UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 ------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------------------- ----------------------- Commission file number 0-12255 ------- YELLOW CORPORATION ------------------ (Exact name of registrant as specified in its charter) Delaware 48-0948788 - ----------------------------------------- ------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 10990 Roe Avenue, P.O. Box 7563, Overland Park, Kansas 66207 - ------------------------------------------------------ ---------- (Address of principal executive offices) (Zip Code) (913) 696-6100 -------------- (Registrant's telephone number, including area code) No Changes ----------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at July 31, 2002 ----- ---------------------------- Common Stock, $1 Par Value 29,165,256 shares
YELLOW CORPORATION INDEX Item Page - ---- ---- PART I 1. Financial Statements Consolidated Balance Sheets - June 30, 2002 and December 31, 2001 3 Statements of Consolidated Operations - Quarter and Six Months Ended June 30, 2002 and 2001 4 Statements of Consolidated Cash Flows - Six Months Ended June 30, 2002 and 2001 5 Notes to Consolidated Financial Statements 6 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 3. Quantitative and Qualitative Disclosures About Market Risk 18 PART II 4. Submission of Matters to a Vote of Security Holders 20 6. Exhibits and Reports on Form 8-K 20 Signatures 24
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS Yellow Corporation and Subsidiaries (Amounts in thousands except per share data) (Unaudited) June 30, December 31, 2002 2001 ----------- ----------- ASSETS CURRENT ASSETS: Cash $ 19,514 $ 20,694 Accounts receivable 287,722 208,267 Prepaid expenses and other 42,706 83,449 ----------- ----------- Total current assets 349,942 312,410 ----------- ----------- PROPERTY AND EQUIPMENT: Cost 2,128,722 2,133,406 Less - Accumulated depreciation 1,279,670 1,267,834 ----------- ----------- Net property and equipment 849,052 865,572 ----------- ----------- GOODWILL AND OTHER ASSETS 34,195 107,795 ----------- ----------- $ 1,233,189 $ 1,285,777 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and checks outstanding $ 106,284 $ 128,343 Wages and employees' benefits 148,946 130,806 Other current liabilities 112,875 103,778 Current maturities of long-term debt 404 6,281 ----------- ----------- Total current liabilities 368,509 369,208 ----------- ----------- OTHER LIABILITIES: Long-term debt 106,611 213,745 Deferred income taxes 91,245 92,817 Claims, insurance and other 140,073 119,018 ----------- ----------- Total other liabilities 337,929 425,580 ----------- ----------- SHAREHOLDERS' EQUITY: Common stock, $1 par value 31,404 31,028 Capital surplus 71,880 41,689 Retained earnings 470,680 537,496 Unamortized restricted stock awards (1,296) -- Accumulated other comprehensive income (loss) (4,615) (6,252) Treasury stock (41,302) (112,972) ----------- ----------- Total shareholders' equity 526,751 490,989 ----------- ----------- $1,233,189 $1,285,777 ========== ========== The accompanying notes are an integral part of these statements. 3
STATEMENTS OF CONSOLIDATED OPERATIONS Yellow Corporation and Subsidiaries For the Quarter and Six Months Ended June 30, 2002 and 2001 (Amounts in thousands except per share data) (Unaudited) Second Quarter Six Months --------------------------- ---------------------------- 2002 2001 2002 2001 --------- --------- ---------- ---------- OPERATING REVENUE $ 842,549 $ 824,770 $1,604,889 $1,656,748 --------- --------- ---------- ---------- OPERATING EXPENSES: Salaries, wages and benefits 541,593 523,117 1,037,934 1,046,461 Operating expenses and supplies 124,391 136,699 235,286 280,629 Operating taxes and licenses 26,542 26,422 52,589 54,659 Claims and insurance 23,098 19,111 41,983 37,602 Depreciation and amortization 30,588 31,565 60,769 63,430 Purchased transportation 81,805 67,978 152,724 135,655 Unusual items 996 2,243 1,964 8,234 --------- --------- ---------- --------- Total operating expenses 829,013 807,135 1,583,249 1,626,670 --------- --------- ---------- --------- INCOME FROM OPERATIONS 13,536 17,635 21,640 30,078 --------- --------- ---------- --------- NONOPERATING (INCOME) EXPENSES: Interest expense 2,867 4,093 6,770 8,158 Loss in Transportation.com - 1,861 - 4,397 Other, net 763 1,581 1,344 4,306 --------- --------- ---------- ---------- Nonoperating expenses, net 3,630 7,535 8,114 16,861 --------- --------- ---------- --------- INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 9,906 10,100 13,526 13,217 INCOME TAX PROVISION 3,686 4,444 5,167 5,815 --------- --------- ---------- --------- INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 6,220 5,656 8,359 7,402 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR GOODWILL - - (75,175) - --------- --------- ---------- --------- NET INCOME (LOSS) $ 6,220 $ 5,656 $ (66,816) $ 7,402 ========= ========= ========== ========= AVERAGE SHARES OUTSTANDING-BASIC 28,404 24,164 26,687 23,968 ========= ========= ========== ========= AVERAGE SHARES OUTSTANDING-DILUTED 28,810 24,342 27,053 24,238 ========= ========= ========== ========= BASIC EARNINGS (LOSS) PER SHARE: Before cumulative effect of accounting change $ .22 $ .23 $ .31 $ .31 Cumulative effect of change in accounting for goodwill - - (2.81) - --------- --------- ---------- --------- Total $ .22 $ .23 $ (2.50) $ .31 --------- --------- ---------- --------- DILUTED EARNINGS (LOSS) PER SHARE: Before cumulative effect of accounting change $ .22 $ .23 $ .31 $ .31 Cumulative effect of change in accounting for goodwill - - (2.78) - --------- --------- ---------- --------- Total $ .22 $ .23 $ (2.47) $ .31 --------- --------- ---------- --------- The accompanying notes are an integral part of these statements. 4
STATEMENTS OF CONSOLIDATED CASH FLOWS Yellow Corporation and Subsidiaries For the Six Months Ended June 30, 2002 and 2001 (Amounts in thousands) (Unaudited) 2002 2001 --------- --------- OPERATING ACTIVITIES: Net income (loss) $ (66,816) $ 7,402 Depreciation and amortization 60,769 63,430 Loss in joint venture -- 4,397 Cumulative effect of accounting change 75,175 -- Change in accounts receivable (57,455) 16,612 Accounts receivable securitizations, net (22,000) (13,500) Change in accounts payable and checks outstanding (22,059) (37,304) Other 91,335 5,965 --------- --------- Net cash from operating activities 58,949 47,002 --------- --------- INVESTING ACTIVITIES: Acquisition of property and equipment (50,752) (73,203) Proceeds from disposal of property and equipment 3,653 3,996 Other -- (4,113) --------- --------- Net cash used in investing activities (47,099) (73,320) --------- --------- FINANCING ACTIVITIES: Increase (decrease) in long-term debt (113,011) 28,142 Proceeds from stock options and other, net 6,189 5,304 Proceeds from issuance of common stock 93,792 -- --------- --------- Net cash provided by (used in) financing activities (13,030) 33,446 --------- --------- NET INCREASE (DECREASE) IN CASH (1,180) 7,128 CASH, BEGINNING OF PERIOD 20,694 25,799 --------- --------- CASH, END OF PERIOD $ 19,514 $ 32,927 ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION: Income taxes paid (refunds), net $ (5,055) $ 4,434 ========= ========= Interest paid $ 7,499 $ 8,278 ========= ========= The accompanying notes are an integral part of these statements. 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Yellow Corporation and Subsidiaries (unaudited) 1. The accompanying consolidated financial statements include the accounts of Yellow Corporation and its wholly-owned subsidiaries (the company or Yellow). The consolidated financial statements have been prepared by the company, without audit by independent public accountants, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). In the opinion of management, all normal recurring adjustments necessary for a fair statement of the results of operations for the interim periods included herein have been made. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted from these statements pursuant to such rules and regulations. Accordingly, the accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements included in the company's 2001 Annual Report to Shareholders. 2. The company is an international transportation services provider with a focus on national, regional and international less-than-truckload (LTL), truckload (TL), and non-asset based transportation services through its three principal operating units and captive technology company. Yellow Transportation, Inc. (Yellow Transportation) is the largest subsidiary and provides LTL national, regional and international transportation services for industrial, commercial, retail and government markets. SCS Transportation, Inc. (SCS Transportation) provides regional overnight and second-day LTL and selected TL transportation services through two subsidiaries, Saia Motor Freight Line, Inc. (Saia) and Jevic Transportation, Inc. (Jevic). Meridian IQ, LLC (Meridian IQ) provides domestic and international forwarding, multi-modal brokerage and transportation management services. Yellow Technologies, Inc. is a subsidiary that provides information technology and other services to the company and its subsidiaries. For the quarter ended June 30, 2002 Yellow Transportation comprised approximately 74 percent of total revenue while Saia comprised approximately 15 percent and Jevic approximately 9 percent of total revenue. The company announced on July 19, 2002, that its Board of Directors had formally approved the terms of the spin-off of its 100 percent interest in SCS Transportation. The targeted spin-off date is September 30, 2002. After the spin-off the company will continue to own and operate Yellow Transportation and Meridian IQ. 6
3. In the third quarter of 2001, the company completed its acquisition of the 35 percent ownership in Meridian IQ (formerly Transportation.com) that it did not previously own, from its venture capital partners. The cash purchase price of approximately $14.3 million was allocated primarily to goodwill ($10.6 million) and tax benefit receivable ($4.0 million). The results of Meridian IQ have been consolidated in the company's financial statements since September 2001. Prior to the acquisition date, the company accounted for its 65 percent ownership interest under the equity method of accounting due to substantive participating rights of the minority investors. Losses on the company's investment were recorded in non-operating expenses, until the acquisition date. 4. Unusual items include integration and business reorganization costs and property gains and losses. 5. The company reports financial and descriptive information about its reportable operating segments on a basis consistent with that used internally for evaluating segment operating performance and allocating resources to segments. The company has four reportable segments, which are strategic business units that offer different products and services. Yellow Transportation is a unionized carrier that provides comprehensive national, regional and international transportation services. Saia is a regional LTL carrier that provides overnight and second-day service in twenty-one states and Puerto Rico. On March 4, 2001, WestEx and Action Express were integrated into the Saia segment. Comparative prior year segment data has been restated to reflect the integration. Jevic is a hybrid regional heavy LTL and TL carrier that provides overnight and second-day service primarily in the Northeastern states. Meridian IQ is a segment that provides domestic and international forwarding, multi-modal brokerage and transportation management services. The segments are managed separately because each requires different operating, technology and marketing strategies. The company evaluates performance primarily on operating income and return on capital. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in the company's 2001 Annual Report to Shareholders. Management fees and other corporate services are charged to segments based on direct benefit received or allocated based on revenues. The following table summarizes the company's operations by business segment (in thousands): 7
Yellow Meridian Corporate Transportation Saia Jevic IQ and Other Consolidated -------------- -------- -------- -------- --------- ------------ As of June 30, 2002 Identifiable assets $ 769,875 $279,246 $158,630 $28,768 $(3,330) $1,233,189 As of December 31, 2001 Identifiable assets $ 757,484 $275,852 $231,520 $17,641 $ 3,280 $1,285,777 Three months ended June 30, 2002 Operating Revenue $ 628,215 $124,027 $ 72,461 $18,942 $(1,096) $ 842,549 Income from operations 10,524 6,010 832 (455) (3,375) 13,536 Three months ended June 30, 2001 Operating Revenue $ 628,968 $122,988 $ 72,647 $ 445 $ (278) $ 824,770 Income from operations 14,354 3,803 1,554 (723) (1,353) 17,635 Six months ended June 30, 2002 Operating revenue $1,192,858 $239,055 $140,970 $34,344 $(2,338) $1,604,889 Income from operations 17,185 9,651 1,800 (1,971) (5,025) 21,640 Six months ended June 30, 2001 Operating revenue $1,264,933 $242,107 $149,504 $ 898 $ (694) $1,656,748 Income from operations 27,955 1,501 3,859 (1,019) (2,218) 30,078 The three months and six months ended June 30, 2001 segment data presented for Meridian IQ represents the results of operations of other non-asset based services. As previously discussed in note 3, Transportation.com was accounted for under the equity method of accounting during the first six months of 2001. Accordingly, nonoperating expenses include losses from Transportation.com of $1.9 million in the second quarter of 2001 and $4.4 million in the first six months of 2001. If Transportation.com had been consolidated in 2001, Meridian IQ revenue would have been $7.7 million and $14.4 million and operating losses would have been $3.6 million and $8.6 million for the three months ended June 30, 2001 and six months ended June 30, 2001, respectively. 6. The difference between average common shares outstanding used in the computation of basic earnings per share and fully diluted earnings per share is attributable to outstanding common stock options. 7. The company's comprehensive income includes net income, changes in the fair value of interest rate swaps and foreign currency translation adjustments. Comprehensive income for the second quarter ended June 30, 2002 and 2001 was $6.4 million and $5.7 million, respectively. Comprehensive income (loss) for the six months ended June 30, 2002 and 2001 was $(65.2) million and $5.7 million, respectively. 8
8. On June 30, 2001, the Financial Accounting Standards Board issued Statement No. 142, Goodwill and Other Intangible Assets (Statement No. 142), that was adopted by the company on January 1, 2002. Statement No. 142 requires that upon adoption and at least annually thereafter, the company assess goodwill impairment by applying a fair value based test. With the adoption of Statement No. 142, goodwill will no longer be subject to amortization resulting in an increase in annualized operating income and net income of $3.0 million. At December 31, 2001 the Company had $100.6 million of goodwill on its consolidated balance sheet, consisting primarily of $75.2 million remaining from the acquisition of Jevic. In valuing the goodwill of Jevic the company used an estimate of that business unit's discounted cash flows in measuring whether goodwill was recoverable. Based on this estimate, the company has 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, the company recorded a non-cash charge of $75.2 million in the first quarter 2002, which was reflected as a cumulative effect of a change in accounting principle. The carrying amount of goodwill attributed to each reportable operating segment with goodwill balances and changes follows (in thousands): Impairment December 31, 2001 Adjustment June 30, 2002 ------------------------------------------------------ Saia $ 14,796 $ -- $ 14,796 Jevic 75,175 (75,175) -- Meridian IQ 10,600 -- 10,600 ------------------------------------------------------ $ 100,571 $ (75,175) $ 25,396 In connection with adopting Statement No. 142, the company also reassessed the useful lives and the classification of its identifiable intangible assets and determined that they continue to be appropriate. The components of amortized intangible assets follow (in thousands): June 30, 2002 December 31, 2001 Gross Carrying Accumulated Gross Carrying Accumulated Amount Amortization Amount Amortization -------------------------------------------------------------- Contract Based $2,238 $ 976 $2,238 $843 Technology Based 231 48 231 19 Other 42 9 42 3 ------------------------------------------------------------ $2,511 $1,033 $2,511 $865 9
Amortization expense for intangible assets for the three months ended June 30, 2002 was $127,583, for the six months ended June 30, 2002 was $167,339, and is estimated to be $422,505 for the full year 2002. Estimated amortization expense for the next five fiscal years follows (in thousands): Estimated Amortization Expense ------------ 2003 $ 423 2004 405 2005 315 2006 121 2007 - Actual results of operations before cumulative effect of accounting change for the three and six months ended June 30, 2002, and proforma results of operations for the three and six months ended June 30, 2001 had the company applied the nonamortization provisions of Statement No. 142 in those periods follow (in thousands, except per share amounts): Quarter Ended Six Months Ended June 30, June 30, 2002 2001 2002 2001 ------------------------------------------------------- Reported income before cumulative effect of accounting change $ 6,220 $ 5,656 $ 8,359 $ 7,402 Add: Goodwill amortization - 769 - 1,502 ------------------------------------------------------ Adjusted income before cumulative effect of accounting change $ 6,220 $ 6,425 $ 8,359 $ 8,904 Basic earnings per share: Reported income before cumulative effect of accounting change $ .22 $ .23 $ .31 $ .31 Goodwill amortization - .03 - .06 ------------------------------------------------------ Adjusted income before cumulative effect of accounting change $ .22 $ .26 $ .31 $ .37 Diluted earnings per share: Reported income before cumulative effect of accounting change $ .22 $ .23 $ .31 $ .31 Goodwill amortization - .03 - .06 ------------------------------------------------------ Adjusted income before cumulative effect of accounting change $ .22 $ .26 $ .31 $ .37 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations FINANCIAL CONDITION June 30, 2002 Compared to December 31, 2001 The company's liquidity needs arise primarily from capital investment in new equipment, land and structures and information technology, as well as funding working capital requirements. To ensure short-term and longer-term liquidity, the company maintains capacity under a bank credit agreement and an asset backed securitization (ABS) agreement involving Yellow Transportation accounts receivable. These facilities provide adequate capacity to fund working capital and capital expenditure requirements. At June 30, 2002, the company did not have any outstanding borrowings against the $300 million bank credit agreement, which expires in April 2004. This facility is also the source of letters of credit used to provide collateral for the self-insurance programs of the company, primarily in the areas of workers' compensation and auto liability. Letter of credit requirements have increased significantly during 2002. Insurance providers have increased collateral requirements in response to the events of September 11 and the bankruptcies of several large companies. In addition, the availability of surety bonds, an alternative form of insurance collateral, has decreased due to the same factors. The following table provides the components of the available unused capacity under the bank credit agreement at June 30, 2002 and December 31, 2001 (amounts in thousands): June 30, 2002 December 31, 2001 ------------- ----------------- Total available $ 300,000 $ 300,000 Outstanding borrowings - (85,000) Letters of credit (163,000) (90,000) ---------- --------- Available unused capacity $ 137,000 $ 125,000 The company intends to refinance under the bank credit facility all other debt maturing within one year, (zero at June 30, 2002 and $22.0 million at December 31, 2001), and has classified these amounts as long-term debt on the balance sheet. Since it involves the sale of accounts receivable, utilization of the $200 million ABS facility impacts the accounting presentation of current assets, and therefore impacts working capital. The following table summarizes the impact of the ABS agreement had it been reflected on the balance sheet (in thousands): 11
June 30, 2002 December 31, 2001 ----------------------------------------------------------------------------------------------- As Reported ABS Facility Adjusted As Reported ABS Facility Adjusted ----------------------------------------------------------------------------------------------- Current Assets: Cash $ 19,514 $ -- $ 19,514 $ 20,694 $ -- $ 20,694 Accounts receivable 287,722 119,500 407,222 208,267 141,500 349,767 Prepaid expenses & other 42,706 -- 42,706 83,449 -- 83,449 ----------------------------------------------------------------------------------------------- Total current assets $ 349,942 $ 119,500 $ 469,442 $ 312,410 $ 141,500 $ 453,910 Current Liabilities: Accounts payable and Checks outstanding $ 106,284 $ -- $ 106,284 $ 128,343 $ -- $ 128,343 Wages & employees' benefits 148,946 -- 148,946 130,806 -- 130,806 Other current liabilities 112,875 -- 112,875 103,778 -- 103,778 ----------------------------------------------------------------------------------------------- Total current liabilities, Excl current maturities $ 368,105 $ -- $ 368,105 $ 362,927 $ -- $ 362,927 ----------------------------------------------------------------------------------------------- Working Capital $ (18,163) $ 119,500 $ 101,337 $ (50,517) $ 141,500 $ 90,983 Total debt $ 107,015 $ 119,500 $ 226,515 $ 220,026 $ 141,500 $ 361,526 As reported, working capital excluding current maturities of long-term debt at June 30, 2002 was $(18.2) million, up from $(50.5) million at December 31, 2001. However, treating the ABS facility as though it was on the balance sheet provides a clearer economic view of working capital. Including adjustments for the ABS facility, working capital at June 30, 2002 was $101.3 million, up $10.3 million from $91.0 million at year-end. Current assets increased $15.5 million primarily due to an increase in accounts receivable resulting from additional business volumes. Current liabilities increased $5.2 million from year-end, as decreased accounts payable were offset by increases in accrued wages and employees' benefits. The $91.3 million of other net cash from operating activities for the six months ended June 30, 2002 is made up primarily of changes in other working capital items. Prepaid expenses and other decreased $40.7 million from December 31, 2001 primarily due to the amortization of a prefunded benefit contribution for the company's employees covered by collective bargaining agreements. Wages and employees' benefits increased $18.1 million from December 31, 2001 primarily due to the timing of vacation payments (accrued but not paid). Additionally, claims, insurance and other long-term liabilities increased $21.1 million from December 31, 2001 primarily due to timing of pension payments (accrued but not paid) and increased workers' compensation reserves. Net capital expenditures for property and equipment during the first six months of 2002 were $47.1 million, compared to $69.2 million during the first six months of 2001. The decrease in capital expenditures is due primarily to timing of revenue equipment purchases in 2002 compared to 2001, and higher spending in 2001 for a large terminal facility at Yellow Transportation. Full year 2002 revenue equipment spending is expected to be near 2001 levels, and total net capital expenditures are expected to be approximately $100 million. In mid April 2002 the company completed the equity offering of 3.4 million shares and a fifteen percent over-allotment of .5 million shares at a price of $25.50 per share. The company received $93.8 million of net proceeds from the offering. The net 12
proceeds were used to repay debt and will provide working capital for investments in the company's growth strategy. A registration statement on Form 10 for SCS Transportation was filed on July 19, 2002 with the SEC containing details of the distribution and important financial and other information about SCS Transportation, including risk factors related to SCS Transportation and the distribution. The spin-off, which is intended to be tax-free to Yellow and to Yellow stockholders, is subject to a number of conditions, including the receipt of a favorable ruling from the Internal Revenue Service or from outside tax advisors, the absence of any legal restraints or prohibitions preventing the consummation of the distribution, final action by the Board of Directors of Yellow to set the record date and distribution date for the spin-off and the effectiveness of the registration statement. It is expected that Yellow shareholders will receive one share of SCS Transportation common stock for every two shares of Yellow common stock they own as of the record date. In addition, at or around the time of the spin-off, it is anticipated that SCS Transportation will raise approximately $150 million pursuant to one or more credit facilities that will be utilized in part to repay indebtedness owed to Yellow and in part for general working capital purposes. On July 22, 2002, Meridian IQ announced that it had reached a tentative agreement to acquire MegaSys, Inc. (MegaSys), a Greenwood, Indiana based provider of non-asset transportation and logistics management services. MegaSys offers carrier procurement, routing and scheduling, audit and payment, and other shipment management capabilities. Meridian IQ expects the acquisition to be completed by mid-August. On July 23, 2002, Meridian IQ announced that it had acquired selected assets of Clicklogistics, Inc. (Clicklogistics), a provider of non-asset transportation and logistics management services, for a nominal purchase price. Meridian IQ acquired certain material assets, consisting primarily of customer contracts and key employees within the Clicklogistics sales, operations and professional services group. 13
RESULTS OF OPERATIONS Comparison of Three Months Ended June 30, 2002 and 2001 Net income for the second quarter ended June 30, 2002 was $6.2 million, or $.22 per share, compared with net income of $5.7 million, or $.23 per share in the second quarter of 2001. The second quarter of 2001 included expense of $.8 million, or $.03 per share, related to the amortization of goodwill for SCS Transportation. Beginning in 2002, with the adoption of Statement No. 142, goodwill is no longer amortized but is periodically tested for impairment. Consolidated operating revenue for the second quarter of 2002 was $843 million, up 2.2 percent from $825 million in the second quarter of 2001. Consolidated operating income was $13.5 million, compared to $17.6 million in the prior year. Second quarter 2001 results included $2.2 million of unusual item costs, primarily related to the integration of WestEx, Inc. and Action Express into Saia. Higher workers' compensation expenses impacted consolidated operating results. Rising health care costs over the past several years have resulted in the ultimate cost of claims being higher than were originally anticipated. On a consolidated basis, workers' compensation costs are up over 70 percent from the second quarter of last year. The company has in place aggressive claims management programs, but expects the impact of increased claims costs to continue in the near term. Yellow Transportation, the company's largest subsidiary, reported second quarter 2002 operating income of $10.5 million, down from $14.4 million in the second quarter of 2001. Yellow Transportation revenue for the second quarter of 2002 was $628 million, down slightly from $629 million in the prior year. The operating ratio was 98.3 for the second quarter of 2002, compared with 97.7 a year earlier. Yellow Transportation second quarter 2002 LTL tonnage per day increased by 1.3 percent and the number of LTL shipments per day increased 1.1 percent compared to the second quarter of 2001. The primary reasons for the increase in volumes are a slowly improving economy, some selective gains in market share and growth in premium services. LTL revenue per hundred weight, excluding fuel surcharge, for the second quarter of 2002 was up .8 percent over the second quarter of 2001. Meridian IQ was formed earlier this year, and formally launched in March, as the Yellow platform for non-asset-based transportation services. These capabilities include international and domestic freight forwarding services, multi-modal brokerage services and transportation management solutions. 14
Meridian IQ operating revenue for the second quarter of 2002 was $19 million and operating losses were $.5 million, which is an improvement from the $1.5 million loss in the first quarter of 2002, and consistent with company expectations for this newly formed entity. Consolidated operating revenue for SCS Transportation was $196 million for the second quarter of 2002, unchanged from $196 million a year ago. Operating income for the second quarter of 2002 was $6.8 million, compared to $5.1 million in the previous year. Second quarter 2001 operating income included expense of $.8 million related to the amortization of goodwill and $1.4 million of unusual item costs related to the March 2001 integration of WestEx, Inc. and Action Express into Saia. All prior period amounts for Saia have been restated to reflect this merger. At Saia, second quarter 2002 revenue was $124 million and operating income was $6.0 million, compared with revenue of $123 million and operating income of $3.8 million in the second quarter of 2001, which included $1.4 million of integration costs. The second quarter 2002 operating ratio was 95.2, compared with 95.7 (excluding integration costs) in the second quarter of 2001. Saia LTL tonnage for the second quarter of 2002 was up 5.0 percent and LTL shipments were up 4.5 percent on a per-day basis over the second quarter of 2001. However, Saia LTL revenue per hundred weight, excluding fuel surcharge for the second quarter of 2002 was down 2.7 percent over the second quarter of 2001 due to planned mix changes designed to replace selected poor performing business with more profitable accounts and competitive pressures. Jevic reported second quarter 2002 revenue of $72.5 million and operating income of $.8 million. On a comparative basis, Jevic had second quarter 2001 revenue of $72.6 million and operating income of $1.6 million. The second quarter of 2002 operating ratio for Jevic was 98.9, compared with 97.9 in the second quarter of 2001. The second quarter of 2002 included a $1.5 million charge due to unfavorable development in workers' compensation claims. Excluding this item, operating results relating directly to the second quarter improved from the prior period. Jevic total tonnage per day for the second quarter of 2002 was up 1.7 percent, consisting of a 0.5 percent decline in LTL volumes and a 3.5 percent increase in truckload volumes compared to the second quarter of 2002. Excluding the fuel surcharge, total revenue per hundred weight was down 1.6 percent consisting of a 0.6 percent improvement in LTL yields and a 3.2 percent decline in truckload pricing. Overall, the pricing environment for Jevic has stabilized although rates remain weak due to pricing pressures over the past two years. 15
Corporate and other expenses were $3.4 million in the second quarter of 2002, compared to $1.4 million in the second quarter of 2001. The increase is due primarily to higher self-insurance retention reserves, higher incentive compensation accruals and professional service costs related to the spin-off of SCS Transportation. Nonoperating expenses were $3.6 million in the second quarter of 2002 compared to $7.5 million in the second quarter of 2001. The second quarter of 2001 had $1.9 million of Transportation.com business development costs and $2.0 million higher financing costs, including interest expense and ABS borrowing costs due to higher interest rates and higher average borrowings outstanding. The effective tax rate was 37.2 percent in the second quarter of 2002 compared to 44.0 percent in the second quarter of 2001. This decrease in tax rate is due to a variety of factors including the projected full-year profit before tax, the implementation of prudent tax planning strategies and decreased travel and entertainment expenses. Comparison of Six Months Ended June 30, 2002 and 2001 Net income (loss) for the six months ended June 30, 2002 was $(66.8) million, or $(2.47) per share, compared with net income of $7.4 million, or $.31 per share in the first half of 2001. The first half of 2002 included a non-cash charge of $75.2 million for the impairment of goodwill associated with Jevic, which was recorded as a cumulative effect of change in accounting for goodwill. The first half of 2001 included expense of $1.5 million, or $.06 per share, related to the amortization of goodwill attributable to SCS Transportation. Consolidated operating revenue for the first half of 2002 was $1.6 billion, down 3.1 percent from $1.7 billion in the first half of 2001. Consolidated operating income was $21.6 million, compared to $30.1 million in the prior year. Yellow Transportation reported operating income of $17.2 million for the first half of 2002 down from $28.0 million in the first half of 2001. Yellow Transportation revenue for the first half of 2002 was $1.2 billion, down 5.0 percent, on a per-day basis, from $1.3 billion in the first half of 2001. The 2002 first half operating ratio was 98.6, compared with 97.8 a year earlier. Yellow Transportation first half 2002 LTL tonnage per day decreased by 3.0 percent and the number of LTL shipments per day decreased 3.4 percent from the first half of 2001. LTL revenue per hundred weight, excluding fuel surcharge, was up .4 percent over the first half of 2001. 16
Meridian IQ operating revenue for the first half of 2002 was $34.3 million and operating losses were $2.0 million. Meridian IQ has had consistent month-over-month revenue and operating income improvement and results are consistent with company expectations for this newly formed entity. Consolidated operating revenue for SCS Transportation for the first half of 2002 was $380 million down from $392 million in the first half of 2001. Operating income was $11.6 million in the first half of 2002, compared to $4.8 million in the first half of 2001. First half 2001 included expense of $1.5 million related to the amortization of goodwill and $6.8 million of unusual item costs related to the March 2001 integration of WestEx, Inc. and Action Express into Saia. For the first half of 2002, Saia revenue was $239 million compared to $242 million in 2001. Operating income in the first half of 2002 was $9.7 million, compared with operating income of $1.5 million in the first half of 2001, which included $6.8 million of integration costs. Jevic reported revenue of $141 million for the first half of 2002 compared to $150 million in the first half of 2001. Operating income was $1.8 million in the first half of 2002, compared to $3.9 million in the first half of 2001. Most of the deterioration in operating income was a result of higher workers' compensation costs in the second quarter as described earlier and weak performance in the first quarter due to economic and competitive conditions. Corporate and other expenses were $5.0 million in the first half of 2002, compared to $2.2 million in the first half of 2001. The increase is due primarily to higher self-insurance retention reserves, higher incentive compensation accruals and professional service costs related to the spin-off of SCS Transportation. Nonoperating expenses were $8.1 million in the first half of 2002, compared to $16.9 million in the first half of 2001. The first half of 2001 had $4.4 million of Transportation.com business development costs and $4.4 million higher financing costs, including interest expense and ABS borrowing costs, due to higher interest rates and higher average borrowings. The effective tax rate was 38.2 percent in the first half of 2002 compared to 44.0 percent in the first half of 2001. The decrease in tax rate is due to the factors described earlier in the results of operations for the three months ended June 30, 2002. 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to a variety of market risks, including the effects of interest rates, fuel prices and foreign currency exchange rates. To ensure adequate funding through seasonal business cycles and minimize overall borrowing costs, the company utilizes a variety of both fixed rate and variable rate financial instruments with varying maturities. At June 30, 2002 approximately 55 percent of the company's debt and off-balance sheet financing is at variable rates with the balance at fixed rates. The company uses interest rate swaps to hedge a portion of its exposure to variable interest rates. The company has hedged approximately 44 percent of its variable debt. The company's revenues and operating expenses, assets and liabilities of its Canadian and Mexican subsidiaries are denominated in foreign currencies, thereby creating exposures to changes in exchange rates. However, the risks related to foreign currency exchange rates are not material to the company's consolidated financial position or results of operations. The following table provides information about the company's financial instruments as of June 30, 2002. The table presents principal cash flows (in millions) and related weighted average interest rates by contractual maturity dates. For interest rate swaps the table presents notional amounts (in millions) and weighted average interest rates by contractual maturity. Debt Instrument Information There- Fair 2002 2003 2004 2005 2006 After Total Value ------ ------ ------ ------ ------ ------ ------ ----- Fixed Rate Debt $ 0.1 $ 24.5 $ 16.3 $ 17.9 $ 8.7 $ 34.5 $ 102.0 $ 109.8 Average interest rate 6.37% 6.02% 6.78% 6.62% 6.79% 6.85% Variable Rate Debt $ 0.1 $ 0.1 $ 0.2 $ 4.6 - - $ 5.0 $ 5.0 Average interest rate 4.01% (1) Off Balance Sheet ABS $ 119.5 $ 119.5 $ 119.5 Average interest rate 1.96% Interest Rate Swaps Notional amount $ 0.1 $ 50.1 (2) $ 0.2 $ 4.6 - - $ 55.0 $ 57.6 Avg. pay rate (fixed) 7.65% 6.06% 7.65% 7.65% N/A N/A Avg. receive rate 4.01% 1.88% (2) 4.01% 4.01% N/A N/A (variable) (1) Weighted average variable rates are based on the 90-day commercial paper rate as of June 30, 2002. (2) Includes a $50 million interest rate swap on the ABS facility. The variable rate on the ABS swap is 1.88% based on the 3-month LIBOR as of June 18, 2002. 18
Yellow Transportation, Saia and Jevic, each have implemented effective fuel surcharge programs. 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, company exposure to fuel price volatility is significantly reduced. Statements contained in, and preceding management's discussion and analysis that are not purely historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding the company's expectations, hopes, beliefs and intentions on strategies regarding the future. It is important to note that the company's actual future results could differ materially from those projected in such forward-looking statements because of a number of factors, including but not limited to inflation, labor relations, inclement weather, price and availability of fuel, competitor pricing activity, expense volatility, changes in and customer acceptance of new technology, changes in equity and debt markets and a downturn in general or regional economic activity. 19
PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders - None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxyley Act of 2002, filed herewith. Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxyley Act of 2002, filed herewith. (b) Reports on Form 8-K On May 17, 2002, a Form 8-K was filed under Item 4, Changes in Registrant's Certifying Accountant, which stated that the Audit Committee approved dismissal of Arthur Andersen LLP as the company's independent auditors and appointed KPMG LLP to serve as the company's independent auditors for the year ending December 31, 2002. On May 22, 2002, a Form 8-K was filed under Item 5, Other Events, which reported that Yellow Transportation, a Yellow Corporation subsidiary, announced that it will implement a general rate increase averaging 5.9 percent effective June 3, 2002. On July 19, 2002, a Form 8-K was filed under Item 5, Other Events, which reported that the company announced its Board of Directors has formally approved the terms of the spin-off of its 100% interest in SCS Transportation, the holding company for its regional operating companies, Saia and Jevic, to its shareholders. The Board of Directors of Yellow anticipates that the spin-off will occur during the third quarter of 2002. On August 7, 2002, a Form 8-K was filed under Item 9, Regulation FD Disclosure, William D. Zollars, Yellow Corporation's Chief Executive Officer, and Donald G. Barger, Jr., Yellow Corporation's Chief Financial Officer, have each executed a Statement Under Oath of Principal Executive Officer and Principal Financial Officer Regarding Facts and Circumstances Relating to Exchange Act Filings. 20
Yellow Transportation Financial Information For the Quarter and Six Months Ended June 30, 2002 and 2001 (Amounts in thousands) Second Quarter Six Months ------------------------------ --------------------------------- 2002 2001 % 2002 2001 % ---------------------------------------------------------------------------------------- Operating revenue 628,215 628,968 (0.1) 1,192,858 1,264,933 (5.7) Operating income -- Before unusual items 10,994 15,351 (28.4) 18,225 29,579 (38.4) Operating income -- as reported 10,524 14,354 (26.7) 17,185 27,955 (38.5) Operating ratio -- Before unusual items 98.2 97.6 98.5 97.7 Operating ratio -- as reported 98.3 97.7 98.6 97.8 Total assets at June 30 769,875 709,768 Second Quarter --------------------------------- Second Quarter Amount/Workday --------------------------- --------------------------------- 2002 2001 % 2002 2001 % --------------------------------------------------------------------------------------- Workdays 64 64 Financial statement LTL 585,826 580,462 0.9 9,153.5 9,069.7 0.9 Revenue TL 44,255 48,369 (8.5) 691.5 755.8 (8.5) Other (1,866) 137 n/m (29.2) 2.1 n/m Total 628,215 628,968 (0.1) 9,815.8 9,827.6 (0.1) Revenue excluding LTL 585,826 580,462 0.9 9,153.5 9,069.7 0.9 Revenue recognition TL 44,255 48,369 (8.5) 691.5 755.8 (8.5) Adjustment Other - 368 n/m - 5.8 n/m Total 630,081 629,199 0.1 9,845.0 9,831.3 0.1 Tonnage LTL 1,536 1,516 1.3 23.99 23.69 1.3 TL 297 308 (3.5) 4.65 4.82 (3.5) Total 1,833 1,824 0.5 28.64 28.51 0.5 Shipments LTL 3,084 3,051 1.1 48.20 47.67 1.1 TL 41 42 (3.5) 0.63 0.66 (3.5) Total 3,125 3,093 1.0 48.83 48.33 1.0 Revenue/cwt. LTL 19.07 19.14 (0.4) TL 7.44 7.85 (5.2) Total 17.19 17.23 (0.2) Revenue/cwt. LTL 18.76 18.61 0.8 (excl fuel surcharge) TL 7.35 7.67 (4.2) Total 16.90 16.76 0.8 Revenue/shipment LTL 189.94 190.23 (0.2) TL 1,091.07 1,150.57 (5.2) Total 201.63 203.28 (0.8) 21
Saia Motor Freight Line, Inc. Financial Information For the Quarter and Six Months Ended June 30, 2002 and 2001 (Amounts in thousands) Second Quarter Six Months ------------------------------- -------------------------- 2002 2001 % 2002 2001 % ------------------------------------------------------------------------------------ Operating revenue 124,027 122,988 0.8 239,055 242,107 (1.3) Operating income -- before unusual items 6,029 5,059 19.2 9,869 8,109 21.7 Operating income -- as reported * 6,010 3,803 58.0 9,651 1,501 n/m Operating ratio -- before unusual items 95.1 95.9 95.9 96.7 Operating ratio -- as reported 95.2 96.9 96.0 99.4 Total assets at June 30 279,246 287,494 Second Quarter Second Quarter Amount/Workday --------------------------- ----------------------------- 2002 2001 % 2002 2001 % ------------------------------------------------------------------------------------ Workdays 64 64 Financial statement LTL 114,027 113,132 0.8 1,781.7 1,767.7 0.8 Revenue TL 10,000 9,856 1.5 156.3 154.0 1.5 Total 124,027 122,988 0.8 1,938.0 1,921.7 0.8 Revenue excluding LTL 114,361 113,151 1.1 1,786.9 1,768.0 1.1 revenue recognition TL 10,029 9,858 1.7 156.7 154.0 1.7 adjustment Total 124,390 123,009 1.1 1,943.6 1,922.0 1.1 Tonnage LTL 598 569 5.0 9.35 8.90 5.0 TL 144 143 1.0 2.25 2.23 1.0 Total 742 712 4.2 11.60 11.13 4.2 Shipments LTL 1,120 1,072 4.5 17.50 16.75 4.5 TL 18 16 11.0 0.28 0.25 11.0 Total 1,138 1,088 4.6 17.78 17.00 4.6 Revenue/cwt. LTL 9.56 9.94 (3.8) TL 3.48 3.46 0.8 Total 8.38 8.64 (3.0) Revenue/cwt. LTL 9.37 9.64 (2.7) (excl fuel surcharge) TL 3.46 3.42 1.1 Total 7.56 7.71 (2.0) Revenue/shipment LTL 102.13 105.56 (3.2) TL 567.48 619.26 (8.4) Total 109.36 113.08 (3.3) * - 2001 results include $1,440,000 in second quarter and $6,825,000 in first six months of one-time integration costs associated with the merger of WestEx and Action into Saia. 22
Jevic Transportation, Inc. Financial Information For the Quarter and Six Months Ended June 30, 2002 and 2001 (Amounts in thousands) Second Quarter Six Months ----------------------------- ----------------------------- 2002 2001 % 2002 2001 % ------------------------------------------------------------------------------------ Operating revenue 72,461 72,647 (0.3) 140,970 149,504 (5.7) Operating income -- before unusual items 810 1,425 (43.2) 1,843 3,743 (50.8) Operating income -- as reported 832 1,554 (46.5) 1,800 3,859 (53.4) Operating ratio -- before unusual items 98.9 98.0 98.7 97.5 Operating ratio -- as reported 98.9 97.9 98.7 97.4 Total assets at June 30 158,630 249,840 Second Quarter Second Quarter Amount/Workday ----------------------------- ------------------------ 2002 2001 % 2002 2001 % ------------------------------------------------------------------------------------------ Workdays 64 63 Financial statement LTL 46,367 46,515 (0.3) 724.5 738.3 (1.9) revenue TL 24,869 24,940 (0.3) 388.6 395.9 (1.8) Other 1,225 1,192 2.8 19.1 18.9 1.2 Total 72,461 72,647 (0.3) 1,132.2 1,153.1 (1.8) Revenue excluding LTL 46,661 46,390 0.6 729.1 736.4 (1.0) revenue recognition TL 25,027 24,873 0.6 391.0 394.8 (1.0) adjustment Other 1,225 1,192 2.8 19.1 18.9 1.2 Total 72,913 72,455 0.6 1,139.2 1,150.1 (0.9) Tonnage LTL 257 254 1.1 4.02 4.03 (0.5) TL 333 317 5.2 5.20 5.03 3.5 Total 590 571 3.4 9.22 9.07 1.7 Shipments LTL 215 207 3.7 3.36 3.29 2.1 TL 36 35 3.0 0.57 0.56 1.4 Total 252 242 3.6 3.93 3.85 2.0 Revenue/cwt. LTL 9.08 9.12 (0.5) TL 3.76 3.93 (4.3) Total 6.07 6.24 (2.7) Revenue/cwt. LTL 8.91 8.86 0.6 (excl fuel surcharge) TL 3.69 3.81 (3.2) Total 5.96 6.06 (1.6) Revenue/shipment LTL 217.05 223.82 (3.0) TL 690.25 706.92 (2.4) Total 285.34 293.93 (2.9) 23
SIGNATURES Pursuant to the requirements 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 CORPORATION ------------------------- Registrant Date: August 7, 2002 /s/ William D. Zollars ------------------ ---------------------------- William D. Zollars Chairman of the Board of Directors, President & Chief Executive Officer Date: August 7, 2002 /s/ Donald G. Barger, Jr. ------------------ ---------------------------- Donald G. Barger, Jr. Senior Vice President & Chief Financial Officer 24
EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the quarterly report of Yellow Corporation on Form 10-Q for the period ended June 30, 2002, as filed with the Securities and Exchange Commission of the date hereof (the "Report"), I, William D. Zollars, Chief Executive Officer of Yellow Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Yellow Corporation. Date: August 7, 2002 /s/ William D. Zollars ------------------ ---------------------------- William D. Zollars Chairman of the Board of Directors, President & Chief Executive Officer 25
EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the quarterly report of Yellow Corporation on Form 10-Q for the period ended June 30, 2002, as filed with the Securities and Exchange Commission of the date hereof (the "Report"), I, Donald G. Barger, Jr., Chief Financial Officer of Yellow Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Yellow Corporation. Date: August 7, 2002 /s/ Donald G. Barger, Jr. ------------------ ---------------------------- Donald G. Barger, Jr. Senior Vice President & Chief Financial Officer 26