UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to _______________________
Commission file number 0-12255
YELLOW CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 48-0948788
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10990 Roe Avenue, Overland Park, Kansas 66207
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(Address of principal executive offices) (Zip Code)
(913) 696-6100
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(Registrant's telephone number, including area code)
No Changes
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(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 30, 2003
----- -----------------------------
Common Stock, $1 Par Value Per Share 29,698,931 shares
YELLOW CORPORATION
INDEX
Item Page
- ---- ----
PART I
------
1. Financial Statements
Consolidated Balance Sheets -
March 31, 2003 and December 31, 2002 3
Statements of Consolidated Operations -
Three Months Ended March 31, 2003 and 2002 4
Statements of Consolidated Cash Flows -
Three Months Ended March 31, 2003 and 2002 5
Notes to Consolidated Financial Statements 6
2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
3. Quantitative and Qualitative Disclosures About Market Risk 14
4. Controls and Procedures 15
PART II
-------
1. Legal Proceedings 16
2. Changes in Securities and Use of Proceeds 16
3. Defaults Upon Senior Securities 16
4. Submission of Matters to a Vote of Security Holders 16
5. Other Information 16
6. Exhibits and Reports on Form 8-K 16
Signatures 18
Certifications 19
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
Yellow Corporation and Subsidiaries
(Amounts in thousands except per share data)
(Unaudited)
March 31, December 31,
2003 2002
----------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 23,336 $ 28,714
Accounts receivable 324,900 327,913
Prepaid expenses and other 52,921 68,726
----------- -----------
Total current assets 401,157 425,353
----------- -----------
PROPERTY AND EQUIPMENT:
Cost 1,693,130 1,679,096
Less - Accumulated depreciation 1,122,794 1,114,120
----------- -----------
Net property and equipment 570,336 564,976
----------- -----------
Goodwill and other assets 54,156 52,656
----------- -----------
Total assets $ 1,025,649 $ 1,042,985
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 77,913 $ 114,989
Wages, vacations, and employees' benefits 166,449 159,998
Other current and accrued liabilities 102,469 101,111
Asset backed securitization (ABS) borrowings 50,000 50,000
Current maturities of long-term debt 35,260 24,261
----------- -----------
Total current liabilities 432,091 450,359
----------- -----------
OTHER LIABILITIES:
Long-term debt, less current portion 39,004 50,024
Deferred income taxes, net 26,240 25,657
Claims and other liabilities 161,673 156,987
----------- -----------
Total other liabilities 226,917 232,668
----------- -----------
SHAREHOLDERS' EQUITY:
Common stock, $1 par value per share 31,828 31,825
Capital surplus 80,654 80,610
Retained earnings 331,100 325,474
Accumulated other comprehensive loss (34,707) (35,596)
Unamortized restricted stock awards (932) (1,053)
Treasury stock, at cost (2,244 shares) (41,302) (41,302)
----------- -----------
Total shareholders' equity 366,641 359,958
----------- -----------
Total liabilities and shareholders' equity $ 1,025,649 $ 1,042,985
=========== ===========
The accompanying notes are an integral part of these statements.
3
STATEMENTS OF CONSOLIDATED OPERATIONS
Yellow Corporation and Subsidiaries
For the Three Months Ended March 31
(Amounts in thousands except per share data)
(Unaudited)
2003 2002
--------- ---------
OPERATING REVENUE $ 681,093 $ 578,802
--------- ---------
OPERATING EXPENSES:
Salaries, wages and benefits 438,748 390,239
Operating expenses and supplies 109,943 81,068
Operating taxes and licenses 19,767 18,379
Claims and insurance 12,724 13,580
Depreciation and amortization 20,268 18,929
Purchased transportation 67,873 53,246
Losses on property disposals, net 11 468
Spin-off and reorganization charges - 236
--------- ---------
Total operating expenses 669,334 576,145
--------- ---------
OPERATING INCOME 11,759 2,657
--------- ---------
NONOPERATING (INCOME) EXPENSES:
Interest expense 2,646 2,310
ABS facility charges - 754
Other, net (93) (158)
--------- ---------
Nonoperating expenses, net 2,553 2,906
--------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 9,206 (249)
INCOME TAX PROVISION (BENEFIT) 3,580 (102)
--------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS 5,626 (147)
Loss from discontinued operations, net - (72,889)
--------- ---------
NET INCOME (LOSS) $ 5,626 $ (73,036)
========= =========
AVERAGE SHARES OUTSTANDING-BASIC 29,583 24,934
========= =========
AVERAGE SHARES OUTSTANDING-DILUTED 29,818 25,259
========= =========
BASIC EARNINGS (LOSS) PER SHARE:
Income (loss) from continuing operations $ 0.19 $ (0.01)
Loss from discontinued operations - (2.92)
--------- ---------
Net income (loss) $ 0.19 $ (2.93)
--------- ---------
DILUTED EARNINGS (LOSS) PER SHARE:
Income (loss) from continuing operations $ 0.19 $ (0.01)
Loss from discontinued operations - (2.88)
--------- ---------
Net income (loss) $ 0.19 $ (2.89)
--------- ---------
The accompanying notes are an integral part of these statements.
4
STATEMENTS OF CONSOLIDATED CASH FLOWS
Yellow Corporation and Subsidiaries
For the Three Months Ended March 31
(Amounts in thousands)
(Unaudited)
2003 2002
-------- --------
OPERATING ACTIVITIES:
Net income (loss) $ 5,626 $(73,036)
Noncash items included in net income (loss):
Depreciation and amortization 20,268 18,929
Loss from discontinued operations - 72,889
Losses on property disposals, net 11 468
Changes in assets and liabilities, net:
Accounts receivable 3,013 (19,212)
Accounts receivable securitizations - 30,500
Accounts payable (37,076) (27,299)
Other working capital items 23,594 42,675
Claims and other 5,183 3,028
Other (564) 2,188
Net change in operating activities of discontinued operations - (3,050)
-------- --------
Net cash from operating activities 20,055 48,080
-------- --------
INVESTING ACTIVITIES:
Acquisition of property and equipment (26,141) (25,380)
Proceeds from disposal of property and equipment 691 (580)
Net capital expenditures of discontinued operations - (1,275)
-------- --------
Net cash used in investing activities (25,450) (27,235)
-------- --------
FINANCING ACTIVITIES:
Decrease in long-term debt (21) (25,418)
ABS borrowings, net - -
Proceeds from stock options and other, net 38 2,039
-------- --------
Net cash provided by (used in) financing activities 17 (23,379)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (5,378) (2,534)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 28,714 19,214
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 23,336 $ 16,680
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid (refunds), net $ 4,832 $ (5,348)
======== ========
Interest paid $ 1,510 $ 2,216
======== ========
The accompanying notes are an integral part of these statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Yellow Corporation and Subsidiaries
(unaudited)
1. The accompanying consolidated financial statements include the accounts
of Yellow Corporation and its wholly owned subsidiaries (the company or
Yellow). The company has prepared the consolidated financial
statements, without audit by independent public accountants, pursuant
to the rules and regulations of the Securities and Exchange Commission
(SEC). In the opinion of management, all normal recurring adjustments
necessary for a fair statement of the financial position, results of
operations and cash flows for the interim periods included herein have
been made. Certain information and note disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted from these
statements pursuant to SEC rules and regulations. Accordingly, the
accompanying consolidated financial statements should be read in
conjunction with the consolidated financial statements included in the
company's Annual Report on Form 10-K for the year ended December 31,
2002.
2. Yellow Corporation 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,
coordinates and manages 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. 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. and Jevic Transportation, Inc. 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 were reclassified to reflect SCST as discontinued
operations for the prior period presented.
Summarized results of operations relating to SCST (as reported in
discontinued operations) for the three months ended March 31, 2002 were
as follows (amounts in thousands, except per share data):
Operating revenue $ 183,538
Operating expenses 178,091
---------
Operating income 5,447
Nonoperating expenses, net 1,578
---------
Income before income taxes 3,869
Income tax provision 1,583
---------
Income from continuing operations 2,286
Cumulative effect of change in accounting for goodwill (75,175)
---------
Loss from discontinued operations, net $ (72,889)
=========
Discontinued operations basic earnings (loss) per share:
Income from continuing operations $ 0.09
Cumulative effect of change in accounting for goodwill (3.01)
---------
Loss from discontinued operations $ (2.92)
=========
Discontinued operations diluted earnings (loss) per share:
Income from continuing operations $ 0.09
Cumulative effect of change in accounting for goodwill
(2.97)
---------
Loss from discontinued operations $ (2.88)
=========
Management fees and other corporate services previously allocated to
SCST were not charged to discontinued operations, as the company
continues to incur the expenses. Interest expense was allocated to
discontinued operations based on the overall effective borrowing rate
of Yellow applied to the debt reduction that Yellow realized from the
spin-off. Interest expense included in discontinued operations was $1.6
million for the three months ended March 31, 2002.
6
3. The company reports financial and descriptive information about its
reportable operating segments on a basis consistent with that used
internally for evaluating segment operating performance and allocating
resources to segments. Yellow manages the segments separately because
each requires different operating strategies. The company evaluates
performance primarily on operating income and return on capital.
The company 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 in the company's Annual Report on
Form 10-K for the year ended December 31, 2002. The company charges
management fees and other corporate services to segments primarily
based on direct benefit received or allocated based on revenue.
Corporate operating losses represent operating expenses of the holding
company, including salaries, wages and benefits, along with incentive
compensation and professional services. In 2003, Corporate operating
losses also included $4.0 million for an industry conference the
company hosted. Corporate identifiable assets primarily referred to
cash and cash equivalents, in addition to pension intangible assets.
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.
The following table summarizes the company's operations by business
segment (in thousands):
Yellow Corporate/
Transportation Meridian IQ Eliminations Consolidated
-------------- ----------- ------------ ------------
As of March 31, 2003
Identifiable assets $ 934,047 $ 63,816 $ 27,786 $ 1,025,649
As of December 31, 2002
Identifiable assets 940,252 64,617 38,116 1,042,985
Three months ended
March 31, 2003
External revenue 659,559 21,534 - 681,093
Intersegment revenue 566 549 (1,115) -
Operating income (loss) 19,500 (893) (6,848) 11,759
Three months ended
March 31, 2002
External revenue 563,949 14,853 - 578,802
Intersegment revenue 694 549 (1,243) -
Operating income (loss) 6,662 (1,515) (2,490) 2,657
4. The company has various stock-based employee compensation plans, which
are described more fully in the company's Annual Report on Form 10-K
for the year ended December 31, 2002. Yellow accounts for those plans
under the recognition and measurement principles of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." 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.
The pro forma calculations in the table below were estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions:
2003 2002
-------- --------
Dividend yield -% -%
Expected volatility 47.2% 39.0%
Risk-free interest rate 2.0% 2.6%
Expected option life (years) 3 3
Fair value per option $ 8.88 $ 7.81
7
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,
for the three months ended March 31:
(In thousands except per share data) 2003 2002
---------- ----------
Net income (loss), as reported $ 5,626 $ (73,036)
Less: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects 549 360
---------- ----------
Pro forma net income (loss) $ 5,077 $ (73,396)
========== ==========
Basic earnings (loss) per share:
Income (loss) from continuing operations -- as reported $ 0.19 $ (0.01)
Income (loss) from continuing operations -- pro forma 0.17 (0.02)
Net income (loss) -- as reported 0.19 (2.93)
Net income (loss) -- pro forma 0.17 (2.94)
Diluted earnings (loss) per share:
Income (loss) from continuing operations -- as reported $ 0.19 $ (0.01)
Income (loss) from continuing operations -- pro forma 0.17 (0.02)
Net income (loss) -- as reported 0.19 (2.89)
Net income (loss) -- pro forma 0.17 (2.90)
5. The company's comprehensive income includes net income, changes in the
fair value of an interest rate swap and foreign currency translation
adjustments. Comprehensive income (loss) for the three months ended
March 31, 2003 and 2002 was $6.5 million and $(71.6) million,
respectively.
6. As of March 31, 2003, the carrying amount of goodwill was $20.5 million
and the carrying amount of identifiable intangible assets was $8.3
million. Refer to the company's Annual Report on Form 10-K for the year
ended December 31, 2002 for a description of the company's goodwill and
intangibles policies.
7. The company incurs rental expenses under noncancelable lease agreements
for certain buildings and operating equipment. Rental expense is
charged to operating expenses and supplies on the Statements of
Consolidated Operations. The following table represents the actual
rental expense, as reflected in operating income, incurred for the
three months ended March 31 (in thousands):
2003 2002
-------- --------
Rental expense $9,595 $8,484
8. 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.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) should be read in conjunction with the Consolidated Financial
Statements and the Notes to the Consolidated Financial Statements of Yellow
Corporation (also referred to as "Yellow," "we" or "our"). MD&A and certain
statements in the Notes to Consolidated Financial Statements include
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21 of the Securities Exchange Act of 1934,
as amended (each a forward-looking statement). Forward-looking statements
include those preceded by, followed by or include the words "should," "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.
RESULTS OF OPERATIONS
CONSOLIDATED RESULTS
The following table summarizes the Statements of Consolidated Operations for the
three months ended March 31 (in millions):
Percent
2003 2002 Change
--------- --------- ---------
Operating Revenue $ 681.1 $ 578.8 17.7%
Operating Income 11.8 2.7 342.6%
Nonoperating Expenses, net 2.6 2.9 (12.1)%
Income (Loss) from Continuing Operations 5.6 (0.1) n/m(1)
Loss from Discontinued Operations - (72.9) n/m(1)
Net Income (Loss) $ 5.6 $ (73.0) 107.7%
--------- --------- ---------
(1) Not meaningful.
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002
Our consolidated operating revenue for the first quarter of 2003 increased by
$102.3 million over the first quarter of 2002, primarily as a result of
increased volumes at Yellow Transportation from growth in premium services and
increased market share from the September 2002 closure of Consolidated
Freightways, Inc. (CF), a major competitor of Yellow Transportation. We also
recognized $6.7 million of additional revenue at Meridian IQ, mostly due to
increased volumes in international forwarding, the July 2002 acquisition of
Clicklogistics, Inc. (Clicklogistics) customer contracts and the August 2002
acquisition of MegaSys, Inc. (MegaSys).
Operating income improved by $9.1 million for the first quarter of 2003 compared
to the first quarter of 2002 despite continued economic conditions and extreme
weather experienced during the quarter. Corporate expenses increased
approximately $4.4 million over last year primarily due to $4.0 million for an
industry conference that Yellow hosts every other year. These costs are included
under "Corporate" in the Business Segments note. Operating income for the first
quarter of 2002 included $0.7 million related to losses on property disposals
and spin-off and reorganization charges. The first quarter of 2003 included
minimal losses on property disposals.
Nonoperating expenses decreased by $0.3 million from the first quarter of 2002
due mostly to lower financing costs for our asset-backed securitization (ABS)
obligations, from both lower interest rates and lower average borrowings. In the
first quarter of 2002, ABS obligations were off-balance sheet with financing
costs recorded as "ABS facility charges" on the Statement of Consolidated
Operations. Due to the December 31, 2002 amendment to the facility, ABS
borrowings were prospectively reflected on the Consolidated Balance Sheets and
the related interest was recorded as "interest expense" on the Statement of
Consolidated Operations. Interest expense for the first quarter of 2003 included
approximately $0.4 million related to the ABS facility compared to $0.8 million
of ABS facility charges in the first quarter of 2002.
Our effective tax rate on continuing operations for the first quarter of 2003
was 38.9 percent compared to 41.0 percent in the first quarter of 2002. The
lower tax rate resulted from projected higher profits before tax and lower
nondeductible business expenses in 2003 compared to 2002.
9
Our net loss of $73.0 million for the first quarter of 2002 occurred primarily
due to the impairment of goodwill associated with the acquisition of Jevic
Transportation, Inc. (Jevic). In the first quarter of 2002, we recorded a
non-cash charge of $75.2 million as a cumulative effect of change in accounting
for the impairment of Jevic goodwill. In September 2002, we successfully
completed the 100 percent distribution (the spin-off) of all of the shares of
SCS Transportation, Inc. (SCST) to our shareholders. As a result of the
spin-off, the non-cash charge and the results of operations for SCST have been
reclassified as discontinued operations on our 2002 Statement of Consolidated
Operations.
YELLOW TRANSPORTATION RESULTS
The table below provides summary information for Yellow Transportation for the
three months ended March 31 (in millions):
Percent
2003 2002 Change
-------- -------- --------
Operating Revenue $660.1 $564.6 16.9%
Operating Income 19.5 6.7 192.7%
Operating Ratio 97.0% 98.8% (1.8)pp
-------- -------- --------
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002
As discussed under our consolidated results, Yellow Transportation realized
increases in volumes and price in the first quarter of 2003 compared to the
first quarter of 2002 as a result of its premium services, pricing discipline,
service quality and market share growth from the CF closure. Less-than-truckload
(LTL) revenue per day increased 17.0% over the first quarter of 2002, primarily
reflecting a 9.2% increase in LTL tonnage per day and a 7.1% improvement in LTL
revenue per hundred weight. A primary indicator of pricing, LTL revenue per
hundred weight excluding fuel surcharge, was up 3.7 percent in the first quarter
of 2003 compared to the first quarter of 2002.
Yellow Transportation realized improved operating income of $12.8 million from
the first quarter of 2002 to the first quarter of 2003, despite increased costs
for wages and benefits, workers' compensation, and bad debts in 2003. In
addition, Yellow Transportation incurred approximately $5.0 million of
unexpected weather-related expenses in the first quarter of 2003, including
driver delays, snow removal, and employee injuries. Higher volumes combined with
contractual wage and benefit increases impacted first quarter 2003 operating
expense by over $35 million. Improved productivity and labor mix slightly offset
the increased wages. Yellow Transportation also recognized a benefit of $1.3
million from a partial insurance recovery under a fidelity policy related to
prior years' cargo expenses. We are reviewing and making appropriate adjustments
to our procedures and controls in response to this insurance claim.
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
were higher than originally anticipated. This occurred despite the continued
improvement of safety statistics at Yellow Transportation year over year.
Workers' compensation expense increased by $3.7 million in the first quarter of
2003 compared to the first quarter of 2002. During the second half of 2002,
Yellow Transportation added additional resources to manage these claims.
Bad debt expense also had a negative impact on Yellow Transportation results,
increasing by $3.5 million in the first quarter of 2003 compared to the first
quarter of 2002. The increase resulted from higher business levels, and a trend
of additional write-offs partially due to the negative impact of the economy on
certain customers and their ability to pay. During the fourth quarter of 2002,
Yellow Transportation added additional collection personnel and improved its
credit policies regarding new and continuing customers.
On March 28, 2003, the International Brotherhood of Teamsters ratified a new
National Master Freight Agreement with the members of the Motor Freight Carrier
Association, including Yellow Transportation. The five-year agreement, effective
April 1, 2003, covers approximately 80 percent of Yellow Transportation
employees. The new contract will increase wages and benefits about 3 percent
annually.
10
MERIDIAN IQ RESULTS
The table below provides summary information for Meridian IQ for the three
months ended March 31 (in millions):
Percent
2003 2002 Change
-------- -------- --------
Operating Revenue $22.1 $15.4 43.4%
Operating Loss (0.9) (1.5) (41.1)%
-------- -------- --------
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002
As discussed under our consolidated results, Meridian IQ recognized additional
revenue of $6.7 million in the first quarter of 2003 compared to the first
quarter of 2002, mostly due to increased volumes in international forwarding and
the recent acquisitions of MegaSys and the customer contracts of Clicklogistics.
Meridian IQ also realized additional revenue from premium services. Operating
losses at Meridian IQ declined from the first quarter of 2002 as a result of
improved operating revenue and margins.
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.
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. The following table summarizes the availability under the bank
credit agreement at each period end (in millions):
March 31, December 31,
2003 2002
------------ --------------
Total capacity $ 300.0 $ 300.0
Outstanding borrowings - -
Letters of credit (152.5) (146.2)
------------ --------------
Available unused capacity $ 147.5 $ 153.8
Our outstanding letters of credit at March 31, 2003 included $14.0 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 regarding certain lease obligations of SCST equaling $6.9 million at
March 31, 2003.
Asset Backed Securitization Facility
Our ABS facility provides us with additional liquidity and lower borrowing costs
through access to the asset backed commercial paper market. By using the ABS
facility, we obtain a variable rate based on the 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 2.1 percent on the
ABS facility in the first quarter of 2003 compared to a rate of 2.3 percent for
the year ended December 31, 2002.
11
The table below provides the borrowing and repayment activity, as well as the
resulting balances, for the periods presented (in millions):
Three Months Twelve Months
Ended Ended
March 31, 2003 December 31, 2002
-------------- -----------------
ABS obligations outstanding at beginning of period $ 50.0 $ 141.5
Transfer of receivables to conduit (borrowings) 85.0 421.5
Redemptions from conduit (repayments) (85.0) (513.0)
-------------- --------------
ABS obligations outstanding at end of period $ 50.0 $ 50.0
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. Refer to our Annual Report on Form 10-K for the year ended December
31, 2002 for a further understanding of the process related to the ABS facility.
Cash Flow Measurements
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 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 three months ended March 31 (in millions):
2003 2002
---------- ----------
Net cash from operating activities $ 20.1 $ 48.1
Net change in operating activities of discontinued operations - 3.1
Accounts receivable securitizations, net - (30.5)
Net property and equipment acquisitions (25.5) (26.0)
Proceeds from stock options - 2.0
---------- ----------
Free cash flow $ (5.4) $ (3.3)
The slight decline of $2.1 million in free cash flow from the first quarter of
2002 compared to first quarter of 2003 resulted primarily from decreases of
accounts payable and other working capital items partially offset by improved
operating results and favorable changes in accounts receivable. Other working
capital fluctuations resulted primarily from performance incentive accruals,
income tax refunds and prefunded benefit contributions.
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 the
first quarter of 2002, we reduced ABS obligations by $30.5 million. In 2003, ABS
obligations were reflected as a financing activity on the Statements of
Consolidated Cash Flows and had no impact on free cash flow or net cash from
operating activities. Changes in operating activities of discontinued operations
related to SCST activity until the spin-off in September 2002.
Nonunion Pension Obligations
As discussed in more detail in our Annual Report on Form 10-K for the year ended
December 31, 2002, we provide defined benefit pension plans for most 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 negatively impacted the funded status of our plans,
resulting in additional funding and expense over the next several years. Based
on a recent valuation study from the independent actuary, our actual 2003
pension expense will be approximately $17 million, significantly less than the
$24 million we expected at December 31, 2002. Cash funding requirements have not
changed since December 31, 2002, and will approximate $35 million in 2003.
12
Regulatory Changes
In October 2002, the Environmental Protection Agency issued new engine emission
standards that apply to heavy-duty vehicles. Yellow Transportation continues to
test several units for fuel economy, reliability and performance standards.
Although meaningful mileage and test results will not be available until the end
of 2003, early results indicate that the engines are performing as expected and
will not have a material impact on our capital expenditures or operating
expenses in 2003.
CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
The following tables provide aggregated information regarding our contractual
obligations and commercial commitments as of March 31, 2003.
Contractual Cash Obligations
(amounts in millions) Payments Due by Period
Less than 2 -- 3 4 -- 5 After 5
1 year years years years Total
-------------------------------------------------------------------
Balance sheet obligations:
ABS borrowings $ 50.0 $ - $ - $ - $ 50.0
Long-term debt 35.3 21.5 7.0 10.5 74.3
Off-balance sheet obligations:
Operating leases 1.2 35.5 6.8 6.0 69.5 (1)
------ ------ ------ ------ ------
Total contractual obligations $106.5 $ 57.0 $ 13.8 $ 16.5 $193.8
====== ====== ====== ====== ======
(1) The net present value of operating leases, using a discount rate of 10
percent, was $58.3 million at March 31, 2003.
Other Commercial Commitments
The following table reflects other commercial commitments or potential cash
outflows that may result from a contingent event.
(amounts in millions) Amount of Commitment Expiration Per Period
Less than 2 -- 3 4 -- 5 After 5
1 year years years years Total
-------------------------------------------------------------------
Available line of credit $ - $147.5 (1) $ - $ - $147.5
Letters of credit 20.1 132.4 - - 152.5
Lease guarantees for SCST 1.3 3.3 1.9 0.4 6.9
Surety bonds 21.0 (2) 34.6 1.2 0.3 57.1
------ ------ ------ ------ ------
Total commercial commitments $42.4 $317.8 $ 3.1 $ 0.7 $364.0
====== ====== ====== ====== ======
(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.
(2) Includes $4.6 million of surety bonds for SCST related to property damage
and workers' compensation self insurance.
13
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We have exposure to a variety of market risks, including the effects of interest
rates, foreign 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 March 31, 2003, 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 March 31, 2003.
The table below provides information regarding our interest rate risk as of
March 31, 2003. 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 (in millions) and contractual
interest rate.
There- Fair
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 $ 82.4
Average interest rate 6.00% 6.77% 6.58% 6.71% - 6.06%
Interest Rate Swap
Notional amount $ 50.0 (1) - - - - - $ 50.0 $ 51.8
Avg. pay rate (fixed) 6.06% - - - - -
Avg. receive rate 1.28% - - - - -
(variable)
(1) Interest rate swap on the ABS facility. The variable rate is based on the
3-month LIBOR as of March 31, 2003.
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.
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.
14
Item 4. Controls and Procedures
The company maintains a rigorous set of disclosure controls and procedures and
internal controls designed to ensure that information required to be disclosed
in its filings under the Securities and Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. The company's principal
executive and financial officers have evaluated its disclosure controls and
procedures within 90 days prior to the filing of this Quarterly Report on Form
10-Q and have determined that such disclosure controls and procedures are
effective.
Subsequent to the evaluation by the company's principal executive and financial
officers, there were no significant changes in internal controls or other
factors that could significantly affect internal controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses. However, we are reviewing and making appropriate adjustments to our
procedures and controls in response to the issue mentioned in Management's
Discussion and Analysis that resulted in an insurance claim under a fidelity
policy related to prior years' cargo expenses.
15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings -- None
Item 2. Changes in Securities and Use of Proceeds -- None
Item 3. Defaults Upon Senior Securities -- None
Item 4. Submission of Matters to a Vote of Security Holders
(a) Annual Meeting of Shareholders on April 17, 2003.
(b) The following directors were elected with the indicated number of votes
set forth below.
Nominees For Withheld
--------- --- --------
Cassandra C. Carr 26,029,128 153,858
Howard M. Dean 25,181,780 1,001,206
Dennis E. Foster 26,032,008 150,978
John C. McKelvey 26,028,245 154,741
William L. Trubeck 25,535,456 647,530
Carl W. Vogt 26,031,446 151,540
William D. Zollars 25,928,572 254,414
(c) Votes were cast with respect to the ratification and approval of the
selection of KPMG LLP as independent public accountants for 2003:
For: 25,793,864 Against: 358,624 Abstain: 30,498
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.2 Bylaws
10.1 Amendments to Amended and Restated Receivables Purchase
Agreement dated July 30, 1999.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On January 7, 2003, a Form 8-K was filed under Item 5, Other Events,
which reported that on December 31, 2002, the company amended its asset
backed securitization (ABS) facility. As a result of the amendment, the
ABS facility is reflected on the Consolidated Balance Sheets of Yellow
Corporation.
On January 17, 2003, a Form 8-K was filed under Item 9, Regulation FD
Disclosure, which reported that the company successfully concluded its
biennial Transformation Conference held in Las Vegas. Approximately
1,500 industry professionals including about 500 Yellow customers and
sponsors attended the conference. The company incurred approximately
$4.0 million to host the conference.
On February 6, 2003, a Form 8-K was filed under Item 9, Regulation FD
Disclosure, which stated that the members of the Motor Freight Carrier
Association, including Yellow Transportation, Inc., and negotiators for
the International Brotherhood of Teamsters (IBT) held a joint press
conference that afternoon to announce that they reached a tentative
16
agreement on a new National Master Freight Agreement, pursuant to which
Yellow Transportation employs its IBT members. The tentative agreement
was subject to ratification by the union membership.
On March 3, 2003, a Form 8-K was filed under Item 5, Other Events, and
Item 9, Regulation FD Disclosure, which announced that the company's
board of directors had approved a stock repurchase program that
authorizes the company to repurchase up to $25 million of common stock.
The company also reconfirmed its first quarter 2003 and full year 2003
earnings guidance.
On April 1, 2003, a Form 8-K was filed under Item 5, Other Events,
which announced that on March 28, 2003, the membership of the IBT
ratified the National Master Freight Agreement. The five-year agreement
is effective on April 1, 2003, and covers approximately 80 percent of
Yellow Transportation employees.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
YELLOW CORPORATION
--------------------
Registrant
Date: May 2, 2003 /s/ William D. Zollars
----------------------------------
William D. Zollars
Chairman of the Board of
Directors, President & Chief
Executive Officer
Date: May 2, 2003 /s/ Donald G. Barger, Jr.
---------------------------------
Donald G. Barger, Jr.
Senior Vice President
& Chief Financial Officer
18
CERTIFICATION
I, William D. Zollars, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of Yellow
Corporation;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have;
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors:
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
(6) The registrant's other certifying officer and I have indicated in this
report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 2, 2003 /s/ William D. Zollars
------------------------------------
William D. Zollars
Chairman of the Board of
Directors, President & Chief
Executive Officer
19
CERTIFICATION
I, Donald G. Barger, Jr., certify that:
(1) I have reviewed this quarterly report on Form 10-Q of Yellow
Corporation;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have;
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors:
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
(6) The registrant's other certifying officer and I have indicated in this
report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 2, 2003 /s/ Donald G. Barger, Jr.
-------------------------------
Donald G. Barger, Jr.
Senior Vice President
& Chief Financial Officer
20