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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2005

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to             

 

Commission file number 0-12255

 


 

YELLOW ROADWAY CORPORATION

(Exact name of registrant as specified in its charter)

 


 

Delaware   48-0948788

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

10990 Roe Avenue, Overland Park, Kansas   66211
(Address of principal executive offices)   (Zip Code)

 

(913) 696-6100

(Registrant’s telephone number, including area code)

 

No Changes

(Former name, former address and former fiscal year, if changed since last report)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

 

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class


 

Outstanding at April 29, 2005


Common Stock, $1 Par Value Per Share   48,866,794 shares

 



Table of Contents

INDEX

 

Item


       Page

PART I – FINANCIAL INFORMATION     
1.   Financial Statements     
   

Consolidated Balance Sheets -
March 31, 2005 and December 31, 2004

   3
   

Statements of Consolidated Operations -
Three Months Ended March 31, 2005 and 2004

   4
   

Statements of Consolidated Cash Flows -
Three Months Ended March 31, 2005 and 2004

   5
    Notes to Consolidated Financial Statements    6

2.

 

Management’s Discussion and Analysis of
Financial Condition and Results of Operations

   20
3.   Quantitative and Qualitative Disclosures About Market Risk    26
4.   Controls and Procedures    27
PART II – OTHER INFORMATION     
6.   Exhibits    28
    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)

 

     March 31,
2005


   

December 31,

2004


 
     (Unaudited)        
Assets                 

Current Assets:

                

Cash and cash equivalents

   $ 101,385     $ 106,489  

Accounts receivable, net

     814,202       778,596  

Prepaid expenses and other

     166,414       168,356  
    


 


Total current assets

     1,082,001       1,053,441  
    


 


Property and Equipment:

                

Cost

     2,671,736       2,672,289  

Less – accumulated depreciation

     1,256,731       1,249,571  
    


 


Net property and equipment

     1,415,005       1,422,718  
    


 


Goodwill

     634,364       632,141  

Intangibles, net

     464,975       468,310  

Other assets

     49,629       50,559  
    


 


Total assets

   $ 3,645,974     $ 3,627,169  
    


 


Liabilities and Shareholders’ Equity

                

Current Liabilities:

                

Accounts payable

   $ 257,774     $ 307,089  

Wages, vacations and employees’ benefits

     397,026       427,731  

Other current and accrued liabilities

     233,453       210,519  

Current maturities of contingently convertible notes

     400,000       250,000  

Current maturities of long-term debt

     4,400       4,400  
    


 


Total current liabilities

     1,292,653       1,199,739  
    


 


Other Liabilities:

                

Long-term debt, less current portion

     252,320       403,535  

Deferred income taxes, net

     319,644       319,839  

Claims and other liabilities

     511,035       489,865  

Commitments and contingencies

                

Shareholders’ Equity:

                

Common stock, $1 par value per share

     50,976       51,303  

Preferred stock, $1 par value per share

     —         —    

Capital surplus

     714,470       694,504  

Retained earnings

     600,377       550,484  

Accumulated other comprehensive loss

     (33,016 )     (33,159 )

Unamortized restricted stock awards

     (22,864 )     (10,479 )

Treasury stock, at cost (2,093 and 2,066 shares)

     (39,621 )     (38,462 )
    


 


Total shareholders’ equity

     1,270,322       1,214,191  
    


 


Total liabilities and shareholders’ equity

   $ 3,645,974     $ 3,627,169  
    


 


 

The accompanying notes are an integral part of these statements.

 

 

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STATEMENTS OF CONSOLIDATED OPERATIONS

Yellow Roadway Corporation and Subsidiaries

For the Three Months Ended March 31

(Amounts in thousands except per share data)

(Unaudited)

 

     2005

    2004

 

Operating Revenue

   $ 1,677,961     $ 1,552,135  
    


 


Operating Expenses:

                

Salaries, wages and employees’ benefits

     1,033,447       993,550  

Operating expenses and supplies

     256,457       238,357  

Operating taxes and licenses

     42,819       40,565  

Claims and insurance

     28,862       30,013  

Depreciation and amortization

     45,968       40,606  

Purchased transportation

     183,653       167,264  

(Gains) losses on property disposals, net

     (3,234 )     462  
    


 


Total operating expenses

     1,587,972       1,510,817  
    


 


Operating Income

     89,989       41,318  
    


 


Nonoperating (Income) Expenses:

                

Interest expense

     8,615       11,910  

Other

     771       (120 )
    


 


Nonoperating expenses, net

     9,386       11,790  
    


 


Income Before Income Taxes

     80,603       29,528  

Income tax provision

     30,710       11,372  
    


 


Net Income

   $ 49,893     $ 18,156  
    


 


Average Common Shares Outstanding – Basic

     48,797       47,874  

Average Common Shares Outstanding – Diluted

     52,193       48,246  

Basic Earnings Per Share

   $ 1.02     $ 0.38  

Diluted Earnings Per Share

   $ 0.96     $ 0.38  

 

The accompanying notes are an integral part of these statements.

 

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STATEMENTS OF CONSOLIDATED CASH FLOWS

Yellow Roadway Corporation and Subsidiaries

For the Three Months Ended March 31

(Amounts in thousands)

(Unaudited)

 

     2005

    2004

 

Operating Activities:

                

Net income

   $ 49,893     $ 18,156  

Noncash items included in net income:

                

Depreciation and amortization

     45,968       40,606  

(Gains) losses on property disposals, net

     (3,234 )     462  

Deferred income tax provision, net

     (193 )     (3,602 )

Changes in assets and liabilities, net:

                

Accounts receivable

     (31,334 )     (25,644 )

Accounts payable

     (49,755 )     (60,204 )

Other working capital items

     1,116       111,285  

Claims and other

     15,138       10,395  

Other, net

     3,623       (1,725 )
    


 


Net cash provided by operating activities

     31,222       89,729  
    


 


Investing Activities:

                

Acquisition of property and equipment

     (42,723 )     (57,931 )

Proceeds from disposal of property and equipment

     8,932       350  

Acquisition of companies

     (3,203 )     (7,881 )
    


 


Net cash used in investing activities

     (36,994 )     (65,462 )
    


 


Financing Activities:

                

ABS borrowings, net

     —         (58,500 )

Repayment of long-term debt

     —         (22,014 )

Proceeds from exercise of stock options

     668       1,769  
    


 


Net cash provided by (used in) financing activities

     668       (78,745 )
    


 


Net Decrease In Cash and Cash Equivalents

     (5,104 )     (54,478 )

Cash and Cash Equivalents, Beginning of Period

     106,489       75,166  
    


 


Cash and Cash Equivalents, End of Period

   $ 101,385     $ 20,688  
    


 


Supplemental Cash Flow Information:

                

Income taxes paid (refunds), net

   $ 10,030     $ (15,146 )

Interest paid

     6,826       8,791  

 

The accompanying notes are an integral part of these statements.

 

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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. Our operating subsidiaries include the following:

 

    Yellow Transportation, Inc. (“Yellow Transportation”) is a leading transportation services provider that offers a full range of regional, national and international services for the movement of industrial, commercial and retail goods, primarily through centralized management and customer facing organizations. Approximately 40% of Yellow Transportation shipments are completed in two days or less.

 

    Roadway Express, Inc. (“Roadway Express”) is a leading transportation services provider that offers a full range of regional, national and international services for the movement of industrial, commercial and retail goods, primarily through regionalized management and customer facing organizations. Approximately 30% of Roadway Express shipments are completed in two days or less. Roadway Express owns 100% of Reimer Express Lines Ltd. (“Reimer”), located in Canada, that specializes in shipments into, across and out of Canada.

 

    Roadway Next Day Corporation is a holding company focused on business opportunities in the regional and next-day delivery lanes. Roadway Next Day Corporation owns 100% 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.

 

    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.

 

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, 2004.

 

3. 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, 2004. 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.

 

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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:

 

     2005

   2004

 

Actual options granted

   —        28,000  

Dividend yield

   n/a      %

Expected volatility

   n/a      45.2 %

Risk-free interest rate

   n/a      2.6 %

Expected option life (years)

   n/a      3.6  

Fair value per option

   n/a    $ 12.61  

 

The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, for the three months ended March 31:

 

(in millions except per share data)


   2005

   2004

Net income, as reported

   $ 49.9    $ 18.2

Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects

     0.2      0.5
    

  

Pro forma net income

   $ 49.7    $ 17.7
    

  

Basic earnings per share:

             

Net income – as reported

   $ 1.02    $ 0.38

Net income – pro forma

     1.02      0.37

Diluted earnings per share:

             

Net income – as reported

   $ 0.96    $ 0.38

Net income – pro forma

     0.95      0.37

 

During the three months ended March 31, 2005, we recorded the issuance of 264,085 share units and 8,975 shares of restricted stock to certain executive officers, key employees and our Board of Directors under our long-term incentive and equity award plan. The weighted-average grant-date fair value of these awards was $59.63 per unit. According to the plan provisions, the share units provide the holders the right to receive one share of common stock upon vesting of one share unit. With respect to 142,226 units awarded, the vesting provision states that 50% of the awarded performance share units will vest three years from the date of grant and the remaining 50% will vest six years from the date of grant. With respect to 114,781 units, the entire award vests on the third anniversary of the date of grant.

 

The related compensation expense for the share units and restricted stock discussed above is included in the consolidated statements of operations ratably over the service period, defined as the performance period and vesting period combined. The performance share units and restricted stock are not reflected in the fair value or pro forma results above.

 

4. Acquisitions

 

In accordance with SFAS No. 141, Business Combinations (“SFAS No. 141”), we allocate the purchase price of our 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 (“SFAS 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 definite useful lives are amortized on a straight-line basis over their respective useful lives.

 

USF Corporation

 

On February 27, 2005, Yellow Roadway and USF Corporation (“USF”) announced that they had entered into a definitive agreement pursuant to which Yellow Roadway will acquire USF through the merger of USF with a wholly owned subsidiary of

 

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Yellow Roadway. On May 2, 2005, Yellow Roadway and USF announced revised terms of the proposed transaction, which is expected to have a transaction value of approximately $1.3 billion. Yellow Roadway will also assume approximately $99 million in net USF debt, resulting in a total enterprise value of approximately $1.4 billion. Each USF shareholder is entitled to receive $29.25 per share in cash and 0.31584 shares of Yellow Roadway stock for each share of USF stock. The transaction is subject to the approval of shareholders of USF. Assuming that all conditions to the merger agreement are satisfied or waived, we expect the transaction to close in the second quarter of 2005.

 

GPS Asia

 

In March 2005, MIQ LLC exercised and closed its option to purchase GPS Logistics Group Ltd., the Asian operations of GPS Logistics, Inc., and in turn, made a payment of $5.7 million ($3.2 million net of cash acquired). Under the terms of the purchase agreement, this payment is subject to subsequent upward and downward adjustments based on the financial performance of the Asia business through March 2007. Additional earn out payments could be required based on the financial performance of the Asia business during the period March 2007 to March 2009. The pro forma effect of this acquisition is not material to our results of operations.

 

5. 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. In accordance with SFAS No. 142, we review goodwill at least annually for impairment based on a fair value approach.

 

The following table shows the amount of goodwill attributable to our operating segments with goodwill balances and changes therein:

 

(in millions)


  

Roadway

Express


   New Penn

    Meridian IQ

   Total

Balances at December 31, 2004

   $ 545.2    $ 58.6     $ 28.3    $ 632.1

Goodwill resulting from acquisition

     —        (0.4 )     2.7      2.3
    

  


 

  

Balances at March 31, 2005

   $ 545.2    $ 58.2     $ 31.0    $ 634.4
    

  


 

  

 

The components of amortizable intangible assets are as follows:

 

          March 31, 2005

   December 31, 2004

(in millions)


   Weighted
Average
Life
(years)


   Gross
Carrying
Amount


   Accumulated
Amortization


   Gross
Carrying
Amount


   Accumulated
Amortization


Customer related

   17    $ 118.2    $ 10.9    $ 118.2    $ 9.0

Marketing related

   6      1.0      0.4      1.0      0.4

Technology based

   3      17.5      7.5      17.5      6.1
         

  

  

  

Intangible assets

        $ 136.7    $ 18.8    $ 136.7    $ 15.5
         

  

  

  

 

Total marketing related intangible assets with indefinite lives, primarily tradenames, were $345.6 million at March 31, 2005 and $346.9 million at December 31, 2004. Certain foreign currency translation adjustments are also reflected in the intangible amounts. These intangible assets are not subject to amortization, but are subjected to annual impairment tests.

 

 

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6. Employee Benefits

 

Components of Net Periodic Pension and Other Postretirement Cost

 

The following table sets forth the components of our pension and other postretirement costs for the three months ended March 31:

 

     Pension Costs

    Other Postretirement Costs

(in millions)


   2005

    2004

    2005

    2004

Service cost

   $ 10.6     $ 10.2     $ 0.2     $ 0.5

Interest cost

     14.9       14.5       0.5       0.8

Expected return on plan assets

     (13.8 )     (13.3 )     —         —  

Amortization of prior service cost

     0.4       0.3       0.1       —  

Amortization of net loss (gain)

     2.6       1.8       (0.1 )     —  
    


 


 


 

Net periodic pension cost

   $ 14.7     $ 13.5     $ 0.7     $ 1.3
    


 


 


 

 

Employer Contributions

 

We expect to contribute approximately $49.5 million to our pension plans in 2005. As of March 31, 2005, our contributions to the pension plans have not been significant.

 

7. Business Segments

 

We report financial and descriptive information about our 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.

 

We have four reportable segments, which are strategic business units that offer complementary transportation services to their customers. Yellow Transportation and Roadway Express are carriers that provide comprehensive regional, national and international transportation services. New Penn is a 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 services, 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, 2004. 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 for all periods presented. 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 Roadway Express as well as charges to Yellow Transportation for use of various Meridian IQ service names.

 

 

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The following table summarizes our operations by business segment:

 

(in millions)


  

Yellow

Transportation


   

Roadway

Express


   

New

Penn


  

Meridian

IQ


   Corporate/
Eliminations


    Consolidated

 

As of March 31, 2005

          Identifiable assets

   $ 1,012.4     $ 2,105.4     $ 248.8    $ 117.6    $ 161.8     $ 3,646.0  

As of December 31, 2004

          Identifiable assets

     1,030.4       2,110.4       248.9      108.0      129.5       3,627.2  

Three months ended March 31, 2005

                                              

External revenue

     790.5       766.2       65.4      55.9      —         1,678.0  

Intersegment revenue

     0.7       0.6       —        0.5      (1.8 )     —    

Operating income (loss)

     48.8       37.1       8.0      1.0      (4.9 )     90.0  

Adjustments to operating income(a)

     (2.6 )     (0.6 )     —        —        —         (3.2 )

Adjusted operating income (loss)(b)

     46.2       36.5       8.0      1.0      (4.9 )     86.8  

Three months ended March 31, 2004

                                              

External revenue

     733.8       717.1       56.1      45.1      —         1,552.1  

Intersegment revenue

     0.7       —         —        0.6      (1.3 )     —    

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)(b)

     26.9       15.0       5.8      0.6      (6.5 )     41.8  

  (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 (gains) on property disposals.
  (b) This measurement is used for internal management purposes and should not be construed as a better measurement than operating income as defined by generally accepted accounting principles.

 

8. 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 follows:

 

(in millions)


   2005

   2004

Net income

   $ 49.9    $ 18.2

Other comprehensive income, net of tax:

             

Changes in foreign currency translation adjustments

     0.6      —  
    

  

Other comprehensive income

     0.6      —  
    

  

Comprehensive income

   $ 50.5    $ 18.2
    

  

 

9. Rental Expenses

 

We incur rental expenses under non-cancelable 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)


   2005

   2004

Rental expense

   $ 27.1    $ 23.5

 

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 80% 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% 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.

 

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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 the 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. Under legislation passed in April 2004, qualified multi-employer plans are permitted to exclude certain recent investment losses from the minimum funding formula through 2005. The Central States Plan, in particular, has informed us that its recent investment performance has adversely affected its funding levels and that the fund is seeking corrective measures to address its funding. During the benefit period of the April 2004 legislation, the Central States Plan is expected to meet the minimum funding requirements. In the unlikely event that the Central States Plan does not elect to receive the benefit of the legislation, the Company believes that the plan would not meet the minimum funding requirements that the Code and related regulations require. If any of these multi-employer pension plans, including the Central States Plan, fails to meet minimum funding requirements and the trustees of such a plan are unable to obtain a waiver of the requirements or certain changes in how the applicable plan calculates its funding level 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. To avoid these taxes, contributions in excess of our contractually agreed upon rates could be required to correct the funding deficiency. If an excise tax were imposed on the participating employers or additional contributions required, it could have a material adverse impact on the financial results of Yellow Roadway.

 

 

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Table of Contents
11. Guarantees of the Contingent Convertible Senior Notes

 

In August 2003, Yellow Roadway issued 5.0% contingent convertible senior notes due 2023. In November 2003, we issued 3.375% contingent convertible senior notes due 2023 (the August and November issuances, collectively, may also be known as the “contingent convertible senior notes”). In December 2004, we completed exchange offers pursuant to which holders of the contingent convertible senior notes could exchange their notes for an equal amount of new net share settled contingent convertible senior notes. Substantially all notes were exchanged as a part of the exchange offers. In connection with the net share settled contingent convertible senior notes, the following 100% owned subsidiaries of Yellow Roadway have issued guarantees in favor of the holders of the net share settled contingent convertible senior notes: Yellow Transportation, Inc., Mission Supply Company, Yellow Relocation Services, Inc., Yellow Roadway Technologies, Inc., Meridian IQ, Inc., MIQ LLC (formerly 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 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, 2005 and December 31, 2004 with respect to the financial position and for the three months ended March 31, 2005 and 2004 for results of operations and for the statements of cash flows of Yellow Roadway and its subsidiaries. The Parent column presents the financial information of Yellow Roadway, the primary obligor of the contingent convertible senior notes. The Guarantor Subsidiaries column presents the financial information of all guarantor subsidiaries of the net share settled 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, Yellow Roadway Receivables Funding Corporation, Yellow Receivables Corporation and Roadway Funding, Inc., the special-purpose entities that are or were associated with our asset backed securitization (“ABS”) agreements.

 

Condensed Consolidating Balance Sheets

 

March 31, 2005

(in millions)


   Parent

    Guarantor
Subsidiaries


   Non-Guarantor
Subsidiaries


    Eliminations

    Consolidated

Cash and cash equivalents

   $ 78     $ 7    $ 16     $ —       $ 101

Intercompany advances receivable

     —         411      54       (465 )     —  

Accounts receivable, net

     4       45      775       (10 )     814

Prepaid expenses and other

     4       147      16       —         167
    


 

  


 


 

Total current assets

     86       610      861       (475 )     1,082

Property and equipment

     —         2,536      136       —         2,672

Less – accumulated depreciation

     —         1,234      23       —         1,257
    


 

  


 


 

Net property and equipment

     —         1,302      113       —         1,415

Investment in subsidiaries

     1,395       108      —         (1,503 )     —  

Receivable from affiliate

     (45 )     51      (6 )     —         —  

Goodwill, intangibles and other assets

     218       1,107      174       (350 )     1,149
    


 

  


 


 

Total assets

   $ 1,654     $ 3,178    $ 1,142     $ (2,328 )   $ 3,646
    


 

  


 


 

Intercompany advances payable

   $ —       $ —      $ 675     $ (675 )   $ —  

Accounts payable

     12       217      29       —         258

Wages, vacations and employees’ benefits

     7       371      19       —         397

Other current and accrued liabilities

     (4 )     223      15       —         234

Current maturities of contingently convertible notes

     400       —        —         —         400

Current maturities of long-term debt

     —         4      —         —         4
    


 

  


 


 

Total current liabilities

     415       815      738       (675 )     1,293

Payable to affiliate

     (27 )     20      157       (150 )     —  

Long-term debt, less current portion

     —         252      —         —         252

Deferred income taxes, net

     (6 )     286      40       —         320

Claims and other liabilities

     20       481      10       —         511

Commitments and contingencies

                                     

Shareholders’ equity

     1,252       1,324      197       (1,503 )     1,270
    


 

  


 


 

Total liabilities and shareholders’ equity

   $ 1,654     $ 3,178    $ 1,142     $ (2,328 )   $ 3,646
    


 

  


 


 

 

12


Table of Contents

December 31, 2004

(in millions)


   Parent

    Guarantor
Subsidiaries


    Non-Guarantor
Subsidiaries


    Eliminations

    Consolidated

 

Cash and cash equivalents

   $ 82     $ 7     $ 17     $ —       $ 106  

Intercompany advances receivable

     —         484       —         (484 )     —    

Accounts receivable, net

     3       14       762       —         779  

Prepaid expenses and other

     4       149       15       —         168  
    


 


 


 


 


Total current assets

     89       654       794       (484 )     1,053  

Property and equipment at cost

     —         2,541       131       —         2,672  

Less – accumulated depreciation

     —         1,231       18       —         1,249  
    


 


 


 


 


Net property and equipment

     —         1,310       113       —         1,423  

Investment in subsidiaries

     1,162       97       —         (1,259 )     —    

Receivable from affiliate

     8       127       39       (174 )     —    

Goodwill, intangibles and other assets

     218       953       180       (200 )     1,151  
    


 


 


 


 


Total assets

   $ 1,477     $ 3,141     $ 1,126     $ (2,117 )   $ 3,627  
    


 


 


 


 


Intercompany advances payable

   $ —       $ —       $ 684     $ (684 )   $ —    

Accounts payable

     8       276       23       —         307  

Wages, vacations and employees’ benefits

     17       391       20       —         428  

Other current and accrued liabilities

     —         117       7       —         124  

ABS borrowings

     17       66       3       —         86  

Current maturities of contingently convertible notes

     250       —         —         —         250  

Current maturities of long-term debt

     —         4       —         —         4  
    


 


 


 


 


Total current liabilities

     292       854       737       (684 )     1,199  

Payable to affiliate

     —         16       158       (174 )     —    

Long-term debt, less current portion

     150       254       —         —         404  

Deferred income taxes, net

     (5 )     286       39       —         320  

Claims and other liabilities

     18       457       15       —         490  

Commitments and contingencies

                                        

Shareholders’ equity

     1,022       1,274       177       (1,259 )     1,214  
    


 


 


 


 


Total liabilities and shareholders’ equity

   $ 1,477     $ 3,141     $ 1,126     $ (2,117 )   $ 3,627  
    


 


 


 


 


Condensed Consolidating Statements of Operations

                                        

For the three months ended March 31, 2005

(in millions)


   Parent

    Guarantor
Subsidiaries


    Non-Guarantor
Subsidiaries


    Eliminations

    Consolidated

 

Operating revenue

   $ 15     $ 1,604     $ 130     $ (71 )   $ 1,678  
    


 


 


 


 


Operating expenses:

                                        

Salaries, wages and employees’ benefits

     11       960       62       —         1,033  

Operating expenses and supplies

     9       294       23       (70 )     256  

Operating taxes and licenses

     —         41       2       —         43  

Claims and insurance

     —         28       1       —         29  

Depreciation and amortization

     —         41       5       —         46  

Purchased transportation

     —         154       31       (1 )     184  

Operating (gains) and losses

     —         (3 )     —         —         (3 )
    


 


 


 


 


Total operating expenses

     20       1,515       124       (71 )     1,588  
    


 


 


 


 


Operating income (loss)

     (5 )     89       6       —         90  
    


 


 


 


 


Nonoperating (income) expenses:

                                        

Interest expense

     6       17       11       (26 )     8  

Other

     (7 )     12       (30 )     26       1  
    


 


 


 


 


Nonoperating (income) expenses, net

     (1 )     29       (19 )     —         9  
    


 


 


 


 


Income (loss) before income taxes

     (4 )     60       25       —         81  

Income tax provision (benefit)

     —         22       9       —         31  

Subsidiary earnings

     54       16       —         (70 )     —    
    


 


 


 


 


Net income (loss)

   $ 50     $ 54     $ 16     $ (70 )   $ 50  
    


 


 


 


 


 

 

13


Table of Contents

For the three months ended March 31, 2004

(in millions)


   Parent

    Guarantor
Subsidiaries


    Non-Guarantor
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 (benefit)

     (3 )     9       5       —         11  

Subsidiary earnings

     22       (3 )     —         (19 )     —    
    


 


 


 


 


Net income (loss)

   $ 42     $ 11     $ 11     $ (46 )   $ 18  
    


 


 


 


 


Condensed Consolidating Statements of Cash Flows                                         

For the three months ended March 31, 2005

(in millions)


   Parent

    Guarantor
Subsidiaries


    Non-Guarantor
Subsidiaries


    Eliminations

    Consolidated

 

Operating activities:

                                        

Net cash provided by (used in) operating activities

   $ (24 )   $ 6     $ 49     $ —       $ 31  
    


 


 


 


 


Investing activities:

                                        

Acquisition of property and equipment

     —         (34 )     (9 )     —         (43 )

Proceeds from disposal of property and equipment

     —         9       —         —         9  

Acquisition of companies

     (6 )     —         3       —         (3 )
    


 


 


 


 


Net cash used in investing activities

     (6 )     (25 )     (6 )     —         (37 )
    


 


 


 


 


Financing activities:

                                        

Proceeds from exercise of stock options

     1       —         —         —         1  

Intercompany advances / repayments

     25       19       (44 )     —         —    
    


 


 


 


 


Net cash provided by (used in) financing activities

     26       19       (44 )     —         1  
    


 


 


 


 


Net decrease in cash and cash equivalents

     (4 )     —         (1 )     —         (5 )

Cash and cash equivalents, beginning of

period

     82       7       17       —         106  
    


 


 


 


 


Cash and cash equivalents, end of period

   $ 78     $ 7     $ 16     $ —       $ 101  
    


 


 


 


 


 

 

14


Table of Contents

For the three months ended March 31, 2004

(in millions)


   Parent

    Guarantor
Subsidiaries


    Non-Guarantor
Subsidiaries


    Eliminations

    Consolidated

 

Operating activities:

                                        

Net cash provided by (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 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  
    


 


 


 


 


 

 

15


Table of Contents
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 and its following 100% 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 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 and its subsidiaries as of March 31, 2005 and December 31, 2004 with respect to the financial position, for the three months ended March 31, 2005 and 2004, for results of operations and for statements of 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 Roadway Receivables Funding Corporation, Yellow Receivables Corporation and Roadway Funding, Inc., the special-purpose entities that are or were associated with our ABS agreements.

 

Condensed Consolidating Balance Sheets

 

March 31, 2005

(in millions)


   Primary
Obligor


    Guarantor
Subsidiaries


    Non-Guarantor
Subsidiaries


    Eliminations

    Consolidated

Cash and cash equivalents

   $ —       $ 86     $ 15     $ —       $ 101

Intercompany advances receivable

     —         517       —         (517 )     —  

Accounts receivable, net

     —         19       805       (10 )     814

Prepaid expenses and other

     11       90       66       —         167
    


 


 


 


 

Total current assets

     11       712       886       (527 )     1,082

Property and equipment

     —         859       1,813       —         2,672

Less – accumulated depreciation

     —         78       1,179       —         1,257
    


 


 


 


 

Net property and equipment

     —         781       634       —         1,415

Investment in subsidiaries

     681       48       9       (738 )     —  

Receivable from affiliate

     107       (61 )     (46 )     —         —  

Goodwill, intangibles and other assets

     656       1,048       95       (650 )     1,149
    


 


 


 


 

Total assets

   $ 1,455     $ 2,528     $ 1,578     $ (1,915 )   $ 3,646
    


 


 


 


 

Intercompany advances payable

   $ —       $ —       $ 527     $ (527 )   $ —  

Accounts payable

     —         102       156       —         258

Wages, vacations and employees’ benefits

     —         218       179       —         397

Other current and accrued liabilities

     9       106       119       —         234

Current maturities of contingently convertible notes

     —         400       —         —         400

Current maturities of long-term debt

     —         —         4       —         4
    


 


 


 


 

Total current liabilities

     9       826       985       (527 )     1,293

Payable to affiliate

     —         623       27       (650 )     —  

Long-term debt, less current portion

     243       —         9       —         252

Deferred income taxes, net

     (9 )     212       117       —         320

Claims and other liabilities

     —         338       173       —         511

Commitments and contingencies

                                      

Shareholders’ equity

     1,212       529       267       (738 )     1,270
    


 


 


 


 

Total liabilities and shareholders’ equity

   $ 1,455     $ 2,528     $ 1,578     $ (1,915 )   $ 3,646
    


 


 


 


 

 

16


Table of Contents

December 31, 2004

(in millions)


   Primary
Obligor


    Guarantor
Subsidiaries


   

Non-

Guarantor
Subsidiaries


   Eliminations

    Consolidated

Cash and cash equivalents

   $ —       $ 89     $ 17    $ —       $ 106

Intercompany advances receivable

     76       542       —        (618 )     —  

Accounts receivable, net

     —         (1 )     780      —         779

Prepaid expenses and other

     11       69       88      —         168
    


 


 

  


 

Total current assets

     87       699       885      (618 )     1,053

Property and equipment

     —         876       1,796      —         2,672

Less – accumulated depreciation

     —         70       1,179      —         1,249
    


 


 

  


 

Net property and equipment

     —         806       617      —         1,423

Investment in subsidiaries

     671       57       1      (729 )     —  

Receivable from affiliate

     650       (12 )     12      (650 )     —  

Goodwill, intangibles and other assets

     6       1,045       100      —         1,151
    


 


 

  


 

Total assets

   $ 1,414     $ 2,595     $ 1,615    $ (1,997 )   $ 3,627
    


 


 

  


 

Intercompany advances payable

   $ —       $ —       $ 618    $ (618 )   $ —  

Accounts payable

     —         123       184      —         307

Wages, vacations and employees’ benefits

     —         238       190      —         428

Claims and insurance accruals

     —         59       65      —         124

Other current and accrued liabilities

     (16 )     71       31      —         86

Current maturities of contingently convertible notes

     —         250       —        —         250

Current maturities of long-term debt

     —         —         4      —         4
    


 


 

  


 

Total current liabilities

     (16 )     741       1,092      (618 )     1,199

Payable to affiliate

     —         626       24      (650 )     —  

Long-term debt, less current portion

     244       150       10      —         404

Deferred income taxes, net

     (9 )     212       117      —         320

Claims and other liabilities

     —         334       156      —         490

Commitments and contingencies

                                     

Shareholders’ equity

     1,195       532       216      (729 )     1,214
    


 


 

  


 

Total liabilities and shareholders’ equity

   $ 1,414     $ 2,595     $ 1,615    $ (1,997 )   $ 3,627
    


 


 

  


 

 

Condensed Consolidating Statements of Operations

 

For the three months ended March 31, 2005

(in millions)


   Primary
Obligor


    Guarantor
Subsidiaries


   

Non-

Guarantor
Subsidiaries


    Eliminations

    Consolidated

 

Operating revenue

   $ —       $ 739     $ 939     $ —       $ 1,678  
    


 


 


 


 


Operating expenses:

                                        

Salaries, wages and employees’ benefits

     —         505       528       —         1,033  

Operating expenses and supplies

     —         70       186       —         256  

Operating taxes and licenses

     —         20       23       —         43  

Claims and insurance

     —         12       17       —         29  

Depreciation and amortization

     —         20       26       —         46  

Purchased transportation

     —         74       110       —         184  

Operating (gains) and losses

     —         (1 )     (2 )     —         (3 )
    


 


 


 


 


Total operating expenses

     —         700       888       —         1,588  
    


 


 


 


 


Operating income (loss)

     —         39       51       —         90  
    


 


 


 


 


Nonoperating (income) expenses:

                                        

Interest expense

     3       7       11       (13 )     8  

Other

     (13 )     21       (20 )     13       1  
    


 


 


 


 


Nonoperating (income) expenses, net

     (10 )     28       (9 )     —         9  
    


 


 


 


 


Income (loss) before income taxes

     10       11       60       —         81  

Income tax provision

     4       5       22       —         31  

Subsidiary earnings

     44       38       —         (82 )     —    
    


 


 


 


 


Net income (loss)

   $ 50     $ 44     $ 38     $ (82 )   $ 50  
    


 


 


 


 


 

17


Table of Contents

For the three months ended March 31, 2004

(in millions)


   Primary
Obligor


    Guarantor
Subsidiaries


   

Non-

Guarantor
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

 

For the three months ended March 31, 2005

(in millions)


   Primary
Obligor


    Guarantor
Subsidiaries


   

Non-

Guarantor
Subsidiaries


    Eliminations

   Consolidated

 

Operating activities:

                                       

Net cash provided by (used in) operating activities

   $ 31     $ (62 )   $ 62     $ —      $ 31  
    


 


 


 

  


Investing activities:

                                       

Acquisition of property and equipment

     —         (12 )     (31 )     —        (43 )

Proceeds from disposal of property and equipment

     —         2       7       —        9  

Acquisition of companies

     —         (6 )     3       —        (3 )
    


 


 


 

  


Net cash used in investing activities

     —         (16 )     (21 )     —        (37 )
    


 


 


 

  


Financing activities:

                                       

Proceeds from exercise of stock options

     —         1       —         —        1  

Intercompany advances / repayments

     (31 )     74       (43 )     —        —    
    


 


 


 

  


Net cash provided by (used in) financing activities

     (31 )     75       (43 )     —        1  
    


 


 


 

  


Net decrease in cash and cash equivalents

     —         (3 )     (2 )     —        (5 )

Cash and cash equivalents, beginning of period

     —         89       17       —        106  
    


 


 


 

  


Cash and cash equivalents, end of period

   $ —       $ 86       15     $ —      $ 101  
    


 


 


 

  


 

18


Table of Contents

Condensed Consolidating Statements of Cash Flows

 

For the three months ended March 31, 2004

(in millions)


   Primary
Obligor


    Guarantor
Subsidiaries


   

Non-

Guarantor
Subsidiaries


    Eliminations

   Consolidated

 

Operating activities:

                                       

Net cash provided by (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  
    


 


 


 

  


 

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Table of Contents

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,” “could,” “may,” “expect,” “believe,” “estimate” 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, inclement weather, price and availability of fuel, competitor pricing activity, expense volatility, ability to capture cost synergies, changes in equity and debt markets, a downturn in general or regional economic activity, effects of a terrorist attack, and labor relations, including (without limitation), the impact of work rules, work stoppages, strikes or other disruptions, any obligations to multi-employer health, welfare and pension plans, wage requirements and employee satisfaction.

 

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

 

Yellow Transportation represented approximately 47% of our consolidated revenue in the first quarter of 2005 and 2004. The table below provides summary financial information for Yellow Transportation for the three months ended March 31:

 

(in millions)


   2005

    2004

    Percent
Change


 

Operating revenue

   $ 791.2     $ 734.5     7.7 %

Operating income

     48.8       26.4     84.8 %

Adjustments to operating income(a)

     (2.6 )     0.5     420.0 %

Adjusted operating income(b)

     46.2       26.9     71.7 %

Operating ratio

     93.8 %     96.4 %   (2.6 )(c)

Adjusted operating ratio

     94.2 %     96.3 %   (2.1 )

(a) Represents charges that management excludes when evaluating segment performance to better understand our core operations (see discussion below).
(b) This measurement is used for internal management purposes and should not be construed as a better measurement than operating income as defined by generally accepted accounting principles
(c) Percentage points.

 

Three months ended March 31, 2005 compared to three months ended March 31, 2004

 

Yellow Transportation reported record first quarter revenue in 2005 of $791.2 million, representing an increase of $56.7 million or 7.7% from the first quarter of 2004. The revenue increase resulted from improved yield, higher fuel surcharge revenue and a continued emphasis on premium services. The fuel surcharge, adjusted weekly and based on a national index, represents an amount charged to customers that adjusts for changing fuel prices and is common throughout the transportation industry. 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 2005, Yellow Transportation LTL tonnage declined by 1.0% per day and LTL revenue per hundred weight improved by 8.4% from the first quarter of 2004.

 

During the first quarter of 2005, a new next-day offering was introduced that was successfully implemented with excellent operational performance. Additionally, 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®, an expedited and time-definite ground service with a 100% satisfaction guarantee. Total Exact Express revenue increased in the first quarter of 2005 by 17.1%.

 

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Table of Contents

Yellow Transportation operating income improved by $22.4 million or 84.8% in the first quarter of 2005 compared to the first quarter of 2004. Operating income increased due to higher revenue, including fuel surcharge revenue, and our continued ability to effectively balance volume and price. Increased wage and benefit rates, primarily contractual, and increased purchased transportation partially offset the operating income improvement. Operating expenses as a percentage of revenue decreased in the first quarter of 2005 by 2.6 percentage points compared to the first quarter of 2004, resulting in an operating ratio of 93.8%. 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 adjusted operating income divided by the change in revenue. The incremental margin at Yellow Transportation from the first quarter of 2004 to the first quarter of 2005 was 34% which is above our 15 to 20% long-term goal. In any given quarter, our incremental margin may be above or below our targeted level of 15 to 20%. However, over the longer-term, our expectation is to average a 15 to 20% 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, 2005 and 2004, adjustments to operating income were ($2.6) million and $0.5 million.

 

Roadway Express Results

 

Roadway Express represented approximately 46% of our consolidated revenue in the first quarter of 2005 and 2004. The table below provides summary financial information for Roadway Express for the three months ended March 31:

 

(in millions)


   2005

    2004

    Percent
Change


 

Operating revenue

   $ 766.8     $ 717.1     6.9 %

Operating income

     37.1       15.0     147.3 %

Adjustments to operating income(a)

     (0.6 )     —       100.0 %

Adjusted operating income(b)

     36.5       15.0     143.3 %

Operating ratio

     95.2 %     97.9 %   (2.7 )(c)

Adjusted operating ratio

     95.2 %     97.9 %   (2.7 )

(a) Represents charges that management excludes when evaluating segment performance to better understand our core operations.
(b) This measurement is used for internal management purposes and should not be construed as a better measurement than operating income as defined by generally accepted accounting principles
(c) Percentage points.

 

Three months ended March 31, 2005 compared to three months ended March 31, 2004

 

Roadway Express reported revenue of $766.8 million in the first quarter of 2005 compared to $717.1 million in the same quarter of 2004. The revenue increase was driven by a 6.5% increase in overall revenue per hundred weight and a 6.0% increase in LTL revenue per hundred weight. A continued emphasis on premium products, which grew 68% compared to the first quarter of 2004, also contributed to the increase in revenue. Modest increases in revenue were also attributable to the increases in tonnage per day of .9%, .5% of which is LTL. Fuel surcharge revenue also contributed to the increased revenue.

 

Roadway Express reported operating income of $37.1 million for the first quarter, an improvement of 147.3% or $22.1 million over the first quarter of 2004. Overall operating expenses were controlled in line with the increase in business volume. Operating supplies, net of fuel related costs, were reduced compared to the first quarter of 2004. Continued efficiencies in synergy activities and positive trends in insurance claims as well as increased fuel surcharge revenue also contributed to the favorable results. The segment experienced somewhat lower efficiencies related to inconsistent adjustment to volumes and the initial implementation of organizational changes in our Regional Service Centers. Roadway Express has experienced significant improvement in these cost areas late in the quarter as the initiatives came to a more complete implementation. Roadway Express reported a first quarter operating ratio of 95.2%, a 2.7 percentage point improvement over the first quarter of 2004.

 

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New Penn Results

 

New Penn represented approximately 4% of our consolidated revenue in the first quarter of 2005 and 2004. The table below provides summary financial information for New Penn for the three months ended March 31:

 

(in millions)


   2005

    2004

    Percent
Change


 

Operating revenue

   $ 65.4     $ 56.1     16.6 %

Operating income

     8.0       5.8     37.9 %

Adjustments to operating income(a)

     —         —       —    

Adjusted operating income(b)

     8.0       5.8     37.9 %

Operating ratio

     87.7 %     89.7 %   (2.0 )(c)

Adjusted operating ratio

     87.7 %     89.7 %   (2.0 )

(a) Represents charges that management excludes when evaluating segment performance to better understand our core operations.
(b) This measurement is used for internal management purposes and should not be construed as a better measurement than operating income as defined by generally accepted accounting principles
(c) Percentage points.

 

Three months ended March 31, 2005 compared to three months ended March 31, 2004

 

New Penn reported revenue of $65.4 million in the first quarter of 2005 compared to reported revenue of $56.1 million in the first quarter of 2004. The 16.6% revenue improvement from the first quarter of 2004 to the first quarter of 2005 resulted primarily from a 9.7% increase in LTL tonnage per day, and a 7.8% increase in LTL revenue per hundred weight. New Penn continued to gain profitable new customers on a year-over-year quarterly basis through strong sales initiatives and closure of a major competitor in the Northeast region, where New Penn primarily operates and favorable general economic conditions.

 

Operating income at New Penn was $8.0 million in the first quarter of 2005 compared to $5.8 million in the first quarter of 2004. Operating income results continued to exceed management’s expectations. Increased revenue, including fuel surcharge revenue, combined with stringent cost management significantly contributed to an operating ratio improvement of 2.0 percentage points from the prior year period resulting in a first quarter 2005 operating ratio of 87.7% compared to the first quarter of 2004 operating ratio of 89.7%.

 

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% of our consolidated revenue in the first quarter of 2005 and 2004. The table below provides summary financial information for Meridian IQ for the three months ended March 31:

 

(in millions)


   2005

   2004

   Percent
Change


 

Operating revenue

   $ 56.4    $ 45.7    23.4 %

Operating income

     1.0      0.6    66.6 %

 

Three months ended March 31, 2005 compared to three months ended March 31, 2004

 

In the first quarter of 2005, Meridian IQ revenue increased by $10.7 million or 23.4% from the first quarter of 2004. The significant increase in revenue resulted from a combination of strong organic growth within Meridian IQ existing services and recent acquisitions. Operating income also increased from $0.6 million in the first quarter of 2004 to $1.0 million in the first quarter of 2005. The improved operating results are reflective of the increased revenue and scalability.

 

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Table of Contents

Consolidated Results

 

Our consolidated results for the three months ended March 31, 2005 include the results of each of the operating segments previously discussed. The following discussion focuses on items that management evaluates on a consolidated basis, as segment results have been discussed previously.

 

Three months ended March 31, 2005 compared to three months ended March 31, 2004

 

The table below provides summary consolidated financial information for the three months ended March 31:

 

(in millions)


   2005

   2004

   Percent
Change


 

Operating revenue

   $ 1,678.0    $ 1,552.1    8.1 %

Operating income

     90.0      41.3    117.9 %

Nonoperating expenses, net

     9.4      11.8    (20.3 )%

Net income

   $ 49.9    $ 18.2    174.2 %

 

Each of our operating segments contributed to the revenue growth, which resulted from a combination of improving economic conditions, increased fuel surcharge revenue, increased premium services and non-asset-based acquisitions. Operating revenue increased by $125.9 million from first quarter 2004 to the first quarter of 2005.

 

Operating income increased $48.7 million for the three months ended March 31, 2005 versus the comparable year ago period, mostly due to increased revenue and the corresponding incremental margins at our operating segments. Corporate expenses in the first quarter of 2005 increased by $2 million from the first quarter of 2004 due to increased professional services costs associated with the compliance with Section 404 of the Sarbanes-Oxley Act of 2002, offset by corporate-allocated management fees.

 

Nonoperating expenses were favorably impacted by decreased interest expense that resulted from lower average debt balances in the first quarter of 2005 compared to those included in first quarter of 2004.

 

Our effective tax rate for the first quarter of 2005 was 38.1% compared to 38.5% in the first quarter of 2004. As we record our tax provision based on our full year forecasted results, we expect this rate to approximate 38.1% 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 $500 million unsecured credit agreement and a $450 million asset backed securitization (“ABS”) agreement involving Yellow Transportation and Roadway Express accounts receivable. We believe these facilities provide adequate capacity to fund our current working capital and capital expenditure requirements.

 

23


Table of Contents

The following table provides details of the outstanding components and available unused capacity under the current bank credit agreement and ABS agreement at each period end:

 

(in millions)


   March 31,
2005


   

December 31,

2004


 

Capacity:

                

Revolving loan

   $ 500.0     $ 500.0  

ABS facility

     450.0       450.0  
    


 


Total capacity

     950.0       950.0  
    


 


Amounts outstanding:

                

Letters of credit under revolver loan

     (276.4 )     (275.4 )

ABS facility

     —         —    
    


 


Total outstanding

     (276.4 )     (275.4 )
    


 


Available unused capacity

   $ 673.6     $ 674.6  
    


 


 

Contingently Convertible Notes

 

On March 31, 2005, the conversion triggers with respect to the $250 million contingent convertible senior notes and the $150 million contingent convertible senior notes had been met. Accordingly, as of March 31, 2005, our note holders had the right, at their option, to convert their notes, in whole or in part, into cash and shares of our common stock, subject to certain limitations. This conversion option, coupled with our obligation to settle any conversion by remitting to the note holder the accreted value of the note in cash, resulted in the classification of the $400 million contingent convertible senior notes as a current liability on the accompanying consolidated balance sheet as of March 31, 2005. The future balance sheet classification of these liabilities will be monitored at each quarterly reporting date, and will be determined based on an analysis of the various conversion rights described above. We believe the likelihood of a note holder presenting their notes for conversion to be remote.

 

Cash Flow Measurements

 

We use free cash flow as a measurement to manage working capital and capital expenditures. Free cash flow indicates cash available after normal capital expenditures have been funded. Free cash flow may be used to fund additional capital expenditures, to reduce outstanding debt (including current maturities), to invest in our growth strategies or other prudent uses of cash. 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)


   2005

    2004

 

Net cash from operating activities

   $ 31.2     $ 89.7  

Net property and equipment additions

     (33.8 )     (57.6 )

Proceeds from exercise of stock options

     0.7       1.8  
    


 


Free cash flow

   $ (1.9 )   $ 33.9  
    


 


 

The $35.8 million decrease in free cash flow from the first quarter of 2004 to the first quarter of 2005 resulted from decreased operating cash flow of $58.5 million. Operating cash flows decreased from the first quarter of 2004 to the first quarter of 2005 primarily due to a decrease in other working capital fluctuations of $110.2 million offset by an increase in operating income of $48.7 million. Other working capital fluctuations primarily related to $87.0 million change in employee wage and benefit accruals, including a $39.3 million change in performance incentive accruals, and $10.6 million change in accrued taxes.

 

Other items considered in evaluating free cash flow include net property and equipment additions and proceeds from the exercise of stock options. In the first three months of 2005, net property and equipment additions decreased by $23.8 million compared to the first three months of 2004. Gross property and equipment additions for the first quarter of 2005 were $42.7 million versus $57.9 million for the first quarter of 2004. Our proceeds received from the exercise of stock options decreased by $1.1 million in the first three months of 2005 compared to the first three months of 2004 due to the decrease in the exercise of stock options.

 

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Table of Contents

Contractual Obligations and 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

   $ —      $ —      $ 223.6    $ —      $ 223.6

Letters of credit

     276.4      —        —        —        276.4

Lease guarantees

     1.3      2.0      0.4      —        3.7

Surety bonds

     50.5      6.7      0.1      —        57.3
    

  

  

  

  

Total commercial commitments

   $ 328.2    $ 8.7    $ 224.1    $ —      $ 561.0
    

  

  

  

  

 

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Table of Contents

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 historically utilized both fixed rate and variable rate financial instruments with varying maturities. Given the favorable interest rate markets in 2003, we issued and entered into a significant amount of fixed-rate debt for the acquisition of Roadway. At March 31, 2005, we had 100% of our outstanding debt at fixed rates.

 

The table below provides information regarding our interest rate risk related to fixed-rate debt as of March 31, 2005. Principal cash flows are stated in millions and weighted average interest rates are by contractual maturity. We estimate the fair value of our industrial development bonds by discounting the principal and interest payments at current rates available for debt of similar terms and maturity. The fair values of our senior notes due 2008 and contingent convertible senior notes have been calculated based on the quoted market prices at March 31, 2005. The market price for the contingent convertible senior notes reflects the combination of debt and equity components of the convertible instrument.

 

(in millions)


   2005

    2006

   2007

   2008

    2009

    Thereafter

    Total

   Fair
Value


Fixed-rate debt

   $ 4.4     $ —      $ —      $ 227.5     $ 1.0     $ 406.0     $ 638.9    $ 928.9

Average interest rate

     5.25 %     —        —        8.22 %     6.13 %     4.40 %             

 

Foreign Exchange Rates

 

Revenue, operating expenses, assets and liabilities of our Canadian, Mexican, United Kingdom and Asian 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. On March 31, 2005, we entered into a foreign currency hedge with a notional amount of $6.9 million and a maturity of June 30, 2005. This instrument is to effectively hedge our exposure to foreign currency fluctuations on certain intercompany debt with GPS Logistics (EU) Ltd., a wholly owned subsidiary.

 

Fuel Price Volatility

 

Yellow Transportation, Roadway Express and New Penn currently have effective fuel surcharge programs in place. As discussed under “Results of Operations – Yellow Transportation,” these programs are well established within the industry and customer acceptance of fuel surcharges remains high. Because 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.

 

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Table of Contents

Item 4. Controls and Procedures

 

We maintain a rigorous set of disclosure controls and procedures 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 the Company’s disclosure controls and procedures are effective.

 

There were no changes in the Company’s internal control over financial reporting that occurred during the fiscal quarter ended March 31, 2005 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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Table of Contents

PART II - OTHER INFORMATION

 

Item 6. 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.

 

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Table of Contents

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    YELLOW ROADWAY CORPORATION
    Registrant
Date: May 9, 2005  

/s/ William D. Zollars


    William D. Zollars
    Chairman of the Board of
    Directors, President & Chief
    Executive Officer
Date: May 9, 2005  

/s/ Donald G. Barger, Jr.


    Donald G. Barger, Jr.
    Senior Vice President
    & Chief Financial Officer

 

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