UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------------- -----------------------
Commission file number 0-12255
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YELLOW ROADWAY CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 48-0948788
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10990 Roe Avenue, Overland Park, Kansas 66211
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(Address of principal executive offices) (Zip Code)
(913) 696-6100
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(Registrant's telephone number, including area code)
No Changes
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<Table>
<Caption>
Class Outstanding at April 30, 2004
----- -----------------------------
Common Stock, $1 Par Value Per Share 48,013,855 shares
</Table>
INDEX
<Table>
<Caption>
Item Page
- ---- ----
PART I
1. Financial Statements
Consolidated Balance Sheets -
March 31, 2004 and December 31, 2003 3
Statements of Consolidated Operations -
Three Months Ended March 31, 2004 and 2003 4
Statements of Consolidated Cash Flows -
Three Months Ended March 31, 2004 and 2003 5
Notes to Consolidated Financial Statements 6
2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18
3. Quantitative and Qualitative Disclosures About Market Risk 25
4. Controls and Procedures 26
PART II
1. Legal Proceedings 27
2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 27
3. Defaults Upon Senior Securities 27
4. Submission of Matters to a Vote of Security Holders 27
5. Other Information 27
6. Exhibits and Reports on Form 8-K 27
Signatures 29
</Table>
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
Yellow Roadway Corporation and Subsidiaries
(Amounts in thousands except per share data)
(Unaudited)
<Table>
<Caption>
March 31, December 31,
2004 2003
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 20,688 $ 75,166
Accounts receivable, net 734,263 699,142
Prepaid expenses and other 107,249 110,128
------------ ------------
Total current assets 862,200 884,436
------------ ------------
Property and Equipment:
Cost 2,593,109 2,538,614
Less - accumulated depreciation 1,163,099 1,135,346
------------ ------------
Net property and equipment 1,430,010 1,403,268
------------ ------------
Goodwill 618,532 617,313
Intangibles, net 466,903 467,114
Other assets 92,546 91,098
------------ ------------
TOTAL ASSETS $ 3,470,191 $ 3,463,229
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 209,316 $ 260,175
Wages, vacations and employees' benefits 394,511 351,287
Other current and accrued liabilities 231,787 178,478
Asset backed securitization ("ABS") borrowings 13,000 71,500
Current maturities of long-term debt 4,506 1,757
------------ ------------
Total current liabilities 853,120 863,197
------------ ------------
Other Liabilities:
Long-term debt, less current portion 810,104 836,082
Deferred income taxes, net 296,406 298,256
Accrued pension and postretirement 275,875 256,187
Claims and other liabilities 208,583 207,422
------------ ------------
Total other liabilities 1,590,968 1,597,947
------------ ------------
Shareholders' Equity:
Common stock, $1 par value per share 50,352 50,146
Capital surplus 660,335 653,739
Retained earnings 384,313 366,157
Accumulated other comprehensive loss (23,106) (23,167)
Unamortized restricted stock awards (4,392) (567)
Treasury stock, at cost (2,238 and 2,359 shares) (41,399) (44,223)
------------ ------------
Total shareholders' equity 1,026,103 1,002,085
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,470,191 $ 3,463,229
============ ============
</Table>
The accompanying notes are an integral part of these statements.
3
STATEMENTS OF CONSOLIDATED OPERATIONS
Yellow Roadway Corporation and Subsidiaries
For the Three Months Ended March 31
(Amounts in thousands except per share data)
(Unaudited)
<Table>
<Caption>
2004 2003
----------- -----------
OPERATING REVENUE $ 1,552,135 $ 681,093
----------- -----------
OPERATING EXPENSES:
Salaries, wages and employees' benefits 993,550 438,748
Operating expenses and supplies 238,357 109,943
Operating taxes and licenses 40,565 19,767
Claims and insurance 30,013 12,724
Depreciation and amortization 40,606 20,268
Purchased transportation 167,264 67,873
Losses on property disposals, net 462 11
----------- -----------
Total operating expenses 1,510,817 669,334
----------- -----------
OPERATING INCOME 41,318 11,759
----------- -----------
NONOPERATING (INCOME) EXPENSES:
Interest expense 11,910 2,646
Other (120) (93)
----------- -----------
Nonoperating expenses, net 11,790 2,553
----------- -----------
INCOME BEFORE INCOME TAXES 29,528 9,206
Income tax provision 11,372 3,580
----------- -----------
NET INCOME $ 18,156 $ 5,626
=========== ===========
AVERAGE COMMON SHARES OUTSTANDING - BASIC 47,874 29,583
AVERAGE COMMON SHARES OUTSTANDING - DILUTED 48,246 29,818
BASIC EARNINGS PER SHARE $ 0.38 $ 0.19
DILUTED EARNINGS PER SHARE $ 0.38 $ 0.19
</Table>
The accompanying notes are an integral part of these statements.
4
STATEMENTS OF CONSOLIDATED CASH FLOWS
Yellow Roadway Corporation and Subsidiaries
For the Three Months Ended March 31
(Amounts in thousands)
(Unaudited)
<Table>
<Caption>
2004 2003
--------- ---------
OPERATING ACTIVITIES:
Net income $ 18,156 $ 5,626
Noncash items included in net income:
Depreciation and amortization 40,606 20,268
Losses on property disposals, net 462 11
Deferred income tax provision, net (3,602) --
Changes in assets and liabilities, net:
Accounts receivable (25,644) 3,013
Accounts payable (60,204) (37,076)
Other working capital items 111,285 23,594
Claims and other 10,395 5,183
Other, net (1,725) (564)
--------- ---------
NET CASH FROM OPERATING ACTIVITIES 89,729 20,055
--------- ---------
INVESTING ACTIVITIES:
Acquisition of property and equipment (57,931) (26,141)
Proceeds from disposal of property and equipment 350 691
Acquisition of companies (7,881) --
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (65,462) (25,450)
--------- ---------
FINANCING ACTIVITIES:
ABS borrowings, net (58,500) --
Repayment of long-term debt (22,014) (21)
Proceeds from exercise of stock options 1,769 38
--------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (78,745) 17
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (54,478) (5,378)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 75,166 28,714
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 20,688 $ 23,336
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid (refunds), net $ (15,146) $ 4,832
Interest paid 8,791 1,510
</Table>
The accompanying notes are an integral part of these statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Yellow Roadway Corporation and Subsidiaries
(Unaudited)
1. DESCRIPTION OF BUSINESS
Yellow Roadway Corporation (also referred to as "Yellow Roadway," "we"
or "our"), one of the largest transportation service providers in the
world, is a holding company that through wholly owned operating
subsidiaries offers its customers a wide range of 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:
o 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.
o 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. located in Canada that
specializes in shipments into, across and out of Canada.
o 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
regional, next-day ground services through a network of
facilities located in the Northeastern United States ("U.S."),
Quebec, Canada and Puerto Rico.
o 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, we successfully closed the acquisition of Roadway
Corporation ("Roadway"). Roadway became Roadway LLC ("Roadway Group")
and a subsidiary of Yellow Roadway. Consideration for the acquisition
included $494 million in cash and 18.0 million shares of Yellow Roadway
common stock for a total purchase price of approximately $1.1 billion.
The Roadway Group has two operating segments, Roadway Express and New
Penn.
2. PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of Yellow Roadway Corporation and its wholly owned subsidiaries. We
have prepared the consolidated financial statements, without audit by
independent public accountants, pursuant to the rules and regulations
of the Securities and Exchange Commission ("SEC"). In management's
opinion, all normal recurring adjustments necessary for a fair
statement of the financial position, results of operations and cash
flows for the interim periods included herein have been made. Certain
information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted from these statements
pursuant to SEC rules and regulations. Accordingly, the accompanying
consolidated financial statements should be read in conjunction with
the consolidated financial statements included in our Annual Report on
Form 10-K for the year ended December 31, 2003.
3. ACQUISITIONS
In accordance with Statement of Financial Accounting Standard ("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'
6
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, we closed the acquisition of Roadway.
Consideration for the acquisition included $494 million in cash and
18.0 million shares of Yellow Roadway common stock for a total purchase
price of approximately $1.1 billion. We allocated $597.0 million of the
purchase price to goodwill and $461.3 million to intangible assets.
Refer to our goodwill and intangibles note for further details.
In accordance with Statement No. 141, we accounted for the acquisition
under purchase accounting. As a result, our Statements of Consolidated
Operations and Statements of Consolidated Cash Flows include results of
Roadway Express and New Penn from the date of acquisition. Our first
quarter 2003 results do not reflect the operations of the Roadway
Group.
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 on January 1, 2003. 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 date
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 three months ended
March 31, 2003:
<Table>
<Caption>
(in millions except per share data)
----------------------------------------------------------------------
Operating revenue $ 1,441.4
Operating income 34.4
Income from continuing operations 12.8
Net income 12.9
Diluted earnings per share:
Income from continuing operations 0.27
Net income 0.27
----------------------------------------------------------------------
</Table>
GPS LOGISTICS
In August 2003, a subsidiary of Meridian IQ, Yellow GPS, LLC ("Yellow
GPS"), acquired certain U.S. assets of GPS Logistics, a global
logistics provider. 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. No earnout payments were made
in the first quarter of 2004. In addition, Yellow GPS received a call
option to purchase the stock of each of GPS Logistics (EU) Ltd., the
related United Kingdom ("U.K.") operations of GPS Logistics, and GPS
Logistics Group Ltd., the related Asian operations of GPS Logistics.
In February 2004, Yellow GPS exercised and closed its option to
purchase GPS Logistics (EU) Ltd. Yellow GPS made a payment of $7.6
million, which is subject to upward and downward adjustments based on
the financial performance of the U.K. business. The initial payment and
acquisition expenses of $0.3 million were allocated as follows: $3.3
million to goodwill, $3.2 million to amortizable intangible assets, and
$1.4 million to miscellaneous assets and liabilities. The results of
GPS Logistics (EU) Ltd. have been included in our financial statements
since the date of acquisition. The pro forma effect of this acquisition
is not material to our results of operations. If Yellow GPS does not
exercise the Asian option, it will be required to pay a deferred option
price to the shareholders of GPS Logistics Group Ltd.
4. GOODWILL AND INTANGIBLES
The following table shows the amount of goodwill attributable to our
operating segments with goodwill balances and changes therein:
7
<Table>
<Caption>
Foreign
Currency
Translation
December 31, Adjustments/ March 31,
(in millions) 2003 Acquisitions Reclasses 2004
- -------------------------------------------------------------------------
Roadway Express $ 474.5 $ -- $ 3.4 $ 477.9
New Penn 122.3 -- (5.5) 116.8
Meridian IQ 20.5 3.3 -- 23.8
- -------------------------------------------------------------------------
Goodwill $ 617.3 $ 3.3 $ (2.1) $ 618.5
- -------------------------------------------------------------------------
</Table>
As the Roadway acquisition occurred in December 2003, the allocation of
the purchase price included in the December 31, 2003 and the March 31,
2004 Consolidated Balance Sheets was 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 certain other refinements. As of March 31,
2004 refinements to the purchase price allocation have not been
significant. We expect substantially all of the above refinements will
be completed by the end of second quarter 2004.
The components of amortizable intangible assets are as follows:
<Table>
<Caption>
March 31, 2004 December 31, 2003
------------------------ -------------------------
Weighted
Average Gross Gross
Life Carrying Accumulated Carrying Accumulated
(in millions) (years) Amount Amortization Amount Amortization
- ----------------------------------------------------------------------------------------------------------
Customer related 17 $ 120.0 $ 3.3 $ 117.4 $ 1.3
Marketing related 6 0.9 0.2 0.7 0.2
Technology based 3 17.5 2.0 17.1 0.6
- ----------------------------------------------------------------------------------------------------------
Intangible assets $ 138.4 $ 5.5 $ 135.2 $ 2.1
- ----------------------------------------------------------------------------------------------------------
</Table>
Total marketing related intangible assets with indefinite lives were
$334.0 million at March 31, 2004 and $334.1 million at December 31,
2003. These intangible assets are not subject to amortization. The
change between periods related to foreign currency translation
adjustments.
5. EMPLOYEE BENEFITS
COMPONENTS OF NET PERIODIC PENSION COST
In December 2003, the Financial Accounting Standards Board revised SFAS
No. 132, Employers' Disclosures about Pensions and Other Postretirement
Benefits ("SFAS 132R"). SFAS 132R requires the disclosure of the
components of the net periodic pension cost recognized during interim
periods. The following table sets forth the components of our pension
costs for the three months ended March 31, 2004 and 2003, and other
postretirement costs for the three months ended March 31, 2004:
<Table>
<Caption>
Other
Postretirement
Pension Costs Costs
-------------------- --------------
(in millions) 2004 2003 2004 (a)
- -----------------------------------------------------------------------------
Service cost $ 10.2 $ 4.0 $ 0.5
Interest cost 14.5 6.6 0.8
Expected return on plan assets (13.3) (6.7) --
Amortization of net transition asset -- (0.3) --
Amortization of prior service cost 0.3 0.4 --
Amortization of net loss 1.8 0.5 --
- -----------------------------------------------------------------------------
Net periodic pension cost $ 13.5 $ 4.5 $ 1.3
- -----------------------------------------------------------------------------
</Table>
(a) Prior to the acquisition of Roadway, we did not provide these benefits;
therefore other postretirement costs are not presented for first quarter
2003.
8
EMPLOYER CONTRIBUTIONS
In our Annual Report on Form 10-K for the year ended December 31, 2003,
we disclosed that we expect to contribute approximately $45 million to
our pension plans in 2004, and this expectation has not changed. As of
March 31, 2004, our contributions to the pension plans have not been
significant.
6. 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 in our Annual Report on Form
10-K for the year ended December 31, 2003. We charge management fees
and other corporate services to our segments based on the direct
benefits received or as a percentage of revenue. Corporate operating
losses represent operating expenses of the holding company, including
salaries, wages and benefits, along with incentive compensation and
professional services, that have not been allocated to the operating
segments. Corporate identifiable assets primarily refer to cash, cash
equivalents and deferred debt issuance costs. 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.
The following table summarizes our operations by business segment:
<Table>
<Caption>
Yellow Roadway New Meridian Corporate/
(in millions) Transportation Express Penn IQ Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------------------------
As of March 31, 2004
Identifiable assets $ 993.9 $ 1,989.1 $ 337.5 $ 102.6 $ 47.1 $ 3,470.2
As of December 31, 2003
Identifiable assets 986.5 2,002.4 340.7 79.9 53.7 3,463.2
Three months ended March 31, 2004
External revenue 733.8 717.1 56.1 45.1 - 1,552.1
Intersegment revenue 0.6 - - 0.6 (1.2) -
Operating income (loss) 26.4 15.0 5.8 0.6 (6.5) 41.3
Adjustments to operating income(a) 0.5 - - - - 0.5
Adjusted operating income (loss) 26.9 15.0 5.8 0.6 (6.5) 41.8
Three months ended March 31, 2003(b)
External revenue 659.5 - - 21.6 - 681.1
Intersegment revenue 0.6 - - 0.5 (1.1) -
Operating income (loss) 19.5 - - (0.9) (6.8) 11.8
Adjustments to operating income(a) - - - - - -
Adjusted operating income (loss) 19.5 - - (0.9) (6.8) 11.8
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
(a) Management excludes these items when evaluating operating income and
segment performance to better evaluate the results of our core operations.
In the periods presented, adjustments consisted of losses on property
disposals.
(b) As of March 31, 2003, Roadway Express and New Penn had not been acquired;
therefore segment information is not reported.
7. STOCK-BASED COMPENSATION
Yellow Roadway has various stock-based employee compensation plans,
which are described more fully in our Annual Report on Form 10-K for
the year ended December 31, 2003. Yellow Roadway accounts for stock
options issued under those plans under the recognition and measurement
principles of Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees. We do not reflect compensation costs in
net income, as all options granted under those plans had an exercise
price equal to the market value of the underlying common stock on the
date of grant.
9
We estimated the fair value per option for each option granted in the
periods presented using the Black-Scholes option pricing model with the
following weighted average assumptions for the three months ended March
31:
<Table>
<Caption>
2004 2003
- -------------------------------------------------------------------------------------------------------
Actual options granted 28,000 14,000
Dividend yield -% -%
Expected volatility 45.2% 47.2%
Risk-free interest rate 2.6% 2.0%
Expected option life (years) 3.6 3.0
Fair value per option $ 12.61 $ 8.88
- -------------------------------------------------------------------------------------------------------
</Table>
The following table illustrates the effect on net income and earnings per share
if Yellow Roadway had applied the fair value recognition provisions of SFAS No.
123, Accounting for Stock-Based Compensation, for the three months ended March
31:
<Table>
<Caption>
(in millions except per share data) 2004 2003
- --------------------------------------------------------------------------------------------------------
Net income, as reported $ 18.2 $ 5.6
Less: Total stock-based employee compensation expense
determined under fair value based method for all awards, net of
related tax effects 0.5 0.5
- --------------------------------------------------------------------------------------------------------
Pro forma net income $ 17.7 $ 5.1
- --------------------------------------------------------------------------------------------------------
Basic earnings per share:
Net income - as reported $ 0.38 $ 0.19
Net income - pro forma 0.37 0.17
Diluted earnings per share:
Net income - as reported 0.38 0.19
Net income - pro forma 0.37 0.17
- --------------------------------------------------------------------------------------------------------
</Table>
In the first quarter of 2004, Yellow Roadway issued 27,647 shares of
restricted stock from the 2002 stock option plan at $31.59 per share.
These shares will vest ratably over the next three years. We also
issued 86,063 performance share unit awards to certain executive
officers under the long-term incentive plan implemented in 2002. 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. None of these shares or performance share units are
reflected in the fair value or pro forma results above.
8. COMPREHENSIVE INCOME
Our comprehensive income for the periods presented includes net income
and foreign currency translation adjustments. The three months ended
March 31, 2003 also included changes in the fair value of an interest
rate swap. Comprehensive income for the three months ended March 31
follows:
<Table>
<Caption>
(in millions) 2004 2003
- -------------------------------------------------------------------------------------------------------
Net income $ 18.2 $ 5.6
Changes in foreign currency translation adjustments - 0.6
Changes in the fair value of an interest rate swap - 0.3
- -------------------------------------------------------------------------------------------------------
Comprehensive income $ 18.2 $ 6.5
- -------------------------------------------------------------------------------------------------------
</Table>
9. RENTAL EXPENSES
Yellow Roadway incurs rental expenses under noncancelable lease
agreements for certain buildings and operating equipment. Rental
expense is charged to "operating expenses and supplies" on the
Statements of Consolidated Operations. The following table represents
the actual rental expense, as reflected in operating income, incurred
for the three months ended March 31:
<Table>
<Caption>
(in millions) 2004 2003
- -------------------------------------------------------------------------------------------------------
Rental expense $ 23.5 $ 9.6
- -------------------------------------------------------------------------------------------------------
</Table>
10
10. MULTI-EMPLOYER PENSION PLANS
Yellow Transportation, Roadway Express and New Penn contribute to
approximately 90 separate 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.
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.
11. GUARANTEES OF THE CONTINGENT CONVERTIBLE SENIOR NOTES
In August 2003, Yellow Roadway Corporation issued 5.0 percent
contingent convertible senior notes due 2023. In November 2003, we
issued 3.375 percent contingent convertible senior notes due 2023 (the
August and November issuances, collectively, may also be known as the
"contingent convertible senior notes"). 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, Inc., 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 March 31, 2004 and December 31, 2003 with respect to
the financial position and for the three months ended March 31, 2004
and 2003 for results of operations and cash flows of Yellow Roadway
Corporation and its subsidiaries. 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 those subsidiaries governed
by foreign laws and Yellow Receivables Corporation and Roadway Funding,
Inc., the special-purpose entities that manage or managed our asset
backed securitization ("ABS") agreements.
11
Condensed Consolidating Balance Sheets
<Table>
<Caption>
Non-
March 31, 2004 Guarantor Guarantor
(in millions) Parent Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
Cash and cash equivalents $ 1 $ 3 $ 17 $ - $ 21
Intercompany advances receivable 355 - - (355) -
Accounts receivable, net 3 316 415 - 734
Prepaid expenses and other 4 94 9 - 107
-------- ------------ ------------ ------------ ------------
Total current assets 363 413 441 (355) 862
Property and equipment at cost - 2,485 108 - 2,593
Less - accumulated depreciation - 1,153 10 - 1,163
-------- ------------ ------------ ------------ ------------
Net property and equipment - 1,332 98 - 1,430
Investment in subsidiaries 1,179 116 19 (1,314) -
Receivable from affiliate 29 150 - (179) -
Goodwill, intangibles and other assets 39 884 255 - 1,178
-------- ------------ ------------ ----------- ------------
Total assets $ 1,610 $ 2,895 $ 813 $ (1,848) $ 3,470
======== ============ ============ ============ ============
Intercompany advances payable $ - $ 87 $ 268 $ (355) $ -
Accounts payable 3 186 20 - 209
Wages, vacations and employees' benefits 8 368 19 - 395
Other current and accrued liabilities 11 211 10 - 232
ABS borrowings - - 13 - 13
Current maturities of long-term debt 4 - - - 4
-------- ------------ ------------ ------------ ------------
Total current liabilities 26 852 330 (355) 853
Payable to affiliate - 24 155 (179) -
Long-term debt, less current portion 549 261 - - 810
Deferred income taxes, net (12) 261 47 - 296
Claims and other liabilities 17 454 14 - 485
Shareholders' equity 1,030 1,043 267 (1,314) 1,026
-------- ------------ ------------ ------------ ------------
Total liabilities and shareholders' equity $ 1,610 $ 2,895 $ 813 $ (1,848) $ 3,470
======== ============ ============ ============ ============
</Table>
<Table>
<Caption>
Non-
December 31, 2003 Guarantor Guarantor
(in millions) Parent Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
Cash and cash equivalents $ 19 $ 20 $ 36 $ - $ 75
Intercompany advances receivable 180 4 - (184) -
Accounts receivable, net 3 351 345 - 699
Prepaid expenses and other 5 97 8 - 110
-------- ------------ ------------ ------------ ------------
Total current assets 207 472 389 (184) 884
Property and equipment at cost - 2,443 96 - 2,539
Less - accumulated depreciation - 1,130 6 - 1,136
-------- ------------ ------------ ------------ ------------
Net property and equipment - 1,313 90 - 1,403
Investment in subsidiaries 1,374 131 - (1,505) -
Receivable from affiliate - 150 - (150) -
Goodwill, intangibles and other assets 39 884 253 - 1,176
-------- ------------ ------------ ------------ ------------
Total assets $ 1,620 $ 2,950 $ 732 $ (1,839) $ 3,463
======== ============ ============ ============ ============
Intercompany advances payable $ - $ - $ 184 $ (184) $ -
Accounts payable 12 231 17 - 260
Wages, vacations and employees' benefits 6 330 15 - 351
Other current and accrued liabilities (7) 173 12 - 178
ABS borrowings - - 72 - 72
Current maturities of long-term debt 2 - - - 2
-------- ------------ ------------ ------------ ------------
Total current liabilities 13 734 300 (184) 863
Payable to affiliate - - 150 (150) -
Long-term debt, less current portion 573 263 - - 836
Deferred income taxes, net (12) 263 47 - 298
Claims and other liabilities 14 437 13 - 464
Shareholders' equity 1,032 1,253 222 (1,505) 1,002
-------- ------------ ------------ ------------ ------------
Total liabilities and shareholders' equity $ 1,620 $ 2,950 $ 732 $ (1,839) $ 3,463
======== ============ ============ ============ ============
</Table>
12
Condensed Consolidating Statements of Operations
<Table>
<Caption>
Non-
For the three months ended March 31, 2004 Guarantor Guarantor
(in millions) Parent Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
Operating revenue $ 11 $ 1,449 $ 105 $ (13) $ 1,552
-------- ------------ ------------ ------------ ------------
Operating expenses:
Salaries, wages and employees' benefits 11 930 53 - 994
Operating expenses and supplies 5 225 20 (12) 238
Operating taxes and licenses - 39 2 - 41
Claims and insurance 1 28 1 - 30
Depreciation and amortization - 37 4 - 41
Purchased transportation - 148 19 - 167
-------- ------------ ------------ ------------ ------------
Total operating expenses 17 1,407 99 (12) 1,511
-------- ------------ ------------ ------------ ------------
Operating income (loss) (6) 42 6 (1) 41
-------- ------------ ------------ ------------ ------------
Nonoperating (income) expenses:
Interest expense 8 8 1 (5) 12
Other (31) 11 (11) 31 -
-------- ------------ ------------ ------------ ------------
Nonoperating (income) expenses, net (23) 19 (10) 26 12
-------- ------------ ------------ ------------ ------------
Income (loss) before income taxes 17 23 16 (27) 29
Income tax provision (3) 9 5 - 11
Subsidiary earnings 22 (3) - (19) -
-------- ------------ ------------ ------------ ------------
Net income (loss) $ 42 $ 11 $ 11 $ (46) $ 18
======== ============ ============ ============ ============
</Table>
<Table>
<Caption>
Non-
For the three months ended March 31, 2003 Guarantor Guarantor
(in millions) Parent Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
Operating revenue $ 4 $ 675 $ 6 $ (4) $ 681
-------- ------------ ------------ ------------ ------------
Operating expenses:
Salaries, wages and employees' benefits 3 434 2 - 439
Operating expenses and supplies 7 100 7 (4) 110
Operating taxes and licenses - 20 - - 20
Claims and insurance - 12 - - 12
Depreciation and amortization - 20 - - 20
Purchased transportation - 65 3 - 68
-------- ------------ ------------ ------------ ------------
Total operating expenses 10 651 12 (4) 669
-------- ------------ ------------ ------------ ------------
Operating income (loss) (6) 24 (6) - 12
-------- ------------ ------------ ------------ ------------
Nonoperating (income) expenses:
Interest expense 2 2 1 (2) 3
Other (1) 14 (14) 1 -
-------- ------------ ------------ ------------ ------------
Nonoperating (income) expenses, net 1 16 (13) (1) 3
-------- ------------ ------------ ------------ ------------
Income (loss) before income taxes (7) 8 7 1 9
Income tax provision (2) 2 3 - 3
Subsidiary earnings 10 - - (10) -
-------- ------------ ------------ ------------ ------------
Net income (loss) $ 5 $ 6 $ 4 $ (9) $ 6
======== ============ ============ ============ ============
</Table>
13
Condensed Consolidating Statements of Cash Flows
<Table>
<Caption>
Non-
For the three months ended March 31, 2004 Guarantor Guarantor
(in millions) Parent Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
Operating activities:
Net cash from (used in) operating activities $ 66 $ 285 $ (37) $ (224) $ 90
-------- ------------ ------------ ------------ ------------
Investing activities:
Acquisition of property and equipment - (54) (3) - (57)
Proceeds from disposal of property
and equipment - (1) 1 - -
Acquisition of companies (8) - - - (8)
-------- ------------ ------------ ------------ ------------
Net cash used in investing activities (8) (55) (2) - (65)
-------- ------------ ------------ ------------ ------------
Financing Activities:
ABS borrowings, net - - (59) - (59)
Repayment of long-term debt (22) - - - (22)
Proceeds from exercise of stock options 2 - - - 2
Intercompany advances / repayments (56) (247) 79 224 -
-------- ------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities (76) (247) 20 224 (79)
-------- ------------ ------------ ------------ ------------
Net decrease in cash and cash equivalents (18) (17) (19) - (54)
Cash and cash equivalents, beginning of
period 19 20 36 - 75
-------- ------------ ------------ ------------ ------------
Cash and cash equivalents, end of period $ 1 $ 3 $ 17 $ - $ 21
======== ============ ============ ============ ============
</Table>
<Table>
<Caption>
Non-
For the three months ended March 31, 2003 Guarantor Guarantor
(in millions) Parent Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
Operating activities:
Net cash from (used in) operating activities $ (2) $ 57 $ (35) $ - $ 20
-------- ------------ ------------ ------------ ------------
Investing activities:
Acquisition of property and equipment - (26) - - (26)
Proceeds from disposal of property
and equipment - 1 - - 1
-------- ------------ ------------ ------------ ------------
Net cash used in investing activities - (25) - - (25)
-------- ------------ ------------ ------------ ------------
Financing Activities:
Repayment of long-term debt - - - - -
Intercompany advances / repayments (5) (31) 36 - -
-------- ------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities (5) (31) 36 - -
-------- ------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents (7) 1 1 - (5)
Cash and cash equivalents, beginning of
period 22 2 4 - 28
-------- ------------ ------------ ------------ ------------
Cash and cash equivalents, end of period $ 15 $ 3 $ 5 $ - $ 23
======== ============ ============ ============ ============
</Table>
14
12. GUARANTEES OF THE SENIOR NOTES DUE 2008
In connection with the senior notes due 2008 that Yellow Roadway
assumed by virtue of its merger with Roadway, and in addition to the
primary obligor, Roadway LLC, Yellow Roadway 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 subsidiary 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
March 31, 2004 and December 31, 2003 with respect to the financial
position, and for the three months ended March 31, 2004 for results of
operations and cash flows. The primary obligor column presents the
financial information of Roadway LLC. The Guarantor Subsidiaries column
presents the financial information of all guarantor subsidiaries of the
senior notes due 2008 including Yellow Roadway, the holding company.
The Non-Guarantor Subsidiaries column presents the financial
information of all non-guarantor subsidiaries, including those
subsidiaries that are governed by foreign laws and Yellow Receivables
Corporation and Roadway Funding, Inc., the special-purpose entities
that manage or managed our ABS agreements.
Condensed Consolidating Balance Sheets
<Table>
<Caption>
Non-
March 31, 2004 Primary Guarantor Guarantor
(in millions) Obligor Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
Cash and cash equivalents $ - $ 8 $ 13 $ - $ 21
Intercompany advances receivable 65 390 - (455) -
Accounts receivable, net - 342 392 - 734
Prepaid expenses and other - 56 51 - 107
------- ------------ ------------ ------------ ------------
Total current assets 65 796 456 (455) 862
Property and equipment at cost - 834 1,759 - 2,593
Less - accumulated depreciation - 19 1,144 - 1,163
------- ------------ ------------ ------------ ------------
Net property and equipment - 815 615 - 1,430
Investment in subsidiaries 597 1,214 22 (1,833) -
Receivable from affiliate 650 - - (650) -
Goodwill, intangibles and other assets 20 1,082 76 - 1,178
------- ------------ ------------ ------------ ------------
Total assets $ 1,332 $ 3,907 $ 1,169 $ (2,938) $ 3,470
======= ============ ============ ============ ============
Intercompany advances payable $ 13 $ 73 $ 369 $ (455) $ -
Accounts payable - 101 108 - 209
Wages, vacations and employees' benefits 1 217 177 - 395
Other current and accrued liabilities (23) 155 100 - 232
ABS borrowings - - 13 - 13
Current maturities of long-term debt - 4 - - 4
------- ------------ ------------ ------------ ------------
Total current liabilities (9) 550 767 (455) 853
Payable to affiliate - 621 179 (800) -
Long-term debt, less current portion 248 548 14 - 810
Deferred income taxes, net (12) 204 104 - 296
Claims and other liabilities 2 357 126 - 485
Shareholders' equity 1,103 1,627 (21) (1,683) 1,026
------- ------------ ------------ ------------ ------------
Total liabilities and shareholders' equity $ 1,332 $ 3,907 $ 1,169 $ (2,938) $ 3,470
======= ============ ============ ============ ============
</Table>
15
<Table>
<Caption>
Non-
December 31, 2003 Primary Guarantor Guarantor
(in millions) Obligor Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
Cash and cash equivalents $ - $ 62 $ 13 $ - $ 75
Intercompany advances receivable 38 109 104 (251) -
Accounts receivable, net - 329 370 - 699
Prepaid expenses and other - 39 71 - 110
------- ------------ ------------ ------------ ------------
Total current assets 38 539 558 (251) 884
Property and equipment at cost - 812 1,727 - 2,539
Less - accumulated depreciation - 3 1,133 - 1,136
------- ------------ ------------ ------------ ------------
Net property and equipment - 809 594 - 1,403
Investment in subsidiaries 593 1,402 8 (2,003) -
Receivable from affiliate 650 - - (650) -
Goodwill, intangibles and other assets 21 1,073 82 - 1,176
------- ------------ ------------ ------------ ------------
Total assets $ 1,302 $ 3,823 $ 1,242 $ (2,904) $ 3,463
======= ============ ============ ============ ============
Intercompany advances payable $ - $ - $ 251 $ (251) $ -
Accounts payable 1 123 136 - 260
Wages, vacations and employees' benefits 1 188 162 - 351
Other current and accrued liabilities (31) 110 99 - 178
ABS borrowings - - 72 - 72
Current maturities of long-term debt - 2 - - 2
------- ------------ ------------ ------------ ------------
Total current liabilities (29) 423 720 (251) 863
Payable to affiliate - 650 - (650) -
Long-term debt, less current portion 249 573 14 - 836
Deferred income taxes, net (11) 205 104 - 298
Claims and other liabilities 1 347 116 - 464
Shareholders' equity 1,092 1,625 288 (2,003) 1,002
------- ------------ ------------ ------------ ------------
Total liabilities and shareholders' equity $ 1,302 $ 3,823 $ 1,242 $ (2,904) $ 3,463
======= ============ ============ ============ ============
</Table>
Condensed Consolidating Statements of Operations
<Table>
<Caption>
Non-
For the three months ended March 31, 2004 Primary Guarantor Guarantor
(in millions) Obligor Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
Operating revenue $ - $ 751 $ 814 $ (13) $ 1,552
------- ------------ ------------ ------------ ------------
Operating expenses:
Salaries, wages and employees' benefits - 491 503 - 994
Operating expenses and supplies - 127 123 (12) 238
Operating taxes and licenses - 18 23 - 41
Claims and insurance - 15 15 - 30
Depreciation and amortization - 18 23 - 41
Purchased transportation - 70 98 (1) 167
------- ------------ ------------ ------------ ------------
Total operating expenses - 739 785 (13) 1,511
------- ------------ ------------ ------------ ------------
Operating income (loss) - 12 29 - 41
------- ------------ ------------ ------------ ------------
Nonoperating (income) expenses:
Interest expense 3 21 6 (18) 12
Other (13) (6) 2 17 -
------- ------------ ------------ ------------ ------------
Nonoperating (income) expenses, net (10) 15 8 (1) 12
------- ------------ ------------ ------------ ------------
Income (loss) before income taxes 10 (3) 21 1 29
Income tax provision 4 (1) 8 - 11
Subsidiary earnings 4 13 - (17) -
------- ------------ ------------ ------------ ------------
Net income (loss) $ 10 $ 11 $ 13 $ (16) $ 18
======= ============ ============ ============ ============
</Table>
16
Condensed Consolidating Statements of Cash Flows
<Table>
<Caption>
Non-
For the three months ended March 31, 2004 Primary Guarantor Guarantor
(in millions) Obligor Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
Operating activities:
Net cash from (used in) operating activities $ 14 $ 79 $ (3) $ - $ 90
------- ------------ ------------ ------------ ------------
Investing activities:
Acquisition of property and equipment - (16) (41) - (57)
Proceeds from disposal of property
and equipment - - - - -
Acquisition of companies - (8) - - (8)
------- ------------ ------------ ------------ ------------
Net cash used in investing activities - (24) (41) - (65)
------- ------------ ------------ ------------ ------------
Financing Activities:
ABS borrowings, net - - (59) - (59)
Repayment of long-term debt - (22) - - (22)
Proceeds from exercise of stock options - 2 - - 2
Intercompany advances/repayments (14) (89) 103 - -
------- ------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities (14) (109) 44 - (79)
------- ------------ ------------ ------------ ------------
Net decrease in cash and cash equivalents - (54) - - (54)
Cash and cash equivalents, beginning of
period - 62 13 - 75
------- ------------ ------------ ------------ ------------
Cash and cash equivalents, end of period $ - $ 8 $ 13 $ - $ 21
======= ============ ============ ============ ============
</Table>
17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") should be read in conjunction with the Consolidated
Financial Statements and the Notes to Consolidated Financial Statements of
Yellow Roadway Corporation (also referred to as "Yellow Roadway," "we" or
"our"). MD&A and certain statements in the Notes to Consolidated Financial
Statements include forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21 of the Securities
Exchange Act of 1934, as amended (each a "forward-looking statement").
Forward-looking statements include those preceded by, followed by or include the
words "should," "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.
On December 11, 2003, we successfully closed the acquisition of Roadway
Corporation ("Roadway"). Roadway became Roadway LLC ("Roadway Group") and a
subsidiary of Yellow Roadway. Consideration for the acquisition included $494
million in cash and 18.0 million shares of Yellow Roadway common stock for a
total purchase price of approximately $1.1 billion. The Roadway Group has two
operating segments, Roadway Express, Inc. ("Roadway Express") and New Penn Motor
Express, Inc. ("New Penn").
In accordance with Statement of Financial Accounting Standards 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 Express and New Penn from the date of
acquisition. Our first quarter 2003 results do not reflect the operations of the
Roadway Group; however, our Notes to Consolidated Financial Statements do
include limited pro forma information that presents the combined results of
operations of Yellow Roadway as if the Roadway acquisition had occurred at the
beginning of the period presented. Management has provided the pro forma
information to more accurately compare results among periods. 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 date presented and should
not be taken as representative of the future consolidated results of operations
of Yellow Roadway.
RESULTS OF OPERATIONS
Our Results of Operations section focuses on the highlights and significant
items that impacted our operating results during the first quarter. 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
As one of our largest operating units, Yellow Transportation represented
approximately 47 percent and 97 percent of our consolidated revenue in the first
quarter of 2004 and 2003, respectively. 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 consolidated
revenue in the first quarter of 2003. The table below provides summary financial
information for Yellow Transportation for the three months ended March 31:
<Table>
<Caption>
(in millions) 2004 2003 Percent Change
- ---------------------------------------------------------------------------------------------------------
Operating revenue $ 734.5 $ 660.1 11.3%
Operating income 26.4 19.5 35.5%
Adjustments to operating income(a) 0.5 - n/m (b)
Adjusted operating income 26.9 19.5 37.8%
Operating ratio 96.4% 97.0% 0.6pp (c)
Adjusted operating ratio 96.3% 97.0% 0.7pp
- ---------------------------------------------------------------------------------------------------------
</Table>
(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.
Yellow Transportation reported record first quarter revenue in 2004 of $734.5
million, representing an increase of $74.4 million or 11.3 percent from the
first quarter of 2003. The revenue increase resulted from a combination of
improving economic conditions, continued emphasis on premium services and
meeting customer expectations. The two primary components of less-than-truckload
("LTL") revenue are tonnage, comprised of the number of shipments and the weight
per shipment, and price, usually evaluated on a
18
per hundred weight basis. In the first quarter of 2004, Yellow Transportation
LTL tonnage increased by 6.6 percent per day, and LTL revenue per hundred
weight, excluding the fuel surcharge, improved by 2.8 percent from the first
quarter of 2003. 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 deliver significant revenue growth. 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 the first quarter of 2004, total Exact Express
revenue increased by 65 percent and Definite Delivery revenue increased by 23
percent compared to the first quarter of 2003. 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 approximately 24 percent of total Yellow Transportation revenue in
the first quarter of 2004 and increased over 18 percent from the first quarter
of 2003. This service provides higher utilization of assets by use of more
direct loading and bypassing intermediate handling at distribution centers.
Yellow Transportation operating income improved by $6.9 million in the first
quarter of 2004 compared to the first quarter of 2003. Operating income
increased due to higher revenue and our continued ability to effectively balance
volume and price. Increased wage and benefit rates, primarily contractual,
partially offset the operating income improvement. In addition, the first
quarter of 2003 included a $1.3 million reduction in claims and insurance
expense for an insurance recovery related to two former employees falsifying
claims over several years. Operating expenses as a percentage of revenue
decreased in the first quarter of 2004 by 0.6 percentage points compared to the
first quarter of 2003, resulting in an operating ratio of 96.4 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 divided by the change in revenue. The
incremental margin at Yellow Transportation from the first quarter of 2003 to
the first quarter of 2004 was approximately 10 percent. This incremental margin
did not meet our 15 to 20 percent guideline primarily due to the reduction in
claims and insurance expense in the first quarter of 2003, as discussed above,
and higher performance incentive accruals and corporate-allocated management
fees in the first quarter of 2004. In any given quarter, our incremental margin
may be above or below our targeted level of 15 to 20 percent. However, over the
longer-term, our expectation is to average a 15 to 20 percent incremental
margin.
Adjustments to operating income represent charges that management excludes when
evaluating segment performance to better understand the results of our core
operations. Management excludes the impact of gains and losses from the disposal
of property as they reflect charges not related to the segment's primary
business. For the three months ended March 31, 2004 and 2003, adjustments to
operating income were $0.5 million and zero, respectively, and consisted
entirely of property gains and losses.
ROADWAY EXPRESS RESULTS
As one of our recently acquired subsidiaries, Roadway Express results were not
included in our first quarter 2003 results of operations, which makes 2004
results more challenging to evaluate against prior periods. In the first quarter
of 2003, Roadway Express results reflected different accounting policies, and
the effect of asset and liability valuations prior to adjusting them to their
fair value, as required by purchase accounting. In addition, the entity reported
results based on a twelve-week period instead of a calendar quarter resulting in
two less business days than the first quarter of 2004. For these reasons,
management evaluates the segment's results primarily based on a combination of
sequential growth month over month, attainment of plan performance and
comparison to adjusted first quarter 2003 results.
Roadway Express reported revenue of $717.1 million in the first quarter of 2004
compared to adjusted revenue of $710.2 million in the first quarter of 2003.
Prior year first quarter revenue was adjusted to reflect the current revenue
recognition policy and the conversion to a calendar quarter. Roadway Express
represented approximately 46 percent of our consolidated revenue in the first
quarter of 2004. On a pro forma basis, assuming the acquisition of Roadway had
occurred on January 1, 2003, Roadway Express revenue would have represented
approximately 49 percent of our consolidated revenue in the first quarter of
2003. The 1.0 percent revenue increase resulted from a 1.4 percent improvement
in LTL revenue per hundred weight, excluding the fuel surcharge, significantly
offset by a 3.0 percent decline in LTL tonnage per day. During the first quarter
of 2003, Roadway Express still had temporary business volumes from the closure
of Consolidated Freightways, contributing to the difficult comparison among
periods. LTL tonnage comparisons improved each month of the first quarter in
2004 and we expect this trend to continue into the second quarter. Compared to
the same month of the prior year, LTL tonnage per day was down 5.5 percent in
January, down 3.7 percent in February and down 2.5 percent in March.
19
Roadway Express reported operating income of $15.0 million in the first quarter
of 2004, which included approximately $7 thousand of gains on property
disposals. Operating income results exceeded management's expectations for the
first quarter of 2004, as the segment lowered operating costs in response to the
lower volumes. Reduced salaries, wages and employees' benefits contributed
significantly to the favorable operating results. Efficiency improvements more
than offset the increased contractual wage and benefit rates. In addition,
operating expenses and supplies decreased from earlier projections despite
significant fluctuations in fuel costs throughout the quarter. In the first
quarter of 2004, Roadway Express recognized $1.7 million of amortization related
to intangible assets identified in the purchase price allocation. Roadway
Express reported a first quarter 2004 operating ratio of 97.9 percent.
NEW PENN RESULTS
Similar to Roadway Express, New Penn results for the first quarter of 2004
include purchase accounting valuations and reflect different accounting policies
than the first quarter of 2003. In addition, the entity reported prior year
results based on a twelve-week period instead of a calendar quarter resulting in
two less business days than the first quarter of 2004.
New Penn reported revenue of $56.1 million in the first quarter of 2004 compared
to adjusted revenue of $50.6 million in the first quarter of 2003. Prior year
first quarter revenue was adjusted to reflect the conversion to a calendar
quarter. Due to the focus on next-day services, New Penn did not record a
significant revenue recognition adjustment in the first quarter of 2004 or the
first quarter of 2003. Please refer to Management's Discussion and Analysis in
our Annual Report on Form 10-K for a detailed discussion of our revenue
recognition policies.
New Penn represented approximately 4 percent of our consolidated revenue in the
first quarter of 2004. On a pro forma basis, assuming the acquisition of Roadway
had occurred on January 1, 2003, New Penn revenue would have represented
approximately 4 percent of our consolidated revenue in the first quarter of
2003. The 10.8 percent revenue improvement from the first quarter of 2003 to the
first quarter of 2004 resulted primarily from a 7.6 percent increase in LTL
tonnage per day, slightly offset by a 0.2 percent decline in revenue per hundred
weight, excluding the fuel surcharge. Revitalized sales initiatives, an
improving economy and less severe winter weather in the first quarter of 2004
contributed to the tonnage growth.
Operating income at New Penn was $5.8 million in the first quarter of 2004,
including approximately $5 thousand of gains on property disposals. Operating
income results exceeded management's expectations for the first quarter of 2004
and significantly increased from the entity's reported results in the first
quarter of 2003. In the first quarter of 2004, New Penn recognized $1.1 million
of amortization related to intangible assets identified in the purchase price
allocation. Increased revenue combined with cost controls and less severe winter
weather than in the first quarter of 2003, significantly contributed to an
operating ratio improvement of 5.1 percentage points from the prior year period
resulting in a first quarter 2004 operating ratio of 89.7 percent.
MERIDIAN IQ RESULTS
Meridian IQ is our non-asset-based segment that plans and coordinates the
movement of goods throughout the world. Meridian IQ represented approximately 3
percent of our consolidated revenue in the first quarter of 2004 and 2003. On a
pro forma basis, assuming the acquisition of Roadway had occurred on January 1,
2003, Meridian IQ revenue would have represented approximately 2 percent of our
consolidated revenue in the first quarter of 2003. The table below provides
summary financial information for Meridian IQ for the three months ended March
31:
<Table>
<Caption>
(in millions) 2004 2003 Percent Change
- ---------------------------------------------------------------------------------------------------------
Operating revenue $ 45.7 $ 22.1 106.8%
Operating income 0.6 (0.9) n/m
Adjustments to operating income - - -
Adjusted operating income 0.6 (0.9) n/m
- ---------------------------------------------------------------------------------------------------------
</Table>
In the first quarter of 2004, Meridian IQ revenue increased by $23.6 million or
106.8 percent from the first quarter of 2003. The significant increase in
revenue resulted from a combination of strong organic growth within Meridian IQ
existing services and recent acquisitions, as discussed below. A first quarter
2003 operating loss of $0.9 million turned into a first quarter 2004 operating
profit of $0.6 million. Increased revenue and cost containment produced the
improved operating results.
Meridian IQ Acquisitions
In August 2003, a subsidiary of Meridian IQ, Yellow GPS, LLC ("Yellow GPS"),
acquired certain U.S. assets of GPS Logistics, a global logistics provider.
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. No
earnout payments were made in the first quarter of 2004. In addition, Yellow GPS
received a call option to purchase the stock of each of GPS
20
Logistics (EU) Ltd., the related United Kingdom ("U.K.") operations of GPS
Logistics, and GPS Logistics Group Ltd., the related Asian operations of GPS
Logistics.
In February 2004, Yellow GPS exercised and closed its option to purchase GPS
Logistics (EU) Ltd. Yellow GPS made a payment of $7.6 million, which is subject
to upward and downward adjustments based on the financial performance of the
U.K. business. The initial payment and acquisition expenses of $0.3 million were
allocated as follows: $3.3 million to goodwill, $3.2 million to amortizable
intangible assets, and $1.4 million to miscellaneous assets and liabilities. If
Yellow GPS does not exercise the Asian option, it will be required to pay a
deferred option price to the shareholders of GPS Logistics Group Ltd.
CONSOLIDATED RESULTS
Our first quarter 2004 consolidated results include the results of each of the
operating segments previously discussed, including Roadway Express and New Penn.
The first quarter 2003 reported results include the former Yellow Corporation
entities only, consisting of Yellow Transportation and Meridian IQ. Pro forma
information provided presents the combined results of operations of Yellow
Roadway as if the Roadway acquisition had occurred at the beginning of the
period presented. The following discussion focuses on corporate charges and
items that management evaluates on a consolidated basis, as segment results have
been discussed previously. The table below provides summary consolidated
financial information for the three months ended March 31:
<Table>
<Caption>
Percent Change
2003 2003 2004 vs. 2003 2004 vs. 2003
(in millions) 2004 Pro Forma Reported Pro Forma Reported
- -------------------------------------------------------------------------------------------------------------------------
Operating revenue $ 1,552.1 $ 1,441.4 $ 681.1 7.7% 127.9%
Operating income 41.3 34.4 11.8 20.3% 251.4%
Nonoperating expenses, net 11.8 12.8 2.6 (8.0)% 361.8%
Income from continuing
operations 18.2 12.8 5.6 42.4% 222.7%
Income from discontinued
operations - 0.1 - n/m n/m
Net income $ 18.2 $ 12.9 $ 5.6 40.8% 222.7%
- -------------------------------------------------------------------------------------------------------------------------
</Table>
Operating revenue in the first quarter of 2004 increased by $110.7 million
compared to pro forma revenue in the first quarter of 2003. The revenue growth
was contributed by each of our operating segments and resulted from a
combination of improving economic conditions, increased premium services and
non-asset-based acquisitions. Operating revenue increased by $871.0 million from
first quarter 2003 reported revenue to the first quarter of 2004, primarily due
to the acquisition of Roadway Express and New Penn in addition to the improved
results at Yellow Transportation and Meridian IQ.
Consolidated operating income improved by $6.9 million from pro forma first
quarter 2003 operating income to the first quarter 2004. The improved results
primarily related to increased revenue and effective cost management at each of
our operating segments. Reported first quarter 2003 operating income increased
by $29.5 million compared to the first quarter of 2004, mostly due to the
acquisition of Roadway Express and New Penn, and increased revenue at Yellow
Transportation and Meridian IQ. Corporate expenses in the first quarter of 2004
decreased by $0.4 million from the first quarter of 2003. However, the first
quarter of 2003 included $4.0 million for an industry conference that we host
every other year. On a comparable basis, first quarter 2004 corporate expenses
increased by $3.6 million, due to higher performance incentive accruals based on
our improved operating results.
Nonoperating expenses in the first quarter of 2004 decreased by $1.0 million
from the pro forma nonoperating expenses in the first quarter of 2003 as a
result of lower interest expense. The lower interest expense resulted from lower
average debt balances in the first quarter of 2004 than included in the pro
forma results. Reported first quarter 2003 interest expense increased by nearly
$9.3 million in the first quarter of 2004 due to the additional debt we assumed
to consummate the Roadway acquisition, including the assumption of $225.0
million of principal senior notes issued by Roadway.
Our effective tax rate for the first quarter of 2004 was 38.5 percent compared
to 38.9 percent in the first quarter of 2003. As we record our tax provision
based on our full year forecasted results, we expect this rate to approximate
38.5 percent for the remainder of the year. Variations in the rate could result
from our income allocation among subsidiaries and their relative state tax
rates, in addition to tax planning strategies that may be implemented throughout
the year.
21
FINANCIAL CONDITION
LIQUIDITY
Our liquidity needs arise primarily from capital investment in new equipment,
land and structures, and information technology, as well as funding working
capital requirements. To provide short-term and longer-term liquidity, we
maintain capacity under a $650 million secured bank credit agreement and a $200
million asset backed securitization ("ABS") agreement involving Yellow
Transportation accounts receivable. We believe these facilities provide adequate
capacity to fund current working capital and capital expenditure requirements
for Yellow Roadway. 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
Our secured credit agreement consists of three parts: a term loan, a letters of
credit facility, and a revolver loan. As of March 31, 2004, we had $150 million
outstanding on the term loan. As we repay the term loan, our total capacity
under the secured credit agreement decreases since we cannot borrow the funds
again in the future. The entire $175 million of the term loan was borrowed in
December 2003 to pay a portion of the Roadway acquisition. We reduced the
outstanding amount of the term loan in the first quarter of 2004 by $25 million
through streamlining our cash processes and working capital management. 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 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 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 March 31, 2004, 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 at each period end:
<Table>
<Caption>
(in millions) March 31, 2004 December 31, 2003
- ----------------------------------------------------------------------------------------------------
Total capacity $ 650.0 $ 675.0
Term loan outstanding (150.0) (175.0)
Letters of credit facility outstanding (250.0) (a) (250.0) (a)
Letters of credit under revolver loan outstanding (30.3) (24.4)
Revolver loan outstanding (3.0) -
- ----------------------------------------------------------------------------------------------------
Available unused capacity $ 216.7 $ 225.6
- ----------------------------------------------------------------------------------------------------
</Table>
(a) We have an additional $1.5 million in letters of credit that are not
currently covered under a credit facility.
On September 30, 2002, we completed the 100 percent distribution ("the
spin-off") of all of the shares of SCS Transportation, Inc. ("SCST") to our
shareholders. As part of the spin-off, 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. Our outstanding letters of credit at March 31, 2004 included $3.4
million for workers' compensation, property damage and liability claims against
SCST. We also provided a guarantee of $5.4 million at March 31, 2004 regarding
certain lease obligations of SCST.
Asset Backed Securitization Facility
Our ABS facility provides us with additional liquidity and lower borrowing costs
through access to the asset backed commercial paper market. 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 approximately 90 percent of the commercial paper market,
significantly increasing our liquidity.
22
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.
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 three months ended March 31:
<Table>
<Caption>
(in millions) 2004 2003
- ------------------------------------------------------------------------------------------
Net cash from operating activities $ 89.7 $ 20.1
Net property and equipment acquisitions (57.6) (25.5)
Proceeds from exercise of stock options 1.8 -
- ------------------------------------------------------------------------------------------
Free cash flow $ 33.9 $ (5.4)
- ------------------------------------------------------------------------------------------
</Table>
The $39.3 million increase in free cash flow from the first quarter of 2003 to
the first quarter of 2004 resulted from increased operating cash flow of $69.6
million partially offset by increased net property and equipment acquisitions of
$32.1 million. Operating cash flows increased from the first quarter of 2004
compared to the first quarter of 2003 primarily due to improved operating
results of $12.5 million and other working capital fluctuations of $87.7
million, somewhat offset by lower accounts receivable collections of $28.7
million and higher accounts payable payments of $23.1 million. Other working
capital fluctuations mostly related to timing differences in employee wage and
benefit accruals, increased performance incentive accruals, and accrued interest
and taxes. In addition, approximately $45 million of the fluctuation related to
employee wage and benefit accruals, accrued income taxes and miscellaneous
prepaids for Roadway Express and New Penn, as these entities were not included
in our reported results for the first quarter of 2003.
Other items considered in evaluating free cash flow include net property and
equipment acquisitions and proceeds from the exercise of stock options. In the
first quarter of 2004, net property and equipment acquisitions increased by
$32.1 million compared to the first quarter of 2003, due to a combination of
increased investments in land and structures at Yellow Transportation and the
impact of capital expenditures for Roadway Express and New Penn. Our proceeds
received from the exercise of stock options increased by $1.8 million in the
first quarter of 2004 compared to the first quarter of 2003 primarily due to the
increase in our average common stock price during the first quarter of 2004.
CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
The following tables provide aggregated information regarding our contractual
obligations and commercial commitments as of March 31, 2004.
Contractual Cash Obligations
<Table>
<Caption>
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 $ 13.0 $ - $ - $ - $ 13.0
Long-term debt 4.5 7.4 374.0 406.0 791.9
Off balance sheet obligations:
Operating leases 71.9 83.8 28.4 12.9 197.0 (a)
Capital expenditures 97.7 - - - 97.7
- ----------------------------------------------------------------------------------------------------------------------------
Total contractual obligations $ 187.1 $ 91.2 $ 402.4 $ 418.9 $1,099.6
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
(a) The net present value of operating leases, using a discount rate of 10
percent, was $166.7 million at March 31, 2004.
On April 30, 2004, we notified Bandag, Inc. that we plan to terminate our tire
lease agreement for Roadway Express with Bandag effective August 1, 2004. The
agreement contains a provision for us to buy the remaining tire inventory.
Bandag currently estimates the inventory value at approximately $37 million;
however, we have not validated that estimate. We believe termination of this
23
agreement supports both our near and long-term economic objectives and is
consistent with our business policies. We do not expect the lease termination to
have a material impact on our results of operations.
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.
<Table>
<Caption>
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 $ - $ - $ 216.7 $ - $ 216.7
Letters of credit 281.8 - - - 281.8 (a)
Lease guarantees for SCST 1.7 2.6 1.1 - 5.4
Surety bonds 57.7 7.4 1.2 - 66.3 (b)
- ----------------------------------------------------------------------------------------------------------------------------
Total commercial commitments $ 341.2 $ 10.0 $ 219.0 $ - $ 570.2
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
(a) Includes $1.5 million in letters of credit that are not currently covered
under a credit facility.
(b) Includes $1.8 million of surety bonds for SCST related to workers'
compensation, property damage and liability claims.
24
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We have exposure to a variety of market risks, including the effects of interest
rates, equity prices, foreign exchange rates and fuel prices.
RISK FROM INTEREST RATES AND EQUITY PRICES
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 March 31, 2004, we had approximately 80 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 March 31, 2004. 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 principal senior notes due 2008 and
contingent convertible senior notes have been calculated based on the quoted
market prices at March 31, 2004. 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.
<Table>
<Caption>
Fair
(in millions) 2004 2005 2006 2007 2008 Thereafter Total Value
- --------------------------------------------------------------------------------------------------------------------------
Fixed-rate debt $ - $ 4.4 $ - $ - $ 227.5 $ 407.0 $ 638.9 $ 777.3
Average interest rate - 5.25% - - 8.22% 4.42%
- --------------------------------------------------------------------------------------------------------------------------
</Table>
FOREIGN EXCHANGE RATES
Revenue, operating expenses, assets and liabilities of our Canadian, Mexican and
United Kingdom 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.
25
Item 4. 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 and 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.
26
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification of William D. Zollars pursuant to Exchange Act
Rules 13a-14 and 15d-14, as Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Donald G. Barger, Jr. pursuant to Exchange
Act Rules 13a-14 and 15d-14, as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of William D. Zollars pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Donald G. Barger, Jr. pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.1 Roadway LLC and Subsidiaries Consolidated Financial
Statements; Consolidated Balance Sheets as of March 31, 2004
and December 31, 2003 and Statements of Consolidated
Operations and Cash Flows for the three months ended March 31,
2004 and twelve weeks ended March 29, 2003.
99.2 Roadway Express, Inc. and Subsidiaries Consolidated Financial
Statements; Consolidated Balance Sheets as of March 31, 2004
and December 31, 2003 and Statements of Consolidated
Operations and Cash Flows for the three months ended March 31,
2004 and twelve weeks ended March 29, 2003.
99.3 Roadway Next Day Corporation and Subsidiary Consolidated
Financial Statements; Consolidated Balance Sheets as of March
31, 2004 and December 31, 2003 and Statements of Consolidated
Operations and Cash Flows for the three months ended March 31,
2004 and twelve weeks ended March 29, 2003.
(b) Reports on Form 8-K
On January 30, 2004, we furnished a Form 8-K to the SEC under Item 12,
Results of Operations and Financial Condition, in which we made
available our results of operations for the three months and twelve
months ending December 31, 2003 by means of a press release.
On February 5, 2004, we furnished a Form 8-K 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
three months and twelve months ending December 31, 2003.
On February 11, 2004, we filed a Form 8-K/A under Item 2, Acquisition
or Disposition of Assets, to make available the results of operations
and financial condition of Roadway Corporation as of September 13, 2003
and December 31, 2002 and for the thirty-six weeks ended September 13,
2003 and September 7, 2002, and to make available the condensed
combined pro forma balance sheet at September 30, 2003, the condensed
combined pro forma statement of operations for the year ended December
31, 2002, the condensed combined pro forma statement of operations for
the nine months ended September 30, 2003, and the related notes to
condensed consolidated financial statements.
On February 19, 2004, we filed a Form 8-K under Item 5, Other Events.
We filed the audited consolidated financial statements of Roadway
Corporation for the period January 1 to December 11, 2003 and the years
ended December 31, 2002 and 2001, in order to comply with Item
210.3-10(g) of Regulation S-X regarding recently acquired subsidiary
guarantors.
27
On March 4, 2004, we filed a Form 8-K/A under Item 5, Other Events, to
include the signature of Ernst & Young, LLP on the audited financial
statements of Roadway Corporation filed under Form 8-K on February 19,
2004.
On March 10, 2004, we filed a Form 8-K/A under Item 7, Financial
Statements, Pro Forma Financial Information and Exhibits, to delete
Note 11 regarding Impact of the Acquisition Related Charges and add a
new Note 12 regarding Guarantor and Non-Guarantor Subsidiaries to
certain financial statements of Roadway Corporation.
On March 10, 2004, we filed a second Form 8-K/A under Item 7, Financial
Statements, Pro Forma Financial Information and Exhibits, to add a new
Note 8 regarding Guarantor and Non-Guarantor Subsidiaries to Roadway
Corporation's financial statements for the twelve weeks ended March 29,
2003 and to add a new Note 9 regarding Guarantor and Non-Guarantor
Subsidiaries to Roadway Corporation's financial statements for the
twelve and twenty-four weeks ended June 21, 2003.
On March 11, 2004, we furnished a Form 8-K to the SEC under Item 9,
Regulation FD Disclosure, in which we announced via a press release
that we increased our first quarter 2004 earnings per share guidance.
On March 17, 2004, we filed a Form 8-K under Item 5, Other Events, to
make available unaudited pro forma financial information for the year
ended December 31, 2003.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
YELLOW ROADWAY CORPORATION
--------------------------
Registrant
Date: May 10, 2004 /s/ William D. Zollars
----------------------------
William D. Zollars
Chairman of the Board of
Directors, President & Chief
Executive Officer
Date: May 10, 2004 /s/ Donald G. Barger, Jr.
----------------------------
Donald G. Barger, Jr.
Senior Vice President
& Chief Financial Officer
29