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
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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)
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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.
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class Outstanding at April 30, 2004
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Common Stock, $1 Par Value Per Share 48,013,855 shares
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INDEX
Item Page
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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
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
Yellow Roadway Corporation and Subsidiaries
(Amounts in thousands except per share data)
(Unaudited)
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
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Property and Equipment:
Cost 2,593,109 2,538,614
Less - accumulated depreciation 1,163,099 1,135,346
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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
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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)
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Total shareholders' equity 1,026,103 1,002,085
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,470,191 $ 3,463,229
============ ============
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The accompanying notes are an integral part of these statements.
STATEMENTS OF CONSOLIDATED OPERATIONS
Yellow Roadway Corporation and Subsidiaries For the Three Months Ended March 31
(Amounts in thousands except per share data)
(Unaudited)
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
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Total operating expenses 1,510,817 669,334
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OPERATING INCOME 41,318 11,759
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NONOPERATING (INCOME) EXPENSES:
Interest expense 11,910 2,646
Other (120) (93)
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Nonoperating expenses, net 11,790 2,553
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INCOME BEFORE INCOME TAXES 29,528 9,206
Income tax provision 11,372 3,580
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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
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The accompanying notes are an integral part of these statements.
STATEMENTS OF CONSOLIDATED CASH FLOWS
Yellow Roadway Corporation and Subsidiaries For the Three Months Ended March 31
(Amounts in thousands)
(Unaudited)
2004 2003
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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)
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NET CASH FROM OPERATING ACTIVITIES 89,729 20,055
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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) --
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NET CASH USED IN INVESTING ACTIVITIES (65,462) (25,450)
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FINANCING ACTIVITIES:
ABS borrowings, net (58,500) --
Repayment of long-term debt (22,014) (21)
Proceeds from exercise of stock options 1,769 38
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NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (78,745) 17
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NET DECREASE IN CASH AND CASH EQUIVALENTS (54,478) (5,378)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 75,166 28,714
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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
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The accompanying notes are an integral part of these statements.
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'
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:
(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 ---------------------------------------------------------------------- |
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:
Foreign
Currency
Translation
December 31, Adjustments/ March 31,
(in millions) 2003 Acquisitions Reclasses 2004
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Roadway Express $ 474.5 $ -- $ 3.4 $ 477.9
New Penn 122.3 -- (5.5) 116.8
Meridian IQ 20.5 3.3 -- 23.8
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Goodwill $ 617.3 $ 3.3 $ (2.1) $ 618.5
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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:
March 31, 2004 December 31, 2003
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Weighted
Average Gross Gross
Life Carrying Accumulated Carrying Accumulated
(in millions) (years) Amount Amortization Amount Amortization
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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
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Intangible assets $ 138.4 $ 5.5 $ 135.2 $ 2.1
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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:
Other
Postretirement
Pension Costs Costs
-------------------- --------------
(in millions) 2004 2003 2004 (a)
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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 --
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Net periodic pension cost $ 13.5 $ 4.5 $ 1.3
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(a) Prior to the acquisition of Roadway, we did not provide these benefits; therefore other postretirement costs are not presented for first quarter 2003.
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:
Yellow Roadway New Meridian Corporate/
(in millions) Transportation Express Penn IQ Eliminations Consolidated
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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
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(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.
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:
2004 2003
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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
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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:
(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 -------------------------------------------------------------------------------------------------------- |
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:
(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 ------------------------------------------------------------------------------------------------------- |
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:
(in millions) 2004 2003 ------------------------------------------------------------------------------------------------------- Rental expense $ 23.5 $ 9.6 ------------------------------------------------------------------------------------------------------- |
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.
Condensed Consolidating Balance Sheets
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
======== ============ ============ ============ ============
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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
======== ============ ============ ============ ============
|
Condensed Consolidating Statements of Operations
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
======== ============ ============ ============ ============
|
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
======== ============ ============ ============ ============
|
Condensed Consolidating Statements of Cash Flows
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
======== ============ ============ ============ ============
|
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
======== ============ ============ ============ ============
|
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
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
======= ============ ============ ============ ============
|
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
======= ============ ============ ============ ============
|
Condensed Consolidating Statements of Operations
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
======= ============ ============ ============ ============
|
Condensed Consolidating Statements of Cash Flows
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
======= ============ ============ ============ ============
|
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:
(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 --------------------------------------------------------------------------------------------------------- |
(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
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.
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:
(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 --------------------------------------------------------------------------------------------------------- |
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
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:
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%
-------------------------------------------------------------------------------------------------------------------------
|
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.
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:
(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 ---------------------------------------------------------------------------------------------------- |
(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.
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:
(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) ------------------------------------------------------------------------------------------ |
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
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
----------------------------------------------------------------------------------------------------------------------------
|
(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
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.
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
----------------------------------------------------------------------------------------------------------------------------
|
(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.
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.
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%
--------------------------------------------------------------------------------------------------------------------------
|
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.
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.
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.
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.
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.
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
|
EXHIBIT 31.1
CERTIFICATION PURSUANT TO
EXCHANGE ACT RULES 13A-14 AND 15D-14,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, William D. Zollars, certify that:
(1) I have reviewed this report on Form 10-Q of Yellow Roadway Corporation;
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
(4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
(5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors:
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: May 10, 2004 /s/ William D. Zollars
----------------------------
William D. Zollars
Chairman of the Board of
Directors, President & Chief
Executive Officer
|
EXHIBIT 31.2
CERTIFICATION PURSUANT TO
EXCHANGE ACT RULES 13A-14 AND 15D-14,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Donald G. Barger, Jr., certify that:
(1) I have reviewed this report on Form 10-Q of Yellow Roadway Corporation;
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
(4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
(5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors:
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: May 10, 2004 /s/ Donald G. Barger, Jr.
-------------------------
Donald G. Barger, Jr.
Senior Vice President
& Chief Financial Officer
|
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Yellow Roadway Corporation on Form 10-Q for the period ended March 31, 2004, as filed with the Securities and Exchange Commission of the date hereof (the "Report"), I, William D. Zollars, Chief Executive Officer of Yellow Roadway Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Yellow Roadway Corporation.
Date: May 10, 2004 /s/ William D. Zollars
----------------------------
William D. Zollars
Chairman of the Board of
Directors, President & Chief
Executive Officer
|
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Yellow Roadway Corporation on Form 10-Q for the period ended March 31, 2004, as filed with the Securities and Exchange Commission of the date hereof (the "Report"), I, Donald G. Barger, Jr., Chief Financial Officer of Yellow Roadway Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Yellow Roadway Corporation.
Date: May 10, 2004 /s/ Donald G. Barger, Jr.
-------------------------
Donald G. Barger, Jr.
Senior Vice President
& Chief Financial Officer
|
EXHIBIT 99.1
CONSOLIDATED FINANCIAL STATEMENTS
Roadway LLC and Subsidiaries
A wholly owned subsidiary of Yellow Roadway Corporation Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003; Statements of Consolidated Operations and Cash Flows for the three months ended March 31, 2004 and twelve weeks ended March 29, 2003.
CONSOLIDATED BALANCE SHEETS
Roadway LLC and Subsidiaries
A wholly owned subsidiary of Yellow Roadway Corporation
(Amounts in thousands)
(Unaudited)
March 31, December 31,
2004 2003
----------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 13,281 $ 49,879
Accounts receivable, net 355,566 343,231
Advances receivable from parent 302 -
Prepaid expenses and other 51,063 34,388
----------- ------------
Total current assets 420,212 427,498
----------- ------------
Property and Equipment:
Cost 847,933 824,747
Less - accumulated depreciation 19,624 3,285
----------- ------------
Net property and equipment 828,309 821,462
----------- ------------
Goodwill 594,781 596,845
Intangibles, net 457,303 460,372
Other assets 35,081 32,314
----------- ------------
TOTAL ASSETS $ 2,335,686 $ 2,338,491
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 96,741 $ 118,701
Advances payable to parent - 56,067
Wages, vacations and employees' benefits 212,983 186,400
Other current and accrued liabilities 121,895 88,653
----------- ------------
Total current liabilities 431,619 449,821
----------- ------------
Other Liabilities:
Long-term debt 247,680 248,895
Deferred income taxes, net 211,930 213,689
Accrued pension and postretirement 218,336 210,596
Claims and other liabilities 123,216 123,725
----------- ------------
Total other liabilities 801,162 796,905
----------- ------------
Parent Company Investment:
Capital surplus 1,097,221 1,097,221
Retained earnings 6,341 (4,558)
Accumulated other comprehensive loss (657) (898)
----------- ------------
Total parent company investment 1,102,905 1,091,765
----------- ------------
TOTAL LIABILITIES AND PARENT COMPANY INVESTMENT $ 2,335,686 $ 2,338,491
=========== ============
|
The accompanying notes are an integral part of these statements.
STATEMENTS OF CONSOLIDATED OPERATIONS
Roadway LLC and Subsidiaries
A wholly owned subsidiary of Yellow Roadway Corporation
(Amounts in thousands)
(Unaudited)
Three | Twelve
Months Ended | Weeks Ended
March 31, | March 29,
2004 | 2003
------------ | -----------
|
OPERATING REVENUE $ 773,242 | $ 754,070
------------ | -----------
|
OPERATING EXPENSES: |
Salaries, wages and employees' benefits 491,455 | 475,435
Operating expenses and supplies 127,874 | 130,412
Operating taxes and licenses 19,511 | 19,866
Claims and insurance 13,535 | 15,112
Depreciation and amortization 18,922 | 17,299
Purchased transportation 81,169 | 74,784
Losses (gains) on property disposals, net (12) | 811
------------ | -----------
Total operating expenses 752,454 | 733,719
------------ | -----------
|
OPERATING INCOME 20,788 | 20,351
------------ | -----------
|
NONOPERATING (INCOME) EXPENSES: |
Interest expense 3,605 | 7,082
Other (453) | (288)
------------ | -----------
Nonoperating expenses, net 3,152 | 6,794
------------ | -----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 17,636 | 13,557
Income tax provision 6,737 | 5,694
------------ | -----------
INCOME FROM CONTINUING OPERATIONS 10,899 | 7,863
Income from discontinued operations - | 147
------------ | -----------
NET INCOME $ 10,899 | $ 8,010
============ | ===========
|
The accompanying notes are an integral part of these statements. Refer to Note 2 for the difference in accounting policies between the periods presented.
STATEMENTS OF CONSOLIDATED CASH FLOWS
Roadway LLC and Subsidiaries
A wholly owned subsidiary of Yellow Roadway Corporation
(Amounts in thousands)
(Unaudited)
Three | Twelve
Months Ended | Weeks Ended
March 31, | March 29,
2004 | 2003
------------ | -----------
|
OPERATING ACTIVITIES: |
Net income $ 10,899 | $ 8,010
Noncash items included in net income: |
Depreciation and amortization 18,922 | 17,299
Losses (gains) on property disposals, net (12) | 811
Deferred income tax provision, net (3,602) | (1,056)
Changes in assets and liabilities, net: |
Accounts receivable (12,335) | 12,606
Accounts payable (21,960) | (10,634)
Other working capital items 44,966 | (31,317)
Claims and other 7,230 | -
Other, net (7,964) | 6,254
------------ | -----------
NET CASH FROM OPERATING ACTIVITIES 36,144 | 1,973
------------ | -----------
|
INVESTING ACTIVITIES: |
Acquisition of property and equipment (16,428) | (13,786)
Proceeds from disposal of property and equipment 55 | 762
Business disposal - | 47,221
------------ | -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (16,373) | 34,197
------------ | -----------
|
FINANCING ACTIVITIES: |
Treasury stock purchases - | (950)
Dividends paid - | (960)
Repayment of long-term debt - | (24,000)
Advances payable to parent, net (56,369) | -
------------ | -----------
NET CASH USED IN FINANCING ACTIVITIES (56,369) | (25,910)
------------ | -----------
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FROM CONTINUING |
OPERATIONS (36,598) | 10,260
NET DECREASE IN CASH AND CASH EQUIVALENTS FROM DISCONTINUED |
OPERATIONS - | (38)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 49,879 | 106,929
------------ | -----------
|
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 13,281 | $ 117,151
============ ===========
|
The accompanying notes are an integral part of these statements. Refer to Note 2 for the difference in accounting policies between the periods presented.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Roadway LLC and Subsidiaries
A wholly owned subsidiary of Yellow Roadway Corporation
(unaudited)
1. DESCRIPTION OF BUSINESS
Roadway LLC (also referred to as "Roadway," "the Company," "we" or "our") is a holding company with two primary segments, Roadway Express, Inc. and Roadway Next Day Corporation. The segments are described as follows:
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. 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, Quebec, Canada and Puerto Rico.
On December 11, 2003, Yellow Corporation completed the acquisition of Roadway Corporation. The combined company was renamed Yellow Roadway Corporation ("Yellow Roadway"). Roadway Corporation was merged with and into Roadway LLC, a newly formed limited liability company and a wholly owned subsidiary of Yellow Roadway. Consideration for the acquisition included $494 million in cash and 18.0 million shares of Yellow Roadway common stock for a total purchase price of approximately $1.1 billion.
2. PRINCIPLES OF CONSOLIDATION AND SUMMARY OF ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts of Roadway LLC 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. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements included as Exhibit 99.2 to the Yellow Roadway Corporation Annual Report on Form 10-K for the year ended December 31, 2003.
Prior to the acquisition of Roadway Corporation by Yellow Corporation on December 11, 2003, Roadway Corporation and all of its wholly owned subsidiaries operated on thirteen four-week accounting periods with twelve weeks in each of the first three quarters and sixteen weeks in the fourth quarter. As part of the acquisition, Roadway LLC adopted a calendar-quarter reporting basis as well as the significant accounting policies of Yellow Roadway Corporation. In addition, we utilized independent third party appraisers to revalue significant assets and liabilities to fair market value, therefore these financial statements are not comparable to prior periods of Roadway Corporation. For accounting policies related to the Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003, and for the Statements of Consolidated Operations and Cash Flows for the three months ended March 31, 2004 and the related notes to financial statements, please refer to the Yellow Roadway Corporation Annual Report on Form 10-K for the year ended December 31, 2003. For accounting policies related to the Statements of Consolidated Operations and Cash Flows for the twelve weeks ended March 29, 2003 and related notes to financial statements, please refer to the Roadway Corporation financial statements and related notes at December 11, 2003, filed as Exhibit 99.1 to the Form 8-K filed by Yellow Roadway Corporation on February 19, 2004.
3. GOODWILL AND INTANGIBLES
Goodwill is recognized for the excess of the purchase price over the fair value of tangible and identifiable intangible net assets of businesses acquired. The following table shows the amount of goodwill attributable to our operating segments with goodwill balances and changes therein:
Foreign Currency
Translation
Adjustments/
(in thousands) December 31, 2003 Reclasses March 31, 2004
---------------------------------------------------------
Roadway Express $ 474,513 $ 3,458 $ 477,971
New Penn 122,332 (5,522) 116,810
----------------- ---------------- --------------
Goodwill $ 596,845 $ (2,064) $ 594,781
================= ================ ==============
|
As the acquisition of Roadway Corporation by Yellow Corporation
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:
March 31, 2004 December 31, 2003
Weighted ------------------------------ ------------------------------
Average Gross Gross
Life Carrying Accumulated Carrying Accumulated
(in thousands) (years) Amount Amortization Amount Amortization
-------- ------------------------------ ------------------------------
Customer related 17 $111,800 $ 2,001 $111,800 $ 356
Technology based 3 16,000 1,487 16,000 273
-------- ------------ -------- ------------
Intangible assets $127,800 $ 3,488 $127,800 $ 629
======== ============ ======== ============
|
Total marketing related intangible assets with indefinite lives were $333.0 million at March 31, 2004 and $333.2 million at December 31, 2003. These intangible assets are not subject to amortization. The change between periods related to foreign currency translation adjustments.
4. EMPLOYEE BENEFITS
COMPONENTS OF NET PERIODIC PENSION COST
In December 2003, the Financial Accounting Standards Board revised Statement of Financial Accounting Standards ("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 net periodic pension cost and other postretirement costs for the three months ended March 31, 2004 and twelve weeks ended March 29, 2003:
Pension Costs Other Postretirement Costs
----------------------------- ----------------------------
March 31, | March 29, March 31, | March 29,
(in thousands) 2004 | 2003 2004 | 2003
--------- | --------- --------- | ---------
| |
Service cost $ 5,412 | $ 4,704 $ 471 | $ 466
Interest cost 7,360 | 6,285 783 | 788
Expected return on plan assets (6,195) | (5,059) - | -
Amortization of net transition obligation - | (330) - | -
Amortization of prior service cost - | 1,298 - | (445)
Amortization of net loss 16 | 32 - | 134
--------- | --------- --------- | ---------
Net periodic pension cost $ 6,593 | $ 6,930 $ 1,254 | $ 943
========= ========= ========= =========
|
EMPLOYER CONTRIBUTIONS
In our financial statements for the year ended December 31, 2003, we disclosed that we expect to contribute approximately $20 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.
5. BUSINESS SEGMENTS
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.
Roadway has two reportable segments, which are strategic business units that offer complementary transportation services to their customers. Roadway Express is a unionized carrier that provides 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 markets.
The accounting policies of the segments are the same as those described in Exhibit 99.2 to the Yellow Roadway Corporation Annual Report on Form 10-K for the year ended December 31, 2003. Yellow Roadway charges management fees and other corporate services to its segments based on the direct benefits received or as a percentage of revenue. Roadway LLC identifiable assets primarily refer to cash, cash equivalents and miscellaneous investments.
The following table summarizes our operations by business segment:
Roadway New Roadway LLC/
(in thousands) Express Penn Eliminations Consolidated
------------------------------------------------------------------------------------
As of March 31, 2004
Identifiable assets $ 1,989,065 $ 337,463 $ 9,158 $ 2,335,686
As of December 31, 2003
Identifiable assets 2,002,421 340,713 (4,643) 2,338,491
Three months ended
March 31, 2004
External revenue 717,138 56,104 - 773,242
Operating income 15,037 5,751 - 20,788
Adjustments to operating income(a) (7) (5) - (12)
Adjusted operating income 15,030 5,746 - 20,776
==================================================================================================================================
Twelve weeks ended
March 29, 2003
External revenue 705,244 48,826 - 754,070
Operating income 17,738 2,613 - 20,351
Adjustments to operating income(a) 802 9 - 811
Adjusted operating income 18,540 2,622 - 21,162
|
(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 property gains and losses.
6. COMPREHENSIVE INCOME
Our comprehensive income for the periods presented includes net income and foreign currency translation adjustments. Comprehensive income for the three months ended March 31, 2004 and twelve weeks ended March 29, 2003 follows:
March 31, | March 29,
(in thousands) 2004 | 2003
--------- | ---------
|
Net income $ 10,899 | $ 8,010
Changes in foreign currency translation adjustments 241 | 2,764
--------- | ---------
Comprehensive income $ 11,140 | $ 10,774
========= | =========
|
7. SUPPLEMENTAL CASH FLOW INFORMATION
During the three months ended March 31, 2004, Roadway LLC received a net cash refund for taxes of $13.5 million and paid $67 thousand in cash for interest.
8. RENTAL EXPENSES
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, 2004 and twelve weeks ended March 29, 2003:
March 31, | March 29,
(in thousands) 2004 | 2003
--------- | ---------
|
Rental expense $ 13,179 | $ 13,049
--------- | ---------
|
9. MULTI-EMPLOYER PENSION PLANS
Roadway Express and New Penn contribute to multi-employer health, welfare and pension plans for employees covered by collective bargaining agreements (approximately 75 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 54 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. Roadway Express and New Penn have no current intention of taking any action that would subject us to obligations under the legislation.
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 Roadway LLC.
10. GUARANTEES OF THE SENIOR NOTES DUE 2008
Roadway LLC, the primary obligor of the senior notes due 2008, and its following 100 percent owned subsidiaries issued guarantees in favor of the holders of the notes: Roadway Next Day Corporation, New Penn Motor Express, Inc., Roadway Express, Inc., Roadway Reverse Logistics, Inc. and Roadway Express International, Inc. In addition, Yellow Roadway Corporation issued a guarantee in favor of the holders of the notes. 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 Roadway LLC or any guarantor to obtain funds from its subsidiaries by dividend or loan.
The following represents summarized condensed consolidating financial information of Roadway LLC 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 and twelve weeks ended March 29, 2003 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 with the exception of 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 Roadway Funding, Inc., the special-purpose entity that managed our ABS agreement.
Condensed Consolidating Balance Sheets
March 31, 2004
Non-
Primary Guarantor Guarantor
(in thousands) Obligor Subsidiaries Subsidiaries Eliminations Consolidated
---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ - $ 7 $ 6 $ - $ 13
Accounts receivable, net - 338 18 - 356
Intercompany advances receivable 65 34 28 (127) -
Prepaid expenses and other - 51 - - 51
---------------------------------------------------------------------------------------------------------------------
Total current assets 65 430 52 (127) 420
Property and equipment - 832 16 - 848
Less - accumulated depreciation - 19 1 - 20
---------------------------------------------------------------------------------------------------------------------
Net property and equipment - 813 15 - 828
Investment in subsidiaries 597 39 - (636) -
Receivable from affiliate 650 - - (650) -
Goodwill, intangibles and other assets 20 1,036 32 - 1,088
---------------------------------------------------------------------------------------------------------------------
Total assets $ 1,332 $ 2,318 $ 99 $ (1,413) $ 2,336
---------------------------------------------------------------------------------------------------------------------
Accounts payable $ - $ 89 $ 8 $ - $ 97
Intercompany advances payable 13 73 41 (127) -
Wages, vacations and employees' benefits 1 209 3 - 213
Other current and accrued liabilities (23) 143 2 - 122
---------------------------------------------------------------------------------------------------------------------
Total current liabilities (9) 514 54 (127) 432
Due to affiliate - 650 - (650) -
Long-term debt 248 - - - 248
Deferred income taxes, net (12) 217 7 - 212
Claims and other liabilities 2 339 - - 341
Parent company investment 1,103 598 38 (636) 1,103
---------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,332 $ 2,318 $ 99 $ (1,413) $ 2,336
---------------------------------------------------------------------------------------------------------------------
|
December 31, 2003
Non-
Primary Guarantor Guarantor
(in thousands) Obligor Subsidiaries Subsidiaries Eliminations Consolidated
----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ - $ 44 $ 6 $ - $ 50
Accounts receivable, net - 326 17 - 343
Intercompany advances receivable 38 56 103 (197) -
Prepaid expenses and other - 34 - - 34
----------------------------------------------------------------------------------------------------------------------
Total current assets 38 460 126 (197) 427
Property and equipment - 811 13 - 824
Less - accumulated depreciation - 3 - - 3
----------------------------------------------------------------------------------------------------------------------
Net property and equipment - 808 13 - 821
Investment in subsidiaries 593 29 - (622) -
Receivable from affiliate 650 - - (650) -
Goodwill, intangibles and other assets 21 1,034 35 - 1,090
----------------------------------------------------------------------------------------------------------------------
Total assets $ 1,302 $ 2,331 $ 174 $ (1,469) $ 2,338
----------------------------------------------------------------------------------------------------------------------
Accounts payable $ 1 $ 111 $ 7 $ - $ 119
Intercompany advances payable - 127 126 (197) 56
Wages, vacations and employees' benefits 1 182 3 - 186
Other current and accrued liabilities (31) 118 2 - 89
----------------------------------------------------------------------------------------------------------------------
Total current liabilities (29) 538 138 (197) 450
Due to affiliate - 650 - (650) -
Long-term debt 249 - - - 249
Deferred income taxes, net (11) 218 7 - 214
Claims and other liabilities 1 333 - - 334
Parent company investment 1,092 592 29 (622) 1,091
----------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,302 $ 2,331 $ 174 $ (1,469) $ 2,338
----------------------------------------------------------------------------------------------------------------------
|
Condensed Consolidating Statements of Operations For the three months ended March 31, 2004
Non-
Primary Guarantor Guarantor
(in thousands) Obligor Subsidiaries Subsidiaries Eliminations Consolidated
----------------------------------------------------------------------------------------------------------------------
Operating revenue $ - $ 740 $ 33 $ - $ 773
----------------------------------------------------------------------------------------------------------------------
Operating expenses:
Salaries, wages and employees' benefits - 480 11 - 491
Operating expenses and supplies - 122 6 - 128
Operating taxes and licenses - 18 1 - 19
Claims and insurance - 14 - - 14
Depreciation and amortization - 18 1 - 19
Purchased transportation - 70 11 - 81
Losses (gains) on property disposals, net - - - - -
----------------------------------------------------------------------------------------------------------------------
Total operating expenses - 722 30 - 752
----------------------------------------------------------------------------------------------------------------------
Operating income (loss) - 18 3 - 21
----------------------------------------------------------------------------------------------------------------------
Nonoperating (income) expenses:
Interest expense 3 14 (1) (13) 3
Other, net (13) (1) 1 13 -
----------------------------------------------------------------------------------------------------------------------
Nonoperating (income) expenses, net (10) 13 - - 3
----------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 10 5 3 - 18
Income tax provision 4 2 1 - 7
Subsidiary earnings 4 1 - (5) -
----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 10 $ 4 $ 2 $ (5) $ 11
----------------------------------------------------------------------------------------------------------------------
|
For the twelve weeks ended March 29, 2003
Non-
Primary Guarantor Guarantor
(in thousands) Obligor Subsidiaries Subsidiaries Eliminations Consolidated
-------------------------------------------------------------------------------------------------------------------
Operating revenue $ - $ 724 $ 30 $ - $ 754
-------------------------------------------------------------------------------------------------------------------
Operating expenses:
Salaries, wages and employees' benefits 2 463 10 - 475
Operating expenses and supplies (2) 125 7 - 130
Operating taxes and licenses - 20 - - 20
Claims and insurance - 15 - - 15
Depreciation and amortization - 17 1 - 18
Purchased transportation - 66 9 - 75
Losses on property disposals, net - 1 - - 1
-------------------------------------------------------------------------------------------------------------------
Total operating expenses - 707 27 - 734
-------------------------------------------------------------------------------------------------------------------
Operating income (loss) - 17 3 - 20
-------------------------------------------------------------------------------------------------------------------
Nonoperating (income) expenses:
Interest expense - 7 - - 7
Other, net - (1) - - (1)
-------------------------------------------------------------------------------------------------------------------
Nonoperating (income) expenses, net - 6 - - 6
-------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes - 11 3 - 14
Income tax provision - 5 1 - 6
Subsidiary earnings 8 2 - (10) -
-------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 8 $ 8 $ 2 $ (10) $ 8
-------------------------------------------------------------------------------------------------------------------
|
Condensed Consolidating Statements of Cash Flows For the three months ended March 31, 2004
Non-
Primary Guarantor Guarantor
(in thousands) Obligor Subsidiaries Subsidiaries Eliminations Consolidated
--------------------------------------------------------------------------------------------------------------------
Operating activities:
Net cash from operating activities $ 14 $ 12 $ 10 $ - $ 36
--------------------------------------------------------------------------------------------------------------------
Investing activities:
Acquisition of property and equipment - (16) - - (16)
Proceeds from disposal of property
and equipment - - - - -
--------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities - (16) - - (16)
--------------------------------------------------------------------------------------------------------------------
Financing Activities:
Intercompany advances / repayments (14) (33) (10) - (57)
--------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (14) (33) (10) - (57)
--------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash
equivalents - (37) - - (37)
Cash and cash equivalents, beginning of
period - 44 6 - 50
--------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ - $ 7 $ 6 $ - $ 13
--------------------------------------------------------------------------------------------------------------------
|
For the twelve weeks ended March 29, 2003
Non-
Primary Guarantor Guarantor
(in thousands) Obligor Subsidiaries Subsidiaries Eliminations Consolidated
---------------------------------------------------------------------------------------------------------------------
Operating activities:
Net cash from (used in) operating activities $ (10) $ 15 $ (3) $ - $ 2
---------------------------------------------------------------------------------------------------------------------
Investing activities:
Acquisition of property and equipment - (13) (1) - (14)
Proceeds from disposal of property
and equipment - 1 - - 1
Business disposal 47 - - - 47
---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing
activities 47 (12) (1) - 34
---------------------------------------------------------------------------------------------------------------------
Financing Activities:
Repayment of long-term debt (24) - - - (24)
Treasury stock purchases (1) - - - (1)
Dividends paid (1) - - - (1)
Intercompany advances / repayments 7 (7) - - -
---------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (19) (7) - - (26)
---------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 18 (4) (4) - 10
Cash and cash equivalents, beginning of
period 12 88 7 - 107
---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 30 $ 84 $ 3 $ - $ 117
---------------------------------------------------------------------------------------------------------------------
|
EXHIBIT 99.2
CONSOLIDATED FINANCIAL STATEMENTS
Roadway Express, Inc. and Subsidiaries
A wholly owned subsidiary of Yellow Roadway Corporation Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003; Statements of Consolidated Operations and Cash Flows for the three months ended March 31, 2004 and twelve weeks ended March 29, 2003.
CONSOLIDATED BALANCE SHEETS
Roadway Express, Inc. and Subsidiaries
A wholly owned subsidiary of Yellow Roadway Corporation
(Amounts in thousands)
(Unaudited)
March 31, December 31,
2004 2003
----------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 6,507 $ 24,552
Accounts receivable, net 332,110 349,016
Prepaid expenses and other 44,648 27,317
----------- ------------
Total current assets 383,265 400,885
----------- ------------
Property and Equipment:
Cost 764,124 750,264
Less - accumulated depreciation 17,358 2,763
----------- ------------
Net property and equipment 746,766 747,501
----------- ------------
Goodwill 477,971 474,513
Intangibles, net 369,123 371,081
Other assets 11,940 8,441
----------- ------------
TOTAL ASSETS $ 1,989,065 $ 2,002,421
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 92,593 $ 108,425
Advances payable to parent and affiliates 62,884 115,202
Wages, vacations and employees' benefits 196,206 173,298
Other current and accrued liabilities 134,338 110,566
----------- ------------
Total current liabilities 486,021 507,491
----------- ------------
Other Liabilities:
Note payable to affiliate 500,000 500,000
Deferred income taxes, net 184,521 186,280
Accrued pension and postretirement 216,424 208,785
Claims and other liabilities 109,549 110,173
----------- ------------
Total other liabilities 1,010,494 1,005,238
----------- ------------
Parent Company Investment:
Capital surplus 496,296 496,044
Retained earnings (3,089) (5,454)
Accumulated other comprehensive loss (657) (898)
----------- ------------
Total parent company investment 492,550 489,692
----------- ------------
TOTAL LIABILITIES AND PARENT COMPANY INVESTMENT $ 1,989,065 $ 2,002,421
=========== ============
|
The accompanying notes are an integral part of these statements.
STATEMENTS OF CONSOLIDATED OPERATIONS
Roadway Express, Inc. and Subsidiaries
A wholly owned subsidiary of Yellow Roadway Corporation
(Amounts in thousands)
(Unaudited)
Three | Twelve
Months Ended | Weeks Ended
March 31, | March 29,
2004 | 2003
------------ | ------------
|
OPERATING REVENUE $ 717,138 | $ 705,244
------------ | ------------
OPERATING EXPENSES: |
|
Salaries, wages and employees' benefits 453,976 | 439,438
Operating expenses and supplies 120,682 | 125,826
Operating taxes and licenses 17,916 | 18,379
Claims and insurance 12,822 | 13,895
Depreciation and amortization 16,078 | 14,924
Purchased transportation 80,634 | 74,242
Losses (gains) on property disposals, net (7) | 802
------------ | ------------
Total operating expenses 702,101 | 687,506
------------ | ------------
OPERATING INCOME 15,037 | 17,738
------------ | ------------
|
NONOPERATING (INCOME) EXPENSES: |
Interest expense 10,390 | 799
Other (96) | (227)
------------ | ------------
Nonoperating expenses, net 10,294 | 572
------------ | ------------
|
INCOME BEFORE INCOME TAXES 4,743 | 17,166
Income tax provision 2,126 | 6,891
------------ | ------------
NET INCOME $ 2,617 | $ 10,275
============ ============
|
The accompanying notes are an integral part of these statements. Refer to Note 2 for the difference in accounting policies between the periods presented.
STATEMENTS OF CONSOLIDATED CASH FLOWS
Roadway Express, Inc. and Subsidiaries
A wholly owned subsidiary of Yellow Roadway Corporation
(Amounts in thousands)
(Unaudited)
Three | Twelve
Months Ended | Weeks Ended
March 31, | March 29,
2004 | 2003
------------ | -----------
|
OPERATING ACTIVITIES: |
Net income $ 2,617 | $ 10,275
Noncash items included in net income: |
Depreciation and amortization 16,078 | 14,924
Losses (gains) on property disposals, net (7) | 802
Deferred income tax provision, net (1,759) | (4,787)
Changes in assets and liabilities, net: |
Accounts receivable 16,906 | 15,207
Accounts payable (15,832) | (12,067)
Other working capital items 29,351 | (15,689)
Claims and other 7,015 | -
Other, net (7,077) | 2,246
------------ | -----------
NET CASH FROM OPERATING ACTIVITIES 47,292 | 10,911
------------ | -----------
|
INVESTING ACTIVITIES: |
Acquisition of property and equipment (12,988) | (13,122)
Proceeds from disposal of property and equipment (31) | 598
------------ | -----------
NET CASH USED IN INVESTING ACTIVITIES (13,019) | (12,524)
------------ | -----------
|
FINANCING ACTIVITIES: |
Advances payable to parent and affiliates, net (52,318) | -
------------ | -----------
NET CASH USED IN FINANCING ACTIVITIES (52,318) | -
------------ | -----------
|
NET DECREASE IN CASH AND CASH EQUIVALENTS (18,045) | (1,613)
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 24,552 | 82,016
------------ | -----------
|
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,507 | $ 80,403
============ ===========
|
The accompanying notes are an integral part of these statements. Refer to Note 2 for the difference in accounting policies between the periods presented.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Roadway Express, Inc. and Subsidiaries
A wholly owned subsidiary of Yellow Roadway Corporation
(unaudited)
1. DESCRIPTION OF BUSINESS
Roadway Express, Inc. and subsidiaries (also referred to as "Roadway Express," "the Company," "we" or "our"), a wholly owned subsidiary of Roadway LLC, which is wholly owned by Yellow Roadway Corporation ("Yellow Roadway"), 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. Roadway Express owns 100 percent of Reimer Express Lines Ltd. located in Canada that specializes in shipments into, across and out of Canada. Roadway Express has no reportable operating segments as management evaluates operating performance and allocates resources based on Roadway Express consolidated results.
On December 11, 2003, Yellow Corporation completed the acquisition of Roadway Corporation. The combined company was renamed Yellow Roadway Corporation ("Yellow Roadway"). Roadway Corporation was merged with and into Roadway LLC, a newly formed limited liability company and a wholly owned subsidiary of Yellow Roadway. Consideration for the acquisition included $494 million in cash and 18.0 million shares of Yellow Roadway common stock for a total purchase price of approximately $1.1 billion. Roadway LLC principal segments include Roadway Express and Roadway Next Day Corporation.
2. PRINCIPLES OF CONSOLIDATION AND SUMMARY OF ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts of Roadway Express 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 as Exhibit 99.4 to the Yellow Roadway Corporation Annual Report on Form 10-K for the year ended December 31, 2003.
Prior to the acquisition of Roadway Corporation by Yellow Corporation on December 11, 2003, Roadway Corporation and all of its wholly owned subsidiaries, including Roadway Express, operated on thirteen four-week accounting periods with twelve weeks in each of the first three quarters and sixteen weeks in the fourth quarter. As part of the acquisition, Roadway Express adopted a calendar-quarter reporting basis as well as the significant accounting policies of Yellow Roadway Corporation. In addition, we utilized independent third party appraisers to revalue significant assets and liabilities to fair market value, therefore these financial statements are not comparable to prior periods. For accounting policies related to the Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003, and for the Statements of Consolidated Operations and Cash Flows for the three months ended March 31, 2004 and the related notes to financial statements, please refer to the Yellow Roadway Corporation Annual Report on Form 10-K for the year ended December 31, 2003. For accounting policies related to the Statements of Consolidated Operations and Cash Flows for the twelve weeks ended March 29, 2003 and related notes to financial statements, please refer to the Roadway Express financial statements and related notes at December 11, 2003, filed as Exhibit 99.3 to the Yellow Roadway Corporation Annual Report on Form 10-K for the year ended December 31, 2003.
3. GOODWILL AND INTANGIBLES
Goodwill is recognized for the excess of the purchase price over the fair value of tangible and identifiable intangible net assets of businesses acquired. The following table shows the amount of goodwill and changes therein:
Foreign Currency
Translation
Adjustments/
(in thousands) December 31, 2003 Reclasses March 31, 2004
-------------------------------------------------------------------
Goodwill $ 474,513 $ 3,458 $ 477,971
-------------------------------------------------------------------
|
As the acquisition of Roadway Corporation by Yellow Corporation
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 our tangible and
intangible assets including associated remaining lives; completion of
all direct costs associated with the acquisition; updating our
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:
March 31, 2004 December 31, 2003
Weighted ------------------------ -------------------------
Average Gross Gross
Life Carrying Accumulated Carrying Accumulated
(in thousands) (years) Amount Amortization Amount Amortization
-------- ------------------------ --------------------------
Customer related 19 $ 48,900 $ 758 $ 48,900 $ 164
Technology based 3 15,000 1,410 15,000 256
------------------------ --------------------------
Intangible assets $ 63,900 $ 2,168 $ 63,900 $ 420
======================== ==========================
|
Total marketing related intangible assets with indefinite lives were $307.4 million at March 31, 2004 and $307.6 million at December 31, 2003. These intangible assets are not subject to amortization. The change between periods related to foreign currency translation adjustments.
4. EMPLOYEE BENEFITS
COMPONENTS OF NET PERIODIC PENSION COST
In December 2003, the Financial Accounting Standards Board revised Statement of Financial Accounting Standards ("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 net periodic pension cost and other postretirement costs for the three months ended March 31, 2004 and twelve weeks ended March 29, 2003:
Pension Costs Other Postretirement Costs
------------------------ --------------------------
March 31, | March 29, March 31, | March 29,
(in thousands) 2004 | 2003 2004 | 2003
--------- | --------- --------- | ---------
| |
Service cost $ 5,401 | $ 4,693 $ 471 | $ 466
Interest cost 7,331 | 6,257 783 | 788
Expected return on plan assets (6,195) | (5,059) - | -
Amortization of net transition obligation - | (330) - | -
Amortization of prior service cost - | 1,298 - | (445)
Amortization of net loss 16 | 32 - | 134
--------- | --------- --------- | ---------
Net periodic pension cost $ 6,553 | $ 6,891 $ 1,254 | $ 943
========= ========= ========= =========
|
EMPLOYER CONTRIBUTIONS
In our financial statements for the year ended December 31, 2003, we disclosed that we expect to contribute approximately $20 million to our pension plans in 2004, and this expectation has not changed. As of March 31, 2004, we have not made any contributions to the plans.
5. COMPREHENSIVE INCOME
Our comprehensive income for the periods presented includes net income and foreign currency translation adjustments. Comprehensive income for the three months ended March 31, 2004 and twelve weeks ended March 29, 2003 follows:
March 31, | March 29,
(in thousands) 2004 | 2003
--------- | ---------
|
Net income $ 2,617 | $ 10,275
Changes in foreign currency translation adjustments 241 | 2,764
--------- | ---------
Comprehensive income $ 2,858 | $ 13,039
========= =========
|
6. SUPPLEMENTAL CASH FLOW INFORMATION
During the three months ended March 31, 2004, Roadway Express paid $1.2 million in cash for taxes and $67 thousand for interest.
7. RENTAL EXPENSES
Roadway Express 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, 2004 and twelve weeks ended March 29, 2003:
March 31, | March 29,
(in thousands) 2004 | 2003
--------- | ---------
|
Rental expense $ 13,108 | $ 12,972
|
8. MULTI-EMPLOYER PENSION PLANS
Roadway Express contributes to multi-employer health, welfare and pension plans for employees covered by collective bargaining agreements (approximately 75 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 54 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. Roadway Express has no current intention of taking any action that would subject us to obligations under the legislation.
Roadway Express has collective bargaining agreements with its unions that stipulate the amount of contributions it 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 Roadway Express.
9. RELATED PARTY TRANSACTIONS
On December 10, 2003, Roadway Express executed a $500 million ten-year
Promissory Note to Roadway Corporation (subsequently renamed Roadway
LLC), accruing interest at the rate of 8.25 percent. Interest is due
and payable quarterly, and the principal is due at maturity. All
amounts were outstanding at March 31, 2004 and at December 31, 2003.
EXHIBIT 99.3
CONSOLIDATED FINANCIAL STATEMENTS
Roadway Next Day Corporation and Subsidiary
A wholly owned subsidiary of Yellow Roadway Corporation Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003; Statements of Consolidated Operations and Cash Flows for the three months ended March 31, 2004 and twelve weeks ended March 29, 2003.
CONSOLIDATED BALANCE SHEETS
Roadway Next Day Corporation and Subsidiary A wholly owned subsidiary of Yellow Roadway Corporation
(Amounts in thousands)
(Unaudited)
March 31, December 31,
2004 2003
--------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 6,774 $ 25,328
Accounts receivable, net 23,456 19,877
Advances receivable from parent and affiliates 11,431 -
Prepaid expenses and other 6,176 6,830
--------- ------------
Total current assets 47,837 52,035
--------- ------------
Property and Equipment:
Cost 83,809 74,482
Less - accumulated depreciation 2,266 521
--------- ------------
Net property and equipment 81,543 73,961
--------- ------------
Goodwill 116,810 122,332
Intangibles, net 88,180 89,291
Other assets 3,093 3,094
--------- ------------
TOTAL ASSETS $ 337,463 $ 340,713
========= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 3,721 $ 8,905
Advances payable to parent and affiliates - 4,568
Wages, vacations and employees' benefits 15,778 12,102
Other current and accrued liabilities 10,440 9,550
--------- ------------
Total current liabilities 29,939 35,125
--------- ------------
Other Liabilities:
Note payable to affiliate 150,000 150,000
Deferred income taxes, net 38,999 38,999
Accrued pension and postretirement 1,912 1,811
Claims and other liabilities 12,172 12,057
--------- ------------
Total other liabilities 203,083 202,867
--------- ------------
Parent Company Investment:
Capital surplus 103,259 103,259
Retained earnings 1,182 (538)
--------- ------------
Total parent company investment 104,441 102,721
--------- ------------
TOTAL LIABILITIES AND PARENT COMPANY INVESTMENT $ 337,463 $ 340,713
========= ============
|
The accompanying notes are an integral part of these statements.
STATEMENTS OF CONSOLIDATED OPERATIONS
Roadway Next Day Corporation and Subsidiary A wholly owned subsidiary of Yellow Roadway Corporation
(Amounts in thousands)
(Unaudited)
Three | Twelve
Months Ended | Weeks Ended
March 31, | March 29,
2004 | 2003
------------ | -----------
|
OPERATING REVENUE $ 56,104 | $ 48,826
------------ | -----------
OPERATING EXPENSES: |
Salaries, wages and employees' benefits 37,476 | 34,067
Operating expenses and supplies 7,197 | 6,639
Operating taxes and licenses 1,595 | 1,408
Claims and insurance 712 | 1,174
Depreciation and amortization 2,844 | 2,374
Purchased transportation 534 | 542
Losses (gains) on property disposals, net (5) | 9
------------ | -----------
Total operating expenses 50,353 | 46,213
------------ | -----------
OPERATING INCOME 5,751 | 2,613
------------ | -----------
|
NONOPERATING (INCOME) EXPENSES: |
Interest expense 3,153 | 6,283
Other (11) | 11
------------ | -----------
Nonoperating expenses, net 3,142 | 6,294
------------ | -----------
|
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 2,609 | (3,681)
Income tax provision (benefit) 889 | (1,402)
------------ | -----------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS 1,720 | (2,279)
Income from discontinued operations - | 147
------------ | -----------
NET INCOME (LOSS) $ 1,720 | $ (2,132)
============ ===========
|
The accompanying notes are an integral part of these statements. Refer to Note 2 for the difference in accounting policies between the periods presented.
STATEMENTS OF CONSOLIDATED CASH FLOWS
Roadway Next Day Corporation and Subsidiary A wholly owned subsidiary of Yellow Roadway Corporation
(Amounts in thousands)
(Unaudited)
Three | Twelve
Months Ended | Weeks Ended
March 31, | March 29,
2004 | 2003
------------ | -----------
|
OPERATING ACTIVITIES: |
Net income (loss) $ 1,720 | $ (2,132)
Noncash items included in net income (loss): |
Depreciation and amortization 2,844 | 3,336
Losses (gains) on property disposals, net (5) | 9
Changes in assets and liabilities, net: |
Accounts receivable (3,579) | (1,301)
Accounts payable (5,184) | 4,293
Other working capital items 4,787 | 36
Claims and other 216 | -
Other, net - | (114)
------------ | -----------
NET CASH FROM OPERATING ACTIVITIES 799 | 4,127
------------ | -----------
|
INVESTING ACTIVITIES: |
Acquisition of property and equipment (3,440) | (664)
Proceeds from disposal of property and equipment 86 | 164
------------ | -----------
NET CASH USED IN INVESTING ACTIVITIES (3,354) | (500)
------------ | -----------
|
FINANCING ACTIVITIES: |
Advances payable to parent and affiliates, net (15,999) | (7,300)
------------ | -----------
NET CASH USED IN FINANCING ACTIVITIES (15,999) | (7,300)
------------ | -----------
|
NET DECREASE IN CASH AND CASH EQUIVALENTS FROM CONTINUING OPERATIONS (18,554) | (3,673)
NET DECREASE IN CASH AND CASH EQUIVALENTS FROM DISCONTINUED OPERATIONS - | (2,400)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 25,328 | 12,992
------------ | -----------
|
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,774 | $ 6,919
============ ===========
|
The accompanying notes are an integral part of these statements. Refer to Note 2 for the difference in accounting policies between the periods presented.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Roadway Next Day Corporation and Subsidiary A wholly owned subsidiary of Yellow Roadway Corporation
(unaudited)
1. DESCRIPTION OF BUSINESS
Roadway Next Day Corporation (also referred to as "Roadway Next Day," "the Company," "we" or "our") is a non-operating holding company focused on business opportunities in regional and next-day 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, Quebec, Canada and Puerto Rico.
In accordance with Rule 3-16 of Regulation S-X and due to Roadway Next Day and New Penn pledging their stock for debt purposes, we are presenting these consolidated financial statements of Roadway Next Day Corporation. We are not presenting the separate financial statements of New Penn because:
o The separate financial statements of New Penn are substantially identical to those of Roadway Next Day Consolidated;
o The separate financial statements of the parent Roadway Next Day, when excluding New Penn, are not material to an investor, and;
o The Company would provide separate financial statements of New Penn should Roadway Next Day commence its own operations or acquire additional subsidiaries.
On December 11, 2003, Yellow Corporation completed the acquisition of Roadway Corporation. The combined company was renamed Yellow Roadway Corporation ("Yellow Roadway"). Roadway Corporation was merged with and into Roadway LLC, a newly formed limited liability company and a wholly owned subsidiary of Yellow Roadway. Consideration for the acquisition included $494 million in cash and 18.0 million shares of Yellow Roadway common stock for a total purchase price of approximately $1.1 billion. Roadway LLC principal segments include Roadway Express, Inc. and Roadway Next Day Corporation.
2. PRINCIPLES OF CONSOLIDATION AND SUMMARY OF ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts of Roadway Next Day 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 our consolidated financial statements included as Exhibit 99.6 to the Yellow Roadway Corporation Annual Report on Form 10-K for the year ended December 31, 2003.
Prior to the acquisition of Roadway Corporation by Yellow Corporation on December 11, 2003, Roadway Corporation and all of its wholly owned subsidiaries, including Roadway Next Day, operated on thirteen four-week accounting periods with twelve weeks in each of the first three quarters and sixteen weeks in the fourth quarter. As part of the acquisition, Roadway Next Day adopted a calendar-quarter reporting basis as well as the significant accounting policies of Yellow Roadway Corporation. In addition, we utilized independent third party appraisers to revalue significant assets and liabilities to fair market value, therefore these financial statements are not comparable to prior periods. For accounting policies related to the Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003, and for the Statements of Consolidated Operations and Cash Flows for the three months ended March 31, 2004 and the related notes to financial statements, please refer to the Yellow Roadway Corporation Annual Report on Form 10-K for the year ended December 31, 2003. For accounting policies related to the
Statements of Consolidated Operations and Cash Flows for the twelve weeks ended March 29, 2003 and related notes to financial statements, please refer to our financial statements and related notes at December 11, 2003, filed as Exhibit 99.5 to the Yellow Roadway Corporation Annual Report on Form 10-K for the year ended December 31, 2003.
3. GOODWILL AND INTANGIBLES
Goodwill is recognized for the excess of the purchase price over the fair value of tangible and identifiable intangible net assets of businesses acquired. The following table shows the amount of goodwill attributable to our only operating segment with balances and changes therein:
Foreign Currency
Translation
Adjustments/
(in thousands) December 31, 2003 Reclasses March 31, 2004
-----------------------------------------------------------------
New Penn $ 122,332 $ (5,522) $ 116,810
-----------------------------------------------------------------
|
As the acquisition of Roadway Corporation by Yellow Corporation
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 our tangible and
intangible assets including associated remaining lives; completion of
all direct costs associated with the acquisition; 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:
March 31, 2004 December 31, 2003
Weighted --------------------------- -----------------------------
Average Gross Gross
Life Carrying Accumulated Carrying Accumulated
(in thousands) years) Amount Amortization Amount Amortization
-------- --------------------------- -----------------------------
Customer related 15 $ 62,900 $ 1,243 $ 62,900 $ 192
Technology based 3 1,000 77 1,000 17
--------------------------- -----------------------------
Intangible assets $ 63,900 $ 1,320 $ 63,900 $ 209
=========================== =============================
|
Total marketing related intangible assets with indefinite lives were $25.6 million at March 31, 2004 and at December 31, 2003. These intangible assets are not subject to amortization.
4. EMPLOYEE BENEFITS
COMPONENTS OF NET PERIODIC PENSION COST
In December 2003, the Financial Accounting Standards Board revised Statement of Financial Accounting Standards ("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 net periodic pension cost for the three months ended March 31, 2004 and twelve weeks ended March 29, 2003:
March 31, | March 29,
(in thousands) 2004 | 2003
--------- | ---------
|
Service cost $ 11 | $ 11
Interest cost 29 | 28
--------- | ---------
Net periodic pension cost $ 40 | $ 39
========= =========
|
EMPLOYER CONTRIBUTIONS
In our financial statements for the year ended December 31, 2003, we disclosed that we expect to contribute approximately $0.1 million to our pension plans in 2004, and this expectation has not changed. As of March 31, 2004, we have made contributions of $20 thousand dollars to our plans.
5. SUPPLEMENTAL CASH FLOW INFORMATION
During the three months ended March 31, 2004, Roadway Next Day paid $255 thousand in cash for taxes and zero for interest.
6. RENTAL EXPENSES
Roadway Next Day 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, 2004 and twelve weeks ended March 29, 2003:
March 31, | March 29,
(in thousands) 2004 | 2003
--------- | ---------
|
Rental expense $ 71 | $ 77
--------- ---------
|
7. MULTI-EMPLOYER PENSION PLANS
Roadway Next Day contributes to multi-employer health, welfare and pension plans for employees covered by collective bargaining agreements (approximately 73 percent of 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. Roadway Next Day has no current intention of taking any action that would subject us to obligations under the legislation.
Roadway Next Day has collective bargaining agreements with its unions that stipulate the amount of contributions it 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 Roadway Next Day.
8. RELATED PARTY TRANSACTIONS
On December 10, 2003, Roadway Next Day executed a $150 million ten-year
Promissory Note to Roadway Corporation (subsequently renamed Roadway
LLC), accruing interest at the rate of 8.25 percent. Interest is due
and payable quarterly, and the principal is due at maturity. All
amounts were outstanding at March 31, 2004 and at December 31, 2003.