remained an option for Yellow common stock with the number of shares covered by
the option and related exercise price adjusted to preserve the intrinsic value.
For employees who worked for SCST after the spin-off, the Yellow options were
cancelled and SCST issued options to purchase SCST common stock with the number
of shares of SCST common stock and exercise price set to preserve the intrinsic
value.
As of December 31, 2002, 2001, and 2000, options on approximately 736,000
shares, 1,054,000 shares, and 1,421,000 shares, respectively, were exercisable
at weighted average exercise prices of $17.77 per share, $20.62 per share, and
$18.12 per share, respectively. The weighted average
71
Notes to Consolidated Financial Statements
Yellow Corporation and Subsidiaries
remaining contract life on outstanding options at December 31, 2002, 2001, and
2000 was 7.4 years, 7.3 years, and 7.9 years, respectively. A summary of
activity in the company's stock option plans is presented in the following
table.
Exercise Price
----------------------------
Shares Weighted
(in thousands) Average Range
-------------- ---------- ---------------
Outstanding at December 31, 1999 3,134 $ 17.44 $ 11.50 - 27.00
Granted 1,170 16.63 14.56 - 18.75
Exercised (517) 13.54 11.50 - 18.13
Forfeited / expired (412) 19.13 11.50 - 27.00
---- ---------- ---------------
Outstanding at December 31, 2000 3,375 $ 17.55 $ 11.50 - 27.00
Granted 42 20.30 18.25 - 21.87
Exercised (1,063) 15.64 11.50 - 24.05
Forfeited / expired (83) 18.57 12.25 - 24.05
--- ---------- ---------------
Outstanding at December 31, 2001 2,271 $ 18.46 $ 11.50 - 27.00
Granted 900 26.81 22.42 - 29.67
Exercised (737) 17.76 10.56 - 24.79
SCST spin-off adjustment (352) -- --
Forfeited / expired (86) 17.83 10.56 - 24.05
-------- ---------- ---------------
Outstanding at December 31, 2002 1,996 $ 21.27 $ 10.56 - 29.67
======== ========== ===============
The following table summarizes information about stock options outstanding as of
December 31, 2002:
Options Outstanding Options Exercisable
--------------------------------------------------- --------------------------------
Weighted-Average
Shares Remaining Weighted-Average Shares Weighted-Average
Range of exercise prices (in thousands) Contractual Years Exercise Price (in thousands) Exercise Price
- ------------------------ -------------- ----------------- ---------------- -------------- ----------------
$10.56 - 15.61 558 7.1 $ 14.36 246 $ 14.30
$15.62 - 22.80 785 5.7 $ 19.26 480 $ 19.41
$22.81 - 29.67 653 9.7 $ 29.58 10 $ 23.93
As discussed in the Summary of Accounting Policies note, the company applies APB
25 in accounting for stock options. Please refer to that note for pro forma
effects had the company applied Statement No. 123.
72
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. Prior
to the adoption on January 1, 2002 of Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets (Statement No. 142), the
company amortized goodwill over the estimated period of benefit on a
straight-line basis over periods generally ranging from 20 to 40 years, and the
company reviewed goodwill for impairment under the policy for other long-lived
assets. Since the adoption of Statement No. 142, the company discontinued
amortization of goodwill, and reviews goodwill at least annually for impairment
based on a fair value approach.
As a result of the spin-off, the company reports results of operations for SCST,
including prior year goodwill amortization, under discontinued operations.
Meridian IQ has not amortized goodwill in accordance with provisions of
Statement No. 142. Therefore, income from continuing operations does not include
goodwill amortization for any period presented.
The net carrying amount of goodwill attributable to each subsidiary with
goodwill balances and changes therein follows:
December 31, Impairment (Spin-off ) / December 31,
(in thousands) 2001 Adjustment Acquisitions 2002
------------ ---------- ------------- ------------
SCST $ 89,971 $(75,175) $(14,796) $ --
Meridian IQ 10,600 -- 9,891 20,491
-------- -------- -------- -------
Goodwill $100,571 $(75,175) $ (4,905) $20,491
======== ======== ======== =======
At December 31, 2001, the company had $100.6 million of goodwill, consisting
primarily of $75.2 million remaining from the acquisition of Jevic included in
the non-current assets of discontinued operations. Based on an estimate of
Jevic's discounted cash flows, the company determined that 100 percent of the
Jevic goodwill was impaired due to lower business volumes, compounded by a weak
economy and an increasingly competitive business environment. As a result, the
company recorded a non-cash charge of $75.2 million in the first quarter 2002,
which was reflected as a cumulative effect of a change in accounting principle.
Due to the spin-off, the company reclassified the non-cash charge to
discontinued operations on the Statement of Consolidated Operations.
In connection with adopting Statement No. 142, the company also reassessed the
useful lives and the classification of its identifiable intangible assets and
determined that they continue to be appropriate.
73
Notes to Consolidated Financial Statements
Yellow Corporation and Subsidiaries
The components of amortized intangible assets follow:
December 31, 2002 December 31, 2001
------------------------- ------------------------
Average Gross Gross
Life Carrying Accumulated Carrying Accumulated
(in thousands) (years) Amount Amortization Amount Amortization
------- -------- ------------ -------- ------------
Customer related 11 $5,622 $ 355 $ 317 $ 34
Marketing related 6 1,550 42 1,963 812
Technology based 5 1,061 140 231 19
------ ------ ------ ------
Intangible assets $8,233 $ 537 $2,511 $ 865
====== ====== ====== ======
The gross carrying amount of intangibles at December 31, 2001 included
approximately $2 million of SCST assets and the related accumulated amortization
of $.8 million. SCST intangibles and accumulated amortization are not reflected
in the December 31, 2002 balances. Identifiable intangibles of approximately
$7.7 million are reflected in the December 31, 2002 balances as a result of
Meridian IQ acquisitions during 2002.
Amortization expense for intangible assets, as reflected in income from
continuing operations, was $482 thousand for the year ending December 31, 2002.
Estimated amortization expense for the next five years is as follows:
(in thousands) 2003 2004 2005 2006 2007
---- ---- ---- ---- ----
Estimated amortization expense $972 $942 $859 $750 $606
Acquisitions
In July 2002, Meridian IQ acquired selected assets, consisting primarily of
customer contracts, of Clicklogistics, Inc. (Clicklogistics) for nominal cash
consideration. Clicklogistics provides non-asset transportation and logistics
management services.
In August 2002, Meridian IQ completed the acquisition of MegaSys, Inc.
(MegaSys), a Greenwood, Indiana based provider of non-asset transportation and
logistics management services, for approximately $17 million. The acquisition
price primarily related to $9.3 million of goodwill and $7.1 million of
identifiable intangible assets. As part of the acquisition, Meridian IQ
negotiated an earnout arrangement, which provides for Meridian IQ to pay
contingent consideration upon MegaSys generating cash flow levels in excess of
an established rate of return through December 31, 2005. If reached, the earnout
amount could increase the purchase price up to an additional $18 million. The
company believes the acquisition supports its plans to grow its non-asset-based
business and be a single-source transportation provider.
74
In September 2001, the company completed its acquisition of the remaining
ownership in Transportation.com from its venture capital partners. The cash
purchase price of approximately $14.3 million was allocated to goodwill of $10.6
million, tax benefit receivable of $4.0 million and miscellaneous assets and
liabilities of $(0.3) million. As of the acquisition date, Transportation.com,
as well as the company's other non-asset-based services, have been consolidated
under Meridian IQ. The purchase agreements provide for material contingent
payments to be paid to the sellers in the event of a public offering of Meridian
IQ on or before August 2006. The company has no current plans for a public
offering of Meridian IQ. Prior to the acquisition date, the company accounted
for its ownership interest under the equity method of accounting due to
substantive participating rights of the minority investors. Losses on the
company's investment of $5.7 million in 2001 and $3.3 million in 2000 were
recorded in nonoperating expenses.
Income Taxes
Deferred income taxes are determined based upon the difference between the book
and the tax basis of the company's assets and liabilities. Deferred taxes are
recorded at the enacted tax rates expected to be in effect when these
differences reverse. Deferred tax liabilities (assets) are comprised of the
following at December 31:
(in thousands) 2002 2001
--------- ---------
Depreciation $ 90,004 $ 81,521
Prepaids 8,193 9,427
Employee benefits 52,330 48,519
Revenue 22,925 20,241
Other 6,354 9,467
--------- ---------
Gross tax liabilities before discontinued operations $ 179,806 $ 169,175
Gross tax liabilities of discontinued operations -- 62,530
--------- ---------
Gross tax liabilities $ 179,806 $ 231,705
--------- ---------
Claims and insurance $ (54,684) $ (53,341)
Bad debts (5,514) (2,812)
Employee benefits (45,076) (18,712)
Revenue (10,882) (15,398)
Other (21,242) (21,698)
--------- ---------
Gross tax assets before discontinued operations $(137,398) $(111,961)
Gross tax assets of discontinued operations -- (20,416)
--------- ---------
Gross tax assets $(137,398) $(132,377)
--------- ---------
Net tax liability $ 42,408 $ 99,328
========= =========
A valuation allowance for deferred tax assets was not required at
December 31, 2002 or 2001.
75
Notes to Consolidated Financial Statements
Yellow Corporation and Subsidiaries
A reconciliation between income taxes at the federal statutory rate and the
consolidated effective tax rate from continuing operations follows:
(in thousands) 2002 2001 2000
-------- -------- ---------
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net (0.8) (2.0) 4.0
Nondeductible business expenses 4.5 11.3 2.7
Foreign tax credit and rate differential (2.2) (2.5) 0.6
Other, net (0.3) (2.8) (0.9)
-------- -------- ---------
Effective tax rate 36.2% 39.0% 41.4%
======== ======== =========
The income tax provision from continuing operations consisted of the following:
(in thousands) 2002 2001 2000
-------- -------- ---------
Current:
U.S. federal $ 12,697 $ (6,853) $ 28,511
State (353) (3,628) 5,556
Foreign (180) 505 (151)
-------- -------- ---------
Current income tax provision $ 12,164 $ (9,976) $ 33,916
-------- -------- ---------
Deferred:
U.S. federal $ 584 $ 14,220 $ 7,739
State 748 2,937 1,191
Foreign 117 (411) 676
-------- -------- ---------
Deferred income tax provision $ 1,449 $ 16,746 $ 9,606
-------- -------- ---------
Income tax provision $ 13,613 $ 6,770 $ 43,522
======== ======== =========
Based on the income from continuing operations
before income taxes:
Domestic $ 37,892 $ 16,119 $ 105,472
Foreign (306) 1,240 (345)
-------- -------- ---------
Income from continuing operations before income taxes $ 37,586 $ 17,359 $ 105,127
======== ======== =========
76
Commitments, Contingencies, and Uncertainties
The company incurs rental expenses under noncancelable lease agreements for
certain buildings and operating equipment. Rental expense is charged to
operating expense and supplies on the Statements of Consolidated Operations.
Actual rental expense, as reflected in income from continuing operations, was
$34.8 million, $37.0 million, and $35.7 million for the years ended December 31,
2002, 2001, and 2000, respectively.
The company utilizes certain terminals and equipment under operating leases. At
December 31, 2002, the company was committed under noncancelable lease
agreements requiring minimum annual rentals payable as follows:
(in thousands) 2003 2004 2005 2006 2007 Thereafter
-------- -------- -------- ------- ------- ----------
Minimum annual rentals $ 26,203 $ 18,182 $ 13,373 $ 4,076 $ 3,039 $ 5,624
The company expects in the ordinary course of business that leases will be
renewed or replaced as they expire. Projected 2003 net capital expenditures are
expected to be $100 to $110 million, of which $32 million was committed at
December 31, 2002.
The company's outstanding letters of credit at December 31, 2002 included $10.6
million for property damage and workers' compensation claims against SCST.
Yellow agreed to maintain the letters of credit outstanding at the spin-off date
until SCST obtained replacement letters of credit or third party guarantees.
SCST agreed to use its reasonable best efforts to obtain these letters of credit
or guarantees, which in many cases would allow Yellow to obtain a release of its
letters of credit. SCST agreed to indemnify Yellow for any claims against the
letters of credit provided by Yellow. SCST reimburses Yellow for all fees
incurred related to the remaining outstanding letters of credit. The company
also provides a guarantee of $6.6 million regarding certain lease obligations of
SCST.
The company is involved in litigation or proceedings that have arisen in the
company's ordinary business activities. The company insures against these risks
to the extent deemed prudent by its management, but no assurance can be given
that the nature and amount of such insurance will be sufficient to fully
indemnify the company against liabilities arising out of pending and future
legal proceedings. Many of these insurance policies contain self-insured
retentions in amounts the company deems prudent. Based on its current assessment
of information available to the company as of the date of these financial
statements, the company believes that its financial statements include adequate
provision for estimated costs and losses that may ultimately be incurred with
regard to the litigation and proceedings to which the company is a party.
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YELLOW CORPORATION AND SUBSIDIARIES
LABOR NEGOTIATIONS
The National Master Freight Agreement covering Yellow Transportation
collective-bargaining employees expires on March 31, 2003. Yellow Transportation
began formal labor negotiations with the International Brotherhood of Teamsters
in October 2002, with a goal to renegotiate the agreement prior to its
expiration. Failure to reach an agreement prior to the expiration of the
contract could have a significant impact on our financial condition and results
of operations. The agreement covers approximately 80 percent of Yellow
Transportation employees.
BUSINESS SEGMENTS
The company reports financial and descriptive information about its reportable
operating segments on a basis consistent with that used internally for
evaluating segment performance and allocating resources to segments. The
segments are managed separately because each requires different operating and
technology strategies. The company evaluates performance primarily on operating
income and return on capital.
Yellow has two reportable segments, which are strategic business units that
offer complementary transportation services to its customers. Yellow
Transportation is a unionized carrier that provides comprehensive regional,
national and international transportation services. Meridian IQ provides
domestic and international freight forwarding, multi-modal brokerage and
transportation management services.
The accounting policies of the segments are the same as those described in the
Summary of Accounting Policies note. Management fees and other corporate
services are charged to segments based on direct benefit received or allocated
based on revenue. Corporate revenue in 2001 and 2000 represented certain
non-asset-based services prior to the formation of Meridian IQ. 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. In 2002, Corporate operating losses also
included approximately $6.9 million of spin-off charges. Corporate identifiable
assets primarily referred to cash and cash equivalents, in addition to pension
intangible assets. In 2002, intersegment revenue related to transportation
services provided by Yellow Transportation to Meridian IQ and charges to Yellow
Transportation for use of various Meridian IQ service names.
Meridian IQ includes the former operations of Transportation.com as well as
other non-asset-based services. The 2001 and 2000 segment data for Meridian IQ
included the partial year results of operations of Transportation.com and other
non-asset-based services for the periods they were part
78
of the company's consolidated financial results. Full year revenue for Meridian
IQ was $31.1 million and $23.4 million in 2001 and 2000, respectively. Full year
operating losses for Meridian IQ were $(16.8) million and $(13.7) million in
2001 and 2000, respectively.
Revenue from foreign sources totaled $24.8 million, $26.0 million, and $24.5
million, in 2002, 2001, and 2000 respectively, and is largely derived from
Canada and Mexico.
The following table summarizes the company's operations by business segment:
Yellow Corporate/
(in thousands) Transportation Meridian IQ Eliminations Consolidated
- -------------------------------------------------------------------------------------------------------------
2002
External revenue $2,544,573 $ 79,575 $ - $2,624,148
Intersegment revenue 2,479 2,196 (4,675) -
Operating income (loss) 70,594 (2,697) (21,033)(2) 46,864
Identifiable assets 940,252 64,617 38,116 1,042,985
Capital expenditures, net 81,232 1,537 61 82,830
Depreciation and amortization 76,972 2,321 41 79,334
- -------------------------------------------------------------------------------------------------------------
2001
External revenue $2,485,972 $ 11,292 $ 7,806 $2,505,070
Intersegment revenue 6,360 - (6,360) -
Operating income (loss) 55,884 (5,738) (11,951) 38,195
Identifiable assets 757,484 17,641 19,704 794,829(1)
Capital expenditures, net 80,463 822 150 81,435
Depreciation and amortization 76,227 698 52 76,977
- -------------------------------------------------------------------------------------------------------------
2000
External revenue $2,763,426 $ 16,788 $ 18,917 $2,799,131
Intersegment revenue 14,346 - (14,346) -
Operating income (loss) 141,829 (4,507) (10,575) 126,747
Identifiable assets 722,808 - 45,793 768,601(1)
Capital expenditures, net 61,791 256 8,642 70,689
Depreciation and amortization 68,780 120 9,687 78,587
- -------------------------------------------------------------------------------------------------------------
(1) The December 31, 2001 and 2000, total assets per the Consolidated Balance
Sheets includes $490,948 and $539,876, respectively, of assets related to
discontinued operations not included above.
(2) Includes $6.9 million of spin-off charges as discussed on the previous
page.
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YELLOW CORPORATION AND SUBSIDIARIES
EARNINGS PER COMMON SHARE
(in thousands except per share data) 2002 2001 2000
- ----------------------------------------------------------------------------------------------------
Income from continuing operations $ 23,973 $ 10,589 $ 61,605
Income (loss) from discontinued operations (117,875) 4,712 6,413
- ----------------------------------------------------------------------------------------------------
Net income (loss) $ (93,902) $ 15,301 $ 68,018
- ----------------------------------------------------------------------------------------------------
Average common shares outstanding - basic 28,004 24,376 24,649
Effect of dilutive options and restricted stock 367 303 138
- ----------------------------------------------------------------------------------------------------
Average common shares outstanding - diluted 28,371 24,679 24,787
Basic earnings per share:
Income from continuing operations $ 0.86 $ 0.44 $ 2.50
Income (loss) from discontinued operations (4.21) 0.19 0.26
- ----------------------------------------------------------------------------------------------------
Net income (loss) $ (3.35) $ 0.63 $ 2.76
- ----------------------------------------------------------------------------------------------------
Effect of dilutive options on earnings per share:
Income from continuing operations $ (0.02) $ (0.01) $ (0.01)
Income (loss) from discontinued operations 0.06 - (0.01)
- ----------------------------------------------------------------------------------------------------
Net income (loss) $ 0.04 $ (0.01) $ (0.02)
- ----------------------------------------------------------------------------------------------------
Diluted earnings per share:
Income from continuing operations $ 0.84 $ 0.43 $ 2.49
Income (loss) from discontinued operations (4.15) 0.19 0.25
- ----------------------------------------------------------------------------------------------------
Net income (loss) $ (3.31) $ 0.62 $ 2.74
====================================================================================================
The impacts of certain options were excluded from the calculation of diluted
earnings per share because average exercise prices were greater than the average
market price of common shares. Data regarding those options is summarized below:
(in thousands except per share data) 2002 2001 2000
- ----------------------------------------------------------------------------------------------------
Weighted average option shares outstanding 129 611 1,500
Weighted average exercise price $ 29.67 $ 24.18 $ 20.79
- ----------------------------------------------------------------------------------------------------
80
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS OF YELLOW CORPORATION:
We have audited the accompanying consolidated balance sheets of Yellow
Corporation (a Delaware corporation) and Subsidiaries as of December 31, 2002
and 2001, and the related consolidated statements of operations, cash flows,
shareholders' equity, and comprehensive income for each of the years in the
three year period ended December 31, 2002. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Yellow Corporation
and Subsidiaries as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in the Goodwill and Intangibles note to the financial statements,
effective January 1, 2002, the Company ceased amortization of goodwill and
changed its method of determining impairment of goodwill as required by
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets.
KPMG LLP
Kansas City, Missouri
January 23, 2003
81
SUPPLEMENTARY INFORMATION
YELLOW CORPORATION AND SUBSIDIARIES
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
First Second Third Fourth
(in thousands except per share data) Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------
2002
Operating revenue $ 578,802 $ 646,061 $ 682,473 $ 716,812
Unusual items expense 704 999 5,718 1,014
Operating income 2,657 6,210 13,482 24,515
Income (loss) from continuing operations (147) 2,628 7,297 14,195
Income (loss) from discontinued operations (72,889) 3,592 (48,578) -
Net income (loss) (73,036) 6,220 (41,281) 14,195
Diluted earnings (loss) per share:
From continuing operations (0.01) 0.09 0.25 0.48
From discontinued operations (2.88) 0.13 (1.65) -
Common stock
High 23.12 27.98 27.07 32.21
Low 18.31 21.20 18.72 25.19
2001
Operating revenue $ 636,002 $ 629,135 $ 639,462 $ 600,471
Unusual items expense (income) 626 1,117 (734) 4,406
Operating income 11,818 11,691 12,816 1,870
Income (loss) from continuing operations 2,780 3,589 5,148 (928)
Income (loss) from discontinued operations (1,034) 2,067 1,330 2,349
Net income 1,746 5,656 6,478 1,421
Diluted earnings (loss) per share:
From continuing operations 0.11 0.15 0.21 (0.03)
From discontinued operations (0.04) 0.08 0.05 0.09
Common stock
High 24.69 20.15 27.57 26.45
Low 15.63 15.50 16.82 18.00
- ------------------------------------------------------------------------------------------------------
COMMON STOCK
Approximately 2,200 shareholders of record hold Yellow Corporation common stock.
The company's only class of stock outstanding is common stock, traded in
over-the-counter markets. Trading activity averaged 384,000 shares per day
during the year, up from 262,000 per day in 2001. The NASDAQ stock market quotes
prices for the company's common stock under the symbol "YELL". The high and low
prices at which Yellow Corporation common stock traded for each calendar quarter
in 2002 and 2001 are shown above.
82
GLOSSARY
FINANCIAL TERMS
ASSET BACKED
SECURITIZATIONS (ABS)
Commercial paper backed by accounts receivable of the company and other
unrelated companies originated by a third-party financial institution.
DEBT TO CAPITALIZATION
The percentage of a company financed by debt versus shareholders' investments.
Debt to capitalization is calculated as debt, including ABS borrowings (total
debt), less cash and cash equivalents, divided by total debt less cash and cash
equivalents plus shareholders' equity.
FREE CASH FLOW
Cash provided by operations and stock option proceeds less cash reinvested in
the business through capital expenditures. ABS activity and net cash from
operating activities of discontinued operations are excluded from this
calculation.
OPERATING RATIO
A key financial indicator in the transportation industry calculated by dividing
operating expenses by operating revenue.
RETURN ON COMMITTED
CAPITAL (ROCC)
One of the company's key metrics. ROCC is calculated by tax-effecting earnings
before interest and taxes, excluding unusual items, and then dividing the result
by committed capital.
Committed capital is calculated as the sum of total debt, including ABS
borrowings, plus shareholders' equity.
SHAREHOLDERS' EQUITY
PER SHARE
Total shareholders' equity at the end of the year divided by the common shares
outstanding at the end of the year.
UNUSUAL ITEMS EXPENSE/ (INCOME)
Items that management does not consider representative of the company's ongoing
operations, including gains and losses on property dispositions. These
transactions can distort the underlying results of operations and affect
comparability between years.
INDUSTRY TERMS
BROKERAGE
Companies licensed by the Interstate Commerce Commission to engage in the
business of arranging for transportation of property in interstate commerce.
LESS-THAN-TRUCKLOAD (LTL)
A term that refers to shipments (typically less than 10,000 pounds) from several
customers that are consolidated onto one trailer.
LINEHAUL
Movement of shipments between cities, excluding pick-up and delivery service.
PICK-UP
Service of a carrier in calling for and collecting shipments to be transported
through its system.
SERVICE CENTER
The location at which shipments are ordinarily loaded and dispatched.
TRUCKLOAD (TL)
Large-volume shipments from a single customer that weigh more than 10,000
pounds.
WEB-NATIVE
Technology built for and designed to be employed only via the Internet.
YELLOW TERMS
CUSTOMER SERVICE CENTERS
Centralized call centers in Des Moines, Iowa, and Sioux Falls, South Dakota,
that handle pick-up and delivery for Yellow service centers throughout the
nation and provide a host of value-added services.
DEFINITE DELIVERY
A guaranteed on-time service at standard transit times with continuous shipment
monitoring and proactive notification.
EXACT EXPRESS
A guaranteed, time-definite, expedited service offering using a variety of air
and ground solutions.
ISO 9001: 2000
A comprehensive set of standards that measure quality within business
organizations. Yellow recently was recertified under the ISO 9001: 2000
classification. The certification applies to "all activities related to freight
transportation," extending to 2007. Certification programs are administered by
the International Accreditation Registry, considered the leading authority on
quality in the world.
MERIDIAN IQ
A non-asset-based Yellow Corporation subsidiary and global transportation
management company that plans and coordinates the movement of goods worldwide
to provide customers a single source for transportation management solutions.
MYYELLOW.COM
The web site that allows Yellow customers to conduct their transportation
business and manage their supply chains online.
POWERTMS
A powerful transportation management system available to Meridian IQ customers.
SCS TRANSPORTATION, INC.
(SCST)
A former Yellow Corporation subsidiary consisting of regional carriers Saia
Motor Freight Line, Inc. and Jevic Transportation, Inc. The spin-off of SCST was
effective September 30, 2002.
STANDARD GROUND
Yellow service offering with direct delivery points throughout North America.
STANDARD GROUND
REGIONAL ADVANTAGE
Two- and three-day service in 500- to 1,500-mile length-of- haul lanes. Yellow
provides this service in 38,000 lanes in metro-to-metro markets throughout the
central and eastern United States.
YELLOW CORPORATION
A holding company that through wholly-owned operating subsidiaries offers its
customers a wide range of asset and non-asset-based transportation services
integrated by technology.
YELLOW GLOBAL
A unit of Meridian IQ handling global transportation services with service to 88
countries worldwide.
YELLOW TECHNOLOGIES
A Yellow Corporation subsidiary providing innovative technology solutions and
services exclusively for Yellow operating companies.
YELLOW TRANSPORTATION
A Yellow Corporation subsidiary offering a full range of regional, national and
international services for the movement of industrial, commercial and retail
goods.
YES WE CAN
Yellow brand promise articulating our commitment to 100 percent customer
satisfaction.
OFFICERS
Yellow Corporation
William D. Zollars
Chairman of the Board,
President and Chief Executive Officer
Donald G. Barger, Jr.
Senior Vice President and
Chief Financial Officer
Daniel J. Churay
Senior Vice President,
General Counsel and Secretary
Gregory A. Reid
Senior Vice President and Chief Marketing Officer
Stephen L. Bruffett
Vice President and Treasurer
Yellow Transportation, Inc.
James L. Welch
President and Chief Executive Officer
Meridian IQ, LLC
James D. Ritchie
President and Chief Executive Officer
Yellow Technologies, Inc.
Lynn M. Caddell
President
Yellow Corporation
P.O. Box 7563
Overland Park, KS 66207
913-696-6100
www.yellowcorp.com
Independent Auditors
KPMG LLP
Kansas City, MO
Transfer Agent and Registrar
Mellon Investor Services
P.O. Box 3315
So. Hackensack, NJ 01606
800-851-9677
www.melloninvestor.com
Annual Meeting
April 17 at 9:30 a.m.
Yellow Corporation
10990 Roe Avenue
Overland Park, KS 66211
10-K Report
Please write to:
Manager, Investor Relations
Yellow Corporation
or see our web site.
www.yellowcorp.com
85
BOARD OF DIRECTORS
[PHOTO OF BOARD OF DIRECTORS]
Pictured, standing, from left to right:
Dennis E. Foster,
William L. Trubeck,
Carl W. Vogt,
Richard C. Green, Jr.,
and John C. McKelvey.
Pictured, sitting, from left to right:
William D. Zollars,
Cassandra C. Carr,
and Howard M. Dean.
William D. Zollars
Director since 1999
Chairman of the Board,
President and Chief Executive Officer
of the Company
Cassandra C. Carr (3)
Director since 1997
Senior Advisor,
Public Strategies
Howard M. Dean (2)
Director since 1987
Retired Chairman,
Dean Foods Company
Dennis E. Foster (1), (3)*
Director since 2000
Retired Vice Chairman,
Alltel Corporation
Richard C. Green, Jr. (2)
Director since 2001
Chairman of the Board,
President and Chief Executive
Officer,
Aquila, Inc.
John C. McKelvey (1)*
Director since 1977
President and
Chief Executive Officer,
Menninger Foundation
and Menninger Psychiatric Clinic
William L. Trubeck (2)*
Director since 1994
Executive Vice President,
Operations Support and
Chief Administrative Officer,
Waste Management, Inc.
Carl W. Vogt (1), (3)
Director since 1996
Of Counsel,
formerly Senior Partner,
Fulbright & Jaworski LLP
Daniel J. Churay
Secretary to the Board
(1) Audit Committee
(2) Compensation Committee
(3) Governance Committee
* Committee Chairman
86
Design: Cahan & Associates, San Francisco; Photography: cover & pgs. 3-13: Todd
Hido; pgs. 27 & 86: Ron Coppock-King
[YELLOW LOGO]
Yellow Corporation
P.O. Box 7563, Overland Park, KS 66207, www.yellowcorp.com
Printed in Canada #505