UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 2003
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to __________
Commission file number 0-12255
YELLOW ROADWAY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 48-0948788
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
10990 Roe Avenue, Overland Park, Kansas 66211
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (913) 696-6100
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1 Par Value Per Share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. | |
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |X| No | |
The aggregate market value of the voting and non-voting common equity held by
nonaffiliates of the registrant at June 30, 2003 was $688,228,141.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at February 27, 2004
----- --------------------------------
Common Stock, $1 Par Value Per Share 47,909,226 shares
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into the Form 10-K:
1) Proxy Statement related to the 2004 Annual Meeting of Shareholders -
Part III
Yellow Roadway Corporation
Form 10-K
Year Ended December 31, 2003
Index
ITEM PAGE
- ---- ----
PART I
1. Business 4
2. Properties 11
3. Legal Proceedings 11
4. Submission of Matters to a Vote of Security Holders 11
PART II
5. Market for the Registrant's Common Stock and Related Shareholder Matters 12
6. Selected Financial Data 13
7. Management's Discussion and Analysis of Financial Condition and Results of Operations 14
7A. Quantitative and Qualitative Disclosures About Market Risk 30
8. Financial Statements and Supplementary Data 31
9. Changes in and Disagreements with Independent Auditors on Accounting and Financial Disclosure 67
9A. Controls and Procedures 67
PART III
10. Directors and Executive Officers of the Registrant 68
11. Executive Compensation 69
12. Security Ownership of Certain Beneficial Owners and Management 69
13. Certain Relationships and Related Transactions 69
PART IV
14. Principal Accountant Fees and Services 70
15. Exhibits, Financial Statement Schedule and Reports on Form 8-K 70
Exhibits Index 70
Report of Independent Auditors on Financial Statement Schedule 76
Financial Statement Schedule II 77
Signatures 78
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PART I
Item 1. Business
GENERAL DEVELOPMENT OF THE BUSINESS
Yellow Roadway Corporation (also referred to as "Yellow Roadway," "Yellow," "we"
or "our"), a Fortune 500 company and one of the largest transportation service
providers in the world, is a holding company that through wholly owned operating
subsidiaries offers its customers a wide range of asset and non-asset-based
transportation services. Yellow Technologies, Inc. ("Yellow Technologies"), a
captive corporate resource, provides innovative technology solutions and
services exclusively for Yellow Roadway companies. Our operating subsidiaries
include the following:
- Yellow Transportation, Inc. ("Yellow Transportation") is a leading
transportation services provider that offers a full range of
regional, national and international services for the movement of
industrial, commercial and retail goods, primarily through
centralized management and customer facing organizations.
Approximately 40 percent of Yellow Transportation shipments are
completed in two days or less.
- Roadway Express, Inc. ("Roadway Express") is a leading
transportation services provider that offers a full range of
regional, national and international services for the movement of
industrial, commercial and retail goods, primarily through
decentralized management and customer facing organizations.
Approximately 30 percent of Roadway Express shipments are completed
in two days or less. Roadway Express owns 100 percent of Reimer
Express Lines Ltd. ("Reimer") located in Canada that specializes in
shipments into, across and out of Canada.
- Roadway Next Day Corporation is a holding company focused on
business opportunities in the regional and next-day delivery lanes.
Roadway Next Day Corporation owns 100 percent of New Penn Motor
Express, Inc. ("New Penn"), which provides superior quality
regional, next-day ground services through a network of facilities
located in the Northeastern United States ("U.S."), Quebec, Canada
and Puerto Rico.
- Meridian IQ, Inc. ("Meridian IQ") is a non-asset-based global
transportation management company that plans and coordinates the
movement of goods throughout the world, providing customers a quick
return on investment, more efficient supply-chain processes and a
single source for transportation management solutions.
On July 8, 2003 we announced our intention to acquire Roadway Corporation
("Roadway") in approximately a half cash, half stock transaction, and on
December 11, 2003 we successfully closed the acquisition of Roadway. As a result
of the acquisition, Roadway Corporation became Roadway LLC, a subsidiary of
Yellow Roadway Corporation. Consideration for the acquisition included $494
million in cash and 18.0 million shares of Yellow Roadway common stock, based on
an exchange ratio of 1.752 and an average price per share of $31.51, for a total
purchase price of $1.1 billion. The purchase price also includes approximately
$19 million for investment banking, legal and accounting fees that Yellow
Roadway incurred to consummate the acquisition, resulting in total cash
consideration of $513 million. In addition, by virtue of the merger, Roadway LLC
assumed $225.0 million of principal senior notes with a fair value of $248.9
million and acquired available cash of $106.3 million.
In August 2003, a subsidiary of Meridian IQ, Yellow Global, LLC, acquired
certain U.S. assets of GPS Logistics, a global logistics provider. Yellow
Global, LLC was then renamed Yellow GPS, LLC ("Yellow GPS"). In exchange for the
acquisition, Yellow GPS assumed certain of GPS Logistics customer, lease and
other obligations and became obligated to pay GPS Logistics earnout payments if
certain financial targets for the combined business of Yellow GPS are met. There
was no net cash consideration paid in the transaction. In addition, Yellow GPS
received a call option to purchase the stock of each of GPS Logistics (E.U.)
Ltd., the related United Kingdom ("U.K.") operations of GPS Logistics, and GPS
Logistics Group Ltd., the related Asian operations of GPS Logistics. If Yellow
GPS does not exercise the Asian option, it would be required to pay a deferred
option price to the shareholders of GPS Logistics Group Ltd. In February 2004,
Yellow GPS exercised and closed its option to purchase GPS Logistics (E.U.) Ltd.
Yellow GPS made a payment of $7.6 million, which is subject to upward and
downward adjustment based on the financial performance of the U.K. business.
FINANCIAL INFORMATION ABOUT SEGMENTS
We have four reportable segments (Yellow Transportation, Roadway Express, New
Penn and Meridian IQ) that are strategic operating units requiring different
operating, marketing and technology strategies. The Business Segments note under
Item 8, Financial Statements and Supplementary Data, presents financial
disclosures for these segments.
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NARRATIVE DESCRIPTION OF THE BUSINESS
Yellow Roadway Corporation is a Fortune 500 company and one of the largest
transportation service providers in the world. Through operating subsidiaries
including Yellow Transportation, Roadway Express, New Penn and Meridian IQ, we
offer our customers a wide range of asset and non-asset-based transportation
services integrated with technology solutions provided by Yellow Technologies.
The Yellow Roadway portfolio of brands provides one of the most comprehensive
packages of services for the shipment of industrial, commercial and retail goods
domestically and internationally. Headquartered in Overland Park, Kansas, we
employed approximately 50,000 people as of December 31, 2003.
OPERATING UNITS OF THE BUSINESS
Yellow Transportation
One of our largest operating units, Yellow Transportation, offers a full range
of services for the movement of industrial, commercial, and retail goods. Yellow
Transportation provides transportation services by moving shipments through its
regional, national and international networks of terminals, utilizing primarily
ground transportation equipment that we own or lease. The Yellow Transportation
mission is to be the leading provider of guaranteed, time-definite, defect-free,
hassle-free transportation services for business customers worldwide. Yellow
Transportation addresses the increasingly complex transportation needs of its
customers through service offerings such as:
- Exact Express(R)- a premium expedited and time-definite ground
service with an industry-leading 100% satisfaction guarantee;
- Definite Delivery(R) - a guaranteed on-time service with constant
shipment monitoring and proactive notification;
- Standard Ground(TM) - a ground service with complete coverage of
North America;
- Standard Ground(TM) Regional Advantage - a high-speed service for
shipments moving between 500 and 1,500 miles; and
- MyYellow(R).com - a leading edge e-commerce web site offering secure
and customized online resources to manage transportation activity.
Yellow Transportation, founded in 1924, serves more than 400,000 manufacturing,
wholesale, retail and government customers throughout North America. No single
customer accounts for more than six percent of Yellow Transportation revenue.
Operating from 335 strategically located facilities, Yellow Transportation
provides service throughout North America, including within Puerto Rico and
Hawaii. Shipments range from 100 to 40,000 pounds, with an average shipment size
of 1,000 pounds traveling an average distance of more than 1,200 miles. Yellow
Transportation has nearly 700 employees with sales responsibilities.
Yellow Technologies has developed and supports proprietary technology that
drives the Yellow Transportation network. Approximately 24,000 Yellow
Transportation employees are dedicated to operating the system that supports
280,000 shipments in transit at any time. An operations research and engineering
team is responsible for the equipment, routing, sequencing and timing of nearly
59 million miles per month. At December 31, 2003, Yellow Transportation had
7,597 owned tractors, 504 leased tractors, 34,939 owned trailers and 60 leased
trailers.
Based in Overland Park, Kansas, Yellow Transportation accounted for 92 percent
of our total operating revenue in 2003, 97 percent of our total operating
revenue in 2002 (excluding SCS Transportation, Inc. ("SCST"), which we spun off
in 2002) and 99 percent in 2001. On a pro forma basis, assuming the acquisition
of Roadway had occurred on January 1, 2003, Yellow Transportation revenue would
have represented approximately 46 percent of our total operating revenue.
Roadway Express
Founded in 1930, Roadway Express, through its extensive network of 369 terminals
located throughout North America, offers long-haul, interregional and regional
less-than-truckload ("LTL") freight services on two-day and beyond lanes.
Roadway Express is a leading transporter of industrial, commercial and retail
goods with a variety of innovative services designed to meet customer needs.
Roadway Express provides seamless, general commodity freight service among all
50 states, Canada, Mexico and Puerto Rico, and offers import and export services
to more than 100 additional countries worldwide through offshore agents. Service
in Canada is provided by Reimer, while service in Mexico is handled by Roadway
Express, S.A. de C.V. Both companies are subsidiaries of Roadway Express.
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General commodity freight includes apparel, appliances, automotive parts,
chemicals, food, furniture, glass machinery, metal and metal products, non-bulk
petroleum products, rubber, textiles, wood and miscellaneous manufactured
products. Roadway Express also offers truckload ("TL") services to complement
its LTL business, usually to fill back hauls and maximize equipment utilization.
Backhaul is the process of moving trailers (often empty or partially full) back
to their destination after a delivery. In addition, Roadway Express provides
higher margin specialized services, including guaranteed expedited services,
time-specific delivery, North American international services, coast-to-coast
air delivery, sealed trailers, product returns, cold-sensitive protection and
government material shipments.
Roadway Express employed approximately 24,000 employees as of December 31, 2003.
It owned 6,272 tractors and 27,030 trailers and leased 2,267 tractors and 621
trailers. Headquartered in Akron, Ohio, Roadway Express accounted for four
percent of our total operating revenue in 2003, as the results of Roadway
Express were only included in our results of operations from the date of
acquisition through December 31. On a pro forma basis, assuming the acquisition
of Roadway had occurred on January 1, 2003, Roadway Express revenue would have
represented approximately 48 percent of our total operating revenue.
New Penn
Founded in 1931, New Penn is a regional, next-day, ground LTL carrier of general
commodities. Through a network of 24 terminals, and using 807 owned tractors and
1,639 owned trailers, New Penn services twelve states in the Northeastern U. S.,
Quebec and Puerto Rico and has links to the Midwest and Southeast regions of the
U.S. and Ontario. New Penn has more than 2,000 employees. Ninety-five percent of
New Penn shipments are delivered next-day in the Northeast region of the U.S. On
a pro forma basis, assuming the acquisition of Roadway had occurred on January
1, 2003, New Penn revenue would have represented approximately four percent of
our total operating revenue.
Reimer Express Lines
Founded in 1952, Reimer, a wholly owned subsidiary of Roadway Express, offers
Canadian shippers an unmatched selection of direct connections within Canada,
throughout North America and around the world. Its network and information
systems are completely integrated with those of Roadway Express. Integration
with Roadway Express enables Reimer to provide seamless cross-border services
between Canada, Mexico and the U.S. At December 31, 2003, Reimer had
approximately 1,500 employees and operated through 22 terminals. Reimer owned
373 tractors (excludes owner-operator tractors) and 513 trailers and leased 126
tractors and 522 trailers. All of the operating statistics of Reimer disclosed
in this paragraph are also included in the Roadway Express statistics previously
discussed.
Meridian IQ
Meridian IQ is a non-asset global transportation management company that plans
and coordinates the movement of goods worldwide to provide customers a single
source for transportation management solutions. Non-asset-based service
providers, such as logistics companies, arrange for and expedite the movement of
goods and materials through the supply chain. The typical logistics provider
neither owns nor operates the physical assets necessary to move goods,
eliminating the significant capital requirements normally experienced by a
typical transportation company. This lower asset requirement allows the
non-asset-based firms to reduce variable costs in economic downturns.
Meridian IQ delivers a wide range of global transportation management services,
with the ability to provide customers improved return-on-investment results
through flexible, fast and easy-to-implement transportation services and
technology management solutions. Meridian IQ has approximately 12,000
transactional and 200 contractual customers.
Meridian IQ offers the following services:
- International forwarding and customs brokerage - arranging for the
administration, transportation and delivery of goods to over 88
countries;
- Multi-modal brokerage services - providing companies with daily
shipment needs with access to volume capacity and specialized
equipment at competitive rates;
- Domestic forwarding and expedited services - arranging guaranteed,
time-definite transportation for companies within North America
requiring time-sensitive delivery options and guaranteed
reliability; and
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- Transportation solutions and technology management - web-native
transportation management systems enabling customers to manage their
transportation network centrally with increased efficiency and
visibility. When combined with network consulting and operations
management any organization, regardless of size, can outsource
transportation functions partially or even entirely with Meridian
IQ.
Meridian IQ and Yellow Transportation create complementary service offerings
with the ability for each to generate revenue for the other. Through its strong
relationships, Yellow Transportation has introduced its customers to Meridian IQ
for value-added transportation technology and management services. This gives
Meridian IQ immediate market credibility from established relationships, and a
large pool of existing Yellow Transportation customers to target. In addition,
Meridian IQ has attracted new transportation and technology management customers
who utilize the Yellow Transportation service portfolio.
The competition of Meridian IQ includes transportation management systems
providers, domestic and international freight forwarders, freight brokers, and
third party logistics companies. Meridian IQ has approximately 600 employees,
including 115 located in the U.K. Meridian IQ has a sales force of approximately
40, including seven located in the U.K. Additionally, the nearly 700 members of
the Yellow Transportation sales force assist Meridian IQ in developing sales
leads. Based in Overland Park, Kansas, Meridian IQ accounted for four percent of
our total operating revenue in 2003, three percent of our total operating
revenue (excluding SCST) in 2002 and less than one percent in 2001. On a pro
forma basis, assuming the acquisition of Roadway had occurred on January 1,
2003, Meridian IQ revenue would have represented approximately two percent of
our total operating revenue.
Yellow Technologies
Yellow Technologies, a captive corporate resource, aims at creating competitive
advantages for Yellow Roadway businesses by delivering innovative information
solutions and technology services. Yellow Technologies has approximately 300
employees. In addition to delivering and supporting highly integrated
applications and solutions, Yellow Technologies provides value-added technical,
network, secure data, and enterprise system management services to our operating
subsidiaries. Yellow Technologies and Meridian IQ together provide hosting,
infrastructure services and managed transportation business systems development.
Yellow Technologies is headquartered in Overland Park, Kansas.
COMPETITION
Customers have a wide range of choices. We believe that service quality,
performance, technology, service variety, responsiveness, and flexibility are
important competitive differentiators.
Few U.S.-based competitors offer comparably broad service capabilities. By
integrating traditional ground, expedited, air cargo, and managed transportation
solutions, we can provide consumers with a single source answer to shipping
challenges with a foundation of service excellence and quality as its basis. Our
market studies show a continued preference among customers for transportation
providers based on quality and value, and we believe that we are positioned to
grow given our strategic focus. By increasing the depth of the services we
offer, we believe that we can successfully compete against the largest
transportation competitors from a value perspective.
Yellow Transportation, Roadway Express and New Penn operate in a highly
competitive environment against a wide range of transportation service
providers. These competitors include a small number of national transportation
services providers similar in size and scope to Yellow Transportation and
Roadway Express, a moderate number of regional or interregional providers and a
large number of relatively small, shorter-haul transportation companies. Yellow
Transportation and Roadway Express also compete in and against several modes of
transportation, including LTL, TL, air cargo, rail, consolidators and private
fleets.
Truck-based transportation includes private fleets and two "for-hire" carrier
groups. The private carrier segment consists of fleets owned and operated by
shippers who move their own goods. The two "for-hire" groups are based on the
typical shipment sizes handled by transportation service companies. Truckload
refers to providers transporting shipments that generally fill a trailer, and
LTL or shared load refers to providers transporting shipments from multiple
shippers that alone would not fill a trailer.
Shared load transportation providers consolidate numerous orders generally
ranging from 100 to 10,000 pounds from businesses in different locations. Orders
are consolidated at individual locations within a certain radius from service
centers. As a result, shared load carriers require expansive networks of pickup
and delivery operations around local service centers and, with respect to
national carriers, shipments are moved between origin and destination through a
series of regional distribution centers. Depending on the distance shipped,
shared load providers are often classified into three sub-groups:
7
- Regional - Average distance is typically less than 500 miles with a
focus on one- and two-day delivery times. Regional transportation
companies can move shipments directly to their respective
destination centers, which increases service reliability and avoids
costs associated with intermediate handling.
- Interregional - Average distance is usually between 500 and 1,000
miles with a focus on two- and three-day delivery times. There is a
blurring of lines between regional and national providers, as each
sees the interregional segment as a growth opportunity, and there
are no providers who focus exclusively on this sector.
- National - Average distance is typically in excess of 1,000 miles
with focus on two- to five-day delivery times. National providers
rely on interim shipment handling through a network of terminals,
which require numerous satellite service centers, multiple
distribution centers and a relay network. To gain service and cost
advantages, they often ship directly between service centers,
minimizing intermediate handling.
Yellow Transportation and Roadway Express provide service to all three
sub-groups. Entry into the LTL trucking industry on a small scale with a limited
service area is relatively easy. The larger the service area the greater the
barriers to entry, due to the need for broader geographic coverage and
additional equipment and facility requirements associated with this coverage.
The level of technology applications required and the ability to generate
shipment densities that provide adequate labor and equipment utilization also
make larger-scale entry into the market difficult.
REGULATION
Yellow Transportation, Roadway Express, New Penn and other interstate carriers
were substantially deregulated following the enactment of the Motor Carrier Act
of 1980, the Trucking Industry Regulatory Reform Act of 1994, the Federal
Aviation Administration Authorization of 1994 and the ICC Termination Act of
1995. Prices and services are now largely free of regulatory controls, although
the states retained the right to require compliance with safety and insurance
requirements, and interstate motor carriers remain subject to regulatory
controls that agencies within the U.S. Department of Transportation impose.
Yellow Transportation, Roadway Express and New Penn are subject to regulatory
and legislative changes, which can affect our economics and those of our
competitors. Various state agencies regulate us, and our operations are also
subject to various federal, foreign, state, provincial and local environmental
laws and regulations dealing with transportation, storage, presence, use,
disposal and handling of hazardous materials, discharge of storm-water and
underground fuel storage tanks.
We believe that our operations are in substantial compliance with current laws
and regulations, and we do not know of any existing conditions that would cause
compliance with applicable regulations to have a material adverse effect on our
business or operating results.
We further describe our operations in Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations, of this report.
ENVIRONMENTAL MATTERS
Our operations are subject to U.S. federal, foreign, state, provincial and local
regulations with regard to air and water quality and other environmental
matters. We believe that we are in substantial compliance with these
regulations. Regulation in this area continues to evolve and changes in
standards of enforcement of existing regulations, as well as the enactment and
enforcement of new legislation may require us and our customers to modify,
supplement or replace equipment or facilities or to change or discontinue
present methods of operation.
During 2003, we spent approximately $2.5 million to comply with U.S. federal,
state and local provisions regulating the discharge of materials into the
environment or otherwise relating to the protection of the environment
(collectively, "Environmental Regulations"). In 2004, we expect to spend
approximately $5 million to comply with the Environmental Regulations. Based
upon current information, we believe that our compliance with Environmental
Regulations will not have a material adverse effect upon our capital
expenditures, results of operation and competitive position because we have
either made adequate reserves for such compliance expenditures or the cost for
such compliance is expected to be small in comparison with our overall net
worth.
We estimate that we will incur less than $1 million in capital expenditures for
environmental control equipment during 2004. We believe that capital
expenditures for environmental control equipment for 2004 will not have a
material adverse effect upon our
8
financial condition because the aggregate amount of these expenditures is
expected to be small in comparison with our overall net worth.
The Comprehensive Environmental Response, Compensation and Liability Act (known
as the "Superfund Act") imposes liability for the release of a "hazardous
substance" into the environment. Superfund liability is imposed without regard
to fault and even if the waste disposal was in compliance with the then current
laws and regulations. With the joint and several liability imposed under the
Superfund Act, a potentially responsible party ("PRP") may be required to pay
more than its proportional share of such environmental remediation. We and
several of our subsidiaries have been identified as PRPs at various sites
discussed below. The U.S. Environmental Protection Agency ("the EPA") and
appropriate state agencies are supervising investigative and cleanup activities
at these sites. The EPA has identified Yellow Transportation as a PRP for two
locations: Omega Chemical Site, Whittier, CA and Alburn Incinerator, Inc.,
Chicago, IL. We estimate that the combined potential costs at these two sites
will not exceed $0.3 million. The EPA has identified Roadway Express as a PRP
for five locations: Operating Industries Site, Monterey Park, CA; BEMS Landfill,
Mt. Holly, NJ; Double Eagle Site, Oklahoma City, OK; M&J Solvent Site, Atlanta,
GA and FL Petroleum Site, Davie, FL. We estimate that combined potential costs
at these five sites will not exceed $0.7 million. Yellow Transportation and
Roadway Express are classified as de minimis PRPs at all of these locations.
While PRPs in Superfund actions have joint and several liabilities for all costs
of remediation, it is not possible at this time to quantify our ultimate
exposure because the projects are either in the investigative or early
remediation stage. Based upon current information, we do not believe that
probable or reasonably possible expenditures in connection with the sites
described above are likely to have a material adverse effect on our result of
operations because:
- We have established adequate reserves to cover the estimate we
presently believe will be our liability with respect to the matter;
- We and our subsidiaries have only limited or de minimis involvement
in the sites based upon a volumetric calculation;
- Other PRPs involved in the sites have substantial assets and may
reasonably be expected to pay their share of the cost of
remediation;
- We have adequate resources, insurance coverage or contractual
indemnities from third parties to cover the ultimate liability; and
- We believe that our ultimate liability is small compared with our
overall net worth.
We are subject to various other governmental proceedings and regulations,
including foreign regulations, relating to environmental matters, but we do not
believe that any of these matters are likely to have a material adverse effect
on our financial condition or results of operation.
This section, "Environmental Matters," contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. The word
"believe" and similar expressions are intended to identify forward-looking
statements. Our expectations regarding our compliance with Environmental
Regulations and our expenditures to comply with Environmental Regulations,
including (without limitation) our capital expenditures on environmental control
equipment, are only our forecasts regarding these matters. These forecasts may
be substantially different from actual results, which may be affected by the
following factors: changes in Environmental Regulations; unexpected, adverse
outcomes with respect to sites where we have been named as a PRP, including
(without limitation) the sites described above; the discovery of new sites of
which we are not aware and where additional expenditures may be required to
comply with Environmental Regulations; an unexpected discharge of hazardous
materials in the course of our business or operations; an acquisition of one or
more new businesses; a catastrophic event causing discharges into the
environment of hydrocarbons; and a material change in the allocation to us of
the volume of discharge and a resulting change in our liability as a PRP with
respect to a site.
ECONOMIC FACTORS AND SEASONALITY
Our business is subject to a number of general economic factors that may have a
materially adverse effect on the results of our operations, many of which are
largely out of our control. These include recessionary economic cycles and
downturns in customers' business cycles, particularly in market segments and
industries, such as retail and manufacturing, where we have a significant
concentration of customers. Economic conditions may adversely affect our
customers' business levels, the amount of transportation services they need and
their ability to pay for our services. We operate in a highly price-sensitive
and competitive industry, making
9
pricing, customer service, effective asset utilization and cost control major
competitive factors. No single customer accounts for more than six percent of
our total revenue. Yellow Transportation, Roadway Express and New Penn revenues
are subject to seasonal variations. Customers tend to reduce shipments after the
winter holiday season, and operating expenses tend to be higher in the winter
months primarily due to colder weather, which causes higher fuel consumption
from increased idle time. Generally, the first quarter is the weakest while the
third quarter is the strongest. The availability and cost of labor can
significantly impact our cost structure and earnings.
FUTURE OUTLOOK
Economists expect growth in capital spending in 2004 as a result of, among
others, rising corporate profits, lower interest rates, improving equity markets
and tax incentives. Our economic assumptions also include year-over-year gains
in the industrial production index and real gross domestic product of four
percent; a significant positive for our industry. Management expects our pricing
environment to remain competitive, yet stable, during the upcoming year. We will
continue to focus on leveraging the capabilities of our new organization and
achieving the synergies that are available to us. With our significant operating
leverage, we are well positioned to take advantage of improving economic
conditions.
This entire annual report encompassing management's discussion and analysis and
certain statements in the Notes to Consolidated Financial Statements includes
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21 of the Securities Exchange Act of 1934,
as amended (each a "forward-looking statement"). Forward-looking statements
include those preceded by, followed by or include the words "should," "expects,"
"believes," "anticipates," "estimates" or similar expressions. Our actual
results could differ materially from those projected by these forward-looking
statements due to a number of factors, including (without limitation),
inflation, labor relations (i.e. disruptions, strikes or work stoppages),
inclement weather, price and availability of fuel, competitor pricing activity,
expense volatility, changes in and customer acceptance of new technology, our
ability to capture cost synergies from our acquisition of Roadway Corporation,
changes in equity and debt markets and a downturn in general or regional
economic activity, as well as those factors discussed in the Economic Factors
and Seasonality section above.
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
Our revenue from foreign sources is largely derived from Canada and Mexico. We
discuss revenue from foreign sources in the Business Segments note under Item 8,
Financial Statements and Supplementary Data, of this report. Foreign source
revenue was not material to our consolidated financial results in 2003, 2002 or
2001.
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Item 2. Properties
At December 31, 2003, we operated a total of 728 freight terminals located in 50
states, Puerto Rico, Canada and Mexico. Of this total, 462 were owned terminals
and 266 were leased, generally for terms of three years or less. The number of
vehicle back-in doors totaled 28,712, of which 23,805 were at owned terminals
and 4,367 were at leased terminals. The freight terminals vary in size ranging
from one to three doors at small local terminals, to over 380 doors at the
largest consolidation and distribution terminal. Substantially all of the larger
terminals, containing the greatest number of doors, are owned. In addition, we
and our subsidiaries own and occupy general office buildings in Overland Park,
Kansas, Akron, Ohio, Lebanon, Pennsylvania and Winnipeg, Manitoba.
The vast majority of our owned freight terminals and office buildings located in
the U.S. have been mortgaged to secure our borrowings under our senior secured
credit facility. The Roadway LLC freight terminals and office buildings are also
mortgaged to secure our senior notes due 2008. We discuss our outstanding debt
in the Debt and Financing note under Item 8, Financial Statements and
Supplementary Data.
Our facilities and equipment are adequate to meet current business requirements
in 2004. Refer to Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations, for a more detailed discussion of
expectations regarding capital spending in 2004.
Item 3. Legal Proceedings
We discuss legal proceedings in the Commitments, Contingencies, and
Uncertainties note under Item 8, Financial Statements and Supplementary Data, of
this report.
Item 4. Submission of Matters to a Vote of Security Holders
A special meeting of the Yellow Roadway security holders occurred December 9,
2003. At the meeting, the security holders approved (1) as consideration for the
acquisition of Roadway, the issuance of the approximately 18 million shares of
our common stock, (2) the changing of our name to Yellow Roadway Corporation
upon the closing of the Roadway acquisition, and (3) adjournments or
postponements of the special meeting to permit further solicitation of proxies
if there are not sufficient votes at the time of the special meeting to approve
proposals 1 and 2. In respect of the issuance of the Yellow Roadway shares,
there were 21,732,954 shares that voted in favor, 252,323 shares that voted
against, 16,819 abstentions and 4,956,799 broker non-votes. In respect of
changing our name, there were 26,473,845 shares that voted in favor, 473,462
shares that voted against, 11,588 abstentions and zero broker non-votes. In
respect of adjournments and postponements, there were 17,980,330 shares that
voted in favor, 8,787,038 shares that voted against, 191,527 abstentions and
zero broker non-votes.
11
PART II
Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters
COMMON STOCK
As of February 27, 2004, approximately 18,312 shareholders of record held Yellow
Roadway Corporation common stock. Our only class of stock outstanding is common
stock, traded through the NASDAQ Stock Market. Trading activity averaged 831,000
shares per day during 2003, up from 384,000 per day in 2002. From January 1,
2003 through the announcement of our acquisition of Roadway on July 8, 2003,
trading activity averaged 495,000 shares per day. From July 9, 2003 through the
end of 2003, trading activity averaged 1,197,000 shares per day. The NASDAQ
Stock Market quotes prices for our common stock under the symbol "YELL." The
high and low prices at which Yellow Roadway Corporation common stock traded for
each calendar quarter in 2003 and 2002 are shown below.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
First Second Third Fourth
(in thousands, except per share data) Quarter Quarter Quarter Quarter (a)
- ------------------------------------------------- ------- ------- ------- --------
2003
Operating revenue $681,093 $713,453 $770,705 $903,365
Losses (gains) on property disposals, net 11 30 381 (589)
Acquisition, spin-off and reorganization charges -- -- 864 2,260
Operating income 11,759 32,333 37,812 6,698 (b)
Net income (loss) 5,626 18,360 17,369 (672)
Diluted earnings (loss) per share 0.19 0.62 0.58 (0.02)
Common stock:
High 27.75 28.03 33.95 36.96
Low 21.18 22.01 21.63 29.35
-------- -------- -------- --------
2002
Operating revenue $578,802 $646,061 $682,473 $716,812
Losses (gains) on property disposals, net 468 438 351 (832)
Spin-off and reorganization charges 236 561 5,367 1,846
Operating income 2,657 6,210 13,482 24,515
Income (loss) from continuing operations (147) 2,628 7,297 14,195
Income (loss) from discontinued operations (72,889) 3,592 (48,578) --
Net income (loss) (73,036) 6,220 (41,281) 14,195
Diluted earnings (loss) per share:
From continuing operations (0.01) 0.09 0.25 0.48
From discontinued operations (2.88) 0.13 (1.65) --
Common stock:
High 23.12 27.98 27.07 32.21
Low 18.31 21.20 18.72 25.19
======== ======== ======== ========
(a) Fourth quarter 2003 information included Roadway LLC revenue of $141.0
million and an operating loss of $6.3 million from the date of acquisition
through December 31.
(b) Fourth quarter 2003 operating income included $2.3 million of acquisition
charges, $17.5 million related to conforming accounting policies, a $2.0
million legal provision and $0.6 million of gains on property disposals.
Yellow Roadway Corporation did not declare any cash dividends on its common
stock in 2002 or 2003. Our ability to pay dividends in the future is restricted
under our senior secured credit facility. Refer to Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations,
Financial Condition - Liquidity - Secured Credit Agreement.
The information required by this item with respect to information regarding our
equity compensation plans is included under the caption "Equity Compensation
Plan Information" in our Proxy Statement related to the 2004 Annual Meeting of
Shareholders and is incorporated herein by reference. The information required
by this item with respect to the sale of unregistered securities is included
under Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations, Acquisition of Roadway Corporation - Financing for the
Acquisition - 5.0 Percent Contingent Convertible Senior Notes and Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Acquisition of Roadway Corporation - Financing for the Acquisition -
3.375 Percent Contingent Convertible Senior Notes.
12
Item 6. Selected Financial Data
(in thousands except per share data) 2003(a) 2002(b) 2001 2000 1999
- ---------------------------------------------------- ----------- ----------- ---------- ---------- ----------
FOR THE YEAR
Operating revenue $3,068,616 $2,624,148 $2,505,070 $2,799,131 $2,632,337
Operating income 88,602 46,864 38,195 126,747 76,026
Losses (gains) on property disposals, net (167) 425 (186) (14,372) 341
Acquisition, spin-off and reorganization charges 3,124 8,010 5,601 -- --
Interest expense 20,606 7,211 8,437 10,131 6,086
Asset backed securitization ("ABS") facility charges - 2,576 7,996 10,052 8,252
Income from continuing operations (after tax) 40,683 23,973 10,589 61,605 38,746
Net income (loss) 40,683 (93,902) 15,301 68,018 50,915
Depreciation and amortization expense 87,398 79,334 76,977 78,587 76,904
Net capital expenditures from
continuing operations 99,134 82,830 81,435 70,689 96,169
Net cash from operating activities from
continuing operations 155,736 25,808 12,189 151,592 206,705
---------- ---------- ---------- ---------- ----------
AT YEAR-END
Net property and equipment 1,403,268 564,976 559,532 554,150 547,139
Total assets 3,463,229 1,042,985 1,285,777 1,308,477 1,325,583
Long-term debt, less current portion 836,082 50,024 213,745 136,645 274,015
ABS facility(c) 71,500 50,000 141,500 177,000 135,000
Total debt, including ABS facility 909,339 124,285 361,526 382,437 411,407
Total shareholders' equity 1,002,085 359,958 490,989 459,776 409,380
---------- ---------- ---------- ---------- ----------
MEASUREMENTS
Diluted per share data:
Income from continuing operations 1.33 0.84 0.43 2.49 1.54
Net income (loss) 1.33 (3.31) 0.62 2.74 2.02
Average common shares outstanding - diluted 30,655 28,371 24,679 24,787 25,168
Debt to capitalization 47.6% 25.7% 42.4% 45.4% 50.1%
Debt to capitalization, less available cash 45.4% 21.0% 41.1% 44.0% 48.9%
Shareholders' equity per share $ 20.97 $ 12.17 $ 19.75 $ 19.32 $ 16.44
Common stock price range:
High 36.96 32.21 27.57 22.13 19.63
Low 21.18 18.31 15.50 13.81 14.38
---------- ---------- ---------- ---------- ----------
OTHER DATA
Average number of employees 50,000(d) 23,000 30,000 32,900 31,200
Yellow Transportation operating ratio 95.7% 97.2% 97.8% 94.9% 96.7%
========== ========== ========== ========== ==========
(a) Represents the results of all Yellow Roadway entities including Roadway
LLC entities from the date of acquisition through December 31.
(b) In 2002, we completed the spin-off of SCS Transportation, Inc. ("SCST").
Financial Summary data has been reclassified for all periods presented to
disclose SCST as a discontinued operation.
(c) Prior to December 31, 2002, the ABS facility was treated as a sale of
assets and the sold receivables and related obligations were not reflected
on the Consolidated Balance Sheets.
(d) In 2003, prior to the acquisition of Roadway on December 11, 2003, we had
an average of 25,000 employees.
13
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
Yellow Roadway Corporation (also referred to as "Yellow Roadway," "Yellow," "we"
or "our"), a Fortune 500 company and one of the largest transportation service
providers in the world, is a holding company that through wholly owned operating
subsidiaries offers its customers a wide range of asset and non-asset-based
transportation services. Yellow Technologies, Inc., a captive corporate
resource, provides innovative technology solutions and services exclusively for
Yellow Roadway companies. Our operating subsidiaries include the following:
- Yellow Transportation, Inc. ("Yellow Transportation") is a leading
transportation services provider that offers a full range of
regional, national and international services for the movement of
industrial, commercial and retail goods, primarily through
centralized management and customer facing organizations.
Approximately 40 percent of Yellow Transportation shipments are
completed in two days or less.
- Roadway Express, Inc. ("Roadway Express") is a leading
transportation services provider that offers a full range of
regional, national and international services for the movement of
industrial, commercial and retail goods, primarily through
decentralized management and customer facing organizations.
Approximately 30 percent of Roadway Express shipments are completed
in two days or less. Roadway Express owns 100 percent of Reimer
Express Lines Ltd. ("Reimer") located in Canada that specializes in
shipments into, across and out of Canada.
- Roadway Next Day Corporation is a holding company focused on
business opportunities in the regional and next-day delivery lanes.
Roadway Next Day Corporation owns 100 percent of New Penn Motor
Express, Inc. ("New Penn"), which provides superior quality
regional, next-day ground services through a network of facilities
located in the Northeastern United States ("U.S."), Quebec, Canada
and Puerto Rico.
- Meridian IQ, Inc. ("Meridian IQ") is a non-asset-based global
transportation management company that plans and coordinates the
movement of goods throughout the world, providing customers a quick
return on investment, more efficient supply-chain processes and a
single source for transportation management solutions.
The following management's discussion and analysis explains the main factors
impacting our results of operations, liquidity and capital expenditures and the
critical accounting policies of Yellow Roadway. This information should be read
in conjunction with the accompanying financial statements and notes to the
financial statements.
FORWARD-LOOKING STATEMENTS
This entire annual report encompassing management's discussion and analysis and
certain statements in the Notes to Consolidated Financial Statements includes
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21 of the Securities Exchange Act of 1934,
as amended (each a "forward-looking statement"). Forward-looking statements
include those preceded by, followed by or include the words "should," "expects,"
"believes," "anticipates," "estimates" or similar expressions. Our actual
results could differ materially from those projected by these forward-looking
statements due to a number of factors, including (without limitation),
inflation, labor relations (i.e. disruptions, strikes or work stoppages),
inclement weather, price and availability of fuel, competitor pricing activity,
expense volatility, changes in and customer acceptance of new technology, our
ability to capture cost synergies from our acquisition of Roadway Corporation,
changes in equity and debt markets and a downturn in general or regional
economic activity.
OUR OPERATING ENVIRONMENT
We operate in a highly competitive environment, yet one where we believe the
right value proposition for our customers permits us to recover our cost of
capital over the business cycle. Historically, our customers viewed us solely as
a less-than-truckload ("LTL") carrier with limited service opportunities. Over
the last seven years significant changes have occurred in our environment,
including: consolidation and liquidation of LTL carriers; the increased presence
of global, small package providers such as FedEx Corporation and United Parcel
Service, Inc.; and increasing needs and demands of our stakeholders. We continue
to proactively address these changes through our focused strategy of being a
global transportation services provider. Over the last few years, we have
spun-off our nonunion, regional carriers, raised substantial capital through a
successful equity offering, expanded our service offerings, and completed
multiple acquisitions of non-asset-based companies. 2003 was no exception to our
strategy, as we negotiated a five-year labor agreement with the International
Brotherhood of Teamsters, completed another non-asset-based acquisition, and
successfully acquired our largest traditional LTL competitor, Roadway Express.
14
We will continue to face challenges in the environment that we operate,
primarily due to the changing competitive landscape and general economic
activity. Specific economic areas that impact our ability to generate profits
and cash flows include the levels of consumer spending and manufacturing
activity. We monitor these areas primarily through growth in real gross domestic
product ("GDP") and the industrial production index ("IPI"). Real GDP measures
the value of goods and services produced in the U.S., excluding inflation, and
the IPI measures the physical units and inputs into the U.S. production process.
According to the St. Louis FREDII database, in 2003 real GDP rose from a 2.4
percent annualized rate in the first six months of the year to 6.1 percent
during the last six months of the year. In addition, the Federal Reserve G17
release states the IPI declined at a 1.1 percent seasonally adjusted annualized
rate in the first half of the year and grew 5.1 percent in the second half of
the year. These favorable improvements are reflected in our increased profits
from 2002 to 2003, as discussed in our Results of Operations section. We manage
the impact of our customers' spending and manufacturing activity through, among
others, pricing discipline, cost management programs, maintaining adequate debt
capacity, investment in technology and continuous improvement programs. We
continue to be well positioned in the transportation industry with a strong
ability to take advantage of the improving economic conditions.
ACQUISITION OF ROADWAY CORPORATION
On July 8, 2003 we announced our intention to acquire Roadway Corporation
("Roadway") in approximately a half cash, half stock transaction, and on
December 11, 2003 we successfully closed the acquisition of Roadway. As a result
of the acquisition, Roadway Corporation became Roadway LLC, a subsidiary of
Yellow Roadway Corporation. Consideration for the acquisition included $494
million in cash and 18.0 million shares of Yellow Roadway common stock, based on
an exchange ratio of 1.752 and an average price per share of $31.51, for a total
purchase price of $1.1 billion. The purchase price also included approximately
$19 million for investment banking, legal and accounting fees that Yellow
Roadway incurred to consummate the acquisition, resulting in total cash
consideration of $513 million. In addition, by virtue of the merger, Roadway LLC
assumed $225.0 million of principal senior notes due 2008 ("senior notes due
2008") with a fair value of $248.9 million and acquired available cash of $106.3
million. To successfully complete the transaction, we obtained the following:
financing for the cash portion of the purchase price, as well as the refinancing
of certain existing debt facilities; customary regulatory approvals; and
approval by the shareholders of both companies of certain aspects of the
transaction.
FINANCING FOR THE ACQUISITION
5.0 Percent Contingent Convertible Senior Notes
As part of the cash portion of the purchase price, we issued $250 million of 5.0
percent contingent convertible senior notes due 2023, in a private offering. On
August 8, 2003, we closed the sale of $200 million of the contingent convertible
senior notes and on August 15, 2003 we closed the sale of an additional $50
million pursuant to the exercise of an option of the initial purchasers to
purchase more notes. We received net proceeds from the sales of $242.5 million,
after fees, and used the proceeds to fund the acquisition of Roadway.
The contingent convertible senior notes have an annual interest rate of 5.0
percent and are convertible into shares of Yellow Roadway common stock at a
conversion price of $39.24 per share only upon the occurrence of certain events.
The contingent convertible senior notes may not be redeemed by us for seven
years from date of issuance but are redeemable at any time after that at par.
Holders of the contingent convertible senior notes have the option to require
Yellow Roadway to purchase their notes at par on August 8, 2010, 2013 and 2018,
and upon a change in control of the company. These terms and other material
terms and conditions applicable to the contingent convertible senior notes are
set forth in an indenture governing the notes.
Medium-Term Notes
Another change in our capital structure in support of the Roadway acquisition
was the repurchase and defeasance of our medium-term notes ("MTNs"). On
September 30, 2003, we completed the repurchase of $24 million aggregate
principal amount of MTNs and defeased the remaining $20 million aggregate
principal amount outstanding, after making scheduled principal payments during
2003 of $11.3 million. Defeasance refers to the process of placing sufficient
funds in an irrevocable trust to pay and discharge the MTNs as they become due.
As a result, we were considered legally released as the primary obligor and the
MTNs were removed from our balance sheet. The interest rate on the MTNs ranged
from 6.1 percent to 7.8 percent with scheduled maturities ranging from October
2003 to August 2008. We recognized a loss on the extinguishment of debt of $2.3
million from the repurchase and defeasance that we reflected in "other"
nonoperating expenses on our Statement of Consolidated Operations. We funded the
repurchase and defeasance with cash on hand.
15
3.375 Percent Contingent Convertible Senior Notes
On November 19, 2003, we announced a private offering of $130 million of
contingent convertible senior notes with an option for the initial purchasers to
acquire an additional $20 million of the notes. On November 25, 2003, we closed
the sale of the entire $150 million of contingent convertible senior notes due
2023. We received net proceeds from the offering of $145.5 million, after fees,
and used the proceeds to fund the acquisition of Roadway.
The contingent convertible senior notes have an annual interest rate of 3.375
percent and are convertible into shares of Yellow Roadway common stock at a
conversion price of $46.00 per share only upon the occurrence of certain events.
The contingent convertible senior notes may not be redeemed by us for nine years
from date of issuance but are redeemable at any time after that at par. Holders
of the contingent convertible senior notes have the option to require Yellow
Roadway to purchase their notes at par on November 25, 2012, 2015 and 2020, and
upon a change in control of the company. These terms and other material terms
and conditions applicable to the contingent convertible senior notes are set
forth in an indenture governing the notes.
Term Loan
The final cash portion of the purchase price for the Roadway acquisition was
funded through a term loan of $175 million drawn on December 11, 2003. The term
loan represents one component of our new $675 million senior secured credit
facility, as described more fully in the Liquidity section.
ACCOUNTING FOR THE ROADWAY ACQUISITION
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 141,
Business Combinations, we accounted for the acquisition under purchase
accounting. As a result, our Statements of Consolidated Operations and
Statements of Consolidated Cash Flows include results for Roadway LLC and its
operating subsidiaries from the date of acquisition (December 11, 2003) through
December 31, 2003 (the "stub period"). Our Consolidated Balance Sheet as of
December 31, 2003 includes Roadway LLC and its operating subsidiaries after
valuing the tangible and intangible assets and liabilities at their fair values.
As the Roadway acquisition occurred in December 2003, the allocation of the
purchase price included in the December 31, 2003 consolidated balance sheet is
preliminary and subject to refinement. Although we do not expect any subsequent
changes to have a material impact on our results of operations or amounts
allocated to goodwill, such changes could result in material adjustments to the
preliminary purchase allocation. The most significant pending items include the
following: finalization of independent asset valuation for the Roadway tangible
and intangible assets including associated remaining lives; completion of all
direct costs associated with the acquisition; updating Roadway personnel
information used to calculate the pension benefit obligation; determination of
the fair value of tax-related contingencies; calculation of an estimate for
certain contractual obligations; and numerous other refinements. We expect
substantially all of the above refinements will be completed by the end of
second quarter 2004.
OPPORTUNITIES AND RISKS OF THE ACQUISITION
Closing the acquisition of Roadway represents a significant step in our strategy
of becoming a global transportation services provider. Over the next year, we
will identify best practices within the two organizations, prudently and
aggressively pursue cost synergies, and provide quality service and value for
full customer retention, while investing in the separate brands and operating
the segments independently. We actively began working toward these action items
immediately upon closing of the transaction. We expect to recognize net
synergies in 2004 of $30 to $50 million. However, there is risk that the synergy
savings we have estimated may not be realized as a result of the following:
management has no experience running the combined business; the costs we incur
in implementing synergies may be greater than expected; we may be restricted
from negotiating lower prices with our suppliers due to previous agreements; or
we may suffer a loss of employees, customers or suppliers, a loss of revenue or
an increase in operating costs. As we have maintained key senior management from
both organizations and experienced minimal customer and employee loss to date,
we believe these risks are being effectively managed.
16
RESULTS OF OPERATIONS
Our Results of Operations section focuses on the highlights and significant
items that impacted our operating results over the last three years. We will
discuss the areas that caused material fluctuations and required specific
evaluation by management. Our discussion will also explain the adjustments to
operating income that management excludes when internally evaluating segment
performance since the items are not related to the segments' core operations.
Please refer to our Business Segments note for further discussion.
YELLOW TRANSPORTATION RESULTS
Yellow Transportation represented approximately 92 percent, 97 percent and 99
percent of our consolidated revenue in 2003, 2002 and 2001, respectively. The
table below provides summary information for Yellow Transportation for the three
years ended December 31:
Percent Change
--------------------------------
(in millions) 2003 2002 2001 2003 vs. 2002 2002 vs. 2001
- ---------------------------------- -------- -------- -------- ------------- -------------
Operating revenue $2,811.9 $2,547.1 $2,492.3 10.4% 2.2%
Operating income 119.9 70.6 55.9 69.8% 26.3%
Adjustments to operating income(a) 19.0 0.5 2.8 n/m(b) 82.1%
Adjusted operating income 138.9 71.1 58.7 95.3% 21.1%
Operating ratio 95.7% 97.2% 97.8% 1.5pp(c) 0.6pp
Adjusted operating ratio 95.1% 97.2% 97.6% 2.1pp 0.4pp
======== ======== ======== ============= =============
(a) Represents charges that management excludes when evaluating segment
performance to better understand our core operations (see discussion
below).
(b) Not meaningful.
(c) Percentage points.
2003 compared to 2002
Yellow Transportation revenue increased by $264.8 million in 2003 compared to
2002 due to improving economic conditions, growth in market share from the 2002
closure of Consolidated Freightways ("CF"), continued emphasis on premium
services and meeting customer requirements. The two primary components of LTL
revenue are volume, comprised of the number of shipments and the weight per
shipment, and price, usually evaluated on a per hundred weight basis. In 2003,
Yellow Transportation LTL volume increased by 6.8 percent and LTL revenue per
hundred weight, excluding the fuel surcharge, improved by 3.6 percent from 2002.
The fuel surcharge, adjusted weekly based on a national index, represents an
amount passed on to customers due to higher fuel costs and is common throughout
the transportation industry. Since we receive the fuel surcharge from customers,
it mostly offsets the higher fuel cost, and it has a high degree of volatility,
we typically evaluate our pricing excluding this surcharge.
Premium services, an integral part of our strategy to offer a broad portfolio of
services and meet the increasingly complex transportation needs of our
customers, continued to produce favorable operating results. Premium services at
Yellow Transportation include, among others, Exact Express(R), an expedited and
time-definite ground service with a 100 percent satisfaction guarantee; and
Definite Delivery(R), a guaranteed on-time service with constant shipment
monitoring and notification. In 2003, total Exact Express revenue increased by
59 percent and Definite Delivery revenue increased by 34 percent compared to
2002. Yellow Transportation also offers Standard Ground(TM) Regional Advantage,
a high-speed service for shipments moving between 500 and 1,500 miles. Standard
Ground Regional Advantage revenue represented nearly 24 percent of total Yellow
Transportation revenue in 2003 and increased by 7 percent from 2002. This
service provides higher utilization of assets by use of more direct loading and
bypassing intermediate handling at distribution centers.
Despite increases in contractual wages and benefits and purchased transportation
rates, Yellow Transportation operating income improved by $49.3 million in 2003
compared to 2002. Operating income increased primarily as a result of increased
revenue and effective cost management in areas such as workers' compensation and
bad debts (refer to the more detailed discussion in the 2002 compared to 2001
analysis below) and miscellaneous operating supplies. The strong operating
income results highlight our continued ability to effectively balance volume and
price. Purchased transportation (mostly rail) raised operating expenses by $24.2
million in 2003 from 2002. The increase resulted from a combination of higher
volumes and increased rates. Operating expenses as a percentage of revenue
decreased in 2003 by 1.5 percentage points compared to 2002, resulting in an
operating ratio of 95.7 percent. Operating ratio refers to a common industry
measurement calculated by dividing a company's operating expenses by its
operating revenue. In addition to the operating ratio, we evaluate our results
based on incremental margins, or the change in operating income
17
year-over-year divided by the change in revenue year-over-year. The incremental
margin at Yellow Transportation from 2002 to 2003 was 25.6 percent after
adjustments to operating income, as discussed below.
Yellow Transportation 2003 operating income includes a $5.0 million reduction in
claims and insurance expense for an insurance recovery related to two former
employees falsifying claims over several years. We reviewed and made appropriate
adjustments to our procedures and controls in response to the claims.
Adjustments to operating income represent charges that management excludes when
evaluating segment performance to better understand the results of our core
operations. With the exception of property disposals, most of these charges do
not occur on a regular basis and can distort our operating results. Management
excludes the impact of gains and losses from the disposal of property as they
reflect charges not related to the segment's primary business. The following
table provides a detail of these charges incurred for the three years ended
December 31:
(in millions) 2003 2002 2001
- ----------------------------------------- ----- ---- ----
Property (gains)/losses $(0.2) $0.3 $ --
Conforming accounting policies 17.5 -- --
Significant legal provision 1.7 -- --
Reorganization charges -- 0.2 2.8
----- ---- ----
Total adjustments to operating income $19.0 $0.5 $2.8
===== ==== ====
Conforming accounting policies in 2003 consisted of adjustments for recognizing
handling costs for workers' compensation and property damage and liability
claims, and a change in policy for accrual of the January 1 holiday pay for
union employees. Currently, Yellow Transportation manages the administrative
portion of claims handling for self-insurance on workers' compensation and
property damage and liability claims. As a result of an initiative to begin
outsourcing these functions at Yellow Transportation, we recorded a one-time
charge in 2003 of $14.6 million for the liability associated with future claims
handling costs related to existing claims. Roadway Express also recorded a
similar liability as a purchase accounting adjustment. The significant legal
provision relates to a claim from a former employee that we believe may result
in a probable adverse outcome; we recorded a small portion of the claim as a
corporate charge for a total provision of $2.0 million.
2002 compared to 2001
Yellow Transportation realized increased volumes in 2002 compared to 2001,
primarily as a result of its premium services and market share growth from the
CF closure in September 2002. Yellow Transportation LTL shipment volumes
increased by 2.3 percent in 2002 from 2001. Prior to the CF closure, volumes
were flat in 2002 compared to 2001. LTL revenue per hundred weight, excluding
the fuel surcharge, was up 1.9 percent in 2002 compared to 2001. The increase in
volume and price resulted from a disciplined approach to reviewing customer mix
and specific yield management efforts.
Premium services continued to produce favorable results and supported our
strategy of an increasing portfolio. Exact Express revenue increased by 36
percent from 2001 to 2002 and Definite Delivery increased by 26 percent for the
same period. Standard Ground Regional Advantage revenue represented more than 23
percent of Yellow Transportation revenue.
Yellow Transportation realized improved operating income of $14.7 million from
2001 to 2002, despite increased costs for wages and benefits, workers'
compensation and bad debt expense in 2002. Contractual wage and benefit
increases combined with higher volumes impacted expense by over $37 million.
Improved productivity and a variance in the labor mix partially offset the
increased wages. In addition, effective cost management over operating supplies
and administrative costs reduced expense by approximately $18 million from 2001.
The incremental margin at Yellow Transportation from 2001 to 2002 was 22.7
percent after adjustments to operating income, as detailed above.
As a result of increased costs per claim and longer duration of cases over
several years, the projected ultimate costs of workers' compensation claims in
2002 was higher than originally anticipated. This occurred despite the continued
improvement of safety statistics at Yellow Transportation in 2002 compared to
2001. Workers' compensation expense increased at Yellow Transportation by $16.0
million in 2002 from 2001. Yellow Transportation added additional resources to
manage these claims. As a result of improved safety statistics and allocation of
additional resources, workers' compensation costs decreased in 2003 compared to
2002; an indicator that we continue to effectively manage this area.
Bad debt expense also had a negative impact on Yellow Transportation results,
increasing by $11.5 million in 2002 from 2001. The increase resulted from a
trend of additional write-offs partially due to the negative impact of the
economy on certain customers and
18
their ability to pay. Yellow Transportation added additional collection
personnel, installed new collections management software and enhanced its credit
policies and procedures regarding new and continuing customers. As a result of
our improvements in this area combined with improving economic conditions,
write-off trends in 2003 actually decreased from 2002.
MERIDIAN IQ RESULTS
Meridian IQ represents our non-asset-based segment that plans and coordinates
the movement of goods throughout the world. The segment was formed in January of
2002, and formally launched in March of 2002, as the Yellow platform for
non-asset-based transportation services. Meridian IQ provides a wide range of
transportation solutions and offers the following services: international
forwarding and customs brokerage by arranging for the administration,
transportation and delivery of goods to over 88 countries; multi-modal brokerage
services by providing companies with access to volume capacity and specialized
equipment; domestic forwarding and expedited services through arranging
guaranteed, time-definite transportation for companies within North America; and
transportation solutions and technology management using web-native systems
enabling customers to manage their transportation needs.
Due to the recent formation of Meridian IQ, in 2002 we evaluated results
primarily based on sequential growth month over month. Throughout 2002, Meridian
IQ had consistent revenue and operating income improvement, with modestly
profitable results in the second half of the year. In 2003, Meridian IQ revenue
increased by 47 percent to total revenue of $120.2 million versus $81.8 million
in 2002. The increase in revenue resulted from a combination of organic growth,
higher premium services and recent non-asset-based acquisitions (as discussed
below). A prior year operating loss of $2.7 million turned into an operating
profit of $0.3 million in 2003; after adjustments to operating income for
acquisition charges of $0.5 million, the segment generated an operating profit
of $0.8 million.
Meridian IQ Acquisitions
In August 2003, a subsidiary of Meridian IQ, Yellow Global, LLC, acquired
certain U.S. assets of GPS Logistics, a global logistics provider. Yellow
Global, LLC was then renamed Yellow GPS, LLC ("Yellow GPS"). In exchange for the
acquisition, Yellow GPS assumed certain of GPS Logistics customer, lease and
other obligations and became obligated to pay GPS Logistics earnout payments if
certain financial targets for the combined business of Yellow GPS are met. There
was no net cash consideration paid in the transaction. In addition, Yellow GPS
received a call option to purchase the stock of each of GPS Logistics (E.U.)
Ltd., the related United Kingdom ("U.K.") operations of GPS Logistics, and GPS
Logistics Group Ltd., the related Asian operations of GPS Logistics. If Yellow
GPS does not exercise the Asian option, it would be required to pay a deferred
option price to the shareholders of GPS Logistics Group Ltd. In February 2004,
Yellow GPS exercised and closed its option to purchase GPS Logistics (E.U.) Ltd.
Yellow GPS made a payment of $7.6 million, which is subject to upward and
downward adjustment based on the financial performance of the U.K. business. The
acquisition will be reflected in our first quarter 2004 results.
In the third quarter of 2002, Meridian IQ acquired selected assets, consisting
primarily of customer contracts, of Clicklogistics, Inc. ("Clicklogistics") for
nominal cash consideration. Clicklogistics provided non-asset transportation and
logistics management services. In that same period, Meridian IQ completed the
acquisition of MegaSys, Inc. ("MegaSys"), a Greenwood, Indiana based provider of
non-asset transportation and logistics management services, for approximately
$17 million. The acquisition price primarily related to $9.3 million of goodwill
and $7.1 million of identifiable intangible assets. As part of the acquisition,
Meridian IQ negotiated an earnout arrangement, which provided for contingent
consideration to be paid by Meridian IQ upon MegaSys generating cash flow levels
in excess of an established rate of return through December 31, 2005. In the
first quarter of 2004, the earnout arrangement was terminated; earnout payments
to date were not material to our results of operations. We believe these
acquisitions support our strategy to grow our non-asset-based business and be a
single-source transportation provider.
In September 2001, we completed the acquisition of the remaining ownership in
Transportation.com from our venture capital partners. Prior to the acquisition,
we accounted for our investment in Transportation.com as an unconsolidated joint
venture under the equity method of accounting. Accordingly, nonoperating
expenses included a loss of $5.7 million in 2001. As of the acquisition date, we
consolidated Transportation.com, as well as our other non-asset-based services,
under Meridian IQ.
ROADWAY LLC RESULTS
As Roadway LLC and its operating segments, Roadway Express and New Penn, were
only included in our results from the date of acquisition through December 31,
2003, a detailed discussion of their results is not material to our 2003 results
of operations. Roadway Express contributed $131.2 million in revenue and New
Penn contributed $9.8 million in revenue for the stub period.
19
Combined the Roadway LLC segments reported a stub period operating loss of $6.3
million mostly due to a combination of volume and pricing.
CONSOLIDATED RESULTS
Our consolidated results include the results of Yellow Transportation, Meridian
IQ and corporate charges for the entire periods presented. In 2003, consolidated
results also included the results of Roadway LLC and its operating segments from
the date of acquisition through December 31. As we have previously discussed the
operating results of Yellow Transportation and Meridian IQ, this section will
focus on corporate charges and items that are evaluated on a consolidated basis.
The following table summarizes the Statement of Consolidated Operations for the
three years ended December 31:
Percent Change
(in millions) 2003 2002 2001 2003 vs. 2002 2002 vs. 2001
- ------------------------------- -------- -------- -------- ------------- -------------
Operating revenue $3,068.6 $2,624.1 $2,505.1 16.9% 4.8%
Operating income 88.6 46.9 38.2 88.9% 22.8%
Nonoperating expenses, net 21.8 9.3 20.8 134.4% (55.3)%
Income from continuing
operations 40.7 24.0 10.6 69.6% 126.4%
Income (loss) from discontinued
operations -- (117.9) 4.7 n/m n/m
Net income (loss) $ 40.7 $ (93.9) $ 15.3 143.3% n/m
======== ======== ======== ============= =============
2003 compared to 2002
Operating revenue in 2003 increased by $444.5 million, or nearly 17 percent,
from 2002. Of this increase, the results of Roadway Express and New Penn for the
stub period attributed $141.0 million, or five percent of our total revenue.
When excluding the results of Roadway LLC segments for the stub period, our
revenue increased by $303.5 million, or 12 percent, from 2002. Our revenue
growth resulted from improving economic conditions, increased premium services,
non-asset-based acquisitions and meeting customer requirements.
Consolidated operating income improved by $41.7 million from 2003 compared to
2002 due to increased revenue and effective cost management at Yellow
Transportation and Meridian IQ, and despite significant adjustments to operating
income and stub period operating losses of $6.3 million for the Roadway
segments. Corporate operating losses in 2003 included approximately $2.7 million
for acquisition-related charges, consisting mostly of marketing and promotional
activities related to the Roadway transaction. Corporate operating losses, after
adjustments for acquisition and spin-off charges, increased in 2003 from 2002 by
$7.9 million, as detailed in our Business Segments note. We expensed $4.0
million in the first quarter of 2003 for an industry conference that we host
every other year. Corporate costs also increased in 2003 by $3.1 million
compared to 2002, due to higher performance incentive accruals based on our
improved operating results.
Nonoperating expenses increased $12.5 million in 2003 compared to 2002 as a
result of the acquisition-related financing costs, partially offset by increased
interest income. As mentioned previously, we recorded a nonoperating loss on the
extinguishment of debt of $2.3 million from the repurchase and defeasance of our
remaining MTNs. In 2003, we entered into arrangements for $1.1 billion of
committed financing with our investment bankers that would allow us to complete
the Roadway acquisition if we were not able to obtain financing elsewhere.
Although we obtained more favorable financing arrangements through our
contingent convertible senior notes offerings and the term loan, we paid a
commitment fee of $4.5 million upon the expiration of the committed financing
agreement that occurred on December 11, 2003. This commitment fee was recorded
as "interest expense" in our Statement of Consolidated Operations. Interest
expense related to our contingent convertible senior notes and term loan
approximated $6.5 million for 2003. Given our current debt levels, including the
assumption of the senior notes due 2008, we expect our 2004 interest expense to
approximate $50 million.
Our effective tax rate for 2003 was 39.1 percent compared to 36.2 percent in
2002. The higher tax rate resulted primarily from 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 2002. Our notes to the financial statements provide an
analysis of the income tax provision and the effective tax rate.
20
2002 compared to 2001
Our 2002 operating revenue improved over 2001, primarily as a result of
increased volumes at Yellow Transportation from growth in premium services and
increased market share from the CF closure. We also recognized additional
revenue with a full year of Meridian IQ activity, including the acquisitions of
Clicklogistics and MegaSys.
Operating income in 2002 included $6.9 million of charges related to the
spin-off of SCS Transportation, Inc. ("SCST"). Spin-off charges represented bank
fees and external legal and accounting services. Operating income also included
higher corporate expenses in 2002 compared to 2001, mostly related to increased
incentive compensation accruals of $2.7 million and professional services of
$1.6 million.
Nonoperating expenses improved by $11.5 million in 2002 as a result of lower
interest charges on variable-rate debt and financing costs for our asset backed
securitization ("ABS") obligations, due to both lower interest rates and lower
average borrowings. In addition, nonoperating costs in 2001 included a loss of
$5.7 million for our equity investment in Transportation.com. Since September
2001, when we acquired the remaining ownership in Transportation.com, results
for this entity have been consolidated under Meridian IQ and reported as
operating income or losses.
Our effective tax rate on continuing operations for 2002 was 36.2 percent
compared to 39.0 percent in 2001. The lower tax rate resulted from a variety of
factors, including decreased nondeductible business expenses and the
implementation of prudent tax planning strategies. Our notes to the financial
statements provide an analysis of the income tax provision and the effective tax
rate.
Our net loss of $93.9 million for 2002 occurred due to the impairment of
goodwill associated with Jevic Transportation, Inc. ("Jevic") and the spin-off
of SCST. We recorded a non-cash charge of $75.2 million in the first quarter of
2002 for the impairment of goodwill related to the acquisition of Jevic. In the
third quarter of 2002, we recorded a non-cash charge of $52.6 million for the
difference between the carrying value of SCST and the fair value, as determined
by the market capitalization of SCST at the spin-off date. Due to the non-cash
nature of the charges, neither charge resulted in tax benefits. As a result of
the spin-off, both non-cash charges and income from operations of $9.9 million
for SCST were reflected in "discontinued operations" on our Statement of
Consolidated Operations for 2002.
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. As a result of our acquisition of Roadway, our liquidity
requirements and availability of funds have significantly changed. To provide
short-term and longer-term liquidity for the combined organization, we replaced
our previous $300 million unsecured credit agreement with a new $675 million
secured credit agreement. In addition, we maintained our $200 million ABS
facility involving Yellow Transportation accounts receivable. We believe these
facilities provide adequate capacity to fund current working capital and capital
expenditure requirements for the combined organization. It is not unusual for us
to have a deficit working capital position, as we can operate in this position
due to rapid turnover of accounts receivable, effective cash management and
ready access to funding.
Secured Credit Agreement
As mentioned above, we replaced our $300 million bank credit facility, scheduled
to expire in April 2004, with a $675 million secured credit agreement. The
secured credit agreement consists of three parts: a $175 million term loan, a
$250 million letters of credit facility, and a $250 million revolver loan. As of
December 31, 2003, we have borrowed the entire amount of the term loan, using
the funds to pay a portion of the Roadway acquisition. We may use the letters of
credit facility for issuance of standby letters of credit and the revolver loan
for short-term borrowings and additional letters of credit. Letters of credit
serve as collateral for our self-insurance programs, primarily in the areas of
workers' compensation, property damage and liability claims. Collateral
requirements for letters of credit and availability of surety bonds, an
alternative form of self-insurance collateral, fluctuate over time with general
conditions in the insurance market. Our outstanding letters of credit increased
significantly at December 31, 2003 compared to prior year due to our
responsibility for the self-insurance programs of Roadway Express and New Penn.
Our interest rate on the secured credit agreement is based on the London
inter-bank offer rate ("LIBOR") plus a fixed increment. We have secured the
credit facility with substantially all of our domestic assets except for those
assets that secure our ABS facility. Under
21
the terms of the agreement, we must comply with certain covenants primarily
relating to our interest expense, fixed charges, senior secured leverage and
total leverage. In addition, the agreement limits our activities regarding
acquisitions, sales of assets, dividends, share repurchases, and capital
expenditures. As of December 31, 2003, we were in compliance with all terms of
the agreement. We do not consider these covenants overly restrictive and we
believe we have considerable flexibility in operating our business in a prudent
manner. The following table provides a detail of the outstanding components and
available unused capacity under the bank credit agreement:
December 31,
(in millions) 2003
- -------------------------------------------------- ------------
Total capacity $ 675.0
Term loan outstanding (175.0)
Letters of credit facility outstanding (250.0)(a)
Letters of credit under revolver loan outstanding (24.4)
-------
Available unused capacity $ 225.6
=======
(a) We have an additional $1.5 million in letters of credit that are not
currently covered under a credit facility.
Our outstanding letters of credit at December 31, 2003 included $3.4 million for
workers' compensation, property damage and liability claims against SCST. We
agreed to maintain the letters of credit outstanding at the spin-off date until
SCST obtained replacement letters of credit or third party guarantees. SCST
agreed to use its reasonable best efforts to obtain these letters of credit or
guarantees, which in many cases would allow us to obtain a release of our
letters of credit. SCST also agreed to indemnify us for any claims against the
letters of credit that we provide. SCST reimburses us for all fees incurred
related to the remaining outstanding letters of credit. We also provided a
guarantee of $5.9 million regarding certain lease obligations of SCST.
Asset Backed Securitization Facility
Our ABS facility provides us with additional liquidity and lower borrowing costs
through access to the asset backed commercial paper ("ABCP") 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 and
2.3 percent in 2003 and 2002, respectively, on the ABS facility.
Borrowing under our ABS facility involves two primary steps. In the first step,
Yellow Transportation sells an ongoing pool of receivables to a special purpose
entity, Yellow Receivables Corporation ("YRC"). YRC is a wholly owned
consolidated subsidiary of Yellow Transportation designed to isolate the
receivables for bankruptcy purposes.
As the second step, YRC transfers the receivables to a conduit administered by a
large financial institution. The conduit bundles our receivables with numerous
unrelated companies and then sells them to investors as ABCP. The conduit
receives the proceeds from investors and forwards them to YRC who then forwards
the proceeds to Yellow Transportation. Repayments of these obligations, along
with related charges, occur in the reverse sequence of the steps just described.
The table below provides the borrowing and repayment activity, as well as the
resulting balances, for the years ending December 31 of each period presented:
(in millions) 2003 2002
- ------------------------------------------------ ------- -------
ABS obligations outstanding at January 1 $ 50.0 $ 141.5
Transfer of receivables to conduit (borrowings) 151.0 421.5
Redemptions from conduit (repayments) (129.5) (513.0)
------- -------
ABS obligations outstanding at December 31 $ 71.5 $ 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.
22
Prior to December 31, 2002, activity under the ABS facility was treated as a
sale of assets for financial reporting purposes. As a result, we did not reflect
the receivables sold by YRC to the conduit and the related ABS obligations on
our Consolidated Balance Sheets. In addition, we recognized the cost of
financing the receivables as "ABS facility charges" on our Statements of
Consolidated Operations and the related cash flows as an operating activity in
our Statements of Consolidated Cash Flows.
On December 31, 2002, we amended the ABS agreement to provide YRC the right to
repurchase, at any time, 100 percent of the receivable interests held by the
conduit. Prior to the amendment, the right to repurchase receivable interests
was limited to instances when ABS borrowings were below $10 million, or five
percent of the $200 million limit. The amendment did not alter the costs
associated with operating the ABS facility. Due to the amendment, we reflect the
ABS activity as a financing activity rather than a sale of assets. We now
reflect the borrowings on our Consolidated Balance Sheets, the financing cost as
"interest expense" on our Statements of Consolidated Operations, and the
related changes in borrowings as a financing activity in our Statements of
Consolidated Cash Flows.
Credit Ratings
As we expected, our credit ratings declined toward the end of 2003 due to the
significant increase in our debt levels from the acquisition of Roadway. Given
our ability to raise attractive financing through the contingent convertible
notes offerings and our adequate debt capacity, we do not expect the lower
credit ratings to materially impact our results of operations or cash flows.
However, we do expect to pay higher interest rates on variable borrowings due to
these lower ratings. As of December 31, 2003, we had an investment grade
corporate rating of BBB- from Standard & Poor's and a high non-investment grade
corporate rating of Ba1 from Moody's. We are working to pay down our debt as
rapidly as possible and improve our credit ratings; however, in the unlikely
event the ratings were to drop, no ratings-driven triggers exist that would have
an immediate or material adverse impact on our liquidity.
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 is used for internal
management purposes and should not be construed as a better measurement than net
cash from operating activities as defined by generally accepted accounting
principles. The following table illustrates our calculation for determining free
cash flow for the years ended December 31:
(in millions) 2003 2002
- -------------------------------------------------------------- ------- ------
Net cash from operating activities $155.7 $ 43.1
Net change in operating activities of discontinued operations -- (17.3)
Accounts receivable securitizations, net -- 91.5
Net property and equipment acquisitions (99.1) (82.8)
Proceeds from exercise of stock options 4.7 13.7
------ ------
Free cash flow $ 61.3 $ 48.2
====== ======
Our additional free cash flow of $13.1 million from 2002 to 2003 resulted
primarily from increases in income from continuing operations of $16.7 million,
improvements in accounts receivable collections of $42.2 million, lower payments
on accounts payable of $15.4 million and claims and other changes of $8.8
million. Claims and other primarily represents increased pension and workers'
compensation accruals. Fluctuations of $78.5 million in other working capital
items mostly offset these favorable improvements. Other working capital changes
included increased pension funding in 2003 of $23.5 million and the impact of
wage and benefit payments of Roadway Express and New Penn that approximated $20
million for the stub period. In addition, accrued income taxes created a
fluctuation of $26.0 million between 2003 and 2002 due to improved operating
results in 2003 and an income tax refund of $10.5 million received in 2002.
Other items considered in evaluating free cash flow include net property and
equipment acquisitions and proceeds from exercise of stock options. In 2003, net
property and equipment acquisitions increased by $16.3 million mostly due to
increased investments in land and structures at Yellow Transportation. Our
continued investment in equipment and land and structures supports our
philosophy of consistently funding capital expenditures for anticipated growth
and expansion of services. Our proceeds received from exercise of stock options
decreased by $9.0 million in 2003 from 2002 mostly due to restrictions of
exercising options during the pending acquisition of Roadway.
23
In 2002, operating cash flow results included $17.3 million from the operating
activities of SCST. Since we completed the spin-off of SCST in September 2002,
results for 2003 do not reflect any SCST activity. As discussed previously, we
recorded our ABS financing as an operating activity in prior periods and in 2003
recognized the borrowings as a financing activity due to the amendment of our
ABS facility agreement. This change in reporting impacted cash from operating
activities by $91.5 million between 2002 and 2003.
CAPITAL EXPENDITURES
Our capital expenditures focus primarily on the replacement of revenue
equipment, land and structures, additional investments in information technology
and acquisitions. As reflected on our Consolidated Balance Sheets, our business
remains capital intensive with significant investments in terminal facilities
and a fleet of tractors and trailers. We determine the amount and timing of
capital expenditures based on numerous factors, including anticipated growth,
economic conditions, new or expanded services, regulatory actions and
availability of financing. The acquisition of Roadway will not change our
capital expenditures philosophy from previous years, given the similarity of our
operations. However, as discussed below, we do expect capital expenditures to
increase significantly due to the acquisition.
The table below summarizes our actual net capital expenditures by type for the
periods ended December 31:
(in millions) 2003 2002 2001
- -------------------------------------------- ---- ---- ----
Revenue equipment $ 62 $ 72 $ 58
Land, structures and technology 37 11 23
---- ---- ----
Total before acquisition of companies and
discontinued operations 99 83 81
Acquisition of companies 513 18 20
Discontinued operations -- 24 20
---- ---- ----
Total net capital expenditures $612 $125 $121
==== ==== ====
Capital expenditures for 2003 included the cash portion of the Roadway
acquisition for a total of $513 million, while 2002 included the Meridian IQ
acquisitions of MegaSys and Clicklogistics for a total of $18 million. We expect
2004 capital spending to approximate $190 to $210 million, including about $120
million for revenue equipment and $7.6 million for the acquisition of GPS
Logistics (E.U.) Ltd. Our philosophy continues to be consistent funding of
capital expenditures even during economic downturns while still generating free
cash flow. We believe our financial condition and access to capital, as they
exist today, are adequate to fund our anticipated capital expenditures and
future growth opportunities.
Our expectation regarding our ability to fund capital expenditures out of
existing financing facilities and cash flow is only our forecast regarding this
matter. This forecast may be substantially different from actual results. In
addition to the factors previously described in the Forward-Looking Statements
section, the following factors could affect levels of capital expenditures: the
accuracy of our estimates regarding our spending requirements; the occurrence of
any unanticipated acquisition opportunities; changes in our strategic direction;
and the need to replace any unanticipated losses in capital assets.
NONUNION PENSION OBLIGATIONS
We provide defined benefit pension plans for employees not covered by collective
bargaining agreements. The Yellow qualified plan covers approximately 4,000
employees and the Roadway LLC qualified plan covers approximately 6,000
employees. Beginning January 1, 2004, the existing qualified benefit plans will
be closed to new participants. All new nonunion employees and all Meridian IQ
employees will participate in a new defined contribution retirement plan.
Increases in our pension benefit obligations combined with market losses in 2002
and 2001 negatively impacted the funded status of our plans and resulted in
additional funding requirements and pension expense in 2003. Due to these same
factors, we recorded a reduction in shareholders' equity in 2002 of $30.8
million, net of tax of $17.2 million, to reflect the minimum liability
associated with the plans. In 2003, we reduced the minimum liability in
shareholders' equity by a net $10.5 million, as a result of the additional
expense we recognized during the year as well as favorable investment experience
in 2003. Our minimum liability reflected in shareholders' equity at December 31,
2003 totals $20.3 million, net of tax of $12.5 million. As we record additional
expense and fund our accumulated benefit obligation, we expect the minimum
liability reflected in shareholders' equity to continue to decrease.
Although market returns improved in 2003, we expect pension funding and expense
to remain an area of management focus over the next several years. Given the
dependence on the economy and the significant amounts involved, pension funding
could have a material
24
impact on our liquidity. Using our current plan assumptions of an 8.75 percent
return on assets (9.0 percent for 2003 actual) and discount rate of 6.25 percent
(6.75 percent for 2003 actual), we either recorded or expect to record the
following:
Shareholders'
Equity
Pension Decrease,
(in millions) Cash Funding Expense net of tax
- -------------- ------------ ------- -------------
2003 Actual $ 35.0 $ 19.3 $ 10.5
2004 Expected 45.0 52.2 14.2
2005 Expected 42.0 56.2 7.1
===== ===== =====
Our actual 2003 pension expense included approximately $1.3 million for the stub
period of Roadway Express and New Penn. The remaining $18.0 million of expense
attributed to the Yellow plans was significantly less than the $24.0 million we
estimated at December 31, 2002, due to a valuation study in the first quarter of
2003 from our independent actuary. The actuary completes a study approximately
every five years that involves reviewing, among other items, actual salary
rates, retirement ages and employee turnover. Expectations for 2004 and 2005
include amounts related to the Roadway plans.
CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
The following tables provide aggregated information regarding our contractual
obligations and commercial commitments as of December 31, 2003. Most of these
obligations and commitments have been discussed in detail either in the
preceding paragraphs or the notes to the financial statements. The tables do not
include expected pension funding as disclosed separately in the previous
section.
Contractual Cash Obligations
Payments Due by Period
(in millions) Less than 1 year 2-3 years 4-5 years After 5 years Total
- ------------------------------- ---------------- --------- --------- ------------- --------
Balance sheet obligations:
ABS borrowings $ 71.5 $ -- $ -- $ -- $ 71.5
Long-term debt 1.8 7.9 397.2 407.0 813.9
Off balance sheet obligations:
Operating leases 73.1 86.9 29.3 14.4 203.7(a)
Capital expenditures 60.0 -- -- -- 60.0
------ ----- ------ ------ --------
Total contractual obligations $206.4 $94.8 $426.5 $421.4 $1,149.1
====== ===== ====== ====== ========
(a) The net present value of operating leases, using a discount rate of 10
percent, was $171.0 million at December 31, 2003.
Other Commercial Commitments
The following table reflects other commercial commitments or potential cash
outflows that may result from a contingent event, such as a need to borrow
short-term funds due to insufficient free cash flow.
Amount of Commitment Expiration Per Period
(in millions) Less than 1 year 2-3 years 4-5 years After 5 years Total
- ---------------------------- ---------------- --------- --------- ------------- ------
Available line of credit $ -- $ -- $ -- $225.6 $225.6
Letters of credit 275.9 -- -- -- 275.9(a)
Lease guarantees for SCST 1.7 2.9 1.3 -- 5.9
Surety bonds 62.8 0.4 1.4 -- 64.6(b)
------ ---- ---- ------ ------
Total commercial commitments $340.4 $3.3 $2.7 $225.6 $572.0
====== ==== ==== ====== ======
(a) Includes $1.5 million in letters of credit that are not currently covered
under a credit facility.
(b) Includes $2.3 million of surety bonds for SCST related to workers'
compensation, property damage and liability claims.
25
CRITICAL ACCOUNTING POLICIES
Preparation of our financial statements requires accounting policies that
involve significant estimates and judgments regarding the amounts included in
the financial statements and disclosed in the accompanying notes to the
financial statements. We continually review the appropriateness of our
accounting policies and the accuracy of our estimates. Even with a thorough
process, estimates must be adjusted based on changing circumstances and new
information. Management has identified the policies described below as requiring
significant judgment and having a potential material impact to our financial
statements.
REVENUE RESERVES
We consider our policies regarding revenue-related reserves as critical based on
their significance in evaluating our financial performance by management and
investors. We have an extensive system that allows us to accurately capture,
record and control all relevant information necessary to effectively manage our
revenue reserves.
For shipments in transit, Yellow Transportation, Roadway Express and New Penn
record revenue based on the percentage of service completed as of the period end
and accrue delivery costs as incurred. In addition, Yellow Transportation,
Roadway Express and New Penn recognize revenue on a gross basis since the
entities are the primary obligors even when they use other transportation
service providers who act on their behalf. Yellow Transportation, Roadway
Express and New Penn remain responsible to their customers for complete and
proper shipment, including the risk of physical loss or damage of the goods and
cargo claims issues. Meridian IQ recognizes revenue upon the completion of
services. In certain logistics transactions where Meridian IQ acts as an agent,
revenue is recorded on a net basis. Net revenue represents revenue charged to
customers less third party transportation costs. Where Meridian IQ acts as
principal, it records revenue from these transactions on a gross basis, without
deducting transportation costs. Management believes these policies most
accurately reflect revenue as earned. Our revenue-related reserves involve three
primary estimates: shipments in transit, rerate reserves, and uncollectible
accounts.
Shipments in Transit
We assign pricing to bills of lading at the time of shipment based on the
weight, general classification of the product, the shipping destination and
individual customer discounts. This process is referred to as rating. At the end
of each period, we estimate the amount of revenue earned on shipments in transit
based on actual shipments picked up and scheduled delivery dates. We calculate a
percentage of completion using this data and the day of the week on which the
period ends. Management believes this provides a reasonable estimation of the
revenue actually earned.
Rerate Reserves
At various points throughout our process, incorrect ratings could be identified
based on many factors, including weight verifications or updated customer
discounts. Although the majority of rerating occurs in the same month as the
original rating, a portion occurs during the following periods. We accrue a
reserve for rerating based on historical trends. At December 31, 2003 and 2002,
our financial statements included a rerate reserve of $21.8 million and $12.0
million, respectively. The significant increase in the rerate reserve from 2002
to 2003 resulted primarily from the inclusion of Roadway Express and New Penn in
2003.
Uncollectible Accounts
We record an allowance for doubtful accounts primarily based on historical
uncollectible amounts. We also take into account known factors surrounding
specific customers and overall collection trends. Our process involves
performing ongoing credit evaluations of customers, including the market in
which they operate and the overall economic conditions. We continually review
historical trends and make adjustments to the allowance for doubtful accounts as
appropriate. Our allowance for doubtful accounts totaled $20.8 million and $15.7
million as of December 31, 2003 and 2002, respectively. The increase in the
allowance for doubtful accounts from 2002 to 2003 resulted primarily from the
inclusion of Roadway Express and New Penn in 2003.
CLAIMS AND INSURANCE
We are self-insured up to certain limits for workers' compensation, cargo loss
and damage, property damage and liability claims. We measure the liabilities
associated with workers' compensation and property damage and liability claims
primarily through actuarial
26
methods performed by an independent third party. Actuarial methods include
estimates for the undiscounted liability for claims reported, for claims
incurred but not reported and for certain future administrative costs. These
estimates are based on historical loss experience and judgments about the
present and expected levels of costs per claim and the time required to settle
claims. The effect of future inflation for costs is implicitly considered in the
actuarial analyses. Actual claims may vary from these estimates due to a number
of factors, including but not limited to, accident frequency and severity,
claims management, changes in healthcare costs and overall economic conditions.
We discount the actuarial calculations to present value based on the U.S.
Treasury rate, at the date of occurrence, for maturities that match the expected
payout of the liabilities. As of December 31, 2003 and 2002, we had $299.3
million and $115.2 million accrued for claims and insurance. The increase in
claims and insurance from 2002 to 2003 resulted primarily from the inclusion of
Roadway Express and New Penn in 2003.
PENSION
With the exception of Meridian IQ, New Penn and Reimer, Yellow Roadway and its
operating subsidiaries sponsor qualified and nonqualified defined benefit
pension plans for most employees not covered by collective bargaining
agreements. Meridian IQ and New Penn do not offer defined benefit pension plans
and instead offer retirement benefits through either contributory 401(k) savings
plans or profit sharing plans. Beginning January 1, 2004, all new nonunion
employees and all Meridian IQ employees will participate in a new defined
contribution retirement plan. The existing Yellow Roadway qualified plans will
be closed to new participants. We account for pension benefits using actuarial
methods based on numerous estimates, including employee turnover, mortality and
retirement ages, expected return on plan assets, discount rates, and future
salary increases. The most critical of these factors, due to their potential
impact on pension cost, are discussed in more detail below.
Return on Plan Assets
The return on plan assets represents a long-term assumption of our portfolio
performance that can impact our pension expense and our minimum liability. With
$615 million of plan assets, including the Roadway plans, a 50-basis-point
decrease in the return rate would increase annual pension expense by
approximately $3 million and would increase our minimum liability reflected in
shareholders' equity by approximately $1 million.
We believe our 2003 expected rate of return of 9.0 percent accurately
represented our investment portfolio that has performed to this level over time.
However, given the addition of the Roadway portfolio of assets and in accordance
with our policy on establishing the long-term rate of return, we have lowered
this rate to 8.75 percent in determining 2004 pension expense. Although plan
investments are subject to short-term market volatility, we believe they are
well diversified and closely managed. Our asset allocation as of December 31,
2003 consisted of 67 percent in equities and 33 percent in fixed-income
securities. This allocation is consistent with the long-term asset allocation
for the plans. We will continue to review our expected long-term rate of return
on an annual basis and revise appropriately. Refer to our discussion of Nonunion
Pension Obligations under the Financial Condition section for details of actual
and anticipated pension charges.
Discount Rate
The discount rate refers to the interest rate used to discount the estimated
future benefit payments earned to their present value, also referred to as the
benefit obligation. The discount rate allows us to calculate what it would cost
to settle the pension obligations as of the measurement date, December 31, and
impacts the following year's pension expense. We determine the discount rate
based on high-grade corporate bonds with principal payments and maturities that
approximate our expected benefit payments.
Although the discount rate used requires little judgment, changes in the rate
can significantly impact our pension expense. For example, a 50-basis-point
decrease in our discount rate would increase annual pension expense by
approximately $7.5 million, assuming all other factors remain constant. Changes
in the discount rate do not have a direct impact on cash funding requirements.
The discount rate can fluctuate considerably over periods depending on overall
economic conditions that impact long-term corporate bond yields. At December 31,
2003 and 2002, we used a discount rate of 6.25 percent and 6.75 percent,
respectively.
Future Salary Increases
We make assumptions of future salary increases for plan participants based on
general inflation and cost of living expectations. As pension benefits are based
on participants' earned wages, estimated levels of our future performance also
factor into the calculation. We believe these increases require less judgment
than other pension estimates but can have a significant impact on our future
pension
27
expense. Our 2003 assumed rate of future annual increases of 3.9 percent
represents a weighted average of the Yellow and Roadway plans and reflects the
recent experience of both plans.
MULTI-EMPLOYER PLANS
Yellow Transportation, Roadway Express and New Penn contribute to multi-employer
health, welfare and pension plans for employees covered by collective bargaining
agreements (approximately 77 percent of total employees). The largest of these
plans, the Central States Southeast and Southwest Areas Pension Plan (the
"Central States Plan") provides retirement benefits to approximately 53 percent
of our total employees. The amounts of these contributions are determined by
contract and established in the agreements. The health and welfare plans provide
health care and disability benefits to active employees and retirees. The
pension plans provide defined benefits to retired participants. We recognize as
net pension cost the required contribution for the period and recognize as a
liability any contributions due and unpaid. Yellow Roadway contributed and
charged to expense $374.4 million in 2003, $315.1 million in 2002, and $307.2
million in 2001. Roadway Corporation contributed and charged to expense
approximately $374 million for the period January 1, 2003 through the date of
acquisition (December 11, 2003).
Under current legislation regarding multi-employer pension plans, a termination,
withdrawal or partial withdrawal from any multi-employer plan in an under-funded
status would render us liable for a proportionate share of 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, Roadway Express and New Penn have no current intention of taking
any action that would subject us to obligations under the legislation.
Yellow Transportation, Roadway Express and New Penn each have collective
bargaining agreements with their unions that stipulate the amount of
contributions each company must make to union-sponsored, multi-employer pension
plans. The Internal Revenue Code and related regulations establish minimum
funding requirements for these plans. If any of these plans, including (without
limitation) the Central States Plan, fail to meet these requirements and the
trustees of these plans are unable to obtain waivers of the requirements from
the Internal Revenue Service ("IRS") or reduce pension benefits to a level where
the requirements are met, the IRS could impose an excise tax on all employers
participating in these plans and require contributions in excess of our
contractually agreed upon rates to correct the funding deficiency. If an excise
tax were imposed on the participating employers and additional contributions
required, it could have a material adverse impact on the financial results of
Yellow Roadway.
PROPERTY AND EQUIPMENT
We capitalize property and equipment in accordance with current accounting
standards, including replacements and improvements when such costs extend the
useful life of the asset. We charge maintenance and repairs to expense as
incurred. Depreciation on capital assets is computed using the straight-line
method and ranges from 3 to 40 years. Management makes assumptions regarding
future conditions in determining estimated useful lives and potential salvage
values. These assumptions impact the amount of depreciation expense recognized
in the period and any gain or loss once the asset is disposed.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS NO. 149
On June 30, 2003, we adopted SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities ("Statement No. 149"). Statement
No. 149 amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities
under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. As we do not currently engage in significant hedging activities, we
do not expect adoption of Statement No. 149 to have a material impact on our
financial position or results of operations.
SFAS NO. 150
On July 1, 2003, we adopted SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity ("Statement No.
150"). Statement No. 150 establishes standards for classifying and measuring
certain financial instruments with characteristics of both liabilities and
equity, and requires us to classify a financial instrument within its scope as a
liability or
28
asset. Previously, many instruments under the scope of Statement No. 150 would
have been classified as equity. We do not expect adoption of Statement No. 150
to have a material impact on our financial position or results of operations.
SFAS NO. 132 (REVISED 2003)
On December 15, 2003 we adopted the disclosure provisions of SFAS No. 132
(Revised 2003), Employers' Disclosures about Pensions and Other Postretirement
Benefits - an amendment of SFAS Nos. 87, 88 and 106 ("Statement No. 132R").
Statement 132R retains the disclosure requirements of SFAS No. 132, which it
replaces, and requires additional disclosures about the assets, obligations,
cash flows, and net periodic benefit cost of defined benefit pension plans and
other defined benefit postretirement plans. Our Notes to the Consolidated
Financial Statements reflect these additional disclosures. Our quarterly reports
on Form 10-Q will also include additional disclosures regarding defined pension
plans and postretirement plans.
OUTLOOK
Economists expect growth in capital spending in 2004 as a result of, among
others, rising corporate profits, lower interest rates, improving equity markets
and tax incentives. Our economic assumptions also include year-over-year gains
in the IPI and real GDP of four percent; a significant positive for our
industry. Management expects our pricing environment to remain competitive, yet
stable, during the upcoming year. We will continue to focus on leveraging the
capabilities of our new organization and achieving the synergies that are
available to us. With our significant operating leverage, we are well positioned
to take advantage of improving economic conditions.
29
Item 7A. Qualitative and Quantitative Disclosures About Market Risk
MARKET RISK POSITION
We have exposure to a variety of market risks, including the effects of interest
rates, foreign 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. Given the favorable interest rate markets
in 2003, we assumed a significant amount of fixed-rate debt for the acquisition
of Roadway. At December 31, 2003, we had approximately 72 percent of our debt at
fixed rates with the balance at variable rates.
The table below provides information regarding our interest rate risk related to
fixed-rate debt as of December 31, 2003. Principal cash flows are stated in
millions and weighted average interest rates are by contractual maturity. We
estimate the fair value of our industrial development bonds by discounting the
principal and interest payments at current rates available for debt of similar
terms and maturity. The fair values of our senior notes due 2008 and contingent
convertible senior notes have been calculated based on the quoted market prices
at December 31, 2003. The market price for the contingent convertible senior
notes reflects the combination of debt and equity components of the convertible
instrument. We consider the fair value of variable-rate debt to approximate
the carrying amount due to the fact that the interest rates are generally set
for periods of three months or less, therefore, we exclude it from the table
below.
Fair
(in millions) 2004 2005 2006 2007 2008 Thereafter Total value
- ----------------------- ---- ------ ----- ----- ------- ---------- ------- -------
Fixed-rate debt $ -- $ 4.4 $ -- $ -- $ 227.5 $ 407.0 $ 638.9 $ 761.0
Average interest rate -- 5.25% -- -- 8.22% 4.42%
==== ====== ===== ===== ======= ========== ======= =======
FOREIGN 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, Roadway Express and New Penn currently have effective
fuel surcharge programs in place. As discussed under the Yellow Transportation
Results of Operations, 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.
30
Item 8. Financial Statements and Supplementary Data
CONSOLIDATED BALANCE SHEETS
Yellow Roadway Corporation and Subsidiaries
December 31, December 31,
(in thousands except per share data) 2003 2002
- ------------------------------------------------------------- ------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 75,166 $ 28,714
Accounts receivable, less allowances of $20,839 and $15,731 699,142 327,913
Fuel and operating supplies 16,452 11,039
Deferred income taxes, net 23,614 --
Prepaid expenses 70,062 57,687
----------- -----------
Total current assets 884,436 425,353
----------- -----------
Property and Equipment:
Land 351,969 93,783
Structures 906,434 516,006
Revenue equipment 968,742 825,606
Technology equipment and software 154,688 141,723
Other 156,781 101,978
----------- -----------
2,538,614 1,679,096
Less - accumulated depreciation (1,135,346) (1,114,120)
----------- -----------
Net property and equipment 1,403,268 564,976
----------- -----------
Goodwill 617,313 20,491
Intangibles 467,114 7,696
Other assets 91,098 24,469
----------- -----------
TOTAL ASSETS $ 3,463,229 $ 1,042,985
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Checks outstanding in excess of bank balances $ 101,395 $ 63,685
Accounts payable 158,780 51,304
Wages, vacations and employees' benefits 351,287 159,998
Deferred income taxes, net -- 16,751
Claims and insurance accruals 112,005 44,045
Other current and accrued liabilities 66,473 40,315
Asset backed securitization ("ABS") borrowings 71,500 50,000
Current maturities of long-term debt 1,757 24,261
----------- -----------
Total current liabilities 863,197 450,359
----------- -----------
Other Liabilities:
Long-term debt, less current portion 836,082 50,024
Deferred income taxes, net 298,256 25,657
Claims and other liabilities 463,609 156,987
Commitments and contingencies
Shareholders' Equity:
Common stock, $1 par value per share - authorized 120,000
shares, issued 50,146 and 31,825 shares 50,146 31,825
Capital surplus 653,739 80,610
Retained earnings 366,157 325,474
Accumulated other comprehensive loss (23,167) (35,596)
Unamortized restricted stock awards (567) (1,053)
Treasury stock, at cost (2,359 and 2,244 shares) (44,223) (41,302)
----------- -----------
Total shareholders' equity 1,002,085 359,958
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,463,229 $ 1,042,985
=========== ===========
The notes to consolidated financial statements are an integral part of these
statements.
31
STATEMENTS OF CONSOLIDATED OPERATIONS
Yellow Roadway Corporation and Subsidiaries
For the years ended December 31
(in thousands except per share data) 2003 2002 2001
- ----------------------------------------------------- ---------- ---------- ----------
OPERATING REVENUE $3,068,616 $2,624,148 $2,505,070
---------- ---------- ----------
OPERATING EXPENSES:
Salaries, wages and employees' benefits 1,970,440 1,717,382 1,638,662
Operating expenses and supplies 449,825 385,522 398,054
Operating taxes and licenses 83,548 75,737 75,637
Claims and insurance 67,670 57,197 56,999
Depreciation and amortization 87,398 79,334 76,977
Purchased transportation 318,176 253,677 215,131
Losses (gains) on property disposals, net (167) 425 (186)
Acquisition, spin-off and reorganization charges 3,124 8,010 5,601
---------- ---------- ----------
Total operating expenses 2,980,014 2,577,284 2,466,875
---------- ---------- ----------
Operating income 88,602 46,864 38,195
---------- ---------- ----------
NONOPERATING (INCOME) EXPENSES:
Interest expense 20,606 7,211 8,437
ABS facility charges -- 2,576 7,996
Interest income (1,706) (843) (1,198)
Loss on equity method investment -- -- 5,741
Other 2,888 334 (140)
---------- ---------- ----------
Nonoperating expenses, net 21,788 9,278 20,836
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 66,814 37,586 17,359
Income Tax Provision 26,131 13,613 6,770
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS 40,683 23,973 10,589
Income (loss) from discontinued operations, net -- (117,875) 4,712
---------- ---------- ----------
NET INCOME (LOSS) $ 40,683 $ (93,902) $ 15,301
---------- ---------- ----------
AVERAGE COMMON SHARES OUTSTANDING - BASIC 30,370 28,004 24,376
AVERAGE COMMON SHARES OUTSTANDING - DILUTED 30,655 28,371 24,679
BASIC EARNINGS (LOSS) PER SHARE:
Income from continuing operations $ 1.34 $ 0.86 $ 0.44
Income (loss) from discontinued operations -- (4.21) 0.19
---------- ---------- ----------
Net income (loss) $ 1.34 $ (3.35) $ 0.63
---------- ---------- ----------
DILUTED EARNINGS (LOSS) PER SHARE:
Income from continuing operations $ 1.33 $ 0.84 $ 0.43
Income (loss) from discontinued operations -- (4.15) 0.19
---------- ---------- ----------
Net income (loss) $ 1.33 $ (3.31) $ 0.62
========== ========== ==========
The notes to consolidated financial statements are an integral part of these
statements.
32
STATEMENTS OF CONSOLIDATED CASH FLOWS
Yellow Roadway Corporation and Subsidiaries
For the years ended December 31
(in thousands except per share data) 2003 2002 2001
- ------------------------------------------------------------- --------- --------- ---------
OPERATING ACTIVITIES:
Net income (loss) $ 40,683 $ (93,902) $ 15,301
Noncash items included in net income (loss):
Depreciation and amortization 87,398 79,334 76,977
Loss (income) from discontinued operations -- 117,875 (4,712)
Loss on equity method investment -- -- 5,741
Deferred income tax provision, net 25,767 1,449 16,746
Losses (gains) on property disposals, net (167) 425 (186)
Changes in assets and liabilities, net:
Accounts receivable (7,430) (49,633) 44,041
Accounts receivable securitizations -- (91,500) (35,500)
Accounts payable 21,294 5,928 (13,704)
Other working capital items (40,053) 38,468 (97,532)
Claims and other 23,189 14,386 (3,742)
Other 5,055 2,978 8,759
Net change in operating activities of discontinued operations -- 17,250 76,106
--------- --------- ---------
NET CASH FROM OPERATING ACTIVITIES 155,736 43,058 88,295
--------- --------- ---------
INVESTING ACTIVITIES:
Acquisition of property and equipment (103,327) (86,337) (88,022)
Proceeds from disposal of property and equipment 4,193 3,507 6,587
Acquisition of companies (513,338) (18,042) (14,300)
Other -- -- (5,830)
Net capital expenditures of discontinued operations -- (24,372) (19,619)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (612,472) (125,244) (121,184)
--------- --------- ---------
FINANCING ACTIVITIES:
Unsecured bank credit lines, net -- (85,000) 25,000
Senior secured credit facility 175,000 -- --
ABS borrowings, net 21,500 -- --
Issuance of long-term debt 400,000 -- --
Debt issuance costs (34,734) -- --
Repayment of long-term debt (60,342) (44,600) (10,412)
Proceeds from issuance of common stock -- 93,792 --
Dividend from subsidiary upon spin-off -- 113,790 --
Treasury stock purchases (2,921) -- --
Proceeds from exercise of stock options 4,685 13,704 16,638
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 503,188 91,686 31,226
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 46,452 9,500 (1,663)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 28,714 19,214 20,877
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 75,166 $ 28,714 $ 19,214
--------- --------- ---------
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid, net $ 15,957 $ 8,272 $ 5,268
Interest paid 13,498 11,518 16,628
Issuance of common stock for Roadway acquisition 583,883 -- --
========= ========= =========
The notes to consolidated financial statements are an integral part of these
statements.
33
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
Yellow Roadway Corporation and Subsidiaries
For the years ended December 31
(in thousands except per share data) 2003 2002 2001
- --------------------------------------------------- ---------- --------- ---------
COMMON STOCK
Beginning balance $ 31,825 $ 31,028 $ 29,959
Exercise of stock options 279 737 1,063
Issuance of common stock for Roadway acquisition 18,038 -- --
Other 4 60 6
---------- --------- ---------
Ending balance 50,146 31,825 31,028
---------- --------- ---------
CAPITAL SURPLUS
Beginning balance 80,610 41,689 23,304
Exercise of stock options, including tax benefits 5,749 15,296 18,286
Stock issued for Roadway acquisition 565,845 -- --
Equity offering and other 1,535 23,625 99
---------- --------- ---------
Ending balance 653,739 80,610 41,689
---------- --------- ---------
RETAINED EARNINGS
Beginning balance 325,474 537,496 522,195
Stock dividend to SCST shareholders -- (118,120) --
Net income (loss) 40,683 (93,902) 15,301
---------- --------- ---------
Ending balance 366,157 325,474 537,496
---------- --------- ---------
ACCUMULATED OTHER COMPREHENSIVE LOSS
Beginning balance (35,596) (6,252) (2,710)
Changes in minimum pension liability adjustment 10,548 (30,848) --
Changes in foreign currency translation adjustments 386 73 (616)
Changes in the fair value of interest rate swaps 1,495 1,431 (2,926)
---------- --------- ---------
Ending balance (23,167) (35,596) (6,252)
---------- --------- ---------
UNAMORTIZED RESTRICTED STOCK AWARDS
Beginning balance (1,053) -- --
Issuance of restricted stock awards -- (1,458) --
Amortization of restricted stock awards 486 405 --
---------- --------- ---------
Ending balance (567) (1,053) --
---------- --------- ---------
TREASURY STOCK, AT COST
Beginning balance (41,302) (112,972) (112,972)
Treasury stock purchases (2,921) -- --
Equity offering - reissuance of treasury stock -- 71,670 --
---------- --------- ---------
Ending balance (44,223) (41,302) (112,972)
---------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY $1,002,085 $ 359,958 $ 490,989
========== ========= =========
The notes to consolidated financial statements are an integral part of these
statements.
34
STATEMENTS OF COMPREHENSIVE INCOME
Yellow Roadway Corporation and Subsidiaries
For the years ended December 31
(in thousands except per share data) 2003 2002 2001
- ------------------------------------------------------ ------- --------- -------
Net income (loss) $40,683 $ (93,902) $15,301
Other comprehensive income (loss), net of tax:
Changes in minimum pension liability adjustment 10,548 (30,848) --
Changes in foreign currency translation adjustments 386 73 (616)
Changes in the fair value of interest rate swaps 1,495 1,431 (2,926)
------- --------- -------
COMPREHENSIVE INCOME (LOSS) $53,112 $(123,246) $11,759
======= ========= =======
The notes to consolidated financial statements are an integral part of these
statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Yellow Roadway Corporation and Subsidiaries
DESCRIPTION OF BUSINESS
Yellow Roadway Corporation (also referred to as "Yellow Roadway," "Yellow," "we"
or "our"), a Fortune 500 company and one of the largest transportation service
providers in the world, is a holding company that through wholly owned operating
subsidiaries offers its customers a wide range of asset and non-asset-based
transportation services. Yellow Technologies, Inc., a captive corporate
resource, provides innovative technology solutions and services exclusively for
Yellow Roadway companies. Our operating subsidiaries include the following:
- Yellow Transportation, Inc. ("Yellow Transportation") is a leading
transportation services provider that offers a full range of
regional, national and international services for the movement of
industrial, commercial and retail goods, primarily through
centralized management and customer facing organizations.
Approximately 40 percent of Yellow Transportation shipments are
completed in two days or less.
- Roadway Express, Inc. ("Roadway Express") is a leading
transportation services provider that offers a full range of
regional, national and international services for the movement of
industrial, commercial and retail goods, primarily through
decentralized management and customer facing organizations.
Approximately 30 percent of Roadway Express shipments are completed
in two days or less. Roadway Express owns 100 percent of Reimer
Express Lines Ltd. ("Reimer") located in Canada that specializes in
shipments into, across and out of Canada.
- Roadway Next Day Corporation is a holding company focused on
business opportunities in the regional and next-day delivery lanes.
Roadway Next Day Corporation owns 100 percent of New Penn Motor
Express, Inc. ("New Penn"), which provides superior quality
regional, next-day ground services through a network of facilities
located in the Northeastern United States ("U.S."), Quebec, Canada
and Puerto Rico.
- Meridian IQ, Inc. ("Meridian IQ") is a non-asset-based global
transportation management company that plans and coordinates the
movement of goods throughout the world, providing customers a quick
return on investment, more efficient supply-chain processes and a
single source for transportation management solutions.
On December 11, 2003, Yellow Corporation completed the acquisition of Roadway
Corporation. The combined company was renamed Yellow Roadway Corporation.
Roadway Corporation was merged with and into Roadway LLC, a newly formed limited
liability company and a wholly owned subsidiary of Yellow Roadway. Consideration
for the acquisition included $494 million in cash and 18.0 million shares of
Yellow Roadway common stock, based on an exchange ratio of 1.752 and an average
price per share of $31.51, for a total purchase price of $1.1 billion. The
purchase price also included approximately $19 million for investment banking,
legal and accounting fees that Yellow Roadway incurred to consummate the
acquisition, resulting in total cash consideration of $513 million. Roadway LLC
principal subsidiaries include Roadway Express and Roadway Next Day Corporation.
The operations of Roadway LLC are included in our consolidated results of
operations and cash flows from the date of acquisition through December 31, 2003
and in our consolidated balance sheet as of the year ended December 31, 2003.
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 reflect SCST as discontinued operations for the periods
prior to the spin-off.
35
PRINCIPLES OF CONSOLIDATION AND SUMMARY OF ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts of
Yellow Roadway Corporation and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Management makes estimates and assumptions that affect the amounts reported in
the financial statements and notes. Actual results could differ from those
estimates.
Accounting policies refer to specific accounting principles and the methods of
applying those principles to fairly present our financial position and results
of operations in accordance with generally accepted accounting principles. The
policies discussed below include those that management has determined to be the
most appropriate in preparing our financial statements and are not discussed in
a separate note.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include demand deposits and highly liquid investments
purchased with maturities of three months or less.
CONCENTRATION OF CREDIT RISKS
We sell services and extend credit based on an evaluation of the customer's
financial condition, without requiring collateral. Exposure to losses on
receivables is principally dependent on each customer's financial condition. We
monitor our exposure for credit losses and maintain allowances for anticipated
losses.
REVENUE RECOGNITION
For shipments in transit, Yellow Transportation, Roadway Express and New Penn
record revenue based on the percentage of service completed as of the period end
and accrue delivery costs as incurred. In addition, Yellow Transportation,
Roadway Express and New Penn recognize revenue on a gross basis since the
entities are the primary obligors even when they use other transportation
service providers who act on their behalf. Yellow Transportation, Roadway
Express and New Penn remain responsible to their customers for complete and
proper shipment, including the risk of physical loss or damage of the goods and
cargo claims issues. Meridian IQ recognizes revenue upon the completion of
services. In certain logistics transactions where Meridian IQ acts as an agent,
revenue is recorded on a net basis. Net revenue represents revenue charged to
customers less third party transportation costs. Where Meridian IQ acts as
principal, it records revenue from these transactions on a gross basis, without
deducting transportation costs. Management believes these policies most
accurately reflect revenue as earned.
FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts receivable, accounts
payable and short-term borrowings approximates their fair value due to the
short-term nature of these instruments.
Effective January 1, 2001, we adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended ("Statement No. 133"). As a result of the adoption of
Statement No. 133, we recognize all derivative financial instruments as either
assets or liabilities at their fair value. In December 2000, we entered into a
three-year interest rate swap agreement ("the swap") to hedge a portion of our
variable rate debt, and in December 2003 the swap expired. As a result of the
swap, we recorded a $12 thousand gain in 2003, a $22 thousand gain in 2002 and a
$34 thousand loss in 2001 in other net nonoperating expense representing the
ineffectiveness of the correlation between the hedge and the ABS financing rate.
At December 31, 2002, accumulated other comprehensive loss included a $1.5
million unrealized loss on the interest rate contract. We recognized the
differential paid under the contract designated as a hedge as adjustments to
interest expense. These adjustments approximated $2.4 million in 2003, $2.1
million in 2002 and $0.8 million in 2001 in additional interest expense.
36
CLAIMS AND INSURANCE ACCRUALS
Claims and insurance accruals, both current and long-term, reflect the estimated
cost of claims for workers' compensation, cargo loss and damage, and property
damage and liability that insurance does not cover. We include these costs in
"claims and insurance" expense except for workers' compensation, which is
included in "salaries, wages, and employees' benefits."
We base reserves for workers' compensation and property damage and liability
claims primarily upon actuarial analyses prepared by independent actuaries.
These reserves are discounted to present value using a risk-free rate at the
date of occurrence. The risk-free rate is the U.S. Treasury rate for maturities
that match the expected payout of such claims. The process of determining
reserve requirements utilizes historical trends and involves an evaluation of
accident frequency and severity, claims management, changes in health care
costs, and certain future administrative costs. Through 2003, Yellow
Transportation internally managed the administrative portion of claims handling
for self-insurance on workers' compensation and property damage and liability
claims. As a result of an initiative to begin outsourcing these functions, we
recorded a one-time charge in 2003 of $14.6 million for the liability associated
with future claims handling costs related to existing claims. The effect of
future inflation for costs is implicitly considered in the actuarial analyses.
Adjustments to previously established reserves are included in operating
results. At December 31, 2003 and 2002, estimated future payments related to
these claims aggregated $336.8 million and $126.0 million, respectively. The
present value of these estimated future payments was $279.2 million at December
31, 2003 and $103.8 million at December 31, 2002. The significant increase in
claims and insurance from 2002 to 2003 resulted primarily from the inclusion of
Roadway Express and New Penn in 2003.
STOCK-BASED COMPENSATION
Yellow Roadway has various stock-based employee compensation plans, which are
described more fully in the Stock Compensation Plans note. We account for those
plans under the recognition and measurement principles of Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"). We do
not reflect compensation costs in net income, as all options granted under those
plans had an exercise price equal to the market value of the underlying common
stock on the date of grant.
Option Value Information
We estimated the pro forma calculations in the table below using the
Black-Scholes option pricing model with the following weighted average
assumptions:
2003 2002 2001
----- ----- -----
Dividend yield --% --% --%
Expected volatility 46.7% 39.0% 36.8%
Risk-free interest rate 1.9% 2.6% 4.2%
Expected option life (years) 3 3 3
Fair value per option $8.41 $7.81 $6.04
===== ===== =====
37
Pro Forma Information
The following table illustrates the effect on income from continuing operations,
net income and earnings per share if we had applied the fair value recognition
provisions of SFAS No. 123, Accounting for Stock-Based Compensation ("Statement
No. 123").
(in thousands except per share data) 2003 2002 2001
- --------------------------------------------------------- ------- -------- -------
Net income (loss) - as reported $40,683 $(93,902) $15,301
Less: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects (2,051) (1,364) (2,141)
------- -------- -------
Pro forma net income (loss) $38,632 $(95,266) $13,160
------- -------- -------
Basic earnings (loss) per share
Income from continuing operations - as reported $ 1.34 $ 0.86 $ 0.44
Income from continuing operations - pro forma 1.27 0.81 0.35
Net income (loss) - as reported 1.34 (3.35) 0.63
Net income (loss) - pro forma 1.27 (3.40) 0.54
Diluted earnings (loss) per share:
Income from continuing operations - as reported $ 1.33 $ 0.84 $ 0.43
Income from continuing operations - pro forma 1.26 0.79 0.34
Net income (loss) - as reported 1.33 (3.31) 0.62
Net income (loss) - pro forma 1.26 (3.36) 0.53
======= ======== =======
PROPERTY AND EQUIPMENT
Yellow Roadway carries property and equipment at cost less accumulated
depreciation. We compute depreciation using the straight-line method based on
the following service lives:
Years
-------
Structures 10 - 40
Revenue equipment 5 - 14
Technology equipment and software 3 - 5
Other 3 - 10
=======
We charge maintenance and repairs to expense as incurred, and capitalize
replacements and improvements when these costs extend the useful life of the
asset.
Our investment in technology equipment and software consists primarily of
advanced customer service and freight management equipment and related software.
We capitalize certain costs associated with developing or obtaining internal-use
software. Capitalizable costs include external direct costs of materials and
services utilized in developing or obtaining the software, payroll, and
payroll-related costs for employees directly associated with the project. For
the years ended December 31, 2003, 2002, and 2001, we capitalized $3.3 million,
$1.3 million, and $2.2 million, respectively, which were primarily payroll and
payroll-related costs.
For the years ended December 31, 2003, 2002, and 2001, depreciation expense was
$85.8 million, $78.9 million, and $77.0 million, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
If facts and circumstances indicate that the carrying value of identifiable
amortizable intangibles and property, plant and equipment may be impaired, we
would perform an evaluation of recoverability in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. If an evaluation
were required, we would compare the estimated future undiscounted cash flows
associated with the asset to the asset's carrying amount to determine if a
write-down is required.
38
ACQUISITION, SPIN-OFF AND REORGANIZATION CHARGES
Acquisition charges of $3.1 million in 2003 related mostly to marketing and
promotional expenses primarily for the acquisition of Roadway Corporation.
Spin-off charges of $6.9 million in 2002 included bank fees and external legal
and accounting services due to the spin-off of SCST. Reorganization costs of
$1.0 million in 2002 and $4.9 million in 2001 were primarily associated with the
reorganization of Yellow Transportation and Transportation.com. These charges
included employee separation, lease termination and rent costs.
RECLASSIFICATIONS
Yellow Roadway has made certain reclassifications to the prior year consolidated
financial statements to conform to the current presentation.
PREFERRED STOCK
Our Certificate of Incorporation authorizes the Board of Directors, at its
discretion, to issue up to 5 million shares of preferred stock with a $1 par
value per share. As of December 31, 2003, none of these shares have been issued.
ACQUISITIONS
In accordance with SFAS No. 141, Business Combinations ("Statement No. 141"),
Yellow Roadway allocates the purchase price of its acquisitions to the tangible
and intangible assets and liabilities of the acquired entity based on their fair
values. We record the excess purchase price over the fair values as goodwill.
The fair value assigned to intangible assets acquired is based on valuations
prepared by independent third party appraisal firms using estimates and
assumptions provided by management. In accordance with SFAS No. 142, Goodwill
and Other Intangible Assets ("Statement No. 142"), goodwill and intangible
assets with indefinite useful lives are not amortized but are reviewed at least
annually for impairment. An impairment loss would be recognized to the extent
that the carrying amount exceeds the assets' fair value. Intangible assets with
estimatable useful lives are amortized on a straight-line basis over their
respective useful lives.
ROADWAY CORPORATION
On December 11, 2003, Yellow Corporation completed the acquisition of Roadway
Corporation ("Roadway") and all of its outstanding stock in approximately a
half cash, half stock transaction. As part of the transaction, we changed our
name to Yellow Roadway Corporation. In addition, Roadway Corporation became
Roadway LLC and a wholly owned subsidiary of Yellow Roadway. Principal operating
subsidiaries of Roadway LLC include Roadway Express and New Penn. Roadway
Express is a leading transporter of industrial, commercial and retail goods in
the two- to five-day regional and long-haul markets. New Penn is a next-day,
ground, less-than-truckload carrier of general commodities. The acquisition
now provides us with the increased scale, strong financial base and market
reach that are necessary to increase shareholder value and enhance customer
service. It also has the potential to accelerate our strategy of offering a
broader range of services for business-to-business transportation decision
makers.
Consideration for the acquisition included $494 million in cash and 18.0 million
shares of Yellow Roadway common stock, based on an exchange ratio of 1.752 and
an average price per share of $31.51, for a total purchase price of $1.1
billion. The purchase price also included approximately $19 million for
investment banking, legal and accounting fees that Yellow Roadway incurred to
consummate the acquisition, resulting in total cash consideration of $513
million. In addition, by virtue of the merger, Roadway LLC assumed $225.0
million of principal senior notes with a fair value of $248.9 million and
acquired available cash of $106.3 million. The cash portion of the purchase
price was funded primarily through a term loan of $175 million under our new
credit facility, a private placement of $250 million of 5.0 percent contingent
convertible senior notes due 2023 and a private placement of $150 million of
3.375 percent contingent convertible senior notes due 2023. The 18.0 million
common shares we issued were valued based on the simple average of the daily
opening and closing trade prices for the period December 9 through December 15,
2003, which represents two days prior and after the date the price was fixed
under the terms of the merger agreement.
Prior to the acquisition, Roadway had agreements in place with key management
personnel that would require Roadway to pay specific amounts to those
individuals upon a change in control of the entity. On December 11, 2003, in
conjunction with the closing of the transaction, Roadway paid $15.9 million to
the individuals covered by the agreement that would not be joining the new
Yellow Roadway organization. This amount was expensed in the pre-acquisition
financial statements of Roadway Corporation. The
39
remaining amount covered under the agreement of $10.6 million was placed in a
trust account for possible payment to the three individuals that remain Roadway
employees. If any of these individuals are terminated within two years and the
applicable conditions of their respective agreements are met, they would receive
the agreed to payments, and we would recognize an expense for those payments at
the time of the triggering event. If termination does not occur within two
years, the funds will be released from restriction and reclassified from a
long-term asset to cash on our Consolidated Balance Sheet.
In accordance with Statement No. 141, we included the results of Roadway LLC and
its operating subsidiaries in our Statements of Consolidated Operations and
Statements of Consolidated Cash Flows from the date of acquisition through
December 31, 2003. Our Consolidated Balance Sheet as of December 31, 2003
includes Roadway LLC and its operating subsidiaries after valuing the tangible
and intangible assets and liabilities at their fair values.
Based on an independent valuation prepared using estimates and assumptions
provided by management, we allocated the total purchase price of approximately
$1.1 billion at the date of acquisition as follows:
(in thousands) December 11, 2003
- ------------------------------ -----------------
Cash and cash equivalents $ 106,307
Accounts receivable 373,695
Other current assets 36,202
Property, plant and equipment 823,443
Other long-term assets 32,436
Intangible assets 461,300
Goodwill 597,070
Accounts payable (127,148)
Other current liabilities (406,382)
Long-term debt (249,165)
Deferred income taxes, net (214,542)
Other long-term liabilities (335,995)
----------
Total purchase price $1,097,221
==========
As the Roadway acquisition occurred in December 2003, the allocation of the
purchase price included in the December 31, 2003 Consolidated Balance Sheet is
preliminary and subject to refinement. Although we do not expect any subsequent
changes to have a material impact on our results of operations or amounts
allocated to goodwill, such changes could result in material adjustments to the
preliminary purchase allocation. The most significant pending items include the
following: finalization of independent asset valuation for the Roadway tangible
and intangible assets including associated remaining lives; completion of all
direct costs associated with the acquisition; updating Roadway personnel
information used to calculate the pension benefit obligation; determination of
the fair value of tax-related contingencies; calculation of an estimate for
certain contractual obligations; and numerous other refinements. We expect
substantially all of the above refinements will be completed by the end of
second quarter 2004.
Intangible Assets
Of the $461.3 million allocated to intangible assets, $333.5 million was
assigned to the Roadway and New Penn trade names which are not subject to
amortization. Of the remaining value, $111.8 million and $16.0 million were
assigned to customer relationships and software related assets, respectively. We
assigned the customer relationships and software assets a weighted average life
of 16.5 years and 3 years, respectively.
Goodwill
In considering the acquisition of Roadway, we based our proposed purchase price
on the increased value that the combined Yellow Roadway organization could
provide to its investors, customers and employees. This value can be attributed
to our increased scale and ability to compete in a highly competitive domestic
and global transportation marketplace, the reputation and recognition of the
distinct brands, and the service capabilities and technologies of both
companies. We recorded $597.0 million in goodwill as part of the acquisition,
allocating $474.7 million to Roadway Express and $122.3 million to New Penn. Of
the total goodwill recorded, the amount that may be deductible for tax purposes
is not material to our results of operations.
40
Pro Forma Results
The following unaudited pro forma financial information presents the combined
results of operations of Yellow Roadway as if the acquisition had occurred as of
the beginning of the years presented. The unaudited pro forma financial
information is not intended to represent or be indicative of the consolidated
results of operations of Yellow Roadway that would have been reported had the
acquisition been completed as of the dates presented, and should not be taken as
representative of the future consolidated results of operations of Yellow
Roadway. Summarized unaudited pro forma results were as follows for the years
ended December 31:
(in thousands except per share data) 2003 2002
- ------------------------------------- ---------- ----------
Operating revenue $6,120,835 $5,637,924
Income from continuing operations 38,127 43,597
Net income (loss) 37,972 (70,496)
Diluted earnings (loss) per share:
Income from continuing operations 0.79 0.94
Net income (loss) 0.79 (1.51)
========== ==========
GPS LOGISTICS, INC.
In August 2003, a subsidiary of Meridian IQ, Yellow Global, LLC, acquired
certain U.S. assets of GPS Logistics, a global logistics provider. Yellow
Global, LLC was then renamed Yellow GPS, LLC ("Yellow GPS"). In exchange for the
acquisition, Yellow GPS assumed certain of GPS Logistics customer, lease and
other obligations and became obligated to pay GPS Logistics earnout payments if
certain financial targets for the combined business of Yellow GPS are met. There
was no net cash consideration paid in the transaction. In addition, Yellow GPS
received a call option to purchase the stock of each of GPS Logistics (E.U.)
Ltd., the related United Kingdom ("U.K.") operations of GPS Logistics, and GPS
Logistics Group Ltd., the related Asian operations of GPS Logistics. If Yellow
GPS does not exercise the Asian option, it would be required to pay a deferred
option price to the shareholders of GPS Logistics Group Ltd. In February 2004,
Yellow GPS exercised and closed its option to purchase GPS Logistics (E.U.) Ltd.
Yellow GPS made a payment of $7.6 million, which is subject to upward and
downward adjustment based on the financial performance of the U.K. business. The
acquisition will be reflected in our first quarter 2004 results.
CLICKLOGISTICS, INC. AND MEGASYS, INC.
In the third quarter of 2002, Meridian IQ acquired selected assets, consisting
primarily of customer contracts, of Clicklogistics, Inc. ("Clicklogistics") for
nominal cash consideration. Clicklogistics provided non-asset transportation and
logistics management services. In that same period, Meridian IQ completed the
acquisition of MegaSys, Inc. ("MegaSys"), a Greenwood, Indiana based provider of
non-asset transportation and logistics management services, for approximately
$17 million. The acquisition price primarily related to $9.3 million of goodwill
and $7.1 million of identifiable intangible assets. As part of the acquisition,
Meridian IQ negotiated an earnout arrangement, which provided for contingent
consideration to be paid by Meridian IQ upon MegaSys generating cash flow levels
in excess of an established rate of return through December 31, 2005. In the
first quarter of 2004, the earnout arrangement was terminated; earnout payments
to date were not material to our results of operations. We believe these
acquisitions support our strategy to grow our non-asset-based business and be a
single-source transportation provider.
TRANSPORTATION.COM
In September 2001, we completed the acquisition of the remaining ownership in
Transportation.com from our venture capital partners. The cash purchase price of
approximately $14.3 million was allocated to goodwill of $10.6 million, tax
benefit receivable of $4.0 million and miscellaneous assets and liabilities of
$(0.3) million. As of the acquisition date, Transportation.com, as well as our
other non-asset-based services, have been consolidated under Meridian IQ. The
purchase agreements provide for material contingent payments to be paid to the
sellers in the event of a public offering of Meridian IQ on or before August
2006. We have no current plans for a public offering of Meridian IQ. Prior to
the acquisition date, we accounted for our ownership interest under the equity
method of accounting due to substantive participating rights of the minority
investors. The loss on our investment of $5.7 million in 2001 was recorded in
nonoperating expense.
41
GOODWILL AND INTANGIBLES
Goodwill is recognized for the excess of the purchase price over the fair value
of tangible and identifiable intangible net assets of businesses acquired. Prior
to the adoption on January 1, 2002 of Statement No. 142, we amortized goodwill
over the estimated period of benefit on a straight-line basis over periods
ranging from 20 to 40 years, and we reviewed goodwill for impairment under the
policy for other long-lived assets. Since the adoption of Statement No. 142, we
discontinued amortization of goodwill and review goodwill at least annually for
impairment based on a fair value approach. Meridian IQ has not amortized
goodwill in accordance with the provisions of Statement No. 142. Therefore,
income from continuing operations does not include goodwill amortization for any
period presented.
The following table shows the amount of goodwill attributable to each segment
with goodwill balances and changes therein:
Foreign Equity
Translation
December 31, Adjustments/ December 31,
(in thousands) 2002 Acquisitions Reclasses 2003
- ---------------- ------------ ------------ -------------- ------------
Roadway Express $ -- $474,738 $(225) $474,513
New Penn -- 122,332 -- 122,332
Meridian IQ 20,491 -- (23) 20,468
------- -------- ----- --------
Goodwill $20,491 $597,070 $(248) $617,313
======= ======== ===== ========
The components of amortizable intangible assets are as follows:
December 31, 2003 December 31, 2002
Weighted ----------------------- -----------------------
Average Gross Gross
Life Carrying Accumulated Carrying Accumulated
(in thousands) (years) Amount Amortization Amount Amortization
- ------------------ -------- -------- ------------ -------- ------------
Customer related 16.5 $117,422 $1,350 $5,622 $355
Marketing related 6 723 159 700 42
Technology based 3 17,061 635 1,061 140
-------- ------ ------ ----
Intangible assets $135,206 $2,144 $7,383 $537
======== ====== ====== ====
Total marketing related intangible assets with indefinite lives were $334.1
million and $0.9 million for the years ended December 31, 2003 and 2002,
respectively. These intangible assets are not subject to amortization. The gross
carrying amount of intangibles at December 31, 2003 included approximately
$461.0 million of Roadway LLC assets and the related accumulated amortization of
$0.6 million. Roadway-related intangibles were not reflected in the December 31,
2002 balances.
Amortization expense for intangible assets, as reflected in income from
continuing operations, was $1.6 million for the year ending December 31, 2003.
Estimated amortization expense for the next five years is as follows:
(in thousands) 2004 2005 2006 2007 2008
- ------------------------------- ------- ------- ------- ------ ------
Estimated amortization expense $13,048 $12,965 $12,581 $7,373 $7,271
======= ======= ======= ====== ======
The increase in amortization expense from prior years relates primarily to the
addition of the Roadway LLC intangible assets as discussed above.
42
EMPLOYEE BENEFITS
PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
Qualified and Nonqualified Defined Benefit Pension Plans
With the exception of Meridian IQ, New Penn and Reimer, Yellow Roadway and its
operating subsidiaries sponsor qualified and nonqualified defined benefit
pension plans for most employees not covered by collective bargaining agreements
(approximately 10,000 employees). Qualified and nonqualified pension benefits
are based on years of service and the employees' covered earnings. Employees
covered by collective bargaining agreements participate in various
multi-employer pension plans to which Yellow Roadway contributes, as discussed
later in this section. Meridian IQ and New Penn do not offer defined benefit
pension plans and instead offer retirement benefits through either contributory
401(k) savings plans or profit sharing plans, as discussed later in this
section. Additionally, beginning January 1, 2004, all new nonunion employees and
all Meridian IQ employees will participate in a new defined contribution
retirement plan. The existing Yellow Roadway defined benefit pension plans will
be closed to new participants.
Our funding policy is to target contributions at the minimum required
tax-deductible contribution for the year while taking into consideration each
plan's funded status, any variable Pension Benefit Guarantee Corporation
premiums and the outlooks for required funding. Our actuarial valuation
measurement date for our principal pension plans and postretirement benefit plan
is December 31.
Other Postretirement Benefit Plan
Roadway LLC sponsors a postretirement healthcare benefit plan that covers
nonunion employees of Roadway hired before February 1, 1997. Health care
benefits under this plan end when the participant attains age 65.
Definitions
We have defined the following terms to provide a better understanding of our
pension and other postretirement benefits:
Projected benefit obligation: The projected benefit obligation is the present
value of future benefits to employees attributed to service as of the
measurement date, including assumed salary increases.
Plan assets: Represents the assets currently invested in the plans. Assets used
in calculating the funded status are measured at the current market value at
December 31.
Funded status: The funded status represents the difference between the projected
benefit obligation and the market value of the assets.
Net amount recognized: The net amount recognized represents the amount accrued
by Yellow Roadway for pension costs.
Unfunded accumulated benefit obligation: The accumulated benefit obligation is
the present value of future benefits attributed to service as of the measurement
date, assuming no future salary growth. The unfunded accumulated benefit
obligation represents the difference between the accumulated benefit obligation
and the fair market value of the assets.
Accumulated postretirement benefit obligation: The accumulated postretirement
benefit obligation is the present value of other postretirement benefits to
employees attributed to service as of the measurement date.
43
Funded Status
The following table sets forth the plans' funded status:
Other
Postretirement
Pension Benefits Benefits(a)
--------------------- --------------
(in thousands) 2003 2002 2003
- -------------------------------------------- --------- --------- --------------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at prior year end $ 417,703 $ 356,035 $ --
Service cost 17,356 15,772 109
Interest cost 27,854 25,595 169
Plan amendment 136 907 --
Benefits paid (17,606) (11,512) (136)
Foreign exchange rate loss 576 -- --
Acquisition of Roadway 457,181 -- 52,934
Actuarial loss 12,039 30,906 --
--------- --------- --------
Benefit obligation at year end $ 915,239 $ 417,703 $ 53,076
========= ========= ========
CHANGE IN PLAN ASSETS:
Fair value of plan assets at prior year end $ 248,721 $ 274,602 $ --
Actual return on plan assets 66,623 (26,381) --
Employer contributions 35,552 12,012 134
Benefits paid (17,606) (11,512) (134)
Foreign exchange rate loss 795 -- --
Acquisition of Roadway 280,601 -- --
--------- --------- --------
Fair value of plan assets at year end $ 614,686 $ 248,721 $ --
========= ========= ========
FUNDED STATUS:
Funded status $(300,553) $(168,982) $(53,076)
Unrecognized transition assets -- (1,344) --
Unrecognized prior service cost 12,336 13,579 --
Unrecognized net actuarial (gain)/loss 94,177 121,850 (2)
--------- --------- --------
Net amount recognized $(194,040) $ (34,897) $(53,078)
========= ========= ========
(a) Other postretirement benefits are shown for the period from the date of
the Roadway acquisition through December 31, 2003. Prior to the
acquisition we did not provide these benefits.
Benefit Plan Obligations
Amounts recognized for the benefit plan liabilities in the Consolidated Balance
Sheets at December 31 are as follows:
Other
Postretirement
Pension Benefits Benefits
--------------------- --------------
(in thousands) 2003 2002 2003
- ---------------------------------------------- --------- --------- --------------
Prepaid benefit cost $ 7,146 $ 6,019 $ --
(Accrued) benefit costs (246,369) (102,545) (53,078)
Intangible asset 12,336 13,579 --
Accumulated other comprehensive loss (pretax) 32,847 48,050 --
--------- --------- --------
Net amount recognized $(194,040) $ (34,897) $(53,078)
========= ========= ========
44
Weighted average actuarial assumptions used to determine benefit obligations at
December 31:
Other
Postretirement
Pension Benefits Benefits
---------------- --------------
2003 2002 2003
---- ----- --------------
Discount rate 6.25% 6.75% 6.25%
Rate of increase in compensation levels 3.87% 4.50% --
==== ===== ====
Information for pension plans with an accumulated benefit obligation in excess
of plan assets at December 31:
(in thousands) 2003 2002
- ------------------------------- -------- --------
Projected benefit obligation $910,138 $414,029
Accumulated benefit obligation 769,726 344,015
Fair value of plan assets 605,896 241,392
======== ========
Equity adjustment
Increases in our pension benefit obligations combined with market losses in 2002
and 2001 negatively impacted the funded status of our plans and resulted in
additional funding requirements and pension expense in 2003. Due to these same
factors, we recorded a reduction in shareholders' equity in 2002 of $30.8
million, net of tax of $17.2 million, to reflect the minimum liability
associated with the plans. In 2003, we reduced the minimum liability in
shareholders' equity by a net $10.5 million, as a result of the additional
expense we recognized during the year as well as favorable investment experience
in 2003. Our minimum liability reflected in shareholders' equity at December 31,
2003 totals $20.3 million, net of tax of $12.5 million. As we record additional
expense and fund the accumulated benefit obligation, we expect the minimum
liability reflected in shareholders' equity to decrease. We reflect these
adjustments in the table below.
(in thousands) 2003 2002
- ----------------------------------------------------------- -------- -------
Increase (decrease) in minimum liability included in other
comprehensive income $(15,203) $48,050
-------- -------
Plan assets by category
Percentage of Plan Assets
at December 31,
Asset Category 2003 2002
- ------------------ ---- ----
Equity securities 67% 65%
Debt securities 33% 35%
--- ---
Total 100% 100%
=== ===
Our investment policies are based on target asset allocations. We review our
pension portfolio periodically and rebalance when significant differences occur
from target. Target asset allocations are as follows:
Yellow Plans Roadway Plans
------------ -------------
Small-cap U.S. equities 10.0% 12.5%
Mid-cap U.S. equities -- 12.5%
Large-cap U.S. equities 40.0% 25.0%
International equities 15.0% 15.0%
Fixed-income securities 35.0% 35.0%
----- -----
Total 100.0% 100.0%
===== =====
45
Contributions
We expect to contribute approximately $45 million to our pension plans in 2004.
Pension and Other Postretirement Costs
The components of our net periodic pension cost for the years ended December 31,
2003, 2002 and 2001, and other postretirement costs for the period from date of
acquisition through December 31, 2003, were as follows:
Other
Postretirement
Pension Costs Costs
------------------------------ --------------
(in thousands) 2003 2002 2001 2003
- -------------------------------------------------------------- -------- -------- -------- --------------
Service cost $ 17,356 $ 15,772 $ 14,496 $109
Interest cost 27,854 25,595 23,427 169
Expected return on plan assets (28,075) (25,139) (21,010) --
Amortization of net transition obligation (1,344) (2,380) (2,384) --
Amortization of prior service cost 1,379 1,438 1,304 --
Amortization of net loss 2,157 -- -- --
-------- -------- -------- ----
Net periodic pension cost $ 19,327 $ 15,286 $ 15,833 $278
======== ======== ======== ====
Weighted average assumptions for the years ended December 31:
Discount rate 6.75% 7.25% 7.50% 6.25%
Rate of increase in compensation levels 4.50% 4.50% 4.50% --
Expected rate of return on assets 9.00% 9.00% 9.00% --
======== ======== ======== ====
We developed the expected long-term rate of return on assets assumption by
considering the historical returns and the future expectations for returns of
each asset class, as well as the target asset allocation of the pension
portfolio. We believe our 2003 expected rate of return of 9.0 percent accurately
represents our investment portfolio that has performed to this level over time.
However, given the addition of the Roadway portfolio of assets and in accordance
with our policy on establishing the long-term rate of return, we have lowered
this rate to 8.75 percent in determining 2004 pension expense.
Other Postretirement Benefit Plans
Assumed health care cost trend rates at December 31, 2003 are as follows:
Health care cost trend used in the current year 11.5%
Health care cost trend rate assumed for next year 10.5%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) 5.0%
Year that the rate reaches the ultimate trend rate 2010
====
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. The policy of Roadway LLC regarding the
management of health care costs passes the increase beyond a fixed threshold to
the plan participants. As a result, a one-percentage-point increase in the
assumed health care cost trend rate would have no effect on the accumulated
postretirement benefit obligation or the service and the interest cost
components. A one-percentage-point decrease in assumed health care cost trend
rates would have the following effects:
(in thousands)
- --------------------------------------------
Effect on total of service and interest cost $ 618
Effect on postretirement benefit obligation 5,938
======
46
MULTI-EMPLOYER PLANS
Yellow Transportation, Roadway Express and New Penn contribute to multi-employer
health, welfare and pension plans for employees covered by collective bargaining
agreements (approximately 77 percent of total employees). The largest of these
plans, the Central States Southeast and Southwest Areas Pension Plan (the
"Central States Plan") provides retirement benefits to approximately 53 percent
of our total employees. The amounts of these contributions are determined by
contract and established in the agreements. The health and welfare plans provide
health care and disability benefits to active employees and retirees. The
pension plans provide defined benefits to retired participants. We recognize as
net pension cost the required contribution for the period and recognize as a
liability any contributions due and unpaid. Yellow Roadway contributed and
charged to expense the following amounts to these plans for the years ended
December 31:
(in thousands) 2003 2002 2001
- ------------------- -------- -------- --------
Health and welfare $195,740 $156,081 $150,012
Pension 178,614 159,018 157,148
-------- -------- --------
Total $374,354 $315,099 $307,160
======== ======== ========
Under current legislation regarding multi-employer pension plans, a termination,
withdrawal or partial withdrawal from any multi-employer plan in an under-funded
status would render us liable for a proportionate share of 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, Roadway Express and New Penn have no current intention of taking
any action that would subject us to obligations under the legislation.
Yellow Transportation, Roadway Express and New Penn each have collective
bargaining agreements with their unions that stipulate the amount of
contributions each company must make to union-sponsored, multi-employer pension
plans. The Internal Revenue Code and related regulations establish minimum
funding requirements for these plans. If any of these plans, including (without
limitation) the Central States Plan, fail to meet these requirements and the
trustees of these plans are unable to obtain waivers of the requirements from
the Internal Revenue Service ("IRS") or reduce pension benefits to a level where
the requirements are met, the IRS could impose an excise tax on all employers
participating in these plans and require contributions in excess of our
contractually agreed upon rates to correct the funding deficiency. If an excise
tax were imposed on the participating employers and additional contributions
required, it could have a material adverse impact on the financial results of
Yellow Roadway.
401(K) SAVINGS PLANS
Yellow Roadway and its operating subsidiaries each sponsor defined contribution
plans, primarily for employees not covered by collective bargaining agreements.
The plans principally consist of contributory 401(k) savings plans and
noncontributory profit sharing plans. Plans provided by Yellow Roadway, the
holding company, and Yellow Transportation consist of both a fixed matching
percentage and a discretionary amount. The nondiscretionary company match for
these plans equals 25 percent of the first six percent of an eligible employee's
contributions. In 2004, the nondiscretionary company match for these plans will
be equal to 25 percent of the first six percent in cash and 25 percent of the
first six percent in Yellow Roadway common stock, for a total match of 50
percent of the first six percent. Discretionary contributions for both the
401(k) savings plan and profit sharing plans are determined annually by the
Board of Directors. The 401(k) savings plan offered by Meridian IQ in 2003
provided a fixed matching percentage of 75 percent of the first six percent of
an eligible employee's contributions with no option for discretionary
contributions. In 2004, Meridian IQ terminated their 401(k) savings plan and
going forward will participate in the Yellow Roadway plan. The 401(k) savings
plan offered by Roadway Express provides a fixed matching percentage of 100
percent of the first four and a half percent of an eligible employee's
contributions. We provide the entire matching component of the Roadway Express
plan with Yellow Roadway common stock. Contributions for each of the three years
in the period ended December 31, 2003, were not material to our operations.
Our employees covered under collective bargaining agreements can also
participate in a contributory 401(k) plan. We do not make employer contributions
to the plan on their behalf.
47
PERFORMANCE INCENTIVE AWARDS
Yellow Roadway and its operating subsidiaries each provide annual performance
incentive awards to nonunion employees, which are based primarily on actual
operating results achieved compared to targeted operating results. Income from
continuing operations in 2003, 2002, and 2001 included performance incentive
expense for nonunion employees of $27.6 million, $15.6 million, and $2.9
million, respectively. We pay annual performance incentive awards primarily in
the first quarter of the following year.
PERFORMANCE BASED LONG-TERM INCENTIVE PLAN
We implemented a long-term incentive plan in 2002. This plan replaced the use of
stock options as the exclusive vehicle for delivering long-term incentive
compensation potential to certain executive officers. Awards under the plan can
be made in cash and performance share units at the discretion of the Board of
Directors. Fifty percent of the awarded performance share units vest three years
from the date of grant and the remaining 50 percent vest six years from the date
of grant. The plan utilizes a phased implementation schedule that allows for
one-third of the typical award in the first year of implementation, two-thirds
in the second year, and the full award in the third year. In 2003, award amounts
were based on growth in our net operating profit after taxes and return on
committed capital compared to the Standard and Poor's Small Cap index
(approximately 600 companies). Income from continuing operations in 2003 and
2002 included performance incentive accruals under this plan of $4.9 million and
$2.0 million, respectively.
DEBT AND FINANCING
At December 31, total debt consisted of the following in order of seniority:
(in thousands) 2003 2002
- ---------------------------------------------------------------------- -------- --------
ABS borrowings, secured by Yellow Transportation accounts receivable $ 71,500 $ 50,000
Term loan, secured by Yellow Roadway assets 175,000 --
Senior notes due 2008, secured by certain Roadway LLC assets 248,895 --
Industrial development bonds, primarily secured by related facilities 13,900 18,900
Contingent convertible senior notes, unsecured 400,000 --
Medium-term notes, unsecured -- 55,250
Capital leases and other 44 135
-------- --------
Total debt $909,339 $124,285
ABS borrowings (71,500) (50,000)
Current maturities (1,757) (24,261)
-------- --------
Long-term debt $836,082 $ 50,024
======== ========
VARIABLE-RATE DEBT
In 2003, Yellow Roadway replaced its previous $300 million unsecured credit
agreement, which was set to expire April 2004, with a new $675 million secured
credit agreement. The secured credit agreement consists of three parts: a $175
million term loan, a $250 million letters of credit facility and a $250 million
revolver loan. As of December 31, 2003, we have borrowed the entire amount of
the term loan. We may use the letters of credit facility for issuance of standby
letters of credit and the revolver loan for short-term borrowings and additional
letters of credit. Interest on borrowings is based on the London inter-bank
offer rate ("LIBOR") plus a fixed increment. The credit facility is secured by
substantially all of our domestic assets except for those assets securing our
ABS facility. Under the terms of the agreement, we must prepare certain reports
and meet certain other criteria ("affirmative covenants") and are prohibited
from engaging in certain financial activities ("negative covenants"). Certain
negative covenants are discussed further in the Commitments, Contingencies and
Uncertainties note. At December 31, 2003, we were in compliance with all terms
of the credit agreement.
48
The following table provides a detail of the outstanding components and
available unused capacity under the credit agreement:
December 31,
(in thousands) 2003
- -------------- ------------
Total capacity $ 675,000
Term loan outstanding (175,000)
Letters of credit facility outstanding (250,000) (a)
Letters of credit outstanding under revolver loan (24,410)
---------
Available unused capacity $ 225,590
=========
(a) We have an additional $1.5 million in letters of credit that are not
covered under a credit facility.
We also maintain an ABS agreement that allows us to transfer an ongoing pool of
receivables to a conduit administered by an independent financial institution
("the conduit"). Under the terms of the agreement, we may transfer Yellow
Transportation trade receivables to a special purpose entity, Yellow Receivables
Corporation ("YRC"). YRC is a wholly owned consolidated subsidiary of Yellow
Transportation designed to isolate the receivables for bankruptcy purposes. The
conduit must purchase from YRC an undivided ownership interest in those
receivables. The percentage ownership interest in receivables purchased by the
conduit may increase or decrease over time, depending on the characteristics of
the receivables, including delinquency rates and debtor concentrations.
Yellow Roadway services the receivables transferred to YRC and receives a
servicing fee, which management has determined approximates market compensation
for these services. The conduit pays YRC the face amount of the undivided
interest at the time of purchase. On a periodic basis, this sales price is
adjusted, resulting in payments by YRC to the conduit of an amount that varies
based on the interest rate on certain of the conduit's liabilities and the
length of time the sold receivables remain outstanding.
The ABS facility involves receivables of Yellow Transportation only and has a
limit of $200 million. Under the terms of the agreement, Yellow Transportation
retains the associated collection risks. Although the facility has no stated
maturity, we have an underlying letter of credit with the administering
financial institution that has a 364-day maturity.
The table below provides the borrowing and repayment activity under the ABS
facility, as well as the resulting balances, for the years ending December 31 of
each period presented:
(in thousands) 2003 2002
- ------------------------------------------------ --------- ---------
ABS obligations outstanding at January 1 $ 50,000 $ 141,500
Transfer of receivables to conduit (borrowings) 151,000 421,500
Redemptions from conduit (repayments) (129,500) (513,000)
--------- ---------
ABS obligations outstanding at December 31 $ 71,500 $ 50,000
========= =========
Prior to December 31, 2002, the ABS facility was treated as a sale of assets and
the sold receivables and related obligations were not reflected on the
Consolidated Balance Sheets. Our loss on the sale of receivables under the ABS
facility to the conduit was $2.6 million in 2002 and $8.0 million in 2001. These
charges are reflected as ABS facility charges on the Statements of Consolidated
Operations.
Roadway historically had a similar ABS facility under which Roadway transferred
Roadway Express domestic accounts receivable to a special purpose entity,
Roadway Funding, Inc. ("REF"). As part of the acquisition, we maintained REF as
a wholly owned subsidiary of Roadway LLC but discontinued the related conduit
with the independent financial institution. As of December 31, 2003, there was
no ABS facility available for Roadway Express.
At December 31, 2003, Reimer had a $10.0 million secured revolving line of
credit available with no outstanding borrowings. In the first quarter of 2004,
we closed the facility.
49
FIXED-RATE DEBT
We have loan guarantees, mortgages, and lease contracts in connection with the
issuance of industrial development bonds ("IDBs") used to acquire, construct or
expand terminal facilities. Rates on these bonds range from 5.3 percent to 6.1
percent, with principal payments due through 2010.
On August 8, 2003, we closed the sale of $200 million of our private offering of
5.0 percent contingent convertible senior notes due 2023 ("contingent
convertible senior notes") and on August 15, 2003 we closed the sale of an
additional $50 million of the notes pursuant to the exercise of the option of
the initial purchasers. We received net proceeds from the sales of $242.5
million, after fees.
The $250 million contingent convertible senior notes have an annual interest
rate of 5.0 percent and are convertible into shares of Yellow Roadway common
stock at a conversion price of $39.24 per share only upon the occurrence of
certain other events. The contingent convertible senior notes may not be
redeemed by us for seven years but are redeemable at any time thereafter at par.
Holders of the contingent convertible senior notes have the option to require
Yellow Roadway to purchase their notes at par on August 8, 2010, 2013 and 2018,
and upon a change in control of the company. These terms and other material
terms and conditions applicable to the contingent convertible senior notes are
set forth in the indenture governing the notes.
On September 30, 2003, we completed the repurchase of $24 million aggregate
principal amount of our medium-term notes ("MTNs"). The remaining $20 million
aggregate principal amount of MTNs outstanding, after scheduled principal
payments during 2003 of $11.3 million, were defeased under the terms thereof.
Defeasance refers to the process of placing sufficient funds in an irrevocable
trust to pay and discharge the MTNs as they become due. As a result, we were
considered legally released as the primary obligor and the MTNs were removed
from our balance sheet. The interest rate on the notes ranged from 6.1 percent
to 7.8 percent with scheduled maturities ranging from October 2003 to August
2008. We recognized a loss on the extinguishment of debt of $2.3 million from
the repurchase and defeasance that we reflected in "other" nonoperating expenses
on our Statement of Consolidated Operations. We funded the repurchase and
defeasance with cash on hand.
On November 19, 2003, we announced a private offering of $130 million of 3.375
percent contingent convertible senior notes with an option for the initial
purchasers to acquire an additional $20 million. On November 25, 2003, we closed
the sale of the entire $150 million of contingent convertible senior notes due
2023. We received net proceeds from the offering of $145.5 million, after fees,
and used the proceeds to fund the acquisition of Roadway.
The $150 million contingent convertible senior notes have an annual interest
rate of 3.375 percent and are convertible into shares of Yellow Roadway common
stock at a conversion price of $46.00 per share only upon the occurrence of
certain other events. The contingent convertible senior notes may not be
redeemed by us for nine years but are redeemable at any time thereafter at par.
Holders of the contingent convertible senior notes have the option to require
Yellow Roadway to purchase their notes at par on November 25, 2012, 2015 and
2020, and upon a change in control of the company. These terms and other
material terms and conditions applicable to the contingent convertible senior
notes are set forth in the indenture governing the notes.
As part of our acquisition of Roadway and by virtue of the merger agreement, we
assumed $225.0 million face value of 8.25 percent senior notes due in full on
December 1, 2008 ("senior notes due 2008"), with interest payments due
semi-annually on June 1 and December 1. The senior notes due 2008 were revalued
as part of purchase accounting and assigned a fair value of $249.2 million on
December 11, 2003. The premium over the face value of the senior notes due 2008
will be amortized as a reduction to interest expense over the remaining life of
the notes. The unamortized premium at December 31, 2003 was $23.9 million. The
senior notes due 2008 are secured by assets of certain Roadway LLC subsidiaries.
In addition, the stock of certain Roadway LLC subsidiaries has been pledged to
secure these notes.
Based on the borrowing rates currently available to us for debt with similar
terms and remaining maturities and the quoted market prices for the senior notes
due 2008 and contingent convertible senior notes, the fair value of fixed-rate
debt at December 31, 2003 and 2002, was approximately $761.0 million and $81.5
million, respectively. The carrying amount of such fixed-rate debt at December
31, 2003 and 2002, was $638.9 million and $74.3 million, respectively.
50
The principal maturities of total debt, excluding ABS borrowings, for the next
five years and thereafter are as follows:
Contingent
convertible Senior notes Capital
(in thousands) IDBs senior notes due 2008 Term loan leases Total
- -------------- ------- ------------ ------------ --------- ------- --------
2004 $ -- $ -- $ -- $ 1,750 $ 7 $ 1,757
2005 4,400 -- -- 1,750 37 6,187
2006 -- -- -- 1,750 -- 1,750
2007 -- -- -- 1,750 -- 1,750
2008 2,500 -- 225,000(a) 168,000 -- 395,500
Thereafter 7,000 400,000 -- -- -- 407,000
------- -------- -------- -------- --- --------
Total $13,900 $400,000 $225,000 $175,000 $44 $813,944
======= ======== ======== ======== === ========
(a) As discussed above, the senior notes due 2008 had a carrying value of
$248.9 million at December 31, 2003 and a principal maturity value of
$225.0 million.
STOCK COMPENSATION PLANS
Yellow Roadway has reserved 4.8 million shares of its common stock for issuance
to key management personnel under five stock option plans. Our long-term
incentive plan implemented in 2002, and discussed under our Employee Benefits
note, replaced the use of stock options as the exclusive vehicle for delivering
long-term incentive compensation potential to our executive officers. The stock
option plans generally permit grants of nonqualified stock options and grants of
stock options coupled with a grant of stock appreciation rights ("SARs"). In
addition, we have reserved 200,000 shares of our common stock for issuance to
our Board of Directors. Under the plans, the exercise price of each option
equals the closing market price of our common stock on the date of grant. The
options vest ratably, generally over a period of four years, and expire ten
years from the date of the grant.
Yellow Roadway implemented a new stock option plan in 2002 which reserves 1.0
million of the 4.8 million shares discussed above. This plan permits the
issuance of restricted stock and restricted stock units, as well as options,
SARs, and performance stock and performance stock unit awards. The maximum
cumulative number of shares that can be awarded in any form other than options
or SARs is 200,000 shares.
We adjusted our outstanding stock options in 2002 to reflect the impact of the
spin-off of SCST. For employees who continued employment with Yellow, the option
remained an option for Yellow common stock with the number of shares covered by
the option and related exercise price adjusted to preserve the intrinsic value.
For employees who worked for SCST after the spin-off, the Yellow options were
cancelled and SCST issued options to purchase SCST common stock with the number
of shares of SCST common stock and exercise price set to preserve the intrinsic
value.
As of December 31, 2003, 2002 and 2001, options on approximately 904,000 shares,
736,000 shares and 1,054,000 shares, respectively, were exercisable at weighted
average exercise prices of $19.44 per share, $17.77 per share and $20.62 per
share, respectively. The weighted average remaining contract life on outstanding
options at December 31, 2003, 2002 and 2001 was 6.7 years, 7.4 years and 7.3
years, respectively.
51
A summary of activity in our stock option plans is presented in the following
table:
Exercise Price
-------------------------
Shares Weighted
(in thousands) Average Range
-------------- -------- --------------
Outstanding at December 31, 2000 3,375 $17.55 $11.50 - 27.00
Granted 42 20.30 18.25 - 21.87
Exercised (1,063) 15.64 11.50 - 24.05
Forfeited / expired (83) 18.57 12.25 - 24.05
------ ------ --------------
Outstanding at December 31, 2001 2,271 $18.46 $11.50 - 27.00
Granted 900 26.81 22.42 - 29.67
Exercised (737) 17.76 10.56 - 24.79
SCST spin-off adjustment (352) -- --
Forfeited / expired (86) 17.83 10.56 - 24.05
------ ------ --------------
Outstanding at December 31, 2002 1,996 $21.27 $10.56 - 29.67
Granted 113 25.17 23.67 - 26.94
Exercised (279) 16.80 13.48 - 29.67
Forfeited / expired (33) 26.67 14.57 - 29.67
------ ------ --------------
Outstanding at December 31, 2003 1,797 $22.14 $11.25 - 29.67
====== ====== ==============
The following table summarizes information about stock options outstanding as of
December 31, 2003:
Options Outstanding Options Exercisable
------------------------------------------------------ --------------------------------
Weighted Average
Shares Remaining Weighted Average Shares Weighted Average
Range of exercise prices (in thousands) Contractual Years Exercise price (in thousands) Exercise price
- ------------------------ -------------- ------------------ --------------- -------------- ---------------
$ 11.25 - 17.00 520 6.0 $14.89 371 $14.86
$ 17.01 - 27.50 660 5.4 $20.82 385 $19.92
$ 27.51 - 29.67 617 8.7 $29.67 148 $29.67
=== === ====== === ======
As discussed in the Summary of Accounting Policies note, we apply APB 25 in
accounting for stock options. Please refer to that note for pro forma effects
had we applied Statement No. 123.
52
INCOME TAXES
Deferred income taxes are determined based upon the difference between the book
and the tax basis of our assets and liabilities. Deferred taxes are recorded at
the enacted tax rates expected to be in effect when these differences reverse.
Deferred tax liabilities (assets) were comprised of the following at December
31:
(in thousands) 2003 2002
- -------------- --------- ---------
Depreciation $ 280,818 $ 90,004
Prepaids 7,861 8,193
Employee benefits 85,183 52,330
Revenue 30,688 22,925
Intangibles 181,273 --
Other 17,746 6,354
--------- ---------
Gross tax liabilities $ 603,569 $ 179,806
--------- ---------
Claims and insurance $(146,916) $ (54,684)
Bad debts (11,046) (5,514)
Employee benefits (120,239) (45,076)
Revenue (12,628) (10,882)
Other (38,098) (21,242)
--------- ---------
Gross tax assets $(328,927) $(137,398)
--------- ---------
Net tax liability $ 274,642 $ 42,408
========= =========
A valuation allowance for deferred tax assets was not required at December 31,
2002. Valuation allowances for deferred tax assets at December 31, 2003 were not
material to our financial condition.
A reconciliation between income taxes at the federal statutory rate and the
consolidated effective tax rate from continuing operations follows:
(in thousands) 2003 2002 2001
---- ---- ----
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net 1.3 (0.8) (2.0)
Nondeductible business expenses 3.3 4.5 11.3
Foreign tax credit and rate differential 0.1 (2.2) (2.5)
Other, net (0.6) (0.3) (2.8)
---- ---- ----
Effective tax rate 39.1% 36.2% 39.0%
==== ==== ====
53
The income tax provision from continuing operations consisted of the following:
(in thousands) 2003 2002 2001
- -------------- ------- ------- -------
Current:
U.S federal $ 2,983 $12,697 $(6,853)
State (1,078) (353) (3,628)
Foreign (1,541) (180) 505
------- ------- -------
Current income tax provision $ 364 $12,164 $(9,976)
------- ------- -------
Deferred:
U.S federal $23,310 $ 584 $14,220
State 2,531 748 2,937
Foreign (74) 117 (411)
------- ------- -------
Deferred income tax provision $25,767 $ 1,449 $16,746
------- ------- -------
Income tax provision $26,131 $13,613 $ 6,770
------- ------- -------
Based on the income from continuing operations before income taxes:
Domestic $71,667 $37,892 $16,119
Foreign (4,853) (306) 1,240
------- ------- -------
Income from continuing operations before income taxes $66,814 $37,586 $17,359
======= ======= =======
COMMITMENTS, CONTINGENCIES, AND UNCERTAINTIES
Yellow Roadway incurs rental expenses under noncancelable lease agreements for
certain buildings and operating equipment. Rental expense is charged to
"operating expense and supplies" on the Statements of Consolidated Operations.
Actual rental expense, as reflected in income from continuing operations, was
$42.6 million, $34.8 million, and $37.0 million for the years ended December 31,
2003, 2002, and 2001, respectively.
We utilize certain terminals and equipment under operating leases. At December
31, 2003, we were committed under noncancelable lease agreements requiring
minimum annual rentals payable as follows:
(in thousands) 2004 2005 2006 2007 2008 Thereafter
- -------------- ------- ------- ------- ------- ------- ----------
Minimum annual rentals $73,121 $54,837 $32,100 $17,782 $11,488 $14,358
------- ------- ------- ------- ------- -------
We expect in the ordinary course of business that leases will be renewed or
replaced as they expire. Projected 2004 net capital expenditures are expected to
be $190 to $210 million, of which approximately $60 million was committed at
December 31, 2003.
Our outstanding letters of credit at December 31, 2003 included $3.4 million for
workers' compensation, property damage and liability claims against SCST. We
agreed to maintain the letters of credit outstanding at the spin-off date until
SCST obtained replacement letters of credit or third party guarantees. SCST
agreed to use its reasonable best efforts to obtain these letters of credit or
guarantees, which in many cases would allow us to obtain a release of our
letters of credit. SCST also agreed to indemnify us for any claims against the
letters of credit that we provide. SCST reimburses us for all fees incurred
related to the remaining outstanding letters of credit. We also provided a
guarantee of $5.9 million regarding certain lease obligations of SCST.
Due to the secured credit facility agreement we entered into, as discussed in
the Debt and Financing note, we are restricted from participating in certain
financial activities. These activities include, but are not limited to,
declaring dividends, assuming additional indebtedness outside the normal course
of business, directly or indirectly lending money or credit to non-subsidiaries
and incurring capital expenditures in excess of a stated annual amount.
We are involved in litigation or proceedings that arise in ordinary business
activities. We insure against these risks to the extent deemed prudent by our
management, but no assurance can be given that the nature and amount of such
insurance will be sufficient to fully indemnify us against liabilities arising
out of pending and future legal proceedings. Many of these insurance policies
contain self-insured retentions in amounts we deem prudent. Based on our current
assessment of information available as of the date of these
54
financial statements, we believe that our financial statements include adequate
provisions for estimated costs and losses that may be incurred with regard to
the litigation and proceedings to which we are a party.
Tax Matters
Because of the acquisition of Roadway, we are responsible for certain federal
tax obligations of Roadway under a tax sharing agreement with its former parent
corporation. The former parent of Roadway, Caliber System, Inc. (which
subsequently was acquired by FDX Corporation, a wholly owned subsidiary of FedEx
Corporation), is involved in tax litigation with the IRS for tax years 1994 and
1995, years prior to Caliber System, Inc's spin-off of Roadway. The IRS has
proposed substantial adjustments for these tax years for multi-employer pension
plan deductions. FedEx Corporation filed a petition challenging the IRS's
position, and this matter is presently in litigation. We are unable to predict
the ultimate outcome of this matter; however, the former parent of Roadway
intends to vigorously contest these proposed adjustments.
Under tax sharing agreements entered into by Roadway and its former parent at
the time of the spin-off, Roadway LLC, a wholly owned subsidiary of Yellow
Roadway Corporation and successor in interest to Roadway, is obligated to
reimburse its former parent for any additional taxes and interest that related
to Roadway business prior to the spin-off. The amount and timing of any payments
is dependent on the ultimate resolutions of the former parent's disputes with
the IRS and the determination of the nature and extent of the obligations under
the tax sharing agreement. On January 16, 2003, Roadway made a $14 million
payment to its former parent under the tax sharing agreement for taxes and
interest related to certain of the proposed adjustments for tax years 1994 and
1995.
We estimate the maximum remaining payments that may be due to the former parent
of Roadway to be approximately $19 million in additional taxes and $5 million in
related interest, net of tax benefit. We have established specific reserves with
respect to these proposed adjustments. There can be no assurance, however, that
the amount or timing of any liability of Roadway LLC to the former parent of
Roadway will not have a material adverse effect on the financial position of
Yellow Roadway.
In addition, Roadway LLC, as successor in interest to Roadway, has a similar tax
issue in each of its subsequent income tax returns and the IRS has made
additional claims for taxes for tax years 1996 through 2000. The outcome of
these proposed adjustments is dependent upon the outcome of the existing tax
litigation. In the event of an adverse decision, we estimate that the potential
taxes and interest, net of tax effect, for all years subsequent to 1995 are
approximately $10 million and $3 million, respectively.
Environmental Matters
Remediation costs are accrued based on estimates of known environmental
remediation exposure using currently available facts, existing environmental
permits and technology and presently enacted laws and regulations. Our estimates
of costs are developed based on internal evaluations and, when necessary,
recommendations from external environmental consultants. These accruals are
recorded when it is probable that we will be obligated to pay amounts for
environmental site evaluation, remediation or related costs, and the amounts can
be reasonably estimated. If the obligation can only be estimated within a range,
we accrue the minimum amount in the range. These accruals are recorded even if
significant uncertainties exist over the ultimate cost of the remediation. Where
we have been identified as a potentially responsible party in a U.S. federal
"Superfund" site, we accrue our share of the estimated remediation costs of the
site based on the ratio of the estimated volume of waste contributed to the site
by us to the total volume of waste at the site.
BUSINESS SEGMENTS
Yellow Roadway reports financial and descriptive information about its
reportable operating segments on a basis consistent with that used internally
for evaluating segment performance and allocating resources to segments. We
manage the segments separately because each requires different operating,
marketing and technology strategies. We evaluate performance primarily on
adjusted operating income and return on capital.
Yellow Roadway has four reportable segments, which are strategic business units
that offer complementary transportation services to their customers. Yellow
Transportation and Roadway Express are unionized carriers that provide
comprehensive regional, national and international transportation services. New
Penn is also a unionized carrier that focuses on business opportunities in the
regional and next-day delivery lanes. Meridian IQ, our non-asset based segment,
provides domestic and international freight forwarding, multi-modal brokerage
and transportation management services.
The accounting policies of the segments are the same as those described in the
Summary of Accounting Policies note. We charge management fees and other
corporate services to our segments based on the direct benefits received or as a
percentage of revenue.
55
Corporate revenue in 2001 represented certain non-asset-based services prior to
the formation of Meridian IQ. Corporate operating losses represent operating
expenses of the holding company, including salaries, wages and benefits, along
with incentive compensation and professional services for all periods presented.
In 2003, corporate operating losses also included $4.0 million for an industry
conference that we host every other year. In 2002, corporate operating losses
included approximately $6.9 million related to the spin-off of SCST. Corporate
identifiable assets primarily refer to cash and cash equivalents, in addition to
pension intangible assets. In 2003 and 2002, intersegment revenue relates to
transportation services provided by Yellow Transportation to Meridian IQ and
charges to Yellow Transportation for use of various Meridian IQ service names.
Meridian IQ includes the former operations of Transportation.com as well as
other non-asset-based services. The 2001 segment data for Meridian IQ included
the partial year results of operations of Transportation.com and other
non-asset-based services for the periods they were part of our consolidated
financial results. Full year revenue for Meridian IQ was $31.1 million and full
year operating losses were $(16.8) million in 2001.
Revenue from foreign sources totaled $29.5 million, $24.8 million, and $26.0
million, in 2003, 2002, and 2001 respectively, and is largely derived from
Canada and Mexico.
The following table summarizes our operations by business segment:
Yellow Roadway(a) New(a) Corporate /
(in thousands) Transportation Express Penn Meridian IQ Eliminations Consolidated
- -------------- -------------- ---------- -------- ----------- ------------ ------------
2003
External revenue $2 ,809,549 $ 131,248 $ 9,770 $118,049 $ -- $3,068,616
Intersegment revenue 2,343 -- -- 2,196 (4,539) --
Operating income (loss) 119,906 (6,075) (221) 288 (25,296) 88,602
Adjustments to operating income(b) 19,020 -- -- 482 2,960 22,462
Adjusted operating income (loss) 138,926 (6,075) (221) 770 (22,336) 111,064
Identifiable assets 986,522 2,002,421 340,713 79,894 53,679 3,463,229
Capital expenditures, net 94,281 1,216 534 3,047 56 99,134
Depreciation and amortization 80,261 3,455 745 2,897 40 87,398
----------- ---------- -------- -------- -------- ----------
2002
External revenue $ 2,544,573 $ -- $ -- $ 79,575 $ -- $2,624,148
Intersegment revenue 2,479 -- -- 2,196 (4,675) --
Operating income (loss) 70,594 -- -- (2,697) (21,033) 46,864
Adjustments to operating income(b) 523 -- -- 1,299 6,613 8,435
Adjusted operating income (loss) 71,117 -- -- (1,398) (14,420) 55,299
Identifiable assets 940,252 -- -- 64,617 38,116 1,042,985
Capital expenditures, net 81,232 -- -- 1,537 61 82,830
Depreciation and amortization 76,972 -- -- 2,321 41 79,334
----------- ---------- -------- --------- ---------- ----------
2001
External revenue $ 2,485,972 $ -- $ -- $ 11,292 $ 7,806 $2,505,070
Intersegment revenue 6,360 -- -- -- (6,360) --
Operating income (loss) 55,884 -- -- (5,738) (11,951) 38,195
Adjustments to operating income(b) 2,797 -- -- 2,108 510 5,415
Adjusted operating income (loss) 58,681 -- -- (3,630) (11,441) 43,610
Identifiable assets 757,484 -- -- 17,641 19,704 794,829(c)
Capital expenditures, net 80,463 -- -- 822 150 81,435
External revenue 76,227 -- -- 698 52 76,977
=========== ========== ======== ======== ======== ==========
(a) In 2003, the segment information shown for Roadway Express and New Penn
represented income statement and capital expenditure information from the
date of acquisition through December 31, 2003 and identifiable assets as
of December 31, 2003.
(b) Management excludes these items when evaluating operating income and
segment performance to better evaluate the results of our core operations.
In 2003, adjustments included acquisition charges, conforming accounting
policies, a significant legal provision and losses (gains) on property
disposals. In prior periods, adjustments included spin-off and
reorganization charges and losses (gains) on property disposals.
(c) The December 31, 2001 total assets per the Consolidated Balance Sheet
included $490.9 million of assets related to discontinued operations not
included above.
56
EARNINGS PER COMMON SHARE
(in thousands except per share data) 2003 2002 2001
- ------------------------------------ ------- --------- --------
Income from continuing operations $40,683 $ 23,973 $ 10,589
Income (loss) from discontinued operations -- (117,875) 4,712
------- --------- --------
Net income (loss) $40,683 $ (93,902) $ 15,301
------- --------- --------
Average common shares outstanding - basic 30,370 28,004 24,376
Effect of dilutive options 285 367 303
------- --------- --------
Average common shares outstanding - diluted 30,655 28,371 24,679
------- --------- --------
Basic earnings (loss) per share:
Income from continuing operations $ 1.34 $ 0.86 $ 0.44
Income (loss) from discontinued operations -- (4.21) 0.19
------- --------- --------
Net income (loss) $ 1.34 $ (3.35) $ 0.63
------- --------- --------
Effect of dilutive options on earnings (loss) per share:
Income from continuing operations $ (0.01) $ (0.02) $ (0.01)
Loss from discontinued operations -- 0.06 --
------- --------- --------
Net income (loss) $ (0.01) $ 0.04 $ (0.01)
------- --------- --------
Diluted earnings (loss) per share:
Income from continuing operations $ 1.33 $ 0.84 $ 0.43
Income (loss) from discontinued operations -- (4.15) 0.19
------- --------- --------
Net income (loss) $ 1.33 $ (3.31) $ 0.62
======= ========= ========
The impacts of certain options were excluded from the calculation of diluted
earnings per share because average exercise prices were greater than the average
market price of common shares. Data regarding those options is summarized below:
(in thousands except per share data) 2003 2002 2001
- ------------------------------------ ------ ------ ------
Weighted average option shares outstanding 617 129 611
Weighted average exercise price $29.67 $29.67 $24.18
------ ------ ------
57
DISCONTINUED OPERATIONS
Summarized results of operations related to SCST (as reported in discontinued
operations) are as follows for the nine months ended September 30, 2002 and the
year ended December 31, 2001:
(in thousands except per share data) 2002 2001
- ------------------------------------ --------- --------
Operating revenue $ 581,181 $771,581
Operating expenses 559,751 752,423
--------- --------
Operating income 21,430 19,158
Nonoperating expenses, net 4,735 7,992
--------- --------
Income before income taxes 16,695 11,166
Provision for income taxes 6,748 6,454
--------- --------
Income from continuing operations 9,947 4,712
Loss on disposal of SCST (52,647) --
Cumulative effect of change in accounting for goodwill (75,175) --
--------- --------
Income (loss) from discontinued operations $(117,875) $ 4,712
--------- --------
Discontinued operations basic earnings (loss) per share:
Income from continuing operations $ 0.35 $ 0.19
Loss on disposal of SCST (1.88) --
Cumulative effect of change in accounting for goodwill (2.68) --
--------- --------
Income (loss) from discontinued operations $ (4.21) $ 0.19
--------- --------
Discontinued operations diluted earnings (loss) per share:
Income from continuing operations $ 0.35 $ 0.19
Loss on disposal of SCST (1.85) --
Cumulative effect of change in accounting for goodwill (2.65) --
--------- --------
Income (loss) from discontinued operations $ (4.15) $ 0.19
========= ========
We did not charge to discontinued operations the management fees and other
corporate services that we previously allocated to SCST, as we continue to incur
a majority of the expense. We allocated interest expense to discontinued
operations based on our overall effective borrowing rate applied to the debt
reduction we realized from the spin-off. Interest expense included in
discontinued operations was $4.6 million for the nine months ended September 30,
2002, and $8.0 million for the year ended December 31, 2001. Goodwill
amortization expense included in discontinued operations was zero for 2002 and
$3.0 million for 2001. In addition, supplemental cash flow information for 2002
and 2001, as shown on our Statements of Consolidated Cash Flows, includes cash
paid on behalf of SCST until the spin-off date.
At December 31, 2001, we had $100.6 million of goodwill, consisting primarily of
$75.2 million remaining from the acquisition of Jevic. Based on an estimate of
Jevic's discounted cash flows, we determined that 100 percent of the Jevic
goodwill was impaired due to lower business volumes, compounded by a weak
economy and an increasingly competitive business environment. As a result, we
recorded a non-cash charge of $75.2 million in the first quarter of 2002, which
was reflected as a cumulative effect of a change in accounting principle. Due to
the spin-off, we reclassified the non-cash charge to "discontinued operations"
on our Statement of Consolidated Operations.
58
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
GUARANTEES OF THE CONTINGENT CONVERTIBLE SENIOR NOTES
In August 2003, Yellow Roadway Corporation issued 5.0 percent contingent
convertible senior notes due 2023 pursuant to Rule 144A under the Securities Act
of 1933, as amended. In November 2003, we issued 3.375 percent contingent
convertible senior notes (the August and November issuances, collectively, may
also be known as the "contingent convertible senior notes") due 2023, pursuant
to Rule 144A under the Securities Act of 1933, as amended. In connection with
the contingent convertible senior notes, the following 100 percent owned
subsidiaries of Yellow Roadway have issued guarantees in favor of the holders of
the contingent convertible senior notes: Yellow Transportation, Inc., Mission
Supply Company, Yellow Relocation Services, Yellow Technologies, Inc., Meridian
IQ, LLC, Yellow GPS, LLC, Globe.com Lines, Inc., Roadway LLC, Roadway Next Day
Corporation, and Roadway Express, Inc. Each of the guarantees is full and
unconditional and joint and several.
The summarized consolidating financial statements are presented in lieu of
separate financial statements and other related disclosures of the subsidiary
guarantors and issuer because management does not believe that such separate
financial statements and related disclosures would be material to investors.
There are currently no significant restrictions on the ability of Yellow Roadway
Corporation or any guarantor to obtain funds from its subsidiaries by dividend
or loan.
The following represents summarized condensed consolidating financial
information as of December 31, 2003 and 2002 with respect to the financial
position and for the years ended December 31, 2003, 2002 and 2001 for results of
operations and cash flows of Yellow Roadway Corporation and its subsidiaries.
The Condensed Consolidating Balance Sheet contains Roadway LLC information as of
December 31, 2003 and the Condensed Consolidating Statements of Operations and
Condensed Consolidating Statements of Cash Flows contain Roadway LLC information
from the date of acquisition (December 11) through December 31, 2003. The Parent
column presents the financial information of Yellow Roadway Corporation, the
primary obligor of the contingent convertible senior notes. The Guarantor
Subsidiaries column presents the financial information of all guarantor
subsidiaries of the contingent convertible senior notes. The Non-Guarantor
Subsidiaries column presents the financial information of all non-guarantor
subsidiaries, including Yellow Receivables Corporation and Roadway Funding,
Inc., the special-purpose entities that manage or managed our ABS agreements,
and those subsidiaries that are governed by foreign laws.
Condensed Consolidating Balance Sheets
Non-
December 31, 2003 Guarantor Guarantor
(in thousands) Parent Subsidiaries Subsidiaries Eliminations Consolidated
- ----------------- ---------- ------------ ------------ ------------ ------------
Cash and cash equivalents $ 18,702 $ 19,631 $ 36,833 $ -- $ 75,166
Intercompany advances receivable 180,367 3,702 -- (184,069) --
Accounts receivable, net 3,437 351,152 344,553 -- 699,142
Prepaid expenses and other 4,719 97,468 7,941 -- 110,128
---------- ----------- -------- ----------- -----------
Total current assets 207,225 471,953 389,327 (184,069) 884,436
Property and equipment 325 2,442,858 95,431 -- 2,538,614
Less - accumulated depreciation (229) (1,129,253) (5,864) -- (1,135,346)
---------- ------------ -------- ----------- -----------
Net property and equipment 96 1,313,605 89,567 -- 1,403,268
Investment in subsidiaries 1,373,794 131,653 -- (1,505,447) --
Receivable from affiliate -- 150,000 -- (150,000) --
Goodwill and other assets 38,989 883,107 253,429 -- 1,175,525
---------- ----------- -------- ----------- -----------
Total assets $1,620,104 $ 2,950,318 $732,323 $(1,839,516) $ 3,463,229
========== =========== ======== =========== ===========
Intercompany advances payable $ -- $ -- $184,069 $ (184,069) $ --
Accounts payable 12,326 231,379 16,470 -- 260,175
Wages, vacations and employees' benefits 5,872 329,680 15,735 -- 351,287
Other current and accrued liabilities (7,071) 173,460 12,089 -- 178,478
ABS borrowings -- -- 71,500 -- 71,500
Current maturities of long-term debt 1,750 7 -- -- 1,757
---------- ----------- -------- ----------- -----------
Total current liabilities 12,877 734,526 299,863 (184,069) 863,197
Payable to affiliate -- -- 150,000 (150,000) --
Long-term debt, less current portion 573,250 262,832 -- -- 836,082
Deferred income taxes, net (12,250) 263,513 46,993 -- 298,256
Claims and other liabilities 13,934 436,400 13,275 -- 463,609
Commitments and contingencies
Shareholders' equity 1,032,293 1,253,047 222,192 (1,505,447) 1,002,085
---------- ----------- -------- ----------- -----------
Total liabilities and shareholders'
equity $1,620,104 $ 2,950,318 $732,323 $(1,839,516) $ 3,463,229
========== =========== ======== =========== ===========
59
Non -
December 31, 2002 Guarantor Guarantor
(in thousands) Parent Subsidiaries Subsidiaries Eliminations Consolidated
- ---------------- -------- ------------ ------------ ------------ ------------
Cash and cash equivalents $ 21,898 $ 2,470 $ 4,346 $ -- $ 28,714
Intercompany advances receivable 141,057 46,291 -- (187,348) --
Accounts receivable, net 3,211 29,017 295,685 -- 327,913
Prepaid expenses and other 3,518 65,148 60 -- 68,726
-------- ----------- -------- --------- -----------
Total current assets 169,684 142,926 300,091 (187,348) 425,353
Property and equipment 289 1,671,327 7,480 -- 1,679,096
Less-accumulated depreciation (213) (1,109,710) (4,197) -- (1,114,120)
-------- ----------- -------- --------- -----------
Net property and equipment 76 561,617 3,283 -- 564,976
Investment in subsidiaries 263,577 -- -- (263,577) --
Goodwill and other assets 3,729 44,756 4,171 -- 52,656
-------- ----------- -------- --------- -----------
Total assets $437,066 $ 749,299 $307,545 $(450,925) $ 1,042,985
======== =========== ======== ========= ===========
Intercompany advances payable $ -- $ -- $187,348 $(187,348) $ --
Accounts payable 1,412 113,251 326 -- 114,989
Wages, vacations and employees' benefits 2,389 157,230 379 -- 159,998
Other current and accrued liabilities (1,098) 101,287 922 -- 101,111
ABS borrowings -- -- 50,000 -- 50,000
Current maturities of long-term debt 19,250 5,011 -- -- 24,261
-------- ----------- -------- --------- -----------
Total current liabilities 21,953 376,779 238,975 (187,348) 450,359
Intercompany debt (20,658) 20,658 -- -- --
Long-term debt, less current portion 36,000 14,024 -- -- 50,024
Deferred income taxes, net (17,319) 43,381 (405) -- 25,657
Claims and other liabilities 15,782 141,495 (290) -- 156,987
Commitments and contingencies
Shareholders' equity 401,308 152,962 69,265 (263,577) 359,958
-------- ----------- -------- --------- -----------
Total liabilities and shareholders'
equity $437,066 $ 749,299 $307,545 $(450,925) $ 1,042,985
======== =========== ======== ========= ===========
Condensed Consolidating Statements of Operations
Non-
For the year ended December 31, 2003 Guarantor Guarantor
(in thousands) Parent Subsidiaries Subsidiaries Eliminations Consolidated
- ------------------------------------ -------- ------------ ------------ ------------ ------------
Operating revenue $ 13,204 $3,029,250 $ 39,437 $(13,275) $3,068,616
-------- ---------- -------- -------- ----------
Operating expenses:
Salaries, wages and employees' benefits 14,814 1,936,127 19,499 -- 1,970,440
Operating expenses and supplies 17,519 420,707 24,824 (13,225) 449,825
Operating taxes and licenses 164 82,049 1,335 -- 83,548
Claims and insurance 755 66,357 558 -- 67,670
Depreciation and amortization 40 86,103 1,255 -- 87,398
Purchased transportation -- 306,079 12,097 -- 318,176
Losses (gains) on property disposals, net 1 (176) 8 -- (167)
Acquisition charges 2,959 165 -- -- 3,124
-------- ---------- -------- -------- ----------
Total operating expenses 36,252 2,897,411 59,576 (13,225) 2,980,014
-------- ---------- -------- -------- ----------
Operating income (loss) (23,048) 131,839 (20,139) (50) 88,602
-------- ---------- -------- -------- ----------
Nonoperating (income) expenses:
Interest expense 17,597 6,506 6,349 (9,846) 20,606
Other, net (1,564) 53,537 (60,587) 9,796 1,182
-------- ---------- -------- -------- ----------
Nonoperating (income) expenses, net 16,033 60,043 (54,238) (50) 21,788
-------- ---------- -------- -------- ----------
Income (loss) before income taxes (39,081) 71,796 34,099 -- 66,814
Income tax provision (14,330) 28,109 12,352 -- 26,131
Subsidiary earnings 65,434 (1,132) -- (64,302) --
-------- ---------- -------- -------- ----------
Net income (loss) $ 40,683 $ 42,555 $ 21,747 $(64,302) $ 40,683
======== ========== ======== ======== ==========
60
Non-
For the year ended December 31, 2002 Guarantor Guarantor
(in thousands) Parent Subsidiaries Subsidiaries Eliminations Consolidated
- ------------------------------------ -------- ------------ ------------ ------------ ------------
Operating revenue $ 43,938 $2,599,394 $ 24,754 $(43,938) $2,624,148
-------- ---------- --------- -------- ----------
Operating expenses:
Salaries, wages and employees' benefits 12,056 1,697,567 7,759 -- 1,717,382
Operating expenses and supplies 14,774 355,476 31,360 (16,088) 385,522
Operating taxes and licenses 206 74,999 532 -- 75,737
Claims and insurance 1,233 55,944 20 -- 57,197
Depreciation and amortization 41 79,028 265 -- 79,334
Purchased transportation -- 244,087 9,590 -- 253,677
Losses (gains) on property disposals, net -- 559 (134) -- 425
Spin-off and reorganization charges 6,613 1,397 -- -- 8,010
-------- ---------- --------- -------- ----------
Total operating expenses 34,923 2,509,057 49,392 (16,088) 2,577,284
-------- ---------- --------- -------- ----------
Operating income (loss) 9,015 90,337 (24,638) (27,850) 46,864
-------- ---------- --------- -------- ----------
Nonoperating (income) expenses:
Interest expense 8,087 3,932 3,394 (8,202) 7,211
ABS facility charges -- -- 2,576 -- 2,576
Other, net (5,047) 74,855 (50,669) (19,648) (509)
-------- ---------- --------- -------- ----------
Nonoperating (income) expenses, net 3,040 78,787 (44,699) (27,850) 9,278
-------- ---------- --------- -------- ----------
Income (loss) from continuing
operations before income taxes 5,975 11,550 20,061 -- 37,586
Income tax provision 1,249 5,143 7,221 -- 13,613
Subsidiary earnings 19,249 -- -- (19,249) --
-------- ---------- --------- -------- ----------
Income (loss) from continuing
operations 23,975 6,407 12,840 (19,249) 23,973
Loss from discontinued operations, net -- -- (117,875) -- (117,875)
-------- ---------- --------- -------- ----------
Net income (loss) $ 23,975 $ 6,407 $(105,035) $(19,249) $ (93,902)
======== ========== ========= ======== ==========
Non-
For the year ended December 31, 2001 Guarantor Guarantor
(in thousands) Parent Subsidiaries Subsidiaries Eliminations Consolidated
- ------------------------------------ -------- ------------ ------------ ------------ ------------
Operating revenue $ 54,264 $2,480,119 $25,987 $(55,300) $2,505,070
-------- ---------- ------- -------- ----------
Operating expenses:
Salaries, wages and employees' benefits 8,390 1,622,638 7,634 -- 1,638,662
Operating expenses and supplies 13,848 378,599 23,516 (17,909) 398,054
Operating taxes and licenses 174 74,920 543 -- 75,637
Claims and insurance 1,983 56,372 (1,356) -- 56,999
Depreciation and amortization 38 76,668 271 -- 76,977
Purchased transportation -- 205,424 9,707 -- 215,131
Losses (gains) on property disposals, net (1) (202) 17 -- (186)
Spin-off and reorganization charges 633 5,089 (121) -- 5,601
-------- ---------- ------- -------- ----------
Total operating expenses 25,065 2,419,508 40,211 (17,909) 2,466,875
-------- ---------- ------- -------- ----------
Operating income (loss) 29,199 60,611 (14,224) (37,391) 38,195
-------- ---------- ------- -------- ----------
Nonoperating (income) expenses:
Interest expense 18,513 2,356 5,017 (17,449) 8,437
ABS facility charges -- -- 7,996 -- 7,996
Other, net (16,106) 90,096 (49,645) (19,942) 4,403
-------- ---------- ------- -------- ----------
Nonoperating (income) expenses, net 2,407 92,452 (36,632) (37,391) 20,836
-------- ---------- ------- -------- ----------
Income (loss) from continuing
operations before income taxes 26,792 (31,841) 22,408 -- 17,359
Income tax provision 9,679 (10,399) 7,490 -- 6,770
Subsidiary earnings 1,812 -- -- (1,812) --
-------- ---------- ------- -------- ----------
Income (loss) from continuing
operations 15,301 (21,442) 14,918 1,812 10,589
Income from discontinued operations,
net -- -- 4,712 -- 4,712
-------- ---------- ------- -------- ----------
Net income (loss) $ 15,301 $ (21,442) $19,630 $ 1,812 $ 15,301
======== ========== ======= ======== ==========
61
Condensed Consolidating Statements of Cash Flows
Non-
For the year ended December 31, 2003 Guarantor Guarantor
(in thousands) Parent Subsidiaries Subsidiaries Eliminations Consolidated
- ------------------------------------ --------- ------------ ------------ ------------ ------------
Operating activities:
Net cash from (used in) operating
activities $(119,878) $ 276,972 $42,368 $(43,726) $ 155,736
--------- --------- ------- -------- ---------
Investing activities:
Acquisition of property and equipment (67) (102,572) (688) -- (103,327)
Proceeds from disposal of property
and equipment 6 3,969 218 -- 4,193
Acquisition of companies (513,338) -- -- -- (513,338)
--------- --------- ------- -------- ---------
Net cash used in investing activities (513,399) (98,603) (470) -- (612,472)
--------- --------- ------- -------- ---------
Financing Activities:
Issuance of long-term debt 575,000 -- -- -- 575,000
ABS borrowings, net -- -- 21,500 -- 21,500
Debt issuance costs (34,734) -- -- -- (34,734)
Repayment of long-term debt (55,250) (5,092) -- -- (60,342)
Treasury stock purchases (2,921) -- -- -- (2,921)
Proceeds from exercise of stock options 4,685 -- -- -- 4,685
Intercompany advances / repayments 143,301 (156,116) (30,911) 43,726 --
--------- --------- ------- -------- ---------
Net cash provided by (used in)
financing activities 630,081 (161,208) (9,411) 43,726 503,188
--------- --------- ------- -------- ---------
Net increase (decrease) in cash and cash
equivalents (3,196) 17,161 32,487 -- 46,452
Cash and cash equivalents, beginning of
year 21,898 2,470 4,346 -- 28,714
--------- --------- ------- -------- ---------
Cash and cash equivalents, end of year $ 18,702 $ 19,631 $36,833 $ -- $ 75,166
========= ========= ======= ======== =========
Non-
For the year ended December 31, 2002 Guarantor Guarantor
(in thousands) Parent Subsidiaries Subsidiaries Eliminations Consolidated
- ------------------------------------ --------- ------------ ------------ ------------ ------------
Operating activities:
Net cash from (used in) operating
activities $ 19,435 $142,608 $(95,311) $(23,674) $ 43,058
-------- -------- -------- -------- ---------
Investing activities:
Acquisition of property and equipment (59) (86,120) (158) -- (86,337)
Proceeds from disposal of property
and equipment -- 3,306 201 -- 3,507
Acquisition of companies (17,105) (937) -- -- (18,042)
Net capital expenditures of
discontinued operations -- -- (24,372) -- (24,372)
-------- -------- -------- -------- ---------
Net cash used in investing activities (17,164) (83,751) (24,329) -- (125,244)
-------- -------- -------- -------- ---------
Financing Activities:
Unsecured bank credit lines, net (85,000) -- -- -- (85,000)
Repayment of long-term debt (22,000) (75) (22,525) -- (44,600)
Dividend from subsidiary upon spin-off -- -- 113,790 -- 113,790
Proceeds from exercise of stock options 13,704 -- -- -- 13,704
Proceeds from issuance of common stock 93,792 -- -- -- 93,792
Intercompany advances / repayments 7,977 (58,256) 26,605 23,674 --
-------- -------- -------- -------- ---------
Net cash provided by (used in)
financing activities 8,473 (58,331) 117,870 23,674 91,686
-------- -------- -------- -------- ---------
Net increase (decrease) in cash and cash
equivalents 10,744 526 (1,770) -- 9,500
Cash and cash equivalents, beginning of
year 11,154 1,944 6,116 -- 19,214
-------- -------- -------- -------- ---------
Cash and cash equivalents, end of year $ 21,898 $ 2,470 $ 4,346 $ -- $ 28,714
======== ======== ======== ======== =========
62
Non-
For the year ended December 31, 2001 Guarantor Guarantor
(in thousands) Parent Subsidiaries Subsidiaries Eliminations Consolidated
- ------------------------------------ --------- ------------ ------------ ------------ ------------
Operating activities:
Net cash from (used in) operating
activities $ 13,282 $ (4,042) $ 72,818 $ 6,237 $ 88,295
-------- --------- -------- ------- ---------
Investing activities:
Acquisition of property and equipment (33) (87,814) (175) -- (88,022)
Proceeds from disposal of property
and equipment -- 6,587 -- -- 6,587
Acquisition of companies -- (14,300) -- -- (14,300)
Other -- (5,830) -- -- (5,830)
Net capital expenditures of
discontinued operations -- -- (19,619) -- (19,619)
-------- --------- -------- ------- ---------
Net cash used in investing activities (33) (101,357) (19,794) -- (121,184)
-------- --------- -------- ------- ---------
Financing Activities:
Unsecured bank credit lines, net 25,000 -- -- -- 25,000
Repayment of long-term debt (1,000) (7,694) (1,718) -- (10,412)
Proceeds from exercise of stock options 16,638 -- -- -- 16,638
Intercompany advances / repayments (48,811) 105,994 (50,946) (6,237) --
-------- --------- -------- ------- ---------
Net cash provided by (used in)
financing activities (8,173) 98,300 (52,664) (6,237) 31,226
-------- --------- -------- ------- ---------
Net increase (decrease) in cash and cash
equivalents 5,076 (7,099) 360 -- (1,663)
Cash and cash equivalents, beginning of
year 6,078 9,043 5,756 -- 20,877
-------- --------- -------- ------- ---------
Cash and cash equivalents, end of year $ 11,154 $ 1,944 $ 6,116 $ -- $ 19,214
======== ========= ======== ======= =========
63
GUARANTEES OF THE SENIOR NOTES DUE 2008
In connection with the senior notes due 2008, assumed by virtue of the merger
agreement, and in addition to the primary obligor, Roadway LLC, Yellow Roadway
Corporation and its following 100 percent owned subsidiaries have issued
guarantees in favor of the holders of the senior notes due 2008: Roadway Next
Day Corporation, New Penn Motor Express, Inc., Roadway Express, Inc., Roadway
Reverse Logistics, Inc. and Roadway Express International, Inc. Each of the
guarantees is full and unconditional and joint and several.
The summarized consolidating financial statements are presented in lieu of
separate financial statements and other related disclosures of the subsidiary
guarantors and issuer because management does not believe that such separate
financial statements and related disclosures would be material to investors.
There are currently no significant restrictions on the ability of Yellow Roadway
Corporation or any guarantor to obtain funds from its subsidiaries by dividend
or loan.
The following represents summarized condensed consolidating financial
information of Yellow Roadway Corporation and its subsidiaries as of December
31, 2003 with respect to the financial position, and for the year ended December
31, 2003 for results of operations and cash flows. The Condensed Consolidating
Balance Sheet as of December 31, 2003 contains Roadway LLC information and the
Condensed Consolidating Statements of Operations and Condensed Consolidating
Statements of Cash Flows contain Roadway LLC information from the date of
acquisition (December 11) through December 31, 2003. The primary obligor column
presents the financial information of Roadway LLC. The Guarantors column
presents the financial information of all guarantors of the senior notes due
2008 including Yellow Roadway, the holding company. The Non-Guarantors column
presents the financial information of all non-guarantors, including Yellow
Receivables Corporation and Roadway Funding, Inc., the special-purpose entities
that manage or managed our ABS agreements, and those subsidiaries that are
governed by foreign laws.
Condensed Consolidating Balance Sheets
December 31, 2003 Primary Non-
(in thousands) Obligor Guarantors Guarantors Eliminations Consolidated
- ---------------- ---------- ---------- ---------- ------------ ------------
Cash and cash equivalents $ -- $ 62,233 $ 12,933 $ -- $ 75,166
Intercompany advances receivable 38,042 109,100 103,582 (250,724) --
Accounts receivable, net -- 329,219 369,923 -- 699,142
Prepaid expenses and other 240 38,866 71,022 -- 110,128
---------- ---------- ---------- ------------ ------------
Total current assets 38,282 539,418 557,460 (250,724) 884,436
Property and equipment -- 811,995 1,726,619 -- 2,538,614
Less - accumulated depreciation -- (3,380) (1,131,966) -- (1,135,346)
---------- ---------- ---------- ------------ ------------
Net property and equipment -- 808,615 594,653 -- 1,403,268
Investment in subsidiaries 592,413 1,402,909 7,761 (2,003,083) --
Receivable from affiliate 650,000 -- -- (650,000) --
Goodwill and other assets 20,778 1,073,193 81,554 -- 1,175,525
---------- ---------- ---------- ------------ ------------
Total assets $1,301,473 $3,824,135 $1,241,428 $ (2,903,807) $ 3,463,229
========== ========== ========== ============ ============
Intercompany advances payable $ -- $ -- $ 250,724 $ (250,724) $ --
Accounts payable 1,372 122,485 136,318 -- 260,175
Wages, vacations and employees' benefits 1,000 188,090 162,197 -- 351,287
Other current and accrued liabilities (31,463) 110,847 99,094 -- 178,478
ABS borrowings -- -- 71,500 -- 71,500
Current maturities of long-term debt -- 1,750 7 -- 1,757
---------- ---------- ---------- ------------ ------------
Total current liabilities (29,091) 423,172 719,840 (250,724) 863,197
Due to affiliate -- 650,000 -- (650,000) --
Long-term debt, less current portion 248,895 573,250 13,937 -- 836,082
Deferred income taxes, net (11,590) 206,247 103,599 -- 298,256
Claims and other liabilities 1,494 346,760 115,355 -- 463,609
Commitments and contingencies
Shareholders' equity 1,091,765 1,624,706 288,697 (2,003,083) 1,002,085
---------- ---------- ---------- ------------ ------------
Total liabilities and shareholders'
equity $1,301,473 $3,824,135 $1,241,428 $ (2,903,807) $ 3,463,229
========== ========== ========== ============ ============
64
Condensed Consolidating Statements of Operations
For the year ended December 31, 2003 Primary Non-
(in thousands) Obligor Guarantors Guarantors Eliminations Consolidated
- ----------------------------------- ---------- ---------- ---------- ------------ ------------
Operating revenue $ -- $148,528 $2,937,852 $(17,764) $3,068,616
------- -------- ---------- -------- ----------
Operating expenses:
Salaries, wages and employees' benefits 121 106,137 1,864,182 -- 1,970,440
Operating expenses and supplies (76) 38,673 424,774 (13,546) 449,825
Operating taxes and licenses (45) 4,453 79,140 -- 83,548
Claims and insurance -- 4,405 63,265 -- 67,670
Depreciation and amortization -- 4,013 83,385 -- 87,398
Purchased transportation -- 16,501 303,647 (1,972) 318,176
Losses (gains) on property disposals, net -- (5) (162) -- (167)
Acquisition charges -- 2,960 164 -- 3,124
------- -------- ---------- -------- ----------
Total operating expenses -- 177,137 2,818,395 (15,518) 2,980,014
------- -------- ---------- -------- ----------
Operating income (loss) -- (28,609) 119,457 (2,246) 88,602
------- -------- ---------- -------- ----------
Nonoperating (income) expenses:
Interest expense 688 20,467 4,867 (5,416) 20,606
ABS facility charges -- -- -- -- --
Other, net (2,897) (1,390) 2,299 3,170 1,182
------- -------- ---------- -------- ----------
Nonoperating (income) expenses, net (2,209) 19,077 7,166 (2,246) 21,788
------- -------- ---------- -------- ----------
Income (loss) before income taxes 2,209 (47,686) 112,291 -- 66,814
Income tax provision 776 (17,561) 42,916 -- 26,131
Subsidiary earnings 5,993 (64,815) -- 58,822 --
------- -------- ---------- -------- ----------
Net income (loss) $(4,560) $ 34,690 $ 69,375 $(58,822) $ 40,683
======= ======== ========== ======== ==========
Condensed Consolidating Statements of Cash Flows
For the year ended December 31, 2003 Primary Non-
(in thousands) Obligor Guarantors Guarantors Eliminations Consolidated
- ------------------------------------------------ ---------- ---------- ---------- ------------ ------------
Operating activities:
Net cash from (used in) operating
activities $(23,817) $ 8,745 $ 170,808 $ -- $ 155,736
-------- --------- --------- ------- ---------
Investing activities:
Acquisition of property and equipment -- (3,016) (100,311) -- (103,327)
Proceeds from disposal of property
and equipment -- 1,045 3,148 -- 4,193
Acquisition of companies -- (513,338) -- -- (513,338)
-------- --------- --------- ------- ---------
Net cash used in investing activities -- (515,309) (97,163) -- (612,472)
-------- --------- --------- ------- ---------
Financing Activities:
Issuance of long-term debt -- 575,000 -- -- 575,000
ABS borrowings, net -- -- 21,500 -- 21,500
Debt issuance costs -- (34,734) -- -- (34,734)
Repayment of long-term debt -- (55,250) (5,092) -- (60,342)
Treasury stock purchases (2,921) -- -- (2,921)
Proceeds from exercise of stock options -- 4,685 -- -- 4,685
Intercompany advances / repayments -- 91,458 (91,458) -- --
-------- --------- --------- ------- ---------
Net cash provided by (used in)
financing activities -- 578,238 (75,050) -- 503,188
-------- --------- --------- ------- ---------
Net increase (decrease) in cash and cash
equivalents (23,817) 71,674 (1,405) -- 46,452
Cash and cash equivalents, beginning of
year 23,817 (9,441) 14,338 -- 28,714
-------- --------- --------- ------- ---------
Cash and cash equivalents, end of year $ -- $ 62,233 $ 12,933 $ -- $ 75,166
======== ========= ========= ======= =========
65
Independent Auditors' Report
To the Board of Directors and Shareholders of
Yellow Roadway Corporation:
We have audited the accompanying consolidated balance sheets of Yellow Roadway
Corporation and subsidiaries as of December 31, 2003 and 2002, and the related
consolidated statements of operations, cash flows, shareholders' equity, and
comprehensive income for each of the years in the three year period ended
December 31, 2003. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Yellow Roadway
Corporation and subsidiaries as of December 31, 2003 and 2002, and the results
of their operations and their cash flows for each of the years in the three year
period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in the Goodwill and Intangibles and Discontinued Operations notes
to the financial statements, effective January 1, 2002, the Company ceased
amortization of goodwill and changed its method of determining impairment of
goodwill as required by Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets.
/s/ KPMG LLP
- ------------------
Kansas City, Missouri
February 20, 2004
66
Item 9. Changes in and Disagreements with Independent Auditors on Accounting and
Financial Disclosure
During the years ended December 31, 2003 and 2002, there were no disagreements
with KPMG LLP on any matter of accounting principle or practice, financial
statement disclosure, or auditing scope or procedure which, if not resolved to
the satisfaction of KPMG LLP, would have caused them to make reference to the
subject matter of the disagreement in connection with the audit reports on our
consolidated financial statements for such years; and there were no reportable
events as defined in Item 304(a)(1)(v) of Regulation S-K.
Item 9A. Controls and Procedures
We maintain a rigorous set of disclosure controls and procedures and internal
controls designed to ensure that information required to be disclosed in our
filings under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. Our principal executive
and financial officers have evaluated our disclosure controls and procedures as
of the end of the period covered by this report and have determined that such
disclosure controls and procedures are effective.
Subsequent to the evaluation by our principal executive and financial officers,
there were no significant changes in internal controls or other factors that
could significantly affect internal controls, including any corrective actions
with regard to significant deficiencies and material weaknesses.
67
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item relating to our directors and nominees,
and compliance with Section 16(a) of the Securities Act of 1934 is included
under the captions "Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in our Proxy Statement related to the 2004
Annual Meeting of Shareholders and is incorporated herein by reference.
The following are our executive officers as of March 15, 2004:
NAME AGE POSITION(S) HELD
--------------------- ---- ---------------------------------------------------------------------------
William D. Zollars 56 Chairman of the Board, President and Chief Executive Officer of
Yellow Roadway (since November 1999); President of Yellow
Transportation (September 1996 to November 1999); Senior Vice
President of Ryder Integrated Logistics, Inc. (1994-1996).
Donald G. Barger, Jr. 61 Senior Vice President and Chief Financial Officer of Yellow Roadway
(since November 2000); Vice President and Chief Financial
Officer of Hillenbrand Industries, Inc. (1998 to November 2000);
Vice President and Chief Financial Officer of Worthington
Industries (1993-1998).
Daniel J. Churay 41 Senior Vice President, General Counsel and Secretary of Yellow Roadway
(since September 2002); Senior Counsel, Fulbright & Jaworski L.L.P.
(2002); Deputy General Counsel and Assistant Secretary of Baker Hughes
Incorporated (1998-2002).
James D. Staley 53 President and Chief Executive Officer of Roadway LLC (since December
2003); President and Chief Executive Officer of Roadway Corporation
(March 2003 to December 2003); President and Chief Operating Officer of
Roadway Express (March 1998 to March 2003); Vice President - Operations
of Roadway Express (1993 to March 1998).
Robert L. Stull 48 President of Roadway Express, Inc. (since March 2003); Vice President -
New Venture Commerce of Roadway Corporation (May 1999 to March 2003);
Vice President - Western Division of Roadway Express, Inc. (October
1994 to May 1999).
James L. Welch 49 President and Chief Executive Officer of Yellow Transportation (since
June 2000); Central Group Vice President of Yellow Transportation (1998
- 2000).
Steven T. Yamasaki 49 Senior Vice President - Human Resources of Yellow Roadway (since May 2003);
Senior Vice President - Human Resources of ConAgra Foods, Inc. (February
2003 - May 2003); Vice President - Human Resources of Honeywell International
(1997 - February 2003).
Bhadresh Sutaria 44 Vice President - Controller and Chief Accounting Officer of Yellow
Roadway (since January 2004); Vice President, Finance and Strategy of
Mascon (2000 - January 2004); Associate Director, Corporate Planning
and Analysis of Monsanto Corporation (1993 - 2000).
The terms of each Yellow Roadway officer designated above are scheduled to
expire at the Board of Directors' meeting immediately following our Annual
Meeting of Shareholders. The terms of each officer of our subsidiary companies
are scheduled to expire on the date of the next annual meeting of shareholders
of that company or until the officer's successor is elected or otherwise
qualified or until the Board of Directors otherwise removes the officer. No
family relationships exist among any of the executive officers named above.
We have adopted a written Code of Conduct that applies to all of our directors,
officers and employees, including our principal executive officer and senior
financial officers. It is available in the governance section of the investor
relations page of our website located at www.yellowroadway.com.
68
Item 11. Executive Compensation
The information required by this item is included under the caption "Executive
Compensation" in our Proxy Statement related to the 2004 Annual Meeting of
Shareholders and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item relating to security ownership of certain
beneficial owners and management and securities authorized for issuance under
equity compensation plans is included under the captions "Amount and Nature of
Beneficial Ownership" and "Equity Compensation Plan Information" in our Proxy
Statement related to the 2004 Annual Meeting of Shareholders and is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions
None.
69
PART IV
Item 14. Principal Accountant Fees and Services
The information required by this item is included under the caption
"Audit/Ethics Committee Report" in our Proxy Statement related to the 2004
Annual Meeting of Shareholders and is incorporated herein by reference.
Item 15. Exhibits, Financial Statement Schedule, and Reports on Form 8-K
(a) (1) Financial Statements Schedule
Pages
Independent Auditors' Report on
Financial Statement Schedule 76
For the years ended December 31, 2003, 2002 and 2001:
Schedule II - Valuation and Qualifying Accounts 77
Schedules other than those listed are omitted for the reason that
they are not required or are not applicable.
(a) (2) Exhibits
Form 10-K Exhibits
2.1 Agreement and Plan of Merger, dated as of July 8, 2003, by and among
Yellow Corporation, Yankee LLC and Roadway Corporation (incorporated
by reference to Exhibit 2.1 to the Current Report on Form 8-K, as
amended, filed on July 8, 2003, Reg. No. 000-12255). Pursuant to
Item 601(b)(2) of Regulation S-K, certain schedules, exhibits and
similar attachments to this Agreement have not been filed with this
exhibit. The schedules contain various items relating to the assets
of the business being acquired and the representations and
warranties made by the parties to the Agreement. The registrants
agree to furnish supplementally any omitted schedule, exhibit or
similar attachment to the SEC upon request.
3.1 Certificate of Incorporation of the company (incorporated by
reference to Exhibit 3.1 to the Annual Report on Form 10-K for the
year ended December 31, 2002, Reg. No. 000-12255)
3.2 Certificate of Amendment to the Certificate of Incorporation of the
company changing the name of the company to Yellow Roadway
Corporation (incorporated by reference to Exhibit 4.2 to the
Registration Statement on Form S-8, filed December 23, 2003, SEC
File No. 333-111499)
3.3 Bylaws of the company (incorporated by reference to Exhibit 3.3 to
the Registration Statement on Form S-3, filed February 23, 2004, SEC
File No. 333-113021)
4.1 Indenture (including form of note) dated August 8, 2003 among Yellow
Corporation, certain subsidiary guarantors and Deutsche Bank Trust
Company Americas, as trustee, relating to Yellow Corporation's 5.0%
Contingent Convertible Senior Notes due 2023 (incorporated by
reference to Exhibit 4.5 to Registration Statement on Form S-4,
filed on August 19, 2003, Reg. No. 333-108081)
4.2 Registration Rights Agreement dated August 8, 2003 among Yellow
Corporation, certain subsidiary guarantors and Deutsche Bank
Securities Inc., as representative of the initial purchasers
(incorporated by reference to Exhibit 4.6 to Registration Statement
on Form S-4, filed on August 18, 2003, Reg. No. 333-108081)
4.3 Indenture (including form of note) dated November 25, 2003 among
Yellow Corporation, certain subsidiary guarantors and Deutsche Bank
Trust Company Americas, as trustee, relating to Yellow Corporation's
3.375% Contingent Convertible Senior Notes due 2023 (incorporated by
reference to Exhibit 4.7 to Registration Statement on Form S-4,
filed on August 18, 2003, Reg. No. 333-111499)
70
4.4 Registration Rights Agreement dated November 25, 2003 among Yellow
Corporation, certain subsidiary guarantors and Deutsche Bank
Securities Inc., as representative of the initial purchasers
(incorporated by reference to Exhibit 4.8 to Registration Statement
on Form S-4, filed on August 18, 2003, Reg. No. 333-111499)
4.5 Indenture (including form of note) dated November 30, 2001 among
Roadway Corporation (predecessor in interest to Roadway LLC),
certain subsidiary guarantors and SunTrust Bank, as trustee,
relating to Roadway's 8 1/4% Senior Notes due December 1, 2008
(incorporated by reference to Exhibit 4.9 to Registration Statement
on Form S-4, filed on August 18, 2003, Reg. No. 333-111499)
4.6* Supplemental Indenture, dated as of December 11, 2003, among Roadway
LLC, as successor obligor, Yellow Roadway Corporation, as a
Guarantor, and SunTrust Bank, as Trustee, supplementing the
Indenture, dated as of November 30, 2001 for the Roadway Corporation
8 1/4% Senior Notes due December 1, 2008.
10.1 Credit Agreement, dated as of December 11, 2003, among Yellow
Roadway Corporation, certain of its subsidiaries, various lenders,
Bank One, NA, and SunTrust Bank as Co-Syndication Agents; Fleet
National Bank and Wachovia Bank, National Association as
Co-Documentation Agents; Deutsche Bank AG, New York Branch as
Administrative Agent; and Deutsche Bank Securities, Inc. as Sole
Lead Arranger and Sole Book Running Manager. Certain schedules and
exhibits to this Credit Agreement have not been filed with this
exhibit. The schedules and exhibits contain various items related to
the representations and warranties made by the parties to the Credit
Agreement and forms of documents executed or to be executed in
connection with the operation of the Credit Agreement. The
registrant agrees to furnish supplementally any omitted schedule or
exhibit to the SEC upon request. (incorporated by reference to
Exhibit 4.1 to Current Report on Form 8-K, filed on December 11,
2003, Reg. No. 000-12255)
10.2 Master Separation and Distribution Agreement dated as of September
30, 2002, between Yellow Corporation and SCS Transportation, Inc.
(incorporated by reference to Exhibit 10.2 to the Quarterly Report
on Form 10-Q for the quarter ended September 30, 2002, Reg. No.
000-12255)
10.3 Tax Indemnification and Allocation Agreement dated as of September
30, 2002, between Yellow Corporation and SCS Transportation, Inc.
(incorporated by reference to Exhibit 10.3 to the Quarterly Report
on Form 10-Q for the quarter ended September 30, 2002, Reg. No.
000-12255)
10.4 (a) Amendment and Restatement dated July 30, 1999 of the Receivables
Purchase Agreement Dated as of August 2, 1996, among Yellow
Receivables Corporation, Falcon Asset Securitization Corporation,
the financial institutions named therein and The First National Bank
of Chicago, as Agent (incorporated by reference to Exhibit 10 to the
Quarterly Report on Form 10-Q for the quarter ended September 30,
1999, Reg. No. 000-12255)
(b) Omnibus Amendment dated as of December 31, 2002, among Yellow
Transportation, Inc., Yellow Receivables Corporation, Falcon Asset
Securitization Corporation, and Bank One, N.A., as Agent and
Investor (incorporated by reference to Exhibit 10.20 to the Annual
Report on Form 10-K for the year ended December 31, 2002, Reg. No.
000-12255)
(c) Amendments: (1) Amendment No. 1 to Receivables Sale Agreement,
entered into as of July 30, 1999, to that certain Receivables Sale
Agreement, dated as of August 2, 1996 by and between Yellow Freight
System, Inc. and Yellow Receivables Corporation; (2) Amendment No. 1
to Amended and Restated Receivables Purchase Agreement, dated as of
July 28, 2000, to that certain Amended and Restated Receivables
Purchase Agreement, dated as of July 30, 1999, by and among Yellow
Receivables Corporation, the Investors, Falcon Asset Securitization
Corporation and Bank One, NA (formerly known as The First National
Bank of Chicago), as Agent; (3) Amendment to Amended and Restated
Receivables Purchase Agreement, entered into as of May 1, 2001, to
that certain Amended and Restated Receivables Purchase Agreement,
dated as of July 30, 1999, by and among Yellow Receivables
Corporation, Falcon Asset Securitization Corporation and Bank One,
NA (formerly known as The First National Bank of Chicago), as Agent;
(4) Second Amendment to Amended and Restated Receivables Purchase
Agreement, entered into as of January 23, 2002, to that certain
Amended and Restated Receivables Purchase Agreement, dated as of
July 30, 1999, by and among Yellow Receivables Corporation, Falcon
Asset Securitization Corporation and Bank One, NA, as Agent; (5)
Amendment No. 2 to Amended and Restated Receivables Purchase
Agreement, entered into as of April 23, 2002, to that certain
Amended and Restated Receivables Purchase Agreement, dated as of
July 30, 1999, by and among Yellow Receivables Corporation, Falcon
Asset Securitization Corporation and Bank One, NA (formerly known as
The First
71
National Bank of Chicago), as Agent; (6) Waiver and Amendment No. 3
to Amended and Restated Receivables Purchase Agreement, entered into
as of August 1, 2002, to that certain Amended and Restated
Receivables Purchase Agreement, dated as of July 30, 1999, by and
among Yellow Receivables Corporation, Falcon Asset Securitization
Corporation and Bank One, NA (formerly known as The First National
Bank of Chicago), as Agent; (7) Omnibus Amendment, entered into as
of December 31, 2002, to that certain Receivables Sale Agreement,
dated as of August 2, 1996, by and among Yellow Transportation, Inc.
(f/k/a Yellow Freight System, Inc.), Yellow Receivables Corporation,
Falcon Asset Securitization Corporation and Bank One, NA (formerly
known as The First National Bank of Chicago), as Agent; (8)
Amendment No. 4 to Amended and Restated Receivables Purchase
Agreement, entered into as of April 29, 2003, to that certain
Amended and Restated Receivables Purchase Agreement, dated as of
July 30, 1999, by and among Yellow Receivables Corporation, Falcon
Asset Securitization Corporation and Bank One, NA (formerly known as
The First National Bank of Chicago), as Agent (incorporated by
reference to Exhibit 10.1 (as Amendments to Amended and Restated
Receivables Purchase Agreement dated July 30, 1999) to the Quarterly
Report on Form 10-Q for the quarter ended March 31, 2003, Reg. No.
000-12255)
10.4(d)* Amendment No. 5 to Amended and Restated Receivables Purchase
Agreement, entered into as of December 11, 2003, by and among Yellow
Receivables Corporation, Falcon Asset Securitization Corporation and
Bank One, NA, amending the Amended and Restated Receivables Purchase
Agreement, dated as of July 30, 1999.
10.5* Operating lease agreement by and between Roadway Express, Inc. and
ABN AMRO North America, Inc., dated as of March 15, 1996 (and
documents not filed which are substantially identical in all
material respects to previously filed documents: (1) Master Lease
Agreement between Roadway Express, Inc. and ABN AMRO Bank N.V. dated
March 3, 1997. This lease agreement for 3,250 linehaul trailers is
identical in all material respects to the Master Lease Agreement
dated March 15, 1996 and (2) Master Lease Agreement between Roadway
Express, Inc. and ABN AMRO Bank N.V. dated April 1, 1998. This lease
agreement for 3,250 linehaul trailers is identical in all material
respects to the Master Lease Agreement dated March 15, 1996)
10.6* Operating lease agreement between Roadway Express, Inc. and General
Electric Capital Corporation, dated as of July 1, 1998
10.7* Operating lease agreement between Roadway Express, Inc. and ICX
Corporation, dated as of May 10, 1999
10.8* Data Processing and Information Technology Agreement between Roadway
Express, Inc. and Affiliated Computer Services, Inc., dated
September 11, 1998
10.9 Employment Agreement dated December 15, 1999 between Yellow
Corporation and William D. Zollars (incorporated by reference to
Exhibit 10 to the Annual Report on Form 10-K for the year ended
December 31, 1999, Reg. No. 000-12255) and Amendment Number One to
Employment Agreement dated December 15, 1999 between Yellow
Corporation and William D. Zollars (incorporated by reference to
Exhibit 10(a) to the Quarterly Report on Form 10-Q for the quarter
ended March 31, 2000, Reg. No. 000-12255)
10.10 Employment Agreement, dated as of October 10, 2003, by and between
Yankee LLC and James D. Staley (incorporated by reference to Exhibit
10.1 to Amendment No. 3 to Registration Statement on Form S-4, filed
on October 17, 2003, Reg. No. 333-108081)
10.11 Form of Executive Severance Agreement between Yellow Corporation and
its executive officers (incorporated by reference to Exhibit 10.1 to
the Annual Report on Form 10-K for the year ended December 31, 2002,
Reg. No. 000-12255)
10.12 2002 Stock Option and Share Award Plan (incorporated by reference to
Exhibit 4 to the Registration Statement on Form S-8, filed on May
15, 2002, SEC File No. 333-88268)
10.13 1999 Stock Option Plan (incorporated by reference to Exhibit 4 to
the Registration Statement on Form S-8, filed on November 9, 2000,
SEC File No. 333-49620)
10.14 1997 Stock Option Plan (incorporated by reference to Exhibit 4 to
the Registration Statement on Form S-8, filed on July 8, 1998, SEC
File No. 333-59255)
72
10.15 1996 Stock Option Plan (incorporated by reference to Exhibit 10.6 to
the Annual Report on Form 10-K for the year ended December 31, 2002,
Reg. No. 000-12255)
10.16 1992 Stock Option Plan (incorporated by reference to Exhibit 10.7 to
the Annual Report on Form 10-K for the year ended December 31, 2002,
Reg. No. 000-12255)
10.17 Form of Stock Option Agreement (incorporated by reference to Exhibit
10.8 to the Annual Report on Form 10-K for the year ended December
31, 2002, Reg. No. 000-12255)
10.18 Form of Restricted Stock Award Agreement pursuant to 1992 Stock
Option Plan with Non-Compete Covenant between Yellow Corporation and
each of William D. Zollars, Donald G. Barger, Jr., Gregory A. Reid,
James D. Ritchie and James L. Welch (incorporated by reference to
Exhibit 10.9 to the Annual Report on Form 10-K for the year ended
December 31, 2002, Reg. No. 000-12255)
10.19 Form of Option Agreement pursuant to Directors' Stock Compensation
Plan for January 2003 grants (incorporated by reference to Exhibit
10.15 to the Annual Report on Form 10-K for the year ended December
31, 2002, Reg. No. 000-12255)
10.20 Form of Option Agreement pursuant to Directors' Stock Compensation
Plan for grants prior to January 2003 (incorporated by reference to
Exhibit 10.16 to the Annual Report on Form 10-K for the year ended
December 31, 2002, Reg. No. 000-12255)
10.21* Form of Yellow Roadway Corporation Share Award Agreement
10.22 Supplemental Retirement Income Agreement dated July 20, 2001,
between Yellow Corporation and Donald G. Barger, Jr. (incorporated
by reference to Exhibit 10 to the Quarterly Report on Form 10-Q for
the quarter ended June 30, 2001, Reg. No. 000-12255)
10.23 Executive Deferred Compensation Plan (incorporated by reference to
Exhibit 10.11 to the Annual Report on Form 10-K for the year ended
December 31, 2002, Reg. No. 000-12255)
10.24 Amended Directors' Stock Compensation Plan (incorporated by
reference to Exhibit 4.1 to the Registration Statement on Form S-8,
filed on November 9, 2000, SEC File No. 333-49618)
10.25* Roadway Corporation 401(a)(17) Benefit Plan (Effective January 1,
2002), as amended by First Amendment to the Roadway Corporation
401(a)(17) Benefit Plan and Second Amendment to the Roadway
Corporation 401(a)(17) Benefit Plan
10.26* Roadway Corporation Excess Benefit Plan (Effective as of January 1,
2002), as amended by First Amendment to the Roadway Corporation
Excess Benefit Plan and Second Amendment to the Roadway Corporation
Excess Benefit Plan
10.27* Roadway LLC Pension Plan, amended and restated as of January 1,
2004
10.28* Yellow Corporation Pension Plan, amended and restated as of January
1, 2004
16.1 Letter from Arthur Andersen LLP dated May 17, 2002, regarding change
in certifying accountant (incorporated by reference to Exhibit 16 to
the Current Report on Form 8-K for the event dated as of May 17,
2002)
21.1 Subsidiaries of the company
23.1* Consent of KMPG LLP
23.2* Consent of Ernst & Young LLP
31.1* Certification of William Zollars pursuant to Exchange Act Rules
13a-14 and 15d-14, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
73
31.2* Certification of Donald G. Barger, Jr. pursuant to Exchange Act
Rules 13a-14 and 15d-14, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1* Certification of Williams Zollars pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
32.2* Certification of Donald G. Barger, Jr. pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
99.1 Roadway Corporation and Subsidiaries Audited Consolidated Financial
Statements for the Period January 1 to December 11, 2003 and the
Years Ended December 31, 2002 and 2001 (incorporated by reference to
Exhibit 99.1 to the Form 8-K filed on February 19, 2004 and
Amendment No. 1 to Form 8-K filed on March 4, 2004).
99.2* Roadway LLC and Subsidiaries Audited Consolidated Financial
Statements for the Period December 12 to December 31, 2003
99.3* Roadway Express, Inc, and Subsidiaries Audited Consolidated
Financial Statements for the Period January 1 to December 11, 2003
and the Years Ended December 31, 2002 and 2001
99.4* Roadway Express, Inc. and Subsidiaries Audited Consolidated
Financial Statements for the Period December 12 to December 31, 2003
99.5* Roadway Next Day Corporation Audited Consolidated Financial
Statements for the Period January 1 to December 11, 2003, the Year
ended December 31, 2002, the One Month Period ended December 31,
2001 (Successor Periods) and Eleven Month Period Ended November 30,
2001 (Predecessor Periods)
99.6* Roadway Next Day Corporation Audited Consolidated Financial
Statements for the Period December 12 to December 31, 2003
- ----------
* Indicates documents filed herewith.
(b) Reports on Form 8-K
On October 1, 2003, a Form 8-K was furnished under Item 9, Regulation FD
Disclosure, which announced via a press release that we would host an
analyst meeting on Friday, October 3, 2003.
On October 20, 2003, a Form 8-K was furnished under Item 9, Regulation FD
Disclosure, reporting the issuance of a press release regarding the
certification of responses by Yellow and Roadway Corporation to the U.S.
Department of Justice's second request for additional information.
On October 21, 2003, a Form 8-K was filed under Item 5, Other Events and
Item 7, Financial Statements, Pro Forma Financial Information and
Exhibits, and furnished under Item 9, Regulation FD Disclosure, announcing
the completion of the private offering of $250 million in contingent
convertible senior notes. We made available in this Form 8-K the
consolidated financial statements of Roadway Corporation for the years
ended 2002, 2001 and 2000 and for the first and second quarters of 2003;
the unaudited condensed combined pro forma balance sheet as of June 30,
2003, pro forma statements of operations for the year ended December 31,
2002 and the six months ended June 30, 2002, the pro forma statement of
cash flows for the six months ended June 30, 2003 and the notes to the
unaudited condensed combined pro forma financial statements; and the
consolidated financial statements of Yellow Corporation and its
subsidiaries for the years ended December 31, 2002, 2001 and 2002 and for
the three months and six months ended June 30, 2003 and 2002.
On October 21, 2003, a Form 8-K/A was filed under Item 7, Financial
Statements, Pro Forma Financial Information and Exhibits, to re-file
Exhibit 23.1, the Consent of Ernst & Young LLP, to include certain dates
that were inadvertently omitted from the original filing.
74
On October 24, 2003, a Form 8-K was furnished to the SEC under Item 12,
Results of Operations and Financial Condition, in which we made available
our results of operations and financial condition for the quarter ending
September 30, 2003 by means of a press release.
On October 24, 2003, a Form 8-K was furnished to the SEC under Item 9,
Regulation FD Disclosure, in which we corrected a statement made during
our third quarter conference call regarding the general rate increase.
On November 18, 2003, a Form 8-K was filed under Item 5, Other Events, to
announce via a press release the expiration of the Hart-Scott-Rodino
waiting period related to the pending acquisition of Roadway Corporation.
On November 19, 2003, a Form 8-K was filed under Item 5, Other Events and
Required FD Disclosure, to announce that Yellow Roadway was seeking to
raise, subject to market and other conditions, approximately $130 million
through a private offering of contingent convertible senior notes. Certain
pro forma financial information related to the merger was provided in
Exhibit 99.2 pursuant to Regulation FD.
On November 20, 2003, a Form 8-K was filed under Item 5, Other Events and
Required FD Disclosure, to announce via a press release that our
previously announced private offering of $130 million of contingent
convertible senior notes due 2023 had been priced at an annual interest
rate of 3.375%. These notes are convertible into shares of Yellow Roadway
common stock at a conversion price of $46.00 per share upon the occurrence
of certain events.
On November 21, 2003, a Form 8-K was filed under Item 5, Other Events and
Required FD Disclosure, to announce via a press release that we would
issue an additional $20 million of the 3.375% Contingent Convertible
Senior Notes due 2023 pursuant to the exercise of the initial purchasers'
overallotment option.
On November 25, 2003, a Form 8-K was filed under Item 5, Other Events and
Required FD Disclosure, to announce via a press release the cash election
deadline related to the pending acquisition of Roadway by Yellow.
On December 3, 2003, a Form 8-K was furnished under Item 9, Regulation FD
Disclosure, to announce via a press release a meeting for investors and
analysts to be held on December 10, 2003.
On December 5, 2003, a Form 8-K was filed under Item 5, Other Events and
Required FD Disclosure, to announce via a press release the exchange ratio
that would be used to calculate the merger consideration in the
acquisition of Roadway by Yellow.
On December 9, 2003, a Form 8-K was filed under Item 5, Other Events and
Required FD Disclosure, to announce via a press release the results of the
company's special meeting of shareholders held to approve the issuance of
shares and name change related to the acquisition of Roadway by Yellow.
On December 10, 2003, a Form 8-K was furnished under Item 9, Regulation FD
Disclosure, to make available a slideshow presentation used at a meeting
for investors and analysts held on December 10, 2003.
On December 11, 2003, a Form 8-K was furnished under Item 9, Regulation FD
Disclosure, to announce via a press release the completion of our
acquisition of Roadway Corporation.
On December 15, 2003, a Form 8-K was furnished under Item 9, Regulation FD
Disclosure, to announce via a press release the results of the cash
election process related to the acquisition of Roadway Corporation by
Yellow Corporation, which was completed on December 11, 2003.
On December 18, 2003, a Form 8-K was filed under Item 2, Acquisition or
Disposition of Assets and Item 5, Other Events. Under Item 2, the Form 8-K
details changes resulting from the acquisition, including the name change
to Yellow Roadway Corporation, the addition of three new board members,
the placement of James Staley as President and CEO of the operating
subsidiary Roadway LLC, and a breakout of the purchase price into cash,
stock and debt assumption. Under Item 5, the Form 8-K discusses the
replacement of the existing credit facility with a new credit facility.
75
Report of Independent Auditors on Financial Statement Schedule
To the Board of Directors and Shareholders of Yellow Roadway Corporation:
Under date of February 20, 2004, we reported on the consolidated balance sheets
of Yellow Roadway Corporation and subsidiaries as of December 31, 2003 and 2002,
and the related consolidated statements of operations, cash flows, shareholders'
equity, and comprehensive income for each of the years in the three-year period
ended December 31, 2003, as contained in the 2003 Annual Report on Form 10-K. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule of valuation and qualifying accounts (Schedule II). This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
- ------------------
Kansas City, Missouri
February 20, 2004
76
Schedule II
Yellow Roadway Corporation and Subsidiaries
Valuation and Qualifying Accounts
For the Years Ended December 31, 2003, 2002 and 2001
COL. A COL. B COL. C COL. D COL. E
----------------------------- ---------- -------------------- ---------- --------
ADDITIONS
--------------------
-1- -2-
Balance, Charged Charged Balance,
Beginning To Costs/ To Other End Of
Description Of Year Expenses Acccounts Deductions Year
(a) (b) (d)
(in thousands)
Year ended December 31, 2003:
Deducted from asset account -
Allowance for uncollectible
accounts $ 15,731 $ 14,713 $ 6,241(c) $ (15,846) $ 20,839
========= ========= ========= ========= ========
Added to liability account -
Claims and insurance accruals $ 115,214 $ 114,585 $ 170,422(c) $(100,939) $299,282
========= ========= ========= ========= ========
Year ended December 31, 2002:
Deducted from asset account -
Allowance for uncollectible
accounts $ 7,695 $ 25,834 $ 189 $ (17,987) $ 15,731
========= ========= ========= ========= ========
Added to liability account -
Claims and insurance
accruals $ 110,298 $ 95,947 $ -- $ (91,031) $115,214
========= ========= ========= ========= ========
Year ended December 31, 2001:
Deducted from asset account -
Allowance for uncollectible
accounts $ 10,591 $ 14,744 $ 332 $ (17,972) $ 7,695
========= ========= ========= ========= ========
Added to liability account -
Claims and insurance
accruals $ 119,479 $ 84,797 $ -- $ (93,978) $110,298
========= ========= ========= ========= ========
(a) All balances shown have been reclassified to reflect valuation and
qualifying accounts of continuing operations due to the spin-off of SCST
on September 30, 2002.
(b) Regarding the allowance for uncollectible accounts, amounts primarily
relate to uncollectible accounts written off, net of recoveries. For the
claims and insurance accruals, amounts primarily relate to payments of
claims and insurance.
(c) These amounts primarily represent the beginning balances for Roadway LLC
as of December 11, 2003.
(d) 2003 balances include the results of Roadway LLC from the date of
acquisition (December 11) through December 31, 2003.
77
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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 Roadway Corporation
BY: /s/ William D. Zollars
----------------------
William D. Zollars
Chairman of the Board, President
and Chief Executive Officer
March 15, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Donald G. Barger, Jr. Senior Vice President March 15, 2004
--------------------------- and Chief Financial Officer
Donald G. Barger, Jr.
/s/ Cassandra C. Carr Director March 15, 2004
---------------------------
Cassandra C. Carr
/s/ Howard M. Dean Director March 15, 2004
---------------------------
Howard M. Dean
/s/ Frank P. Doyle Director March 15, 2004
---------------------------
Frank P. Doyle
/s/ John F. Fiedler Director March 15, 2004
---------------------------
John F. Fiedler
/s/ Dennis E. Foster Director March 15, 2004
---------------------------
Dennis E. Foster
/s/ John C. McKelvey Director March 15, 2004
---------------------------
John C. McKelvey
/s/ Phillip J. Meek Director March 15, 2004
---------------------------
Phillip J. Meek
/s/ William L. Trubeck Director March 15, 2004
---------------------------
William L. Trubeck
/s/ Carl W. Vogt Director March 15, 2004
---------------------------
Carl W. Vogt
78