UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the fiscal year ended December 31,
20032004OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from
__________to__________Commission file number 0-12255
YELLOW ROADWAY CORPORATION
(Exact(Exact name of registrant as specified in its charter)
Delaware 48-0948788 (State(State or other jurisdiction of (I.R.S Employer
incorporation or organization)(I.R.S. Employer
Identification No.)10990 Roe Avenue, Overland Park, Kansas 66211 (Address(Address of principal executive offices) (Zip(Zip Code) Registrant'sRegistrant’s telephone number, including area code: (913) 696-6100
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1 Par Value Per Share
(Title(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
|X| No| |x No ¨Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.| |¨Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes
|X|x No| |¨The aggregate market value of the voting and non-voting common equity held by nonaffiliates of the registrant at June 30,
20032004 was$688,228,141.$1,913,499,270.Indicate the number of shares outstanding of each of the
registrant'sregistrant’s classes of common stock, as of the latest practicable date.
Class
Outstanding at February
27, 2004 ----- --------------------------------28, 2005 Common Stock, $1 Par Value Per Share 47,909,22648,869,291 shares DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into the Form 10-K:
1) Proxy Statement related to the 2004 Annual Meeting of Shareholders - Part III
1) Proxy Statement related to the 2005 Annual Meeting of Shareholders—Part III Form 10-K
Year Ended December 31,
20032004Index
ITEM PAGE - ---- ----PART I 1. Business 4 2. Properties 11 3. Legal Proceedings 11 4. Submission of Matters to a Vote of Security Holders 11 PART II 5. Market for the Registrant's Common Stock and Related Shareholder Matters 12 6. Selected Financial Data 13 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 7A. Quantitative and Qualitative Disclosures About Market Risk 30 8. Financial Statements and Supplementary Data 31 9. Changes in and Disagreements with Independent Auditors on Accounting and Financial Disclosure 67 9A. Controls and Procedures 67 PART III 10. Directors and Executive Officers of the Registrant 68 11. Executive Compensation 69 12. Security Ownership of Certain Beneficial Owners and Management 69 13. Certain Relationships and Related Transactions 69 PART IV 14. Principal Accountant Fees and Services 70 15. Exhibits, Financial Statement Schedule and Reports on Form 8-K 70 Exhibits Index 70 Report of Independent Auditors on Financial Statement Schedule 76 Financial Statement Schedule II 77 Signatures 783
Item
Page PART I
1.
1 2.
8 3.
8 4.
8 PART II
5.
9 6.
10 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
11 7A.
28 8.
29 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
72 9A.
72 9B.
72 PART III
10.
73 11.
74 12.
Security Ownership of Certain Beneficial Owners and Management
74 13.
74 14.
74 PART IV
15.
75 75 Report of Independent Auditors on Financial Statement Schedule
79 80 81 This entire annual report, including (among other items) management’s discussion and analysis and certain statements in the Notes to Consolidated Financial Statements, includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21 of the Securities Exchange Act of 1934, as amended (each a “forward-looking statement”). Forward-looking statements include those preceded by, followed by or include the words “should,” “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 as well as those factors discussed in the Economic Factors and Seasonality section below.
PART I
Item 1. Business
GENERAL DEVELOPMENT OF THE BUSINESSGeneral Development of the Business
Yellow Roadway Corporation (also referred to as
"Yellow“Yellow Roadway," "Yellow," "we"” “we” or"our"“our”),a Fortune 500 company andone of the largest transportation service providers in the world, is a holding company that through wholly owned operating subsidiaries offers its customers a wide range of asset and non-asset-based transportation services.Yellow Technologies, Inc. ("Yellow Technologies"), a captive corporate resource, provides innovative technology solutions and services exclusively forThe Yellow Roadwaycompanies.portfolio of brands provides one of the most comprehensive packages of services for the shipment of industrial, commercial and retail goods domestically and internationally. Our operating subsidiaries which are also our reportable segments include the following:-Yellow Transportation, Inc.("(“YellowTransportation"Transportation”) is a leading transportation services provider that offers a full range of regional, national and international services for the movement of industrial, commercial and retail goods, primarily through centralized management and customer facing organizations. Approximately 40 percent of Yellow Transportation shipments are completed in two days or less.-Roadway Express, Inc.("(“RoadwayExpress"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 throughdecentralizedregionalized management and customer facing organizations. Approximately 30 percent of Roadway Express shipments are completed in two days or less. Roadway Express owns 100 percent of Reimer Express Lines Ltd.("Reimer"(“Reimer”), located in Canada, that specializes in shipments into, across and out of Canada.-Roadway Next Day Corporation is a holding company focused on business opportunities in the regional and next-day delivery lanes. Roadway Next Day Corporation owns 100 percent of New Penn Motor Express, Inc.("(“NewPenn"Penn”), which providessuperior qualityregional, 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.("(“MeridianIQ"IQ”) is a non-asset-based global transportation management company that plans and coordinates the movement of goods throughout the world, providing customers aquickfaster return on investment, more efficient supply-chain processes and a single source for transportation management solutions.On July 8, 2003 we announced our intention to acquire Roadway Corporation ("Roadway") in approximately a half cash, half stock transaction, and on December 11, 2003 we successfully closed the acquisition of Roadway. As a result of the acquisition, Roadway Corporation became Roadway LLC, a subsidiary of Yellow Roadway Corporation. Consideration for the acquisition included $494 million in cash and 18.0 million shares of Yellow Roadway common stock, based on an exchange ratio of 1.752 and an average price per share of $31.51, for a total purchase price of $1.1 billion. The purchase price also includes approximately $19 million for investment banking, legal and accounting fees that Yellow Roadway incurred to consummate the acquisition, resulting in total cash consideration of $513 million. In addition, by virtue of the merger, Roadway LLC assumed $225.0 million of principal senior notes with a fair value of $248.9 million and acquired available cash of $106.3 million. In August 2003, a subsidiary of Meridian IQ, Yellow Global, LLC, acquired certain U.S. assets of GPS Logistics, a global logistics provider. Yellow Global, LLC was then renamed Yellow GPS, LLC ("Yellow GPS"). In exchange for the acquisition, Yellow GPS assumed certain of GPS Logistics customer, leaseFor revenue and other
obligations and became obligated to pay GPS Logistics earnout payments if certain financial targets forinformation regarding these segments, see thecombined business of Yellow GPS are met. There was no net cash consideration paid in the transaction. In addition, Yellow GPS received a call option to purchase the stock of each of GPS Logistics (E.U.) Ltd., the related United Kingdom ("U.K.") operations of GPS Logistics, and GPS Logistics Group Ltd., the related Asian operations of GPS Logistics. If Yellow GPS does not exercise the Asian option, it would be required to pay a deferred option price to the shareholders of GPS Logistics Group Ltd. In February 2004, Yellow GPS exercised and closed its option to purchase GPS Logistics (E.U.) Ltd. Yellow GPS made a payment of $7.6 million, which is subject to upward and downward adjustment based on the financial performance of the U.K. business. FINANCIAL INFORMATION ABOUT SEGMENTS We have four reportable segments (Yellow Transportation, Roadway Express, New Penn and Meridian IQ) that are strategic operating units requiring different operating, marketing and technology strategies. TheBusiness Segments note under Item 8, Financial Statements and SupplementaryData, presents financial disclosures for these segments. 4NARRATIVE DESCRIPTION OF THE BUSINESSData. Yellow RoadwayCorporation isTechnologies, Inc. (“YR Technologies”), aFortune 500 companycaptive corporate resource, provides innovative technology solutions andone of the largest transportation service providers in the world. Throughservices exclusively for Yellow Roadway companies. In addition to delivering and supporting highly integrated applications and solutions, YRTechnologies provides value-added technical, network, secure data, and enterprise system management services to our operating subsidiaries. Costs incurred by YR Technologies, primarily personnel costs, are charged to our operating subsidiaries
including Yellow Transportation, Roadway Express, New Pennvia a management fee.Incorporated in Delaware in 1983 and
Meridian IQ, we offer our customers a wide range of asset and non-asset-based transportation services integrated with technology solutions provided by Yellow Technologies. The Yellow Roadway portfolio of brands provides one of the most comprehensive packages of services for the shipment of industrial, commercial and retail goods domestically and internationally. Headquarteredheadquartered in Overland Park, Kansas, we employed approximately 50,000 people as of December 31,2003. OPERATING UNITS OF THE BUSINESS Yellow Transportation One2004. The mailing address of ourlargestheadquarters is 10990 Roe Avenue, Overland Park, Kansas 66211, and our telephone number is (913) 696-6100. Our website is www.yellowroadway.com. Through the “SEC Filings” link on our website, we make available the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission (“SEC”): our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. All such filings may be viewed or printed from our website free of charge.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 approximately $494 million in cash and approximately 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
units,segments, Roadway Express and New Penn. The results of the Roadway Group are included herein since the date of acquisition.Narrative Description of the Business
Operating Units
Yellow Transportation
Yellow Transportation offers a full range of services for the movement of industrial, commercial, and retail
goods. Yellow Transportationgoods and provides transportation services by moving shipments through its regional, national and international networks of terminals, utilizing primarily ground transportation equipment that we own or lease. The Yellow Transportation mission is to be the leading provider of guaranteed, time-definite, defect-free, hassle-free transportation services for business customers worldwide. Yellow Transportation addresses the increasingly complex transportation needs of its customers through service offerings such as:- Exact Express(R)- a premium expedited and time-definite ground service with an industry-leading 100% satisfaction guarantee; - Definite Delivery(R) - a guaranteed on-time service with constant shipment monitoring and proactive notification; - Standard Ground(TM) - a ground service with complete coverage of North America; - Standard Ground(TM) Regional Advantage - a high-speed service for shipments moving between 500 and 1,500 miles; and - MyYellow(R).com - a leading edge e-commerce web site offering secure and customized online resources to manage transportation activity.
• Exact Express®—a premium expedited and time-definite ground service with an industry-leading 100% satisfaction guarantee;
• Definite Delivery®—a guaranteed on-time service with constant shipment monitoring and proactive notification;
• Standard Ground™—a ground service with complete coverage of North America;
• Standard Ground™Regional Advantage—a high-speed service for shipments moving between 500 and 1,500 miles; and
• MyYellow®.com—a leading edge e-commerce web site offering secure and customized online resources to manage transportation activity. Yellow Transportation, founded in 1924, serves more than 400,000 manufacturing, wholesale, retail and government customers throughout North America.
No single customer accounts for more than six percent of Yellow Transportation revenue.Operating from335332 strategically located facilities with 12,945 doors, Yellow Transportation provides service throughout North America, including within Puerto Rico and Hawaii. Shipments range from 100 to 40,000 pounds, with an average shipment size of 1,000 pounds traveling an average distance of more than 1,200 miles. Yellow Transportation has nearly 700 employees with sales responsibilities.Yellow Technologies has developed and supports proprietary technology that drives the Yellow Transportation network. Approximately 24,000As of December 31, 2004, approximately 23,000 Yellow Transportation employees are dedicated to operating the system that supports 280,000 shipments in transit at any time. An operations research and engineering team is responsible for the equipment, routing, sequencing and timing of nearly 59 million miles per month. At December 31,
2003,2004, Yellow Transportation had7,5977,858 owned tractors,504536 leased tractors,34,93933,106 owned trailers and6058 leased trailers.Based in Overland Park, Kansas, Yellow Transportation accounted for 47 percent of our total operating revenue in 2004, 92 percent of our total operating revenue in 2003 and 97 percent of our total operating revenue in 2002 (excluding SCS Transportation, Inc.
("SCST"(“SCST”), which we spun off in 2002)and 99 percent in 2001. On a pro forma basis, assuming the acquisition of Roadway had occurred on January 1, 2003, Yellow Transportation revenue would have represented approximately 46 percent of our total operating revenue..Roadway Express
Founded in 1930, Roadway Express, through its extensive network of
369366 terminals with 13,745 doors located throughout North America, offers long-haul, interregional and regional less-than-truckload("LTL"(“LTL”) freight services on two-day and beyond lanes. Roadway Express is a leading transporter of industrial, commercial and retail goods with a variety of innovative services designed to meet customer needs. Roadway Express provides seamless, general commodity freight service among all 50 states, Canada, Mexico and Puerto Rico, and offers import and export services to more than 100 additional countries worldwide through offshore agents.ServiceReimer Express Lines provides service in Canada,is provided by Reimer,whileservice in Mexico is handled byRoadway Express, S.A. de C.V. handles service in Mexico. Both companies are subsidiaries of Roadway Express.5General commodity freight includes apparel, appliances, automotive parts, chemicals, food, furniture, glass machinery, metal and metal products, non-bulk petroleum products, rubber, textiles, wood and miscellaneous manufactured products. Roadway Express also offers truckload
("TL"(“TL”) services to complement its LTL business, usually to fill back hauls and maximize equipment utilization.BackhaulBack haul is the process of moving trailers (often empty or partially full) back to their destination after a delivery. In addition, Roadway Express provides higher margin specialized services, including guaranteed expedited services, time-specific delivery, North American international services, coast-to-coast air delivery, sealed trailers, product returns, cold-sensitive protection and government material shipments. The Roadway Express suite of time-based services provides customers the flexibility to choose next day and beyond service on the ground or in the air at any hour, day or night, anywhere across North America with extreme reliability. These service offerings include:
• Time-Critical™ Service—a premium expedited and time-definite service designed to meet any need at any speed with delivery windows as precise as one hour. Time Critical service delivers industry-leading reliability with over 99% on-time service performance for 8 years running and is backed by a 100% on-time, no-invoice guarantee.
• Time-Critical™ Multi-Day Window Service—a service option providing customers the ability to select any size multiple day delivery window and is guaranteed not to deliver early or late. Multi-Day Window service is ideal for vendors shipping to retailers trying to avoid costly charge-backs when faced with strict window delivery requirements.
• Time-Advantage™ Service—Roadway’s newest expedited service option providing customers the ability to pick the speed to match their need on the ground or in the air anywhere throughout North America.
• Sealed Divider™—a dedicated service providing extra protection in transit with customers paying only for the space used on the trailer.
• My.roadway.com—a secure e-commerce web site offering online resources for shipment visibility and management in real time. Roadway Express employed approximately
24,00023,000 employees as of December 31,2003. It2004. At that date, it owned6,2726,457 tractors and27,03029,994 trailers and leased2,2672,903 tractors and6212,101 trailers. Headquartered in Akron, Ohio, Roadway Express accounted forfour46 percent of our total operating revenue in2003, as the results of Roadway Express were only included in our results of operations from the date of acquisition through December 31. On a pro forma basis, assuming the acquisition of Roadway had occurred on January 1, 2003, Roadway Express revenue would have represented approximately 48 percent of our total operating revenue.2004.New Penn
Founded in 1931, New Penn is a regional, next-day, ground LTL carrier of general commodities. Through a network of
2423 terminals with 1,235 doors, and using807854 owned tractors and1,6391,716 owned trailers as of December 31, 2004, New Penn services twelve states in the NortheasternU. S.U.S., Quebec and Puerto Rico and has links to the Midwest and Southeast regions of the U.S. and Ontario. At December 31, 2004, New Pennhashad more than 2,000 employees. Ninety-five percent of New Penn shipments are delivered next-day in the Northeast region of the U.S.On a pro forma basis, assuming the acquisition of Roadway had occurred on January 1, 2003,Headquartered in Lebanon, Pennsylvania, New Pennrevenue would have represented approximatelyaccounted for four percent of our total operatingrevenue.revenue in 2004.Reimer Express Lines
Founded in 1952, Reimer, a wholly owned subsidiary of Roadway Express, offers Canadian shippers
an unmatcheda selection of direct connections within Canada, throughout North America and around the world. Its network and information systems are completely integrated with those of Roadway Express. Integration with Roadway Express enables Reimer to provide seamless cross-border services between Canada, Mexico and the U.S. At December 31,2003,2004, Reimer had approximately1,5001,400 employees and operated through 22 terminals. Reimer owned373301 tractors (excludes owner-operator tractors) and513499 trailers and leased12686 tractors and522 trailers.535 trailers as of December 31, 2004. All of the operating statistics of Reimer disclosed in this paragraph are also included in the Roadway Express statistics previously discussed.Meridian IQ
Meridian IQ is a non-asset global transportation management company that plans and coordinates the movement of goods worldwide to provide customers a single source for transportation management solutions. Non-asset-based service providers (i.e. logistics providers), such as
logistics companies,Meridian IQ, arrange for and expedite the movement of goods and materials through the supply chain.TheAs is typical with logisticsproviderproviders, Meridian IQ neither owns nor operates the physical assets necessary to move goods, eliminating the significant capital requirements that asset-based providers normallyexperienced by a typical transportation company.require. This lower asset requirement allows the non-asset-based firms to reduce variable costs in economic downturns.Meridian IQ delivers a wide range of global transportation management services, with the ability to provide customers improved return-on-investment results through flexible, fast and easy-to-implement transportation services and technology management solutions. Meridian IQ has approximately
12,00018,000 transactional and 200 contractual customers.Meridian IQ offers the following services:
- International forwarding and customs brokerage - arranging for the administration, transportation and delivery of goods to over 88 countries; - Multi-modal brokerage services - providing companies with daily shipment needs with access to volume capacity and specialized equipment at competitive rates; - Domestic forwarding and expedited services - arranging guaranteed, time-definite transportation for companies within North America requiring time-sensitive delivery options and guaranteed reliability; and 6- Transportation solutions and technology management -
• International forwarding and customs brokerage—arranging for the administration, transportation and delivery of goods to over 74 countries;
• Multi-modal brokerage services—providing companies with daily shipment needs with access to volume capacity and specialized equipment at competitive rates;
• Domestic forwarding and expedited services—arranging guaranteed, time-definite transportation for companies within North America requiring time-sensitive delivery options and guaranteed reliability; and
• Transportation solutions and technology management—web-native transportation management systems enabling customers to manage their transportation network centrally with increased efficiency and visibility. When combined with network consulting and operations management any organization, regardless of size, can outsource transportation functions partially or even entirely with Meridian IQ. At December 31, 2004, Meridian IQ
and Yellow Transportation create complementary service offerings with the ability for each to generate revenue for the other. Through its strong relationships, Yellow Transportation has introduced its customers to Meridian IQ for value-added transportation technology and management services. This gives Meridian IQ immediate market credibility from established relationships, and a large pool of existing Yellow Transportation customers to target. In addition, Meridian IQ has attracted new transportation and technology management customers who utilize the Yellow Transportation service portfolio. The competition of Meridian IQ includes transportation management systems providers, domestic and international freight forwarders, freight brokers, and third party logistics companies. Meridian IQ hashad approximately600650 employees, including115125 located in theU.K.United Kingdom. Meridian IQ has a sales force of approximately 40, includingseven10 located in the U.K. Additionally, the nearly 700 members of the Yellow Transportation sales force assist Meridian IQ in developing sales leads. Basedin Overland Park, Kansas, Meridian IQ accounted for three percent of our total operating revenue in 2004, four percent of our total operating revenue in 2003 and three percent of our total operating revenue (excluding SCST) in
2002 and less than one percent in 2001. On a pro forma basis, assuming the acquisition of Roadway had occurred on January 1, 2003, Meridian IQ revenue would have represented approximately two percent of our total operating revenue. Yellow Technologies Yellow Technologies, a captive corporate resource, aims at creating competitive advantages for2002.Yellow Roadway
businesses by delivering innovative information solutionsTechnologiesYellow Roadway Technologies is headquartered in Overland Park, Kansas and
technology services. Yellow Technologieshas approximately 300 employees.In addition to delivering and supporting highly integrated applications and solutions,YellowTechnologies provides value-added technical, network, secure data, and enterprise system management services to our operating subsidiaries. YellowRoadway Technologies and Meridian IQ together provide hosting, infrastructure services and managed transportation business systems development.Yellow Technologies is headquartered in Overland Park, Kansas. COMPETITIONCompetition
Customers have a wide range of choices. We believe that service quality, performance, technology, service variety, responsiveness, and flexibility are important competitive differentiators.
Few U.S.-based LTL competitors offer comparably broad service capabilities. By integrating traditional ground, expedited, air cargo, and managed transportation solutions, we can provide consumers with a single source answer to shipping challenges with a foundation of service excellence and quality as its basis. Our market studies show a continued preference among customers for transportation providers based on quality and value, and we
believe that we are positioned to grow given our strategic focus.focus on these attributes. By increasing the depth of the services we offer, we also believe that we cansuccessfullycompete against the largest transportation competitors from a value perspective.Yellow Transportation, Roadway Express and New Penn operate in a highly competitive environment against a wide range of transportation service providers. These competitors include a few global, integrated transportation services providers, a small number of national transportation services providers similar in size and scope to Yellow Transportation and Roadway Express, a moderate number of regional or interregional providers and a large number of relatively small, shorter-haul transportation companies. Yellow Transportation and Roadway Express also compete in and against several modes of transportation, including LTL, TL, air cargo, rail, consolidators and private fleets.
Truck-based transportation includes private fleets and two
"for-hire"“for-hire” carrier groups. The private carrier segment consists of fleets owned and operated by shippers who move their own goods. The two"for-hire"“for-hire” groups are based on the typical shipment sizes handled by transportation service companies. Truckload refers to providers transporting shipments that generally fill a trailer, and LTL or shared load refers to providers transporting shipments from multiple shippers that alone would not fill a trailer.Shared load transportation providers, LTL, consolidate numerous orders generally ranging from 100 to 10,000 pounds from businesses in different locations. Orders are consolidated at individual locations within a certain radius from service centers. As a result, shared load carriers require expansive networks of pickup and delivery operations around local service centers and, with respect to national carriers, shipments are moved between origin and destination through a series of regional distribution centers. Depending on the distance shipped, shared load providers are often classified into three sub-groups:
7- Regional -Regional—Average distance is typically less than 500 miles with a focus on one- and two-day delivery times. Regional transportation companies can move shipments directly to their respective destination centers, which increases service reliability and avoids costs associated with intermediate handling.- Interregional -Interregional—Average distance is usually between 500 and 1,000 miles with a focus on two- and three-day delivery times. There is a blurring of lines between regional and national providers, as each sees the interregional segment as a growth opportunity, and there are no providers who focus exclusively on this sector.- National -National—Average distance is typically in excess of 1,000 miles with focus on two- to five-day delivery times. National providers rely on interim shipment handling through a network of terminals, which
require numerous satellite service centers, multiple distribution centers and a relay network. To gain service and cost advantages, they often ship directly between service centers, minimizing intermediate handling.
require numerous satellite service centers, multiple distribution centers and a relay network. To gain service and cost advantages, they often ship directly between service centers, minimizing intermediate handling.
Yellow Transportation and Roadway Express provide service to all three sub-groups. Entry into the LTL trucking industry on a small scale with a limited service area is relatively easy. The larger the service area the greater the barriers to entry, due to the need for broader geographic coverage and additional equipment and facility requirements associated with this coverage. The level of technology applications required and the ability to generate shipment densities that provide adequate labor and equipment utilization also make larger-scale entry into the market difficult.
REGULATIONThe competition of Meridian IQ includes transportation management systems providers, domestic and international freight forwarders, freight brokers, and third party logistics companies.
Regulation
Yellow Transportation, Roadway Express, New Penn and other interstate carriers were substantially deregulated following the enactment of the Motor Carrier Act of 1980, the Trucking Industry Regulatory Reform Act of 1994, the Federal Aviation Administration Authorization of 1994 and the ICC Termination Act of 1995. Prices and services are now largely free of regulatory controls, although the states retained the right to require compliance with safety and insurance requirements, and interstate motor carriers remain subject to regulatory controls that agencies within the U.S. Department of Transportation impose.
Yellow Transportation, Roadway Express and New Penn are subject to regulatory and legislative changes, which can affect our economics and those of our competitors. Various state agencies regulate us, and our operations are also subject to various federal, foreign, state, provincial and local environmental laws and regulations dealing with transportation, storage, presence, use, disposal and handling of hazardous materials, discharge of storm-water and underground fuel storage tanks.
We believe that our operations are in substantial compliance with current laws and
regulations, and we do not know of any existing conditions that would cause compliance with applicable regulations to have a material adverse effect on our business or operating results.regulations.We further describe our operations in Item 7,
Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations, of this report.ENVIRONMENTAL MATTERSEnvironmental Matters
Our operations are subject to U.S. federal, foreign, state, provincial and local regulations with regard to air and water quality and other environmental matters. We believe that we are in substantial compliance with these regulations. Regulation in this area continues to evolve and changes in standards of enforcement of existing regulations, as well as the enactment and enforcement of new legislation may require us and our customers to modify, supplement or replace equipment or facilities or to change or discontinue present methods of operation.
During
2003,2004, we spent approximately$2.5$3.4 million to comply with U.S. federal, state and local provisions regulating the discharge of materials into the environment or otherwise relating to the protection of the environment (collectively,"Environmental Regulations"“Environmental Regulations”). In2004,2005, we expect to spend approximately$5$4.0 million to comply with the Environmental Regulations. Based upon current information, we believe that our compliance with Environmental Regulations will not have a material adverse effect upon our capital expenditures, results of operation and competitive position because we have either made adequate reserves for such compliance expenditures or the cost for such compliance is expected to be small in comparison with our overall net worth.We estimate that we will incur less than $1 million in capital expenditures for environmental control equipment during
2004.2005. We believe that capital expenditures for environmental control equipment for20042005 willnot have a material adverse effect upon our
8financial condition because the aggregate amount of these expenditures is expected to be small in comparison with our overall net worth. The Comprehensive Environmental Response, Compensation and Liability Act (known as the
"Superfund Act"“Superfund Act”) imposes liability for the release of a"hazardous substance"“hazardous substance” into the environment. Superfund liability is imposed without regard to fault and even if the waste disposal was in compliance with the then current laws and regulations. With the joint and several liability imposed under the Superfund Act, a potentially responsible party("PRP"(“PRP”) may be required to pay more than its proportional share of such environmental remediation.We and severalSeveral of our subsidiaries have been identified as PRPs at various sites discussed below. The U.S. Environmental Protection Agency("(“theEPA"EPA”) and appropriate state agencies are supervising investigative and cleanup activities at these sites. The EPA has identified Yellow Transportation as a PRP fortwothree locations: Omega Chemical Site, Whittier,CACA; a site at Dupo, IL; and Alburn Incinerator, Inc., Chicago, IL. We estimate that the combined potential costs atthese twothe Omega and Alburn sites will not exceed $0.3 million. With respect to the Dupo site, it appears that Yellow Transportation delivered less than 100 gallons of waste to this site, which isde minimis in relation to other respondents. The EPA has issued an order under Section 106(a) of the Super fund Act for Yellow Transportation and 18 other respondents to begin remediation efforts at the Omega site. The EPA has identified Roadway Express as a PRP for five locations: Operating Industries Site, Monterey Park, CA; BEMS Landfill, Mt. Holly, NJ; Double Eagle Site, Oklahoma City, OK; M&J Solvent Site, Atlanta, GA and FL Petroleum Reprocessors Site, Davie, FL. We estimate that combined potential costs at these five sites will not exceed $0.7 million. Yellow Transportation and Roadway Express are classified asde minimis PRPs at all of these locations.While PRPs in Superfund actions have joint and several liabilities for all costs of remediation, it is not possible at this time to quantify our ultimate exposure because the projects are either in the investigative or early remediation stage. Based upon current information, we do not believe that probable or reasonably possible expenditures in connection with the sites described above are likely to have a material adverse effect on our result of operations because:
- WeTo the extent necessary, we have established adequate reserves to cover the estimate we presently believe will be our liability with respect to the matter;- We and our subsidiaries have only limited or de minimis involvement in the sites based upon a volumetric calculation; -
• We and our subsidiaries have only limited orde minimis involvement in the sites based upon a volumetric calculation; Other PRPs involved in the sites have substantial assets and may reasonably be expected to pay their share of the cost of remediation;-We have adequate resourcesinsurance coverage or contractual indemnities from third partiesto cover the ultimate liability; and-We believe that our ultimate liability is small compared with our overall net worth.We are subject to various other governmental proceedings and regulations, including foreign regulations, relating to environmental matters, but we do not believe that any of these matters are likely to have a material adverse effect on our financial condition or results of operation.
This section,
"Environmental“Environmental Matters,"” contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Theword "believe"words “believe”, “expect”, “estimate”, “may” and similar expressions are intended to identify forward-looking statements. Our expectations regarding our compliance with Environmental Regulations and our expenditures to comply with Environmental Regulations, including (without limitation) our capital expenditures on environmental control equipment, and the effect that liability from Environmental Regulation or Superfund sites may have on our financial condition or results of operations, are only our forecasts regarding these matters. These forecasts may be substantially different from actual results, which may be affected by the following factors: changes in Environmental Regulations; unexpected, adverse outcomes with respect to sites where we have been named as a PRP, including (without limitation) the sites described above; the discovery of new sites ofwhich we are not aware and where additional expenditures may be required to comply with Environmental Regulations; an unexpected discharge of hazardous materials in the course of our business or operations; an acquisition of one or more new businesses; a catastrophic event causing discharges into the environment of hydrocarbons; the inability of other PRPs to pay their share of liability for a Superfund site; and a material change in the allocation to us of the volume of discharge and a resulting change in our liability as a PRP with respect to a site.
ECONOMIC FACTORS AND SEASONALITYEconomic Factors and Seasonality
Our business is subject to a number of general economic factors that may have a materially adverse effect on the results of our operations, many of which are largely out of our control. These include recessionary economic cycles and downturns in
customers'customers’ business cycles, particularly in market segments and industries, such as retail and manufacturing, where we have a significant concentration of customers. Economic conditions may adversely affect ourcustomers'customers’ business levels, the amount of transportation services they need and their ability to pay for our services. We operate in a highly price-sensitive and competitive industry, making9pricing, customer service, effective asset utilization and cost control major competitive factors. No single customer accounts for more than six percent of our total revenue.Yellow Transportation, Roadway Express and New Penn revenues are subject to seasonal variations. Customers tend to reduce shipments after the winter holiday season, and operating expenses tend to be higher in the winter months primarily due to colderweather, which causes higher fuel consumption from increased idle time.weather. Generally, the first quarter is the weakest while the third quarter is the strongest. The availability and cost of labor can significantly impact our cost structure and earnings.FUTURE OUTLOOK Economists expect growth in capital spending in 2004 as a result of, among others, rising corporate profits, lower interest rates, improving equity markets and tax incentives. Our economic assumptions also include year-over-year gains in the industrial production index and real gross domestic product of four percent; a significant positive for our industry. Management expects our pricing environment to remain competitive, yet stable, during the upcoming year. We will continue to focus on leveraging the capabilities of our new organization and achieving the synergies that are available to us. With our significant operating leverage, we are well positioned to take advantage of improving economic conditions. This entire annual report encompassing management's discussion and analysis and certain statements in the Notes to ConsolidatedFinancial
Statements includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21 of the Securities Exchange Act of 1934, as amended (each a "forward-looking statement"). Forward-looking statements include those preceded by, followed by or include the words "should," "expects," "believes," "anticipates," "estimates" or similar expressions. Our actual results could differ materially from those projected by these forward-looking statements due to a number of factors, including (without limitation), inflation, labor relations (i.e. disruptions, strikes or work stoppages), inclement weather, price and availability of fuel, competitor pricing activity, expense volatility, changes in and customer acceptance of new technology, our ability to capture cost synergies from our acquisition of Roadway Corporation, changes in equity and debt markets and a downturn in general or regional economic activity, as well as those factors discussed in the Economic Factors and Seasonality section above. FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREASInformation About Geographic AreasOur revenue from foreign sources is largely derived from Canada, United Kingdom and Mexico. We have certain long-lived assets located in these countries as well. We discuss
revenue from foreign sourcesthis information in the Business Segments note under Item 8, Financial Statements and Supplementary Data, of this report.Foreign source revenue was not material to our consolidated financial results in 2003, 2002 or 2001. 10At December 31,
2003,2004, we operated a total of728721 freight terminals located in 50 states, Puerto Rico, Canada and Mexico. Of this total,462447 were owned terminals and266274 were leased, generally for terms of three years or less. The number of vehicle back-in doors totaled28,712,27,925, of which23,80523,467 were at owned terminals and4,3674,458 were at leased terminals. The freight terminals vary in size ranging from one to three doors at small local terminals, to over 380 doors at the largest consolidation and distribution terminal.SubstantiallyWe own substantially all of the larger terminals, containing the greatest number of doors, are owned. In addition, we and our subsidiaries own and occupy general office buildings in Overland Park, Kansas, Akron, Ohio, Lebanon, Pennsylvania and Winnipeg, Manitoba.The vast majority of ourOur owned freight terminals and office buildingslocated in the U.S. have been mortgaged to secure our borrowings under our senior secured credit facility. The Roadway LLC freight terminals and office buildingsarealso mortgaged to secure our senior notes due 2008. We discuss our outstanding debt in the Debt and Financing note under Item 8, Financial Statements and Supplementary Data.unencumbered.Our facilities and equipment are adequate to meet current business requirements in
2004.2005. Refer to Item 7,Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations, for a more detailed discussion of expectations regarding capital spending in2004.2005.We discuss legal proceedings in the Commitments, Contingencies, and Uncertainties note under Item 8, Financial Statements and Supplementary Data, of this report.
Item 4. Submission of Matters to a Vote of Security Holders
A special meetingWe did not submit any matters to the vote of our stockholders during the fourth quarter of the
Yellow Roadway security holders occurred December 9, 2003. At the meeting, the security holders approved (1) as consideration for the acquisition of Roadway, the issuance of the approximately 18 million shares of our common stock, (2) the changing of our name to Yellow Roadway Corporation upon the closing of the Roadway acquisition, and (3) adjournments or postponements of the special meeting to permit further solicitation of proxies if there are not sufficient votes at the time of the special meeting to approve proposals 1 and 2. In respect of the issuance of the Yellow Roadway shares, there were 21,732,954 shares that voted in favor, 252,323 shares that voted against, 16,819 abstentions and 4,956,799 broker non-votes. In respect of changing our name, there were 26,473,845 shares that voted in favor, 473,462 shares that voted against, 11,588 abstentions and zero broker non-votes. In respect of adjournments and postponements, there were 17,980,330 shares that voted in favor, 8,787,038 shares that voted against, 191,527 abstentions and zero broker non-votes. 11most recent fiscal year. PART II
Item 5. Market for
the Registrant'sRegistrant’s CommonStockEquity, Related Stockholder Matters andRelated Shareholder Matters COMMON STOCKIssuer Purchases of Equity Securities.Common Stock
As of February
27, 2004,28, 2005, approximately18,31217,300 shareholders of record held Yellow RoadwayCorporationcommon stock. Our only class of stock outstanding is common stock, traded through the NASDAQ Stock Market. Trading activity averaged831,0001,019,000 shares per day during2003,2004, up from384,000831,000 per day in2002. From January 1, 2003 through the announcement of our acquisition of Roadway on July 8, 2003, trading activity averaged 495,000 shares per day. From July 9, 2003 through the end of 2003, trading activity averaged 1,197,000 shares per day.2003. The NASDAQ Stock Market quotes prices for our common stock under the symbol"YELL."“YELL.” The high and low prices at which Yellow RoadwayCorporationcommon stock traded for each calendar quarter in20032004 and20022003 are shown below.QUARTERLY FINANCIAL INFORMATION (UNAUDITED)Quarterly Financial Information (unaudited)
(in thousands, except per share data) First
Quarter
Second
QuarterThird
Quarter
Fourth
Quarter2004
Operating revenue
$ 1,552,135 $ 1,674,131 $ 1,767,082 $ 1,774,137 Losses (gains) on property disposals, net
462 (193 ) (859 ) (3,957 ) Operating income
41,318 88,241 120,592 111,450 Net income
18,156 46,917 55,909 63,345 Diluted earnings per share
0.38 0.97 1.15 1.24 Common stock:
High
38.86 39.95 46.89 56.49 Low
29.77 32.41 38.32 45.20 2003
(a) Operating revenue
$ 681,093 $ 713,453 $ 770,705 $ 903,365 Losses (gains) on property disposals, net
11 30 381 (589 ) Acquisition charges
— — 864 2,260 Operating income
11,759 32,333 37,812 6,698 (b) Net income (loss)
5,626 18,360 17,369 (672 ) Diluted earnings (loss) per share
0.19 0.62 0.58 (0.02 ) Common stock:
High
27.75 28.03 33.95 36.96 Low
21.18 22.01 21.63 29.35
First Second Third(a) Fourth (in thousands, except per share data) Quarter Quarter Quarter Quarter (a) - ------------------------------------------------- ------- ------- ------- --------quarter 2003Operatinginformation included Roadway LLC revenue$681,093 $713,453 $770,705 $903,365 Losses (gains)of $141.0 million and an operating loss of $6.3 million from the date of acquisition, December 11, through December 31.
(b) Fourth quarter 2003 operating income included $17.5 million related to conforming accounting policies and a $2.0 million legal provision in addition to the $2.3 million of acquisition charges and $0.6 million of gains on property disposals net 11 30 381 (589) Acquisition, spin-off and reorganization charges -- -- 864 2,260 Operating income 11,759 32,333 37,812 6,698 (b) Net income (loss) 5,626 18,360 17,369 (672) Diluted earnings (loss) per share 0.19 0.62 0.58 (0.02) Common stock: High 27.75 28.03 33.95 36.96 Low 21.18 22.01 21.63 29.35 -------- -------- -------- -------- 2002 Operating revenue $578,802 $646,061 $682,473 $716,812 Losses (gains) on property disposals, net 468 438 351 (832) Spin-off and reorganization charges 236 561 5,367 1,846 Operating income 2,657 6,210 13,482 24,515 Income (loss) from continuing operations (147) 2,628 7,297 14,195 Income (loss) from discontinued operations (72,889) 3,592 (48,578) -- Net income (loss) (73,036) 6,220 (41,281) 14,195 Diluted earnings (loss) per share: From continuing operations (0.01) 0.09 0.25 0.48 From discontinued operations (2.88) 0.13 (1.65) -- Common stock: High 23.12 27.98 27.07 32.21 Low 18.31 21.20 18.72 25.19 ======== ======== ======== ========shown above.(a) Fourth quarter 2003 information included Roadway LLC revenue of $141.0 million and an operating loss of $6.3 million from the date of acquisition through December 31. (b) Fourth quarter 2003 operating income included $2.3 million of acquisition charges, $17.5 million related to conforming accounting policies, a $2.0 million legal provision and $0.6 million of gains on property disposals. Yellow Roadway CorporationWe did not declare any cash dividends on
itsour common stock in20022004 or 2003.Our ability to pay dividends in the future is restricted under our senior secured credit facility. Refer to Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, Financial Condition - Liquidity - Secured Credit Agreement.The information required by this item with respect to information regarding our equity compensation plans is included under the caption
"Equity“Equity Compensation PlanInformation"Information” in our Proxy Statement related to the20042005 Annual Meeting of Shareholders and is incorporated herein by reference.The information required by this item with respect to the sale of unregistered securities is included underItem
7, Management's6. Selected Financial Data
(in thousands except per share data) 2004 2003(a) 2002(b) 2001 2000 For the Year
Operating revenue
$ 6,767,485 $ 3,068,616 $ 2,624,148 $ 2,505,070 $ 2,799,131 Operating income
361,601 88,602 46,864 38,195 126,747 Losses (gains) on property disposals, net
(4,547 ) (167 ) 425 (186 ) (14,372 ) Acquisition, spin-off and reorganization charges
— 3,124 8,010 5,601 — Interest expense
43,954 20,606 7,211 8,437 10,131 Assets backed securitization (“ABS”) facility charges
— — 2,576 7,996 10,052 Income from continuing operations (after tax)
184,327 40,683 23,973 10,589 61,605 Net income (loss)
184,327 40,683 (93,902 ) 15,301 68,018 Depreciation and amortization expense
171,468 87,398 79,334 76,977 78,587 Net capital expenditures from continuing operations
164,289 99,134 82,830 81,435 70,689 Net cash from operating activities from continuing operations
435,718 155,736 25,808 12,189 151,592 At Year-End
Net property and equipment
1,422,718 1,403,268 564,976 559,532 554,150 Total assets
3,627,169 3,463,229 1,042,985 1,285,777 1,308,477 Long-term debt, less current portion
403,535 836,082 50,024 213,745 136,645 ABS facility(c)
— 71,500 50,000 141,500 177,000 Total debt, including ABS facility
657,935 909,339 124,285 361,526 382,437 Total shareholders’ equity
1,214,191 1,002,085 359,958 490,989 459,776 Measurements
Basic per share data:
Income from continuing operations
3.83 1.34 0.86 0.44 2.50 Net income (loss)
3.83 1.34 (3.35 ) 0.63 2.76 Average common shares outstanding—basic
48,149 30,370 28,004 24,376 24,649 Diluted per share data:
Income from continuing operations
3.75 1.33 0.84 0.43 2.49 Net income (loss)
3.75 1.33 (3.31 ) 0.62 2.74 Average common shares outstanding—diluted
49,174 30,655 28,371 24,679 24,787 Debt to capitalization
35.1 % 47.6 % 25.7 % 42.4 % 45.4 % Debt to capitalization, less available cash
31.2 % 45.4 % 21.0 % 41.1 % 44.0 % Shareholders’ equity per share
24.66 20.97 12.17 19.75 19.32 Common stock price range:
High
56.49 36.96 32.21 27.57 22.13 Low
29.77 21.18 18.31 15.50 13.81 Other Data
Average number of employees
50,000 50,000 (d) 23,000 30,000 32,900 Operating ratio:
Yellow Transportation
94.0 % 95.7 % 97.2 % 97.8 % 94.9 % Roadway Express
94.9 % — — — — New Penn
87.0 % — �� — —
(a) Represents the results of all Yellow Roadway entities including Roadway LLC entities from the date of acquisition, December 11, through December 31.
(b) In 2002, we completed the spin-off of SCS Transportation, Inc. (“SCST”). Financial Summary data has been reclassified for all periods presented to disclose SCST as a discontinued operation.
(c) Prior to December 31, 2002, the ABS facility was treated as a sale of assets and the sold receivables and related obligations were not reflected on the Consolidated Balance Sheets.
(d) In 2003, prior to the acquisition of Roadway on December 11, 2003, we had an average of 25,000 employees. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Acquisition of Roadway Corporation - Financing for the Acquisition - 5.0 Percent Contingent Convertible Senior Notes and Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, Acquisition of Roadway Corporation - Financing for the Acquisition - 3.375 Percent Contingent Convertible Senior Notes. 12Item 6. Selected Financial Data
(in thousands except per share data) 2003(a) 2002(b) 2001 2000 1999 - ---------------------------------------------------- ----------- ----------- ---------- ---------- ----------FOR THE YEAR Operating revenue $3,068,616 $2,624,148 $2,505,070 $2,799,131 $2,632,337 Operating income 88,602 46,864 38,195 126,747 76,026 Losses (gains) on property disposals, net (167) 425 (186) (14,372) 341 Acquisition, spin-off and reorganization charges 3,124 8,010 5,601 -- -- Interest expense 20,606 7,211 8,437 10,131 6,086 Asset backed securitization ("ABS") facility charges - 2,576 7,996 10,052 8,252 Income from continuing operations (after tax) 40,683 23,973 10,589 61,605 38,746 Net income (loss) 40,683 (93,902) 15,301 68,018 50,915 Depreciation and amortization expense 87,398 79,334 76,977 78,587 76,904 Net capital expenditures from continuing operations 99,134 82,830 81,435 70,689 96,169 Net cash from operating activities from continuing operations 155,736 25,808 12,189 151,592 206,705 ---------- ---------- ---------- ---------- ---------- AT YEAR-END Net property and equipment 1,403,268 564,976 559,532 554,150 547,139 Total assets 3,463,229 1,042,985 1,285,777 1,308,477 1,325,583 Long-term debt, less current portion 836,082 50,024 213,745 136,645 274,015 ABS facility(c) 71,500 50,000 141,500 177,000 135,000 Total debt, including ABS facility 909,339 124,285 361,526 382,437 411,407 Total shareholders' equity 1,002,085 359,958 490,989 459,776 409,380 ---------- ---------- ---------- ---------- ---------- MEASUREMENTS Diluted per share data: Income from continuing operations 1.33 0.84 0.43 2.49 1.54 Net income (loss) 1.33 (3.31) 0.62 2.74 2.02 Average common shares outstanding - diluted 30,655 28,371 24,679 24,787 25,168 Debt to capitalization 47.6% 25.7% 42.4% 45.4% 50.1% Debt to capitalization, less available cash 45.4% 21.0% 41.1% 44.0% 48.9% Shareholders' equity per share $ 20.97 $ 12.17 $ 19.75 $ 19.32 $ 16.44 Common stock price range: High 36.96 32.21 27.57 22.13 19.63 Low 21.18 18.31 15.50 13.81 14.38 ---------- ---------- ---------- ---------- ---------- OTHER DATA Average number of employees 50,000(d) 23,000 30,000 32,900 31,200 Yellow Transportation operating ratio 95.7% 97.2% 97.8% 94.9% 96.7% ========== ========== ========== ========== ==========(a) Represents the results of all Yellow Roadway entities including Roadway LLC entities from the date of acquisition through December 31. (b) In 2002, we completed the spin-off of SCS Transportation, Inc. ("SCST"). Financial Summary data has been reclassified for all periods presented to disclose SCST as a discontinued operation. (c) Prior to December 31, 2002, the ABS facility was treated as a sale of assets and the sold receivables and related obligations were not reflected on the Consolidated Balance Sheets. (d) In 2003, prior to the acquisition of Roadway on December 11, 2003, we had an average of 25,000 employees. 13Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations OVERVIEWOverview
Yellow Roadway Corporation (also referred to as
"Yellow“Yellow Roadway," "Yellow," "we"” “we” or"our"“our”),a Fortune 500 company andone 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 Roadway Technologies, Inc., a captive corporate resource, provides innovative technology solutions and services exclusively for Yellow Roadway companies. Our operating subsidiaries include the following:-Yellow Transportation, Inc.("(“YellowTransportation"Transportation”) is a leading transportation services provider that offers a full range of regional, national and international services for the movement of industrial, commercial and retail goods, primarily through centralized management and customer facing organizations. Approximately 40 percent of Yellow Transportation shipments are completed in two days or less.-Roadway Express, Inc.("(“RoadwayExpress"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 throughdecentralizedregionalized management and customer facing organizations. Approximately 30 percent of Roadway Express shipments are completed in two days or less. Roadway Express owns 100 percent of Reimer Express Lines Ltd.("Reimer"(“Reimer”), located in Canada, that specializes in shipments into, across and out of Canada.-Roadway Next Day Corporation is a holding company focused on business opportunities in the regional and next-day delivery lanes. Roadway Next Day Corporation owns 100 percent of New Penn Motor Express, Inc.("(“NewPenn"Penn”), which providessuperior qualityregional, 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.("(“MeridianIQ"IQ”) is a non-asset-based global transportation management company that plans and coordinates the movement of goods throughout the world, providing customers aquickfaster return on investment, more efficient supply-chain processes and a single source for transportation management solutions.The following
management'smanagement’s discussion and analysis explains the main factors impacting our results of operations, liquidity and capital expenditures and the critical accounting policies of Yellow Roadway. This information should be read in conjunction with the accompanying financial statements and notes to the financial statements.FORWARD-LOOKING STATEMENTS This entire annual report encompassing management's discussion and analysis and certain statements in the Notes to Consolidated Financial Statements includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21 of the Securities Exchange Act of 1934, as amended (each a "forward-looking statement"). Forward-looking statements include those preceded by, followed by or include the words "should," "expects," "believes," "anticipates," "estimates" or similar expressions.Our
actual results could differ materially from those projected by these forward-looking statements due to a number of factors, including (without limitation), inflation, labor relations (i.e. disruptions, strikes or work stoppages), inclement weather, price and availability of fuel, competitor pricing activity, expense volatility, changes in and customer acceptance of new technology, our ability to capture cost synergies from our acquisition of Roadway Corporation, changes in equity and debt markets and a downturn in general or regional economic activity. OUR OPERATING ENVIRONMENTOperating EnvironmentWe operate in a highly competitive environment, yet one where we believe the right value proposition for our customers permits us to recover our cost of capital over the business cycle. Historically, our customers viewed us solely as a less-than-truckload
("LTL"(“LTL”) carrier with limited service opportunities. Over the lastsevenseveral years significant changes have occurred in our environment, including: consolidation and liquidation of LTL carriers; the increased presence of global, small package providers such as FedEx Corporation and United Parcel Service, Inc.; and increasing needs and demands of our stakeholders. We continue to proactively address these changes through our focused strategy of being a global transportation services provider. Over the last few years, we have spun-off our nonunion, regional carriers, raised substantial capital through a successful equity offering, expanded our service offerings, and completed multiple acquisitions of non-asset-based companies. In 2003,was no exceptionwe continued to implement our strategy, as we negotiated a five-year labor agreement with the International Brotherhood of Teamsters, completed another non-asset-based acquisition, andsuccessfullyacquiredour largest traditional LTL competitor,Roadway Express.14In 2004, we were especially focused on the synergy opportunities that the Roadway acquisition presented, which effectively doubled our revenue, and meeting the demands of our customers during this strong economic period. From a services perspective, we targeted our premium services revenue lines and will continue this focus in 2005, including the introduction of a next-day offering to Yellow Transportation’s suite of services. We will continue to face challenges in the environment that we operate, primarily due to the changing competitive landscape and
general economic activity.meeting our stakeholders’ demands. Specific economic areas that impact our ability to generate profits and cash flows include the levels of consumer spending and manufacturing activity. We monitor these areas primarily through growth in real gross domestic product("GDP"(“GDP”) and the industrial production index("IPI"(“IPI”). Real GDP measures the value of goods and services produced in the U.S., excluding inflation, and the IPI measures the physical units and inputs into the U.S. production process. According to the St. Louis FREDII database, in20032004 real GDProsedeclined from a2.43.9 percent annualized rate in the first six months of the year to6.1a 3.5 percent annualized rate during the last six months of the year. In addition, the Federal Reserve G17 release states the IPIdeclinedgrew at a1.15.0 percent seasonally adjusted annualized rate in the first half of the year andgrew 5.1slowed to a 4.0 percent annualized rate in the second half of the year. Thesefavorable improvements are reflectedfactors, while declining in the later half of the year, were still strong enough to contribute to our increased profits from20022003 to2003,2004, as discussed in our Results of Operations section. We manage the impact of ourcustomers'customers’ spending and manufacturing activity through, among others, pricing discipline, cost management programs, maintaining adequate debt capacity, investment in technology and continuous improvement programs. We continue to be well positioned in the transportation industry with a strong ability to take advantage of theimprovingpositive economic conditions.ACQUISITION OF ROADWAY CORPORATIONAcquisition of Roadway Corporation
On July 8, 2003 we announced our intention to acquire Roadway Corporation
("Roadway"(“Roadway”) in approximately a half cash, half stock transaction, and on December 11, 2003 wesuccessfullyclosed theacquisition of Roadway.acquisition. As a result of the acquisition, Roadway Corporation became Roadway LLC, a subsidiary of YellowRoadway Corporation.Roadway. Consideration for the acquisition included approximately $494 million in cash and approximately 18.0 million shares of Yellow Roadway common stock, based on an exchange ratio of 1.752 and an average price per share of $31.51 (subject to proration and allocation provisions), for a total purchase price of $1.1 billion. The purchase price also included approximately $19 million for investment banking, legal and accounting fees that Yellow Roadway incurred to consummate the acquisition, resulting in total cash consideration of $513 million. In addition, by virtue of the merger,Roadway LLCwe assumed $225.0 million of principal senior notes due 2008("senior notes due 2008")with a fair value of$248.9$249.2 million at the acquisition date and acquired available cash of $106.3 million.To successfully completeDuring 2004, we worked toward the
transaction, we obtained the following: financing for the cash portionintegration ofthe purchase price, as well as the refinancing of certain existing debt facilities; customary regulatory approvals; and approval by the shareholders of both companies of certain aspects of the transaction. FINANCING FOR THE ACQUISITION 5.0 Percent Contingent Convertible Senior Notes As part of the cash portion of the purchase price, we issued $250 million of 5.0 percent contingent convertible senior notes due 2023, in a private offering. On August 8, 2003, we closed the sale of $200 million of the contingent convertible senior notes and on August 15, 2003 we closed the sale of an additional $50 million pursuant to the exercise of an option of the initial purchasers to purchase more notes. We received net proceeds from the sales of $242.5 million, after fees, and used the proceeds to fund the acquisition of Roadway. The contingent convertible senior notes have an annual interest rate of 5.0 percent and are convertible into shares of Yellow Roadway common stock at a conversion price of $39.24 per share only upon the occurrence of certain events. The contingent convertible senior notes may not be redeemed by us for seven years from date of issuance but are redeemable at any time after that at par. Holders of the contingent convertible senior notes have the option to require Yellow Roadway to purchase their notes at par on August 8, 2010, 2013 and 2018, and upon a change in control of the company. These terms and other material terms and conditions applicable to the contingent convertible senior notes are set forth in an indenture governing the notes. Medium-Term Notes Another change in our capital structure in support of the Roadway acquisition was the repurchase and defeasance of our medium-term notes ("MTNs"). On September 30, 2003, we completed the repurchase of $24 million aggregate principal amount of MTNs and defeased the remaining $20 million aggregate principal amount outstanding, after making scheduled principal payments during 2003 of $11.3 million. Defeasance refers to the process of placing sufficient funds in an irrevocable trust to pay and discharge the MTNs as they become due. As a result, we were considered legally released as the primary obligor and the MTNs were removed from our balance sheet. The interest rate on the MTNs ranged from 6.1 percent to 7.8 percent with scheduled maturities ranging from October 2003 to August 2008. We recognized a loss on the extinguishment of debt of $2.3 million from the repurchase and defeasance that we reflected in "other" nonoperating expenses on our Statement of Consolidated Operations. We funded the repurchase and defeasance with cash on hand. 153.375 Percent Contingent Convertible Senior Notes On November 19, 2003, we announced a private offering of $130 million of contingent convertible senior notes with an option for the initial purchasers to acquire an additional $20 million of the notes. On November 25, 2003, we closed the sale of the entire $150 million of contingent convertible senior notes due 2023. We received net proceeds from the offering of $145.5 million, after fees, and used the proceeds to fund the acquisition of Roadway. The contingent convertible senior notes have an annual interest rate of 3.375 percent and are convertible into shares of Yellow Roadway common stock at a conversion price of $46.00 per share only upon the occurrence of certain events. The contingent convertible senior notes may not be redeemed by us for nine years from date of issuance but are redeemable at any time after that at par. Holders of the contingent convertible senior notes have the option to require Yellow Roadway to purchase their notes at par on November 25, 2012, 2015 and 2020, and upon a change in control of the company. These terms and other material terms and conditions applicable to the contingent convertible senior notes are set forth in an indenture governing the notes. Term Loan The final cash portion of the purchase price for the Roadway acquisition was funded through a term loan of $175 million drawn on December 11, 2003. The term loan represents one component of our new $675 million senior secured credit facility, as described more fully in the Liquidity section. ACCOUNTING FOR THE ROADWAY ACQUISITION In accordance with Statement of Financial Accounting Standards ("SFAS") No. 141, Business Combinations, we accounted for the acquisition under purchase accounting. As a result, our Statements of Consolidated Operations and Statements of Consolidated Cash Flows include results forRoadway LLC andits operating subsidiaries fromthedateapplication ofacquisition (December 11, 2003) through December 31, 2003 (the "stub period"). Our Consolidated Balance Sheet assynergies to both Roadway Express and Yellow Transportation including the identification ofDecember 31, 2003 includes Roadway LLC and its operating subsidiaries after valuing the tangible and intangible assets and liabilities at their fair values. As the Roadway acquisition occurred in December 2003, the allocation of the purchase price included in the December 31, 2003 consolidated balance sheet is preliminary and subject to refinement. Although we do not expect any subsequent changes to have a material impact on our results of operations or amounts allocated to goodwill, such changes could result in material adjustments to the preliminary purchase allocation. The most significant pending items include the following: finalization of independent asset valuation for the Roadway tangible and intangible assets including associated remaining lives; completion of all direct costs associated with the acquisition; updating Roadway personnel information used to calculate the pension benefit obligation; determination of the fair value of tax-related contingencies; calculation of an estimate for certain contractual obligations; and numerous other refinements. We expect substantially all of the above refinements will be completed by the end of second quarter 2004. OPPORTUNITIES AND RISKS OF THE ACQUISITION Closing the acquisition of Roadway represents a significant step in our strategy of becoming a global transportation services provider. Over the next year, we will identifybest practices within the twoorganizations, prudently and aggressively pursueorganizations. We successfully identified cost synergies and,provide quality service and value for full customer retention, while investingcoupled with a positive economy, realized strong operating results inthe separate brands and operating the segments independently. We actively began working toward these action items immediately upon closing of the transaction. We expect to recognize net synergies in 2004 of $30 to $50 million. However, there is risk that the synergy savings we have estimated may not be realizedour first year as aresultcombined entity. We will continue to be challenged in identifying and capturing additional cost synergies and maintaining our separate brands.Results of
the following: management has no experience running the combined business; the costs we incur in implementing synergies may be greater than expected; we may be restricted from negotiating lower prices with our suppliers due to previous agreements; or we may suffer a loss of employees, customers or suppliers, a loss of revenue or an increase in operating costs. As we have maintained key senior management from both organizations and experienced minimal customer and employee loss to date, we believe these risks are being effectively managed. 16RESULTS OF OPERATIONSOperationsOur Results of Operations section focuses on the highlights and significant items that impacted our operating results over the last three years. We will discuss the areas that caused material fluctuations and required specific evaluation by management. Our discussion will also explain the adjustments to operating income that management excludes when internally evaluating segment performance
sincebecause the items are not related to thesegments'segments’ core operations. Please refer to our Business Segments note for further discussion.YELLOW TRANSPORTATION RESULTSYellow Transportation Results
Yellow Transportation represented approximately 47 percent, 92 percent
97 percentand9997 percent of our consolidated revenue in 2004, 20032002and2001,2002, respectively. The table below provides summary information for Yellow Transportation for the three years ended December 31:
Percent Change (in millions) 2004 2003 2002 2004 vs. 2003 2003 vs. 2002 Operating revenue
$ 3,180.6 $ 2,811.9 $ 2,547.1 13.1 % 10.4 % Operating income
191.5 119.9 70.6 59.7 % 69.8 % Adjustments to operating income(a)
(3.1 ) 19.0 0.5 n/m (b) n/m Adjusted operating income(d)
188.4 138.9 71.1 35.6 % 95.3 % Operating ratio
94.0 % 95.7 % 97.2 % 1.7 pp(c) 1.5 pp Adjusted operating ratio
94.1 % 95.1 % 97.2 % 1.0 pp 2.1 pp
Percent Change -------------------------------- (in millions) 2003 2002 2001 2003 vs. 2002 2002 vs. 2001 - ---------------------------------- -------- -------- -------- ------------- -------------Operating revenue $2,811.9 $2,547.1 $2,492.3 10.4% 2.2% Operating income 119.9 70.6 55.9 69.8% 26.3% Adjustments(a) Represents charges that management excludes when evaluating segment performance to operating income(a) 19.0 0.5 2.8 n/m(b) 82.1% Adjustedbetter understand our core operations (see discussion below).
(b) Not meaningful.
(c) Percentage points.
(d) This measurement is used for internal management purposes and should not be construed as a better measurement than operating income 138.9 71.1 58.7 95.3% 21.1% Operating ratio 95.7% 97.2% 97.8% 1.5pp(c) 0.6pp Adjusted operating ratio 95.1% 97.2% 97.6% 2.1pp 0.4pp ======== ======== ======== ============= =============as defined by generally accepted accounting principles.(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. 20032004 compared to
20022003Yellow Transportation revenue increased by
$264.8$368.7 million in20032004 compared to20022003 due to improving economic conditions,growth in market share from the 2002 closure of Consolidated Freightways ("CF"),continued emphasis on premium services and meeting customerrequirements.requirements and increased revenue from fuel surcharge. The fuel surcharge, adjusted weekly 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 LTL revenue are volume, comprised of the number of shipments and the weight per shipment, and price, usually evaluated on a per hundred weight basis. In2003,2004, Yellow Transportation LTLvolumetonnage increased by6.85.6 percent per day, and LTL revenue per hundred weightexcluding the fuel surcharge,improved by3.65.3 percent from2002. 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.2003.Premium services, an integral part of our strategy to offer a broad portfolio of services and meet the increasingly complex transportation needs of our customers, continued to produce favorable operating results. Premium services at Yellow Transportation include, among others, Exact
Express(R)Express®, an expedited and time-definite ground service with a 100 percent satisfaction guarantee; and DefiniteDelivery(R)Delivery®, a guaranteed on-time service with constant shipment monitoring and notification. In 2004, total Exact Express revenue increased by nearly 47 percent and Definite Delivery revenue increased by nearly 5 percent, in each case, compared to 2003. Yellow Transportation also offers Standard Ground™ Regional Advantage, a high-speed service for shipments moving between 500 and 1,500 miles. Standard Ground Regional Advantage revenue represented nearly 23 percent of total Yellow Transportation revenue in 2004 and increased by nearly 15 percent from 2003. This service provides higher utilization of assets by use of more direct loading and bypassing intermediate handling at distribution centers.Despite increases in contractual wages and benefits and purchased transportation rates, Yellow Transportation operating income improved by $71.6 million in 2004 compared to 2003. Operating income increased primarily as a result of higher volume, better yield, increased fuel surcharge, effective labor management and overall effective cost management including the realization of synergies associated with the Roadway acquisition. The strong operating income results highlight our continued ability to effectively balance volume and price. Purchased transportation (mostly rail) raised operating expenses by $31.4 million in 2004 from 2003. The increase resulted from a combination of higher volumes and increased rates. Operating expenses as a percentage of revenue decreased in 2004 by 1.7 percentage points compared to 2003, resulting in an operating
ratio of 94.0 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 year-over-year divided by the change in revenue year-over-year. The incremental margin at Yellow Transportation from 2003 to 2004 was 13.4 percent after adjustments to operating income, as discussed below.
Adjustments to operating income represent charges that management excludes when evaluating segment performance to better understand the results of our core operations. With the exception of property disposals, most of these charges do not occur on a regular basis and can distort our operating results. Management excludes the impact of gains and losses from the disposal of property as they reflect charges not related to the segment’s primary business. The following table provides a detail of these charges incurred for the three years ended December 31:
(in millions) 2004 2003 2002 Property (gains) losses
$ (3.1 ) $ (0.2 ) $ 0.3 Conforming accounting policies
— 17.5 — Significant legal provision
— 1.7 — Reorganization charges
— — 0.2 Total adjustments to operating income
$ (3.1 ) $ 19.0 $ 0.5 2003 compared to 2002
Yellow Transportation revenue increased by $264.8 million in 2003 compared to 2002 due to improving economic conditions, growth in market share from the 2002 closure of Consolidated Freightways (“CF”), a competitor, and continued emphasis on premium services and meeting customer requirements. In 2003, Yellow Transportation LTL tonnage increased by 5.5 percent on a per day basis, and LTL revenue per hundred weight improved by 4.9 percent from 2002.
In 2003, total Exact Express revenue increased by 59 percent and Definite Delivery revenue increased by 34 percent compared to 2002. Yellow Transportation also offers Standard
Ground(TM)Ground™ Regional Advantage, a high-speed service for shipments moving between 500 and 1,500 miles. Standard Ground Regional Advantage revenue represented nearly 24 percent of total Yellow Transportation revenue in 2003 and increased by 7 percent from 2002.This service provides higher utilization of assets by use of more direct loading and bypassing intermediate handling at distribution centers.Despite increases in contractual wages and benefits and purchased transportation rates, Yellow Transportation operating income improved by $49.3 million in 2003 compared to 2002. Operating income increased primarily as a result of increased revenue and effective cost management in areas such as
workers'workers’ compensation and bad debts(refer to the more detailed discussion in the 2002 compared to 2001 analysis below)and miscellaneous operating supplies. The strong operating income results highlight our continued ability to effectively balance volume and price. Purchased transportation (mostly rail) raised operating expenses by $24.2 million in 2003 from 2002. The increase resulted from a combination of higher volumes and increased rates. Operating expenses as a percentage of revenue decreased in 2003 by 1.5 percentage points compared to 2002, resulting in an operating ratio of 95.7 percent.Operating ratio refers to a common industry measurement calculated by dividing a company's operating expenses by its operating revenue. In addition to the operating ratio, we evaluate our results based on incremental margins, or the change in operating income 17year-over-year divided by the change in revenue year-over-year.The incremental margin at Yellow Transportation from 2002 to 2003 was 25.6 percent after adjustments to operating income, as discussed below.Yellow Transportation 2003 operating income includes a $5.0 million reduction in claims and insurance expense for an insurance recovery related to two former employees falsifying claims over several years. We reviewed and made appropriate adjustments to our procedures and controls in response to the
claims. Adjustmentsfalsifications.The table provided above reflects the detail of adjustments to operating income
representincurred during 2003 and 2002. Also, included in the 2003 adjustments to operating income are chargesthat management excludes when evaluating segment performance to better understand the results of our core operations. With the exception of property disposals, most of these charges do not occur on a regular basis and can distort our operating results. Management excludes the impact of gains and losses from the disposal of property as they reflect charges not related to the segment's primary business. The following table provides a detail of these charges incurredforthe three years ended December 31:
(in millions) 2003 2002 2001 - ----------------------------------------- ----- ---- ----Property (gains)/losses $(0.2) $0.3 $ -- Conforming accounting policies 17.5 -- -- Significant legal provision 1.7 -- -- Reorganization charges -- 0.2 2.8 ----- ---- ---- Total adjustments to operating income $19.0 $0.5 $2.8 ===== ==== ====Conformingconforming accounting policies in 2003 that consisted of adjustments for recognizing handling costs forworkers'workers’ compensation and propertydamage and liability claims, and a change in policy for accrual of the January 1 holiday pay for union employees.
Currently,Previously, Yellow Transportationmanagesmanaged the administrative portion of claims handling for self-insurance onworkers'workers’ compensation and property damage and liability claims. As a result of an initiative to begin outsourcing these functions at Yellow Transportation, we recorded a one-time charge in 2003 of $14.6 million for the liability associated with future claims handling costs related to existing claims. Roadway Express also recorded a similar liability as a purchase accounting adjustment. The significant legal provisionrelatesrelated to a claim from a former employee that we believe may result ina probablean adverse outcome; we recorded a small portion of the claim as a corporate charge for a total provision of $2.0 million.2002Roadway Express Results
Roadway Express results were included in 2003 consolidated results only from the acquisition date of December 11, 2003 through December 31, 2003. Prior to the acquisition, Roadway Express operated using different accounting policies. Therefore, conforming adjustments are needed for evaluating prior period results. In addition, prior to the acquisition date in 2003, Roadway Express results reflected asset and liability valuations prior to adjustments to fair market value as required in purchase accounting. For these reasons management evaluates the segment’s results primarily based on a combination of sequential growth month over month, comparison versus plan, and comparison to adjusted 2003 results.
2004 compared to
2001 Yellow Transportation realized2003Roadway Express revenue increased
volumesby $165.8 million or 5.6 percent to $3,119.9 million in20022004 compared to2001,adjusted 2003 due primarilyas a result of itsto improving economic conditions, growth in premium services andmarket share growthincreased revenue from fuel surcharge. Total tonnage, on a picked up basis, increased 2.2 percent, while LTL tonnage (shipments weighing less than 10,000 pounds) was flat compared to 2003. However, on a year-over-year sequential quarterly basis, Roadway experienced significant recovery in LTL tonnage, which constitutes over 90 percent of total revenue, as follows: first quarter (2.4%), second quarter (2.0%), third quarter 1.4%, fourth quarter 3.2%. This recovery reflects theCF closure in September 2002. Yellow Transportation LTL shipment volumes increased by 2.3 percent in 2002 from 2001. Priorrefocused efforts of the Roadway team and particularly those of the sales organization, which was restructured at the end of 2003 and early 2004. In addition to theCF closure, volumes were flat in 2002 compared to 2001.improved tonnage, Roadway Express LTL revenue per hundred weightexcluding the fuel surcharge, was up 1.9increased 4.3 percent in20022004. Roadway Express represented approximately 46 percent of our consolidated revenue for 2004.Roadway Express’ guaranteed service products, namely Time Critical™ Service and Time Advantage™ Service, continue to be an integral part of our focus to maintain and improve our ability to meet the needs of our customers. Roadway Express premium products encompass expedited ground, air, and time-definite deliveries. In 2004, total premium services revenue grew by 60 percent compared to
2001. The increase2003.Operating income was $158.3 million for 2004. Roadway Express operating ratio was 94.9 percent, a 3.3 point improvement compared to an adjusted 98.2 percent in 2003. These results show our ability and commitment to control cost throughout Roadway Express business, as well as reflect improved yield, improved volume during the later half of the year and
price resulted fromincreased fuel surcharge.Synergy efforts have allowed combined efficiencies in information technology and in purchased transportation, insurance premiums, and other general office services. Other efforts included streamlining processes, utilizing technology improvements, and reorganization of sales, operations and general office staff. Operating expenses were reduced as a
disciplined approachpercentage of revenue despite revenue growth through strict management controls and effective and efficient work systems. Improvements were made toreviewing customer mixefficiencies in terminal operations in both dock andspecific yield management efforts. Premium services continuedpickup and delivery. Cargo claims expense decreased 10.2 percent in 2004 while travel, entertainment, and other expenses were down 11.5 percent compared toproduce favorable results and supported our strategy of an increasing portfolio. Exact Express revenue increased by 36 percent from 2001 to 2002 and Definite Delivery increased by 26 percent for the same period. Standard Ground Regional Advantage revenue represented more than 23 percent of Yellow Transportation revenue. Yellow Transportation realized improved operating income of $14.7 million from 2001 to 2002, despite increased costs for wages and benefits, workers' compensation and bad debt expense in 2002. Contractual wage and benefit increases combined with higher volumes impacted expense by over $37 million. Improved productivity and a variance in the labor mix partially offset the increased wages. In addition, effective cost management over operating supplies and administrative costs reduced expense by approximately $18 million from 2001. The incremental margin at Yellow Transportation from 2001 to 2002 was 22.7 percent after adjustments to operating income, as detailed above. As a result of increased costs per claim and longer duration of cases over several years, the projected ultimate costs of workers'2003.Workers’ compensation claims decreased 8.3 percent in
2002 was higher than originally anticipated. This occurred despite the continued improvement of safety statistics at Yellow Transportation in 20022004 compared to2001. Workers'2003, while workers compensationexpenseself insurance expenditures decreased 6.8 percent. Management remains committed to thecontinued reduction of lost time injuries through a safe and effective work environment. Depreciation and amortization increased
at Yellow Transportation by $16.0$7.6 millionin 2002 from 2001. Yellow Transportation added additional resources to manage these claims. As a resultthrough the amortization ofimproved safety statistics and allocation of additional resources, workers' compensation costs decreased in 2003 compared to 2002; an indicator that we continue to effectively manage this area. Bad debt expense also had a negative impact on Yellow Transportation results, increasing by $11.5 million in 2002 from 2001. The increase resulted from a trend of additional write-offs partiallyintangible assets recognized due to thenegative impactacquisition.Property disposals in 2004 resulted in a net gain of $1.4 million for the year. These disposals were primarily for consolidation and relocation of terminals to reduce redundancy of operating facilities. Because property disposals are often not recurring items, management excludes these items in the normal course of evaluating the operating results of the
economybusiness.New Penn Results
New Penn results were included in 2003 consolidated results only from the acquisition date of December 11, 2003 through December 31, 2003. Therefore, management makes adjustments similar to those made at Roadway Express, to New Penn’s results in evaluating the segment’s performance. Management primarily evaluates the segment’s results based on
certain customersa combination of factors such as sequential month over month growth, comparison versus plan, and18their abilitycomparison topay. Yellow Transportation added additional collection personnel, installed new collections management softwareadjusted 2003 results.New Penn increased revenue by $44.1 million or 20.4 percent to $260.6 million in 2004 compared to adjusted 2003. The primary reasons for this growth were revitalized sales efforts and
enhanced its credit policiesclosure of a major competitor in the Northeast region, where New Penn primarily operates, as well as favorable economic conditions. Total tonnage, on a picked up basis, increased 16.2 percent, with LTL tonnage increasing 15.4 percent. New Penn also experienced tonnage gains on a sequential quarter-over-quarter basis throughout the year as follows: first quarter 9.9%, second quarter 16.8%, third quarter 22.2%, fourth quarter 15.3%. New Penn LTL revenue per hundred weight increased 3.9 percent in 2004.Operating income was $33.9 million with an accompanying operating ratio of 87.0 percent. New Penn was able to benefit from capacity utilization, particularly in line haul and
procedures regarding newcity operations. This was accomplished along with matching staffing levels with tonnage andcontinuing customers. As a resultrevenue growth to achieve effective and efficient operations. Amortization of intangible assets recognized due to the acquisition was $3.8 million in 2004. New Penn represented approximately four percent of ourimprovementsconsolidated revenue for 2004. New Penn is a premium service carrier with 96 percent of its freight delivered next day and has historically maintained an on-time service ratio in excess of 98 percent.2003 Roadway LLC Results
As Roadway LLC and its operating segments, Roadway Express and New Penn, were only included in our results from the date of acquisition, December 11, through December 31, 2003, a detailed discussion of their results is not material to our 2003 results of operations. Roadway Express contributed $131.2 million in revenue and New Penn contributed $9.8 million in revenue for the period December 11 through December 31, 2003. Combined the Roadway LLC segments reported an operating loss of $6.3 million during this
area combined with improving economic conditions, write-off trends in 2003 actually decreased from 2002. MERIDIAN IQ RESULTSsame period mostly due to a combination of volume and pricing.Meridian IQ
representsResultsMeridian IQ is our non-asset-based segment that plans and coordinates the movement of goods throughout the world.
The segment was formed in January of 2002, and formally launched in March of 2002, as the Yellow platform for non-asset-based transportation services.Meridian IQ represented approximately three percent of our consolidated revenue in 2004 and approximately four percent in 2003. The table below providesa wide range of transportation solutions and offers the following services: international forwarding and customs brokerage by arrangingsummary financial information for Meridian IQ for theadministration, transportationthree years ended December 31:
Percent Change (in millions) 2004 2003 2002 2004 vs. 2003 2003 vs. 2002 Operating revenue
$ 213.2 $ 120.3 $ 81.8 77.3 % 47.1 % Operating income (loss)
3.7 0.3 (2.7 ) n/m n/m 2004 compared to 2003
Meridian IQ revenue increased by $92.9 million or 77.3 percent in 2004. The significant increase in revenue resulted from a combination of organic growth within Meridian IQ existing services and
delivery of goodsrecent acquisitions. Operating income increased by $3.4 million in 2004 over 2003. Increased revenue, partially offset by higher marketing costs, produced the improved operating results.2003 compared to
over 88 countries; multi-modal brokerage services by providing companies with access to volume capacity and specialized equipment; domestic forwarding and expedited services through arranging guaranteed, time-definite transportation for companies within North America; and transportation solutions and technology management using web-native systems enabling customers to manage their transportation needs.2002Due to the recent formation of Meridian IQ, in 2002 we evaluated results primarily based on sequential growth month over month. Throughout 2002, Meridian IQ had consistent revenue and operating income improvement, with modestly profitable results in the second half of the year. In 2003, Meridian IQ revenue increased by 47 percent to total revenue of
$120.2$120.3 million versus $81.8 million in 2002. The increase in revenue resulted from a combination of organic growth, higher premium services and recent non-asset-based acquisitions (as discussedbelow)in the acquisitions footnote under Item 8, Financial Statements and Supplementary Data). A prior year operating loss of $2.7 million turned into an operating profit of $0.3 million in 2003; after adjustments to operating income for acquisition charges of $0.5 million, the segment generated an operating profit of $0.8 million.Meridian IQ Acquisitions In August 2003, a subsidiary of Meridian IQ, Yellow Global, LLC, acquired certain U.S. assets of GPS Logistics, a global logistics provider. Yellow Global, LLC was then renamed Yellow GPS, LLC ("Yellow GPS"). In exchange for the acquisition, Yellow GPS assumed certain of GPS Logistics customer, lease and other obligations and became obligated to pay GPS Logistics earnout payments if certain financial targets for the combined business of Yellow GPS are met. There was no net cash consideration paid in the transaction. In addition, Yellow GPS received a call option to purchase the stock of each of GPS Logistics (E.U.) Ltd., the related United Kingdom ("U.K.") operations of GPS Logistics, and GPS Logistics Group Ltd., the related Asian operations of GPS Logistics. If Yellow GPS does not exercise the Asian option, it would be required to pay a deferred option price to the shareholders of GPS Logistics Group Ltd. In February 2004, Yellow GPS exercised and closed its option to purchase GPS Logistics (E.U.) Ltd. Yellow GPS made a payment of $7.6 million, which is subject to upward and downward adjustment based on the financial performance of the U.K. business. The acquisition will be reflected in our first quarter 2004 results. In the third quarter of 2002, Meridian IQ acquired selected assets, consisting primarily of customer contracts, of Clicklogistics, Inc. ("Clicklogistics") for nominal cash consideration. Clicklogistics provided non-asset transportation and logistics management services. In that same period, Meridian IQ completed the acquisition of MegaSys, Inc. ("MegaSys"), a Greenwood, Indiana based provider of non-asset transportation and logistics management services, for approximately $17 million. The acquisition price primarily related to $9.3 million of goodwill and $7.1 million of identifiable intangible assets. As part of the acquisition, Meridian IQ negotiated an earnout arrangement, which provided for contingent consideration to be paid by Meridian IQ upon MegaSys generating cash flow levels in excess of an established rate of return through December 31, 2005. In the first quarter of 2004, the earnout arrangement was terminated; earnout payments to date were not material to our results of operations. We believe these acquisitions support our strategy to grow our non-asset-based business and be a single-source transportation provider. In September 2001, we completed the acquisition of the remaining ownership in Transportation.com from our venture capital partners. Prior to the acquisition, we accounted for our investment in Transportation.com as an unconsolidated joint venture under the equity method of accounting. Accordingly, nonoperating expenses included a loss of $5.7 million in 2001. As of the acquisition date, we consolidated Transportation.com, as well as our other non-asset-based services, under Meridian IQ. ROADWAY LLC RESULTS As Roadway LLC and its operating segments, Roadway Express and New Penn, were only included in our results from the date of acquisition through December 31, 2003, a detailed discussion of their results is not material to our 2003 results of operations. Roadway Express contributed $131.2 million in revenue and New Penn contributed $9.8 million in revenue for the stub period. 19Combined the Roadway LLC segments reported a stub period operating loss of $6.3 million mostly due to a combination of volume and pricing. CONSOLIDATED RESULTSConsolidated Results
Our consolidated results include the results of
Yellow Transportation, Meridian IQeach of the operating segments previously discussed and corporate charges for the entire periods presented. In 2003, consolidated results also included the results of Roadway LLC and its operating segments from the date of acquisition, December 11, through December 31. As we have previously discussed the operating results ofYellow Transportation and Meridian IQ,our segments, this section will focus on corporate charges and items that are evaluated on a consolidated basis.The following table summarizes the Statement of Consolidated Operations for the three years ended December 31:
Percent Change (in millions) 2003 2002 2001 2003 vs. 2002 2002 vs. 2001 - ------------------------------- -------- -------- -------- ------------- -------------Operating revenue $3,068.6 $2,624.1 $2,505.1 16.9% 4.8% Operating income 88.6 46.9 38.2 88.9% 22.8% Nonoperating expenses, net 21.8 9.3 20.8 134.4% (55.3)% Income from continuing operations 40.7 24.0 10.6 69.6% 126.4% Income (loss) from discontinued operations -- (117.9) 4.7 n/m n/m Net income (loss) $ 40.7 $ (93.9) $ 15.3 143.3% n/m ======== ======== ======== ============= =============
Percent Change (in millions) 2004 2003 2002 2004 vs. 2003 2003 vs. 2002 Operating revenue
$ 6,767.5 $ 3,068.6 $ 2,624.1 120.5 % 16.9 % Operating income
361.6 88.6 46.9 308.1 % 88.9 % Nonoperating expenses, net
63.9 21.8 9.3 193.1 % 134.4 % Income from continuing operations
184.3 40.7 24.0 352.8 % 69.6 % Loss from discontinued operations
— — (117.9 ) — n/m Net income (loss)
$ 184.3 $ 40.7 $ (93.9 ) 352.8 % 143.3 % 2004 compared to 2003
Our consolidated revenue is reflective of increased revenue at all of our operating companies due in part to a strong economic environment. When compared to pro forma 2003 amounts, our consolidated revenue increased 11 percent with strong increases in premium services and an overall positive pricing environment.
Consolidated operating income of $361.6 million greatly exceeded pro forma 2003 operating income of $148.6 million. This improvement is due to a variety of factors including the strong economy and our ability to capture cost synergies of approximately $50 million through our cost reduction program. Corporate expenses reflect increased performance incentive accruals related to our increased operating results and increased professional fees associated with the Sarbanes-Oxley Act of 2002 of $5.5 million and $2.6 million of fees associated with the exchange of our contingently convertible notes in December 2004. These expenses were offset by the higher corporate-allocated management fees and the absence of costs associated with sponsoring a trade conference that we have hosted every other year (approximately $4.0 million in 2003). Corporate expenses for 2003 also included approximately $2.7 million for acquisition-related charges, consisting mostly of marketing and promotional activities related to the Roadway transaction.
Consolidated nonoperating expenses included a write off of deferred debt issuance costs of $18.3 million resulting from our September 2004 debt refinancing. Additionally, nonoperating expenses were unfavorably impacted by increased interest expense of $23.3 million due to the additional debt we issued to consummate the Roadway acquisition and the assumption of $225.0 million of senior notes issued by Roadway.
Our effective tax rate for 2004 was 38.1 percent compared to 39.1 percent for 2003. The lower tax rate resulted primarily from a favorable change in the relationship of non-deductible business expenses relative to our profit before tax offset by an increase in earnings attributable to states with higher rates.
2003 compared to 2002
Operating revenue in 2003 increased by $444.5 million, or nearly 17 percent, from 2002. Of this increase, the results of Roadway Express and New Penn for the stub period attributed $141.0 million, or five percent of our total revenue. When excluding the results of Roadway LLC segments for the stub period, our revenue increased by $303.5 million, or 12 percent, from 2002. Our revenue growth resulted from improving economic conditions, increased premium services, non-asset-based acquisitions and meeting customer requirements.
Consolidated operating income improved by $41.7 million
fromin 2003 compared to 2002 due to increased revenue and effective cost management at Yellow Transportation and Meridian IQ, and despite significant adjustments to operating income and stub period operating losses of $6.3 million for the Roadway segments. Corporate operating losses in 2003 included approximately $2.7 million for acquisition-related charges, consisting mostly of marketing and promotional activities related to the Roadway transaction. Corporate operating losses, after adjustments for acquisition and spin-off charges, increased in 2003 from 2002 by $7.9 million, as detailed in our Business Segments note. We expensed $4.0 million in the first quarter of 2003 for an industry conference that wehosthave hosted every other year. Corporate costs also increased in 2003 by $3.1 million compared to 2002, due to higher performance incentive accruals based on our improved operating results.Nonoperating expenses increased $12.5 million in 2003 compared to 2002 as a result of the acquisition-related financing costs, partially offset by increased interest income. As mentioned previously, we recorded a nonoperating loss on the extinguishment of debt of $2.3 million from the repurchase and defeasance of our remaining
MTNs.medium-term notes. In 2003, we entered into arrangements for $1.1 billion of committed financing with our investment bankers that would allow us to complete the Roadway acquisition if we were not able to obtain financing elsewhere. Although we obtained more favorable financing arrangements through our contingent convertible senior notes offerings and the term loan, we paid a commitment fee of $4.5 million upon the expiration of the committed financing agreement that occurred on December 11, 2003. This commitment fee was recorded as"interest expense"“interest expense” in our Statement of Consolidated Operations. Interest expense related to our contingent convertible senior notes and term loan approximated $6.5 million for 2003.Given our current debt levels, including the assumption of the senior notes due 2008, we expect our 2004 interest expense to approximate $50 million.Our effective tax rate for 2003 was 39.1 percent compared to 36.2 percent in 2002. The higher tax rate resulted primarily from our income allocation among subsidiaries and their relative state tax rates. In 2003, Yellow Transportation, a higher tax rate subsidiary, generated a larger percentage of our profits before tax compared to 2002. Our notes to the financial statements provide an analysis of the income tax provision and the effective tax rate.
202002 compared to 2001 Our 2002 operating revenue improved over 2001, primarily as a result of increased volumes at Yellow Transportation from growth in premium services and increased market share from the CF closure. We also recognized additional revenue with a full year of Meridian IQ activity, including the acquisitions of Clicklogistics and MegaSys. Operating income in 2002 included $6.9 million of charges related to the spin-off of SCS Transportation, Inc. ("SCST"). Spin-off charges represented bank fees and external legal and accounting services. Operating income also included higher corporate expenses in 2002 compared to 2001, mostly related to increased incentive compensation accruals of $2.7 million and professional services of $1.6 million. Nonoperating expenses improved by $11.5 million in 2002 as a result of lower interest charges on variable-rate debt and financing costs for our asset backed securitization ("ABS") obligations, due to both lower interest rates and lower average borrowings. In addition, nonoperating costs in 2001 included a loss of $5.7 million for our equity investment in Transportation.com. Since September 2001, when we acquired the remaining ownership in Transportation.com, results for this entity have been consolidated under Meridian IQ and reported as operating income or losses. Our effective tax rate on continuing operations for 2002 was 36.2 percent compared to 39.0 percent in 2001. The lower tax rate resulted from a variety of factors, including decreased nondeductible business expenses and the implementation of prudent tax planning strategies. Our notes to the financial statements provide an analysis of the income tax provision and the effective tax rate. Our net loss of $93.9 million for 2002 occurred due to the impairment of goodwill associated with Jevic Transportation, Inc. ("Jevic") and the spin-off of SCST. We recorded a non-cash charge of $75.2 million in the first quarter of 2002 for the impairment of goodwill related to the acquisition of Jevic. In the third quarter of 2002, we recorded a non-cash charge of $52.6 million for the difference between the carrying value of SCST and the fair value, as determined by the market capitalization of SCST at the spin-off date. Due to the non-cash nature of the charges, neither charge resulted in tax benefits. As a result of the spin-off, both non-cash charges and income from operations of $9.9 million for SCST were reflected in "discontinued operations" on our Statement of Consolidated Operations for 2002. FINANCIAL CONDITION LIQUIDITYFinancial Condition
Liquidity
Our liquidity needs arise primarily from capital investment in new equipment, land and structures, and information technology, as well as funding working capital requirements.
As a result of our acquisition of Roadway, our liquidity requirements and availability of funds have significantly changed.To provide short-term and longer-term liquidity,for the combined organization,wereplaced our previous $300maintain capacity under a $500 million unsecured bank credit agreementwithand anew $675$450 millionsecured credit agreement. In addition, we maintained our $200 million ABS facilityasset-backed securitization (“ABS”) agreement involving Yellow Transportation and Roadway Express accounts receivable. We believe these facilities both of which are more fully described in the Debt and Financing note under Item 8, Financial Statements and Supplementary Data, provide adequate capacity to fund our current working capital and capital expenditurerequirements forrequirements.The following table provides details of the
combined organization. It is not unusual for us to have a deficit working capital position, as we can operate in this position due to rapid turnover of accounts receivable, effective cash managementoutstanding components andready access to funding. Secured Credit Agreement As mentioned above, we replaced our $300 millionavailable unused capacity under the current bank creditfacility, scheduled to expire in April 2004, with a $675 million secured credit agreement. The secured creditagreementconsists of three parts: a $175 million term loan, a $250 million letters of credit facility, and a $250 million revolver loan. As of December 31, 2003, we have borrowed the entire amount of the term loan, using the funds to pay a portion of the Roadway acquisition. We may use the letters of credit facility for issuance of standby letters of creditand therevolver loan for short-term borrowings and additional letters of credit. Letters of credit serve as collateral for our self-insurance programs, primarily in the areas of workers' compensation, property damage and liability claims. Collateral requirements for letters of credit and availability of surety bonds, an alternative form of self-insurance collateral, fluctuate over time with general conditions in the insurance market. Our outstanding letters of credit increased significantlyABS agreement at December31, 2003 compared to prior year due to our responsibility for the self-insurance programs of Roadway Express and New Penn. Our interest rate on the secured credit agreement is based on the London inter-bank offer rate ("LIBOR") plus a fixed increment. We have secured the credit facility31:
(in millions) 2004 2003 Capacity:
Unsecured credit facility:
Revolving loan
$ 500.0 $ 250.0 Term loan
— 175.0 Letters of credit facility
— 250.0 ABS facility
450.0 200.0 Total capacity
950.0 875.0 Amounts outstanding:
Term loan
— (175.0 ) Letters of credit facility
— (250.0 ) Letters of credit under revolving loan
(275.4 ) (24.4 ) ABS facility
— (71.5 ) Total outstanding
(275.4 ) (520.9 ) Available unused capacity
$ 674.6 $ 354.1 In accordance with
substantially all of our domestic assets except for those assets that secure our ABS facility. Under 21the terms of the agreement, we must comply with certain financial covenants primarily relating to our interest expense,leverage ratio, fixed chargessenior secured leveragecoverage ratio andtotal leverage. In addition, the agreement limits our activities regarding acquisitions, sales of assets, dividends, share repurchases, and capital expenditures.minimum net worth. As of December 31,2003,2004, 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.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
providesillustrates our calculation for determining free cash flow for the years ended December 31:
(in millions) 2004 2003 Net cash from operating activities
$ 435.7 $ 155.7 Net property and equipment acquisitions
(164.3 ) (99.1 ) Proceeds from stock options
15.9 4.7 Free cash flow
$ 287.3 $ 61.3 Our additional free cash flow of $226.0 million from 2003 to 2004 resulted primarily from increases in income from operations of $143.6 million, lower payments on accounts payable of $13.0 million, increase in other working capital items of $81.9 million and claims and other changes of $7.6 million, all of which are offset by an increase in ending accounts receivable of $62.8 million, reflective of increased volume. Claims and other primarily represents increased pension and workers’ compensation accruals. Other working capital changes included increased wage and benefit obligations that approximated $102.9 million, which is offset by a
detail$41.4 million Roadway tax deposit and $28.0 million increase in prepaid tires. In addition, accrued income taxes created a fluctuation of $45.3 million between 2004 and 2003 due to improved operating results in 2004 and a reduction in rate.Other items considered in evaluating free cash flow include net property and equipment acquisitions and proceeds from exercise of stock options. In 2004, net property and equipment acquisitions increased by $65.2 million mostly due to the inclusion of Roadway LLC’s activity consisting of $49.1 million investment in revenue equipment and $16.7 million investment in technology equipment and software. Net capital expenditures in 2004 at Yellow Transportation were consistent with 2003 and included an increase in revenue equipment purchases over 2003 of $7.5 million offset by increased dispositions of land and structures of $7.2 million in 2004. Our proceeds received from exercise of stock options increased by $11.2 million in 2004 from 2003 mostly due to the increase in stock price and the lack of restrictions of exercising related to the pending acquisition of Roadway that was present in 2003.
Capital Expenditures
Our capital expenditures focus primarily on the replacement of revenue equipment, land and structures, additional investments in information technology and acquisitions. As reflected on our Consolidated Balance Sheets, our business is capital intensive with significant investments in terminal facilities and a fleet of tractors and trailers. We determine the amount and timing of capital expenditures based on numerous factors, including anticipated growth, economic conditions, new or expanded services, regulatory actions and availability of financing. The acquisition of Roadway did not change our capital expenditures philosophy from previous years, given the similarity of our operations. However, as we expected, our capital expenditures increased significantly due to the acquisition.
The table below summarizes our actual net capital expenditures by type for the years ended December 31:
(in millions) 2004 2003 2002 Revenue equipment
$ 118.6 $ 62.0 $ 71.5 Land, structures and technology
45.7 37.2 11.3 Total before acquisition of companies and discontinued operations
164.3 99.2 82.8 Acquisition of companies
10.5 513.3 18.0 Discontinued operations
— — 24.4 Total net capital expenditures
$ 174.8 $ 612.5 $ 125.2 Capital expenditures for 2004 reflect the inclusion of $66.4 million net expenditures of Roadway LLC as discussed above in the Liquidity section and Meridian IQ’s acquisition of GPS Logistics (EU) Limited. Capital expenditures for 2003 included the cash portion of the
outstanding componentsRoadway acquisition for a total of $513 million, while 2002 included the Meridian IQ acquisitions of MegaSys andavailable unused capacity underClicklogistics for a total of $18 million. We expect 2005 gross capital spending to approximate $235 to $245 million, including about $145 million for revenue equipment and approximately $55 million for technology. This spending level includes an increase of approximately $20 to $25 million for synergy projects. We also expect $25 to $30 million in proceeds from thebank credit agreement:disposition of real estate in 2005. Our philosophy continues to be consistent funding of capital expenditures even during economic downturns while still generating free cash flow. We believe our financial condition and access to capital, as they exist today, are adequate to fund our anticipated capital expenditures and future growth opportunities.Our expectation regarding our ability to fund capital expenditures out of existing financing facilities and cash flow is only our forecast regarding this matter. This forecast may be substantially different from actual results. In addition to the factors previously described in the Forward-Looking Statements section, the following factors could affect levels of capital expenditures: the accuracy of our estimates regarding our spending requirements; the occurrence of any unanticipated acquisition opportunities; changes in our strategic direction; the need to spend additional capital on synergy opportunities; and the need to replace any unanticipated losses in capital assets.
Nonunion Pension Obligations
We provide defined benefit pension plans for employees not covered by collective bargaining agreements. The Yellow qualified plan covers approximately 4,000 employees and the Roadway LLC qualified plan covers approximately 5,000 employees. On January 1, 2004, the existing qualified benefit plans were closed to new participants. All new U.S. – salaried nonunion employees (except those currently participating in other profit sharing plans) and all Meridian IQ employees now participate in a defined contribution retirement plan.
We expect pension funding and expense to remain an area of management focus over the next several years. Given the dependence on the economy and the significant amounts involved, pension funding could have a material impact on our liquidity. Using our current plan assumptions of an 8.75 percent return on assets and discount rate of 5.75 percent (6.25 percent for 2004 actual), we either recorded or expect to record the following:
(in millions) Cash
FundingPension
ExpenseShareholders’
Equity Increase
(Decrease),net of tax
2004 Actual
$ 42.3 $ 48.3 $ (16.8 ) 2005 Expected
48.0 56.0 8.7 2006 Expected
42.5 54.3 8.8 Our actual 2004 pension expense of $48.3 million was less than the $52.2 million we estimated at December 31, 2003 due to an assumption change related to the Yellow Transportation salary scale. The expected expense was based on a flat salary scale of 4.5 percent while the actual expense was based on a graded salary scale as determined by a salary study and incorporated in our actuarial valuation. The increase reflected in our estimated 2005 expense is a result of the 50 basis point decrease in our discount rate.
The above discussion includes forward-looking statements as indicated by “expect” and “estimate” and the actual results may be materially different. Factors that affect these results include actual return on plan assets and discount rate changes among others.
Contractual Obligations and Other Commercial Commitments
The following tables provide aggregated information regarding our contractual obligations and commercial commitments as of December 31, 2004. Most of these obligations and commitments have been discussed in detail either in the preceding paragraphs or the notes to the financial statements. The tables do not include expected pension funding as disclosed separately in the previous section.
Contractual Cash Obligations
Payments Due by Period (in millions) Less than 1 year 2-3 years 4-5 years After 5 years Total Balance sheet obligations:
Long-term debt including interest
$ 41.3 $ 73.4 $ 283.2 $ 652.1 $ 1,050.0 Off balance sheet obligations:
Operating leases
75.1 79.3 24.6 9.2 188.2 (a) Capital expenditures
38.0 — — — 38.0 Total contractual obligations
$ 154.4 $ 152.7 $ 307.8 $ 661.3 $ 1,276.2
(a) The net present value of operating leases, using a discount rate of 10 percent, was $160.3 million at December 31, (in millions) 2003 - -------------------------------------------------- ------------Total capacity $ 675.0 Term loan outstanding (175.0) Letters of credit facility outstanding (250.0)(a) Letters of credit under revolver loan outstanding (24.4) ------- Available unused capacity $ 225.6 =======2004.(a) WeOur consolidated balance sheet at December 31, 2004 reflects $250 million contingently convertible notes classified as a current liability as our note holders had the right, at their option, to convert their notes, in whole or in part, into cash and shares of common stock as more fully described in Item 8, Debt and Financing. However, we have
an additional $1.5 million in lettersreflected the obligation above based on the stated maturity as we believe the likelihood ofcredita note holder presenting their notes for conversion to be remote.Other Commercial Commitments
The following table reflects other commercial commitments or potential cash outflows that
are not currently covered undermay result from acredit facility.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
$ — $ — $ 224.6 $ — $ 224.6 Letters of credit
275.4 — — — 275.4 Lease guarantees for SCST
1.7 2.0 0.4 — 4.1 Surety bonds
57.3 6.4 0.4 — 64.1 Total commercial commitments
$ 334.4 $ 8.4 $ 225.4 $ — $ 568.2 Our outstanding letters of credit at December 31,
20032004 included$3.4$2.5 million forworkers'workers’ compensation, property damage and liability claims against SCST. We agreed to maintain the letters of credit outstanding at the spin-off date until SCST obtained replacement letters of credit or third party guarantees. SCST agreed to use its reasonable best efforts to obtain these letters of credit or guarantees, which in many cases would allow us to obtain a release of our letters of credit. SCST also agreed to indemnify us for any claims against the letters of credit that we provide. SCST reimburses us for all fees incurred related to the remaining outstanding letters of credit. We also provided a guarantee of$5.9$4.1 million regarding certain lease obligations of SCST.Asset Backed Securitization Facility Our ABS facility provides us with additional liquidity and lower borrowing costs through access to the asset backed commercial paper ("ABCP") market. By using the ABS facility, we obtain a variable rate based on the A1 commercial paper rate plus a fixed increment for utilization and administration fees. A1 rated commercial paper comprises more than 90 percent of the commercial paper market, significantly increasing our liquidity. We averaged a rate of 2.1 percent and 2.3 percent in 2003 and 2002, respectively, on the ABS facility. Borrowing under our ABS facility involves two primary steps. In the first step, Yellow Transportation sells an ongoing pool of receivables to a special purpose entity, Yellow Receivables Corporation ("YRC"). YRC is a wholly owned consolidated subsidiary of Yellow Transportation designed to isolate the receivables for bankruptcy purposes. As the second step, YRC transfers the receivables to a conduit administered by a large financial institution. The conduit bundles our receivables with numerous unrelated companies and then sells them to investors as ABCP. The conduit receives the proceeds from investors and forwards them to YRC who then forwards the proceeds to Yellow Transportation. Repayments of these obligations, along with related charges, occur in the reverse sequence of the steps just described. The table below provides the borrowing and repayment activity, as well as the resulting balances, for the years ending December 31 of each period presented:
(in millions) 2003 2002 - ------------------------------------------------ ------- -------ABS obligations outstanding at January 1 $ 50.0 $ 141.5 Transfer of receivables to conduit (borrowings) 151.0 421.5 Redemptions from conduit (repayments) (129.5) (513.0) ------- ------- ABS obligations outstanding at December 31 $ 71.5 $ 50.0 ======= =======Our ABS facility involves receivables of Yellow Transportation only and has a limit of $200 million. Under the terms of the agreement, Yellow Transportation provides servicing of the receivables and retains the associated collection risks. Although the facility has no stated maturity, there is an underlying letter of credit with the administering financial institution that has a 364-day maturity. 22Prior to December 31, 2002, activity under the ABS facility was treated as a sale of assets for financial reporting purposes. As a result, we did not reflect the receivables sold by YRC to the conduit and the related ABS obligations on our Consolidated Balance Sheets. In addition, we recognized the cost of financing the receivables as "ABS facility charges" on our Statements of Consolidated Operations and the related cash flows as an operating activity in our Statements of Consolidated Cash Flows. On December 31, 2002, we amended the ABS agreement to provide YRC the right to repurchase, at any time, 100 percent of the receivable interests held by the conduit. Prior to the amendment, the right to repurchase receivable interests was limited to instances when ABS borrowings were below $10 million, or five percent of the $200 million limit. The amendment did not alter the costs associated with operating the ABS facility. Due to the amendment, we reflect the ABS activity as a financing activity rather than a sale of assets. We now reflect the borrowings on our Consolidated Balance Sheets, the financing cost as "interest expense" on our Statements of Consolidated Operations, and the related changes in borrowings as a financing activity in our Statements of Consolidated Cash Flows. Credit Ratings As we expected, our credit ratings declined toward the end of 2003 due to the significant increase in our debt levels from the acquisition of Roadway. Given our ability to raise attractive financing through the contingent convertible notes offerings and our adequate debt capacity, we do not expect the lower credit ratings to materially impact our results of operations or cash flows. However, we do expect to pay higher interest rates on variable borrowings due to these lower ratings. As of December 31, 2003, we had an investment grade corporate rating of BBB- from Standard & Poor's and a high non-investment grade corporate rating of Ba1 from Moody's. We are working to pay down our debt as rapidly as possible and improve our credit ratings; however, in the unlikely event the ratings were to drop, no ratings-driven triggers exist that would have an immediate or material adverse impact on our liquidity. Cash Flow Measurements We use free cash flow as a measurement to manage working capital and capital expenditures. Free cash flow indicates cash available to fund additional capital expenditures, to reduce outstanding debt (including current maturities), or to invest in our growth strategies. This measurement is used for internal management purposes and should not be construed as a better measurement than net cash from operating activities as defined by generally accepted accounting principles. The following table illustrates our calculation for determining free cash flow for the years ended December 31:
(in millions) 2003 2002 - -------------------------------------------------------------- ------- ------Net cash from operating activities $155.7 $ 43.1 Net change in operating activities of discontinued operations -- (17.3) Accounts receivable securitizations, net -- 91.5 Net property and equipment acquisitions (99.1) (82.8) Proceeds from exercise of stock options 4.7 13.7 ------ ------ Free cash flow $ 61.3 $ 48.2 ====== ======Our additional free cash flow of $13.1 million from 2002 to 2003 resulted primarily from increases in income from continuing operations of $16.7 million, improvements in accounts receivable collections of $42.2 million, lower payments on accounts payable of $15.4 million and claims and other changes of $8.8 million. Claims and other primarily represents increased pension and workers' compensation accruals. Fluctuations of $78.5 million in other working capital items mostly offset these favorable improvements. Other working capital changes included increased pension funding in 2003 of $23.5 million and the impact of wage and benefit payments of Roadway Express and New Penn that approximated $20 million for the stub period. In addition, accrued income taxes created a fluctuation of $26.0 million between 2003 and 2002 due to improved operating results in 2003 and an income tax refund of $10.5 million received in 2002. Other items considered in evaluating free cash flow include net property and equipment acquisitions and proceeds from exercise of stock options. In 2003, net property and equipment acquisitions increased by $16.3 million mostly due to increased investments in land and structures at Yellow Transportation. Our continued investment in equipment and land and structures supports our philosophy of consistently funding capital expenditures for anticipated growth and expansion of services. Our proceeds received from exercise of stock options decreased by $9.0 million in 2003 from 2002 mostly due to restrictions of exercising options during the pending acquisition of Roadway. 23In 2002, operating cash flow results included $17.3 million from the operating activities of SCST. Since we completed the spin-off of SCST in September 2002, results for 2003 do not reflect any SCST activity. As discussed previously, we recorded our ABS financing as an operating activity in prior periods and in 2003 recognized the borrowings as a financing activity due to the amendment of our ABS facility agreement. This change in reporting impacted cash from operating activities by $91.5 million between 2002 and 2003. CAPITAL EXPENDITURES Our capital expenditures focus primarily on the replacement of revenue equipment, land and structures, additional investments in information technology and acquisitions. As reflected on our Consolidated Balance Sheets, our business remains capital intensive with significant investments in terminal facilities and a fleet of tractors and trailers. We determine the amount and timing of capital expenditures based on numerous factors, including anticipated growth, economic conditions, new or expanded services, regulatory actions and availability of financing. The acquisition of Roadway will not change our capital expenditures philosophy from previous years, given the similarity of our operations. However, as discussed below, we do expect capital expenditures to increase significantly due to the acquisition. The table below summarizes our actual net capital expenditures by type for the periods ended December 31:
(in millions) 2003 2002 2001 - -------------------------------------------- ---- ---- ----Revenue equipment $ 62 $ 72 $ 58 Land, structures and technology 37 11 23 ---- ---- ---- Total before acquisition of companies and discontinued operations 99 83 81 Acquisition of companies 513 18 20 Discontinued operations -- 24 20 ---- ---- ---- Total net capital expenditures $612 $125 $121 ==== ==== ====Capital expenditures for 2003 included the cash portion of the Roadway acquisition for a total of $513 million, while 2002 included the Meridian IQ acquisitions of MegaSys and Clicklogistics for a total of $18 million. We expect 2004 capital spending to approximate $190 to $210 million, including about $120 million for revenue equipment and $7.6 million for the acquisition of GPS Logistics (E.U.) Ltd. Our philosophy continues to be consistent funding of capital expenditures even during economic downturns while still generating free cash flow. We believe our financial condition and access to capital, as they exist today, are adequate to fund our anticipated capital expenditures and future growth opportunities. Our expectation regarding our ability to fund capital expenditures out of existing financing facilities and cash flow is only our forecast regarding this matter. This forecast may be substantially different from actual results. In addition to the factors previously described in the Forward-Looking Statements section, the following factors could affect levels of capital expenditures: the accuracy of our estimates regarding our spending requirements; the occurrence of any unanticipated acquisition opportunities; changes in our strategic direction; and the need to replace any unanticipated losses in capital assets. NONUNION PENSION OBLIGATIONS We provide defined benefit pension plans for employees not covered by collective bargaining agreements. The Yellow qualified plan covers approximately 4,000 employees and the Roadway LLC qualified plan covers approximately 6,000 employees. Beginning January 1, 2004, the existing qualified benefit plans will be closed to new participants. All new nonunion employees and all Meridian IQ employees will participate in a new defined contribution retirement plan. Increases in our pension benefit obligations combined with market losses in 2002 and 2001 negatively impacted the funded status of our plans and resulted in additional funding requirements and pension expense in 2003. Due to these same factors, we recorded a reduction in shareholders' equity in 2002 of $30.8 million, net of tax of $17.2 million, to reflect the minimum liability associated with the plans. In 2003, we reduced the minimum liability in shareholders' equity by a net $10.5 million, as a result of the additional expense we recognized during the year as well as favorable investment experience in 2003. Our minimum liability reflected in shareholders' equity at December 31, 2003 totals $20.3 million, net of tax of $12.5 million. As we record additional expense and fund our accumulated benefit obligation, we expect the minimum liability reflected in shareholders' equity to continue to decrease. Although market returns improved in 2003, we expect pension funding and expense to remain an area of management focus over the next several years. Given the dependence on the economy and the significant amounts involved, pension funding could have a material 24impact on our liquidity. Using our current plan assumptions of an 8.75 percent return on assets (9.0 percent for 2003 actual) and discount rate of 6.25 percent (6.75 percent for 2003 actual), we either recorded or expect to record the following:
Shareholders' Equity Pension Decrease, (in millions) Cash Funding Expense net of tax - -------------- ------------ ------- -------------2003 Actual $ 35.0 $ 19.3 $ 10.5 2004 Expected 45.0 52.2 14.2 2005 Expected 42.0 56.2 7.1 ===== ===== =====Our actual 2003 pension expense included approximately $1.3 million for the stub period of Roadway Express and New Penn. The remaining $18.0 million of expense attributed to the Yellow plans was significantly less than the $24.0 million we estimated at December 31, 2002, due to a valuation study in the first quarter of 2003 from our independent actuary. The actuary completes a study approximately every five years that involves reviewing, among other items, actual salary rates, retirement ages and employee turnover. Expectations for 2004 and 2005 include amounts related to the Roadway plans. CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS The following tables provide aggregated information regarding our contractual obligations and commercial commitments as of December 31, 2003. Most of these obligations and commitments have been discussed in detail either in the preceding paragraphs or the notes to the financial statements. The tables do not include expected pension funding as disclosed separately in the previous section. Contractual Cash Obligations
Payments Due by Period (in millions) Less than 1 year 2-3 years 4-5 years After 5 years Total - ------------------------------- ---------------- --------- --------- ------------- --------Balance sheet obligations: ABS borrowings $ 71.5 $ -- $ -- $ -- $ 71.5 Long-term debt 1.8 7.9 397.2 407.0 813.9 Off balance sheet obligations: Operating leases 73.1 86.9 29.3 14.4 203.7(a) Capital expenditures 60.0 -- -- -- 60.0 ------ ----- ------ ------ -------- Total contractual obligations $206.4 $94.8 $426.5 $421.4 $1,149.1 ====== ===== ====== ====== ========(a) The net present value of operating leases, using a discount rate of 10 percent, was $171.0 million at December 31, 2003. Other Commercial Commitments The following table reflects other commercial commitments or potential cash outflows that may result from a contingent event, such as a need to borrow short-term funds due to insufficient free cash flow.
Amount of Commitment Expiration Per Period (in millions) Less than 1 year 2-3 years 4-5 years After 5 years Total - ---------------------------- ---------------- --------- --------- ------------- ------Available line of credit $ -- $ -- $ -- $225.6 $225.6 Letters of credit 275.9 -- -- -- 275.9(a) Lease guarantees for SCST 1.7 2.9 1.3 -- 5.9 Surety bonds 62.8 0.4 1.4 -- 64.6(b) ------ ---- ---- ------ ------ Total commercial commitments $340.4 $3.3 $2.7 $225.6 $572.0 ====== ==== ==== ====== ======(a) Includes $1.5 million in letters of credit that are not currently covered under a credit facility. (b) Includes $2.3 million of surety bonds for SCST related to workers' compensation, property damage and liability claims. 25CRITICAL ACCOUNTING POLICIESCritical Accounting Policies
Preparation of our financial statements requires accounting policies that involve significant estimates and judgments regarding the amounts included in the financial statements and disclosed in the accompanying notes to the financial statements. We continually review the appropriateness of our accounting policies and the accuracy of our
estimates.estimates including discussion with the Audit/Ethics Committee of our Board of Directors who make recommendations to management regarding these policies. Even with a thorough process, estimates must be adjusted based on changing circumstances and new information. Management has identified the policies described below as requiring significant judgment and having a potential material impact to our financial statements.REVENUE RESERVESRevenue Reserves
We consider our policies regarding revenue-related reserves as critical based on their significance in evaluating our financial performance by management and investors. We have an extensive system that allows us to accurately capture, record and control all relevant information necessary to effectively manage our revenue reserves.
For shipments in transit, Yellow Transportation, Roadway Express and New Penn record revenue based on the percentage of service completed as of the period end and accrue delivery costs as incurred. In addition, Yellow Transportation, Roadway Express and New Penn recognize revenue on a gross basis
sincebecause the entities are the primary obligors even when they use other transportation service providers who act on their behalf. Yellow Transportation, Roadway Express and New Penn remain responsible to their customers for complete and proper shipment, including the risk of physical loss or damage of the goods and cargo claims issues. Meridian IQ recognizes revenue upon the completion of services. In certain logistics transactions where Meridian IQ acts as an agent, revenue is recorded on a net basis. Net revenue represents revenue charged to customers less third party transportation costs. Where Meridian IQ acts as principal, it records revenue from these transactions on a gross basis, without deducting transportation costs. Management believes these policies most accurately reflect revenue as earned. Our revenue-related reserves involve three primary estimates: shipments in transit, rerate reserves, and uncollectible accounts.Shipments in Transit
We assign pricing to bills of lading at the time of shipment based primarily on the weight, general classification of the product, the shipping destination and individual customer discounts. This process is referred to as rating. At the end of each period, we estimate the amount of revenue earned on shipments in transit based on actual shipments picked up and scheduled delivery dates. We calculate a percentage of completion using this data and the day of the week on which the period ends. Management believes this provides a reasonable estimation of the revenue actually earned.
Rerate Reserves
At various points throughout our process, incorrect ratings could be identified based on many factors, including weight verifications or updated customer discounts. Although the majority of rerating occurs in the
same month as the original rating, a portion occurs during the following periods. We accrue a reserve for rerating based on historical trends. At December 31,
20032004 and2002,2003, our financial statements included a rerate reserve of$21.8$25.1 million and$12.0$21.8 million, respectively. Thesignificantincrease in the rerate reserve from20022003 to2003 resulted primarily from the inclusion2004 is reflective ofRoadway Express and New Pennour overall increase in2003.operations.Uncollectible Accounts
We record an allowance for doubtful accounts primarily based on historical uncollectible amounts. We also take into account known factors surrounding specific customers and overall collection trends. Our process involves performing ongoing credit evaluations of customers, including the market in which they operate and the overall economic conditions. We continually review historical trends and make adjustments to the allowance for doubtful accounts as appropriate. Our allowance for doubtful accounts totaled
$20.8$22.4 million and$15.7$20.8 million as of December 31,20032004 and2002,2003, respectively. The increase in the allowance for doubtful accounts from20022003 to2003 resulted primarily from the inclusion2004 is reflective ofRoadway Expressour overall increase in operations.Claims and
New Penn in 2003. CLAIMS AND INSURANCEInsuranceWe are self-insured up to certain limits for
workers'workers’ compensation, cargo loss and damage, property damage and liability claims. We measure the liabilities associated withworkers'workers’ compensation and property damage and liability claims primarily through actuarial26methods performed bythat an independent thirdparty.party performs. Actuarial methods include estimates for the undiscounted liability for claims reported, for claims incurred but not reported and for certain future administrative costs. These estimates are based on historical loss experience and judgments about the present and expected levels of costs per claim and the time required to settle claims. The effect of future inflation for costs is implicitly considered in the actuarial analyses. Actual claims may vary from these estimates due to a number of factors, including but not limited to, accident frequency and severity, claims management, changes in healthcare costs and overall economic conditions. We discount the actuarial calculations to present value based on the U.S. Treasury rate, at the date of occurrence, for maturities that match the expected payout of the liabilities. As of December 31,20032004 and2002,2003, we had$299.3$320.8 million and$115.2$299.3 million accrued for claims and insurance. The increase in claims and insurance from20022003 to2003 resulted primarily from the inclusion2004 is reflective ofRoadway Express and New Pennour overall increase in2003. PENSIONoperations.Pension
With the exception of Meridian IQ, New Penn and Reimer, Yellow Roadway and its operating subsidiaries sponsor qualified and nonqualified defined benefit pension plans for most employees not covered by collective bargaining agreements. Meridian IQ and New Penn do not offer defined benefit pension plans and instead offer retirement benefits through either contributory 401(k) savings plans or profit sharing plans.
BeginningEffective January 1, 2004, all new U.S. – salaried nonunion employees (except those currently participating in other profit sharing plans) and all Meridian IQ employeeswillnow participate in a new defined contribution retirement plan. The existing Yellow Roadway qualified planswill beare closed to new participants. We account for pension benefits using actuarial methods based on numerous estimates, including employee turnover, mortality and retirement ages, expected return on plan assets, discount rates, and future salary increases. The most critical of these factors, due to their potential impact on pension cost, are discussed in more detail below.Return on Plan Assets
The return on plan assets represents a long-term assumption of our portfolio performance that can impact our pension expense and our minimum liability. With
$615$673 million of plan assets,including the Roadway plans,a 50-basis-point decrease in the return rate would increase annual pension expense by approximately$3$3.2 million and wouldincreasedecrease our minimum liability reflected inshareholders'shareholders’ equity by approximately$1 million.$1.1 million, net of tax.We believe our
20032004 expected rate of return of9.08.75 percentaccurately representedis appropriate based on our historical experience in this investment portfoliothat has performed to this level over time. However, given the additionas well as a review ofthe Roadway portfolio of assets and in accordance with our policy on establishing the long-term rate of return, we have lowered this rate to 8.75 percent in determining 2004 pension expense.other objective indices. Although plan investments are subject to short-term market volatility, we believe they are well diversified and closely managed. Our asset allocation as of December 31,20032004 consisted of6768 percent in equities and3332 percent in fixed-income securities. This allocation is consistent with the long-term asset allocation for the plans. We will continue to review our expected long-term rate of return on an annual basis and revise appropriately. Refer to our discussion of Nonunion Pension Obligations under the Financial Condition section for details of actual and anticipated pension charges.Discount Rate
The discount rate refers to the interest rate used to discount the estimated future benefit payments earned to their present value, also referred to as the benefit obligation. The discount rate allows us to calculate what it would cost to settle the pension obligations as of the measurement date, December 31, and impacts the following
year'syear’s pensionexpense.cost. We determine the discount rate based on high-grade corporate bonds with principal payments and maturities that approximate our expected benefit payments.Although the discount rate used requires little judgment, changes in the rate can significantly impact our pension
expense.cost. For example, a 50-basis-point decrease in our discount rate would increase annual pension expense by approximately$7.5$11.0 million and increase our minimum liability reflected in shareholders’ equity by approximately $18.3 million, net of tax, assuming all other factors remain constant. Changes in the discount rate do not have a direct impact on cash funding requirements. The discount rate can fluctuate considerably over periods depending on overall economic conditions that impact long-term corporate bond yields. At December 31,20032004 and2002,2003, we used a discount rate of 5.75 percent and 6.25 percent,and 6.75 percent,respectively.Future Salary Increases
We make assumptions of future salary increases for plan participants based on general inflation and cost of living expectations. As pension benefits are based on
participants'participants’ earned wages, estimated levels of our future performance also factor into the calculation. We believe these increases require less judgment than other pension estimates but can have a significant impact on our future pension27expense. Our 20032004 assumed rate of future annual increases of3.93.8 percent represents a weighted average of the Yellow and Roadway plans and reflects the recent experience of both plans.MULTI-EMPLOYER PLANSMulti-Employer 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
7780 percent of total employees). The largest of these plans, the Central States Southeast and Southwest Areas Pension Plan (the"Central“Central StatesPlan"Plan”) provides retirement benefits to approximately 53 percent of our total employees. The amounts of these contributions are determined by contract and established in the agreements. The health and welfare plans provide health care and disability benefits to active employees and retirees. The pension plans provide defined benefits to retired participants. We recognize as net pension cost the required contribution for the period and recognize as a liability any contributions due and unpaid.Yellow Roadway contributed and charged to expense $374.4 million in 2003, $315.1 million in 2002, and $307.2 million in 2001. Roadway Corporation contributed and charged to expense approximately $374 million for the period January 1, 2003 through the date of acquisition (December 11, 2003).Under current legislation regarding multi-employer pension plans, a termination, withdrawal or partial withdrawal from any multi-employer plan in an under-funded status would render us liable for a proportionate share of
suchthe multi-employerplans'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 andresults 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 (the “Code”) and related regulations establish minimum funding requirements for these plans. Under recent legislation, 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 plan is seeking corrective measures to address its funding. During the benefit period of the recent 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
(without limitation)the Central States Plan,failfails to meettheseminimum funding requirements and the trustees ofthese planssuch a plan are unable to obtainwaiversa waiver of the requirements or certain changes in how the applicable plan calculates its funding level from the Internal Revenue Service("IRS"(“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 theseplans and requireplans. 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 employersandor additional contributions required, it could have a material adverse impact on the financial results of Yellow Roadway.PROPERTY AND EQUIPMENTProperty and Equipment and Definite Life Intangibles
Impairment Testing
We
capitalizereview property and equipment and definite life intangibles for impairment whenever events or changes inaccordance with currentcircumstances indicate that the carrying amount of an asset may not be recoverable. We evaluate recoverability of assets to be held and used by comparing the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.We believe that the accounting
standards, including replacements and improvements when such costs extendestimate related to asset impairment is a critical accounting estimate because: (1) it requires our management to make assumptions about future revenues over theusefullife of theasset.asset, and (2) the impact that recognizing an impairment would have on our financial position, as well as our results of operations, could be material. Management’s assumptions about future revenues require significant judgment because actual revenues have fluctuated in the past and may continue to do so.In estimating future revenues, we use our internal business forecasts. We
charge maintenancedevelop our forecasts based on recent revenue data for existing services andrepairsother industry and economic factors.Depreciable Lives of Assets
We perform annual internal studies to
expense as incurred. Depreciation on capital assets is computed usingconfirm thestraight-line methodappropriateness of depreciable lives for each category of property andranges from 3equipment. These studies utilize models, which take into account actual usage, physical wear and tear, and replacement history to40 years. Management makescalculate remaining life of our asset base. We also make assumptions regarding future conditions in determiningestimated useful lives andpotential salvage values. These assumptions impact the amount of depreciation expense recognized in the period and any gain or loss once the asset is disposed.NEW ACCOUNTING PRONOUNCEMENTS SFAS NO. 149 On June 30, 2003, we adoptedGoodwill and Indefinite Life Intangibles
Goodwill and indefinite life intangibles are reviewed at least annually for impairment, or more frequently if indicators of impairment exist. Goodwill is tested by comparing net book value of the reporting unit (identified as our operating segments) to fair value. Indefinite life intangibles are tested by comparing book value to estimated fair value.
We believe that the accounting estimate related to goodwill and indefinite life intangibles is a critical accounting estimate because (1) it requires our management to make assumptions about fair values, and (2) the impact of recognizing an impairment could be material to our financial position, as well as our results of operations. Management’s assumptions about fair values require significant judgment because broad economic factors and industry factors can result in variable and volatile fair values.
Management completed impairment analyses on both goodwill and indefinite life intangibles in the fourth quarter of 2004. These tests were performed internally. As of December 31, 2004 no impairment existed.
New Accounting Pronouncements
SFAS No.
149,153, Exchange of Nonmonetary Assets—An Amendment of APB Opinion No. 29On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued Statement
133 on Derivative Instruments and Hedging Activities ("Statementof Financial Accounting Standards (“SFAS”) No.149"). Statement153, Exchanges of Nonmonetary Assets—An Amendment of APB Opinion No.149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under29. The amendments made by SFAS No.133, Accounting153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception forDerivative Instrumentsnonmonetary exchanges of similar productive assets andHedging Activities. As wereplace it with a broader exception for exchanges of nonmonetary assets that do notcurrently engagehave “commercial substance.” Previously, Opinion 29 required that the accounting for an exchange of a productive asset should be based on the recorded amount of the asset relinquished. The provisions insignificant hedging activities, weSFAS No. 153 are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Early application is permitted and companies must apply the standard prospectively. We do not expectadoption of StatementSFAS No.149153 to have a materialimpacteffect on our financialpositionstatements.SFAS No. 123 (Revised 2004), Share-Based Payment
On December 16, 2004, the FASB issued SFAS No. 123 (Revised 2004), Share-Based Payment. The new FASB rule requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or
resultsliability instruments issued. We will be required to apply SFAS No. 123R as ofoperations. SFAS NO. 150 OnJuly 1,2003, we adopted2005, the beginning of our third quarter and intend to use the modified-prospective-transition method, as defined therein. The scope of SFAS No.150,123R includes a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. SFAS No. 123R replaces FASB SFAS No. 123, Accounting forCertain Financial Instruments with Characteristics of Both LiabilitiesStock-Based Compensation, andEquity ("Statementsupersedes APB Opinion No.150"). Statement No. 150 establishes standards25, Accounting forclassifying and measuring certain financial instruments with characteristics of both liabilities and equity, and requires usStock Issued toclassify a financial instrument within its scope as a liability or 28asset. Previously, many instruments under the scope of Statement No. 150 would have been classified as equity.Employees. We do not expectadoption of StatementSFAS No.150123R to have a materialimpacteffect on our financialposition or results of operations. SFAS NO. 132 (REVISED 2003) On December 15, 2003 we adopted the disclosure provisions of SFAS No. 132 (Revised 2003), Employers' Disclosures about Pensions and Other Postretirement Benefits - an amendment of SFAS Nos. 87, 88 and 106 ("Statement No. 132R"). Statement 132R retains the disclosure requirements of SFAS No. 132, which it replaces, and requires additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. Our Notes to the Consolidated Financial Statements reflect these additional disclosures. Our quarterly reports on Form 10-Q will also include additional disclosures regarding defined pension plans and postretirement plans. OUTLOOKstatements.Outlook
Economists expect continued growth in capital spending in
2004 as a result2005, underpinned by high returns on capital, rising business confidence, healthy balance sheets and still favorable financing conditions. As the U.S. dollar continues to depreciate in the international market, economists expect U.S. exports to rise and be supportive ofamong others, rising corporate profits, lower interest rates, improving equity markets and tax incentives.economic growth. Our economic assumptions also include year-over-year gains in theIPIindustrial production index and realGDPgross domestic product offour3.5 percent; asignificantpositive for our industry. Management expectsourfirm LTL pricingenvironmenttrends toremain competitive, yet stable,continue during the upcoming year. We will continue to focus onleveraging the capabilitiesachieving synergies availableto us as a result of our
new organization and achieving the synergies that are available to us.combined organization. With our significant operating leverage, we are well positioned to take advantage ofimprovingcontinued economicconditions. 29strength. Item 7A. Qualitative and Quantitative Disclosures About Market Risk
MARKET RISK POSITIONMarket Risk Position
We have exposure to a variety of market risks, including the effects of interest rates, foreign exchange rates and fuel prices.
INTEREST RATE RISKInterest Rate Risk
To provide adequate funding through seasonal business cycles and minimize overall borrowing costs, we utilize both fixed rate and variable rate financial instruments with varying maturities.
Given the favorable interest rate markets in 2003, we assumed a significant amount of fixed-rate debt for the acquisition of Roadway.At December 31,2003, we had approximately 72 percent2004, as no amounts were outstanding under our asset-based securitization agreement or revolving line of credit, all of our debt was at fixedrates with the balance at variablerates.The table below provides information regarding our interest rate risk related to fixed-rate debt as of December 31,
2003.2004. 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 senior notes due 2008 and contingent convertible senior notes have been calculated based on the quoted market prices at December 31,2003.2004. The market price for the contingent convertible senior notes reflects the combination of debt andequitythe conversion option components of the convertible instrument. We consider the fair value of variable-rate debt to approximate the carrying amount due to the fact that the interest rates are generally set for periods of three months or less, therefore, we exclude it from the table below.
Fair (in millions) 2004 2005 2006 2007 2008 Thereafter Total value - ----------------------- ---- ------ ----- ----- ------- ---------- ------- -------Fixed-rate debt $ -- $ 4.4 $ -- $ -- $ 227.5 $ 407.0 $ 638.9 $ 761.0 Average interest rate -- 5.25% -- -- 8.22% 4.42% ==== ====== ===== ===== ======= ========== ======= =======FOREIGN EXCHANGE RATES
(in millions) 2005 2006 2007 2008 2009 Thereafter Total Fair
valueFixed-rate debt
$ 4.4 $ — $ — $ 227.5 $ 1.0 $ 406.0 $ 638.9 $ 921.2 Average interest rate
5.25 % — — 8.22 % 6.13 % 4.40 % Our consolidated balance sheet at December 31, 2004 reflects $250 million contingently convertible notes classified as a current liability as our note holders had the right, at their option, to convert their notes, in whole or in part, into cash and shares of common stock as more fully described in Item 8, Debt and Financing. However, we have reflected the obligation above based on the stated maturity as we believe the likelihood of a note holder presenting their notes for conversion to be remote.
Foreign Exchange Rates
Revenue, operating expenses, assets and liabilities of our Canadian, Mexican and
MexicanUnited 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 VOLATILITYDuring 2004 we entered into two foreign currency hedges both of which matured December 31, 2004. These instruments were to effectively hedge our exposure to foreign currency fluctuations on certain intercompany debt with GPS Logistics (EU) Limited, a wholly owned subsidiary. It is expected that we will continue to hedge this exposure in 2005.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,previously, 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.30Item 8. Financial Statements and Supplementary Data
CONSOLIDATED BALANCE SHEETS
Yellow Roadway Corporation and Subsidiaries
December 31, December 31, (in thousands except per share data) 2003 2002 - ------------------------------------------------------------- ------------ ------------ASSETS Current Assets: Cash and cash equivalents $ 75,166 $ 28,714 Accounts receivable, less allowances of $20,839 and $15,731 699,142 327,913 Fuel and operating supplies 16,452 11,039 Deferred income taxes, net 23,614 -- Prepaid expenses 70,062 57,687 ----------- ----------- Total current assets 884,436 425,353 ----------- ----------- Property and Equipment: Land 351,969 93,783 Structures 906,434 516,006 Revenue equipment 968,742 825,606 Technology equipment and software 154,688 141,723 Other 156,781 101,978 ----------- ----------- 2,538,614 1,679,096 Less - accumulated depreciation (1,135,346) (1,114,120) ----------- ----------- Net property and equipment 1,403,268 564,976 ----------- ----------- Goodwill 617,313 20,491 Intangibles 467,114 7,696 Other assets 91,098 24,469 ----------- ----------- TOTAL ASSETS $ 3,463,229 $ 1,042,985 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Checks outstanding in excess of bank balances $ 101,395 $ 63,685 Accounts payable 158,780 51,304 Wages, vacations and employees' benefits 351,287 159,998 Deferred income taxes, net -- 16,751 Claims and insurance accruals 112,005 44,045 Other current and accrued liabilities 66,473 40,315 Asset backed securitization ("ABS") borrowings 71,500 50,000 Current maturities of long-term debt 1,757 24,261 ----------- ----------- Total current liabilities 863,197 450,359 ----------- ----------- Other Liabilities: Long-term debt, less current portion 836,082 50,024 Deferred income taxes, net 298,256 25,657 Claims and other liabilities 463,609 156,987 Commitments and contingencies Shareholders' Equity: Common stock, $1 par value per share - authorized 120,000 shares, issued 50,146 and 31,825 shares 50,146 31,825 Capital surplus 653,739 80,610 Retained earnings 366,157 325,474 Accumulated other comprehensive loss (23,167) (35,596) Unamortized restricted stock awards (567) (1,053) Treasury stock, at cost (2,359 and 2,244 shares) (44,223) (41,302) ----------- ----------- Total shareholders' equity 1,002,085 359,958 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,463,229 $ 1,042,985 =========== ===========
(in thousands except per share data) December 31,
2004December 31,
2003Assets
Current Assets:
Cash and cash equivalents
$ 106,489 $ 75,166 Accounts receivable, less allowances of $22,371 and $20,839
778,596 699,142 Fuel and operating supplies
20,916 16,452 Deferred income taxes, net
66,496 23,614 Prepaid expenses
80,944 70,062 Total current assets
1,053,441 884,436 Property and Equipment:
Land
336,613 351,969 Structures
916,550 906,434 Revenue equipment
1,067,663 968,742 Technology equipment and software
181,444 154,688 Other
170,019 156,781 2,672,289 2,538,614 Less—accumulated depreciation
(1,249,571 ) (1,135,346 ) Net property and equipment
1,422,718 1,403,268 Goodwill
632,141 617,313 Intangibles
468,310 467,114 Other assets
50,559 91,098 Total assets
$ 3,627,169 $ 3,463,229 Liabilities and Shareholders’ Equity
Current Liabilities:
Checks outstanding in excess of bank balances
$ 112,917 $ 101,395 Accounts payable
194,172 158,780 Wages, vacations and employees’ benefits
427,731 351,287 Claims and insurance accruals
124,060 112,005 Other current and accrued liabilities
86,459 66,473 Asset backed securitization (“ABS”) borrowings
— 71,500 Current maturities of contingently convertible notes
250,000 — Current maturities of other long-term debt
4,400 1,757 Total current liabilities
1,199,739 863,197 Other Liabilities:
Long-term debt, less current portion
403,535 836,082 Deferred income taxes, net
319,839 298,256 Claims and other liabilities
489,865 463,609 Commitments and Contingencies
Shareholders’ Equity:
Common stock, $1 par value per share—authorized 120,000 shares, issued 51,303 and 50,146 shares
51,303 50,146 Preferred stock, $1 par value per share—authorized 5,000 shares, none issued
— — Capital surplus
694,504 653,739 Retained earnings
550,484 366,157 Accumulated other comprehensive loss
(33,159 ) (23,167 ) Unamortized equity awards
(10,479 ) (567 ) Treasury stock, at cost (2,066 and 2,359 shares)
(38,462 ) (44,223 ) Total shareholders’ equity
1,214,191 1,002,085 Total liabilities and shareholders’ equity
$ 3,627,169 $ 3,463,229 The notes to consolidated financial statements are an integral part of these statements.
31STATEMENTS OF CONSOLIDATED OPERATIONS
Yellow Roadway Corporation and Subsidiaries
For the years ended December 31
(in thousands except per share data) 2003 2002 2001 - ----------------------------------------------------- ---------- ---------- ----------OPERATING REVENUE $3,068,616 $2,624,148 $2,505,070 ---------- ---------- ---------- OPERATING EXPENSES: Salaries, wages and employees' benefits 1,970,440 1,717,382 1,638,662 Operating expenses and supplies 449,825 385,522 398,054 Operating taxes and licenses 83,548 75,737 75,637 Claims and insurance 67,670 57,197 56,999 Depreciation and amortization 87,398 79,334 76,977 Purchased transportation 318,176 253,677 215,131 Losses (gains) on property disposals, net (167) 425 (186) Acquisition, spin-off and reorganization charges 3,124 8,010 5,601 ---------- ---------- ---------- Total operating expenses 2,980,014 2,577,284 2,466,875 ---------- ---------- ---------- Operating income 88,602 46,864 38,195 ---------- ---------- ---------- NONOPERATING (INCOME) EXPENSES: Interest expense 20,606 7,211 8,437 ABS facility charges -- 2,576 7,996 Interest income (1,706) (843) (1,198) Loss on equity method investment -- -- 5,741 Other 2,888 334 (140) ---------- ---------- ---------- Nonoperating expenses, net 21,788 9,278 20,836 ---------- ---------- ---------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 66,814 37,586 17,359 Income Tax Provision 26,131 13,613 6,770 ---------- ---------- ---------- INCOME FROM CONTINUING OPERATIONS 40,683 23,973 10,589 Income (loss) from discontinued operations, net -- (117,875) 4,712 ---------- ---------- ---------- NET INCOME (LOSS) $ 40,683 $ (93,902) $ 15,301 ---------- ---------- ---------- AVERAGE COMMON SHARES OUTSTANDING - BASIC 30,370 28,004 24,376 AVERAGE COMMON SHARES OUTSTANDING - DILUTED 30,655 28,371 24,679 BASIC EARNINGS (LOSS) PER SHARE: Income from continuing operations $ 1.34 $ 0.86 $ 0.44 Income (loss) from discontinued operations -- (4.21) 0.19 ---------- ---------- ---------- Net income (loss) $ 1.34 $ (3.35) $ 0.63 ---------- ---------- ---------- DILUTED EARNINGS (LOSS) PER SHARE: Income from continuing operations $ 1.33 $ 0.84 $ 0.43 Income (loss) from discontinued operations -- (4.15) 0.19 ---------- ---------- ---------- Net income (loss) $ 1.33 $ (3.31) $ 0.62 ========== ========== ==========
(in thousands except per share data) 2004 2003 2002 Operating Revenue
$ 6,767,485 $ 3,068,616 $ 2,624,148 Operating Expenses:
Salaries, wages and employees’ benefits
4,172,144 1,970,440 1,717,382 Operating expenses and supplies
1,011,864 449,825 385,522 Operating taxes and licenses
169,374 83,548 75,737 Claims and insurance
132,793 67,670 57,197 Depreciation and amortization
171,468 87,398 79,334 Purchased transportation
752,788 318,176 253,677 Losses (gains) on property disposals, net
(4,547 ) (167 ) 425 Acquisition, spin-off and reorganization charges
— 3,124 8,010 Total operating expenses
6,405,884 2,980,014 2,577,284 Operating income
361,601 88,602 46,864 Nonoperating (Income) Expenses:
Interest expense
43,954 20,606 7,211 ABS facility charges
— — 2,576 Interest income
(2,080 ) (1,706 ) (843 ) Write off debt issuance costs
18,279 — — Other
3,785 2,888 334 Nonoperating expenses, net
63,938 21,788 9,278 Income from Continuing Operations Before Income Taxes
297,663 66,814 37,586 Income Tax Provision
113,336 26,131 13,613 Income from Continuing Operations
184,327 40,683 23,973 Income (loss) from discontinued operations, net
— — (117,875 ) Net Income (Loss)
$ 184,327 $ 40,683 $ (93,902 ) Average Common Shares Outstanding—Basic
48,149 30,370 28,004 Average Common Shares Outstanding—Diluted
49,174 30,655 28,371 Basic Earnings (Loss) Per Share:
Income from continuing operations
$ 3.83 $ 1.34 $ 0.86 Income (loss) from discontinued operations
— — (4.21 ) Net income (loss)
$ 3.83 $ 1.34 $ (3.35 ) Diluted Earnings (Loss) Per Share:
Income from continuing operations
$ 3.75 $ 1.33 $ 0.84 Income (loss) from discontinued operations
— — (4.15 ) Net income (loss)
$ 3.75 $ 1.33 $ (3.31 ) The notes to consolidated financial statements are an integral part of these statements.
32STATEMENTS OF CONSOLIDATED CASH FLOWS
Yellow Roadway Corporation and Subsidiaries
For the years ended December 31
(in thousands except per share data) 2003 2002 2001 - ------------------------------------------------------------- --------- --------- ---------OPERATING ACTIVITIES: Net income (loss) $ 40,683 $ (93,902) $ 15,301 Noncash items included in net income (loss): Depreciation and amortization 87,398 79,334 76,977 Loss (income) from discontinued operations -- 117,875 (4,712) Loss on equity method investment -- -- 5,741 Deferred income tax provision, net 25,767 1,449 16,746 Losses (gains) on property disposals, net (167) 425 (186) Changes in assets and liabilities, net: Accounts receivable (7,430) (49,633) 44,041 Accounts receivable securitizations -- (91,500) (35,500) Accounts payable 21,294 5,928 (13,704) Other working capital items (40,053) 38,468 (97,532) Claims and other 23,189 14,386 (3,742) Other 5,055 2,978 8,759 Net change in operating activities of discontinued operations -- 17,250 76,106 --------- --------- --------- NET CASH FROM OPERATING ACTIVITIES 155,736 43,058 88,295 --------- --------- --------- INVESTING ACTIVITIES: Acquisition of property and equipment (103,327) (86,337) (88,022) Proceeds from disposal of property and equipment 4,193 3,507 6,587 Acquisition of companies (513,338) (18,042) (14,300) Other -- -- (5,830) Net capital expenditures of discontinued operations -- (24,372) (19,619) --------- --------- --------- NET CASH USED IN INVESTING ACTIVITIES (612,472) (125,244) (121,184) --------- --------- --------- FINANCING ACTIVITIES: Unsecured bank credit lines, net -- (85,000) 25,000 Senior secured credit facility 175,000 -- -- ABS borrowings, net 21,500 -- -- Issuance of long-term debt 400,000 -- -- Debt issuance costs (34,734) -- -- Repayment of long-term debt (60,342) (44,600) (10,412) Proceeds from issuance of common stock -- 93,792 -- Dividend from subsidiary upon spin-off -- 113,790 -- Treasury stock purchases (2,921) -- -- Proceeds from exercise of stock options 4,685 13,704 16,638 --------- --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES 503,188 91,686 31,226 --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 46,452 9,500 (1,663) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 28,714 19,214 20,877 --------- --------- --------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 75,166 $ 28,714 $ 19,214 --------- --------- --------- SUPPLEMENTAL CASH FLOW INFORMATION: Income taxes paid, net $ 15,957 $ 8,272 $ 5,268 Interest paid 13,498 11,518 16,628 Issuance of common stock for Roadway acquisition 583,883 -- -- ========= ========= =========
(in thousands except per share data) 2004 2003 2002 Operating Activities:
Net income (loss)
$ 184,327 $ 40,683 $ (93,902 ) Noncash items included in net income (loss):
Depreciation and amortization
171,468 87,398 79,334 Deferred debt issuance cost write off
18,279 — — Loss from discontinued operations
— — 117,875 Deferred income tax provision, net
17,996 25,767 1,449 Losses (gains) on property disposals, net
(4,547 ) (167 ) 425 Changes in assets and liabilities, net:
Accounts receivable
(70,230 ) (7,430 ) (49,633 ) Accounts receivable securitizations
— — (91,500 ) Accounts payable
34,284 21,294 5,928 Other working capital items
41,865 (40,053 ) 38,468 Claims and other
30,792 23,189 14,386 Other
11,484 5,055 2,978 Net change in operating activities of discontinued operations
— — 17,250 Net cash provided by operating activities
435,718 155,736 43,058 Investing Activities:
Acquisition of property and equipment
(201,818 ) (103,327 ) (86,337 ) Proceeds from disposal of property and equipment
37,529 4,193 3,507 Acquisition of companies
(10,463 ) (513,338 ) (18,042 ) Other
4,494 — — Net capital expenditures of discontinued operations
— — (24,372 ) Net cash used in investing activities
(170,258 ) (612,472 ) (125,244 ) Financing Activities:
Unsecured bank credit lines, net
— — (85,000 ) Senior secured credit facility
— 175,000 — ABS borrowings, net
(71,500 ) 21,500 — Issuance of long-term debt
— 400,000 — Debt issuance costs
(2,938 ) (34,734 ) — Repayment of long-term debt
(175,044 ) (60,342 ) (44,600 ) Proceeds from issuance of common stock
— — 93,792 Dividend from subsidiary upon spin-off
— — 113,790 Treasury stock purchases
— (2,921 ) — Proceeds from exercise of stock options
15,859 4,685 13,704 Other
(514 ) — — Net cash (used in) provided by financing activities
(234,137 ) 503,188 91,686 Net Increase In Cash and Cash Equivalents
31,323 46,452 9,500 Cash and Cash Equivalents, Beginning of Year
75,166 28,714 19,214 Cash and Cash Equivalents, End of Year
$ 106,489 $ 75,166 $ 28,714 Supplemental Cash Flow Information:
Income taxes paid, net
$ 85,316 $ 15,957 $ 8,272 Interest paid
59,044 13,498 11,518 Issuance of common stock for Roadway acquisition
— 583,883 — The notes to consolidated financial statements are an integral part of these statements.
33STATEMENTS OF CONSOLIDATED
SHAREHOLDERS'SHAREHOLDERS’ EQUITYYellow Roadway Corporation and Subsidiaries
For the years ended December 31
(in thousands except per share data) 2003 2002 2001 - --------------------------------------------------- ---------- --------- ---------COMMON STOCK Beginning balance $ 31,825 $ 31,028 $ 29,959 Exercise of stock options 279 737 1,063 Issuance of common stock for Roadway acquisition 18,038 -- -- Other 4 60 6 ---------- --------- --------- Ending balance 50,146 31,825 31,028 ---------- --------- --------- CAPITAL SURPLUS Beginning balance 80,610 41,689 23,304 Exercise of stock options, including tax benefits 5,749 15,296 18,286 Stock issued for Roadway acquisition 565,845 -- -- Equity offering and other 1,535 23,625 99 ---------- --------- --------- Ending balance 653,739 80,610 41,689 ---------- --------- --------- RETAINED EARNINGS Beginning balance 325,474 537,496 522,195 Stock dividend to SCST shareholders -- (118,120) -- Net income (loss) 40,683 (93,902) 15,301 ---------- --------- --------- Ending balance 366,157 325,474 537,496 ---------- --------- --------- ACCUMULATED OTHER COMPREHENSIVE LOSS Beginning balance (35,596) (6,252) (2,710) Changes in minimum pension liability adjustment 10,548 (30,848) -- Changes in foreign currency translation adjustments 386 73 (616) Changes in the fair value of interest rate swaps 1,495 1,431 (2,926) ---------- --------- --------- Ending balance (23,167) (35,596) (6,252) ---------- --------- --------- UNAMORTIZED RESTRICTED STOCK AWARDS Beginning balance (1,053) -- -- Issuance of restricted stock awards -- (1,458) -- Amortization of restricted stock awards 486 405 -- ---------- --------- --------- Ending balance (567) (1,053) -- ---------- --------- --------- TREASURY STOCK, AT COST Beginning balance (41,302) (112,972) (112,972) Treasury stock purchases (2,921) -- -- Equity offering - reissuance of treasury stock -- 71,670 -- ---------- --------- --------- Ending balance (44,223) (41,302) (112,972) ---------- --------- --------- TOTAL SHAREHOLDERS' EQUITY $1,002,085 $ 359,958 $ 490,989 ========== ========= =========
(in thousands except per share data) 2004 2003 2002 Common Stock
Beginning balance
$ 50,146 $ 31,825 $ 31,028 Exercise of stock options
766 279 737 Issuance of equity awards, net
428 — — Issuance of common stock for Roadway acquisition
— 18,038 — Other
(37 ) 4 60 Ending balance
51,303 50,146 31,825 Capital Surplus
Beginning balance
653,739 80,610 41,689 Exercise of stock options, including tax benefits
19,634 5,749 15,296 Issuance of equity awards, net
16,162 — — Issuance of common stock for Roadway acquisition
— 565,845 — Employer contribution to 401(k) plan
4,867 — — Equity offering and other
102 1,535 23,625 Ending balance
694,504 653,739 80,610 Retained Earnings
Beginning balance
366,157 325,474 537,496 Stock dividend to SCST shareholders
— — (118,120 ) Net income (loss)
184,327 40,683 (93,902 ) Ending balance
550,484 366,157 325,474 Accumulated Other Comprehensive Loss
Beginning balance
(23,167 ) (35,596 ) (6,252 ) Minimum pension liability adjustment, net of tax
(16,761 ) 10,548 (30,848 ) Foreign currency translation adjustments, net of tax
6,769 386 73 Fair value of interest rate swaps, net of tax
— 1,495 1,431 Ending balance
(33,159 ) (23,167 ) (35,596 ) Unamortized Equity Awards
Beginning balance
(567 ) (1,053 ) — Issuance of equity awards, net
(16,128 ) — (1,458 ) Amortization of equity awards
6,216 486 405 Ending balance
(10,479 ) (567 ) (1,053 ) Treasury Stock, At Cost
Beginning balance
(44,223 ) (41,302 ) (112,972 ) Treasury stock purchases
— (2,921 ) — Employer contribution to 401(k) plan
5,761 — — Equity offering—reissuance of treasury stock
— — 71,670 Ending balance
(38,462 ) (44,223 ) (41,302 ) Total Shareholders’ Equity
$ 1,214,191 $ 1,002,085 $ 359,958 The notes to consolidated financial statements are an integral part of these statements.
34STATEMENTS OF COMPREHENSIVE INCOME
Yellow Roadway Corporation and Subsidiaries
For the years ended December 31
(in thousands except per share data) 2003 2002 2001 - ------------------------------------------------------ ------- --------- -------Net income (loss) $40,683 $ (93,902) $15,301 Other comprehensive income (loss), net of tax: Changes in minimum pension liability adjustment 10,548 (30,848) -- Changes in foreign currency translation adjustments 386 73 (616) Changes in the fair value of interest rate swaps 1,495 1,431 (2,926) ------- --------- ------- COMPREHENSIVE INCOME (LOSS) $53,112 $(123,246) $11,759 ======= ========= =======
(in thousands except per share data) 2004 2003 2002 Net income (loss)
$ 184,327 $ 40,683 $ (93,902 ) Other comprehensive income (loss), net of tax:
Minimum pension liability adjustment
(16,761 ) 10,548 (30,848 ) Foreign currency translation adjustments
6,769 386 73 Fair value of interest rate swaps
— 1,495 1,431 Other comprehensive income (loss)
(9,992 ) 12,429 (29,344 ) Comprehensive income (loss)
$ 174,335 $ 53,112 $ (123,246 ) The notes to consolidated financial statements are an integral part of these
statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTSstatements.Notes to Consolidated Financial Statements
Yellow Roadway Corporation and Subsidiaries
DESCRIPTION OF BUSINESSDescription of Business
Yellow Roadway Corporation (also referred to as
"Yellow“Yellow Roadway," "Yellow," "we"” “we” or"our"“our”),a Fortune 500 company andone 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 Roadway Technologies, Inc., a captive corporate resource, provides innovative technology solutions and services exclusively for Yellow Roadway companies. Our operating subsidiaries include the following:-Yellow Transportation, Inc.("(“YellowTransportation"Transportation”) is a leading transportation services provider that offers a full range of regional, national and international services for the movement of industrial, commercial and retail goods, primarily through centralized management and customer facing organizations. Approximately 40 percent of Yellow Transportation shipments are completed in two days or less.-Roadway Express, Inc.("(“RoadwayExpress"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 throughdecentralizedregionalized management and customer facing organizations. Approximately 30 percent of Roadway Express shipments are completed in two days or less. Roadway Express owns 100 percent of Reimer Express Lines Ltd.("Reimer"(“Reimer”), located in Canada, that specializes in shipments into, across and out of Canada.-Roadway Next Day Corporation is a holding company focused on business opportunities in the regional and next-day delivery lanes. Roadway Next Day Corporation owns 100 percent of New Penn Motor Express, Inc.("(“NewPenn"Penn”), which providessuperior qualityregional, 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.("(“MeridianIQ"IQ”) is a non-asset-based global transportation management company that plans and coordinates the movement of goods throughout the world, providing customers aquickfaster return on investment, more efficient supply-chain processes and a single source for transportation management solutions.On December 11, 2003,
Yellow Corporation completedwe successfully closed the acquisition of RoadwayCorporation. The combined company was renamed YellowCorporation (“Roadway”). RoadwayCorporation. Roadway Corporation was merged with and intobecame Roadway LLCa newly formed limited liability company(“Roadway Group”) and awholly ownedsubsidiary of Yellow Roadway. Consideration for the acquisition included approximately $494 million in cash and approximately 18.0 million shares of Yellow Roadway common stockbased on an exchange ratio of 1.752 and an average price per share of $31.51,for a total purchase price of approximately $1.1 billion. Thepurchase price also included approximately $19 million for investment banking, legal and accounting fees that YellowRoadwayincurred to consummate the acquisition, resulting in total cash consideration of $513 million. Roadway LLC principal subsidiaries includeGroup has two operating segments, Roadway Express andRoadway Next Day Corporation. The operationsNew Penn.Principles of
Roadway LLC are included in our consolidated resultsConsolidation and Summary ofoperations and cash flows from the date of acquisition through December 31, 2003 and in our consolidated balance sheet as of the year ended December 31, 2003. On September 30, 2002, Yellow completed the 100 percent distribution ("the spin-off") of all of its shares of SCS Transportation, Inc. ("SCST") to Yellow shareholders. Shares were distributed on the basis of one share of SCST common stock for every two shares of Yellow common stock. As a result of the spin-off, our financial statements reflect SCST as discontinued operations for the periods prior to the spin-off. 35PRINCIPLES OF CONSOLIDATION AND SUMMARY OF ACCOUNTING POLICIESAccounting PoliciesThe accompanying consolidated financial statements include the accounts of Yellow Roadway Corporation and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Management makes estimates and assumptions that affect the amounts reported in the financial statements and notes. Actual results could differ from those estimates.
Accounting policies refer to specific accounting principles and the methods of applying those principles to fairly present our financial position and results of operations in accordance with generally accepted accounting principles. The policies discussed below include those that management has determined to be the most appropriate in preparing our financial statements and are not otherwise discussed in a separate note.
CASH AND CASH EQUIVALENTSCash and Cash Equivalents
Cash and cash equivalents include demand deposits and highly liquid investments purchased with maturities of three months or less.
CONCENTRATION OF CREDIT RISKSConcentration of Credit Risks and Other
We sell services and extend credit based on an evaluation of the
customer'scustomer’s financial condition, without requiring collateral. Exposure to losses on receivables is principally dependent on eachcustomer'scustomer’s financial condition. We monitor our exposure for credit losses and maintain allowances for anticipated losses.REVENUE RECOGNITIONAt December 31, 2004, approximately 80 percent of our labor force is subject to collective bargaining agreements that expire in 2008.
Revenue Recognition
For shipments in transit, Yellow Transportation, Roadway Express and New Penn record revenue based on the percentage of service completed as of the period end and accrue delivery costs as incurred. In addition, Yellow Transportation, Roadway Express and New Penn recognize revenue on a gross basis
sincebecause the entities are the primary obligors even when they use other transportation service providers who act on their behalf. Yellow Transportation, Roadway Express and New Penn remain responsible to their customers for complete and proper shipment, including the risk of physical loss or damage of the goods and cargo claims issues. We assign pricing to bills of lading at the time of shipment based primarily on the weight, general classification of the product, the shipping destination and individual customer discounts. This process is referred to as rating. At various points throughout our process, incorrect ratings could be identified based on many factors, including weight verifications or updated customer discounts. Although the majority of rerating occurs in the same month as the original rating, a portion occurs during the following periods. We accrue a reserve for rerating based on historical trends.Meridian IQ recognizes revenue upon the completion of services. In certain logistics transactions where Meridian IQ acts as an agent, revenue is recorded on a net basis. Net revenue represents revenue charged to customers less third party transportation costs. Where Meridian IQ acts as principal, it records revenue from these transactions on a gross basis, without deducting transportation costs. Management believes these policies most accurately reflect revenue as earned.
FINANCIAL INSTRUMENTSForeign Currency
Our functional currency is the U.S. dollar, whereas, our foreign operations utilize the local currency as their functional currency. Accordingly, for purposes of translating foreign subsidiary financial statements to the U.S. dollar reporting currency, assets and liabilities of our foreign operations are translated at the fiscal year end exchange rates and income and expenses are translated at the average exchange rates for the fiscal year. Foreign currency gains and losses resulting from foreign currency transactions are included in consolidated operations in the year of occurrence.
Financial and Derivative Instruments
The carrying value of cash and cash equivalents, accounts receivable, accounts payable and short-term borrowings approximates their fair value due to the short-term nature of these instruments.
Effective January 1, 2001, we adoptedStatement of Financial Accounting Standards
("SFAS"(“SFAS”) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended,("Statement No. 133"). As a result of the adoption of Statement No. 133, werequires companies to recognize all derivative financial instruments as either assets or liabilities at their fair value. In December 2000, we entered into a three-year interest rate swap agreement("(“theswap"swap”) to hedge a portion of our variable rate debt, and in December 2003 the swap expired. This swap was designated and qualified as a cash flow hedge, accordingly the effective portion of the gain or losson the swap was reported as a component of other comprehensive income and reclassified into earnings in the same periods during which the hedged transaction affected earnings. As a result of the swap, we recorded
a $12 thousand gainimmaterial gains in 2003a $22 thousand gain inand 2002and a $34 thousand loss in 2001in other net nonoperating expense representing the ineffectiveness of the correlation between the hedge and theABSasset-based securitization facility financing rate. At December 31, 2002, accumulated other comprehensive loss included a $1.5 million unrealized loss on the interest rate contract. We recognized the differential paid under the contract designated as a hedge as adjustments to interest expense. These adjustments approximated $2.4 million in 2003 and $2.1 million in 2002and $0.8 million in 2001in additional interest expense.36CLAIMS AND INSURANCE ACCRUALSDuring 2004 we entered into two forward contracts to hedge our exposure to foreign currency risk related to an intercompany note between a United States subsidiary and a United Kingdom subsidiary. These contracts expired December 31, 2004 and did not have a material impact to our operations.
Claims and Insurance Accruals
Claims and insurance accruals, both current and long-term, reflect the estimated cost of claims for
workers'workers’ compensation, cargo loss and damage, and property damage and liability that insurance does not cover. We include these costs in"claims“claims andinsurance"insurance” expense except forworkers'workers’ compensation, which is included in"salaries,“salaries, wages, andemployees'employees’ benefits."”We base reserves for
workers'workers’ compensation and property damage and liability claims primarily upon actuarial analysesprepared bythat independentactuaries.actuaries prepare. These reserves are discounted to present value using a risk-free rate at the date of occurrence. The risk-free rate is the U.S. Treasury rate for maturities that match the expected payout of such claims. The process of determining reserve requirements utilizes historical trends and involves an evaluation of accident frequency and severity, claims management, changes in health care costs, and certain future administrative costs. The effect of future inflation for costs is implicitly considered in the actuarial analyses. Adjustments to previously established reserves are included in operating results. At December 31, 2004 and 2003, estimated future payments related to these claims aggregated $348.7 million and $336.8 million, respectively. The present value of these estimated future payments was $300.7 million at December 31, 2004 and $279.2 million at December 31, 2003. Through 2003, Yellow Transportation internally managed the administrative portion of claims handling for self-insurance onworkers'workers’ compensation and property damage and liability claims. As a result of an initiative to begin outsourcing these functions, we recorded a one-time charge in 2003 of $14.6 million for the liability associated with future claims handling costs related to existing claims.The effect of future inflation for costs is implicitly considered in the actuarial analyses. Adjustments to previously established reserves are included in operating results. At December 31, 2003 and 2002, estimated future payments related to these claims aggregated $336.8 million and $126.0 million, respectively. The present value of these estimated future payments was $279.2 million at December 31, 2003 and $103.8 million at December 31, 2002. The significant increase in claims and insurance from 2002 to 2003 resulted primarily from the inclusion of Roadway Express and New Penn in 2003. STOCK-BASED COMPENSATIONStock-Based Compensation
Yellow Roadway has various stock-based employee compensation plans, which are described more fully in the Stock Compensation Plans note. We account for those plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,
("as amended (“APB25"25”). We do not reflect compensation costs in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.Option Value Information
We estimated the pro forma calculations in the table below using the Black-Scholes option pricing model with the following weighted average assumptions:
2003 2002 2001 ----- ----- -----Dividend yield --% --% --% Expected volatility 46.7% 39.0% 36.8% Risk-free interest rate 1.9% 2.6% 4.2% Expected option life (years) 3 3 3 Fair value per option $8.41 $7.81 $6.04 ===== ===== =====37
2004 2003 2002 Dividend yield
— % — % — % Expected volatility
45.2 % 46.7 % 39.0 % Risk-free interest rate
2.6 % 1.9 % 2.6 % Expected option life (years)
3.6 3.0 3.0 Fair value per option
$ 12.61 $ 8.41 $ 7.81 Pro Forma Information
The following table illustrates the effect on income from continuing operations, net income and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation
("Statement(“SFAS No.123"123”).
(in thousands except per share data) 2003 2002 2001 - --------------------------------------------------------- ------- -------- -------Net income (loss) - as reported $40,683 $(93,902) $15,301 Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (2,051) (1,364) (2,141) ------- -------- ------- Pro forma net income (loss) $38,632 $(95,266) $13,160 ------- -------- ------- Basic earnings (loss) per share Income from continuing operations - as reported $ 1.34 $ 0.86 $ 0.44 Income from continuing operations - pro forma 1.27 0.81 0.35 Net income (loss) - as reported 1.34 (3.35) 0.63 Net income (loss) - pro forma 1.27 (3.40) 0.54 Diluted earnings (loss) per share: Income from continuing operations - as reported $ 1.33 $ 0.84 $ 0.43 Income from continuing operations - pro forma 1.26 0.79 0.34 Net income (loss) - as reported 1.33 (3.31) 0.62 Net income (loss) - pro forma 1.26 (3.36) 0.53 ======= ======== =======PROPERTY AND EQUIPMENTAs our options vest ratably over stated periods, we recognize the related expense herein on a straight line basis.
(in millions except per share data) 2004 2003 2002 Net income (loss)—as reported
$ 184.3 $ 40.7 $ (93.9 ) Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects
(1.6 ) (2.1 ) (1.4 ) Pro forma net income (loss)
$ 182.7 $ 38.6 $ (95.3 ) Basic earnings (loss) per share:
Income from continuing operations—as reported
$ 3.83 $ 1.34 $ 0.86 Income from continuing operations—pro forma
3.80 1.27 0.81 Net income (loss)—as reported
3.83 1.34 (3.35 ) Net income (loss)—pro forma
3.80 1.27 (3.40 ) Diluted earnings (loss) per share:
Income from continuing operations—as reported
$ 3.75 $ 1.33 $ 0.84 Income from continuing operations—pro forma
3.72 1.26 0.79 Net income (loss)—as reported
3.75 1.33 (3.31 ) Net income (loss)—pro forma
3.72 1.26 (3.36 ) Property and Equipment
Yellow Roadway carries property and equipment at cost less accumulated depreciation. We compute depreciation using the straight-line method based on the following service lives:
Years -------Structures
10 -– 40Revenue equipment
5 -– 14Technology equipment and software
3 -– 5Other
3 -– 10=======We charge maintenance and repairs to expense as incurred, and capitalize replacements and improvements when these costs extend the useful life of the asset.
Our investment in technology equipment and software consists primarily of advanced customer service and freight management equipment and related software. We capitalize certain costs associated with developing or obtaining internal-use software. Capitalizable costs include external direct costs of materials and services utilized in developing or obtaining the software, payroll, and payroll-related costs for employees directly associated with the project. For the years ended December 31, 2004, 2003
2002,and2001,2002 we capitalized $7.3 million, $3.3 million,$1.3 million,and$2.2$1.3 million, respectively, which were primarily payroll and payroll-related costs.For the years ended December 31, 2004, 2003,
2002,and2001,2002, depreciation expense was $158.1 million, $85.8 million, and $78.9 million,and $77.0 million,respectively.IMPAIRMENT OF LONG-LIVED ASSETSImpairment of Long-Lived Assets
If facts and circumstances indicate that the carrying value of identifiable amortizable intangibles and property, plant and equipment may be impaired, we would perform an evaluation of recoverability in accordance
with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. If an evaluation were required, we would compare the estimated future undiscounted cash flows associated with the asset to the
asset'sasset’s carrying amount to determine if a write-down is required.38ACQUISITION, SPIN-OFF AND REORGANIZATION CHARGESAcquisition, Spin-off and Reorganization Charges
There were no acquisition, spin-off or reorganization charges during the year ended December 31, 2004. Acquisition charges of $3.1 million in 2003 related mostly to marketing and promotional expenses primarily for the acquisition of Roadway Corporation. Spin-off charges of $6.9 million in 2002 included bank fees and external legal and accounting services due to the spin-off of SCST. Reorganization costs of $1.0 million in 2002
and $4.9 million in 2001were primarily associated with the reorganization of Yellow Transportation and Transportation.com. These charges included employee separation, lease termination and rent costs.RECLASSIFICATIONS Yellow Roadway has made certain reclassifications to the prior year consolidated financial statements to conform to the current presentation. PREFERRED STOCK Our Certificate of Incorporation authorizes the Board of Directors, at its discretion, to issue up to 5 million shares of preferred stock with a $1 par value per share. As of December 31, 2003, none of these shares have been issued. ACQUISITIONSAcquisitions
In accordance with SFAS No. 141, Business Combinations
("Statement(“SFAS No.141"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 valuationsprepared bythat independent third party appraisal firms prepared using estimates and assumptions provided by management. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets("Statement(“SFAS No.142"142”), we do not amortize goodwill and intangible assets with indefinite useful livesare not amortizedbutare reviewedreview these assets at least annually for impairment.AnWe would recognize impairment losswould be recognizedto the extent that the carrying amount exceeds theassets'assets’ fair value. Intangible assets with estimatable useful lives are amortized on a straight-line basis over their respective useful lives.ROADWAY CORPORATIONRoadway Corporation
On December 11, 2003,
Yellow Corporation completedwe closed the acquisition ofRoadway Corporation ("Roadway") and all of its outstanding stock in approximately a half cash, half stock transaction. As part of the transaction, we changed our name to Yellow Roadway Corporation. In addition, Roadway Corporation became Roadway LLC and a wholly owned subsidiary of YellowRoadway.Principal operating subsidiaries of Roadway LLC include Roadway Express and New Penn. Roadway Express is a leading transporter of industrial, commercial and retail goods in the two- to five-day regional and long-haul markets. New Penn is a next-day, ground, less-than-truckload carrier of general commodities. The acquisition now provides us with the increased scale, strong financial base and market reach that are necessary to increase shareholder value and enhance customer service. It also has the potential to accelerate our strategy of offering a broader range of services for business-to-business transportation decision makers.Consideration for the acquisition included$494approximately $494.0 million in cash and approximately 18.0 million shares of Yellow Roadway common stock, based on an exchange ratio of 1.752 and an average price per share of $31.51 (subject to proration and allocation provisions), for a total purchase price of approximately $1.1 billion. The purchase price also included approximately $19 million for investment banking, legal and accounting fees that Yellow Roadway incurred to consummate the acquisition, resulting in total cash consideration of $513 million.In addition, by virtueWe recorded the net assets at their estimated fair values and included operating results in our financial statements from the date of acquisition. We allocated themerger, Roadway LLC assumed $225.0 million of principal senior notes withpurchase price at December 31, 2003, on afair value of $248.9 million and acquired available cash of $106.3 million.preliminary basis using information then available. Thecash portionallocation of the purchase price to the assets and liabilities acquired wasfunded primarily through a term loanfinalized in the fourth quarter of$1752004 including receipt of an independent valuation. The final purchase price allocation is shown below and resulted in $5.9 millionunderincrease to goodwill from ournew credit facility, a private placement of $250 million of 5.0 percent contingent convertible senior notes due 2023 and a private placement of $150 million of 3.375 percent contingent convertible senior notes due 2023. The 18.0 million common shares we issued were valued based on the simple average of the daily opening and closing trade prices for the period December 9 through December 15, 2003, which represents two days prior and after the date the price was fixed under the terms of the merger agreement.preliminary allocation.Prior to the acquisition, Roadway had agreements in place with key management personnel that would require Roadway to pay specific amounts to those individuals upon a change in control of the entity. On December 11, 2003, in conjunction with the closing of the transaction, Roadway paid $15.9 million to the individuals covered by the agreement that would not be joining the new Yellow Roadway organization. This amount was expensed in the pre-acquisition financial statements of Roadway Corporation. The
39remaining amount covered under the agreement of $10.6 million was placed in a trust account for possible payment to the three individuals that remain Roadway employees. If any of these individuals are terminated within two years of the effective date of the acquisition and the applicable conditions of their respective agreements are met, they would receive the agreed to payments, and we would recognize an expense for those payments at the time of the triggering event. If termination does not occur within two years,by December 2005, the funds will be released from restriction and reclassified froma long-term assetprepaid expenses to cash on our Consolidated Balance Sheet.In connection with the acquisition, we incurred $12.0 million of restructuring costs as a result of severance (administrative, sales and operations personnel) and contract terminations. We have recognized such costs as a liability assumed as of the acquisition date, resulting in additional goodwill. These restructuring costs consisted of $10.5 million of employee termination (including wages, health benefits and outplacement services) for approximately 800 employees and $1.5 million for contract terminations. All of these restructuring items were effectuated within one year of the acquisition in accordance with
Statement No. 141, we includedpurchase accounting requirements. During theresults of Roadway LLC and its operating subsidiaries in our Statements of Consolidated Operations and Statements of Consolidated Cash Flows from the date of acquisition throughyear ended December 31,2003. Our Consolidated Balance Sheet as2004, we paid $7.7 million of restructuring costs resulting in a $4.3 million accrued liability at December 31,2003 includes Roadway LLC and its operating subsidiaries after valuing the tangible and intangible assets and liabilities at their fair values. Based on an independent valuation prepared using estimates and assumptions provided by management, we allocated the total2004.The final purchase price
of approximately $1.1 billion at the date of acquisitionallocation was as follows:
(in thousands) December 11, 2003 - ------------------------------ -----------------Cash and cash equivalents $ 106,307 Accounts receivable 373,695 Other current assets 36,202 Property, plant and equipment 823,443 Other long-term assets 32,436 Intangible assets 461,300 Goodwill 597,070 Accounts payable (127,148) Other current liabilities (406,382) Long-term debt (249,165) Deferred income taxes, net (214,542) Other long-term liabilities (335,995) ---------- Total purchase price $1,097,221 ==========As the Roadway acquisition occurred in December 2003, the allocation of the purchase price included in the December 31, 2003 Consolidated Balance Sheet is preliminary and subject to refinement. Although we do not expect any subsequent changes to have a material impact on our results of operations or amounts allocated to goodwill, such changes could result in material adjustments to the preliminary purchase allocation. The most significant pending items include the following: finalization of independent asset valuation for the Roadway tangible and intangible assets including associated remaining lives; completion of all direct costs associated with the acquisition; updating Roadway personnel information used to calculate the pension benefit obligation; determination of the fair value of tax-related contingencies; calculation of an estimate for certain contractual obligations; and numerous other refinements. We expect substantially all of the above refinements will be completed by the end of second quarter 2004.
(in millions) Cash and cash equivalents
$ 106.3 Accounts receivable
365.7 Other current assets
19.7 Property, plant and equipment
805.8 Other long-term assets
32.2 Intangible assets
470.7 Goodwill
603.0 Accounts payable and other current liabilities
(519.6 ) Long-term debt ($225.0 million principal)
(249.2 ) Deferred income taxes, net
(218.8 ) Other long-term liabilities
(317.5 ) Total purchase price
$ 1,098.3 Intangible Assets
Of the
$461.3$470.7 million that we allocated to intangible assets,$333.5$344.7 million was assigned to the Roadway and New Penn trade names, which are not subject to amortization. Of the remaining value,$111.8$110.0 million and $16.0 million were assigned to customer relationships and software related assets, respectively. We assigned the customer relationships and software assets a weighted average life of16.517 years and 3 years, respectively.Goodwill
In considering the acquisition of Roadway, we based our proposed purchase price on the increased value that the combined Yellow Roadway organization could provide to its investors, customers and employees. This value can be attributed to our increased scale and ability to compete in a highly competitive domestic and global transportation marketplace, the reputation and recognition of the distinct brands, and the service capabilities and technologies of both companies. We recorded
$597.0$602.9 million in goodwill as part of the acquisition, allocating$474.7$544.3 million to Roadway Express and$122.3$58.6 million to New Penn. Of the total goodwill recorded, the amount that may be deductible for tax purposes is not material to our results of operations.40Pro Forma Results
The following unaudited pro forma financial information presents the combined results of operations of Yellow Roadway as if the acquisition had occurred as of the beginning of the years presented. The unaudited pro forma financial information is not intended to represent or be indicative of the consolidated results of operations of Yellow Roadway that would have been reported had the acquisition been completed as of the dates presented, and should not be taken as representative of the future consolidated results of operations of Yellow Roadway. Summarized unaudited pro forma results were as follows for the years ended December 31:
(in thousands except per share data) 2003 2002 - ------------------------------------- ---------- ----------Operating revenue $6,120,835 $5,637,924 Income from continuing operations 38,127 43,597 Net income (loss) 37,972 (70,496) Diluted earnings (loss) per share: Income from continuing operations 0.79 0.94 Net income (loss) 0.79 (1.51) ========== ==========
(in millions except per share data) 2003 2002 Operating revenue
$ 6,120.8 $ 5,637.9 Income from continuing operations
38.1 43.6 Net income (loss)
38.0 (70.5 ) Diluted earnings (loss) per share:
Income from continuing operations
0.79 0.94 Net income (loss)
0.79 (1.51 ) GPS
LOGISTICS, INC.Logistics, Inc.In
August 2003,February 2004, MIQ LLC (formerly known as Yellow GPS), a subsidiary of Meridian IQ,Yellow Global,exercised and closed its option to purchase GPS Logistics (EU) Limited MIQ LLCacquired certainmade a payment of $7.6 million ($6.4 million, net of cash acquired), which is subject to upward and downward adjustments based on the financial performance of GPS Logistics (EU) Limited. The initial payment plus 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) Limited 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.In September 2004, MIQ LLC paid an additional $3.7 million to the former owner of GPS Logistics (EU) Limited, which represented a hold back payment in accordance with the terms of the February 2004 transaction. This amount has been allocated to goodwill in the accompanying financial statements. In February 2006 a final computation will be performed to determine if any additional purchase price is required. Any earn out payments will be determined based on the twelve month periods ended February 28, 2007 and 2008 operating results.
MIQ LLC is also subject to earn out payments related to the August 2003 acquisition of the U.S. assets of GPS Logistics,
a global logistics provider. Yellow Global, LLC was then renamed Yellow GPS, LLC ("Yellow GPS"). In exchangeInc. This amount, if any, is limited to $3.5 million and will be determined annually based on certain operating results for theacquisition, Yellow GPS assumed certainfiscal years ending December 31, 2004 through 2006.MIQ LLC also has an option to acquire the Asian business of GPS Logistics
customer, lease and other obligations and became obligated to pay GPS Logistics earnout payments if certain financial targets forGroup Ltd. (not previously acquired) at a price that varies with thecombined businessperformance ofYellow GPS are met. There was no net cash consideration paid in the transaction. In addition, Yellow GPS received a call option to purchase the stock of each of GPS Logistics (E.U.) Ltd., the related United Kingdom ("U.K.") operations of GPS Logistics, and GPS Logistics Group Ltd., the related Asian operations of GPS Logistics.that business. IfYellow GPSMIQ LLC does not exercise the Asian option, itwouldwill be required to pay a deferred option price to the shareholders of GPS Logistics Group Ltd.In February 2004, Yellow GPS exercisedClicklogistics, Inc. and
closed its option to purchase GPS Logistics (E.U.) Ltd. Yellow GPS made a payment of $7.6 million, which is subject to upward and downward adjustment based on the financial performance of the U.K. business. The acquisition will be reflected in our first quarter 2004 results. CLICKLOGISTICS, INC. AND MEGASYS, INC.MegaSys, Inc.In the third quarter of 2002, Meridian IQ acquired selected assets, consisting primarily of customer contracts, of Clicklogistics, Inc.
("Clicklogistics"(“Clicklogistics”) for nominal cash consideration. Clicklogistics provided non-asset transportation and logistics management services. In that same period, Meridian IQ completed the acquisition of MegaSys, Inc.("MegaSys"(“MegaSys”), a Greenwood, Indiana based provider of non-asset transportation and logistics management services, for approximately $17 million. The acquisition price primarily related to $9.3 million of goodwill and $7.1 million of identifiable intangible assets.As part of the acquisition, Meridian IQ negotiated an earnout arrangement, which provided for contingent consideration to be paid by Meridian IQ upon MegaSys generating cash flow levels in excess of an established rate of return through December 31, 2005. In the first quarter of 2004, the earnout arrangement was terminated; earnout payments to date were not material to our results of operations. We believe these acquisitions support our strategy to grow our non-asset-based businessGoodwill and
be a single-source transportation provider. TRANSPORTATION.COM In September 2001, we completed the acquisition of the remaining ownership in Transportation.com from our venture capital partners. The cash purchase price of approximately $14.3 million was allocated to goodwill of $10.6 million, tax benefit receivable of $4.0 million and miscellaneous assets and liabilities of $(0.3) million. As of the acquisition date, Transportation.com, as well as our other non-asset-based services, have been consolidated under Meridian IQ. The purchase agreements provide for material contingent payments to be paid to the sellers in the event of a public offering of Meridian IQ on or before August 2006. We have no current plans for a public offering of Meridian IQ. Prior to the acquisition date, we accounted for our ownership interest under the equity method of accounting due to substantive participating rights of the minority investors. The loss on our investment of $5.7 million in 2001 was recorded in nonoperating expense. 41GOODWILL AND INTANGIBLESIntangiblesGoodwill is recognized for the excess of the purchase price over the fair value of tangible and identifiable intangible net assets of businesses acquired.
Prior to the adoption on January 1, 2002 of StatementIn accordance with SFAS No. 142, weamortized goodwill over the estimated period of benefit on a straight-line basis over periods ranging from 20 to 40 years, and we reviewed goodwill for impairment under the policy for other long-lived assets. Since the adoption of Statement No. 142, we discontinued amortization of goodwill andreview goodwill at least annually for impairment based on a fair value approach.Meridian IQ has not amortizedDuring the fourth quarter of 2004, we completed our annual impairment testing of goodwillin accordance with the provisions of Statement No. 142. Therefore, income from continuing operations does not include goodwill amortization for any period presented.and tradenames, which are deemed to have indefinite lives, and determined there was no impairment.The following table shows the changes in the carrying amount of goodwill attributable to each
segment with goodwill balances and changes therein:segment:
Foreign Equity Translation December 31, Adjustments/ December 31, (in thousands) 2002 Acquisitions Reclasses 2003 - ---------------- ------------ ------------ -------------- ------------Roadway Express $ -- $474,738 $(225) $474,513 New Penn -- 122,332 -- 122,332 Meridian IQ 20,491 -- (23) 20,468 ------- -------- ----- -------- Goodwill $20,491 $597,070 $(248) $617,313 ======= ======== ===== ========
(in millions) Roadway
ExpressNew Penn Meridian IQ Total Balances at December 31, 2002
$ — $ — $ 20.5 $ 20.5 Goodwill resulting from acquisition
474.7 122.3 — 597.0 Changes in foreign currency exchange rates
(0.2 ) — — (0.2 ) Balances at December 31, 2003
474.5 122.3 20.5 617.3 Final purchase price allocation adjustment
69.6 (63.7 ) — 5.9 Goodwill resulting from acquisition
— — 7.4 7.4 Change in foreign currency exchange rates
1.1 — 0.4 1.5 Balances at December 31, 2004
$ 545.2 $ 58.6 $ 28.3 $ 632.1 The components of amortizable intangible assets are as
follows:follows at December 31:
December 31, 2003 December 31, 2002 Weighted ----------------------- ----------------------- Average Gross Gross Life Carrying Accumulated Carrying Accumulated (in thousands) (years) Amount Amortization Amount Amortization - ------------------ -------- -------- ------------ -------- ------------Customer related 16.5 $117,422 $1,350 $5,622 $355 Marketing related 6 723 159 700 42 Technology based 3 17,061 635 1,061 140 -------- ------ ------ ---- Intangible assets $135,206 $2,144 $7,383 $537 ======== ====== ====== ====
Weighted
Average
Life (years)2004 2003 (in millions) Gross
Carrying
AmountAccumulated
AmortizationGross
Carrying
AmountAccumulated
AmortizationCustomer related
17 $ 118.2 $ 9.0 $ 117.4 $ 1.3 Marketing related
6 1.0 0.4 0.7 0.2 Technology based
3 17.5 6.1 17.1 0.6 Intangible assets
$ 136.7 $ 15.5 $ 135.2 $ 2.1 Total marketing related intangible assets with indefinite lives, primarily tradenames, were $346.9 million and $334.1 million
and $0.9 million for the years endedas of December 31, 2004 and 2003, respectively. During 2004 these amounts were impacted by final purchase price allocation adjustments of $11.2 million and2002, respectively.changes in foreign currency exchange rates of $1.7 million. These intangible assets are not subject toamortization. The gross carrying amount of intangibles at December 31, 2003 included approximately $461.0 million of Roadway LLC assets andamortization, but are subjected to therelated accumulated amortization of $0.6 million. Roadway-related intangibles were not reflected in the December 31, 2002 balances.impairment test previously discussed.Amortization expense for intangible assets, as reflected in income from continuing operations, was $13.4 million and $1.6 million for the
yearyears ending December 31,2003.2004 and 2003, respectively. Estimated amortization expense for the next five years is as follows:
(in thousands) 2004 2005 2006 2007 2008 - ------------------------------- ------- ------- ------- ------ ------Estimated amortization expense $13,048 $12,965 $12,581 $7,373 $7,271 ======= ======= ======= ====== ======The increase in amortization expense from prior years relates primarily to the addition of the Roadway LLC intangible assets as discussed above. 42EMPLOYEE BENEFITS PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
(in millions) 2005 2006 2007 2008 2009 Estimated amortization expense
$ 13.2 $ 12.8 $ 7.9 $ 7.5 $ 7.3 Employee Benefits
Pension and Other Postretirement Benefit Plans
Qualified and Nonqualified Defined Benefit Pension Plans
With the exception of Meridian IQ, New Penn and Reimer, Yellow Roadway and its operating subsidiaries sponsor qualified and nonqualified defined benefit pension plans for most employees not covered by collective bargaining agreements (approximately 10,000 employees). Qualified and nonqualified pension benefits are based on years of service and the
employees'employees’ covered earnings. Employees covered by collective bargaining agreements participate in various multi-employer pension plans to which Yellow Roadway contributes, as discussed later in this section. Meridian IQ and New Penn do not offer defined benefit pension plans and instead offer retirement benefits through either contributory 401(k) savings plans or profit sharing plans, as discussed later in this section.Additionally, beginningEffective January 1, 2004, all new U.S. – salaried nonunion employees (except those currently participating in other profit sharing plans) and all Meridian IQ employeeswillparticipate in a new defined contribution retirement plan. The existing Yellow Roadway defined benefit pension planswill beare closed to new participants.Our funding policy is to target contributions at the minimum required tax-deductible contribution for the year while taking into consideration each
plan'splan’s funded status, any variable Pension Benefit Guarantee Corporation premiums and the outlooks for required funding. Our actuarial valuation measurement date for our principal pension plans and postretirement benefit plan is December 31.Other Postretirement Benefit Plan
Roadway LLC sponsors a postretirement healthcare benefit plan that covers nonunion employees of Roadway hired before February 1, 1997. Health care benefits under this plan end when the participant attains age 65.
Definitions
We have defined the following terms to provide a better understanding of our pension and other postretirement benefits:
Projected benefit obligation: The projected benefit obligation is the present value of future benefits to employees attributed to service as of the measurement date, including assumed future salary
increases.increases through retirement.Plan assets: Represents the assets currently invested in the plans. Assets used in calculating the funded status are measured at the current market value at December 31.
Funded status: The funded status represents the difference between the projected benefit obligation and
the market value of theplan assets.Net amount recognized: The net amount recognized represents the amount accrued by Yellow Roadway for pension costs.
Unfunded accumulated benefit obligation: The accumulated benefit obligation is the present value of future benefits attributed to service as of the measurement date, assuming no future salary growth. The unfunded accumulated benefit obligation represents the difference between the accumulated benefit obligation and the
fair market value of theplan assets.Accumulated postretirement benefit obligation: The accumulated postretirement benefit obligation is the present value of other postretirement benefits to employees attributed to service as of the measurement date.
43Funded Status
The following table sets forth the
plans'plans’ funded status:
Pension Benefits Other
Postretirement
Benefits(a)(in millions) 2004 2003 2004 2003 Change in benefit obligation:
Benefit obligation at prior year end
$ 915.2 $ 417.7 $ 53.1 $ — Service cost
39.2 17.4 0.8 0.1 Interest cost
57.1 27.8 2.2 0.2 Plan amendment
0.2 0.1 (15.0 ) — Participant contributions
— — 0.7 — Benefits paid
(45.4 ) (17.6 ) (3.0 ) (0.1 ) Foreign exchange rate loss
0.4 0.6 — — Acquisition of Roadway
— 457.2 — 52.9 Actuarial (gain) loss
81.2 12.0 (0.9 ) — Benefit obligation at year end
$ 1,047.9 $ 915.2 $ 37.9 $ 53.1 Change in plan assets:
Fair value of plan assets at prior year end
$ 614.7 $ 248.7 $ — $ — Actual return on plan assets
60.4 66.6 — — Employer contributions
43.0 35.6 2.3 0.1 Participant contributions
— — 0.7 — Benefits paid
(45.4 ) (17.6 ) (3.0 ) (0.1 ) Foreign exchange rate loss
0.6 0.8 — — Acquisition of Roadway
— 280.6 — — Fair value of plan assets at year end
$ 673.3 $ 614.7 $ — $ — Funded status:
Funded status
$ (374.6 ) $ (300.6 ) $ (37.9 ) $ (53.1 ) Unrecognized prior service cost
11.1 12.3 — — Unrecognized net actuarial (gain) loss
162.8 94.2 (0.9 ) — Net amount recognized
$ (200.7 ) $ (194.1 ) $ (38.8 ) $ (53.1 )
Other Postretirement Pension Benefits Benefits(a) --------------------- -------------- (in thousands) 2003 2002 2003 - -------------------------------------------- --------- --------- --------------CHANGE IN BENEFIT OBLIGATION: Benefit obligation at prior year end $ 417,703 $ 356,035 $ -- Service cost 17,356 15,772 109 Interest cost 27,854 25,595 169 Plan amendment 136 907 -- Benefits paid (17,606) (11,512) (136) Foreign exchange rate loss 576 -- -- Acquisition of Roadway 457,181 -- 52,934 Actuarial loss 12,039 30,906 -- --------- --------- -------- Benefit obligation at year end $ 915,239 $ 417,703 $ 53,076 ========= ========= ======== CHANGE IN PLAN ASSETS: Fair value of plan assets at prior year end $ 248,721 $ 274,602 $ -- Actual return on plan assets 66,623 (26,381) -- Employer contributions 35,552 12,012 134 Benefits paid (17,606) (11,512) (134) Foreign exchange rate loss 795 -- -- Acquisition of Roadway 280,601 -- -- --------- --------- -------- Fair value of plan assets at year end $ 614,686 $ 248,721 $ -- ========= ========= ======== FUNDED STATUS: Funded status $(300,553) $(168,982) $(53,076) Unrecognized transition assets -- (1,344) -- Unrecognized prior service cost 12,336 13,579 -- Unrecognized net actuarial (gain)/loss 94,177 121,850 (2) --------- --------- -------- Net amount recognized $(194,040) $ (34,897) $(53,078) ========= ========= ========(a)(a) Other postretirement benefits are shown for the period from the date of the Roadway acquisition through December 31, 2003. Prior to the acquisition we did not provide these benefits. As a part of our acquisition of Roadway LLC, certain changes were made to the
acquisition we did not provide these benefits.post retirement benefit plan available to certain Roadway LLC employees. These plan changes revised the cost sharing structure between the employer and the different employee groups. The reduction to the liability of $15.0 million was recognized in purchase accounting.Benefit Plan Obligations
Amounts recognized for the benefit plan liabilities in the Consolidated Balance Sheets at December 31 are as follows:
Other Postretirement Pension Benefits Benefits --------------------- -------------- (in thousands) 2003 2002 2003 - ---------------------------------------------- --------- --------- --------------Prepaid benefit cost $ 7,146 $ 6,019 $ -- (Accrued) benefit costs (246,369) (102,545) (53,078) Intangible asset 12,336 13,579 -- Accumulated other comprehensive loss (pretax) 32,847 48,050 -- --------- --------- -------- Net amount recognized $(194,040) $ (34,897) $(53,078) ========= ========= ========44
Pension Benefits Other
Postretirement
Benefits(in millions) 2004 2003 2004 2003 Prepaid benefit cost
$ 7.4 $ 7.2 $ — $ — Accrued benefit costs
(278.9 ) (246.4 ) (38.8 ) (53.1 ) Intangible asset
11.1 12.3 — — Accumulated other comprehensive loss (pretax)
59.7 32.8 — — Net amount recognized
$ (200.7 ) $ (194.1 ) $ (38.8 ) $ (53.1 ) Weighted average actuarial assumptions used to determine benefit obligations at December 31:
Other Postretirement Pension Benefits Benefits ---------------- -------------- 2003 2002 2003 ---- ----- --------------Discount rate 6.25% 6.75% 6.25% Rate of increase in compensation levels 3.87% 4.50% -- ==== ===== ====
Pension Benefits Other
Postretirement
Benefits2004 2003 2004 2003 Discount rate
5.75 % 6.25 % 5.75 % 6.25 % Rate of increase in compensation levels
3.76 % 3.87 % — — Information for pension plans with an accumulated benefit obligation in excess of plan assets at December 31:
(in thousands) 2003 2002 - ------------------------------- -------- --------Projected benefit obligation $910,138 $414,029 Accumulated benefit obligation 769,726 344,015 Fair value of plan assets 605,896 241,392 ======== ========Equity adjustment Increases in our pension
(in millions) 2004 2003 Projected benefit obligation
$ 1,041.6 $ 910.1 Accumulated benefit obligation
889.3 769.7 Fair value of plan assets
663.6 605.9 The total accumulated benefit
obligations combined with market losses in 2002obligation for all plans was $894.3 million and2001 negatively impacted the funded status of our plans and resulted in additional funding requirements and pension expense in 2003. Due to these same factors, we recorded a reduction in shareholders' equity in 2002 of $30.8$773.9 millionnet of tax of $17.2 million, to reflect the minimum liability associated with the plans. In 2003, we reduced the minimum liability in shareholders' equity by a net $10.5 million, as a result of the additional expense we recognized during the year as well as favorable investment experience in 2003. Our minimum liability reflected in shareholders' equityat December 31, 2004 and 2003,totals $20.3 million, netrespectively.Accumulated other comprehensive loss
The components of
tax of $12.5 million. As we record additional expense and fund theaccumulatedbenefit obligation, we expect the minimum liability reflected in shareholders' equity to decrease. We reflect these adjustments in the table below.
(in thousands) 2003 2002 - ----------------------------------------------------------- -------- -------Increase (decrease) in minimum liability included in other comprehensive income $(15,203) $48,050 -------- -------Plan assets by category
Percentage of Plan Assetsother comprehensive loss at December 31Asset Category 2003 2002 - ------------------ ---- ----Equity securities 67% 65% Debt securities 33% 35% --- --- Total 100% 100% === ===Our investment policies are based on target asset allocations. We review our pension portfolio periodically and rebalance when significant differences occur from target. Target asset allocationsare as follows:
Yellow Plans Roadway Plans ------------ -------------Small-cap U.S. equities 10.0% 12.5% Mid-cap U.S. equities -- 12.5% Large-cap U.S. equities 40.0% 25.0% International equities 15.0% 15.0% Fixed-income securities 35.0% 35.0% ----- ----- Total 100.0% 100.0% ===== =====45
(in millions) 2004 2003 2002 Balance at beginning of year
$ 32.8 $ 48.0 $ — Current period change
26.9 (15.2 ) 48.0 Balance at end of year, before tax
$ 59.7 $ 32.8 $ 48.0 Tax expense
(22.6 ) (12.5 ) (17.2 ) Balance at end of year, net of tax
$ 37.1 $ 20.3 $ 30.8 Future Contributions and Benefit Payments
We expect to contribute approximately
$45$49.2 million to our pension plans in2004.2005.Expected benefit payments for each of the next five years ended December 31 are as follows:
(in millions) 2005 2006 2007 2008 2009 2010-2014 Expected benefit payments
$ 34.8 $ 37.9 $ 42.8 $ 49.8 $ 54.4 $ 385.6 Pension and Other Postretirement Costs
The components of our net periodic pension cost for the years ended December 31, 2004, 2003
2002and2001,2002, and other postretirement costs for the year ended December 31, 2004 and the period from date of acquisition through December 31, 2003, were as follows:
Other Postretirement Pension Costs Costs ------------------------------ -------------- (in thousands) 2003 2002 2001 2003 - -------------------------------------------------------------- -------- -------- -------- --------------Service cost $ 17,356 $ 15,772 $ 14,496 $109 Interest cost 27,854 25,595 23,427 169 Expected return on plan assets (28,075) (25,139) (21,010) -- Amortization of net transition obligation (1,344) (2,380) (2,384) -- Amortization of prior service cost 1,379 1,438 1,304 -- Amortization of net loss 2,157 -- -- -- -------- -------- -------- ---- Net periodic pension cost $ 19,327 $ 15,286 $ 15,833 $278 ======== ======== ======== ==== Weighted average assumptions for the years ended December 31: Discount rate 6.75% 7.25% 7.50% 6.25% Rate of increase in compensation levels 4.50% 4.50% 4.50% -- Expected rate of return on assets 9.00% 9.00% 9.00% -- ======== ======== ======== ====
Pension Costs Other Post-
retirement Costs
(in millions) 2004 2003 2002 2004 2003 Service cost
$ 39.2 $ 17.4 $ 15.8 $ 0.8 $ 0.1 Interest cost
57.1 27.9 25.6 2.2 0.2 Expected return on plan assets
(53.0 ) (28.1 ) (25.1 ) — — Amortization of net transition obligation
— (1.4 ) (2.4 ) — — Amortization of prior service cost
1.4 1.4 1.4 — — Amortization of net loss
5.5 2.1 — — — Net periodic pension cost
$ 50.2 $ 19.3 $ 15.3 $ 3.0 $ 0.3 Weighted average assumptions for the years ended December 31:
Discount rate
6.25 % 6.75 % 7.25 % 6.25 % 6.25 % Rate of increase in compensation levels
3.77 % 4.50 % 4.50 % — — Expected rate of return on assets
8.75 % 9.00 % 9.00 % — — We
developedbelieve our 2004 expected rate of return of 8.75 percent is appropriate based on our historical experience in this investment portfolio as well as a review of other objective indices. Although plan investments are subject to short-term market volatility, we believe they are well diversified and closely managed. Our asset allocation as of December 31, 2004 consisted of 68 percent in equities and 32 percent in fixed-income securities. This allocation is consistent with the long-term asset allocation for the plans. We will continue to review our expected long-term rate of return onassets assumption by considering the historical returnsan annual basis andthe future expectations for returns of eachrevise appropriately.Target asset
class,allocations are aswell as the target asset allocation of the pension portfolio. We believe our 2003 expected rate of return of 9.0 percent accurately represents our investment portfolio that has performed to this level over time. However, given the addition of the Roadway portfolio of assets and in accordance with our policy on establishing the long-term rate of return, we have lowered this rate to 8.75 percent in determining 2004 pension expense.follows:
Yellow Plans Roadway Plans Small-cap U.S. equities
10.0 % 10.0 % Large-cap U.S. equities
40.0 % 37.0 % International equities
15.0 % 22.0 % Fixed-income securities
35.0 % 31.0 % Total
100.0 % 100.0 % Other Postretirement Benefit Plans
Assumed health care cost trend rates at December 31
2003are as follows:
Health care cost trend used in the current year 11.5% Health care cost trend rate assumed for next year 10.5% Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) 5.0% Year that the rate reaches the ultimate trend rate 2010 ====
2004 2003 Health care cost trend used in the current year
10.5 % 11.5 % Health care cost trend rate assumed for next year
10.0 % 10.5 % Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)
5.0 % 5.0 % Year that the rate reaches the ultimate trend rate
2010 2010 Assumed health care cost trend rates have a significant effect on the amounts reported for the
health careother postretirement benefit plans. The policy of Roadway LLC regarding the management of health care costs passes the increase beyond a fixed threshold to the plan participants. As a result, aone-percentage-pointone percentage point increase in the assumed health care cost trend rate would have no effect on the accumulated postretirement benefit obligation or the service and the interest cost components.A one-percentage-point decrease in assumed health care cost trend rates would have the following effects:
(in thousands) - --------------------------------------------Effect on total of service and interest cost $ 618 Effect on postretirement benefit obligation 5,938 ======46MULTI-EMPLOYER PLANS
(in millions) 2004 Effect on total of service and interest cost
$ 2.7 Effect on postretirement benefit obligation
2.5 The estimated employer contributions during the year ended December 31, 2005 are approximately $3.2 million.
Expected benefit payments for each of the next five years ended December 31 are as follows:
(in millions) 2005 2006 2007 2008 2009 2010-2014 Expected benefit payments
$ 3.2 $ 3.5 $ 3.8 $ 3.9 $ 4.2 $ 23.2 Multi-Employer 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
7780 percent of total employees). The largest of these plans, the Central States Southeast and Southwest Areas Pension Plan (the"Central“Central StatesPlan"Plan”) provides retirement benefits to approximately 53 percent of our total employees. The amounts of these contributions are determined by contract and established in the agreements. The health and welfare plans provide health care and disability benefits to active employees and retirees. The pension plans provide defined benefits to retired participants. We recognize as net pension cost the required contribution for the period and recognize as a liability any contributions due and unpaid.Yellow Roadway contributed and charged to expense the following amounts to these plans for the years ended December 31:
(in thousands) 2003 2002 2001 - ------------------- -------- -------- --------Health and welfare $195,740 $156,081 $150,012 Pension 178,614 159,018 157,148 -------- -------- -------- Total $374,354 $315,099 $307,160 ======== ======== ========
(in millions) 2004 2003 2002 Health and welfare
$ 421.4 $ 195.7 $ 156.1 Pension
378.0 178.6 159.0 Total
$ 799.4 $ 374.3 $ 315.1 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
suchthe multi-employerplans'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 (the “Code”) and related regulations establish minimum funding requirements for these plans. Under recent legislation, 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 plan is seeking corrective measures to address its funding. During the benefit period of the recent 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
(without limitation)the Central States Plan,failfails to meettheseminimum funding requirements and the trustees ofthese planssuch a plan are unable to obtainwaiversa waiver of the requirements or certain changes in how the applicable plan calculates its funding level from the Internal Revenue Service("IRS"(“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 theseplans and requireplans. 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 employersandor additional contributions required, it could have a material adverse impact on the financial results of Yellow Roadway.401(K) SAVINGS PLANS401(k) Savings Plans and Profit Sharing Plans
Yellow Roadway and its operating subsidiaries
eachsponsor defined contribution plans, primarily for employees not covered by collective bargaining agreements. The plans principally consist of contributory 401(k) savings plans and noncontributory profit sharing plans.Plans provided byThe Yellow Roadwaythe holding company, and Yellow Transportation consistcontributory 401(k) savings plan consists of both a fixed matching percentage and a discretionary amount. The maximum nondiscretionary company match forthese plans equals 25 percent ofthefirst six percent of an eligible employee's contributions. In 2004, the nondiscretionary company match for these plans will beYellow Roadway plan is equal to 25 percent of the first six percent in cash and 25 percent of the first six percent in Yellow Roadway common stock, for a total match of 50 percent of the first sixpercent. Discretionarypercent of before-tax participant contributions. Any discretionary contributions forboththe Yellow Roadway 401(k) savings planand profit sharing plansare determined annually by the Board ofDirectors. The 401(k) savings plan offered by Meridian IQDirectors and may be in2003 provided a fixed matching percentagethe form of75 percent of the first six percent of an eligible employee's contributions with no option for discretionary contributions. In 2004,cash, stock or other property. Effective December 31, 2003, Meridian IQ terminatedtheirits 401(k) savings plan andgoing forward will participatebegan participating in the Yellow Roadway plan.ThePrior to its merger into the Yellow Roadway 401(k) savings planoffered byeffective December 31, 2004, the RoadwayExpress providesLLC 401(k) savings plan provided for afixed matching percentagemaximum nondiscretionary company match of 100 percent of the first four and a half percent ofan eligible employee's contributions. We provide the entireparticipant contributions (either before-tax or after-tax contributions), with all nondiscretionary company matchingcomponent ofcontributions in stock. Any discretionary contributions for the RoadwayExpressLLC 401(k) savings planwith Yellow Roadway commonwere determined annually and if made, would be in stock.ContributionsEmployer contributions for the year ended December 31, 2004 were $13.7 million. Employer contributions for each of thethreetwo years in the period ended December 31, 2003, were not material to our operations.For the Yellow Roadway noncontributory profit sharing plan, which was established effective January 1, 2004, the nondiscretionary company contribution is based on years of participation service and compensation, with a maximum fixed contribution of 5 percent of compensation for more than ten years of participation service. The Yellow Roadway profit sharing plan also provides for a discretionary performance based contribution of a maximum of 2½ percent of compensation. Any discretionary contributions are determined annually by the Board of Directors. Contributions under the Yellow Roadway profit sharing plan may be made in cash or other property, as determined by the Board of Directors, and nondiscretionary contributions will generally be made in cash. New Penn provides a noncontributory profit sharing plan for employees not covered by collective bargaining agreements. Any contributions are discretionary employer contributions. Employer contributions to our profit sharing plans in 2004 totaled $2.2 million. Amounts for the two years ended December 31, 2003 were not material to our operations.
Our employees covered under collective bargaining agreements
canmay also participate in a contributory 401(k) plan. We do not make employer contributions to the plan on their behalf.47PERFORMANCE INCENTIVE AWARDSPerformance Incentive Awards
Yellow Roadway and its operating subsidiaries each provide annual performance incentive awards to nonunion employees, which are based primarily on actual operating results achieved compared to targeted operating
results.results, and are paid in cash. Income from continuing operations in 2004, 2003,2002,and20012002 included performance incentive expense for nonunion employees of $110.4 million, $27.6 million,$15.6 million,and$2.9$15.6 million, respectively. We pay annual performance incentive awards primarily in the first quarter of the followingyear. PERFORMANCE BASED LONG-TERM INCENTIVE PLANyear, except for Roadway Express who pays awards quarterly.Performance Based Long-Term Incentive Plan
We implemented a long-term incentive plan in
2002. This plan2002 and replaced it in 2004 with a new long-term incentive and equity award plan. These plans replaced the use of stock options as the exclusive vehicle for delivering long-term incentive compensation potential to certain executive officers. Awards under theplanplans can be made in cash and performance share units at the discretion of the Board of Directors.FiftyDuring the year ended December 31, 2004, we recorded the issuance of 436,747 share units to certain executive officers, key employees and our Board of Directors under these plans. The weighted-average grant-date fair value of these awards was $38.43 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 177,721 units awarded, the vesting provision states that fifty percent of the awarded performance share units will vest three years from the date of grant and the remaining 50 percent will vest six years from the date of grant.
The plan utilizes a phased implementation schedule that allowsVesting forone-third133,309 units is 100 percent on the third anniversary of thetypical awarddate of grant, 41,147 vest ratably over three years and 84,570 vest ratably over one year. During the year ended December 31, 2004, 8,588 share units at a weighted-average grant date fair value of $30.75 were forfeited resulting inthe first year of implementation, two-thirds in the second year, and the full award in the third year. In 2003, award amounts were based on growth in our net operating profit after taxes and return on committed capital compared to the Standard and Poor's Small Cap index (approximately 600 companies).428,159 share units outstanding ($38.58 weighted-average grant date fair value) at December 31, 2004.Income from continuing operations in 2004, 2003 and 2002 included performance incentive
accrualsexpense underthis planthese plans of$4.9$16.3 million, $5.4 million and $2.0 million, respectively.DEBT AND FINANCINGDebt and Financing
At December 31, total debt consisted of the following in order of seniority:
(in thousands) 2003 2002 - ---------------------------------------------------------------------- -------- --------ABS borrowings, secured by Yellow Transportation accounts receivable $ 71,500 $ 50,000 Term loan, secured by Yellow Roadway assets 175,000 -- Senior notes due 2008, secured by certain Roadway LLC assets 248,895 -- Industrial development bonds, primarily secured by related facilities 13,900 18,900 Contingent convertible senior notes, unsecured 400,000 -- Medium-term notes, unsecured -- 55,250 Capital leases and other 44 135 -------- -------- Total debt $909,339 $124,285 ABS borrowings (71,500) (50,000) Current maturities (1,757) (24,261) -------- -------- Long-term debt $836,082 $ 50,024 ======== ========VARIABLE-RATE DEBT
(in millions) 2004 2003 ABS borrowings, secured by accounts receivable
$ — $ 71.5 Term loan
— 175.0 Senior notes due 2008
244.0 248.9 Industrial development bonds, primarily secured by related facilities
13.9 13.9 Contingent convertible senior notes
400.0 400.0 Capital leases and other
— 0.1 Total debt
$ 657.9 $ 909.4 ABS borrowings
— (71.5 ) Current maturities
(254.4 ) (1.8 ) Long-term debt
$ 403.5 $ 836.1 Variable-Rate Debt
In
2003, Yellow RoadwaySeptember 2004, we replaceditsour previous$300$375 million secured credit agreement with a new $500 million unsecured creditagreement, which was setagreement. This new facility provides a revolving loan up toexpire April 2004, with a new $675the maximum limit of $500 millionsecured credit agreement. The secured credit agreement consists of three parts: a $175 million term loan, a $250 millionoffset by any letters of creditfacilityoutstanding, which are limited to $375 million. The revolving loan allows for tranches denominated in foreign currencies, including a $50 million Canadian dollar tranche and a$250$10 millionrevolver loan.euro/pound sterling tranche. Any borrowings under the foreign denominated tranches reduce the available borrowings under the total facility. As of December 31,2003, we have borrowed2004, no amounts were outstanding under this agreement.Our interest rate on the
entire amount of the term loan. We may use the letters ofunsecured creditfacility for issuance of standby letters of credit and the revolver loan for short-term borrowings and additional letters of credit. Interest on borrowingsagreement is based on the London inter-bank offer rate("LIBOR"(“LIBOR”) plus a fixedincrement. The credit facility is secured by substantially allspread. We are also required to pay certain commitment fees on the total capacity and the fixed spread plus fronting fees related to the outstanding letters ofour domestic assets except for those assets securing our ABS facility. Undercredit. In accordance with the terms of the agreement, we mustprepare certain reports and meet certain other criteria ("affirmative covenants") and are prohibited from engaging incomply with certain financialactivities ("negative covenants"). Certain negativecovenantsare discussed further in the Commitments, Contingenciesprimarily relating to our leverage ratio, fixedcharges coverage ratio and
Uncertainties note. Atminimum net worth. As of December 31,2003,2004, we were in compliance with all terms of the agreement.At the time of our refinancing, we had a $75 million term loan outstanding under our previous secured credit
agreement. 48The following table provides a detailfacility. We borrowed under our ABS facility (discussed below) to repay that term loan amount. As of December 31, 2004, we were not drawn on theoutstanding components and available unused capacity under thenew unsecured creditagreement:
December 31, (in thousands) 2003 - -------------- ------------Total capacity $ 675,000 Term loan outstanding (175,000) Letters of credit facility outstanding (250,000) (a) Letters of credit outstanding under revolver loan (24,410) --------- Available unused capacity $ 225,590 =========(a) Wefacility but havean additional $1.5 million inissued certain letters of creditthat are not covered under awhich serve primarily as collateral for our self-insurance programs, mainly in the areas of workers’ compensation, property damage and liability claims. Collateral requirements for letters of credit and surety bonds, an alternative form of self-insurance collateral, fluctuate over time with general conditions in the insurance market. In conjunction with the refinancing, we wrote off $18.3 million of deferred debt issuance costs associated with the secured credit facility. We incurred approximately $2.0 million of costs associated with the new unsecured credit facility which have been capitalized and will be recognized over the debt term. The facility matures in September 2009.We also maintain an asset-backed securitization (ABS) facility that provides us with additional liquidity and lower borrowing costs through access to the asset-backed commercial paper market. By using the ABS
agreementfacility, we obtain a variable rate based on the A1/P1 commercial paper rate, plus a fixed increment for utilization. We also pay certain administration fees that are paid regardless of borrowings. The ABS facility allows us to transfer an ongoing pool of receivables to a conduit administered by an independent financial institution("(“theconduit"conduit”). In May 2004, we replaced our then existing ABS facility with a new ABS facility. The new ABS facility involved receivables of Yellow Transportation and Roadway Express and had an increased limit of $300 million, up from the previous limit of $200 million. In September 2004 we again modified our existing ABS facility, increasing the limit to $450 million. Under the terms of the agreement, Yellow Transportation and Roadway Express provide servicing of the receivables and retain the associated collection risks. The termination date of the ABS facility is May 20, 2005 at which time we intend and expect to renew on an annual basis. As of December 31, 2004 no amounts were outstanding under this facility.The ABS facility is operated by Yellow Roadway Receivables Funding Corporation (“YRRFC”), a special purpose entity and wholly owned subsidiary of Yellow Roadway. Under the terms of the agreement, we may transfer
Yellow Transportationtrade receivables toa special purpose entity, Yellow Receivables Corporation ("YRC"). YRCYRRFC which isa wholly owned consolidated subsidiary of Yellow Transportationdesigned to isolate the receivables for bankruptcy purposes. The conduit must purchase fromYRCYRRFC an undivided ownership interest in those receivables. The percentage ownership interest in receivables purchased by the conduit may increase or decrease over time, depending on the characteristics of the receivables, including delinquency rates and debtor concentrations.Yellow Roadway servicesManagement will continue to evaluate thereceivables transferred to YRC and receives a servicing fee, which management has determined approximates market compensation for these services. The conduit pays YRC the face amount of the undivided interest at the time of purchase. On a periodic basis, this sales price is adjusted, resulting in payments by YRC to the conduit of an amount that varies based on the interest rate on certain of the conduit's liabilities and the length of time the sold receivables remain outstanding. The ABS facility involves receivablesfinancial position of Yellow TransportationonlyandhasRoadway Express, including the transferred receivables and related borrowings. As alimit of $200 million. Underresult, theterms ofYellow Roadway consolidated financial statements and segment reporting will not be impacted by this change. However, as theagreement, Yellow Transportation retains the associated collection risks. Although the facility has no stated maturity, we have an underlying letter of creditreceivables will be legally owned by YRRFC, separate subsidiary financial statements filed with theadministering financial institution that has a 364-day maturity.Securities and Exchange Commission due to the issuance of public debt will not reflect the transferred receivables and related borrowings.The table below provides the borrowing and repayment activity under the ABS facility, as well as the resulting balances, for the years ending December 31 of each period presented:
(in thousands) 2003 2002 - ------------------------------------------------ --------- ---------ABS obligations outstanding at January 1 $ 50,000 $ 141,500 Transfer of receivables to conduit (borrowings) 151,000 421,500 Redemptions from conduit (repayments) (129,500) (513,000) --------- --------- ABS obligations outstanding at December 31 $ 71,500 $ 50,000 ========= =========
(in millions) 2004 2003 ABS obligations outstanding at January 1
$ 71.5 $ 50.0 Transfer of receivables to conduit (borrowings)
1,004.4 151.0 Redemptions from conduit (repayments)
(1,075.9 ) (129.5 ) ABS obligations outstanding at December 31
$ — $ 71.5 Prior to December 31, 2002, the ABS facility was treated as a sale of assets and the sold receivables and related obligations were not reflected on the Consolidated Balance Sheets. Our loss on the sale of receivables under the ABS facility to the conduit was $2.6 million in
2002 and $8.0 million in 2001. These charges are2002. This charge is reflected as ABS facility charges on the Statements of Consolidated Operations.Roadway historically hadThe following table provides a
similar ABS facility under which Roadway transferred Roadway Express domestic accounts receivable to a special purpose entity, Roadway Funding, Inc. ("REF"). As partdetail of theacquisition, we maintained REF as a wholly owned subsidiary of Roadway LLC but discontinuedoutstanding components and available unused capacity under therelated conduit with the independent financial institution. As ofbank credit agreement and ABS agreement at December31, 2003, there was no ABS facility available for Roadway Express.31:
(in millions) 2004 2003 Capacity:
Revolving loan
$ 500.0 $ 250.0 Term loan
— 175.0 Letters of credit facility
— 250.0 ABS facility
450.0 200.0 Total capacity
$ 950.0 $ 875.0 Amounts outstanding:
Term loan
— (175.0 ) Letters of credit facility
— (250.0 ) Letters of credit under revolver loan
(275.4 ) (24.4 ) ABS facility
— (71.5 ) Total outstanding
(275.4 ) (520.9 ) Available unused capacity
$ 674.6 $ 354.1 At December 31, 2003, Reimer had a $10.0 million secured revolving line of credit available with no outstanding borrowings. In the first quarter of 2004, we closed the facility.
49FIXED-RATE DEBT We have loan guarantees, mortgages, and lease contracts in connection with the issuance of industrial development bonds ("IDBs") used to acquire, construct or expand terminal facilities. Rates on these bonds range from 5.3 percent to 6.1 percent, with principal payments due through 2010.Fixed-Rate Debt
Contingently Convertible Notes
On August 8, 2003, we closed the sale of $200 million of
our private offering of5.0 percent contingent convertible senior notes due 2023("(“contingent convertible seniornotes"notes”) and on August 15, 2003 we closed the sale of an additional $50 million of the notes pursuant to the exercise of the option of the initial purchasers. We received net proceeds from the sales of $242.5 million, after fees.The $250 million contingent convertible senior notes have an annual interest rate of 5.0 percent and are convertible into shares of Yellow Roadway common stock at a conversion price of $39.24 per share only upon the occurrence of certain other events. The contingent convertible senior notes may not be redeemed by us for seven years but are redeemable at any time thereafter at par. Holders of the contingent convertible senior notes have the option to require Yellow Roadway to purchase their notes at par on August 8, 2010, 2013 and 2018, and upon a change in control of the company. These terms and other material terms and conditions applicable to the contingent convertible senior notes are set forth in the indenture governing the notes.
On September 30, 2003, we completed the repurchase of $24 million aggregate principal amount of our medium-term notes ("MTNs"). The remaining $20 million aggregate principal amount of MTNs outstanding, after scheduled principal payments during 2003 of $11.3 million, were defeased under the terms thereof. Defeasance refers to the process of placing sufficient funds in an irrevocable trust to pay and discharge the MTNs as they become due. As a result, we were considered legally released as the primary obligor and the MTNs were removed from our balance sheet. The interest rate on the notes ranged from 6.1 percent to 7.8 percent with scheduled maturities ranging from October 2003 to August 2008. We recognized a loss on the extinguishment of debt of $2.3 million from the repurchase and defeasance that we reflected in "other" nonoperating expenses on our Statement of Consolidated Operations. We funded the repurchase and defeasance with cash on hand. On November 19, 2003, we announced a private offering of $130 million of 3.375 percent contingent convertible senior notes with an option for the initial purchasers to acquire an additional $20 million.On November 25, 2003, we closed the sale of
the entire$150 million of 3.375 percent contingent convertible senior notes due 2023. We received net proceeds from the offering of $145.5 million, after fees, and used the proceeds to fund the acquisition of Roadway.The $150 million contingent convertible senior notes have an annual interest rate of 3.375 percent and are convertible into shares of Yellow Roadway common stock at a conversion price of $46.00 per share only upon the occurrence of certain other events. The contingent convertible senior notes may not be redeemed by us for nine years but are redeemable at any time thereafter at par. Holders of the contingent convertible senior notes have the option to require Yellow Roadway to purchase their notes at par on November 25, 2012, 2015 and 2020, and upon a change in control of the company. These terms and other material terms and conditions applicable to the contingent convertible senior notes are set forth in the indenture governing the notes.
In December 2004, we completed exchange offers pursuant to which holders of the 5 percent contingent convertible senior notes and the 3.375 percent contingent convertible senior notes (collectively, the “Existing Notes”) could exchange their Existing Notes for an equal amount of our new 5 percent net share settled contingently convertible senior notes due 2023 and new 3.375 percent net share settled contingently convertible senior notes due 2023 (collectively, the “New Notes”), respectively. The New Notes contain a net share settlement feature that, upon conversion, provides for the principal amount of the New Notes to be settled in cash and the excess value to be settled in common stock, as well as an additional change of control feature. The results of the exchange offer included $247.7 million aggregate principal amount of the $250 million of 5 percent contingent convertible senior notes outstanding and $144.6 million aggregate principal amount of the $150 million of 3.375 percent contingent convertible senior notes outstanding, representing 99.06 percent and 96.41 percent, respectively, of the Existing Notes validly and timely tendered in exchange for an equal principal amount of the New Notes.
The accounting for convertible debt with the settlement features contained in our New Notes is addressed in the consensus reached by the Emerging Issues Task Force of the Financial Accounting Standards Board with respect to the accounting for Instrument C as set forth in EITF 90-19, “Convertible Bonds with Issuer Option to Settle for Cash Upon Conversion.” We are contractually obligated to settle the conversion obligations of the New Notes consistent with Instrument C. Because the accreted value of the New Notes will be settled for cash upon the conversion, only the conversion spread (the excess conversion value over the accreted value), which will be settled in stock, will result in potential dilution in our earnings-per-share computations. (See further discussion of dilution related to the Existing Notes and the New Notes in Earnings Per Common Share.)
On December 31, 2004, the conversion triggers with respect to the $250 million contingent convertible senior notes had been met. Accordingly, as of December 31, 2004, 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 as described above, 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 $250 million contingent convertible senior notes as a current liability on the accompanying consolidated balance sheets as of December 31, 2004. 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.
Other
We have loan guarantees, mortgages, and lease contracts in connection with the issuance of industrial development bonds (“IDBs”) used to acquire, construct or expand terminal facilities. Rates on these bonds range from 5.3 percent to 6.1 percent, with principal payments due through 2010.
On September 30, 2003, we completed the repurchase of $24 million aggregate principal amount of our medium-term notes (“MTNs”). The remaining $20 million aggregate principal amount of MTNs outstanding, after scheduled principal payments during 2003 of $11.3 million, were defeased under the terms thereof. Defeasance refers to the process of placing sufficient funds in an irrevocable trust to pay and discharge the MTNs as they become due. As a result, we were considered legally released as the primary obligor, and the MTNs were removed from our balance sheet. The interest rate on the notes ranged from 6.1 percent to 7.8 percent with scheduled maturities ranging from October 2003 to August 2008. During the year ended December 31, 2003, we recognized a loss on the extinguishment of debt of $2.3 million from the repurchase and defeasance that we reflected in “other” nonoperating expenses on our Statement of Consolidated Operations. We funded the repurchase and defeasance with cash on hand.
As part of our acquisition of Roadway and by virtue of the merger agreement, we assumed $225.0 million face value of 8.25 percent senior notes due in full on December 1, 2008
("(“senior notes due2008"2008”), with interest payments due semi-annually on June 1 and December 1. The senior notes due 2008 were revalued as part ofpurchase accounting and assigned a fair value of $249.2 million on December 11, 2003. The premium over the face value of the senior notes due 2008
will beis being amortized as a reduction to interest expense over the remaining life of the notes. The unamortized premium at December 31, 2004 and 2003 was $19.0 million and $23.9million. The senior notes due 2008 are secured by assets of certain Roadway LLC subsidiaries. In addition, the stock of certain Roadway LLC subsidiaries has been pledged to secure these notes.million, respectively.Based on the borrowing rates currently available to us for debt with similar terms and remaining maturities and the quoted market prices for the senior notes due 2008 and contingent convertible senior notes, the fair value of fixed-rate debt at December 31,
20032004 and2002,2003, was approximately$761.0$921.2 million and$81.5$761.0 million, respectively. The carrying amount of such fixed-rate debt at December 31, 2004 and 2003,and 2002,was$638.9$657.9 million and$74.3$662.8 million, respectively.50The principal maturities of total debt
excluding ABS borrowings,for the next five years and thereafter are as follows:
(in millions) IDBs Contingent
convertible
senior notesSenior notes
due 2008Total 2005
$ 4.4 $ — $ — $ 4.4 2006
— — — — 2007
— — — — 2008
2.5 — 225.0 (a) 227.5 2009
1.0 — — 1.0 Thereafter
6.0 400.0 (b) — 406.0 Total
$ 13.9 $ 400.0 $ 225.0 $ 638.9
Contingent convertible Senior notes Capital (in thousands) IDBs(a) As discussed above, the senior notes due 2008 Term loan leases Total - -------------- ------- ------------ ------------ --------- ------- --------had a carrying value of $244.0 million at December 31, 2004 $ -- $ -- $ -- $ 1,750 $ 7 $ 1,757 2005 4,400 -- -- 1,750 37 6,187 2006 -- -- -- 1,750 -- 1,750 2007 -- -- -- 1,750 -- 1,750 2008 2,500 -- 225,000(a) 168,000 -- 395,500 Thereafter 7,000 400,000 -- -- -- 407,000 ------- -------- -------- -------- --- -------- Total $13,900 $400,000 $225,000 $175,000 $44 $813,944 ======= ======== ======== ======== === ========and a principal maturity value of $225.0 million.(a) As discussed above, the senior notes due 2008 had a carrying value of $248.9 million at December 31, 2003 and a principal maturity value of $225.0 million. STOCK COMPENSATION PLANS
(b) Our consolidated balance sheet at December 31, 2004 reflects $250 million contingently convertible notes classified as a current liability as our note holders had the right, at their option, to convert their notes, in whole or in part, into cash and shares of common stock as we’ve fully described in Item 8, Debt and Financing. However, we’ve reflected the obligation above based on the stated maturity as we believe the likelihood of a note holder presenting their notes for conversion to be remote. Stock Compensation Plans
Yellow Roadway has reserved
4.89.0 million shares of its common stock for issuance to key management personnel underfivesix stock optionplans.plans and 3.1 million shares remain available at December 31, 2004. Our long-term incentive plan implemented in 2002 and replaced in 2004 with a new long-term incentive and equity award plan, and discussed under our Employee Benefits note, replaced the use of stock options as the exclusive vehicle for delivering long-term incentive compensation potential to our executive officers. The stock option plans generally permit grants of nonqualified stock options and grants of stock options coupled with a grant of stock appreciation rights("SARs"(“SARs”). In addition, wehavehad previously reserved 200,000 shares of our common stock for issuance to our Board ofDirectors.Directors under a stock compensation plan, which has subsequently been replaced with the 2004 long-term incentive and equity award plan. Under the plans, the exercise price of each option equals the closing market price of our common stock on the date of grant. The options vest ratably, generally over a period of four years, and expire ten years from the date of the grant.Yellow Roadway implemented a new
stock optionlong-term incentive and equity award plan in20022004 whichreserves 1.0reserved 3.4 million of the4.89.0 million shares discussed above. This plan permits the issuance of restricted stock and restricted stock units, as well as options, SARs, and performance stock and performance stock unit awards.Yellow Roadway implemented a stock option plan in 2002 which reserved 1.0 million of the 9.0 million shares discussed above, and in 2004, 195,000 shares were subsequently de-registered. This plan permits the
issuance of restricted stock and restricted stock units, as well as options, SARs, and performance stock and performance stock unit awards. The maximum cumulative number of shares that can be awarded in any form other than options or SARs is 200,000 shares.
We adjusted our outstanding stock options in 2002 to reflect the impact of the spin-off of SCST. For employees who continued employment with Yellow Corporation, the option remained an option for Yellow common stock with the number of shares covered by the option and related exercise price adjusted to preserve the intrinsic value. For employees who worked for SCST after the spin-off, the Yellow Corporation options were cancelled and SCST issued options to purchase SCST common stock with the number of shares of SCST common stock and exercise price set to preserve the intrinsic value.
As of December 31, 2004, 2003
2002and2001,2002, options on approximately 517,000 shares, 904,000 shares736,000 sharesand1,054,000736,000 shares, respectively, were exercisable at weighted average exercise prices of $19.11 per share, $19.44 per share$17.77 per shareand$20.62$17.77 per share, respectively. The weighted average remaining contract life on outstanding options at December 31, 2004, 2003 and 2002and 2001was 5.8 years, 6.7 years and 7.4 years,and 7.3 years,respectively.51A summary of activity in our stock option plans is presented in the following table:
Exercise Price ------------------------- Shares Weighted (in thousands) Average Range -------------- -------- --------------Outstanding at December 31, 2000 3,375 $17.55 $11.50 - 27.00 Granted 42 20.30 18.25 - 21.87 Exercised (1,063) 15.64 11.50 - 24.05 Forfeited / expired (83) 18.57 12.25 - 24.05 ------ ------ -------------- Outstanding at December 31, 2001 2,271 $18.46 $11.50 - 27.00 Granted 900 26.81 22.42 - 29.67 Exercised (737) 17.76 10.56 - 24.79 SCST spin-off adjustment (352) -- -- Forfeited / expired (86) 17.83 10.56 - 24.05 ------ ------ -------------- Outstanding at December 31, 2002 1,996 $21.27 $10.56 - 29.67 Granted 113 25.17 23.67 - 26.94 Exercised (279) 16.80 13.48 - 29.67 Forfeited / expired (33) 26.67 14.57 - 29.67 ------ ------ -------------- Outstanding at December 31, 2003 1,797 $22.14 $11.25 - 29.67 ====== ====== ==============
Exercise Price Shares
(in thousands)Weighted
AverageRange Outstanding at December 31, 2001
2,271 $ 18.46 $ 11.50–27.00 Granted
900 26.81 22.42–29.67 Exercised
(737 ) 17.76 10.56–24.79 SCST spin-off adjustment
(352 ) — — Forfeited / expired
(86 ) 17.83 10.56–24.05 Outstanding at December 31, 2002
1,996 $ 21.27 $ 10.56–29.67 Granted
113 25.17 23.67–26.94 Exercised
(279 ) 16.80 13.48–29.67 Forfeited / expired
(33 ) 26.67 14.57–29.67 Outstanding at December 31, 2003
1,797 $ 22.14 $ 11.25–29.67 Granted
28 34.65 31.59–36.35 Exercised
(766 ) 20.72 11.25–29.67 Forfeited / expired
(61 ) 30.95 14.57–36.35 Outstanding at December 31, 2004
998 $ 23.04 $ 11.25–31.59 The following table summarizes information about stock options outstanding as of December 31,
2003:
Options Outstanding Options Exercisable ------------------------------------------------------ -------------------------------- Weighted Average Shares Remaining Weighted Average Shares Weighted Average Range of exercise prices (in thousands) Contractual Years Exercise price (in thousands) Exercise price - ------------------------ -------------- ------------------ --------------- -------------- ---------------$ 11.25 - 17.00 520 6.0 $14.89 371 $14.86 $ 17.01 - 27.50 660 5.4 $20.82 385 $19.92 $ 27.51 - 29.67 617 8.7 $29.67 148 $29.67 === === ====== === ======As discussed in2004:
Options Outstanding Options Exercisable Range of exercise prices
Shares
(in thousands)Weighted Average
Remaining
Contractual YearsWeighted
Average
Exercise priceShares
(in thousands)Weighted
Average
Exercise price$ 11.25 – 17.50
346 5.7 $ 16.44 343 $ 16.43 $ 17.51 – 26.50
302 3.5 $ 22.90 127 $ 22.43 $ 26.51 – 31.59
350 7.9 $ 29.68 47 $ 29.67 Income Taxes
We use the
Summary of Accounting Policies note, we apply APB 25 in accounting for stock options. Please referliability method tothat note for pro forma effects had we applied Statement No. 123. 52INCOME TAXES Deferredreflect income taxesare determined based upon the difference between the book and theon our financial statements. We recognize deferred taxbasis of ourassets andliabilities. Deferred taxes are recorded at theliabilities by applying enacted tax ratesexpectedand regulations to the differences between the carrying valueof existing assets and liabilities and their respective tax basis and capital loss and tax credit carryforwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that the change is enacted. We assess the realizability of deferred tax assets for capital and operating loss carryforwards and provide valuation allowances when we determine it is more likely than not that such losses will not be realized within the applicable carryforward period. We have not recognized deferred taxes for U.S. federal income taxes on foreign subsidiaries’ earnings that are deemed to be
in effect when these differences reverse.permanently reinvested and any related taxes associated with such earnings are not material. Deferred tax liabilities (assets) were comprised of the following at December 31:
(in thousands) 2003 2002 - -------------- --------- ---------Depreciation $ 280,818 $ 90,004 Prepaids 7,861 8,193 Employee benefits 85,183 52,330 Revenue 30,688 22,925 Intangibles 181,273 -- Other 17,746 6,354 --------- --------- Gross tax liabilities $ 603,569 $ 179,806 --------- --------- Claims and insurance $(146,916) $ (54,684) Bad debts (11,046) (5,514) Employee benefits (120,239) (45,076) Revenue (12,628) (10,882) Other (38,098) (21,242) --------- --------- Gross tax assets $(328,927) $(137,398) --------- --------- Net tax liability $ 274,642 $ 42,408 ========= =========A valuation allowance for deferred tax assets was not required at December 31, 2002. Valuation allowances for deferred tax assets at December 31, 2003 were not material to our financial condition.
(in millions) 2004 2003 Depreciation
$ 297.2 $ 280.8 Prepaids
8.7 7.9 Employee benefits
56.2 85.2 Revenue
36.2 30.7 Intangibles
172.5 181.3 Other
26.4 17.7 Gross tax liabilities
$ 597.2 $ 603.6 Claims and insurance
$ (154.7 ) $ (146.9 ) Bad debts
(12.7 ) (11.1 ) Employee benefits
(122.3 ) (120.2 ) Revenue
(18.9 ) (12.6 ) Other
(35.2 ) (38.1 ) Gross tax assets
$ (343.8 ) $ (328.9 ) Net tax liability
$ 253.4 $ 274.7 A reconciliation between income taxes at the federal statutory rate and the consolidated effective tax rate from continuing operations follows:
(in thousands) 2003 2002 2001 ---- ---- ----Federal statutory rate 35.0% 35.0% 35.0% State income taxes, net 1.3 (0.8) (2.0) Nondeductible business expenses 3.3 4.5 11.3 Foreign tax credit and rate differential 0.1 (2.2) (2.5) Other, net (0.6) (0.3) (2.8) ---- ---- ---- Effective tax rate 39.1% 36.2% 39.0% ==== ==== ====53
2004 2003 2002 Federal statutory rate
35.0 % 35.0 % 35.0 % State income taxes, net
2.3 1.3 (0.8 ) Nondeductible business expenses
1.5 3.3 4.5 Foreign tax credit and rate differential
(0.1 ) 0.1 (2.2 ) Other, net
(0.6 ) (0.6 ) (0.3 ) Effective tax rate
38.1 % 39.1 % 36.2 % The income tax provision from continuing operations consisted of the following:
(in thousands) 2003 2002 2001 - -------------- ------- ------- -------Current: U.S federal $ 2,983 $12,697 $(6,853) State (1,078) (353) (3,628) Foreign (1,541) (180) 505 ------- ------- ------- Current income tax provision $ 364 $12,164 $(9,976) ------- ------- ------- Deferred: U.S federal $23,310 $ 584 $14,220 State 2,531 748 2,937 Foreign (74) 117 (411) ------- ------- ------- Deferred income tax provision $25,767 $ 1,449 $16,746 ------- ------- ------- Income tax provision $26,131 $13,613 $ 6,770 ------- ------- ------- Based on the income from continuing operations before income taxes: Domestic $71,667 $37,892 $16,119 Foreign (4,853) (306) 1,240 ------- ------- ------- Income from continuing operations before income taxes $66,814 $37,586 $17,359 ======= ======= =======COMMITMENTS, CONTINGENCIES, AND UNCERTAINTIES
(in millions) 2004 2003 2002 Current:
U.S federal
$ 81.3 $ 3.0 $ 12.7 State
9.3 (1.1 ) (0.4 ) Foreign
4.8 (1.5 ) (0.2 ) Current income tax provision
$ 95.4 $ 0.4 $ 12.1 Deferred:
U.S federal
$ 15.9 $ 23.3 $ 0.6 State
2.1 2.5 0.7 Foreign
(0.1 ) (0.1 ) 0.2 Deferred income tax provision
$ 17.9 $ 25.7 $ 1.5 Income tax provision
$ 113.3 $ 26.1 $ 13.6 Based on the income from continuing operations before income taxes:
Domestic
$ 283.6 $ 71.7 $ 37.9 Foreign
14.1 (4.9 ) (0.3 ) Income from continuing operations before income taxes
$ 297.7 $ 66.8 $ 37.6 Previously, the Internal Revenue Service (“IRS”) challenged the timing of a deduction by Roadway Express related to prior years’ contributions to certain union pension plans. During the year ended December 31, 2004 we reached an agreement with the IRS and paid $41.4 million ($32.3 million net of tax benefit) to resolve this matter. Additional state tax and interest payments of approximately $9.0 million ($7.4 million net of tax benefit) resulting from the federal adjustments were made in January of 2005. We had specifically established reserves related to these payments in purchase accounting.
Commitments, Contingencies, and Uncertainties
Yellow Roadway incurs rental expenses under noncancelable lease agreements for certain buildings and operating equipment. Rental expense is charged to
"operating“operating expense andsupplies"supplies” on the Statements of Consolidated Operations. Actual rental expense, as reflected in income from continuing operations, was $95.1 million, $42.6 million,$34.8 million,and$37.0$34.8 million for the years ended December 31, 2004, 2003, and 2002,and 2001,respectively.We utilize certain terminals and equipment under operating leases. At December 31,
2003,2004, we were committed under noncancelable lease agreements requiring minimum annual rentals payable as follows:
(in thousands) 2004 2005 2006 2007 2008 Thereafter - -------------- ------- ------- ------- ------- ------- ----------Minimum annual rentals $73,121 $54,837 $32,100 $17,782 $11,488 $14,358 ------- ------- ------- ------- ------- -------
(in millions) 2005 2006 2007 2008 2009 Thereafter Minimum annual rentals
$ 75.1 $ 48.9 $ 30.4 $ 17.6 $ 7.0 $ 9.2 We expect in the ordinary course of business that leases will be renewed or replaced as they expire.
Projected
2004 net2005 gross capital expenditures are expected to be$190$235 to$210$245 million, of which approximately$60$38.0 million was committed at December 31,2003.2004.Our outstanding letters of credit at December 31,
20032004 included$3.4$2.5 million forworkers'workers’ compensation, property damage and liability claims against SCST. We agreed to maintain the letters of credit outstanding at the spin-off date until SCST obtained replacement letters of credit or third party guarantees. SCST agreed to use its reasonable best efforts to obtain these letters of credit or guarantees, which in many cases would allow us to obtain a release of our letters of credit. SCST also agreed to indemnify us for any claims against the letters of credit that we provide. SCST reimburses us for all fees incurred related to the remaining outstanding letters of credit. We also provided a guarantee of$5.9$4.1 million regarding certain lease obligations of SCST.Due to the secured credit facility agreement we entered into, as discussed in the Debt and Financing note, we are restricted from participating in certain financial activities. These activities include, but are not limited to, declaring dividends, assuming additional indebtedness outside the normal course of business, directly or indirectly lending money or credit to non-subsidiaries and incurring capital expenditures in excess of a stated annual amount.We are involved in litigation or proceedings that arise in ordinary business activities. We insure against these risks to the extent deemed prudent by our management, but no assurance can be given that the nature and amount of such insurance will be sufficient to fully indemnify us against liabilities arising out of pending and future legal proceedings. Many of these insurance policies contain self-insured retentions in amounts we deem prudent. Based on our current assessment of information available as of the date of these
54financial statements, we believe that our financial statements include adequate provisions for estimated costs and losses that may be incurred with regard to the litigation and proceedings to which we are a party. Tax Matters Because of the acquisition of Roadway, we are responsible for certain federal tax obligations of Roadway under a tax sharing agreement with its former parent corporation. The former parent of Roadway, Caliber System, Inc. (which subsequently was acquired by FDX Corporation, a wholly owned subsidiary of FedEx Corporation), is involved in tax litigation with the IRS for tax years 1994 and 1995, years prior to Caliber System, Inc's spin-off of Roadway. The IRS has proposed substantial adjustments for these tax years for multi-employer pension plan deductions. FedEx Corporation filed a petition challenging the IRS's position, and this matter is presently in litigation. We are unable to predict the ultimate outcome of this matter; however, the former parent of Roadway intends to vigorously contest these proposed adjustments. Under tax sharing agreements entered into by Roadway and its former parent at the time of the spin-off, Roadway LLC, a wholly owned subsidiary of Yellow Roadway Corporation and successor in interest to Roadway, is obligated to reimburse its former parent for any additional taxes and interest that related to Roadway business prior to the spin-off. The amount and timing of any payments is dependent on the ultimate resolutions of the former parent's disputes with the IRS and the determination of the nature and extent of the obligations under the tax sharing agreement. On January 16, 2003, Roadway made a $14 million payment to its former parent under the tax sharing agreement for taxes and interest related to certain of the proposed adjustments for tax years 1994 and 1995. We estimate the maximum remaining payments that may be due to the former parent of Roadway to be approximately $19 million in additional taxes and $5 million in related interest, net of tax benefit. We have established specific reserves with respect to these proposed adjustments. There can be no assurance, however, that the amount or timing of any liability of Roadway LLC to the former parent of Roadway will not have a material adverse effect on the financial position of Yellow Roadway. In addition, Roadway LLC, as successor in interest to Roadway, has a similar tax issue in each of its subsequent income tax returns and the IRS has made additional claims for taxes for tax years 1996 through 2000. The outcome of these proposed adjustments is dependent upon the outcome of the existing tax litigation. In the event of an adverse decision, we estimate that the potential taxes and interest, net of tax effect, for all years subsequent to 1995 are approximately $10 million and $3 million, respectively.Environmental Matters
Remediation costs are accrued based on estimates of known environmental remediation exposure using currently available facts, existing environmental permits and technology and presently enacted laws and regulations. Our estimates of costs are developed based on internal evaluations and, when necessary, recommendations from external environmental consultants. These accruals are recorded when it is probable that we will be obligated to pay amounts for environmental site evaluation, remediation or related costs, and the amounts can be reasonably estimated. If the obligation can only be estimated within a range, we accrue the minimum amount in the range. These accruals are recorded even if significant uncertainties exist over the ultimate cost of the remediation. Where we have been identified as a potentially responsible party in a U.S. federal
"Superfund"“Superfund” site, we accrue our share of the estimated remediation costs of the site based on the ratio of the estimated volume of waste contributed to the site by us to the total volume of waste at the site.BUSINESS SEGMENTSAs of December 31, 2004, recorded balances related to these matters were not material.Business Segments
Yellow Roadway reports financial and descriptive information about its reportable operating segments on a basis consistent with that used internally for evaluating segment performance and allocating resources to segments. We manage the segments separately because each requires different operating, marketing and technology strategies. We evaluate performance primarily on adjusted operating income and return on capital.
Yellow Roadway has four reportable segments, which are strategic business units that offer complementary transportation services to their customers. Yellow Transportation and Roadway Express are unionized carriers that provide comprehensive regional, national and international transportation services. New Penn is also a unionized carrier that focuses on business opportunities in the regional and next-day delivery lanes. Meridian IQ, our non-asset based segment, provides domestic and international freight forwarding, multi-modal brokerage and transportation management services.
The accounting policies of the segments are the same as those described in the Summary of Accounting Policies note. We charge management fees and other corporate services to our segments based on the direct benefits received or as a percentage of revenue.
55Corporate revenue in 2001 represented certain non-asset-based services prior to the formation of Meridian IQ.Corporate operating losses represent operating expenses of the holding company, including salaries, wages and benefits, along with incentive compensation and professional services for all periods presented. In 2004, corporate operating losses also included increased professional fees associated with the Sarbanes-Oxley Act of 2002 of $5.5 million and $2.6 million of fees associated with the exchange of our contingently convertible notes in December 2004. In 2003, corporate operating losses also included $4.0 million for an industry conference that wehosthave hosted every other year. In 2002, corporate operating losses included approximately $6.9 million related to the spin-off of SCST. Corporate identifiable assets primarily refer to cash and cash equivalents, in addition to pension intangible assets.In 2003 and 2002, intersegmentIntersegment revenue relates to transportation services provided by Yellow Transportation to Meridian IQ and Roadway Express and charges to Yellow Transportation for use of various Meridian IQ service names.Meridian IQ includes the former operations of Transportation.com as well as other non-asset-based services. The 2001 segment data for Meridian IQ included the partial year results of operations of Transportation.com and other non-asset-based services for the periods they were part of our consolidated financial results. Full year revenue for Meridian IQ was $31.1 million and full year operating losses were $(16.8) million in 2001.Revenue from foreign sources totaled $220.2 million, $29.5 million, and $24.8 million, in 2004, 2003, and
$26.0 million, in 2003,2002and 2001respectively, and is largely derived from Canada, United Kingdom and Mexico. Long-lived assets located in foreign countries totaled $23.5 million and $16.7 million at December 31, 2004 and 2003, respectively.The following table summarizes our operations by business segment:
(in millions) Yellow
TransportationRoadway(a)
ExpressNew(a)
PennMeridian
IQCorporate/
EliminationsConsolidated 2004
External revenue
$ 3,177.7 $ 3,118.2 $ 260.6 $ 211.0 $ — $ 6,767.5 Intersegment revenue
2.9 1.7 — 2.2 (6.8 ) — Operating income (loss)
191.5 158.3 33.9 3.7 (25.8 ) 361.6 Adjustments to operating income(b)
(3.1 ) (1.4 ) — — — (4.5 ) Adjusted operating income (loss)(c)
188.4 156.9 33.9 3.7 (25.8 ) 357.1 Identifiable assets
1,030.4 2,110.4 248.9 108.0 129.5 3,627.2 Capital expenditures, net
95.1 47.8 18.6 2.7 0.1 164.3 Depreciation and amortization
85.8 70.5 11.7 3.5 — 171.5 2003
External revenue
$ 2,809.5 $ 131.2 $ 9.8 $ 118.1 $ — $ 3,068.6 Intersegment revenue
2.4 — — 2.2 (4.6 ) — Operating income (loss)
119.9 (6.1 ) (0.2 ) 0.3 (25.3 ) 88.6 Adjustments to operating income(b)
19.0 — — 0.5 3.0 22.5 Adjusted operating income (loss)(c)
138.9 (6.1 ) (0.2 ) 0.8 (22.3 ) 111.1 Identifiable assets
986.5 2,002.4 340.7 79.9 53.7 3,463.2 Capital expenditures, net
94.3 1.2 0.5 3.1 0.1 99.2 Depreciation and amortization
80.3 3.5 0.7 2.9 — 87.4 2002
External revenue
$ 2,544.6 $ — $ — $ 79.5 $ — 2,624.1 Intersegment revenue
2.5 — — 2.3 (4.8 ) — Operating income (loss)
70.6 — — (2.7 ) (21.0 ) 46.9 Adjustments to operating income(b)
0.5 — — 1.3 6.6 8.4 Adjusted operating income (loss)(c)
71.1 — — (1.4 ) (14.4 ) 55.3 Identifiable assets
940.3 — — 64.6 38.1 1,043.0 Capital expenditures, net
81.2 — — 1.5 0.1 82.8 Depreciation and amortization
77.0 — — 2.3 — 79.3
Yellow Roadway(a) New(a) Corporate / (in thousands) Transportation(a) In 2003, the segment information shown for Roadway Express and New Penn Meridian IQ Eliminations Consolidated - -------------- -------------- ---------- -------- ----------- ------------ ------------represented income statement and capital expenditure information from the date of acquisition December 11, through December 31, 2003 External revenue $2 ,809,549 $ 131,248 $ 9,770 $118,049 $ -- $3,068,616 Intersegment revenue 2,343 -- -- 2,196 (4,539) -- Operating income (loss) 119,906 (6,075) (221) 288 (25,296) 88,602 Adjustments to operating income(b) 19,020 -- -- 482 2,960 22,462 Adjustedand identifiable assets as of December 31, 2003.
(b) Management excludes these items when evaluating operating income (loss) 138,926 (6,075) (221) 770 (22,336) 111,064 Identifiable assets 986,522 2,002,421 340,713 79,894 53,679 3,463,229 Capital expenditures, net 94,281 1,216 534 3,047 56 99,134 Depreciationandamortization 80,261 3,455 745 2,897 40 87,398 ----------- ---------- -------- -------- -------- ----------segment performance to better evaluate the results of our core operations. In 2004, adjustments included gains on property disposals. In 2003, adjustments included acquisition charges, conforming accounting policies, a significant legal provision and losses (gains) on property disposals. In 2002,External revenue $ 2,544,573 $ -- $ -- $ 79,575 $ -- $2,624,148 Intersegment revenue 2,479 -- -- 2,196 (4,675) -- Operating income (loss) 70,594 -- -- (2,697) (21,033) 46,864 Adjustments to operating income(b) 523 -- -- 1,299 6,613 8,435 Adjustedadjustments included spin-off and reorganization charges and losses (gains) on property disposals.
(c) This measurement is used for internal management purposes and should not be construed as a better measurement than operating income (loss) 71,117 -- -- (1,398) (14,420) 55,299 Identifiable assets 940,252 -- -- 64,617 38,116 1,042,985 Capital expenditures, net 81,232 -- -- 1,537 61 82,830 Depreciation and amortization 76,972 -- -- 2,321 41 79,334 ----------- ---------- -------- --------- ---------- ---------- 2001 External revenue $ 2,485,972 $ -- $ -- $ 11,292 $ 7,806 $2,505,070 Intersegment revenue 6,360 -- -- -- (6,360) -- Operating income (loss) 55,884 -- -- (5,738) (11,951) 38,195 Adjustments to operating income(b) 2,797 -- -- 2,108 510 5,415 Adjusted operating income (loss) 58,681 -- -- (3,630) (11,441) 43,610 Identifiable assets 757,484 -- -- 17,641 19,704 794,829(c) Capital expenditures, net 80,463 -- -- 822 150 81,435 External revenue 76,227 -- -- 698 52 76,977 =========== ========== ======== ======== ======== ==========as defined by generally accepted accounting principles.(a) In 2003, the segment information shown for Roadway Express and New Penn represented income statement and capital expenditure information from the date of acquisition through December 31, 2003 and identifiable assets as of December 31, 2003. (b) Management excludes these items when evaluating operating income and segment performance to better evaluate the results of our core operations. In 2003, adjustments included acquisition charges, conforming accounting policies, a significant legal provision and losses (gains) on property disposals. In prior periods, adjustments included spin-off and reorganization charges and losses (gains) on property disposals. (c) The December 31, 2001 total assetsEarnings per
the Consolidated Balance Sheet included $490.9 million of assets related to discontinued operations not included above. 56EARNINGS PER COMMON SHARECommon Share
(in thousands except per share data) 2003 2002 2001 - ------------------------------------ ------- --------- --------Income from continuing operations $40,683 $ 23,973 $ 10,589 Income (loss) from discontinued operations -- (117,875) 4,712 ------- --------- -------- Net income (loss) $40,683 $ (93,902) $ 15,301 ------- --------- -------- Average common shares outstanding - basic 30,370 28,004 24,376 Effect of dilutive options 285 367 303 ------- --------- -------- Average common shares outstanding - diluted 30,655 28,371 24,679 ------- --------- -------- Basic earnings (loss) per share: Income from continuing operations $ 1.34 $ 0.86 $ 0.44 Income (loss) from discontinued operations -- (4.21) 0.19 ------- --------- -------- Net income (loss) $ 1.34 $ (3.35) $ 0.63 ------- --------- -------- Effect of dilutive options on earnings (loss) per share: Income from continuing operations $ (0.01) $ (0.02) $ (0.01) Loss from discontinued operations -- 0.06 -- ------- --------- -------- Net income (loss) $ (0.01) $ 0.04 $ (0.01) ------- --------- -------- Diluted earnings (loss) per share: Income from continuing operations $ 1.33 $ 0.84 $ 0.43 Income (loss) from discontinued operations -- (4.15) 0.19 ------- --------- -------- Net income (loss) $ 1.33 $ (3.31) $ 0.62 ======= ========= ========
(in thousands except per share data) 2004 2003 2002 Income from continuing operations
$ 184,327 $ 40,683 $ 23,973 Income (loss) from discontinued operations
— — (117,875 ) Net income (loss)
$ 184,327 $ 40,683 $ (93,902 ) Average common shares outstanding—basic
48,149 30,370 28,004 Effect of dilutive equity awards
613 285 367 Contingent convertible notes dilution
412 — — Average common shares outstanding—diluted
49,174 30,655 28,371 Basic earnings (loss) per share:
Income from continuing operations
$ 3.83 $ 1.34 $ 0.86 Income (loss) from discontinued operations
— — (4.21 ) Net income (loss)
$ 3.83 $ 1.34 $ (3.35 ) Effect of dilutive instruments on earnings (loss) per share:
Income from continuing operations
$ (0.08 ) $ (0.01 ) $ (0.02 ) Loss from discontinued operations
— — 0.06 Net income (loss)
$ (0.08 ) $ (0.01 ) $ 0.04 Diluted earnings (loss) per share:
Income from continuing operations
$ 3.75 $ 1.33 $ 0.84 Income (loss) from discontinued operations
— — (4.15 ) Net income (loss)
$ 3.75 $ 1.33 $ (3.31 ) The impacts of certain options were excluded from the calculation of diluted earnings per share because average exercise prices were greater than the average market price of common shares. Data regarding those options is summarized below:
(in thousands except per share data) 2003 2002 2001 - ------------------------------------ ------ ------ ------Weighted average option shares outstanding 617 129 611 Weighted average exercise price $29.67 $29.67 $24.18 ------ ------ ------57DISCONTINUED OPERATIONS
(in thousands except per share data) 2004 2003 2002 Weighted average option shares outstanding
— 148 129 Weighted average exercise price
$ — $ 29.67 $ 29.67 Discontinued Operations
Summarized results of operations related to SCST (as reported in discontinued operations) are as follows for the nine months ended September 30,
2002 and the year ended December 31, 2001:2002:
(in thousands except per share data) 2002 2001 - ------------------------------------ --------- --------Operating revenue $ 581,181 $771,581 Operating expenses 559,751 752,423 --------- -------- Operating income 21,430 19,158 Nonoperating expenses, net 4,735 7,992 --------- -------- Income before income taxes 16,695 11,166 Provision for income taxes 6,748 6,454 --------- -------- Income from continuing operations 9,947 4,712 Loss on disposal of SCST (52,647) -- Cumulative effect of change in accounting for goodwill (75,175) -- --------- -------- Income (loss) from discontinued operations $(117,875) $ 4,712 --------- -------- Discontinued operations basic earnings (loss) per share: Income from continuing operations $ 0.35 $ 0.19 Loss on disposal of SCST (1.88) -- Cumulative effect of change in accounting for goodwill (2.68) -- --------- -------- Income (loss) from discontinued operations $ (4.21) $ 0.19 --------- -------- Discontinued operations diluted earnings (loss) per share: Income from continuing operations $ 0.35 $ 0.19 Loss on disposal of SCST (1.85) -- Cumulative effect of change in accounting for goodwill (2.65) -- --------- -------- Income (loss) from discontinued operations $ (4.15) $ 0.19 ========= ========
(in millions except per share data) 2002 Operating revenue
$ 581.2 Operating expenses
559.8 Operating income
21.4 Nonoperating expenses, net
4.7 Income before income taxes
16.7 Provision for income taxes
6.8 Income from continuing operations
9.9 Loss on disposal of SCST
(52.6 ) Cumulative effect of change in accounting for goodwill
(75.2 ) Loss from discontinued operations
$ (117.9 ) Discontinued operations basic earnings (loss) per share:
Income from continuing operations
$ 0.35 Loss on disposal of SCST
(1.88 ) Cumulative effect of change in accounting for goodwill
(2.68 ) Loss from discontinued operations
$ (4.21 ) Discontinued operations diluted earnings (loss) per share:
Income from continuing operations
$ 0.35 Loss on disposal of SCST
(1.85 ) Cumulative effect of change in accounting for goodwill
(2.65 ) Loss from discontinued operations
$ (4.15 ) We did not charge to discontinued operations the management fees and other corporate services that we previously allocated to SCST, as we continue to incur a majority of the expense. We allocated interest expense to discontinued operations based on our overall effective borrowing rate applied to the debt reduction we realized from the spin-off. Interest expense included in discontinued operations was $4.6 million for the nine months ended September 30,
2002, and $8.0 million for the year ended December 31, 2001. Goodwill amortization expense included in discontinued operations was zero for 2002 and $3.0 million for 2001.2002. In addition, supplemental cash flow information for 2002,and 2001,as shown on our Statements of Consolidated Cash Flows, includes cash paid on behalf of SCST until the spin-off date.At December 31, 2001, we had $100.6 million of goodwill, consisting primarily of $75.2 million remaining from the acquisition of Jevic. Based on an estimate of
Jevic'sJevic’s discounted cash flows, we determined that 100 percent of the Jevic goodwill was impaired due to lower business volumes, compounded by a weak economy and an increasingly competitive business environment. As a result, we recorded a non-cash charge of $75.2 million in the first quarter of 2002, which was reflected as a cumulative effect of a change in accounting principle. Due to the spin-off, we reclassified the non-cash charge to"discontinued operations"“discontinued operations” on our Statement of Consolidated Operations.58CONDENSED CONSOLIDATING FINANCIAL STATEMENTS GUARANTEES OF THE CONTINGENT CONVERTIBLE SENIOR NOTESSubsequent Events
USF Corporation
On February 27, 2005, USF Corporation (USF) and Yellow Roadway announced that we have entered into a definitive agreement pursuant to which Yellow Roadway will acquire USF through the merger of USF with and into a wholly owned subsidiary of Yellow Roadway. The transaction is valued at approximately $1.37 billion
(based on the Yellow Roadway trailing 90-day closing stock price as of February 18, 2005). Yellow Roadway will also assume approximately $99 million in net USF debt, resulting in a total enterprise value of approximately $1.47 billion. Each USF shareholder has the right to elect for each share either $45 in cash or 0.9024 shares of Yellow Roadway common stock at a fixed exchange ratio. All shareholder elections will be adjusted such that the gross cash consideration will total approximately $639 million, based on USF shares currently outstanding, and the balance will be paid in stock. The transaction is subject to the approval of shareholders of both companies. In addition, the acquisition is subject to the expiration or termination of the waiting period pursuant to the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended and other customary closing conditions. We expect the transaction to close in the 2005 second quarter.
GPS Logistics, Inc.
In March 2005, MIQ LLC exercised its option to purchase GPS Logistics Group Ltd., the Asian operations of GPS Logistics, Inc. Under the terms of the purchase agreement, MIQ LLC is required to make a payment on March 31, 2005 based on a computation related to sustainable cash flow and working capital. This payment is not expected to exceed $7.0 million, and 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.
Condensed Consolidating Financial Statements
Guarantees of the Contingent Convertible Senior Notes
In August 2003, Yellow Roadway
Corporationissued 5.0 percent contingent convertible senior notes due 2023 pursuant to Rule 144A under the Securities Act of 1933, as amended. In November 2003, we issued 3.375 percent contingent convertible senior notes (the August and November issuances, collectively, may also be known as the"contingent“contingent convertible seniornotes"notes”) due 2023, pursuant to Rule 144A under the Securities Act of 1933, as amended. In connection with the contingent convertible senior notes, the following 100 percent owned subsidiaries of Yellow Roadway have issued guarantees in favor of the holders of the contingent convertible senior notes: Yellow Transportation, Inc., Mission Supply Company, Yellow Relocation Services, Yellow Roadway Technologies, Inc., Meridian IQ Inc., MIQ LLC (formerly Yellow GPS,LLC,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
Corporationor any guarantor to obtain funds from its subsidiaries by dividend or loan.The following represents summarized condensed consolidating financial information as of December 31,
20032004 and20022003 with respect to the financial position and for the years ended December 31, 2004, 20032002and20012002 for results of operations and cash flows of Yellow RoadwayCorporationand its subsidiaries. TheCondensed Consolidating Balance Sheet contains Roadway LLC information as of December 31,2003and theCondensed Consolidating Statements of Operations and Condensed Consolidating Statements of Cash Flows contain Roadway LLC information from the date of acquisition (December 11) through December31, 2003.31. 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 that are governed by foreign laws, Yellow Roadway Receivables Funding Corporation, Yellow Receivables Corporation and Roadway Funding, Inc., the special-purpose entities thatmanageare ormanagedwere associated with our ABSagreements, and those subsidiaries that are governed by foreign laws.agreements.Condensed Consolidating Balance Sheets
Non- December 31, 2003 Guarantor Guarantor (in thousands) Parent Subsidiaries Subsidiaries Eliminations Consolidated - ----------------- ---------- ------------ ------------ ------------ ------------Cash and cash equivalents $ 18,702 $ 19,631 $ 36,833 $ -- $ 75,166 Intercompany advances receivable 180,367 3,702 -- (184,069) -- Accounts receivable, net 3,437 351,152 344,553 -- 699,142 Prepaid expenses and other 4,719 97,468 7,941 -- 110,128 ---------- ----------- -------- ----------- ----------- Total current assets 207,225 471,953 389,327 (184,069) 884,436 Property and equipment 325 2,442,858 95,431 -- 2,538,614 Less - accumulated depreciation (229) (1,129,253) (5,864) -- (1,135,346) ---------- ------------ -------- ----------- ----------- Net property and equipment 96 1,313,605 89,567 -- 1,403,268 Investment in subsidiaries 1,373,794 131,653 -- (1,505,447) -- Receivable from affiliate -- 150,000 -- (150,000) -- Goodwill and other assets 38,989 883,107 253,429 -- 1,175,525 ---------- ----------- -------- ----------- ----------- Total assets $1,620,104 $ 2,950,318 $732,323 $(1,839,516) $ 3,463,229 ========== =========== ======== =========== =========== Intercompany advances payable $ -- $ -- $184,069 $ (184,069) $ -- Accounts payable 12,326 231,379 16,470 -- 260,175 Wages, vacations and employees' benefits 5,872 329,680 15,735 -- 351,287 Other current and accrued liabilities (7,071) 173,460 12,089 -- 178,478 ABS borrowings -- -- 71,500 -- 71,500 Current maturities of long-term debt 1,750 7 -- -- 1,757 ---------- ----------- -------- ----------- ----------- Total current liabilities 12,877 734,526 299,863 (184,069) 863,197 Payable to affiliate -- -- 150,000 (150,000) -- Long-term debt, less current portion 573,250 262,832 -- -- 836,082 Deferred income taxes, net (12,250) 263,513 46,993 -- 298,256 Claims and other liabilities 13,934 436,400 13,275 -- 463,609 Commitments and contingencies Shareholders' equity 1,032,293 1,253,047 222,192 (1,505,447) 1,002,085 ---------- ----------- -------- ----------- ----------- Total liabilities and shareholders' equity $1,620,104 $ 2,950,318 $732,323 $(1,839,516) $ 3,463,229 ========== =========== ======== =========== ===========59
Non - December 31, 2002 Guarantor Guarantor (in thousands) Parent Subsidiaries Subsidiaries Eliminations Consolidated - ---------------- -------- ------------ ------------ ------------ ------------Cash and cash equivalents $ 21,898 $ 2,470 $ 4,346 $ -- $ 28,714 Intercompany advances receivable 141,057 46,291 -- (187,348) -- Accounts receivable, net 3,211 29,017 295,685 -- 327,913 Prepaid expenses and other 3,518 65,148 60 -- 68,726 -------- ----------- -------- --------- ----------- Total current assets 169,684 142,926 300,091 (187,348) 425,353 Property and equipment 289 1,671,327 7,480 -- 1,679,096 Less-accumulated depreciation (213) (1,109,710) (4,197) -- (1,114,120) -------- ----------- -------- --------- ----------- Net property and equipment 76 561,617 3,283 -- 564,976 Investment in subsidiaries 263,577 -- -- (263,577) -- Goodwill and other assets 3,729 44,756 4,171 -- 52,656 -------- ----------- -------- --------- ----------- Total assets $437,066 $ 749,299 $307,545 $(450,925) $ 1,042,985 ======== =========== ======== ========= =========== Intercompany advances payable $ -- $ -- $187,348 $(187,348) $ -- Accounts payable 1,412 113,251 326 -- 114,989 Wages, vacations and employees' benefits 2,389 157,230 379 -- 159,998 Other current and accrued liabilities (1,098) 101,287 922 -- 101,111 ABS borrowings -- -- 50,000 -- 50,000 Current maturities of long-term debt 19,250 5,011 -- -- 24,261 -------- ----------- -------- --------- ----------- Total current liabilities 21,953 376,779 238,975 (187,348) 450,359 Intercompany debt (20,658) 20,658 -- -- -- Long-term debt, less current portion 36,000 14,024 -- -- 50,024 Deferred income taxes, net (17,319) 43,381 (405) -- 25,657 Claims and other liabilities 15,782 141,495 (290) -- 156,987 Commitments and contingencies Shareholders' equity 401,308 152,962 69,265 (263,577) 359,958 -------- ----------- -------- --------- ----------- Total liabilities and shareholders' equity $437,066 $ 749,299 $307,545 $(450,925) $ 1,042,985 ======== =========== ======== ========= ===========
December 31, 2004
(in millions)Parent Guarantor
SubsidiariesNon-Guarantor
SubsidiariesEliminations 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
— 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 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 Claims and insurance accruals
— 117 7 — 124 Other current and accrued liabilities
17 66 3 — 86 Current maturities of long-term debt
250 4 — — 254 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
December 31, 2003
(in millions)Parent Guarantor
SubsidiariesNon-Guarantor
SubsidiariesEliminations 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
— 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 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 Intercompany debt
— — 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 Commitments and contingencies
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 year ended December 31, 2003 Guarantor Guarantor (in thousands) Parent Subsidiaries Subsidiaries Eliminations Consolidated - ------------------------------------ -------- ------------ ------------ ------------ ------------Operating revenue $ 13,204 $3,029,250 $ 39,437 $(13,275) $3,068,616 -------- ---------- -------- -------- ---------- Operating expenses: Salaries, wages and employees' benefits 14,814 1,936,127 19,499 -- 1,970,440 Operating expenses and supplies 17,519 420,707 24,824 (13,225) 449,825 Operating taxes and licenses 164 82,049 1,335 -- 83,548 Claims and insurance 755 66,357 558 -- 67,670 Depreciation and amortization 40 86,103 1,255 -- 87,398 Purchased transportation -- 306,079 12,097 -- 318,176 Losses (gains) on property disposals, net 1 (176) 8 -- (167) Acquisition charges 2,959 165 -- -- 3,124 -------- ---------- -------- -------- ---------- Total operating expenses 36,252 2,897,411 59,576 (13,225) 2,980,014 -------- ---------- -------- -------- ---------- Operating income (loss) (23,048) 131,839 (20,139) (50) 88,602 -------- ---------- -------- -------- ---------- Nonoperating (income) expenses: Interest expense 17,597 6,506 6,349 (9,846) 20,606 Other, net (1,564) 53,537 (60,587) 9,796 1,182 -------- ---------- -------- -------- ---------- Nonoperating (income) expenses, net 16,033 60,043 (54,238) (50) 21,788 -------- ---------- -------- -------- ---------- Income (loss) before income taxes (39,081) 71,796 34,099 -- 66,814 Income tax provision (14,330) 28,109 12,352 -- 26,131 Subsidiary earnings 65,434 (1,132) -- (64,302) -- -------- ---------- -------- -------- ---------- Net income (loss) $ 40,683 $ 42,555 $ 21,747 $(64,302) $ 40,683 ======== ========== ======== ======== ==========60
Non- For the year ended December 31, 2002 Guarantor Guarantor (in thousands) Parent Subsidiaries Subsidiaries Eliminations Consolidated - ------------------------------------ -------- ------------ ------------ ------------ ------------Operating revenue $ 43,938 $2,599,394 $ 24,754 $(43,938) $2,624,148 -------- ---------- --------- -------- ---------- Operating expenses: Salaries, wages and employees' benefits 12,056 1,697,567 7,759 -- 1,717,382 Operating expenses and supplies 14,774 355,476 31,360 (16,088) 385,522 Operating taxes and licenses 206 74,999 532 -- 75,737 Claims and insurance 1,233 55,944 20 -- 57,197 Depreciation and amortization 41 79,028 265 -- 79,334 Purchased transportation -- 244,087 9,590 -- 253,677 Losses (gains) on property disposals, net -- 559 (134) -- 425 Spin-off and reorganization charges 6,613 1,397 -- -- 8,010 -------- ---------- --------- -------- ---------- Total operating expenses 34,923 2,509,057 49,392 (16,088) 2,577,284 -------- ---------- --------- -------- ---------- Operating income (loss) 9,015 90,337 (24,638) (27,850) 46,864 -------- ---------- --------- -------- ---------- Nonoperating (income) expenses: Interest expense 8,087 3,932 3,394 (8,202) 7,211 ABS facility charges -- -- 2,576 -- 2,576 Other, net (5,047) 74,855 (50,669) (19,648) (509) -------- ---------- --------- -------- ---------- Nonoperating (income) expenses, net 3,040 78,787 (44,699) (27,850) 9,278 -------- ---------- --------- -------- ---------- Income (loss) from continuing operations before income taxes 5,975 11,550 20,061 -- 37,586 Income tax provision 1,249 5,143 7,221 -- 13,613 Subsidiary earnings 19,249 -- -- (19,249) -- -------- ---------- --------- -------- ---------- Income (loss) from continuing operations 23,975 6,407 12,840 (19,249) 23,973 Loss from discontinued operations, net -- -- (117,875) -- (117,875) -------- ---------- --------- -------- ---------- Net income (loss) $ 23,975 $ 6,407 $(105,035) $(19,249) $ (93,902) ======== ========== ========= ======== ==========
Non- For the year ended December 31, 2001 Guarantor Guarantor (in thousands) Parent Subsidiaries Subsidiaries Eliminations Consolidated - ------------------------------------ -------- ------------ ------------ ------------ ------------Operating revenue $ 54,264 $2,480,119 $25,987 $(55,300) $2,505,070 -------- ---------- ------- -------- ---------- Operating expenses: Salaries, wages and employees' benefits 8,390 1,622,638 7,634 -- 1,638,662 Operating expenses and supplies 13,848 378,599 23,516 (17,909) 398,054 Operating taxes and licenses 174 74,920 543 -- 75,637 Claims and insurance 1,983 56,372 (1,356) -- 56,999 Depreciation and amortization 38 76,668 271 -- 76,977 Purchased transportation -- 205,424 9,707 -- 215,131 Losses (gains) on property disposals, net (1) (202) 17 -- (186) Spin-off and reorganization charges 633 5,089 (121) -- 5,601 -------- ---------- ------- -------- ---------- Total operating expenses 25,065 2,419,508 40,211 (17,909) 2,466,875 -------- ---------- ------- -------- ---------- Operating income (loss) 29,199 60,611 (14,224) (37,391) 38,195 -------- ---------- ------- -------- ---------- Nonoperating (income) expenses: Interest expense 18,513 2,356 5,017 (17,449) 8,437 ABS facility charges -- -- 7,996 -- 7,996 Other, net (16,106) 90,096 (49,645) (19,942) 4,403 -------- ---------- ------- -------- ---------- Nonoperating (income) expenses, net 2,407 92,452 (36,632) (37,391) 20,836 -------- ---------- ------- -------- ---------- Income (loss) from continuing operations before income taxes 26,792 (31,841) 22,408 -- 17,359 Income tax provision 9,679 (10,399) 7,490 -- 6,770 Subsidiary earnings 1,812 -- -- (1,812) -- -------- ---------- ------- -------- ---------- Income (loss) from continuing operations 15,301 (21,442) 14,918 1,812 10,589 Income from discontinued operations, net -- -- 4,712 -- 4,712 -------- ---------- ------- -------- ---------- Net income (loss) $ 15,301 $ (21,442) $19,630 $ 1,812 $ 15,301 ======== ========== ======= ======== ==========61
For the year ended December 31, 2004
(in millions)Parent Guarantor
SubsidiariesNon-Guarantor
SubsidiariesEliminations Consolidated Operating revenue
$ 48 $ 6,291 $ 483 $ (55 ) $ 6,767 Operating expenses:
Salaries, wages and employees’ benefits
37 3,900 235 — 4,172 Operating expenses and supplies
32 921 108 (49 ) 1,012 Operating taxes and licenses
— 159 10 — 169 Claims and insurance
3 126 4 — 133 Depreciation and amortization
— 156 15 — 171 Purchased transportation
— 663 94 (4 ) 753 Losses (gains) on property disposals, net
— (4 ) (1 ) — (5 ) Total operating expenses
72 5,921 465 (53 ) 6,405 Operating income (loss)
(24 ) 370 18 (2 ) 362 Nonoperating (income) expenses:
Interest expense
28 72 33 (89 ) 44 Other, net
(1 ) 64 (130 ) 87 20 Nonoperating (income) expenses, net
27 136 (97 ) (2 ) 64 Income (loss) before income taxes
(51 ) 234 115 — 298 Income tax provision
(8 ) 81 41 — 114 Subsidiary earnings
227 74 — (301 ) — Net income (loss)
$ 184 $ 227 $ 74 $ (301 ) $ 184
For the year ended December 31, 2003
(in millions)
Parent Guarantor
SubsidiariesNon-Guarantor
SubsidiariesEliminations Consolidated Operating revenue
$ 13 $ 3,029 $ 40 $ (13 ) $ 3,069 Operating expenses:
Salaries, wages and employees’ benefits
15 1,936 19 — 1,970 Operating expenses and supplies
18 421 24 (13 ) 450 Operating taxes and licenses
— 82 2 — 84 Claims and insurance
— 66 2 — 68 Depreciation and amortization
— 86 1 — 87 Purchased transportation
— 306 12 — 318 Losses (gains) on property disposals, net
— — — — — Spin-off and reorganization charges
3 — — — 3 Total operating expenses
36 2,897 60 (13 ) 2,980 Operating income (loss)
(23 ) 132 (20 ) — 89 Nonoperating (income) expenses:
Interest expense
18 6 7 (10 ) 21 Other, net
(2 ) 54 (61 ) 10 1 Nonoperating (income) expenses, net
16 60 (54 ) — 22 Income (loss) before income taxes
(39 ) 72 34 — 67 Income tax provision
(14 ) 28 12 — 26 Subsidiary earnings
(65 ) 1 — 64 — Net income (loss)
$ 40 $ 43 $ 22 $ (64 ) $ 41
For the year ended December 31, 2002
(in millions)
Parent Guarantor
SubsidiariesNon-Guarantor
SubsidiariesEliminations Consolidated Operating revenue
$ 44 $ 2,599 $ 25 $ (44 ) $ 2,624 Operating expenses:
Salaries, wages and employees’ benefits
12 1,698 7 — 1,717 Operating expenses and supplies
15 355 32 (16 ) 386 Operating taxes and licenses
— 75 1 — 76 Claims and insurance
1 56 — — 57 Depreciation and amortization
— 79 — — 79 Purchased transportation
— 244 10 — 254 Losses (gains) on property disposals, net
— — — — — Spin-off and reorganization charges
7 1 — — 8 Total operating expenses
35 2,508 50 (16 ) 2,577 Operating income (loss)
9 91 (25 ) (28 ) 47 Nonoperating (income) expenses:
Interest expense
8 4 3 (8 ) 7 ABS facility charges
— — 3 — 3 Other, net
(5 ) 75 (51 ) (20 ) (1 ) Nonoperating (income) expenses, net
3 79 (45 ) (28 ) 9 Income (loss) from continuing operations before income taxes
6 12 20 — 38 Income tax provision
1 6 7 — 14 Subsidiary earnings
(19 ) — — 19 — Income (loss) from continuing
Operations
24 6 13 (19 ) 24 Income from discontinued operations, net
— — (118 ) — (118 ) Net income (loss)
$ 24 $ 6 $ (105 ) $ (19 ) $ (94 ) Condensed Consolidating Statements of Cash Flows
Non- For the year ended December 31, 2003 Guarantor Guarantor (in thousands) Parent Subsidiaries Subsidiaries Eliminations Consolidated - ------------------------------------ --------- ------------ ------------ ------------ ------------Operating activities: Net cash from (used in) operating activities $(119,878) $ 276,972 $42,368 $(43,726) $ 155,736 --------- --------- ------- -------- --------- Investing activities: Acquisition of property and equipment (67) (102,572) (688) -- (103,327) Proceeds from disposal of property and equipment 6 3,969 218 -- 4,193 Acquisition of companies (513,338) -- -- -- (513,338) --------- --------- ------- -------- --------- Net cash used in investing activities (513,399) (98,603) (470) -- (612,472) --------- --------- ------- -------- --------- Financing Activities: Issuance of long-term debt 575,000 -- -- -- 575,000 ABS borrowings, net -- -- 21,500 -- 21,500 Debt issuance costs (34,734) -- -- -- (34,734) Repayment of long-term debt (55,250) (5,092) -- -- (60,342) Treasury stock purchases (2,921) -- -- -- (2,921) Proceeds from exercise of stock options 4,685 -- -- -- 4,685 Intercompany advances / repayments 143,301 (156,116) (30,911) 43,726 -- --------- --------- ------- -------- --------- Net cash provided by (used in) financing activities 630,081 (161,208) (9,411) 43,726 503,188 --------- --------- ------- -------- --------- Net increase (decrease) in cash and cash equivalents (3,196) 17,161 32,487 -- 46,452 Cash and cash equivalents, beginning of year 21,898 2,470 4,346 -- 28,714 --------- --------- ------- -------- --------- Cash and cash equivalents, end of year $ 18,702 $ 19,631 $36,833 $ -- $ 75,166 ========= ========= ======= ======== =========
Non- For the year ended December 31, 2002 Guarantor Guarantor (in thousands) Parent Subsidiaries Subsidiaries Eliminations Consolidated - ------------------------------------ --------- ------------ ------------ ------------ ------------Operating activities: Net cash from (used in) operating activities $ 19,435 $142,608 $(95,311) $(23,674) $ 43,058 -------- -------- -------- -------- --------- Investing activities: Acquisition of property and equipment (59) (86,120) (158) -- (86,337) Proceeds from disposal of property and equipment -- 3,306 201 -- 3,507 Acquisition of companies (17,105) (937) -- -- (18,042) Net capital expenditures of discontinued operations -- -- (24,372) -- (24,372) -------- -------- -------- -------- --------- Net cash used in investing activities (17,164) (83,751) (24,329) -- (125,244) -------- -------- -------- -------- --------- Financing Activities: Unsecured bank credit lines, net (85,000) -- -- -- (85,000) Repayment of long-term debt (22,000) (75) (22,525) -- (44,600) Dividend from subsidiary upon spin-off -- -- 113,790 -- 113,790 Proceeds from exercise of stock options 13,704 -- -- -- 13,704 Proceeds from issuance of common stock 93,792 -- -- -- 93,792 Intercompany advances / repayments 7,977 (58,256) 26,605 23,674 -- -------- -------- -------- -------- --------- Net cash provided by (used in) financing activities 8,473 (58,331) 117,870 23,674 91,686 -------- -------- -------- -------- --------- Net increase (decrease) in cash and cash equivalents 10,744 526 (1,770) -- 9,500 Cash and cash equivalents, beginning of year 11,154 1,944 6,116 -- 19,214 -------- -------- -------- -------- --------- Cash and cash equivalents, end of year $ 21,898 $ 2,470 $ 4,346 $ -- $ 28,714 ======== ======== ======== ======== =========62
Non- For the year ended December 31, 2001 Guarantor Guarantor (in thousands) Parent Subsidiaries Subsidiaries Eliminations Consolidated - ------------------------------------ --------- ------------ ------------ ------------ ------------Operating activities: Net cash from (used in) operating activities $ 13,282 $ (4,042) $ 72,818 $ 6,237 $ 88,295 -------- --------- -------- ------- --------- Investing activities: Acquisition of property and equipment (33) (87,814) (175) -- (88,022) Proceeds from disposal of property and equipment -- 6,587 -- -- 6,587 Acquisition of companies -- (14,300) -- -- (14,300) Other -- (5,830) -- -- (5,830) Net capital expenditures of discontinued operations -- -- (19,619) -- (19,619) -------- --------- -------- ------- --------- Net cash used in investing activities (33) (101,357) (19,794) -- (121,184) -------- --------- -------- ------- --------- Financing Activities: Unsecured bank credit lines, net 25,000 -- -- -- 25,000 Repayment of long-term debt (1,000) (7,694) (1,718) -- (10,412) Proceeds from exercise of stock options 16,638 -- -- -- 16,638 Intercompany advances / repayments (48,811) 105,994 (50,946) (6,237) -- -------- --------- -------- ------- --------- Net cash provided by (used in) financing activities (8,173) 98,300 (52,664) (6,237) 31,226 -------- --------- -------- ------- --------- Net increase (decrease) in cash and cash equivalents 5,076 (7,099) 360 -- (1,663) Cash and cash equivalents, beginning of year 6,078 9,043 5,756 -- 20,877 -------- --------- -------- ------- --------- Cash and cash equivalents, end of year $ 11,154 $ 1,944 $ 6,116 $ -- $ 19,214 ======== ========= ======== ======= =========63GUARANTEES OF THE SENIOR NOTES DUE
For the year ended December 31, 2004
(in millions)
Parent Guarantor
SubsidiariesNon-Guarantor
SubsidiariesEliminations Consolidated Operating activities:
Net cash from (used in) operating activities
$ 63 $ 450 $ (78 ) $ — $ 435 Investing activities:
Acquisition of property and equipment
— (175 ) (27 ) — (202 ) Proceeds from disposal of property and equipment
— 34 4 — 38 Acquisition of subsidiaries
(10 ) — — — (10 ) Other
4 — — — 4 Net cash used in investing activities
(6 ) (141 ) (23 ) — (170 ) Financing Activities:
ABS borrowings
— — (72 ) — (72 ) Debt issuance costs
(3 ) — — — (3 ) Repayment of long-term debt
(179 ) 4 — — (175 ) Proceeds from exercise of stock options
16 — — — 16 Intercompany advances / repayments
172 (326 ) 154 — — Net cash provided by (used in) financing activities
6 (322 ) 82 — (234 ) Net increase (decrease) in cash and cash equivalents
63 (13 ) (19 ) — 31 Cash and cash equivalents, beginning of year
19 20 36 — 75 Cash and cash equivalents, end of year
$ 82 $ 7 $ 17 $
—
$ 106
For the year ended December 31, 2003
(in millions)
Parent Guarantor
SubsidiariesNon-Guarantor
SubsidiariesEliminations Consolidated Operating activities:
Net cash from (used in) operating activities
$ (120 ) $ 278 $ 42 $ (44 ) $ 156 Investing activities:
Acquisition of property and equipment
— (103 ) (1 ) — (104 ) Proceeds from disposal of property and equipment
— 4 — — 4 Acquisition of subsidiaries
(513 ) — — — (513 ) Net cash used in investing activities
(513 ) (99 ) (1 ) — (613 ) Financing Activities:
Proceeds from issuance of debt
575 — — — 575 ABS borrowings
— — 22 — 22 Debt issuance costs
(35 ) — — — (35 ) Repayment of long-term debt
(55 ) (5 ) — — (60 ) Treasury stock purchases
(3 ) — — — (3 ) Proceeds from exercise of stock options
5 — — — 5 Intercompany advances / repayments
143 (156 ) (31 ) 44 — Net cash provided by (used in) financing activities
630 (161 ) (9 ) 44 504 Net increase (decrease) in cash and cash equivalents
(3 ) 18 32 — 47 Cash and cash equivalents, beginning of year
22 2 4 — 28 Cash and cash equivalents, end of year
$ 19 $ 20 $ 36 $ — $ 75
For the year ended December 31, 2002
(in millions)
Parent Guarantor
SubsidiariesNon-Guarantor
SubsidiariesEliminations Consolidated Operating activities:
Net cash from (used in) operating activities
$ 19 $ 143 (95 ) $ (24 ) $ 43 Investing activities:
Acquisition of property and equipment
— (86 ) — — (86 ) Proceeds from disposal of property and equipment
— 3 — — 3 Acquisition of subsidiaries
(17 ) (1 ) — — (18 ) Net capital expenditures of discontinued operations
— — (24 ) — (24 ) Net cash used in investing activities
(17 ) (84 ) (24 ) — (125 ) Financing Activities:
Unsecured bank credit lines, net
(85 ) — — — (85 ) Repayment of long-term debt
(22 ) — (23 ) — (45 ) Dividend from subsidiary upon spin-off
— — 114 — 114 Proceeds from exercise of stock options
14 — — — 14 Proceeds from issuance of common stock
94 — — — 94 Intercompany advances / repayments
8 (59 ) 27 24 — Net cash provided by (used in) financing activities
9 (59 ) 118 24 92 Net increase (decrease) in cash and cash equivalents
11 — (1 ) — 10 Cash and cash equivalents, beginning of year
11 2 6 — 19 Cash and cash equivalents, end of year
$ 22 $ 2 $ 5 $ — $ 29 Guarantees of the Senior Notes Due 2008
In connection with the senior notes due 2008, assumed by virtue of the merger agreement, and in addition to the primary obligor, Roadway LLC, Yellow Roadway
Corporationand 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
Corporationor any guarantor to obtain funds from its subsidiaries by dividend or loan.The following represents summarized condensed consolidating financial information of Yellow Roadway
Corporationand its subsidiaries as of December 31, 2004 and 2003 with respect to the financial position, and for theyearyears ended December 31, 2004 and 2003 for results of operations and cash flows. TheCondensed Consolidating Balance Sheet as of December 31,2003contains Roadway LLC information and theCondensed Consolidating Statements of Operations and Condensed Consolidating Statements of Cash Flows contain Roadway LLC information from the date of acquisition (December 11) through December31, 2003.31. The primary obligor column presents the financial information of Roadway LLC. The Guarantors column presents the financial information of all guarantors of the senior notes due 2008 including Yellow Roadway, the holding company. The Non-Guarantors column presents the financial information of all non-guarantors, including those subsidiaries that are governed by foreign laws and Yellow Roadway Receivables Funding Corporation, Yellow ReceivablesCorporation and Roadway Funding, Inc., the special-purpose entities that
manageare ormanagedwere associated with our ABSagreements, and those subsidiaries that are governed by foreign laws.agreements.Condensed Consolidating Balance Sheets
December 31, 2003 Primary Non- (in thousands) Obligor Guarantors Guarantors Eliminations Consolidated - ---------------- ---------- ---------- ---------- ------------ ------------Cash and cash equivalents $ -- $ 62,233 $ 12,933 $ -- $ 75,166 Intercompany advances receivable 38,042 109,100 103,582 (250,724) -- Accounts receivable, net -- 329,219 369,923 -- 699,142 Prepaid expenses and other 240 38,866 71,022 -- 110,128 ---------- ---------- ---------- ------------ ------------ Total current assets 38,282 539,418 557,460 (250,724) 884,436 Property and equipment -- 811,995 1,726,619 -- 2,538,614 Less - accumulated depreciation -- (3,380) (1,131,966) -- (1,135,346) ---------- ---------- ---------- ------------ ------------ Net property and equipment -- 808,615 594,653 -- 1,403,268 Investment in subsidiaries 592,413 1,402,909 7,761 (2,003,083) -- Receivable from affiliate 650,000 -- -- (650,000) -- Goodwill and other assets 20,778 1,073,193 81,554 -- 1,175,525 ---------- ---------- ---------- ------------ ------------ Total assets $1,301,473 $3,824,135 $1,241,428 $ (2,903,807) $ 3,463,229 ========== ========== ========== ============ ============ Intercompany advances payable $ -- $ -- $ 250,724 $ (250,724) $ -- Accounts payable 1,372 122,485 136,318 -- 260,175 Wages, vacations and employees' benefits 1,000 188,090 162,197 -- 351,287 Other current and accrued liabilities (31,463) 110,847 99,094 -- 178,478 ABS borrowings -- -- 71,500 -- 71,500 Current maturities of long-term debt -- 1,750 7 -- 1,757 ---------- ---------- ---------- ------------ ------------ Total current liabilities (29,091) 423,172 719,840 (250,724) 863,197 Due to affiliate -- 650,000 -- (650,000) -- Long-term debt, less current portion 248,895 573,250 13,937 -- 836,082 Deferred income taxes, net (11,590) 206,247 103,599 -- 298,256 Claims and other liabilities 1,494 346,760 115,355 -- 463,609 Commitments and contingencies Shareholders' equity 1,091,765 1,624,706 288,697 (2,003,083) 1,002,085 ---------- ---------- ---------- ------------ ------------ Total liabilities and shareholders' equity $1,301,473 $3,824,135 $1,241,428 $ (2,903,807) $ 3,463,229 ========== ========== ========== ============ ============64
December 31, 2004
(in millions)
Primary
ObligorGuarantors Non-Guarantors 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 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 long-term debt
— 250 4 — 254 Total current liabilities
(16 ) 741 1,092 (618 ) 1,199 Due 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
December 31, 2003
(in millions)
Primary
ObligorGuarantors Non-Guarantors 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
— 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 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 Due 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 Commitments and contingencies
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 Consolidated Statements of Operations
For the year ended December 31, 2004
(in millions)
Primary
ObligorGuarantors Non-Guarantors Eliminations Consolidated Operating revenue
$ — $ 3,229 $ 3,539 $ (1 ) $ 6,767 Operating expenses:
Salaries, wages and benefits
— 2,082 2,090 — 4,172 Operating expenses and supplies
— 465 548 (1 ) 1,012 Operating taxes and licenses
— 80 89 — 169 Claims and insurance
— 63 70 — 133 Depreciation and amortization
— 79 92 — 171 Purchased transportation
— 306 447 — 753 Losses (gains) on property disposals, net
— (1 ) (4 ) — (5 ) Acquisition charges
— — — — — Total operating expenses
— 3,074 3,332 (1 ) 6,405 Operating income (loss)
— 155 207 — 362 Nonoperating (income) expenses:
Interest expense
14 46 38 (54 ) 44 Other, net
(53 ) 65 (46 ) 54 20 Nonoperating (income) expenses, net
(39 ) 111 (8 ) — 64 Income before income taxes
39 44 215 — 298 Income tax provision
15 24 75 — 114 Subsidiary earnings
72 140 — (212 ) — Net income (loss)
$ 96 $ 160 $ 140 $ (212 ) $ 184 Condensed Consolidating Statements of Operations
For the year ended December 31, 2003 Primary Non- (in thousands) Obligor Guarantors Guarantors Eliminations Consolidated - ----------------------------------- ---------- ---------- ---------- ------------ ------------Operating revenue $ -- $148,528 $2,937,852 $(17,764) $3,068,616 ------- -------- ---------- -------- ---------- Operating expenses: Salaries, wages and employees' benefits 121 106,137 1,864,182 -- 1,970,440 Operating expenses and supplies (76) 38,673 424,774 (13,546) 449,825 Operating taxes and licenses (45) 4,453 79,140 -- 83,548 Claims and insurance -- 4,405 63,265 -- 67,670 Depreciation and amortization -- 4,013 83,385 -- 87,398 Purchased transportation -- 16,501 303,647 (1,972) 318,176 Losses (gains) on property disposals, net -- (5) (162) -- (167) Acquisition charges -- 2,960 164 -- 3,124 ------- -------- ---------- -------- ---------- Total operating expenses -- 177,137 2,818,395 (15,518) 2,980,014 ------- -------- ---------- -------- ---------- Operating income (loss) -- (28,609) 119,457 (2,246) 88,602 ------- -------- ---------- -------- ---------- Nonoperating (income) expenses: Interest expense 688 20,467 4,867 (5,416) 20,606 ABS facility charges -- -- -- -- -- Other, net (2,897) (1,390) 2,299 3,170 1,182 ------- -------- ---------- -------- ---------- Nonoperating (income) expenses, net (2,209) 19,077 7,166 (2,246) 21,788 ------- -------- ---------- -------- ---------- Income (loss) before income taxes 2,209 (47,686) 112,291 -- 66,814 Income tax provision 776 (17,561) 42,916 -- 26,131 Subsidiary earnings 5,993 (64,815) -- 58,822 -- ------- -------- ---------- -------- ---------- Net income (loss) $(4,560) $ 34,690 $ 69,375 $(58,822) $ 40,683 ======= ======== ========== ======== ==========
For the year ended December 31, 2003
(in millions)
Primary
ObligorGuarantors Non-Guarantors Eliminations Consolidated Operating revenue
$ — $ 149 $ 2,938 $ (18 ) $ 3,069 Operating expenses:
Salaries, wages and benefits
— 106 1,864 — 1,970 Operating expenses and supplies
— 39 425 (14 ) 450 Operating taxes and licenses
— 4 80 — 84 Claims and insurance
— 4 64 — 68 Depreciation and amortization
— 4 83 — 87 Purchased transportation
— 17 303 (2 ) 318 Losses (gains) on property disposals, net
— — — — — Acquisition charges
— 3 — — 3 Total operating expenses
— 177 2,819 (16 ) 2,980 Operating income (loss)
— (28 ) 119 (2 ) 89 Nonoperating (income) expenses:
Interest expense
1 20 5 (5 ) 21 ABS facility charges
— — — — — Other, net
(3 ) (1 ) 2 3 1 Nonoperating (income) expenses, net
(2 ) 19 7 (2 ) 22 Income (loss) before income taxes
2 (47 ) 112 — 67 Income tax provision
1 (18 ) 43 — 26 Subsidiary earnings
6 (65 ) — 59 — Net income (loss)
$ (5 ) $ 36 $ 69 $ (59 ) $ 41 Condensed Consolidating Statements of Cash Flows
For the year ended December 31, 2003 Primary Non- (in thousands) Obligor Guarantors Guarantors Eliminations Consolidated - ------------------------------------------------ ---------- ---------- ---------- ------------ ------------Operating activities: Net cash from (used in) operating activities $(23,817) $ 8,745 $ 170,808 $ -- $ 155,736 -------- --------- --------- ------- --------- Investing activities: Acquisition
For the year ended December 31, 2004
(in millions)
Primary
ObligorGuarantors Non-Guarantors Eliminations Consolidated Operating activities:
Net cash from (used in) operating activities
$ 34 $ 198 $ 203 $ — $ 435 Investing activities:
Acquisition of property and equipment
— (92 ) (110 ) — (202 ) Proceeds from disposal of property and equipment
— 28 10 — 38 Acquisition of subsidiaries
— (10 ) — — (10 ) Other
4 — — — 4 Net cash used in investing activities
4 (74 ) (100 ) — (170 ) Financing Activities:
ABS borrowings, net
— — (72 ) — (72 ) Debt issuance costs
— (3 ) — — (3 ) Repayment of long-term debt
— (175 ) — — (175 ) Proceeds from exercise of stock options
— 16 — — 16 Intercompany advances / repayments
(38 ) 65 (27 ) — — Net cash provided by (used in) financing activities
(38 ) (97 ) (99 ) — (234 ) Net increase (decrease) in cash and cash equivalents
— 27 4 — 31 Cash and cash equivalents, beginning of year
— 62 13 — 75 Cash and cash equivalents, end of year
$ — $ 89 $ 17 $
—
$ 106
For the year ended December 31, 2003
(in millions)
Primary
ObligorGuarantors Non-Guarantors Eliminations Consolidated Operating activities:
Net cash from (used in) operating activities
$ (24 ) $ 9 $ 171 $ — $ 156 Investing activities:
Acquisition of property and equipment
— (3 ) (101 ) — (104 ) Proceeds from disposal of property and equipment
— 1 3 — 4 Acquisition of subsidiaries
— (513 ) — — (513 ) Net cash used in investing activities
— (515 ) (98 ) — (613 ) Financing Activities:
Issuance of long-term debt
— 575 — — 575 ABS borrowings, net
— — 22 — 22 Debt issuance costs
— (35 ) — — (35 ) Repayment of long-term debt
— (55 ) (5 ) — (60 ) Treasury stock purchases
(3 ) — — (3 ) Proceeds from exercise of stock options
— 5 — — 5 Intercompany advances / repayments
— 91 (91 ) — — Net cash provided by (used in) financing activities
— 578 (74 ) — 504 Net increase (decrease) in cash and cash equivalents
(24 ) 72 (1 ) — 47 Cash and cash equivalents, beginning of year
24 (10 ) 14 — 28 Cash and cash equivalents, end of year
$ — $ 62 $ 13 $ — $ 75 Report of
property and equipment -- (3,016) (100,311) -- (103,327) Proceeds from disposal of property and equipment -- 1,045 3,148 -- 4,193 Acquisition of companies -- (513,338) -- -- (513,338) -------- --------- --------- ------- --------- Net cash used in investing activities -- (515,309) (97,163) -- (612,472) -------- --------- --------- ------- --------- Financing Activities: Issuance of long-term debt -- 575,000 -- -- 575,000 ABS borrowings, net -- -- 21,500 -- 21,500 Debt issuance costs -- (34,734) -- -- (34,734) Repayment of long-term debt -- (55,250) (5,092) -- (60,342) Treasury stock purchases (2,921) -- -- (2,921) Proceeds from exercise of stock options -- 4,685 -- -- 4,685 Intercompany advances / repayments -- 91,458 (91,458) -- -- -------- --------- --------- ------- --------- Net cash provided by (used in) financing activities -- 578,238 (75,050) -- 503,188 -------- --------- --------- ------- --------- Net increase (decrease) in cash and cash equivalents (23,817) 71,674 (1,405) -- 46,452 Cash and cash equivalents, beginning of year 23,817 (9,441) 14,338 -- 28,714 -------- --------- --------- ------- --------- Cash and cash equivalents, end of year $ -- $ 62,233 $ 12,933 $ -- $ 75,166 ======== ========= ========= ======= =========65Independent Auditors' Report To theRegistered Public Accounting FirmThe Board of Directors and
Shareholders ofStockholdersYellow Roadway
Corporation:CorporationWe have audited the accompanying consolidated balance sheets of Yellow Roadway Corporation (the “Company”) and subsidiaries as of December 31,
20032004 and2002,2003, and the related consolidated statements of operations, cash flows,shareholders'shareholders’ equity, and comprehensive income for each of the years in thethree yearthree-year period ended December 31,2003.2004. These consolidated financial statements are the responsibility of theCompany'sCompany’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.We conducted our audits in accordance with
auditingthe standardsgenerally accepted inof theUnited States of America.Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Yellow Roadway Corporation and subsidiaries as of December 31,
20032004 and2002,2003, and the results of their operations and their cash flows for each of the years in thethree yearthree-year period ended December 31,2003,2004, in conformity withaccounting principlesU.S. generally accepted accounting principles.We also have audited, in accordance with the
United Statesstandards ofAmerica. As discussedthe Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by theGoodwillCommittee of Sponsoring Organizations of the Treadway Commission (COSO), andIntangiblesour report dated March 4, 2005, expressed an unqualified opinion on management’s assessment of, andDiscontinued Operations notes tothe effective operation of, internal control over financialstatements, effective January 1, 2002, the Company ceased amortization of goodwill and changed its method of determining impairment of goodwill as required by Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. /s/reporting./s/ KPMG LLP
- ------------------Kansas City, Missouri
February 20,March 4, 2005
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Yellow Roadway Corporation
We have audited management’s assessment, included in the accompanyingManagement’s Report On Internal Control Over Financial Reporting,that Yellow Roadway Corporation (“the Company”) maintained effective internal control over financial reporting as of December 31, 2004,
66based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of operations, cash flows, shareholders’ equity, and comprehensive income for each of the years in the three-year period ended December 31, 2004, and our report dated March 4, 2005, expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Kansas City, Missouri
March 4, 2005
Item 9. Changes in and Disagreements with
Independent AuditorsAccountants on Accounting and Financial DisclosureDuring the years ended December 31,
20032004 and2002,2003, there were no disagreements with KPMG LLP on any matter of accounting principle or practice, financial statement disclosure, or auditing scope or procedure which, if not resolved to the satisfaction of KPMG LLP, would have caused them to make reference to the subject matter of the disagreement in connection with the audit reports on our consolidated financial statements for such years; and there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain a rigorous set of disclosure controls and procedures
and internal controlsdesigned 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 ExchangeCommission'sCommission’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 thatsuchthe Company’s disclosure controls and procedures are effective.SubsequentManagement’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining a system of adequate internal control over the Company’s financial reporting, which is designed to provide reasonable assurance regarding the
evaluation bypreparation of reliable published consolidated financial statements. The system contains self-monitoring mechanisms, and actions are taken to correct deficiencies as they are identified.The Company’s management assessed the effectiveness of the Company’s system of internal control over financial reporting as of December 31, 2004. In making this assessment, the Company’s management used the criteria for effective internal control over financial reporting described in “Internal Control – Integrated Framework” that the Committee of Sponsoring Organizations of the Treadway Commission issued.
Based on its assessment using those criteria, management believes that, as of December 31, 2004, the Company’s system of internal control over financial reporting was effective.
KPMG LLP, the registered public accounting firm that audited our
principal executive andDecember 31, 2004 consolidated financialofficers, therestatements, has issued an attestation report on management’s assessment of the Company’s system of internal control over financial reporting. The KPMG LLP attestation report is included herein.Changes in Internal Control Over Financial Reporting
There were no
significantchanges in the Company’s internalcontrolscontrol over financial reporting that occurred during the fiscal quarter ended December 31, 2004 that have materially affected, orother factors that could significantlyare reasonably likely to materially affect, the Company’s internalcontrols, including any corrective actions with regard to significant deficiencies and material weaknesses. 67control over financial reporting. None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item relating to our directors and nominees, and compliance with Section 16(a) of the Securities Act of 1934 is included under the captions
"Election“Election ofDirectors"Directors” and"Section“Section 16(a) Beneficial Ownership ReportingCompliance"Compliance” in our Proxy Statement related to the20042005 Annual Meeting of Shareholders and is incorporated herein by reference.The following are our executive officers as of March 15,
2004:2005:
NAME AGE POSITION(S) HELD --------------------- ---- ---------------------------------------------------------------------------Name
Age Position(s) Held
William D. Zollars
5657 Chairman of the Board, President and Chief Executive Officer of Yellow Roadway (since November 1999); President of Yellow Transportation (September 1996 to November(1996–1999); Senior Vice President of Ryder Integrated Logistics, Inc.(1994-1996)(1994–1996).Donald G. Barger, Jr.
6162 Senior Vice President and Chief Financial Officer of Yellow Roadway (since November 2000); Vice President and Chief Financial Officer of Hillenbrand Industries, Inc. (1998 to November(1998–2000); Vice President and Chief Financial Officer of Worthington Industries(1993-1998)(1993–1998).Daniel J. Churay
4142 Senior Vice President, General Counsel and Secretary of Yellow Roadway (since September 2002); Senior Counsel, Fulbright & Jaworski L.L.P. (2002); Deputy General Counsel and Assistant Secretary of Baker Hughes Incorporated (1998-2002)(1998–2002).James D. Staley
5354 President and Chief Executive Officer of Roadway LLC (since December 2003); President and Chief Executive Officer of Roadway Corporation (March 2003 to December 2003)(2003); President and Chief Operating Officer of Roadway Express(March 1998 to March(1998–2003); VicePresident -President—Operations of Roadway Express(1993 to March(1993–1998).Robert L. Stull
4849 President of Roadway Express, Inc.Inc (since March 2003); VicePresident -President—New Venture Commerce of Roadway Corporation(May 1999 to March(1999–2003); VicePresident -President—Western Division of Roadway Express, Inc.(October 1994 to May(1994–1999).James L. Welch
4950 President and Chief Executive Officer of Yellow Transportation (since June 2000); Central Group Vice President of Yellow Transportation (1998 -(1998–2000).Steven T. Yamasaki
4950 Senior Vice President -President—Human Resources of Yellow Roadway (since May 2003); Senior VicePresident -President—Human Resources of ConAgra Foods, Inc.(February 2003 - May 2003)(2003); VicePresident -President—Human Resources of Honeywell International(1997 - February(1997–2003).Bhadresh A. Sutaria
4445 Vice President, -Controller and Chief Accounting Officer of Yellow Roadway (since January 2004); Vice President, Finance and Strategy of Mascon(2000 - January(2000–2004); Associate Director, Corporate Planning and Analysis of Monsanto Corporation(1993 -(1993–2000).The terms of each Yellow Roadway officer designated above are scheduled to expire at the Board of
Directors'Directors’ meeting immediately following our Annual Meeting of Shareholders. The terms of each officer of our subsidiary companies are scheduled to expire on the date of the next annual meeting of shareholders of that company or until theofficer'sofficer’s successor is elected or otherwise qualified or until the Board of Directors otherwise removes the officer. No family relationships exist among any of the executive officers named above.We have adopted a written Code of Conduct that applies to all of our directors, officers and employees, including our principal executive officer and senior financial officers. It is available in the governance section of the investor relations page of our website located at
www.yellowroadway.com. 68www.yellowroadway.com, or a copy may be obtained without charge by contacting the Company’s investor relations representative by telephone at (913) 696 6100 or by mail at Yellow Roadway Corporation, Attention: Investor Relations, 10990 Roe Avenue, Overland Park, KS 66211. Item 11. Executive Compensation
The information required by this item is included under the caption
"Executive Compensation"“Executive Compensation” in our Proxy Statement related to the20042005 Annual Meeting of Shareholders and is incorporated herein by reference.Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item relating to security ownership of certain beneficial owners and management and securities authorized for issuance under equity compensation plans is included under the captions
"Amount“Amount and Nature of BeneficialOwnership"Ownership” and"Equity“Equity Compensation PlanInformation"Information” in our Proxy Statement related to the20042005 Annual Meeting of Shareholders and is incorporated herein by reference.Item 13. Certain Relationships and Related Transactions
None.
69PART IVItem 14. Principal
AccountantAccountants Fees and ServicesThe information required by this item is included under the caption
"Audit/“Audit/Ethics CommitteeReport"Report” in our Proxy Statement related to the20042005 Annual Meeting of Shareholders and is incorporated herein by reference.PART IV
Item 15. Exhibits, Financial Statement
Schedule, and Reports on Form 8-KSchedules(a) (1) Financial Statements Schedule
Pages Independent Auditors' Report on Financial Statement Schedule 76 For the years ended December 31, 2003, 2002 and 2001: Schedule II - Valuation and Qualifying Accounts 77
Pages Independent Auditors’ Report on Financial Statement Schedule
79 For the years ended December 31, 2004, 2003 and 2002: Schedule II—Valuation and Qualifying Accounts
80 Schedules other than those listed are omitted for the reason that they are not required or are not applicable.
(a) (2) Exhibits
Form 10-K Exhibits
2.1 Agreement and Plan of Merger, dated as of July 8, 2003, by and among Yellow Corporation, Yankee LLC and Roadway Corporation (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K, as amended, filed on July 8, 2003, Reg. No. 000-12255). Pursuant to Item 601(b)(2) of Regulation S-K, certain schedules, exhibits and similar attachments to this Agreement have not been filed with this exhibit. The schedules contain various items relating to the assets of the business being acquired and the representations and warranties made by the parties to the Agreement. The registrants agree to furnish supplementally any omitted schedule, exhibit or similar attachment to the SEC upon request. 3.1 Certificate of Incorporation of the company (incorporated by reference to Exhibit 3.1 to the Annual Report on Form 10-K for the year ended December 31, 2002, Reg. No. 000-12255) 3.2 Certificate of Amendment to the Certificate of Incorporation of the company changing the name of the company to Yellow Roadway Corporation (incorporated by reference to Exhibit 4.2 to the Registration Statement on Form S-8, filed December 23, 2003, SEC File No. 333-111499) 3.3 Bylaws of the company (incorporated by reference to Exhibit 3.3 to the Registration Statement on Form S-3, filed February 23, 2004, SEC File No. 333-113021) 4.1 Indenture (including form of note) dated August 8, 2003 among Yellow Corporation, certain subsidiary guarantors and Deutsche Bank Trust Company Americas, as trustee, relating to Yellow Corporation's 5.0% Contingent Convertible Senior Notes due 2023 (incorporated by reference to Exhibit 4.5 to Registration Statement on Form S-4, filed on August 19, 2003, Reg. No. 333-108081) 4.2 Registration Rights Agreement dated August 8, 2003 among Yellow Corporation, certain subsidiary guarantors and Deutsche Bank Securities Inc., as representative of the initial purchasers (incorporated by reference to Exhibit 4.6 to Registration Statement on Form S-4, filed on August 18, 2003, Reg. No. 333-108081) 4.3 Indenture (including form of note) dated November 25, 2003 among Yellow Corporation, certain subsidiary guarantors and Deutsche Bank Trust Company Americas, as trustee, relating to Yellow Corporation's 3.375% Contingent Convertible Senior Notes due 2023 (incorporated by reference to Exhibit 4.7 to Registration Statement on Form S-4, filed on August 18, 2003, Reg. No. 333-111499) 704.4 Registration Rights Agreement dated November 25, 2003 among Yellow Corporation, certain subsidiary guarantors and Deutsche Bank Securities Inc., as representative of the initial purchasers (incorporated by reference to Exhibit 4.8 to Registration Statement on Form S-4, filed on August 18, 2003, Reg. No. 333-111499) 4.5 Indenture (including form of note) dated November 30, 2001 among Roadway Corporation (predecessor in interest to Roadway LLC), certain subsidiary guarantors and SunTrust Bank, as trustee, relating to Roadway's 8 1/4% Senior Notes due December 1, 2008 (incorporated by reference to Exhibit 4.9 to Registration Statement on Form S-4, filed on August 18, 2003, Reg. No. 333-111499) 4.6* Supplemental Indenture, dated as of December 11, 2003, among Roadway LLC, as successor obligor, Yellow Roadway Corporation, as a Guarantor, and SunTrust Bank, as Trustee, supplementing the Indenture, dated as of November 30, 2001 for the Roadway Corporation 8 1/4% Senior Notes due December 1, 2008. 10.1 Credit Agreement, dated as of December 11, 2003, among Yellow Roadway Corporation, certain of its subsidiaries, various lenders, Bank One, NA, and SunTrust Bank as Co-Syndication Agents; Fleet National Bank and Wachovia Bank, National Association as Co-Documentation Agents; Deutsche Bank AG, New York Branch as Administrative Agent; and Deutsche Bank Securities, Inc. as Sole Lead Arranger and Sole Book Running Manager. Certain schedules and exhibits to this Credit Agreement have not been filed with this exhibit. The schedules and exhibits contain various items related to the representations and warranties made by the parties to the Credit Agreement and forms of documents executed or to be executed in connection with the operation of the Credit Agreement. The registrant agrees to furnish supplementally any omitted schedule or exhibit to the SEC upon request. (incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K, filed on December 11, 2003, Reg. No. 000-12255) 10.2 Master Separation and Distribution Agreement dated as of September 30, 2002, between Yellow Corporation and SCS Transportation, Inc. (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2002, Reg. No. 000-12255) 10.3 Tax Indemnification and Allocation Agreement dated as of September 30, 2002, between Yellow Corporation and SCS Transportation, Inc. (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2002, Reg. No. 000-12255) 10.4 (a) Amendment and Restatement dated July 30, 1999 of the Receivables Purchase Agreement Dated as of August 2, 1996, among Yellow Receivables Corporation, Falcon Asset Securitization Corporation, the financial institutions named therein and The First National Bank of Chicago, as Agent (incorporated by reference to Exhibit 10 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, Reg. No. 000-12255) (b) Omnibus Amendment dated as of December 31, 2002, among Yellow Transportation, Inc., Yellow Receivables Corporation, Falcon Asset Securitization Corporation, and Bank One, N.A., as Agent and Investor (incorporated by reference to Exhibit 10.20 to the Annual Report on Form 10-K for the year ended December 31, 2002, Reg. No. 000-12255) (c) Amendments: (1) Amendment No. 1 to Receivables Sale Agreement, entered into as of July 30, 1999, to that certain Receivables Sale Agreement, dated as of August 2, 1996 by and between Yellow Freight System, Inc. and Yellow Receivables Corporation; (2) Amendment No. 1 to Amended and Restated Receivables Purchase Agreement, dated as of July 28, 2000, to that certain Amended and Restated Receivables Purchase Agreement, dated as of July 30, 1999, by and among Yellow Receivables Corporation, the Investors, Falcon Asset Securitization Corporation and Bank One, NA (formerly known as The First National Bank of Chicago), as Agent; (3) Amendment to Amended and Restated Receivables Purchase Agreement, entered into as of May 1, 2001, to that certain Amended and Restated Receivables Purchase Agreement, dated as of July 30, 1999, by and among Yellow Receivables Corporation, Falcon Asset Securitization Corporation and Bank One, NA (formerly known as The First National Bank of Chicago), as Agent; (4) Second Amendment to Amended and Restated Receivables Purchase Agreement, entered into as of January 23, 2002, to that certain Amended and Restated Receivables Purchase Agreement, dated as of July 30, 1999, by and among Yellow Receivables Corporation, Falcon Asset Securitization Corporation and Bank One, NA, as Agent; (5) Amendment No. 2 to Amended and Restated Receivables Purchase Agreement, entered into as of April 23, 2002, to that certain Amended and Restated Receivables Purchase Agreement, dated as of July 30, 1999, by and among Yellow Receivables Corporation, Falcon Asset Securitization Corporation and Bank One, NA (formerly known as The First 71National Bank of Chicago), as Agent; (6) Waiver and Amendment No. 3 to Amended and Restated Receivables Purchase Agreement, entered into as of August 1, 2002, to that certain Amended and Restated Receivables Purchase Agreement, dated as of July 30, 1999, by and among Yellow Receivables Corporation, Falcon Asset Securitization Corporation and Bank One, NA (formerly known as The First National Bank of Chicago), as Agent; (7) Omnibus Amendment, entered into as of December 31, 2002, to that certain Receivables Sale Agreement, dated as of August 2, 1996, by and among Yellow Transportation, Inc. (f/k/a Yellow Freight System, Inc.), Yellow Receivables Corporation, Falcon Asset Securitization Corporation and Bank One, NA (formerly known as The First National Bank of Chicago), as Agent; (8) Amendment No. 4 to Amended and Restated Receivables Purchase Agreement, entered into as of April 29, 2003, to that certain Amended and Restated Receivables Purchase Agreement, dated as of July 30, 1999, by and among Yellow Receivables Corporation, Falcon Asset Securitization Corporation and Bank One, NA (formerly known as The First National Bank of Chicago), as Agent (incorporated by reference to Exhibit 10.1 (as Amendments to Amended and Restated Receivables Purchase Agreement dated July 30, 1999) to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2003, Reg. No. 000-12255) 10.4(d)* Amendment No. 5 to Amended and Restated Receivables Purchase Agreement, entered into as of December 11, 2003, by and among Yellow Receivables Corporation, Falcon Asset Securitization Corporation and Bank One, NA, amending the Amended and Restated Receivables Purchase Agreement, dated as of July 30, 1999. 10.5* Operating lease agreement by and between Roadway Express, Inc. and ABN AMRO North America, Inc., dated as of March 15, 1996 (and documents not filed which are substantially identical in all material respects to previously filed documents: (1) Master Lease Agreement between Roadway Express, Inc. and ABN AMRO Bank N.V. dated March 3, 1997. This lease agreement for 3,250 linehaul trailers is identical in all material respects to the Master Lease Agreement dated March 15, 1996 and (2) Master Lease Agreement between Roadway Express, Inc. and ABN AMRO Bank N.V. dated April 1, 1998. This lease agreement for 3,250 linehaul trailers is identical in all material respects to the Master Lease Agreement dated March 15, 1996) 10.6* Operating lease agreement between Roadway Express, Inc. and General Electric Capital Corporation, dated as of July 1, 1998 10.7* Operating lease agreement between Roadway Express, Inc. and ICX Corporation, dated as of May 10, 1999 10.8* Data Processing and Information Technology Agreement between Roadway Express, Inc. and Affiliated Computer Services, Inc., dated September 11, 1998 10.9 Employment Agreement dated December 15, 1999 between Yellow Corporation and William D. Zollars (incorporated by reference to Exhibit 10 to the Annual Report on Form 10-K for the year ended December 31, 1999, Reg. No. 000-12255) and Amendment Number One to Employment Agreement dated December 15, 1999 between Yellow Corporation and William D. Zollars (incorporated by reference to Exhibit 10(a) to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, Reg. No. 000-12255) 10.10 Employment Agreement, dated as of October 10, 2003, by and between Yankee LLC and James D. Staley (incorporated by reference to Exhibit 10.1 to Amendment No. 3 to Registration Statement on Form S-4, filed on October 17, 2003, Reg. No. 333-108081) 10.11 Form of Executive Severance Agreement between Yellow Corporation and its executive officers (incorporated by reference to Exhibit 10.1 to the Annual Report on Form 10-K for the year ended December 31, 2002, Reg. No. 000-12255) 10.12 2002 Stock Option and Share Award Plan (incorporated by reference to Exhibit 4 to the Registration Statement on Form S-8, filed on May 15, 2002, SEC File No. 333-88268) 10.13 1999 Stock Option Plan (incorporated by reference to Exhibit 4 to the Registration Statement on Form S-8, filed on November 9, 2000, SEC File No. 333-49620) 10.14 1997 Stock Option Plan (incorporated by reference to Exhibit 4 to the Registration Statement on Form S-8, filed on July 8, 1998, SEC File No. 333-59255) 7210.15 1996 Stock Option Plan (incorporated by reference to Exhibit 10.6 to the Annual Report on Form 10-K for the year ended December 31, 2002, Reg. No. 000-12255) 10.16 1992 Stock Option Plan (incorporated by reference to Exhibit 10.7 to the Annual Report on Form 10-K for the year ended December 31, 2002, Reg. No. 000-12255) 10.17 Form of Stock Option Agreement (incorporated by reference to Exhibit 10.8 to the Annual Report on Form 10-K for the year ended December 31, 2002, Reg. No. 000-12255) 10.18 Form of Restricted Stock Award Agreement pursuant to 1992 Stock Option Plan with Non-Compete Covenant between Yellow Corporation and each of William D. Zollars, Donald G. Barger, Jr., Gregory A. Reid, James D. Ritchie and James L. Welch (incorporated by reference to Exhibit 10.9 to the Annual Report on Form 10-K for the year ended December 31, 2002, Reg. No. 000-12255) 10.19 Form of Option Agreement pursuant to Directors' Stock Compensation Plan for January 2003 grants (incorporated by reference to Exhibit 10.15 to the Annual Report on Form 10-K for the year ended December 31, 2002, Reg. No. 000-12255) 10.20 Form of Option Agreement pursuant to Directors' Stock Compensation Plan for grants prior to January 2003 (incorporated by reference to Exhibit 10.16 to the Annual Report on Form 10-K for the year ended December 31, 2002, Reg. No. 000-12255) 10.21* Form of Yellow Roadway Corporation Share Award Agreement 10.22 Supplemental Retirement Income Agreement dated July 20, 2001, between Yellow Corporation and Donald G. Barger, Jr. (incorporated by reference to Exhibit 10 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2001, Reg. No. 000-12255) 10.23 Executive Deferred Compensation Plan (incorporated by reference to Exhibit 10.11 to the Annual Report on Form 10-K for the year ended December 31, 2002, Reg. No. 000-12255) 10.24 Amended Directors' Stock Compensation Plan (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-8, filed on November 9, 2000, SEC File No. 333-49618) 10.25* Roadway Corporation 401(a)(17) Benefit Plan (Effective January 1, 2002), as amended by First Amendment to the Roadway Corporation 401(a)(17) Benefit Plan and Second Amendment to the Roadway Corporation 401(a)(17) Benefit Plan 10.26* Roadway Corporation Excess Benefit Plan (Effective as of January 1, 2002), as amended by First Amendment to the Roadway Corporation Excess Benefit Plan and Second Amendment to the Roadway Corporation Excess Benefit Plan 10.27* Roadway LLC Pension Plan, amended and restated as of January 1, 2004 10.28* Yellow Corporation Pension Plan, amended and restated as of January 1, 2004 16.1 Letter from Arthur Andersen LLP dated May 17, 2002, regarding change in certifying accountant (incorporated by reference to Exhibit 16 to the Current Report on Form 8-K for the event dated as of May 17, 2002) 21.1 Subsidiaries of the company 23.1* Consent of KMPG LLP 23.2* Consent of Ernst & Young LLP 31.1* Certification of William Zollars pursuant to Exchange Act Rules 13a-14 and 15d-14, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 7331.2* Certification of Donald G. Barger, Jr. pursuant to Exchange Act Rules 13a-14 and 15d-14, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1* Certification of Williams Zollars pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2* Certification of Donald G. Barger, Jr. pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.1 Roadway Corporation and Subsidiaries Audited Consolidated Financial Statements for the Period January 1 to December 11, 2003 and the Years Ended December 31, 2002 and 2001 (incorporated by reference to Exhibit 99.1 to the Form 8-K filed on February 19, 2004 and Amendment No. 1 to Form 8-K filed on March 4, 2004). 99.2* Roadway LLC and Subsidiaries Audited Consolidated Financial Statements for the Period December 12 to December 31, 2003 99.3* Roadway Express, Inc, and Subsidiaries Audited Consolidated Financial Statements for the Period January 1 to December 11, 2003 and the Years Ended December 31, 2002 and 2001 99.4* Roadway Express, Inc. and Subsidiaries Audited Consolidated Financial Statements for the Period December 12 to December 31, 2003 99.5* Roadway Next Day Corporation Audited Consolidated Financial Statements for the Period January 1 to December 11, 2003, the Year ended December 31, 2002, the One Month Period ended December 31, 2001 (Successor Periods) and Eleven Month Period Ended November 30, 2001 (Predecessor Periods) 99.6* Roadway Next Day Corporation Audited Consolidated Financial Statements for the Period December 12 to December 31, 2003 - ---------- * Indicates documents filed herewith. (b) Reports on Form 8-K On October 1, 2003, a Form 8-K was furnished under Item 9, Regulation FD Disclosure, which announced via a press release that we would host an analyst meeting on Friday, October 3, 2003. On October 20, 2003, a Form 8-K was furnished under Item 9, Regulation FD Disclosure, reporting the issuance of a press release regarding the certification of responses by Yellow and Roadway Corporation to the U.S. Department of Justice's second request for additional information. On October 21, 2003, a Form 8-K was filed under Item 5, Other Events and Item 7, Financial Statements, Pro Forma Financial Information and Exhibits, and furnished under Item 9, Regulation FD Disclosure, announcing the completion of the private offering of $250 million in contingent convertible senior notes. We made available in this Form 8-K the consolidated financial statements of Roadway Corporation for the years ended 2002, 2001 and 2000 and for the first and second quarters of 2003; the unaudited condensed combined pro forma balance sheet as of June 30, 2003, pro forma statements of operations for the year ended December 31, 2002 and the six months ended June 30, 2002, the pro forma statement of cash flows for the six months ended June 30, 2003 and the notes to the unaudited condensed combined pro forma financial statements; and the consolidated financial statements of Yellow Corporation and its subsidiaries for the years ended December 31, 2002, 2001 and 2002 and for the three months and six months ended June 30, 2003 and 2002. On October 21, 2003, a Form 8-K/A was filed under Item 7, Financial Statements, Pro Forma Financial Information and Exhibits, to re-file Exhibit 23.1, the Consent of Ernst & Young LLP, to include certain dates that were inadvertently omitted from the original filing. 74On October 24, 2003, a Form 8-K was furnished to the SEC under Item 12, Results of Operations and Financial Condition, in which we made available our results of operations and financial condition for the quarter ending September 30, 2003 by means of a press release. On October 24, 2003, a Form 8-K was furnished to the SEC under Item 9, Regulation FD Disclosure, in which we corrected a statement made during our third quarter conference call regarding the general rate increase. On November 18, 2003, a Form 8-K was filed under Item 5, Other Events, to announce via a press release the expiration of the Hart-Scott-Rodino waiting period related to the pending acquisition of Roadway Corporation. On November 19, 2003, a Form 8-K was filed under Item 5, Other Events and Required FD Disclosure, to announce that Yellow Roadway was seeking to raise, subject to market and other conditions, approximately $130 million through a private offering of contingent convertible senior notes. Certain pro forma financial information related to the merger was provided in Exhibit 99.2 pursuant to Regulation FD. On November 20, 2003, a Form 8-K was filed under Item 5, Other Events and Required FD Disclosure, to announce via a press release that our previously announced private offering of $130 million of contingent convertible senior notes due 2023 had been priced at an annual interest rate of 3.375%. These notes are convertible into shares of Yellow Roadway common stock at a conversion price of $46.00 per share upon the occurrence of certain events. On November 21, 2003, a Form 8-K was filed under Item 5, Other Events and Required FD Disclosure, to announce via a press release that we would issue an additional $20 million of the 3.375% Contingent Convertible Senior Notes due 2023 pursuant to the exercise of the initial purchasers' overallotment option. On November 25, 2003, a Form 8-K was filed under Item 5, Other Events and Required FD Disclosure, to announce via a press release the cash election deadline related to the pending acquisition of Roadway by Yellow. On December 3, 2003, a Form 8-K was furnished under Item 9, Regulation FD Disclosure, to announce via a press release a meeting for investors and analysts to be held on December 10, 2003. On December 5, 2003, a Form 8-K was filed under Item 5, Other Events and Required FD Disclosure, to announce via a press release the exchange ratio that would be used to calculate the merger consideration in the acquisition of Roadway by Yellow. On December 9, 2003, a Form 8-K was filed under Item 5, Other Events and Required FD Disclosure, to announce via a press release the results of the company's special meeting of shareholders held to approve the issuance of shares and name change related to the acquisition of Roadway by Yellow. On December 10, 2003, a Form 8-K was furnished under Item 9, Regulation FD Disclosure, to make available a slideshow presentation used at a meeting for investors and analysts held on December 10, 2003. On December 11, 2003, a Form 8-K was furnished under Item 9, Regulation FD Disclosure, to announce via a press release the completion of our acquisition of Roadway Corporation. On December 15, 2003, a Form 8-K was furnished under Item 9, Regulation FD Disclosure, to announce via a press release the results of the cash election process related to the acquisition of Roadway Corporation by Yellow Corporation, which was completed on December 11, 2003. On December 18, 2003, a Form 8-K was filed under Item 2, Acquisition or Disposition of Assets and Item 5, Other Events. Under Item 2, the Form 8-K details changes resulting from the acquisition, including the name change to Yellow Roadway Corporation, the addition of three new board members, the placement of James Staley as President and CEO of the operating subsidiary Roadway LLC, and a breakout of the purchase price into cash, stock and debt assumption. Under Item 5, the Form 8-K discusses the replacement of the existing credit facility with a new credit facility. 75
2.1 Agreement and Plan of Merger, dated as of February 27, 2005, by and among Yellow Roadway Corporation, Yankee II LLC and USF Corporation (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K, filed on February 27, 2005, Reg. No. 000-12255).
3.1 Certificate of Incorporation of the company (incorporated by reference to Exhibit 3.1 to the Annual Report on Form 10-K for the year ended December 31, 2002, Reg. No. 000-12255).
3.2 Certificate of Amendment to the Certificate of Incorporation of the company changing the name of the company to Yellow Roadway Corporation (incorporated by reference to Exhibit 4.2 to the to Registration Statement on Form S-8, SEC File No. 333-111499).
3.3 Bylaws of the company (incorporated by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, Reg. No. 000-12255).
4.1 Certificate of Incorporation of the company (incorporated by reference to Exhibit 3.1 to this Annual Report on Form 10-K), as amended by Certificate of Amendment to the Certificate of Incorporation (incorporated by reference to Exhibit 3.2 to this Annual Report on Form 10-K).
4.2 Bylaws (incorporated by reference to Exhibit 3.3 to this Annual Report on Form 10-K).
4.3 Indenture (including form of note) dated August 8, 2003 among Yellow Roadway Corporation, certain subsidiary guarantors and Deutsche Bank Trust Company Americas, as trustee, relating to Yellow Roadway Corporation’s 5.0% Contingent Convertible Senior Notes due 2023 (incorporated by reference to Exhibit 4.5 to Registration Statement on Form S-4, filed on August 19, 2003, Reg. No. 333-108081).
4.4 Registration Rights Agreement dated August 8, 2003 among Yellow Roadway Corporation, certain subsidiary guarantors and Deutsche Bank Securities Inc., as representative of the initial purchasers (incorporated by reference to Exhibit 4.6 to Registration Statement on Form S-4, filed on August 19, 2003, Reg. No. 333-108081).
4.5 Indenture (including form of note) dated November 25, 2003 among Yellow Roadway Corporation, certain subsidiary guarantors and Deutsche Bank Trust Company Americas, as trustee, relating to Yellow Roadway Corporation’s 3.375% Contingent Convertible Senior Notes due 2023 (incorporated by reference to Exhibit 4.7 to Registration Statement on Form S-8, filed on December 23, 2003, Reg. No. 333-111499).
4.6 Registration Rights Agreement dated November 25, 2003 among Yellow Roadway Corporation, certain subsidiary guarantors and Deutsche Bank Securities Inc., as representative of the initial purchasers (incorporated by reference to Exhibit 4.8 to Registration Statement on Form S-8, filed on December 23, 2003, Reg. No. 333-111499).
4.7 Indenture (including form of note) dated November 30, 2001 among Roadway Corporation (predecessor in interest to Roadway LLC), certain subsidiary guarantors and SunTrust Bank, as trustee, relating to Roadway’s 8 ¼% Senior Notes due December 1, 2008 (incorporated by reference to Exhibit 4.9 to Registration Statement on Form S-8, filed on December 23, 2003, Reg. No. 333-111499).
4.8 Supplemental Indenture, dated as of December 11, 2003, among Roadway LLC, as successor obligor, Yellow Roadway Corporation, as a Guarantor, and SunTrust Bank, as Trustee, supplementing the Indenture, dated as of November 30, 2001 for the Roadway Corporation 8¼% Senior Notes due December 1, 2008 (incorporated by reference to Exhibit 4.8 to the Annual Report on Form 10-K for the year ended December 31, 2003, Reg. No. 000-12255).
4.9 Indenture (including form of note) dated December 31, 2004, among Yellow Roadway Corporation, certain subsidiary guarantors and Deutsche Bank Trust Company Americas, as trustee, relating to Yellow Roadway Corporation’s 5.0% Net Share Settled Contingent Convertible Senior Notes due 2023 (incorporated by reference to Exhibit 4.7 to Amendment No. 1 to Registration Statement on Form S-4/A, filed on November 30, 2004, Reg. No. 333-119990).
4.10 Indenture (including form of note) dated December 31, 2004, among Yellow Roadway Corporation, certain subsidiary guarantors and Deutsche Bank Trust Company Americas, as trustee, relating to Yellow Roadway Corporation’s 3.375% Net Share Settled Contingent Convertible Senior Notes due 2023 (incorporated by reference to Exhibit 4.8 to Amendment No. 1 to Registration Statement on Form S-4/A, filed on November 30, 2004, Reg. No. 333-119990).
10.1 Credit Agreement, dated as of September 10, 2004, among Yellow Roadway Corporation, the lenders party to the Credit Agreement, Bank of America, N.A., SunTrust Bank, as Syndication Agents, U.S. Bank National Association, Wachovia Bank, National Association, as Documentation Agents, JPMorgan Chase Bank, Toronto Branch, as Canadian Agent, J.P. Morgan Europe Limited, as UK Agent, and JPMorgan Chase Bank, as Administrative Agent. (incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K, filed on September 16, 2004, Reg. No. 000-12255).
10.2 Master Separation and Distribution Agreement dated as of September 30, 2002, between Yellow Roadway Corporation and SCS Transportation, Inc. (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2002, Reg. No. 000-12255).
10.3 Tax Indemnification and Allocation Agreement dated as of September 30, 2002, between Yellow Roadway Corporation and SCS Transportation, Inc. (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2002, Reg. No. 000-12255).
10.4 Receivables Sale Agreement, dated as of May 21, 2004, between Yellow Transportation, Inc. and Roadway Express, Inc., as the Originators, and Yellow Roadway Receivables Funding Corporation, as the Buyer (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, Reg. No. 000-12255).
10.5 Amended and Restated Receivables Purchase Agreement, dated as of September 10, 2004, among Yellow Roadway Receivables Funding Corporation, as Seller, Falcon Asset Securitization Corporation, Blue Ridge Asset Funding Corporation, and Three Pillars Funding LLC, as Conduits, the financial institutions party thereto, as Committed Purchasers, Wachovia Bank, National Association, as Blue Ridge Agent, SunTrust Capital Markets, Inc., as Three Pillars Agent and Bank One, NA (Main Office Chicago), as Falcon Agent and as Administrative Agent. (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed on September 16, 2004, Reg. No. 000-12255).
10.6 Employment Agreement dated December 15, 1999 between Yellow Roadway Corporation and William D. Zollars (incorporated by reference to Exhibit 10 to the Annual Report on Form 10-K for the year ended December 31, 1999, Reg. No. 000-12255) and Amendment Number One to Employment Agreement dated December 15, 1999 between Yellow Roadway Corporation and William D. Zollars (incorporated by reference to Exhibit 10(a) to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, Reg. No. 000-12255).
10.7 Employment Agreement, dated as of October 10, 2003, by and between Roadway LLC and James D. Staley (incorporated by reference to Exhibit 10.1 to Amendment No. 3 to Registration Statement on Form S-4, filed on October 17, 2003, Reg. No. 333-108081).
10.8* Form of Executive Severance Agreement between Yellow Roadway Corporation and its executive officers.
10.9 Yellow Roadway Corporation 2002 Stock Option and Share Award Plan (incorporated by reference to Exhibit 4 to the Registration Statement on Form S-8, SEC File No. 333-88268, filed on May 15, 2002).
10.10 1999 Stock Option Plan (incorporated by reference to Exhibit 4 to the Registration Statement on Form S-8, SEC File No. 333-49620, filed on November 9, 2000).
10.11* 1997 Stock Option Plan.
10.12 1996 Stock Option Plan (incorporated by reference to Exhibit 10.6 to the Annual Report on Form 10-K for the year ended December 31, 2002, Reg. No. 000-12255).
10.13 1992 Stock Option Plan (incorporated by reference to Exhibit 10.7 to the Annual Report on Form 10-K for the year ended December 31, 2002, Reg. No. 000-12255).
10.14 Form of Stock Option Agreement (incorporated by reference to Exhibit 10.8 to the Annual Report on Form 10-K for the year ended December 31, 2002, Reg. No. 000-12255).
10.15 Form of Option Agreement pursuant to Directors’ Stock Compensation Plan for January 2003 grants (incorporated by reference to Exhibit 10.15 to the Annual Report on Form 10-K for the year ended December 31, 2002, Reg. No. 000-12255).
10.16 Form of Option Agreement pursuant to Directors’ Stock Compensation Plan for grants prior to January 2003 (incorporated by reference to Exhibit 10.16 to the Annual Report on Form 10-K for the year ended December 31, 2002, Reg. No. 000-12255)
10.17 Supplemental Retirement Income Agreement dated July 20, 2001, between Yellow Roadway Corporation and Donald G. Barger, Jr. (incorporated by reference to Exhibit 10 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2001, Reg. No. 000-12255).
10.18 Executive Deferred Compensation Plan (incorporated by reference to Exhibit 10.11 to the Annual Report on Form 10-K for the year ended December 31, 2002, Reg. No. 000-12255).
10.19 Amended Directors’ Stock Compensation Plan (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-8, SEC File No. 333-49618).
10.20 Roadway Corporation 401(a)(17) Benefit Plan (Effective January 1, 2002), as amended by First Amendment to the Roadway Corporation 401(a)(17) Benefit Plan and Second Amendment to the Roadway Corporation 401(a)(17) Benefit Plan (incorporated by reference to Exhibit 10.25 to the Annual Report on Form 10-K for the year ended December 31, 2003, Reg. No. 000-12255).
10.21 Roadway Corporation Excess Benefit Plan (Effective as of January 1, 2002), as amended by First Amendment to the Roadway Corporation Excess Benefit Plan and Second Amendment to the Roadway Corporation Excess Benefit Plan (incorporated by reference to Exhibit 10.26 to the Annual Report on Form 10-K for the year ended December 31, 2003, Reg. No. 000-12255).
10.22 Roadway LLC Pension Plan, amended and restated as of January 1, 2004 (incorporated by reference to Exhibit 10.27 to the Annual Report on Form 10-K for the year ended December 31, 2003, Reg. No. 000-12255).
10.23 Yellow Corporation Pension Plan, amended and restated as of January 1, 2004 (incorporated by reference to Exhibit 10.28 to the Annual Report on Form 10-K for the year ended December 31, 2003, Reg. No. 000-12255).
10.24 Yellow Roadway Corporation 2004 Long-term Incentive and Equity Award Plan (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, Reg. No. 000-12255).
10.25* Yellow Roadway Corporation 2004 Long-term Incentive Plan.
10.26* Form of Yellow Roadway Corporation Share Unit Agreement.
10.27* Form of Yellow Roadway Corporation Director Share Unit Agreement.
10.28 Yellow Roadway Corporation Director Compensation Plan (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed on December 13, 2004, Reg. No. 000-12255)
10.29 Yellow Roadway Corporation Executive Ownership Guidelines (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, filed on December 13, 2004, Reg. No. 000-12255)
16.1 Letter from Arthur Andersen LLP dated May 17, 2002, regarding change in certifying accountant (incorporated by reference to Exhibit 16 to the Current Report on Form 8-K for the event dated as of May 17, 2002)
21.1* Subsidiaries of the company
23.1* Consent of KMPG LLP
23.2* Consent of Ernst & Young LLP
31.1* Certification 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 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 Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2* Certification 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 Audited Consolidated Financial Statements for the year ended December 31, 2004 and the period December 12 to December 31, 2003
99.2* Roadway LLC and Subsidiaries Audited Consolidated Financial Statements for the period January 1 to December 11, 2003 and the year ended December 31, 2002
99.3* Roadway Express, Inc. and Subsidiaries Audited Consolidated Financial Statements for the year ended December 31, 2004 and the Period December 12 to December 31, 2003
99.4* Roadway Express, Inc. and Subsidiaries Audited Consolidated Financial Statements for the period January 1 to December 11, 2003 and the year ended December 31, 2002
99.5* Roadway Next Day Corporation Audited Consolidated Financial Statements for the year ended December 31, 2004 and the period December 12 to December 31, 2003
99.6* Roadway Next Day Corporation Audited Consolidated Financial Statements for period January 1 to December 11, 2003 and the year ended December 31, 2002
* Indicates documents filed herewith. Report of Independent
Auditors on Financial Statement Schedule To theRegistered Public Accounting FirmThe Board of Directors and
Shareholders ofStockholdersYellow Roadway Corporation:
Under date of
February 20, 2004,March 4, 2005, we reported on the consolidated balance sheets of Yellow Roadway Corporation and subsidiaries as of December 31,20032004 and2002,2003, and the related consolidated statements of operations, cash flows,shareholders'shareholders’ equity and comprehensive income for each of the years in the three-year period ended December 31,2003, as contained2004, which appears in the2003 Annual ReportDecember 31, 2004 annual report on Form10-K.10-K of Yellow Roadway Corporation. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule of valuation and qualifying accounts (Schedule II).ThisThe financial statement schedule is the responsibility of theCompany'sCompany’s management. Our responsibility is to express an opinion onthisthe financial statement schedule based on our audits.In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s//s/ KPMG LLP
- ------------------Kansas City, Missouri
February 20, 2004 76March 4, 2005
Schedule II
Yellow Roadway Corporation and Subsidiaries
Valuation and Qualifying Accounts
For the Years Ended December 31, 2004, 2003
2002and20012002
COL. A
COL. B COL. C COL. D COL. E Additions Description
Balance,
Beginning
Of Year(a)
-1-
Charged
To Costs/
Expenses
-2-
Charged
To Other
Accounts
Deductions(b) Balance,
End Of
Year(d)
(in millions) Year ended December 31, 2004:
Deducted from asset account—
Allowance for uncollectible accounts
$ 20.8 $ 22.3 $ 0.4 $ (21.1 ) $ 22.4 Added to liability account—
Claims and insurance accruals
$ 299.3 $ 207.2 $ 0.2 $ (185.9 ) $ 320.8 Year ended December 31, 2003:
Deducted from asset account—
Allowance for uncollectible accounts
$ 15.7 $ 14.7 $ 6.2 (c) $ (15.8 ) $ 20.8 Added to liability account—
Claims and insurance accruals
$ 115.2 $ 114.6 $ 170.4 (c) $ (100.9 ) $ 299.3 Year ended December 31, 2002:
Deducted from asset account—
Allowance for uncollectible accounts
$ 7.7 $ 25.8 $ 0.2 $ (18.0 ) $ 15.7 Added to liability account—
Claims and insurance accruals
$ 110.3 $ 95.9 $ — $ (91.0 ) $ 115.2
COL. A COL. B COL. C COL. D COL. E ----------------------------- ---------- -------------------- ---------- -------- ADDITIONS -------------------- -1- -2- Balance, Charged Charged Balance, Beginning To Costs/ To Other End Of Description Of Year Expenses Acccounts Deductions Year(a) All balances shown have been reclassified to reflect valuation and qualifying accounts of continuing operations due to the spin-off of SCST on September 30, 2002.
(b) (d) (in thousands)Year ended December 31, 2003: Deducted from asset account - AllowanceRegarding the allowance for uncollectible accounts, $ 15,731 $ 14,713 $ 6,241(c) $ (15,846) $ 20,839 ========= ========= ========= ========= ======== Addedamounts primarily relate toliability account - Claimsuncollectible accounts written off, net of recoveries. For the claims and insurance accruals,$ 115,214 $ 114,585 $ 170,422(c) $(100,939) $299,282 ========= ========= ========= ========= ======== Year endedamounts primarily relate to payments of claims and insurance.
(c) These amounts primarily represent the beginning balances for Roadway LLC as of December 11, 2003.
(d) 2003 balances include the results of Roadway LLC from the date of acquisition (December 11) through December 31, 2002: Deducted from asset account - Allowance for uncollectible accounts $ 7,695 $ 25,834 $ 189 $ (17,987) $ 15,731 ========= ========= ========= ========= ======== Added to liability account - Claims and insurance accruals $ 110,298 $ 95,947 $ -- $ (91,031) $115,214 ========= ========= ========= ========= ======== Year ended December 31, 2001: Deducted from asset account - Allowance for uncollectible accounts $ 10,591 $ 14,744 $ 332 $ (17,972) $ 7,695 ========= ========= ========= ========= ======== Added to liability account - Claims and insurance accruals $ 119,479 $ 84,797 $ -- $ (93,978) $110,298 ========= ========= ========= ========= ========2003.(a) All balances shown have been reclassified to reflect valuation and qualifying accounts of continuing operations due to the spin-off of SCST on September 30, 2002. (b) Regarding the allowance for uncollectible accounts, amounts primarily relate to uncollectible accounts written off, net of recoveries. For the claims and insurance accruals, amounts primarily relate to payments of claims and insurance. (c) These amounts primarily represent the beginning balances for Roadway LLC as of December 11, 2003. (d) 2003 balances include the results of Roadway LLC from the date of acquisition (December 11) through December 31, 2003. 77SignaturesPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Yellow Roadway Corporation BY: /s/ William D. Zollars ---------------------- William D. Zollars Chairman of the Board, President and Chief Executive Officer March 15, 2004
YELLOW ROADWAY CORPORATION By: /S/ WILLIAM D. ZOLLARS William D. Zollars Chairman of the Board, President and Chief Executive Officer
March 15, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Donald G. Barger, Jr. Senior Vice President March 15, 2004 --------------------------- and Chief Financial Officer Donald G. Barger, Jr. /s/ Cassandra C. Carr Director March 15, 2004 --------------------------- Cassandra C. Carr /s/ Howard M. Dean Director March 15, 2004 --------------------------- Howard M. Dean /s/ Frank P. Doyle Director March 15, 2004 --------------------------- Frank P. Doyle /s/ John F. Fiedler Director March 15, 2004 --------------------------- John F. Fiedler /s/ Dennis E. Foster Director March 15, 2004 --------------------------- Dennis E. Foster /s/ John C. McKelvey Director March 15, 2004 --------------------------- John C. McKelvey /s/ Phillip J. Meek Director March 15, 2004 --------------------------- Phillip J. Meek /s/ William L. Trubeck Director March 15, 2004 --------------------------- William L. Trubeck /s/ Carl W. Vogt Director March 15, 2004 --------------------------- Carl W. Vogt 78
/S/ DONALD G. BARGER, JR. | Senior Vice President | March 15, 2005 | ||
| Donald G. Barger, Jr. | and Chief Financial Officer | |||
/S/ BHADRESH A. SUTARIA | Vice President, Corporate | March 15, 2005 | ||
| Bhadresh A. Sutaria | Controller & Chief Accounting | |||
| Officer | ||||
/S/ CASSANDRA C. CARR | Director | March 15, 2005 | ||
| Cassandra C. Carr | ||||
/S/ HOWARD M. DEAN | Director | March 15, 2005 | ||
| Howard M. Dean | ||||
/S/ FRANK P. DOYLE | Director | March 15, 2005 | ||
| Frank P. Doyle | ||||
/S/ JOHN F. FIEDLER | Director | March 15, 2005 | ||
| John. F. Fiedler | ||||
/S/ DENNIS E. FOSTER | Director | March 15, 2005 | ||
| Dennis E. Foster | ||||
/S/ JOHN C. MCKELVEY | Director | March 15, 2005 | ||
| John C. McKelvey | ||||
/S/ PHILLIP J. MEEK | Director | March 15, 2005 | ||
| Phillip J. Meek | ||||
/S/ WILLIAM L. TRUBECK | Director | March 15, 2005 | ||
| William L. Trubeck | ||||
/S/ CARL W. VOGT | Director | March 15, 2005 | ||
| Carl W. Vogt | ||||
81