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 June 30, 2003
-------------
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
- --------------------------------------------------------------------------------
(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 66211
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(Address of principal executive offices) (Zip Code)
(913) 696-6100
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
No Changes
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at June 30, 2003
- ----------------------------------------------- ----------------------------
Common Stock, $1 Par Value Per Share 29,550,371 shares
INDEX
<Table>
<Caption>
Item Page
----
PART I
1. Financial Statements
Consolidated Balance Sheets -
June 30, 2003 and December 31, 2002 3
Statements of Consolidated Operations -
Three Months and Six Months Ended June 30, 2003 and 2002 4
Statements of Consolidated Cash Flows -
Six Months Ended June 30, 2003 and 2002 5
Notes to Consolidated Financial Statements 6
2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
3. Quantitative and Qualitative Disclosures About Market Risk 16
4. Controls and Procedures 17
PART II
1. Legal Proceedings 18
2. Changes in Securities and Use of Proceeds 18
3. Defaults Upon Senior Securities 18
4. Submission of Matters to a Vote of Security Holders 18
5. Other Information 18
6. Exhibits and Reports on Form 8-K 18
Signatures 19
</Table>
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
Yellow Corporation and Subsidiaries
(Amounts in thousands except per share data)
(Unaudited)
<Table>
<Caption>
June 30, December 31,
2003 2002
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 49,811 $ 28,714
Accounts receivable, net 334,360 327,913
Prepaid expenses and other 31,765 68,726
------------ ------------
Total current assets 415,936 425,353
------------ ------------
PROPERTY AND EQUIPMENT:
Cost 1,698,586 1,679,096
Less - Accumulated depreciation 1,127,405 1,114,120
------------ ------------
Net property and equipment 571,181 564,976
------------ ------------
Goodwill and other assets 53,564 52,656
------------ ------------
Total assets $ 1,040,681 $ 1,042,985
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 71,283 $ 114,989
Wages, vacations, and employees' benefits 166,369 159,998
Other current and accrued liabilities 113,572 101,111
Asset backed securitization (ABS) borrowings 50,000 50,000
Current maturities of long-term debt 40,259 24,261
------------ ------------
Total current liabilities 441,483 450,359
------------ ------------
OTHER LIABILITIES:
Long-term debt, less current portion 33,983 50,024
Deferred income taxes, net 27,089 25,657
Claims and other liabilities 153,260 156,987
------------ ------------
Total other liabilities 214,332 232,668
------------ ------------
SHAREHOLDERS' EQUITY:
Common stock, $1 par value per share 31,910 31,825
Capital surplus 82,104 80,610
Retained earnings 349,460 325,474
Accumulated other comprehensive loss (33,575) (35,596)
Unamortized restricted stock awards (810) (1,053)
Treasury stock, at cost (2,359 and 2,244 shares) (44,223) (41,302)
------------ ------------
Total shareholders' equity 384,866 359,958
------------ ------------
Total liabilities and shareholders' equity $ 1,040,681 $ 1,042,985
============ ============
</Table>
The accompanying notes are an integral part of these statements.
3
STATEMENTS OF CONSOLIDATED OPERATIONS
Yellow Corporation and Subsidiaries
For the Three and Six Months Ended June 30
(Amounts in thousands except per share data)
(Unaudited)
<Table>
<Caption>
Three Months Six Months
---------------------------- ----------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
OPERATING REVENUE $ 713,453 $ 646,061 $ 1,394,546 $ 1,224,863
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Salaries, wages and benefits 458,036 429,782 896,784 820,021
Operating expenses and supplies 103,908 92,753 213,851 173,821
Operating taxes and licenses 19,492 18,722 39,259 37,101
Claims and insurance 10,730 16,642 23,454 30,222
Depreciation and amortization 20,818 19,482 41,086 38,411
Purchased transportation 68,106 61,471 135,979 114,717
Losses on property disposals, net 30 438 41 906
Spin-off and reorganization charges -- 561 -- 797
----------- ----------- ----------- -----------
Total operating expenses 681,120 639,851 1,350,454 1,215,996
----------- ----------- ----------- -----------
OPERATING INCOME 32,333 6,210 44,092 8,867
----------- ----------- ----------- -----------
NONOPERATING (INCOME) EXPENSES:
Interest expense 2,625 1,437 5,271 3,747
ABS facility charges -- 715 -- 1,469
Other (343) (44) (436) (202)
----------- ----------- ----------- -----------
Nonoperating expenses, net 2,282 2,108 4,835 5,014
----------- ----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 30,051 4,102 39,257 3,853
INCOME TAX PROVISION 11,691 1,474 15,271 1,372
----------- ----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS 18,360 2,628 23,986 2,481
Income (loss) from discontinued operations, net -- 3,592 -- (69,297)
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 18,360 $ 6,220 $ 23,986 $ (66,816)
=========== =========== =========== ===========
AVERAGE SHARES OUTSTANDING-BASIC 29,586 28,404 29,585 26,687
=========== =========== =========== ===========
AVERAGE SHARES OUTSTANDING-DILUTED 29,834 28,810 29,826 27,053
=========== =========== =========== ===========
BASIC EARNINGS (LOSS) PER SHARE:
Income from continuing operations $ 0.62 $ 0.09 $ 0.81 $ 0.09
Income (loss) from discontinued operations -- 0.13 -- (2.59)
----------- ----------- ----------- -----------
Net income (loss) $ 0.62 $ 0.22 $ 0.81 $ (2.50)
----------- ----------- ----------- -----------
DILUTED EARNINGS (LOSS) PER SHARE:
Income from continuing operations $ 0.62 $ 0.09 $ 0.80 $ 0.09
Income (loss) from discontinued operations -- 0.13 -- (2.56)
----------- ----------- ----------- -----------
Net income (loss) $ 0.62 $ 0.22 $ 0.80 $ (2.47)
----------- ----------- ----------- -----------
</Table>
The accompanying notes are an integral part of these statements.
4
STATEMENTS OF CONSOLIDATED CASH FLOWS
Yellow Corporation and Subsidiaries
For the Six Months Ended June 30
(Amounts in thousands)
(Unaudited)
<Table>
<Caption>
2003 2002
------------ ------------
OPERATING ACTIVITIES:
Net income (loss) $ 23,986 $ (66,816)
Noncash items included in net income (loss):
Depreciation and amortization 41,086 38,411
Loss from discontinued operations -- 69,297
Losses on property disposals, net 41 906
Changes in assets and liabilities, net:
Accounts receivable (6,447) (49,858)
Accounts receivable securitizations -- (22,000)
Accounts payable (43,706) (21,641)
Other working capital items 55,861 67,522
Claims and other (2,653) 20,056
Other 1,603 2,760
Net change in operating activities of discontinued operations -- 19,081
------------ ------------
Net cash from operating activities 69,771 57,718
------------ ------------
INVESTING ACTIVITIES:
Acquisition of property and equipment (48,038) (39,398)
Proceeds from disposal of property and equipment 1,204 1,528
Net capital expenditures of discontinued operations -- (9,229)
------------ ------------
Net cash used in investing activities (46,834) (47,099)
------------ ------------
FINANCING ACTIVITIES:
Decrease in long-term debt (43) (113,011)
ABS borrowings, net -- --
Proceeds from issuance of common stock -- 93,792
Treasury stock purchases (2,921) --
Proceeds from stock options 1,124 6,189
------------ ------------
Net cash used in financing activities (1,840) (13,030)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 21,097 (2,411)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 28,714 19,214
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 49,811 $ 16,803
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid (refunds), net $ 4,170 $ (5,055)
============ ============
Interest paid $ 4,491 $ 7,499
============ ============
</Table>
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 (also referred
to as "Yellow," "we" or "our"). We have prepared the consolidated
financial statements, without audit by independent public accountants,
pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). In management's opinion, all normal recurring
adjustments necessary for a fair statement of the financial position,
results of operations and cash flows for the interim periods included
herein have been made. Certain information and note disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
from these statements pursuant to SEC rules and regulations.
Accordingly, the accompanying consolidated financial statements should
be read in conjunction with the consolidated financial statements
included in our Annual Report on Form 10-K for the year ended December
31, 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 July 8, 2003, Yellow and Roadway Corporation (Roadway) announced a
definitive agreement under which we will acquire Roadway for
approximately $966 million in cash and Yellow common stock on
approximately a 50/50 basis. We will also assume an expected $140
million in net Roadway indebtedness, bringing the enterprise value of
the acquisition to approximately $1.1 billion. Upon completion of the
transaction, Roadway will be an operating subsidiary under the holding
company, which will be renamed Yellow-Roadway Corporation. Please refer
to our Current Report on Form 8-K/A dated July 8, 2003 for a more
detailed description of the transaction.
On September 30, 2002, Yellow completed the 100 percent distribution
(the spin-off) of all of its shares of SCS Transportation, Inc. (SCST)
to Yellow shareholders. 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, our financial statements were reclassified
to reflect SCST as discontinued operations for the periods prior to the
spin-off.
Summarized results of operations relating to SCST (as reported in
discontinued operations) for the three and six months ended June 30,
2002 were as follows (amounts in thousands, except per share data):
<Table>
<Caption>
Three Months Six Months
------------ ------------
Operating revenue $ 196,488 $ 380,026
Operating expenses 189,162 367,253
------------ ------------
Operating income 7,326 12,773
Nonoperating expenses, net 1,522 3,100
------------ ------------
Income before income taxes 5,804 9,673
Income tax provision 2,212 3,795
Income from continuing operations 3,592 5,878
Cumulative effect of change in accounting for goodwill -- (75,175)
------------ ------------
Income (loss) from discontinued operations, net $ 3,592 $ (69,297)
------------ ------------
Discontinued operations basic earnings (loss) per share:
Income from continuing operations $ 0.13 $ 0.22
Cumulative effect of change in accounting for goodwill -- (2.81)
------------ ------------
Income (loss) from discontinued operations $ 0.13 $ (2.59)
============ ============
Discontinued operations diluted earnings (loss) per share:
Income from continuing operations $ 0.13 $ 0.22
Cumulative effect of change in accounting for goodwill -- (2.78)
------------ ------------
Income (loss) from discontinued operations $ 0.13 $ (2.56)
============ ============
</Table>
6
Management fees and other corporate services previously allocated to
SCST were not charged to discontinued operations, as we continue to
incur the expenses. We allocated interest expense to discontinued
operations based on the overall effective borrowing rate of Yellow
applied to the debt reduction that we realized from the spin-off.
Interest expense included in discontinued operations was $1.4 million
and $3.0 million for the three months and six months ended June 30,
2002, respectively.
3. Yellow 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. We manage the segments separately because each
requires different operating strategies. We evaluate 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 in our Annual Report on Form 10-K
for the year ended December 31, 2002. We charge 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 Yellow hosted.
Corporate identifiable assets primarily include cash and cash
equivalents, in addition to pension intangible assets. Intersegment
revenue consists of 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 our operations by business segment (in
thousands):
<Table>
<Caption>
Yellow Corporate/
Transportation Meridian IQ Eliminations Consolidated
-------------- ------------ ------------ ------------
As of June 30, 2003
Identifiable assets $ 918,602 $ 64,874 $ 57,205 $ 1,040,681
As of December 31, 2002
Identifiable assets 940,252 64,617 38,116 1,042,985
Three months ended
June 30, 2003
External revenue 690,817 22,636 -- 713,453
Intersegment revenue 632 549 (1,181) --
Operating income (loss) 36,361 64 (4,092) 32,333
Three months ended
June 30, 2002
External revenue 627,668 18,393 -- 646,061
Intersegment revenue 547 549 (1,096) --
Operating income (loss) 10,525 (454) (3,861) 6,210
Six months ended
June 30, 2003
External revenue 1,350,376 44,170 -- 1,394,546
Intersegment revenue 1,198 1,098 (2,296) --
Operating income (loss) 55,861 (829) (10,940) 44,092
Six months ended
June 30, 2002
External revenue 1,191,617 33,246 -- 1,224,863
Intersegment revenue 1,241 1,098 (2,339) --
Operating income (loss) 17,187 (1,969) (6,351) 8,867
</Table>
7
4. Yellow has various stock-based employee compensation plans, which are
described more fully in our Annual Report on Form 10-K for the year
ended December 31, 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." We do not
reflect compensation cost in net income, as all options granted under
those plans had an exercise price equal to the market value of the
underlying common stock on the date of grant.
We estimated the pro forma calculations in the table below using the
Black-Scholes option pricing model with the following weighted average
assumptions for the three and six months ended June 30:
<Table>
<Caption>
Three Months Six Months
------------------------------ ------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Dividend yield --% n/a --% --%
Expected volatility 46.8% n/a 46.9% 35.7%
Risk-free interest rate 2.2% n/a 2.1% 3.8%
Expected option life (years) 3 n/a 3 3
Fair value per option $ 8.91 n/a $ 8.90 $ 5.59
Actual options granted 40,700 0 54,700 14,000
</Table>
The following table illustrates the effect on income from continuing
operations, net income and earnings per share if Yellow had applied the
fair value recognition provisions of Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation, for the
three and six months ended June 30:
<Table>
<Caption>
Three Months Six Months
----------------------------- -----------------------------
(In thousands except per share data) 2003 2002 2003 2002
------------ ------------ ------------ ------------
Net income (loss), as reported $ 18,360 $ 6,220 $ 23,986 $ (66,816)
Less: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects 552 345 1,101 705
------------ ------------ ------------ ------------
Pro forma net income (loss) $ 17,808 $ 5,875 $ 22,885 $ (67,521)
============ ============ ============ ============
Basic earnings (loss) per share:
Income from continuing operations - as reported $ 0.62 $ 0.09 $ 0.81 $ 0.09
Income from continuing operations - pro forma 0.60 0.08 0.77 0.06
Net income (loss) - as reported 0.62 0.22 0.81 (2.50)
Net income (loss) - pro forma 0.60 0.21 0.77 (2.53)
Diluted earnings (loss) per share:
Income from continuing operations - as reported $ 0.62 $ 0.09 $ 0.80 $ 0.09
Income from continuing operations - pro forma 0.60 0.08 0.76 0.06
Net income (loss) - as reported 0.62 0.22 0.80 (2.47)
Net income (loss) - pro forma 0.60 0.21 0.76 (2.50)
</Table>
5. Our comprehensive income includes net income, changes in the fair value
of an interest rate swap and foreign currency translation adjustments.
Comprehensive income for the three months ended June 30, 2003 and 2002
was $19.5 million and $6.4 million, respectively, while comprehensive
income (loss) for the six months ended June 30, 2003 and 2002 was $26.0
million and $(65.2) million, respectively.
6. As of June 30, 2003, the carrying amount of goodwill was $20.5 million
and the gross amount of identifiable intangible assets was $8.3
million. Accumulated amortization of intangibles totaled $1.0 million.
Refer to our Annual Report on Form 10-K for the year ended December 31,
2002 for a description of our goodwill and intangibles policies.
7. Yellow 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 and six months
ended June 30 (in thousands):
8
<Table>
<Caption>
Three Months Six Months
----------------------------- -----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Rental expense $ 9,578 $ 8,472 $ 19,173 $ 16,956
</Table>
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 Yellow liable for a
proportionate share of such multi-employer plans' unfunded vested
liabilities. This potential unfunded pension liability also applies to
our unionized competitors who contribute to multi-employer plans. Based
on the limited information available from plan administrators, which we
cannot independently validate, we believe that our portion of the
contingent liability in the case of a full withdrawal or termination
would be material to our financial position and results of operations.
Yellow Transportation has no current intention of taking any action
that would subject Yellow to obligations under the legislation.
Yellow Transportation has collective bargaining agreements with its
unions that stipulate the amount of contributions it 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 provide provisions to address the
plans' funding if it fails to meet those requirements.
9
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 and six months ended June 30 (in millions):
<Table>
<Caption>
Three Months Six Months
--------------------------------------- ----------------------------------------
Percent Percent
2003 2002 Change 2003 2002 Change
----------- ----------- ----------- ----------- ----------- -----------
Operating Revenue $ 713.5 $ 646.1 10.4% $ 1,394.5 $ 1,224.9 13.9%
Operating Income 32.3 6.2 420.7% 44.1 8.9 397.3%
Nonoperating Expenses, net 2.3 2.1 8.3% 4.8 5.0 (3.6)%
Income from Continuing Operations 18.4 2.6 598.6% 24.0 2.5 866.8%
Income (Loss) from Discontinued Operations -- 3.6 n/m(1) -- (69.3) n/m(1)
----------- ----------- ----------- ----------- ----------- -----------
Net Income (Loss) $ 18.4 $ 6.2 195.2% $ 24.0 $ (66.8) 135.9%
</Table>
(1) Not meaningful.
Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002
Our consolidated operating revenue for the second quarter of 2003 increased by
$67.4 million over the second quarter of 2002, primarily as a result of
increased volumes and improved yield 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 $4.3 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 $26.1 million for the second quarter of 2003
compared to the second quarter of 2002 due to increased revenue and effective
cost management. Operating income for the three months ended June 30, 2003
included $3.7 million as part of an insurance recovery. In the first quarter of
2003, we recognized $1.3 million of operating income under the same insurance
claim for a year-to-date total of $5.0 million. The insurance recovery related
to two former employees falsifying claims over several recent years. We reviewed
and made appropriate adjustments to our procedures and internal controls in
response to this claim. Corporate expenses were in line with last year and are
included under "Corporate" in the Business Segments note. Operating income for
the second quarter of 2002 included $1.0 million mostly related to losses on
property disposals and charges for the spin-off as discussed below. The second
quarter of 2003 included minimal losses on property disposals.
Nonoperating expenses increased by $0.2 million from the second quarter of 2002
due to increased interest expense mostly offset by favorable foreign currency
translation. Our interest expense does not fluctuate in relation to variable
interest rates as 100 percent of our variable rate debt has been hedged under a
swap agreement. The $0.5 million increase in interest expense for the second
quarter of 2003 compared to the combined interest expense and asset-backed
securitization (ABS) facility charges for the second quarter of 2002 resulted
from the method of interest allocation to discontinued operations in the prior
year. As discussed in the Notes to Consolidated Financial Statements, interest
expense was allocated to discontinued operations based on our overall effective
borrowing rate which was higher in 2002 compared to 2003. In the second 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
10
second quarter of 2003 included approximately $0.3 million related to the ABS
facility compared to $0.7 million of ABS facility charges in the second quarter
of 2002.
Our effective tax rate on continuing operations for the second quarter of 2003
was 38.9 percent compared to 35.9 percent in the second quarter of 2002. The
higher tax rate was a function of our income allocation among subsidiaries and
their relative state tax rates. In 2003, Yellow Transportation, a higher tax
rate subsidiary, generated a larger percentage of our profits before tax
compared to the same period in 2002.
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 historical results of operations
for SCST have been reclassified as discontinued operations on our 2002 Statement
of Consolidated Operations.
Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002
Our consolidated operating revenue for the six months ended June 30, 2003
surpassed the six months ended June 30, 2002 by $169.6 million or 13.9 percent.
As discussed above, Yellow Transportation realized increased volumes and
improved yield from growth in premium services and the closure of CF in
September 2002. In addition, Meridian IQ generated additional year-to-date
revenue of nearly $11.0 million mostly due to increased volumes in international
forwarding and its third quarter 2002 acquisitions of MegaSys and Clicklogistics
customer contracts.
Operating income for the first six months of 2003 improved by $35.2 million
compared to the first six months of 2002 due to increased revenue and effective
cost management. We also recognized a $5.0 million reduction in claims and
insurance expense in the first six months of 2003 for the insurance claim
discussed previously. Corporate expenses increased approximately $4.6 million
over the same period last year primarily due to $4.0 million for an industry
conference that Yellow hosts every other year. Operating income for the first
six months of 2002 included $1.7 million related to losses on property disposals
and spin-off and reorganization charges. The first six months of 2003 included
minimal losses on property disposals.
Nonoperating expenses decreased by $0.2 million in the first six months of 2003
compared to the same period in 2002 mostly due to favorable foreign currency
translation. Year-to-date interest expense in 2003 was consistent with
year-to-date 2002 combined interest expense and ABS facility charges mostly as a
result of 100 percent of our variable debt being hedged under a swap agreement
and the method of interest allocation to discontinued operations in 2002.
Our effective tax rate for the first six months of 2003 was 38.9 percent
compared to 35.6 percent for the first six months of 2002. The higher tax rate
was a function of our income allocation among subsidiaries and their relative
state tax rates. In 2003, Yellow Transportation, a higher tax rate subsidiary,
generated a larger percentage of our profits before tax compared to the same
period in 2002.
Our net loss of $66.8 million in the first six months of 2002 occurred primarily
due to the impairment of goodwill associated with 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. As a result of the spin-off, the non-cash charge and the results
of operations of 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 and six months ended June 30 (in millions):
<Table>
<Caption>
Three Months Six Months
----------------------------------------- -----------------------------------------
Percent Percent
2003 2002 Change 2003 2002 Change
----------- ----------- ----------- ----------- ----------- -----------
Operating Revenue $ 691.4 $ 628.2 10.1% $ 1,351.6 $ 1,192.9 13.3%
Operating Income 36.4 10.5 245.5% 55.9 17.2 225.0%
Operating Ratio 94.7% 98.3% 3.6pp 95.9% 98.6% 2.7pp
----------- ----------- ----------- ----------- ----------- -----------
</Table>
Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002
As discussed under our consolidated results, Yellow Transportation realized
increases in volumes and price in the second quarter of 2003 compared to the
second 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 10.2 percent over the second quarter of
11
2002, primarily reflecting a 5.0 percent increase in LTL tonnage per day and a
4.9 percent improvement in LTL revenue per hundred weight. A primary indicator
of pricing, LTL revenue per hundred weight excluding fuel surcharge, was up 3.5
percent in the second quarter of 2003 compared to the second quarter of 2002.
Yellow Transportation realized improved operating income of $25.9 million from
the second quarter of 2002 to the second quarter of 2003, despite increased
costs for wages and benefits and purchased transportation (mostly consisting of
rail) in 2003. Higher volumes combined with contractual wage and benefit
increases impacted second quarter 2003 operating expense by over $32 million.
Improved productivity and labor mix slightly offset the increased wages. In
addition, salaries and wages as a percentage of revenue declined by 2.3
percentage points and total operating expenses as a percentage of revenue
decreased by 3.6 percentage points compared to second quarter 2002. Yellow
Transportation also recognized a benefit of $3.7 million from the insurance
recovery discussed under our Consolidated Results.
Workers' compensation expense in the second quarter of 2003 declined by $4.5
million compared to the second quarter of 2002, primarily as a result of
improved safety statistics in 2003, added resources to manage claims and
additional expenses recorded in the second quarter of 2002. In the second
quarter of 2002, Yellow Transportation recorded additional workers' compensation
expenses due to increased costs per claim and the longer duration of prior
years' cases.
Bad debt expense in the second quarter of 2003 decreased by $3.4 million
compared to the second quarter of 2002, mostly due to improved credit policies,
added collection personnel and additional expenses recorded in the second
quarter of 2002. Additional bad debt expense in the second quarter of 2002 was
partially attributed to increased write-offs from the negative impact of the
economy on certain customers and their ability to pay.
Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002
Yellow Transportation generated increased volumes and improved pricing
throughout the first six months of 2003 compared to the first six months of
2002. With increased volumes from premium services and market share growth from
the CF closure, Yellow Transportation reported increased revenue of $158.7
million in the first six months of 2003 compared to the first six months of
2002. Less-than-truckload (LTL) revenue per day increased 13.4 percent over the
first six months of 2002, primarily reflecting a 7.0 percent increase in LTL
tonnage per day and a 6.0 percent improvement in LTL revenue per hundred weight.
A primary indicator of pricing, LTL revenue per hundred weight excluding fuel
surcharge, was up 3.6 percent in the first six months of 2003 compared to the
first six months of 2002.
Despite increased costs of nearly $60 million in wages and benefits mostly due
to increased volumes and contractual wage and benefit increases, Yellow
Transportation recorded improved operating income of $38.7 million for the first
six months of 2003 compared to the first six months of 2002. Improved
productivity and labor mix slightly offset the increased wages. Fuel costs and
purchased transportation (mostly rail) increased operating expenses by $35.7
million in the first six months of 2003 compared to the same period in 2002.
Even with these increased costs, operating expenses as a percentage of revenue
decreased for the first six months of 2003 by 2.7 percentage points compared to
the first six months of 2002, resulting in an operating ratio of 95.9 percent.
Yellow Transportation recognized a benefit in operating income of $5.0 million
in the first six months of 2003 related to the insurance recovery discussed
under our Consolidated Results.
In recent periods, Yellow Transportation recorded increased expenses for
workers' compensation due to increased costs per claim and longer duration of
cases. As a result of recording these additional expenses, improved safety
statistics and additional resources to manage claims, workers' compensation
expense on a year-to-date basis was consistent with the prior year and declined
as a percentage of revenue by nearly 0.5 percent.
MERIDIAN IQ RESULTS
The table below provides summary information for Meridian IQ for the three and
six months ended June 30 (in millions):
<Table>
<Caption>
Three Months Six Months
------------------------------------------- --------------------------------------------
Percent Percent
2003 2002 Change 2003 2002 Change
------------ ------------ ------------ ------------ ------------ ------------
Operating Revenue $ 23.2 $ 18.9 22.4% $ 45.3 $ 34.3 31.8%
Operating Income / (Loss) 0.1 (0.5) 114.1% (0.8) (2.0) 57.9%
------------ ------------ ------------ ------------ ------------ ------------
</Table>
12
Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002
As discussed under our consolidated results, Meridian IQ realized additional
revenue of $4.3 million in the second quarter of 2003 compared to the second
quarter of 2002, mostly due to increased volumes in international forwarding and
the third quarter 2002 acquisitions of MegaSys and the customer contracts of
Clicklogistics. Meridian IQ also realized additional revenue from premium
services. In the second quarter of 2003, Meridian IQ reported operating income
of $0.1 million, a $0.6 million improvement over the second quarter of 2002.
Improved operating results were attributed to increased revenue and effective
cost management.
Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002
Meridian IQ reported increased revenue of $11.0 million in the first six months
of 2003 compared to the first six months of 2002, as a result of increased
volumes in international forwarding, the third quarter 2002 acquisitions of
MegaSys and Clicklogistics customer contracts, and additional revenue from
premium services. Operating losses at Meridian IQ declined for the first six
months of 2003 by nearly $1.2 million compared to the first six months of 2002.
Increased revenue, improved margins and effective cost management contributed to
the improved operating results.
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 excluding those requirements that will result from the closing of
our recently announced agreement to acquire Roadway Corporation. 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. A more detailed discussion of our
working capital requirements after the closing of our acquisition of Roadway
Corporation will be included in a Joint Proxy/Prospectus on a Registration
Statement on Form S-4 that we will file in connection with the transaction.
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):
<Table>
<Caption>
June 30, December 31,
2003 2002
------------ ------------
Total capacity $ 300.0 $ 300.0
Outstanding borrowings -- --
Letters of credit (152.1) (146.2)
------------ ------------
Available unused capacity $ 147.9 $ 153.8
</Table>
Our outstanding letters of credit at June 30, 2003 included $13.6 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 regarding certain lease obligations of SCST equaling $6.7 million at
June 30, 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
13
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 2.2 percent on the ABS facility for the
first six months of 2003 compared to a rate of 2.3 percent for the year ended
December 31, 2002.
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 cash available to fund additional capital
expenditures, to reduce outstanding debt (including current maturities), 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 six months ended June 30 (in
millions):
<Table>
<Caption>
2003 2002
------------ ------------
Net cash from operating activities $ 69.8 $ 57.7
Net change in operating activities of discontinued operations -- (19.1)
Accounts receivable securitizations, net -- 22.0
Net property and equipment acquisitions (46.8) (37.9)
Proceeds from stock options 1.1 6.2
------------ ------------
Free cash flow $ 24.1 $ 28.9
</Table>
The decline of $4.8 million in free cash flow from the first six months of 2002
compared to the first six months of 2003 resulted primarily from increases in
net property and equipment acquisitions of $8.9 million and decreases in stock
option proceeds of $5.1 million, mostly offset by improved operating results and
favorable accounts receivable collections. Other working capital fluctuations
resulted primarily from performance incentive payments and income tax refunds.
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 six months of
2002, we reduced ABS obligations by $22.0 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 in 2002 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 valuation study in the first quarter of 2003 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 did not change since December 31, 2002, and a payment of $35
million was made in July 2003.
CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
The following tables provide aggregated information regarding our contractual
obligations and commercial commitments as of June 30, 2003.
14
Contractual Cash Obligations
<Table>
<Caption>
(amounts in millions) Payments Due by Period
Less than After 5
1 year 2 - 3 years 4 - 5 years years Total
----------- ----------- ----------- ----------- -----------
Balance sheet obligations:
ABS borrowings $ 50.0 $ -- $ -- $ -- $ 50.0
Long-term debt 40.3 18.5 5.0 10.5 74.3
Off-balance sheet obligations:
Operating leases 26.3 31.8 6.0 6.0 70.1(1)
----------- ----------- ----------- ----------- -----------
Total contractual obligations $ 116.6 $ 50.3 $ 11.0 $ 16.5 $ 194.4
=========== =========== =========== =========== ===========
</Table>
(1) The net present value of operating leases, using a discount rate of 10
percent, was $58.4 million at June 30, 2003.
Other Commercial Commitments
The following table reflects other commercial commitments or potential cash
outflows that may result from a contingent event.
<Table>
<Caption>
(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 $ 147.9(1) $ -- $ -- $ -- $ 147.9
Letters of credit 151.8 0.3 -- -- 152.1
Lease guarantees for SCST 1.8 3.1 1.6 0.2 6.7
Surety bonds 48.7(2) 3.0 1.5 -- 53.2
----------- ----------- ----------- ----------- -----------
Total commercial commitments $ 350.2 $ 6.4 $ 3.1 $ 0.2 $ 359.9
=========== =========== =========== =========== ===========
</Table>
(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 $3.3 million of surety bonds for SCST related to property damage
and workers' compensation self insurance.
SUBSEQUENT EVENTS
On July 8, 2003, Yellow and Roadway Corporation (Roadway) announced a definitive
agreement under which we will acquire Roadway for approximately $966 million, or
$48 per share (based on a fixed exchange ratio and a 60-day average price per
share of $24.95 for Yellow common stock in a half cash, half stock transaction).
We will also assume an expected $140 million in net Roadway indebtedness,
bringing the enterprise value of the acquisition to approximately $1.1 billion.
Upon completion of the transaction, Roadway will be an operating subsidiary
under the holding company, which will be renamed Yellow-Roadway Corporation. The
transaction is expected to be complete by the end of 2003. As a stipulation to
the definitive agreement, Yellow has entered into arrangements for approximately
$1.1 billion in committed financing. As of July 29, we were committed to an
estimated $14 million in investment banking, financing, legal and accounting
fees as a result of this transaction.
15
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 June 30, 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 June 30, 2003.
The table below provides information regarding our interest rate risk as of June
30, 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.
<Table>
<Caption>
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 $ 84.1
Average interest rate 6.00% 6.77% 6.58% 6.71% -- 6.06%
Interest Rate Swap
Notional amount $ 50.0(1) -- -- -- -- -- $ 50.0 $ 51.3
Avg. pay rate (fixed) 6.06% -- -- -- -- --
Avg. receive rate (variable) 1.12% -- -- -- -- --
</Table>
(1) Interest rate swap on the ABS facility. The variable rate is based on the
3-month LIBOR as of June 30, 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.
16
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. We made 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'
expenses.
17
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 - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.2 Bylaws.
10.1 Executive Severance Agreement dated as of July 1, 2003,
between Yellow Corporation and Steve Yamasaki.
31.1 Certification pursuant to Exchange Act Rules 13a-14 and
15d-14, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification pursuant to Exchange Act Rules 13a-14 and
15d-14, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 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 April 21, 2003, a Form 8-K was filed under Item 7, Financial
Statements and Exhibits, and Item 9, Information Being Provided Under
Item 12. We made available our results of operations and financial
condition for the quarter ending March 31, 2003 by means of a press
release.
On June 5, 2003, a Form 8-K was filed under Item 9, Regulation FD
Disclosure, in which Yellow reconfirmed previously-provided second
quarter guidance and full year 2003 earnings per share guidance.
On July 8, 2003, a Form 8-K/A was filed under Item 5, Other Events, to
announce the signing of a definitive agreement under which Yellow will
acquire Roadway Corporation for approximately $966 million in cash and
Yellow common stock on approximately a 50/50 basis.
18
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: July 29, 2003 /s/ William D. Zollars
----------------------------
William D. Zollars
Chairman of the Board of
Directors, President & Chief
Executive Officer
Date: July 29, 2003 /s/ Donald G. Barger, Jr.
----------------------------
Donald G. Barger, Jr.
Senior Vice President
& Chief Financial Officer
19