Form 10-Q
Table of Contents

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 September 30, 2005

 

OR

 

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

 

For the transition period from              to             

 

Commission file number 0-12255

 


 

YELLOW ROADWAY CORPORATION

(Exact name of registrant as specified in its charter)

 


 

Delaware   48-0948788

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

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

 

(913) 696-6100

(Registrant’s telephone number, including area code)

 

No Changes

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

 


 

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

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    Yes  ¨    No  x

 

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 October 31, 2005


Common Stock, $1 Par Value Per Share

  58,070,095 shares

 



Table of Contents

INDEX

 

Item


        Page

PART I – FINANCIAL INFORMATION
1.    Financial Statements     
    

Consolidated Balance Sheets -
September 30, 2005 and December 31, 2004

   3
    

Statements of Consolidated Operations -
Three and Nine Months Ended September 30, 2005 and 2004

   4
    

Statements of Consolidated Cash Flows -
Nine Months Ended September 30, 2005 and 2004

   5
    

Statement of Consolidated Shareholders’ Equity - Nine Months Ended September 30, 2005

   6
     Notes to Consolidated Financial Statements    7
2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    30
3.    Quantitative and Qualitative Disclosures About Market Risk    38
4.    Controls and Procedures    39
PART II – OTHER INFORMATION
6.    Exhibits    40
     Signatures    41

 

2


Table of Contents

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

CONSOLIDATED BALANCE SHEETS

Yellow Roadway Corporation and Subsidiaries

(Amounts in thousands except per share data)

 

    

September 30,

2005


   

December 31,

2004


 
     (Unaudited)        

Assets

                

Current Assets:

                

Cash and cash equivalents

   $ 57,474     $ 106,489  

Accounts receivable, net

     1,249,604       778,596  

Prepaid expenses and other

     221,401       168,356  
    


 


Total current assets

     1,528,479       1,053,441  
    


 


Property and Equipment:

                

Cost

     3,611,559       2,672,289  

Less – accumulated depreciation

     1,352,767       1,249,571  
    


 


Net property and equipment

     2,258,792       1,422,718  
    


 


Goodwill

     1,195,883       632,141  

Intangibles, net

     705,555       468,310  

Other assets

     107,945       50,559  
    


 


Total assets

   $ 5,796,654     $ 3,627,169  
    


 


Liabilities and Shareholders’ Equity

                

Current Liabilities:

                

Accounts payable

   $ 358,847     $ 307,089  

Wages, vacations and employees’ benefits

     528,199       427,731  

Other current and accrued liabilities

     431,339       210,519  

Asset-backed securitization (“ABS”) borrowings

     456,000       —    

Current maturities of contingently convertible notes

     —         250,000  

Current maturities of long-term debt

     4,439       4,400  
    


 


Total current liabilities

     1,778,824       1,199,739  
    


 


Other Liabilities:

                

Long-term debt, less current portion

     1,170,483       403,535  

Deferred income taxes, net

     373,844       319,839  

Claims and other liabilities

     578,587       489,865  

Commitments and contingencies

                

Shareholders’ Equity:

                

Common stock, $1 par value per share

     60,177       51,303  

Preferred stock, $1 par value per share

     —         —    

Capital surplus

     1,163,584       694,504  

Retained earnings

     761,767       550,484  

Accumulated other comprehensive loss

     (31,265 )     (33,159 )

Unamortized restricted stock awards

     (19,726 )     (10,479 )

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

     (39,621 )     (38,462 )
    


 


Total shareholders’ equity

     1,894,916       1,214,191  
    


 


Total liabilities and shareholders’ equity

   $ 5,796,654     $ 3,627,169  
    


 


 

The accompanying notes are an integral part of these statements.

 

3


Table of Contents

STATEMENTS OF CONSOLIDATED OPERATIONS

Yellow Roadway Corporation and Subsidiaries

For the Three and Nine Months Ended September 30

(Amounts in thousands except per share data)

(Unaudited)

 

     Three Months

    Nine Months

 
     2005

    2004

    2005

    2004

 

Operating Revenue

   $ 2,491,650     $ 1,767,082     $ 6,258,457     $ 4,993,348  
    


 


 


 


Operating Expenses:

                                

Salaries, wages and employees’ benefits

     1,450,548       1,083,027       3,721,462       3,107,697  

Operating expenses and supplies

     412,949       251,261       1,002,998       738,746  

Purchased transportation

     274,568       196,070       686,552       546,718  

Depreciation and amortization

     75,800       43,158       180,848       126,746  

Other operating expenses

     110,147       73,833       274,272       223,880  

(Gains) losses on property disposals, net

     1,638       (859 )     (346 )     (590 )

Acquisition and executive severance charges

     9,213       —         10,077       —    
    


 


 


 


Total operating expenses

     2,334,863       1,646,490       5,875,863       4,743,197  
    


 


 


 


Operating Income

     156,787       120,592       382,594       250,151  
    


 


 


 


Nonoperating (Income) Expenses:

                                

Interest expense

     19,949       11,041       42,753       34,448  

Write off of deferred debt issuance costs

     —         18,279       —         18,279  

Other

     (943 )     364       (1,488 )     706  
    


 


 


 


Nonoperating expenses, net

     19,006       29,684       41,265       53,433  
    


 


 


 


Income Before Income Taxes

     137,781       90,908       341,329       196,718  

Income tax provision

     52,496       34,999       130,046       75,736  
    


 


 


 


Net Income

   $ 85,285     $ 55,909     $ 211,283     $ 120,982  
    


 


 


 


Average Common Shares Outstanding – Basic

     57,994       48,204       53,177       47,993  

Average Common Shares Outstanding – Diluted

     60,194       48,778       56,018       48,492  

Basic Earnings Per Share

   $ 1.47     $ 1.16     $ 3.97     $ 2.52  

Diluted Earnings Per Share

   $ 1.42     $ 1.15     $ 3.77     $ 2.50  

 

The accompanying notes are an integral part of these statements.

 

4


Table of Contents

STATEMENTS OF CONSOLIDATED CASH FLOWS

Yellow Roadway Corporation and Subsidiaries

For the Nine Months Ended September 30

(Amounts in thousands)

(Unaudited)

 

     2005

    2004

 

Operating Activities:

                

Net income

   $ 211,283     $ 120,982  

Noncash items included in net income:

                

Depreciation and amortization

     180,848       126,746  

Deferred debt issuance cost write off

     —         18,279  

Gains on property disposals, net

     (346 )     (590 )

Deferred income tax provision, net

     9,373       (11,161 )

Changes in assets and liabilities, net:

                

Accounts receivable

     (139,053 )     (123,958 )

Accounts payable

     (43,990 )     (31,401 )

Other working capital items

     (20,351 )     118,256  

Claims and other

     51,062       49,884  

Other, net

     7,510       7,626  
    


 


Net cash provided by operating activities

     256,336       274,663  
    


 


Investing Activities:

                

Acquisition of property and equipment

     (231,644 )     (155,165 )

Proceeds from disposal of property and equipment

     18,366       12,867  

Acquisition of companies, net of cash acquired

     (754,120 )     (10,463 )

Investment in affiliate

     (46,043 )     —    

Other

     2,075       —    
    


 


Net cash used in investing activities

     (1,011,366 )     (152,761 )
    


 


Financing Activities:

                

ABS borrowings, net

     456,000       (2,500 )

Issuance (repayment) of long-term debt

     249,978       (175,044 )

Debt issuance costs

     (4,256 )     (2,843 )

Proceeds from exercise of stock options

     4,293       9,321  
    


 


Net cash provided by (used in) financing activities

     706,015       (171,066 )
    


 


Net Decrease In Cash and Cash Equivalents

     (49,015 )     (49,164 )

Cash and Cash Equivalents, Beginning of Period

     106,489       75,166  
    


 


Cash and Cash Equivalents, End of Period

   $ 57,474     $ 26,002  
    


 


 

The accompanying notes are an integral part of these statements.

 

5


Table of Contents

STATEMENT OF CONSOLIDATED SHAREHOLDERS’ EQUITY

Yellow Roadway Corporation and Subsidiaries

For the Nine Months Ended September 30

(Amounts in thousands except per share data)

(Unaudited)

 

     2005

 

Common Stock

        

Beginning balance

   $ 51,303  

Issuance of common stock for USF acquisition

     9,020  

Other, net

     (146 )
    


Ending balance

   $ 60,177  
    


Capital Surplus

        

Beginning balance

   $ 694,504  

Issuance of equity awards, net

     19,668  

Issuance of common stock for USF acquisition

     439,105  

Employer contribution to 401(k) plan

     6,189  

Stock option exercises

     4,159  

Other, net

     (41 )
    


Ending balance

   $ 1,163,584  
    


Retained Earnings

        

Beginning balance

   $ 550,484  

Net income

     211,283  
    


Ending balance

   $ 761,767  
    


Accumulated Other Comprehensive Loss

        

Beginning balance

   $ (33,159 )

Foreign currency translation adjustment, net of tax

     1,894  
    


Ending balance

   $ (31,265 )
    


Unamortized Equity Awards

        

Beginning balance

   $ (10,479 )

Issuance of equity awards, net

     (17,424 )

Amortization of equity awards

     8,177  
    


Ending balance

   $ (19,726 )
    


Treasury Stock, At Cost

        

Beginning balance

   $ (38,462 )

Other, net

     (1,159 )
    


Ending balance

     (39,621 )
    


Total Shareholders’ Equity

   $ 1,894,916  
    


 

The accompanying notes are an integral part of these statements.

 

6


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Yellow Roadway Corporation and Subsidiaries

(Unaudited)

 

1. Description of Business

 

Yellow Roadway Corporation (also referred to as “Yellow Roadway,” “we” or “our”), one of the largest transportation service providers in the world, is a holding company that through wholly owned operating subsidiaries offers its customers a wide range of transportation services. Our operating subsidiaries include the following:

 

    Yellow Transportation, Inc. (“Yellow Transportation”) is a leading transportation services provider that offers a full range of regional, national and international services for the movement of industrial, commercial and retail goods, primarily through centralized management and customer facing organizations. Approximately 45% of Yellow Transportation shipments are completed in two days or less.

 

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

 

    YRC Regional Transportation, Inc. (“Regional Transportation”) is a holding company for our transportation service providers focused on business opportunities in the regional and next-day delivery markets. Regional Transportation includes the results of New Penn Motor Express, Inc. (“New Penn”), USF Holland Inc., USF Reddaway Inc. and USF Bestway Inc., which provide regional, next-day ground services through a network of facilities located across the United States (“U.S.”); Quebec, Canada; Mexico and Puerto Rico and USF Glen Moore Inc., which provides truckload services throughout the U.S.

 

    Meridian IQ, Inc. (“Meridian IQ”) is a logistics company that plans and coordinates the movement of goods throughout the world, providing customers a quick return on investment, more efficient supply-chain processes and a single source for transportation management solutions. Meridian IQ also includes the business of USF Logistics Services Inc. following our acquisition of USF Corporation.

 

2. Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of Yellow Roadway and its wholly owned subsidiaries. Investments in non-majority owned affiliates are accounted for on the equity method. Management makes estimates and assumptions that affect the amounts reported in the financial statements and notes. Actual results could differ from those estimates. We have prepared the consolidated financial statements, without audit by independent public accountants, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In management’s opinion, all normal recurring adjustments necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods included herein have been made. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted from these statements pursuant to SEC rules and regulations. Accordingly, the accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2004.

 

3. Acquisitions and Investments

 

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations (“SFAS No. 141”), we allocate the purchase price of our acquisitions to the tangible and intangible assets and liabilities of the acquired entity based on their fair values. We record the excess of the purchase price over the fair values as goodwill. The fair value assigned to intangible assets acquired is based on valuations prepared by independent third party appraisal firms using estimates and assumptions provided by management. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”), goodwill and intangible assets with indefinite useful lives are not amortized but are reviewed at least annually for impairment. An impairment loss would be recognized to the extent that the carrying amount exceeds the assets’ fair value. Intangible assets with definite useful lives are amortized on a straight-line basis over their respective useful lives.

 

7


Table of Contents

The operating results of the following acquisitions are included in our consolidated results of operations from the dates of acquisition through September 30, 2005.

 

USF Corporation

 

On May 24, 2005, Yellow Roadway completed the acquisition of USF Corporation (“USF”), headquartered in Chicago, IL, through the merger (the “Merger”) of a wholly owned subsidiary of Yellow Roadway with and into USF, resulting in USF becoming a wholly owned subsidiary of Yellow Roadway. USF, a leader in the transportation industry, specializes in delivering comprehensive supply chain management solutions, including high-value next-day, regional and national less-than-truckload (“LTL”) transportation, third-party logistics, and premium regional and national truckload transportation. The company serves the North American market, including the United States, Canada and Mexico, as well as the U.S. territories of Puerto Rico and Guam under the following brands: USF Holland, USF Reddaway, USF Bestway, USF Glen Moore and USF Logistics. The acquisition further advances Yellow Roadway as one of the leading transportation services companies in the world. The combined entity offers customers a broad range of transportation services including next day, inter-regional, national and international capabilities.

 

Pursuant to the Merger, each share of common stock of USF was converted into the right to receive $29.25 in cash and 0.31584 shares of Yellow Roadway common stock resulting in consideration of approximately $835 million in cash and 9 million shares for a total purchase price of $1.3 billion. The purchase price also included approximately $14.1 million for investment banking, legal and accounting fees that Yellow Roadway incurred to consummate the acquisition, resulting in total cash consideration of $742 million, net of cash acquired. The cash portion of the merger consideration was financed with a combination of proceeds from the issuance of floating rate notes, borrowings under our ABS facility, and cash on hand.

 

The allocation of the total consideration for the USF acquisition is as follows (in millions):

 

Current assets, net of cash acquired of $106.9 million

   $ 357.3  

Property and equipment

     792.7  

Goodwill

     561.3  

Intangible assets

     238.7  

Other assets

     21.6  

Current liabilities

     (367.7 )

Long-term debt

     (272.2 )

Other liabilities

     (141.0 )
    


Net assets acquired

   $ 1,190.7  
    


 

The purchase price allocation has been prepared on a preliminary basis, and changes are expected as an appraisal of both tangible and intangible assets is completed and additional information becomes available.

 

Of the estimated $238.7 million of acquired intangible assets, $159.1 million was assigned to trade names that are not subject to amortization. The remaining $79.6 million of acquired intangible assets has a weighted-average useful life of approximately thirteen years. The intangible assets that make up that amount include customer relationships of $71.4 million (fourteen-year weighted average useful life) and computer software of $8.2 million (five-year weighted average useful life). The $561.3 million of goodwill was assigned to the Regional Transportation and Meridian IQ segments in the amounts of $480.0 million and $81.3 million, respectively. None of the goodwill is expected to be deductible for tax purposes.

 

In connection with the acquisition and our overall business strategy, on June 20, 2005 we announced the planned shut down of USF Dugan Inc., effective July 11, 2005. Additionally, we have significantly reduced the personnel requirements in Chicago, IL, USF’s former headquarters. As a result of these planned events, we incurred $33.0 million of restructuring costs as a result of severance (administrative, sales and operations personnel primarily from USF Dugan and the USF corporate office) and contract terminations. We have recognized these costs as a liability assumed as of the acquisition date, resulting in additional goodwill. These restructuring costs consisted of $24.4 million of employee termination (including wages, health benefits and outplacement services) for approximately 1,250 employees and $8.6 million for contract terminations and other miscellaneous costs. All of these restructuring items will have been effectuated within one year of the acquisition in accordance with purchase accounting requirements. During the nine months ended September 30, 2005, we paid $25.7 million of restructuring costs resulting in a $7.3 million accrued liability at September 30, 2005.

 

8


Table of Contents

The following unaudited pro forma data summarizes the results of operations for the periods indicated as if the USF acquisition had occurred as of the beginning of the periods presented for the three and nine months ended September 30.

 

     Three Months

   Nine Months

(in millions except per share data)


   2005

   2004

   2005

   2004

Revenue

   $ 2,491.7    $ 2,349.2    $ 7,216.7    $ 6,804.1

Net income

     85.3      65.1      192.1      130.3

Diluted earnings per share

   $ 1.42    $ 1.13    $ 3.16    $ 2.27

 

The pro forma data gives effect to actual operating results prior to the acquisition and adjustments to interest expense and amortization expense, net of tax. Included in the pro forma results for the nine months ended September 30, 2005 is approximately $18.3 million ($11.0 million net of tax) of acquisition charges incurred by USF that are considered unusual. 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.

 

GPS Asia

 

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

 

JHJ

 

On September 1, 2005, Yellow Roadway Corporation completed the purchase of a 50% equity interest in JHJ International Transportation Co., Ltd., (“JHJ”) a Shanghai, China-based freight forwarder, with a purchase price of $46 million including transaction costs. Included in the Meridian IQ segment, the Company accounts for it’s ownership in JHJ using the equity method of accounting. As of September 30, 2005, the excess of the Company’s investment over the Company’s interest in JHJ’s equity is approximately $37 million.

 

4. Goodwill and Intangibles

 

Goodwill is recognized for the excess of the purchase price over the fair value of tangible and identifiable intangible net assets of businesses acquired. In accordance with SFAS No. 142, we review goodwill at least annually for impairment based on a fair value approach.

 

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

 

(in millions)


  

Roadway

Express


   Regional
Transportation


   Meridian IQ

    Total

 

Balances at December 31, 2004

   $ 545.2    $ 58.6    $ 28.3     $ 632.1  

Goodwill resulting from acquisitions

     —        480.0      83.9       563.9  

Changes in foreign currency exchange rates

     0.5      —        (0.6 )     (0.1 )
    

  

  


 


Balances at September 30, 2005

   $ 545.7    $ 538.6    $ 111.6     $ 1,195.9  
    

  

  


 


 

9


Table of Contents

The components of amortizable intangible assets are as follows:

 

    

Weighted

Average

Life
(years)


   September 30, 2005

   December 31, 2004

(in millions)


     

Gross

Carrying

Amount


  

Accumulated

Amortization


  

Gross

Carrying

Amount


  

Accumulated

Amortization


Customer related

   15    $ 196.3    $ 16.1    $ 118.2    $ 9.0

Marketing related

   6      1.0      0.5      1.0      0.4

Technology based

   4      25.5      10.7      17.5      6.1
         

  

  

  

Intangible assets

        $ 222.8    $ 27.3    $ 136.7    $ 15.5
         

  

  

  

 

Total marketing related intangible assets with indefinite lives, primarily tradenames, were $507.2 million at September 30, 2005 and $346.9 million at December 31, 2004. Certain foreign currency translation adjustments are also reflected in the intangible amounts. These intangible assets are not subject to amortization, but are subjected to annual impairment tests.

 

5. Debt and Financing

 

Total debt consisted of the following:

 

(in millions)


   September 30, 2005

    December 31, 2004

 

ABS borrowings, secured by accounts receivable

   $ 456.0     $ —    

Floating rate notes

     150.0       —    

USF senior notes

     270.6       —    

Senior notes due 2008

     240.4       244.0  

Contingent convertible senior notes

     400.0       400.0  

Revolving credit facility

     100.0       —    

Other

     13.9       13.9  
    


 


Total debt

   $ 1,630.9     $ 657.9  

ABS borrowings

     (456.0 )     —    

Current maturities

     (4.4 )     (254.4 )
    


 


Long-term debt

   $ 1,170.5     $ 403.5  
    


 


 

Floating Rate Notes

 

On May 24, 2005, we completed the private placement of $150 million in aggregate principal amount of senior floating rate notes due 2008 (the “Floating Rate Notes”) that bear interest at a floating rate based on the London Interbank Offered Rate (“LIBOR”) plus 1.375% payable quarterly in arrears (3.79% at September 30, 2005). The Floating Rate Notes contain affirmative covenants similar to our credit agreement, yet does not require any financial covenants. We used the proceeds from the $150 million private placement as a part of the financing for the acquisition of USF. The notes were later exchanged for registered notes as a part of an exchange offer in June 2005.

 

The Floating Rate Notes represent senior unsecured obligations of the Company and rank pari passu in right of payment with all other present and future senior indebtedness of the Company. The Floating Rate Notes are jointly and severally guaranteed by certain of our current domestic subsidiaries and have certain call features which allow us to redeem the notes at par anytime after November 15, 2006.

 

USF Senior Notes

 

As part of our acquisition of USF and by virtue of the merger agreement, we assumed $150 million aggregate principal amount of 8.5% senior notes due April 15, 2010, and $100 million aggregate principal amount of 6.5% senior notes due May 1, 2009 (collectively “USF Senior Notes”). The USF Senior Notes were revalued as part of purchase accounting and assigned a fair value of $272.2 million on May 24, 2005, with $18.6 million fair value adjustment to the 2010 notes and $3.6 million fair value adjustment to the 2009 notes. The premium over the face value of the USF Senior Notes is being amortized as a reduction to interest expense over the remaining life of the notes.

 

10


Table of Contents

Asset Backed Securitization Facility

 

On May 24, 2005, we amended our asset-backed securitization (“ABS”) facility by entering into a Second Amended and Restated Receivables Purchase Agreement. Under the terms of this agreement, the ABS facility now involves receivables of USF Holland and USF Reddaway, two operating companies of USF acquired May 24, 2005, in addition to the previously included receivables of Yellow Transportation and Roadway Express. In addition, the facility has an increased limit of $650 million, up from the previous limit of $450 million, and now provides a letter of credit sublimit of $325 million. The interest rate continues to be a variable rate based on A1/P1 rated commercial paper, plus a fixed increment for utilization. No other material changes were made to the agreement. Upon finalization of the amended agreement on May 24, 2005, we borrowed $550 million from the facility to fund a portion of the USF purchase price.

 

Credit Agreement

 

On May 19, 2005, we entered into an Amended and Restated Credit Agreement with certain banks, expiring May 18, 2010, that provides a $850 million senior unsecured revolving credit facility, including sublimits available for borrowings under certain foreign currencies. This agreement amends and restates our existing Credit Agreement, dated as of September 10, 2004, that provided, among other things, a revolving facility of $500 million. The new agreement also provides for letters of credit to be issued that would, in turn, reduce the borrowing capacity. As of September 30, 2005, $100 million was outstanding under the new agreement.

 

Amounts borrowed under the credit agreement bear interest at LIBOR plus 0.60% (3.81% at September 30, 2005). Additionally, we are obligated to a facility fee of 0.15% of the total commitment. In accordance with the terms of the agreement, we must comply with certain performance covenants. As of September 30, 2005, we were in compliance with all terms of the agreement.

 

Future maturities of total debt for the years ending December 31 are as follows:

 

(in millions)


    

2005

   $ 4.4

2006

     456.0

2007

     —  

2008

     377.5

2009

     101.0

Thereafter

     656.0
    

Total

   $ 1,594.9
    

 

6. Stock-Based Compensation

 

We have various stock-based employee compensation plans, which are described more fully in our Annual Report on Form

10-K for the year ended December 31, 2004. We account for stock options issued under those plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. We do not reflect compensation costs in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

 

We have not granted any options during the three or the nine months ended September 30, 2005. We estimated the fair value per option for each option granted during the nine months ended September 30, 2004 using the Black-Scholes option pricing model with the following weighted average assumptions:

 

    

Nine Months Ended

September 30, 2004


 

Actual options granted

     28,000  

Dividend yield

     —   %

Expected volatility

     45.2 %

Risk-free interest rate

     2.6 %

Expected option life (years)

     3.6  

Fair value per option

   $ 12.61  

 

11


Table of Contents

The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, for the three and nine months ended September 30:

 

     Three Months

   Nine Months

(in millions except per share data)


   2005

   2004

   2005

   2004

Net income, as reported

   $ 85.3    $ 55.9    $ 211.3    $ 121.0

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

     0.2      0.4      0.7      1.3
    

  

  

  

Pro forma net income

   $ 85.1    $ 55.5    $ 210.6    $ 119.7
    

  

  

  

Basic earnings per share:

                           

Net income – as reported

   $ 1.47    $ 1.16    $ 3.97    $ 2.52

Net income – pro forma

     1.47      1.15      3.96      2.49

Diluted earnings per share:

                           

Net income – as reported

     1.42      1.15      3.77      2.50

Net income – pro forma

     1.41      1.14      3.76      2.47

 

During the nine months ended September 30, 2005, we recorded the issuance of 329,413 share units and 8,975 shares of restricted stock to certain executive officers, key employees and our board of directors under our long-term incentive and equity award plan. The weighted-average grant-date fair value of these awards was $58.39 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 172,859 units awarded, the vesting provision states that 50% of the awarded performance share units will vest three years from the date of grant, and the remaining 50% will vest six years from the date of grant. With respect to 155,024 units, the entire award vests on the third anniversary of the date of grant.

 

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

 

7. Employee Benefits

 

Components of Net Periodic Pension and Other Postretirement Cost

 

The following table sets forth the components of our pension costs for the three and nine months ended September 30:

 

     Three Months

    Nine Months

 

(in millions)


   2005

    2004

    2005

    2004

 

Service cost

   $ 10.8     $ 9.7     $ 32.1     $ 29.6  

Interest cost

     15.2       14.2       45.2       42.9  

Expected return on plan assets

     (14.0 )     (13.2 )     (41.8 )     (39.7 )

Amortization of prior service cost

     0.3       0.4       1.1       1.0  

Amortization of net loss

     2.7       1.2       8.0       4.2  
    


 


 


 


Net periodic pension cost

   $ 15.0     $ 12.3     $ 44.6     $ 38.0  
    


 


 


 


 

The following table sets forth the components of our other postretirement costs for the three and nine months ended September 30:

 

     Three Months

   Nine Months

(in millions)


   2005

   2004

   2005

    2004

Service cost

   $ —      $ 0.5    $ 0.6     $ 1.4

Interest cost

     0.2      0.8      1.8       2.4

Amortization of prior service cost

     —        —        0.2       —  

Amortization of net gain

     —        —        (0.2 )     —  
    

  

  


 

Other postretirement cost

   $ 0.2    $ 1.3    $ 2.4     $ 3.8
    

  

  


 

 

12


Table of Contents

Employer Contributions

 

We expect to contribute a total of $49.9 million to our pension plans in 2005. For the nine months ended September 30, 2005, our contributions to the pension plans have approximated $49.5 million.

 

8. Earnings Per Share

 

Dilutive securities, consisting of options to purchase our common stock, included in the calculation of diluted weighted average common shares were 600,000 and 667,000 for the three and nine months ended September 30, 2005 and 574,000 and 499,000 for the three and nine months ended September 30, 2004. In addition, dilutive securities related to our net share settle contingent convertible notes were 1,600,000 and 2,174,000 for the three and nine months ended September 30, 2005. There were no such comparable amounts for the three and nine months ended September 30, 2004.

 

9. Business Segments

 

We report financial and descriptive information about our reportable operating segments on a basis consistent with that used internally for evaluating segment performance and allocating resources to segments. We manage the segments separately because each requires different operating, marketing and technology strategies. We evaluate performance primarily on adjusted operating income and return on capital.

 

We have four reportable segments, which are strategic business units that offer complementary transportation services to their customers. Yellow Transportation and Roadway Express are carriers that provide comprehensive regional, national and international transportation services. Regional Transportation is comprised of carriers that focus primarily on business opportunities in the regional and next-day delivery markets. Meridian IQ, our logistics segment, provides domestic and international freight forwarding, warehousing and cross-dock services, multi-modal brokerage services, and transportation management services.

 

The accounting policies of the segments are the same as those described in the Summary of Accounting Policies note in our Annual Report on Form 10-K for the year ended December 31, 2004. The USF accounting policies have been conformed to Yellow Roadway effective as of May 25, 2005. We charge management fees and other corporate services to our segments based on the direct benefits received or as a percentage of revenue. Corporate operating losses represent operating expenses of the holding company, including salaries, wages and benefits, along with incentive compensation and professional services for all periods presented. Corporate identifiable assets primarily refer to cash, cash equivalents, technology assets and deferred debt issuance costs. Intersegment revenue relates to transportation services between our segments, as well as charges to Yellow Transportation for use of various Meridian IQ service names.

 

The following table summarizes our operations by business segment:

 

(in millions)


  

Yellow

Transportation


   

Roadway

Express


  

Regional

Transportation


  

Meridian

IQ


  

Corporate/

Eliminations


    Consolidated

 

As of September 30, 2005

                                             

Identifiable assets

   $ 1,073.9     $ 2,126.4    $ 2,174.8    $ 278.4    $ 143.2     $ 5,796.7  

As of December 31, 2004

                                             

Identifiable assets

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

Three months ended September 30, 2005

                                             

External revenue

     891.2       857.3      601.8      141.4      —         2,491.7  

Intersegment revenue

     1.3       1.1      4.8      0.5      (7.7 )     —    

Operating income (loss)

     73.5       58.2      27.8      6.3      (9.0 )     156.8  

Adjustments to operating income(a)

     (0.4 )     1.9      5.0      —        4.3       10.8  

Adjusted operating income (loss)(b)

     73.1       60.1      32.8      6.3      (4.7 )     167.6  

Three months ended September 30, 2004

                                             

External revenue

     828.3       811.7      70.7      56.4      —         1,767.1  

Intersegment revenue

     0.7       0.7      —        0.6      (2.0 )     —    

Operating income (loss)

     63.7       52.1      10.2      1.1      (6.5 )     120.6  

Adjustments to operating income(a)

     (1.3 )     0.3      0.1      0.1      —         (0.8 )

Adjusted operating income (loss)(b)

     62.4       52.4      10.3      1.2      (6.5 )     119.8  

Nine months ended September 30, 2005

                                             

External revenue

     2,532.0       2,453.4      980.7      292.4      —         6,258.5  

Intersegment revenue

     2.8       2.6      5.8      1.6      (12.8 )     —    

Operating income (loss)

     190.8       146.5      55.7      10.9      (21.3 )     382.6  

Adjustments to operating income(a)

     (2.9 )     2.4      5.4      —        4.8       9.7  

Adjusted operating income (loss)(b)

     187.9       148.9      61.1      10.9      (16.5 )     392.3  

Nine months ended September 30, 2004

                                             

External revenue

     2,354.0       2,296.6      191.1      151.6      —         4,993.3  

Intersegment revenue

     2.1       1.1      —        1.7      (4.9 )     —    

Operating income (loss)

     135.8       103.5      25.2      2.3      (16.6 )     250.2  

Adjustments to operating income(a)

     (0.8 )     0.2      —        —        —         (0.6 )

Adjusted operating income (loss)(b)

     135.0       103.7      25.2      2.3      (16.6 )     249.6  

(a) Management excludes these items when evaluating operating income and segment performance to better evaluate the results of our core operations. In the 2005 periods presented, adjustments consisted of losses (gains) on property disposals, acquisition charges and executive severance charges. In the 2004 periods presented, adjustments consisted of losses (gains) on property disposals.
(b) This measurement is used for internal management purposes and should not be construed as a better measurement than operating income as defined by generally accepted accounting principles.

 

13


Table of Contents
10. Comprehensive Income

 

Our comprehensive income for the periods presented includes net income and foreign currency translation adjustments. Comprehensive income for the three and nine months ended September 30 follows:

 

     Three Months

   Nine Months

(in millions)


   2005

   2004

   2005

   2004

Net income

   $ 85.3    $ 55.9    $ 211.3    $ 121.0

Other comprehensive income, net of tax:

                           

Changes in foreign currency translation adjustments

     3.6      2.9      1.9      1.5
    

  

  

  

Comprehensive income

   $ 88.9    $ 58.8    $ 213.2    $ 122.5
    

  

  

  

 

11. Rental Expenses

 

We incur rental expenses under non-cancelable lease agreements for certain buildings and operating equipment. Rental expense is included in “operating expenses and supplies” on the Statements of Consolidated Operations. The following table represents the actual rental expense, as reflected in operating income, incurred for the three and nine months ended September 30:

 

     Three Months

   Nine Months

(in millions)


   2005

   2004

   2005

   2004

Rental expense

   $ 31.5    $ 23.6    $ 89.4    $ 71.5
    

  

  

  

 

12. Multi-Employer Pension Plans

 

Yellow Transportation, Roadway Express, New Penn, USF Bestway, USF Holland and USF Reddaway contribute to approximately 90 separate multi-employer health, welfare and pension plans for employees covered by collective bargaining agreements (approximately 69% of our total employees). The largest of these plans, the Central States Southeast and Southwest Areas Pension Plan (the “Central States Plan”) provides retirement benefits to approximately 37% of our total employees. The amounts of these contributions are determined by contract and established in the agreements. The health and welfare plans provide health care and disability benefits to active employees and retirees. The pension plans provide defined benefits to retired participants. We recognize as net pension cost the required contribution for the period and recognize as a liability any contributions due and unpaid.

 

Under current law regarding multi-employer pension plans, a termination, withdrawal or partial withdrawal from any multi-employer plan in an under-funded status would render us liable for a proportionate share of the multi-employer plans’ unfunded vested liabilities. This potential unfunded pension liability also applies to our unionized competitors who contribute to multi-employer plans. Based on the limited information available from plan administrators, which we cannot independently validate, we believe that our portion of the contingent liability in the case of a full withdrawal or termination from all of the multi-employer pension plans to which we contribute or from one or more plans that provide benefits to a significant number of our employees would be material to our financial position and results of operations. Yellow Transportation, Roadway Express and the applicable subsidiaries of Regional Transportation have no current intention of taking any action that would subject us to obligations under the legislation.

 

14


Table of Contents

Yellow Transportation, Roadway Express, New Penn, USF Bestway, USF Holland and USF Reddaway 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. The Central States Plan, in particular, has informed us that investment performance has adversely affected its funding levels and that the fund is seeking corrective measures to address its funding. If any of these multi-employer pension plans, including the Central States Plan, fail to meet minimum funding requirements and the trustees of such a plan are unable to obtain a waiver of the requirements or certain changes in how the applicable plan calculates its funding level from the Internal Revenue Service (“IRS”) or reduce pension benefits to a level where the requirements are met, the IRS could impose an excise tax on all employers participating in these plans. These excise taxes are not contributed to the deficient funds, but rather are deposited in the United States general treasury funds. To avoid these taxes, contributions in excess of our contractually agreed upon rates could be necessary to correct the funding deficiency. If the IRS imposed an excise tax on the participating employers or we pay additional contributions in amounts sufficient to avoid the tax, either of these actions could have a material adverse impact on the financial results of Yellow Roadway.

 

The Central States Plan has applied for, and the IRS has granted, an extension on the amortization of its unfunded liabilities through 2014, subject to Central States Plan improving its funding levels during that period and certain other conditions. Assuming that the Central States Plan meets these conditions, it is expected to meet the minimum funding requirements, as the IRS has modified them, through at least 2014. Absent the benefit of the amortization extension that the IRS has granted to the Central States Plan, the Company believes that the plan would not meet the minimum funding requirements that the Code and related regulations require.

 

13. Certain Commitments, Contingencies and Uncertainties

 

In 2004, USF Red Star, a USF subsidiary that operated in the Northeastern U.S, was shut down. Due to the shutdown, USF, now our wholly owned subsidiary, is subject to withdrawal liability under the Multi-Employer Pension Plan Amendment Act of 1980 (as amended, “MEPPA”) for up to 14 multi-employer pension plans. Based on information that USF has recently received from these plans, Yellow Roadway estimates that USF Red Star could be liable for up to approximately $85 million. However, Yellow Roadway also estimates that approximately $20 million of this liability could be abated because of contributions that Yellow Transportation, Roadway Express, New Penn and USF Holland made to certain of these 14 plans. Thus, at the purchase date we reserved approximately $65 million for the liabilities. During the three months ended September 30, 2005, we made payments of approximately $5 million resulting in a reserve of approximately $60 million at September 30, 2005. We have recognized these liabilities as an obligation assumed on the acquisition date of USF, resulting in additional goodwill. See Note 3. The expected annual cash flow relative to this liability is approximately $12 million until further resolution. USF is entitled to review and contest liability assessments that various funds provided as well as determine whether additional abatement might be available as a result of other Yellow Roadway business units who make contributions to these plans. The final withdrawal liability may be adjusted when further information is available as we negotiate with the pension plans to agree on the correct calculation of withdrawal liability amounts and as sufficient information becomes available to determine the available abatement of the liability under MEPPA, including any necessary arbitration or litigation with the affected pension plans. The timing of any funding of USF Red Star’s withdrawal liabilities to any particular fund will depend upon agreement with the fund on the ultimate amount of the liability, the conclusion of any arbitration or litigation to settle any disputes and the determination at the end of a plan year of whether abatement is applicable. MEPPA provides that certain interim payments may be required until these events occur. MEPPA also provides that any ultimate withdrawal liability payments may be made in a lump sum or over a period of time.

 

In November 2004, the Teamsters National Freight Industry Negotiating Committee (the “Teamsters”) filed a complaint against USF, USF Red Star and USF Holland in the United States District Court for the Eastern District of Pennsylvania. In connection with the shut down of USF Red Star, the Teamsters claimed certain violations of the National Labor Relations Act (the “NLRA”), alleging (among other things) that the shut down was in breach of USF Red Star’s labor contract. The Teamsters asked for unspecified damages. Additionally, the Teamsters filed a class action suit on behalf of the employees of USF Red Star alleging violations of the federal Worker Adjustment and Retraining Notification Act (“WARN Act”), seeking 60 days back compensation for USF Red Star employees due to allegedly shutting down USF Red Star without adequate notice under the WARN Act. We have vigorously contested this lawsuit. The Teamsters also requested the National Labor Relations Board (“NLRB”) to issue a complaint against USF, USF Red Star and USF Holland for allegedly unfair labor practices for these same allegations. We vigorously contested these allegations as well. The NLRB has not issued a complaint in this matter.

 

Including the Teamsters WARN action mentioned above, either or both of USF or USF Red Star are currently named in five class action lawsuits alleging violations of the federal WARN Act. These suits have been consolidated into one action in the

 

15


Table of Contents

United States District Court for the Eastern District of Pennsylvania. The plaintiffs in these suits are seeking 60 days back compensation for USF Red Star employees due to allegedly shutting down Red Star without adequate notice under the WARN Act. We have vigorously contested these lawsuits.

 

USF Red Star has sued the Teamsters in connection with their strike on USF Red Star in the Northern District of New York, alleging that the strike was in breach of Teamsters’ labor contract and that the strike was illegal secondary conduct under the NLRA, intending to pressure USF Dugan to allow organizing efforts at USF Dugan to succeed. USF Red Star sought unspecified damages from the Teamsters in connection with this lawsuit.

 

The Teamsters, USF, USF Holland, USF Red Star and the WARN class action plaintiffs have tentatively settled all of these disputes arising out of the USF Red Star shutdown. Pursuant to the tentative settlement, USF Red Star would pay the WARN Act plaintiffs $7 million; the WARN Act plaintiffs would release USF Red Star, USF Holland and USF from any further liability; the unfair labor practice charges before the NLRB would be withdrawn; and certain related labor grievances would be settled. The tentative settlement is subject to final approval of the court. We have recognized this settlement obligation as a liability assumed on the acquisition date of USF, resulting in additional goodwill. See Note 3.

 

In December 2003, Idealease Services, Inc. (“Idealease”) filed a complaint against USF Logistics in the Circuit Court of Cook County in Chicago, Illinois. Idealease was asking the court to require USF Logistics to specifically perform an alleged contractual obligation to buy back from Idealease a fleet of vehicles following the cessation of a customer’s business operations. In the interim, Idealease sold the vehicles and asked USF Logistics to pay Idealease the difference between the sale price of the vehicles and the price schedule set forth on the parties’ contract, approximately $4.9 million. Alternatively, Idealease contended that USF Logistics was liable for the unpaid lease payments of approximately $11.5 million, which remained payable because certain riders to the lease agreement are invalid due to a lack of consideration. In October 2005, USF Logistics orally settled this dispute for an agreement to pay $3 million. We will recognize the settlement obligation as a liability assumed on the acquisition date of USF, resulting in additional goodwill. See Note 3.

 

During June 2005, USF Reddaway entered into a four year labor agreement with its unionized employees at certain of its Oregon and Washington facilities.

 

16


Table of Contents
14. Guarantees of the Contingent Convertible Senior Notes and Senior Floating Rate Notes

 

In August 2003, we issued 5.0% contingent convertible senior notes due 2023. In November 2003, we issued 3.375% contingent convertible senior notes due 2023 (the August and November issuances, collectively, may also be known as the “contingent convertible senior notes”). In December 2004, we completed exchange offers pursuant to which holders of the contingent convertible senior notes could exchange their notes for an equal amount of new net share settled contingent convertible senior notes. Substantially all notes were exchanged as a part of the exchange offers. In May 2005, we completed the private placement of $150 million in aggregate principal amount of senior floating rate notes due 2008. In connection with the net share settled contingent convertible senior notes and the floating rate notes, the following 100% owned subsidiaries of Yellow Roadway have issued guarantees in favor of the holders of the net share settled contingent convertible senior notes and the floating rate notes: Yellow Transportation, Inc., Mission Supply Company, Yellow Relocation Services, Inc., Yellow Roadway Technologies, Inc., Meridian IQ, Inc., MIQ LLC (formerly Yellow GPS, LLC), Globe.com Lines, Inc., Roadway LLC, Roadway Next Day Corporation, and Roadway Express, Inc. Each of the guarantees is full and unconditional and joint and several.

 

The summarized consolidating financial statements are presented in lieu of separate financial statements and other related disclosures of the subsidiary guarantors and issuer because management does not believe that such separate financial statements and related disclosures would be material to investors. There are currently no significant restrictions on the ability of Yellow Roadway or any guarantor to obtain funds from its subsidiaries by dividend or loan.

 

The following represents summarized condensed consolidating financial information as of September 30, 2005 and

December 31, 2004 with respect to the financial position, for the three and nine months ended September 30, 2005 and 2004 for results of operations, and for the nine months ended September 30, 2005 and 2004 for the statements of cash flows of Yellow Roadway and its subsidiaries. The Parent column presents the financial information of Yellow Roadway, the primary obligor of the contingent convertible senior notes and the floating rate notes. The Guarantor Subsidiaries column presents the financial information of all guarantor subsidiaries of the net share settled contingent convertible senior notes and the floating rate notes. The Non-Guarantor Subsidiaries column presents the financial information of all non-guarantor subsidiaries, including those subsidiaries governed by foreign laws, and Yellow Roadway Receivables Funding Corporation, Yellow Receivables Corporation and Roadway Funding, Inc., the special-purpose entities that are or were associated with our ABS agreements.

 

Condensed Consolidating Balance Sheets

 

September 30, 2005

(in millions)


   Parent

   

Guarantor

Subsidiaries


   

Non-

Guarantor

Subsidiaries


   Eliminations

    Consolidated

Cash and cash equivalents

   $ 11     $ 9     $ 37    $ —       $ 57

Intercompany advances receivable

     —         (84 )     84      —         —  

Accounts receivable, net

     3       39       1,218      (10 )     1,250

Prepaid expenses and other

     5       152       56      8       221
    


 


 

  


 

Total current assets

     19       116       1,395      (2 )     1,528

Property and equipment

     —         3,015       597      —         3,612

Less – accumulated depreciation

     —         1,303       50      —         1,353
    


 


 

  


 

Net property and equipment

     —         1,712       547      —         2,259

Investment in subsidiaries

     2,703       171       —        (2,874 )     —  

Receivable from affiliate

     (290 )     694       77      (481 )     —  

Goodwill, intangibles and other assets

     266       1,716       377      (349 )     2,010
    


 


 

  


 

Total assets

   $ 2,698     $ 4,409     $ 2,396    $ (3,706 )   $ 5,797
    


 


 

  


 

Intercompany advances payable

   $ 456     $ (743 )   $ 486    $ (199 )   $ —  

Accounts payable

     4       281       74      —         359

Wages, vacations and employees’ benefits

     10       459       59      —         528

Other current and accrued liabilities

     (29 )     323       179      (41 )     432

Current maturities of long-term debt

     —         4       456      —         460
    


 


 

  


 

Total current liabilities

     441       324       1,254      (240 )     1,779

Payable to affiliate

     (113 )     174       581      (642 )     —  

Long-term debt, less current portion

     650       520       —        —         1,170

Deferred income taxes, net

     —         270       99      5       374

Claims and other liabilities

     23       574       52      (70 )     579

Commitments and contingencies

     —         —         —        —         —  

Shareholders’ equity

     1,697       2,547       410      (2,759 )     1,895
    


 


 

  


 

Total liabilities and shareholders’ equity

   $ 2,698     $ 4,409     $ 2,396    $ (3,706 )   $ 5,797
    


 


 

  


 

 

17


Table of Contents

December 31, 2004

(in millions)


   Parent

    Guarantor
Subsidiaries


  

Non-

Guarantor
Subsidiaries


    Eliminations

    Consolidated

 

Cash and cash equivalents

   $ 82     $ 7    $ 17     $ —       $ 106  

Intercompany advances receivable

     —         484      —         (484 )     —    

Accounts receivable, net

     3       14      762       —         779  

Prepaid expenses and other

     4       149      15       —         168  
    


 

  


 


 


Total current assets

     89       654      794       (484 )     1,053  

Property and equipment at cost

     —         2,541      131       —         2,672  

Less – accumulated depreciation

     —         1,231      18       —         1,249  
    


 

  


 


 


Net property and equipment

     —         1,310      113       —         1,423  

Investment in subsidiaries

     1,162       97      —         (1,259 )     —    

Receivable from affiliate

     8       127      39       (174 )     —    

Goodwill, intangibles and other assets

     218       953      180       (200 )     1,151  
    


 

  


 


 


Total assets

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


 

  


 


 


Intercompany advances payable

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

Accounts payable

     8       276      23       —         307  

Wages, vacations and employees’ benefits

     17       391      20       —         428  

Other current and accrued liabilities

     17       183      10       —         210  

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  
    


 

  


 


 


Condensed Consolidating Statements of Operations

                                       

For the three months ended September 30, 2005

(in millions)


   Parent

    Guarantor
Subsidiaries


  

Non-

Guarantor
Subsidiaries


    Eliminations

    Consolidated

 

Operating revenue

   $ 15     $ 2,130    $ 445     $ (98 )   $ 2,492  
    


 

  


 


 


Operating expenses:

                                       

Salaries, wages and employees’ benefits

     12       1,232      220       (13 )     1,451  

Operating expenses and supplies

     9       392      86       (74 )     413  

Purchased transportation

     —         196      86       (8 )     274  

Depreciation and amortization

     —         57      19       —         76  

Other operating expenses

     —         98      17       (3 )     112  

Acquisition and executive severance charges

     4       1      4       —         9  
    


 

  


 


 


Total operating expenses

     25       1,976      432       (98 )     2,335  
    


 

  


 


 


Operating income (loss)

     (10 )     154      13       —         157  
    


 

  


 


 


Nonoperating (income) expenses:

                                       

Interest expense

     10       8      21       (19 )     20  

Other

     (6 )     48      (52 )     9       (1 )
    


 

  


 


 


Nonoperating (income) expenses, net

     4       56      (31 )     (10 )     19  
    


 

  


 


 


Income (loss) before income taxes

     (14 )     98      44       10       138  

Income tax provision (benefit)

     (4 )     41      20       (4 )     53  
    


 

  


 


 


Net income (loss)

   $ (10 )   $ 57    $ 24     $ 14     $ 85  
    


 

  


 


 


 

18


Table of Contents

For the three months ended September 30, 2004

(in millions)


   Parent

    Guarantor
Subsidiaries


  

Non-

Guarantor
Subsidiaries


    Eliminations

    Consolidated

 

Operating revenue

   $ 11     $ 1,642    $ 128     $ (14 )   $ 1,767  
    


 

  


 


 


Operating expenses:

                                       

Salaries, wages and employees’ benefits

     9       1,012      62       —         1,083  

Operating expenses and supplies

     8       232      23       (12 )     251  

Purchased transportation

     —         174      23       (1 )     196  

Depreciation and amortization

     —         39      4       —         43  

Other operating expenses

     —         69      4       —         73  
    


 

  


 


 


Total operating expenses

     17       1,526      116       (13 )     1,646  
    


 

  


 


 


Operating income (loss)

     (6 )     116      12       (1 )     121  
    


 

  


 


 


Nonoperating (income) expenses:

                                       

Interest expense

     6       19      10       (24 )     11  

Other

     64       11      (28 )     (28 )     19  
    


 

  


 


 


Nonoperating (income) expenses, net

     70       30      (18 )     (52 )     30  
    


 

  


 


 


Income (loss) before income taxes

     (76 )     86      30       51       91  

Income tax provision (benefit)

     (9 )     34      11       (1 )     35  
    


 

  


 


 


Net income (loss)

   $ (67 )   $ 52    $ 19     $ 52     $ 56  
    


 

  


 


 


For the nine months ended September 30, 2005

(in millions)


   Parent

    Guarantor
Subsidiaries


  

Non-

Guarantor
Subsidiaries


    Eliminations

    Consolidated

 

Operating revenue

   $ 45     $ 5,544    $ 918     $ (249 )   $ 6,258  
    


 

  


 


 


Operating expenses:

                                       

Salaries, wages and employees’ benefits

     35       3,254      450       (18 )     3,721  

Operating expenses and supplies

     25       1,009      180       (211 )     1,003  

Purchased transportation

     —         522      179       (14 )     687  

Depreciation and amortization

     —         147      34       —         181  

Other operating expenses

     1       245      33       (5 )     274  

Acquisition and executive severance charges

     5       1      4       —         10  
    


 

  


 


 


Total operating expenses

     66       5,178      880       (248 )     5,876  
    


 

  


 


 


Operating income (loss)

     (21 )     366      38       (1 )     382  
    


 

  


 


 


Nonoperating (income) expenses:

                                       

Interest expense

     24       19      45       (45 )     43  

Other

     (20 )     113      (129 )     34       (2 )
    


 

  


 


 


Nonoperating (income) expenses, net

     4       132      (84 )     (11 )     41  
    


 

  


 


 


Income (loss) before income taxes

     (25 )     234      122       10       341  

Income tax provision (benefit)

     (4 )     93      48       (7 )     130  
    


 

  


 


 


Net income (loss)

   $ (21 )   $ 141    $ 74     $ 17     $ 211  
    


 

  


 


 


 

19


Table of Contents

For the nine months ended September 30, 2004

(in millions)


   Parent

    Guarantor
Subsidiaries


   

Non-

Guarantor
Subsidiaries


    Eliminations

    Consolidated

 

Operating revenue

   $ 34     $ 4,646     $ 353     $ (40 )   $ 4,993  
    


 


 


 


 


Operating expenses:

                                        

Salaries, wages and employees’ benefits

     28       2,907       173       —         3,108  

Operating expenses and supplies

     19       671       84       (35 )     739  

Purchased transportation

     —         484       66       (3 )     547  

Depreciation and amortization

     —         115       12       —         127  

Other operating expenses

     3       210       9       —         222  
    


 


 


 


 


Total operating expenses

     50       4,387       344       (38 )     4,743  
    


 


 


 


 


Operating income (loss)

     (16 )     259       9       (2 )     250  
    


 


 


 


 


Nonoperating (income) expenses:

                                        

Interest expense

     22       54       21       (63 )     34  

Other

     4       49       (95 )     61       19  
    


 


 


 


 


Nonoperating (income) expenses, net

     26       103       (74 )     (2 )     53  
    


 


 


 


 


Income (loss) before income taxes

     (42 )     156       83       —         197  

Income tax provision (benefit)

     (16 )     62       29       1       76  
    


 


 


 


 


Net income (loss)

   $ (26 )   $ 94     $ 54     $ (1 )   $ 121  
    


 


 


 


 


Condensed Consolidating Statements of Cash Flows

                                        

For the nine months ended September 30, 2005

(in millions)


   Parent

    Guarantor
Subsidiaries


   

Non-

Guarantor
Subsidiaries


    Eliminations

    Consolidated

 

Operating activities:

                                        

Net cash provided by (used in) operating activities

   $ (51 )   $ 285     $ 18     $ 4     $ 256  
    


 


 


 


 


Investing activities:

                                        

Acquisition of property and equipment

     —         (185 )     (46 )     —         (231 )

Proceeds from disposal of property and equipment

     —         16       2       —         18  

Acquisition of companies

     (805 )     45       6       —         (754 )

Investment in affiliate

     (46 )     —         —         —         (46 )

Other

     —         —         2       —         2  
    


 


 


 


 


Net cash used in investing activities

     (851 )     (124 )     (36 )     —         (1,011 )
    


 


 


 


 


Financing activities:

                                        

ABS borrowings, net

     —         —         456       —         456  

Issuance of long-term debt

     250       —         —         —         250  

Debt issuance costs

     (4 )     —         —         —         (4 )

Proceeds from exercise of stock options

     4       —         —         —         4  

Cash dividends paid to shareholders

     —         7       (7 )     —         —    

Intercompany advances / repayments

     581       (166 )     (411 )     (4 )     —    
    


 


 


 


 


Net cash provided by (used in) financing activities

     831       (159 )     38       (4 )     706  
    


 


 


 


 


Net increase (decrease) in cash and cash equivalents

     (71 )     2       20       —         (49 )

Cash and cash equivalents, beginning of period

     82       7       17       —         106  
    


 


 


 


 


Cash and cash equivalents, end of period

   $ 11     $ 9     $ 37     $ —       $ 57  
    


 


 


 


 


 

20


Table of Contents

For the nine months ended September 30, 2004

(in millions)


   Parent

    Guarantor
Subsidiaries


   

Non-

Guarantor
Subsidiaries


    Eliminations

   Consolidated

 

Operating activities:

                                       

Net cash provided by (used in) operating activities

   $ (2 )   $ 567     $ (290 )   $ —      $ 275  
    


 


 


 

  


Investing activities:

                                       

Acquisition of property and equipment

     —         (139 )     (16 )     —        (155 )

Proceeds from disposal of property and equipment

     —         11       1       —        12  

Investment in subsidiary

     —         (17 )     17              —    

Acquisition of companies

     (11 )     1       —         —        (10 )
    


 


 


 

  


Net cash used in investing activities

     (11 )     (144 )     2       —        (153 )
    


 


 


 

  


Financing activities:

                                       

ABS borrowings, net

     —         —         (2 )     —        (2 )

Repayment of long-term debt

     (175 )     —         —         —        (175 )

Debt issuance cost

     (3 )     —         —         —        (3 )

Proceeds from stock options

     9       —         —         —        9  

Intercompany advances / repayments

     172       (436 )     264       —        —    
    


 


 


 

  


Net cash provided by (used in) financing activities

     3       (436 )     262       —        (171 )
    


 


 


 

  


Net decrease in cash and cash equivalents

     (10 )     (13 )     (26 )     —        (49 )

Cash and cash equivalents, beginning of period

     19       20       36       —        75  
    


 


 


 

  


Cash and cash equivalents, end of period

   $ 9     $ 7     $ 10     $ —      $ 26  
    


 


 


 

  


 

21


Table of Contents
15. Guarantees of the Senior Notes Due 2008

 

In connection with the senior notes due 2008 that Yellow Roadway assumed by virtue of its merger with Roadway, and in addition to the primary obligor, Roadway LLC, Yellow Roadway and its following 100% owned subsidiaries have issued guarantees in favor of the holders of the senior notes due 2008: Roadway Next Day Corporation, New Penn Motor Express, Inc., Roadway Express, Inc., Roadway Reverse Logistics, Inc. and Roadway Express International, Inc. Each of the guarantees is full and unconditional and joint and several.

 

The summarized consolidating financial statements are presented in lieu of separate financial statements and other related disclosures of the subsidiary guarantors and issuer because management does not believe that such separate financial statements and related disclosures would be material to investors. There are currently no significant restrictions on the ability of Yellow Roadway or any guarantor subsidiary to obtain funds from its subsidiaries by dividend or loan.

 

The following represents summarized condensed consolidating financial information of Yellow Roadway and its subsidiaries as of September 30, 2005 and December 31, 2004 with respect to the financial position, for the three and nine months ended September 30, 2005 and 2004 for results of operations, and for the nine months ended September 30, 2005 and 2004 for statements of cash flows. The primary obligor column presents the financial information of Roadway LLC. The Guarantor Subsidiaries column presents the financial information of all guarantor subsidiaries of the senior notes due 2008 including Yellow Roadway, the holding company. The Non-Guarantor Subsidiaries column presents the financial information of all non-guarantor subsidiaries, including those subsidiaries that are governed by foreign laws and Yellow Roadway Receivables Funding Corporation, Yellow Receivables Corporation and Roadway Funding, Inc., the special-purpose entities that are or were associated with our ABS agreements.

 

Condensed Consolidating Balance Sheets

 

September 30, 2005

(in millions)


   Primary
Obligor


    Guarantor
Subsidiaries


   

Non-

Guarantor
Subsidiaries


   Eliminations

    Consolidated

Cash and cash equivalents

   $ —       $ 19     $ 38    $ —       $ 57

Intercompany advances receivable

     —         (24 )     24      —         —  

Accounts receivable, net

     —         16       1,244      (10 )     1,250

Prepaid expenses and other

     11       76       134      —         221
    


 


 

  


 

Total current assets

     11       87       1,440      (10 )     1,528

Property and equipment

     —         892       2,720      —         3,612

Less – accumulated depreciation

     —         112       1,241      —         1,353
    


 


 

  


 

Net property and equipment

     —         780       1,479      —         2,259

Investment in subsidiaries

     —         2,703       24      (2,727 )     —  

Receivable from affiliate

     118       (250 )     132      —         —  

Goodwill, intangibles and other assets

     656       1,291       911      (848 )     2,010
    


 


 

  


 

Total assets

   $ 785     $ 4,611     $ 3,986    $ (3,585 )   $ 5,797
    


 


 

  


 

Intercompany advances payable

   $ —       $ 91     $ 119    $ (210 )   $ —  

Accounts payable

     —         101       258      —         359

Wages, vacations and employees’ benefits

     —         233       295      —         528

Other current and accrued liabilities

     11       94       327      —         432

Current maturities of long-term debt

     —         —         460      —         460
    


 


 

  


 

Total current liabilities

     11       519       1,459      (210 )     1,779

Payable to affiliate

     —         537       113      (650 )     —  

Long-term debt, less current portion

     240       650       280      —         1,170

Deferred income taxes, net

     (9 )     218       165      —         374

Claims and other liabilities

     —         317       262      —         579

Commitments and contingencies

     —         —         —        —         —  

Shareholders’ equity

     543       2,370       1,707      (2,725 )     1,895
    


 


 

  


 

Total liabilities and shareholders’ equity

   $ 785     $ 4,611     $ 3,986    $ (3,585 )   $ 5,797
    


 


 

  


 

 

22


Table of Contents

December 31, 2004

(in millions)


   Primary
Obligor


    Guarantor
Subsidiaries


   

Non-

Guarantor
Subsidiaries


    Eliminations

    Consolidated

 

Cash and cash equivalents

   $ —       $ 89     $ 17     $ —       $ 106  

Intercompany advances receivable

     76       542       —         (618 )     —    

Accounts receivable, net

     —         (1 )     780       —         779  

Prepaid expenses and other

     11       69       88       —         168  
    


 


 


 


 


Total current assets

     87       699       885       (618 )     1,053  

Property and equipment

     —         876       1,796       —         2,672  

Less – accumulated depreciation

     —         70       1,179       —         1,249  
    


 


 


 


 


Net property and equipment

     —         806       617       —         1,423  

Investment in subsidiaries

     671       57       1       (729 )     —    

Receivable from affiliate

     650       (12 )     12       (650 )     —    

Goodwill, intangibles and other assets

     6       1,045       100       —         1,151  
    


 


 


 


 


Total assets

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


 


 


 


 


Intercompany advances payable

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

Accounts payable

     —         123       184       —         307  

Wages, vacations and employees’ benefits

     —         238       190       —         428  

Other current and accrued liabilities

     (16 )     130       96       —         210  

Current maturities of long-term debt

     —         250       4       —         254  
    


 


 


 


 


Total current liabilities

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

Payable to affiliate

     —         626       24       (650 )     —    

Long-term debt, less current portion

     244       150       10       —         404  

Deferred income taxes, net

     (9 )     212       117       —         320  

Claims and other liabilities

     —         334       156       —         490  

Commitments and contingencies

                                        

Shareholders’ equity

     1,195       532       216       (729 )     1,214  
    


 


 


 


 


Total liabilities and shareholders’ equity

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


 


 


 


 


Condensed Consolidating Statements of Operations

                                        

For the three months ended September 30, 2005

(in millions)


  

Primary

Obligor


   

Guarantor

Subsidiaries


   

Non-

Guarantor
Subsidiaries


    Eliminations

    Consolidated

 

Operating revenue

   $ —       $ 906     $ 1,663     $ (77 )   $ 2,492  
    


 


 


 


 


Operating expenses:

                                        

Salaries, wages and employees’ benefits

     —         531       920       —         1,451  

Operating expenses and supplies

     —         168       319       (74 )     413  

Purchased transportation

     —         84       193       (3 )     274  

Depreciation and amortization

     —         21       55       —         76  

Other operating expenses

     —         39       73       —         112  

Acquisition and executive severance charges

     —         4       5       —         9  
    


 


 


 


 


Total operating expenses

     —         847       1,565       (77 )     2,335  
    


 


 


 


 


Operating income

     —         59       98       —         157  
    


 


 


 


 


Nonoperating (income) expenses:

                                        

Interest expense

     3       24       26       (33 )     20  

Other

     (13 )     8       (19 )     23       (1 )
    


 


 


 


 


Nonoperating (income) expenses, net

     (10 )     32       7       (10 )     19  
    


 


 


 


 


Income before income taxes

     10       27       91       10       138  

Income tax provision

     4       12       34       3       53  
    


 


 


 


 


Net income

   $ 6     $ 15     $ 57     $ 7     $ 85  
    


 


 


 


 


 

23


Table of Contents

For the three months ended September 30, 2004

(in millions)


   Primary
Obligor


    Guarantor
Subsidiaries


  

Non-

Guarantor
Subsidiaries


    Eliminations

    Consolidated

Operating revenue

   $ —       $ 845    $ 923     $ (1 )   $ 1,767
    


 

  


 


 

Operating expenses:

                                     

Salaries, wages and employees’ benefits

     —         547      536       —         1,083

Operating expenses and supplies

     —         112      140       (1 )     251

Purchased transportation

     —         79      117       —         196

Depreciation and amortization

     —         20      23       —         43

Other operating expenses

     —         34      39       —         73
    


 

  


 


 

Total operating expenses

     —         792      855       (1 )     1,646
    


 

  


 


 

Operating income

     —         53      68       —         121
    


 

  


 


 

Nonoperating (income) expenses:

                                     

Interest expense

     3       8      13       (13 )     11

Other

     (13 )     34      (15 )     13       19
    


 

  


 


 

Nonoperating (income) expenses, net

     (10 )     42      (2 )     —         30
    


 

  


 


 

Income before income taxes

     10       11      70       —         91

Income tax provision

     4       5      26       —         35
    


 

  


 


 

Net income

   $ 6     $ 6    $ 44     $ —       $ 56
    


 

  


 


 

 

For the nine months ended September 30, 2005

(in millions)


   Primary
Obligor


    Guarantor
Subsidiaries


  

Non-

Guarantor
Subsidiaries


    Eliminations

    Consolidated

 

Operating revenue

   $ —       $ 2,593    $ 3,884     $ (219 )   $ 6,258  
    


 

  


 


 


Operating expenses:

                                       

Salaries, wages and employees’ benefits

     —         1,563      2,158       —         3,721  

Operating expenses and supplies

     —         462      751       (210 )     1,003  

Purchased transportation

     —         244      451       (8 )     687  

Depreciation and amortization

     —         62      119       —         181  

Other operating expenses

     —         108      166       —         274  

Acquisition and executive severance charges

     —         5      5       —         10  
    


 

  


 


 


Total operating expenses

     —         2,444      3,650       (218 )     5,876  
    


 

  


 


 


Operating income

     —         149      234       (1 )     382  
    


 

  


 


 


Nonoperating (income) expenses:

                                       

Interest expense

     10       63      55       (85 )     43  

Other

     (40 )     27      (63 )     74       (2 )
    


 

  


 


 


Nonoperating (income) expenses, net

     (30 )     90      (8 )     (11 )     41  
    


 

  


 


 


Income before income taxes

     30       59      242       10       341  

Income tax provision

     11       28      91       —         130  
    


 

  


 


 


Net income

   $ 19     $ 31    $ 151     $ 10     $ 211  
    


 

  


 


 


 

24


Table of Contents

For the nine months ended September 30, 2004

(in millions)


   Primary
Obligor


    Guarantor
Subsidiaries


   

Non-

Guarantor
Subsidiaries


    Eliminations

    Consolidated

 

Operating revenue

   $ —       $ 2,378     $ 2,616     $ (1 )   $ 4,993  
    


 


 


 


 


Operating expenses:

                                        

Salaries, wages and employees’ benefits

     —         1,547       1,561       —         3,108  

Operating expenses and supplies

     —         341       399       (1 )     739  

Purchased transportation

     —         223       324       —         547  

Depreciation and amortization

     —         58       69       —         127  

Other operating expenses

     —         105       117       —         222  
    


 


 


 


 


Total operating expenses

     —         2,274       2,470       (1 )     4,743  
    


 


 


 


 


Operating income

     —         104       146       —         250  
    


 


 


 


 


Nonoperating (income) expenses:

                                        

Interest expense

     10       39       25       (40 )     34  

Other

     (40 )     44       (25 )     40       19  
    


 


 


 


 


Nonoperating (income) expenses, net

     (30 )     83       —         —         53  
    


 


 


 


 


Income before income taxes

     30       21       146       —         197  

Income tax provision

     11       11       54       —         76  
    


 


 


 


 


Net income

   $ 19     $ 10     $ 92     $ —       $ 121  
    


 


 


 


 


Condensed Consolidating Statements of Cash Flows

                                        

For the nine months ended September 30, 2005

(in millions)


   Parent

    Guarantor
Subsidiaries


   

Non-

Guarantor
Subsidiaries


    Eliminations

    Consolidated

 

Operating activities:

                                        

Net cash provided (used in) operating activities

   $ 42     $ 25     $ 192     $ (3 )   $ 256  
    


 


 


 


 


Investing activities:

                                        

Acquisition of property and equipment

     —         (53 )     (178 )     —         (231 )

Proceeds from disposal of property and equipment

     —         5       13       —         18  

Acquisition of companies

     —         (806 )     52       —         (754 )

Investment in affiliate

     —         (46 )     —         —         (46 )

Other

     —         —         2       —         2  
    


 


 


 


 


Net cash used in investing activities

     —         (900 )     (111 )     —         (1,011 )
    


 


 


 


 


Financing activities:

                                        

ABS borrowings, net

     —         —         456       —         456  

Issuance of long-term debt

     —         250       —         —         250  

Debt issuance costs

     —         (4 )     —         —         (4 )

Proceeds from exercise of stock options

     —         4       —         —         4  

Cash dividends paid to shareholders

     —         7       (7 )     —         —    

Intercompany advances / repayments

     (42 )     548       (509 )     3       —    
    


 


 


 


 


Net cash provided by (used in) financing activities

     (42 )     805       (60 )     3       706  
    


 


 


 


 


Net increase (decrease) in cash and cash equivalents

     —         (70 )     21       —         (49 )

Cash and cash equivalents, beginning of period

     —         89       17       —         106  
    


 


 


 


 


Cash and cash equivalents, end of period

   $ —       $ 19     $ 38     $ —       $ 57  
    


 


 


 


 


 

25


Table of Contents

For the nine months ended September 30, 2004

(in millions)


   Primary
Obligor


    Guarantor
Subsidiaries


   

Non-

Guarantor
Subsidiaries


    Eliminations

   Consolidated

 

Operating activities: