1 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 Period ended September 11, 1999. 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 0-600 ROADWAY EXPRESS, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 34-0492670 - ------------------------------- ----------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No) 1077 Gorge Boulevard, Akron, OH 44310 - ------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (330) 384-1717 ---------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . ----- ---- The number of shares of common stock ($.01 par value) outstanding as of October 9, 1999 was 19,377,264. 2 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ROADWAY EXPRESS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) September 11, 1999 December 31, 1998 ------------------------------------- (in thousands, except share data) Assets Current assets Cash and cash equivalents $ 92,594 $ 60,232 Accounts receivable, net 293,869 280,170 Other current assets 15,900 18,978 ---------- ---------- Total current assets 402,363 359,380 Carrier operating property, at cost 1,337,130 1,341,496 Less allowance for depreciation 971,680 984,380 ---------- ---------- Net carrier operating property 365,450 357,116 Goodwill, net 8,635 8,382 Deferred income taxes 33,017 23,955 ---------- ---------- Total assets $ 809,465 $ 748,833 ========== ========== Liabilities and shareholders' equity Current liabilities Accounts payable $ 196,904 $ 177,641 Salaries and wages 116,805 103,723 Other current liabilities 48,151 47,249 ---------- ---------- Total current liabilities 361,860 328,613 Long-term liabilities Casualty claims payable 50,986 51,812 Future equipment repairs 11,424 14,708 Accrued pension and retiree medical 114,531 104,091 ---------- ---------- Total long-term liabilities 176,941 170,611 Shareholders' equity Common Stock - $.01 par value Authorized - 100,000,000 shares Issued - 20,556,714 shares 206 206 Other shareholders' equity 270,458 249,403 ---------- ---------- Total shareholders' equity 270,664 249,609 ---------- ---------- Total liabilities and shareholders' equity $ 809,465 $ 748,833 ========== ========== Note: The balance sheet at December 31, 1998 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See notes to condensed consolidated financial statements. 1 3 ROADWAY EXPRESS, INC. AND SUBSIDIARIES CONDENSED STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED) Twelve Weeks Ended (Third Quarter) September 11, 1999 September 12, 1998 ------------------------------------------- (in thousands, except per share data) Revenue $ 652,218 $ 617,135 Operating expenses: Salaries, wages and benefits 421,904 401,927 Operating supplies and expenses 103,981 106,370 Purchased transportation 69,072 61,275 Operating taxes and licenses 17,180 17,812 Insurance and claims expense 13,169 12,132 Provision for depreciation 10,694 9,426 Net (gain) on disposal of operating property (1) (122) --------- --------- Total operating expenses 635,999 608,820 --------- --------- Operating income 16,219 8,315 Other income (expense), net 396 (459) --------- --------- Income before income taxes 16,615 7,856 Provision for income taxes 6,970 3,528 --------- --------- Net income $ 9,645 $ 4,328 ========= ========= Earnings per share - basic $ 0.51 $ 0.23 Earnings per share - diluted $ 0.50 $ 0.22 Average shares outstanding - basic 18,844 19,267 Average shares outstanding - diluted 19,151 19,473 Dividends declared per share $ 0.05 $ 0.05 See notes to condensed consolidated financial statements. 2 4 ROADWAY EXPRESS, INC. AND SUBSIDIARIES CONDENSED STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED) Thirty-six Weeks Ended (Three Quarters) September 11, 1999 September 12, 1998 ------------------------------------------ (in thousands, except per share data) Revenue $ 1,878,618 $ 1,848,150 Operating expenses: Salaries, wages and benefits 1,217,758 1,200,158 Operating supplies and expenses 307,140 320,455 Purchased transportation 189,195 176,401 Operating taxes and licenses 52,801 55,263 Insurance and claims expense 39,114 40,515 Provision for depreciation 30,261 28,833 Net (gain) on disposal of operating property (123) (1,692) ----------- ----------- Total operating expenses 1,836,146 1,819,933 ----------- ----------- Operating income 42,472 28,217 Other income, net 1,445 421 ----------- ----------- Income before income taxes 43,917 28,638 Provision for income taxes 18,709 12,394 ----------- ----------- Net income 25,208 $ 16,244 =========== =========== Net income per share - basic $ 1.34 $ 0.82 Net income per share - diluted $ 1.32 $ 0.81 Average shares outstanding - basic 18,834 19,832 Average shares outstanding - diluted 19,112 20,057 Dividends declared per share $ 0.15 $ 0.15 See notes to condensed consolidated financial statements. 3 5 ROADWAY EXPRESS, INC. AND SUBSIDIARIES CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED) Thirty-six Weeks Ended (Three Quarters) September 11, 1999 September 12, 1998 -------------------------------------- (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 25,208 $ 16,244 Depreciation and amortization 30,009 29,588 Other operating adjustments 18,606 (15,788) -------- -------- Net cash provided by operating activities 73,823 30,044 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of carrier operating property (43,697) (29,455) Sales of carrier operating property 5,225 9,279 -------- -------- Net cash used by investing activities (38,472) (20,176) CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid (2,905) (3,019) Purchase of treasury shares (84) (15,818) -------- -------- Net cash used by financing activities (2,989) (18,837) Net increase (decrease) in cash and cash equivalents 32,362 (8,969) Cash and cash equivalents at beginning of period 60,232 58,505 -------- -------- Cash and cash equivalents at end of period $ 92,594 $ 49,536 ======== ======== See notes to condensed consolidated financial statements. 4 6 Roadway Express, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements Note A--Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the twelve weeks ending September 11, 1999 are not necessarily indicative of the results that may be expected for the year ended December 31, 1999. For further information, refer to the consolidated financial statements and footnotes thereto included in the registrant's annual report on Form 10-K for the year ended December 31, 1998. Note B--Accounting Period The registrant operates on 13 four-week accounting periods with 12 weeks in each of the first three quarters and 16 weeks in the fourth quarter. Note C--Earnings per Share The following table sets forth the computation of basic and diluted earnings per share: Twelve Weeks Ended Thirty-six Weeks Ended (Third Quarter) (Three Quarters) Sept 11, 1999 Sept 12, 1998 Sept 11, 1999 Sept 12, 1998 ------------------------------------------------------------ (in thousands, except per share data) Net income $ 9,645 $ 4,328 $25,208 $16,244 ======= ======= ======= ======= Weighted-average shares for basic earnings per share 18,844 19,267 18,834 19,832 Management incentive stock plans 307 206 278 225 ------- ------- ------- ------- Weighted-average shares for diluted earnings per share 19,151 19,473 19,112 20,057 ======= ======= ======= ======= Earnings per share - basic $ 0.51 $ 0.23 $ 1.34 $ 0.82 Earnings per share - diluted $ 0.50 $ 0.22 $ 1.32 $ 0.81 5 7 Note D--Comprehensive Income Comprehensive income differs from net income due to foreign currency translation adjustments as shown below: Twelve Weeks Ended Thirty-six Weeks Ended (Third Quarter) (Three Quarters) Sept 11, 1999 Sept 12, 1998 Sept 11, 1999 Sept 12, 1998 -------------------------------------------------------------- (in thousands) Net income $ 9,645 $ 4,328 $ 25,208 $ 16,244 Foreign currency translation adjustments (659) (71) 467 (638) -------- -------- -------- -------- Comprehensive income $ 8,986 $ 4,257 $ 25,675 $ 15,606 ======== ======== ======== ======== Note E--Contingent Matter The Company's former parent is currently under examination by the Internal Revenue Service for tax years 1994 and 1995, years prior to the spin-off of the Company. The IRS has proposed substantial adjustments for these tax years for multiemployer pension plan deductions. The IRS is challenging the timing, not the validity of these deductions. The Company is unable to predict the ultimate outcome of this matter, however, its former parent intends to vigorously contest these proposed adjustments. Under a tax sharing agreement entered into by the Company and its former parent at the time of the spin-off, the Company is obligated to reimburse the former parent for any additional taxes and interest which relate to the Company's business prior to the spin-off. The amount and timing of such payments, if any, is dependent on the ultimate resolution of the former parent's disputes with the IRS and the determination of the nature and extent of the obligations under the tax sharing agreement. The Company has established certain reserves with respect to these proposed adjustments. There can be no assurance, however, that the amount or timing of any liability of the Company to the former parent will not have a material adverse effect on the Company's results of operations and financial position. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company had net income of $9.6 million or $0.50 per share (diluted), for the third quarter ended September 11, 1999, compared to net income of $4.3 million, or $0.22 per share (diluted) in the same quarter last year, an increase of 122.9%. Revenues were $652.2 million in the current quarter, a 5.7% increase from third quarter 1998. Tonnage was up 4.2% in the current quarter compared to the prior year quarter. Less-than-truckload (LTL) tons were up 4.4% and truckload tons were up 3.4%. Net revenue per ton increased 1.4% compared to the same quarter last year. This increase is lower than the increase in the underlying freight rates, as the average shipment size increased by 2.2%, effectively reducing revenue per ton. This change in the shipment characteristics reflects the strategic direction of the Company relative to freight mix and service offerings. Operating expenses per ton were up 0.3% compared to the third quarter of 1998. Salaries, wages, and benefits increased 0.7% per ton, reflecting increased costs associated with Company sponsored health and pension benefits, workers' compensation, and variable compensation related to Company performance. Despite the increases under the terms of the Teamsters contract, terminal wage and benefit expenses declined 0.7% per ton, due to improved efficiencies driven by the changing freight mix. The increased use of railroads led to an 8.2% increase in purchased transportation expense per ton. The portion of linehaul miles utilizing rail was 29.8% in the third quarter of 1999 versus 27.1% in the third quarter of 1998. Operating supplies and expenses decreased 6.2% per ton. Decreased costs associated with outsourced information systems services and some maintenance services were partially offset by the increased cost of long term 6 8 tractor and trailer leases and higher fuel costs. Insurance and claims expense increased 4.2% per ton, which reflects increased liability expense offset by reductions in cargo loss and damage claims. Increased depreciation charges related to recent purchases of computer equipment were partially offset as revenue equipment becomes fully depreciated and the Company replaces some owned equipment with leased equipment. The Company also experienced a 7.4% decrease in operating tax and license expense per ton. The effective tax rate for the third quarters of 1999 and 1998 differs from the Federal statutory rate due to the impact of state taxes, taxes on foreign operations, and non-deductible operating expenses. At the end of the quarter, cash and marketable securities amounted to $92.6 million, a $32.4 million increase from year-end 1998. Cash flow from operations has been sufficient to meet working capital needs. The Company is taking actions to improve operating margins, such as cost controls, sales and marketing initiatives, working with specific customers to improve the yield on freight, and changing the freight mix. Yield improvement is expected in the fourth quarter, resulting from a general rate increase effective September 12, 1999. The Company's core business offering, national LTL service, represented 66% of revenue in the quarter. Regional service offerings were 16% of revenue, truckload was 7%, and specialized products (international North America, Time Critical, Precision Delivery, ocean services, exhibit services, and protective services) represented 11% of revenue. Regional LTL revenue increased 11%, and the Company's specialized product offerings grew 18%, principally due to a 37% increase in revenue from the domestic portion of these specialized products. Roadway has successfully completed the remediation and full-system integration test of all identified, existing, mission-critical systems, except as noted below, to insure the Company's ability to process transactions in the year 2000. A new, compliant accounts receivable system was implemented as planned in September 1999. Implementation of new, compliant desktop equipment has been completed. Any systems vital to moving freight, paying employees, or doing business with customers have been deemed mission-critical. Roadway has chosen to defer the planned 1999 implementation of a new vehicle maintenance management system. Instead, the Company is remediating and testing the existing system (the primary contingency plan). The implementation and testing of the maintenance system is expected to be completed by mid December 1999. Additional contingency plans for this system are in place to ensure that no disruptions to freight movement or other mission-critical functions occur. There have been no material impacts due to delays in other Information Systems projects. The Company sent letters to key vendors and suppliers requesting information regarding their compliance plans. Targeted vendors included utilities, computer suppliers, fuel suppliers, railroads, interlines, ocean carriers, and financial institutions. Most have indicated compliance or satisfactory plans for compliance. For those who have not, alternate vendors and suppliers are being identified. Many customers have requested Roadway's compliance plans, and all inquiries have been fulfilled. Roadway's internal EDI system is Year 2000 compliant. The Company will continue testing with customers who choose to convert their systems through the end of 1999, as customer needs dictate. If a customer chooses to remain on a previous version, which uses the YYMMDD format, Roadway will not force an upgrade. Our internal systems that receive and send EDI data are able to handle either format. The Company's most likely worst case scenario is a localized utility outage, which would affect a portion of the operations, including the ability to effectively plan equipment and human resource needs, the result being an increased potential for service delays. The Company's contingency plan's assessment and preparation phase includes action items that anticipate and mitigate the impact of these risks. Roadway's approach to contingency planning is to prepare employees to quickly and effectively address any failure that may occur, rather than attempting to pre-identify every specific failure that may occur. The corporate office and all field locations will have individual contingency plans to ensure a seamless transition into the new millennium. 7 9 These contingency plans are comprised of four phases and are proactive in nature. The four phases are: 1. Pre-millennium rollover assessment and preparation (April 1999 - December 31, 1999) consists of vendor and equipment assessments and alternative plans, task list development, and deployment of pre-event action items. 2. Post-millennium rollover site check and assessment (January 1, 2000) consists of staff at each location checking the location and assessing the impact of any failures. 3. Post-millennium rollover assessment reporting and communications (January 1, 2000) consists of each location reporting on its status. These individual reports will be compiled into an overall corporate status report and will be disseminated to the executive officers for external notifications. 4. Post-millennium rollover failure remediation (January 1, 2000) consists of on-site remediation teams prepared to immediately address any problems encountered. Roadway's Year 2000 compliance cost is projected to use approximately 10.7% of the total Information Technology budget in 1999. The Year 2000 project is financed from operating cash flow and all phases have been budgeted. Total costs during 1997, 1998, and 1999 to bring the internal systems into compliance are estimated at $6.9 million in capital expenditures and $7.4 million in expense. The Company has made substantially all of these expenditures through the third quarter of 1999. The portions of narrative set forth in this discussion that are not historical in nature are forward-looking statements. The Company's actual future performance and operating and financial results may differ from those described in the forward-looking statements as a result of a variety of factors that, besides those mentioned, include the condition of the industry and the economy, labor relations, and the success of the Company's operating plans. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not hold any market risk sensitive instruments for trading purposes. The Company's primary market risks include fluctuations in interest rates, currency exchange rates, and fuel prices. The Company's earnings are affected by changes in interest rates related to its trailer leases. During 1998, the Company entered into interest rate swap agreements with major commercial banks to fix the interest rate of its trailer leases from previous variable interest rates. The value of the leases upon which the payments are based was not changed. The agreements, which expire from 2002 to 2004, fix the Company's interest costs at rates varying from 6.07% to 7.12% on leases valued at $41.4 million. An interest rate variation of 1% would have no material impact on the Company. Roadway may incur economic losses due to adverse changes in foreign currency exchange rates, primarily with fluctuations in the Canadian dollar and Mexican peso. An instantaneous 10% adverse change in foreign currency exchange rates would have no material impact on future cash flows of the Company. An increase in fuel prices would be mitigated by fuel purchase contracts in place throughout 1999, which protect the Company from a significant portion of the exposure. In addition, a variable rate fuel surcharge, assessed by Roadway when the national average price of diesel fuel exceeds $1.10 per gallon, was reinstated on July 6, 1999. 8 10 PART II -- OTHER INFORMATION ITEM 5. OTHER INFORMATION On October 6, 1999, the Board of Directors declared a cash dividend of $0.05 per share on the Company's common stock payable on December 1, 1999, to shareholders of record on November 12, 1999. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibit No. - ----------- 27 Financial Data Schedule. List of the Current Reports on Form 8-K which were filed during the current quarter--none. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ROADWAY EXPRESS, INC. Date: October 22, 1999 By: /s/ J. Dawson Cunningham ---------------- ----------------------------------------------- J. Dawson Cunningham, Executive Vice President, Chief Financial Officer, and Treasurer Date: October 22, 1999 By: /s/ John G. Coleman ---------------- ----------------------------------------------- John G. Coleman, Controller 9