Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


FORM 10-Q

 


(Mark One)

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

For the quarterly period ended March 31, 2007

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

 


YRC Worldwide Inc.

(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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨

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 April 30, 2007

Common Stock, $1 Par Value Per Share   57,503,136 shares

 



INDEX

 

Item        Page
  PART I – FINANCIAL INFORMATION   
1.  

Financial Statements

  
 

Consolidated Balance Sheets - March 31, 2007 and December 31, 2006

   3
 

Statements of Consolidated Operations - Three Months Ended March 31, 2007 and 2006

   4
 

Statements of Consolidated Cash Flows - Three Months Ended March 31, 2007 and 2006

   5
 

Statement of Consolidated Shareholders’ Equity - Three Months Ended March 31, 2007

   6
 

Notes to Consolidated Financial Statements

   7
2.  

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

   24
3.  

Quantitative and Qualitative Disclosures About Market Risk

   31
4.  

Controls and Procedures

   32
  PART II – OTHER INFORMATION   
6.  

Exhibits

   33
 

Signatures

   34

 

2


PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

YRC Worldwide Inc. and Subsidiaries

(Amounts in thousands except per share data)

 

    

March 31,

2007

   

December 31,

2006

 
     (Unaudited)        

Assets

    

Current Assets:

    

Cash and cash equivalents

   $ 107,488     $ 76,391  

Accounts receivable, net

     1,230,145       1,190,818  

Prepaid expenses and other

     304,043       323,882  
                

Total current assets

     1,641,676       1,591,091  
                

Property and Equipment:

    

Cost

     3,921,394       3,841,657  

Less – accumulated depreciation

     1,584,124       1,571,811  
                

Net property and equipment

     2,337,270       2,269,846  
                

Goodwill

     1,330,016       1,326,583  

Intangibles, net

     687,159       691,417  

Other assets

     72,413       73,300  
                

Total assets

   $ 6,068,534     $ 5,952,237  
                

Liabilities and Shareholders’ Equity

    

Current Liabilities:

    

Accounts payable

   $ 402,596     $ 397,586  

Wages, vacations and employees’ benefits

     439,941       413,759  

Other current and accrued liabilities

     360,353       324,124  

Asset backed securitization borrowings

     250,000       225,000  
                

Total current liabilities

     1,452,890       1,360,469  
                

Other Liabilities:

    

Long-term debt, less current portion

     1,059,099       1,058,496  

Deferred income taxes, net

     610,359       609,193  

Pension and postretirement

     360,142       349,723  

Claims and other liabilities

     380,451       381,807  

Commitments and contingencies

    

Shareholders’ Equity:

    

Common stock, $1 par value per share

     61,158       60,876  

Preferred stock, $1 par value per share

     —         —    

Capital surplus

     1,195,790       1,180,578  

Retained earnings

     1,110,779       1,115,246  

Accumulated other comprehensive loss

     (52,517 )     (54,534 )

Treasury stock, at cost (3,679 shares)

     (109,617 )     (109,617 )
                

Total shareholders’ equity

     2,205,593       2,192,549  
                

Total liabilities and shareholders’ equity

   $ 6,068,534     $ 5,952,237  
                

The accompanying notes are an integral part of these statements.

 

3


STATEMENTS OF CONSOLIDATED OPERATIONS

YRC Worldwide Inc. and Subsidiaries

For the Three Months Ended March 31

(Amounts in thousands except per share data)

(Unaudited)

 

     2007     2006  

Operating Revenue

   $ 2,328,342     $ 2,374,161  
                

Operating Expenses:

    

Salaries, wages and employees’ benefits

     1,421,525       1,401,932  

Operating expenses and supplies

     441,928       449,927  

Purchased transportation

     251,768       253,286  

Depreciation and amortization

     58,991       73,440  

Other operating expenses

     116,324       106,866  

Losses on property disposals, net

     2,949       882  

Reorganization charges

     14,457       —    
                

Total operating expenses

     2,307,942       2,286,333  
                

Operating Income

     20,400       87,828  
                

Nonoperating (Income) Expenses:

    

Interest expense

     20,038       20,548  

Other, net

     (1,734 )     (796 )
                

Nonoperating expenses, net

     18,304       19,752  
                

Income Before Income Taxes

     2,096       68,076  

Income tax provision

     817       25,940  
                

Net Income

   $ 1,279     $ 42,136  
                

Average Common Shares Outstanding – Basic

     57,337       57,374  

Average Common Shares Outstanding – Diluted

     58,614       59,128  

Basic Earnings Per Share

   $ 0.02     $ 0.73  

Diluted Earnings Per Share

   $ 0.02     $ 0.71  

The accompanying notes are an integral part of these statements.

 

4


STATEMENTS OF CONSOLIDATED CASH FLOWS

YRC Worldwide Inc. and Subsidiaries

For the Three Months Ended March 31

(Amounts in thousands)

(Unaudited)

 

      2007     2006  

Operating Activities:

    

Net income

   $ 1,279     $ 42,136  

Noncash items included in net income:

    

Depreciation and amortization

     58,991       73,440  

Losses on property disposals, net

     2,949       882  

Deferred income tax provision (benefit)

     155       (293 )

Other noncash items

     2,614       2,147  

Changes in assets and liabilities, net:

    

Accounts receivable

     (41,749 )     (25,967 )

Accounts payable

     4,016       (29,856 )

Other operating assets

     (2,113 )     (4,870 )

Other operating liabilities

     96,840       (56,915 )
                

Net cash provided by operating activities

     122,982       704  
                

Investing Activities:

    

Acquisition of property and equipment

     (132,289 )     (118,073 )

Proceeds from disposal of property and equipment

     6,644       8,708  

Acquisition of companies

     —         (11,659 )

Other

     (277 )     4,000  
                

Net cash used in investing activities

     (125,922 )     (117,024 )
                

Financing Activities:

    

Asset backed securitization borrowings, net

     25,000       74,530  

Borrowing of long-term debt, net

     3,000       12,500  

Proceeds from exercise of stock options

     6,037       1,951  
                

Net cash provided by financing activities

     34,037       88,981  
                

Net Increase (Decrease) In Cash and Cash Equivalents

     31,097       (27,339 )

Cash and Cash Equivalents, Beginning of Period

     76,391       82,361  
                

Cash and Cash Equivalents, End of Period

   $ 107,488     $ 55,022  
                

The accompanying notes are an integral part of these statements.

 

5


STATEMENT OF CONSOLIDATED SHAREHOLDERS’ EQUITY

YRC Worldwide Inc. and Subsidiaries

For the Three Months Ended March 31

(Amounts in thousands)

(Unaudited)

 

     2007  

Common Stock

  

Beginning balance

   $ 60,876  

Exercise of stock options

     205  

Issuance of equity awards

     8  

Employer contribution to 401(k) plan

     69  
        

Ending balance

   $ 61,158  
        

Capital Surplus

  

Beginning balance

   $ 1,180,578  

Exercise of stock options, including tax benefits

     5,832  

Share-based compensation

     3,972  

Employer contribution to 401(k) plan

     2,858  

Other, net

     2,550  
        

Ending balance

   $ 1,195,790  
        

Retained Earnings

  

Beginning balance

   $ 1,115,246  

Cumulative effect - adoption of FIN 48, “Accounting for Uncertainty in Income Taxes”

     (5,746 )

Net income

     1,279  
        

Ending balance

   $ 1,110,779  
        

Accumulated Other Comprehensive Loss

  

Beginning balance

   $ (54,534 )

Amortization of pension costs

     1,407  

Foreign currency translation adjustment

     610  
        

Ending balance

   $ (52,517 )
        

Treasury Stock, At Cost

  

Beginning and ending balance

   $ (109,617 )
        

Total Shareholders’ Equity

   $ 2,205,593  
        

The accompanying notes are an integral part of these statements.

 

6


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YRC Worldwide Inc. and Subsidiaries

(Unaudited)

 

1. Description of Business

YRC Worldwide Inc. (also referred to as “YRC Worldwide”, “the Company”, “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. These services include global, national and regional transportation as well as logistics. The YRC Worldwide portfolio of brands provides a comprehensive suite of services for the shipment of industrial, commercial and retail goods domestically and internationally. Our reportable segments, which are comprised of our various operating subsidiaries, include the following:

 

   

YRC National Transportation (“National Transportation”) is a holding company for our transportation service providers focused on business opportunities in regional, national and international services. National Transportation is comprised of Yellow Transportation and Roadway. These companies each provide for the movement of industrial, commercial and retail goods, primarily through regionalized and centralized management and customer facing organizations. National Transportation also owns 100% of Reimer Express Lines (“Reimer”), located in Canada, that specializes in shipments into, across and out of Canada. Approximately 36% of National Transportation shipments are completed in two days or less. In addition to the United States and Canada, National Transportation also serves parts of Mexico and Puerto Rico.

 

   

YRC Regional Transportation (“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 is comprised of New Penn Motor Express (“New Penn”), USF Holland and USF Reddaway. These companies each provide regional, next-day ground services in their respective regions through a network of facilities located across the United States (“U.S.”); Quebec, Canada; Mexico and Puerto Rico. USF Glen Moore, a provider of truckload services throughout the U.S., is also a subsidiary of Regional Transportation. Approximately 90% of Regional Transportation less-than-truckload (“LTL”) shipments are completed in two days or less. In 2006, Regional Transportation also included USF Bestway. In February 2007, we consolidated the majority of USF Bestway’s operations into USF Reddaway.

 

   

Logistics includes the Meridian IQ family of companies that plan and coordinate the movement of goods worldwide to provide customers a single source for logistics management solutions. Logistics delivers a wide range of global logistics management services, with the ability to provide customers improved return-on-investment results through flexible, fast and easy-to-implement logistics services and technology management solutions.

At March 31, 2007, approximately 70% of our labor force is subject to collective bargaining agreements, which predominantly expire in 2008.

 

2. Principles of Consolidation

The accompanying consolidated financial statements include the accounts of YRC Worldwide and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Investments in non-majority owned affiliates, where the entity is either not a variable interest entity or YRC Worldwide is not the primary beneficiary, are accounted for on the equity method. Management makes estimates and assumptions that affect the amounts reported in the consolidated financial statements and notes. Actual results could differ from those estimates. We have prepared the consolidated financial statements, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In management’s opinion, all normal recurring adjustments except as otherwise noted, necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods included in these financial statements 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, 2006.

 

7


Property and Equipment

Property and equipment are recorded at cost. In the third quarter of 2006, the Company revised the estimated useful lives and salvage values of certain classes of property and equipment to more appropriately reflect how the Company expects to use the assets over time. Effective July 1, 2006, the Company increased revenue equipment lives to ten to twenty years from three to fourteen years and modified certain salvage values. If the Company had not changed the estimated useful lives and salvage values of this property and equipment, additional depreciation expense of approximately $13.5 million would have been recorded during the three months ended March 31, 2007. Accordingly, the changes in estimates resulted in an increase in income from continuing operations of approximately $13.5 million (an $8.2 million increase in net income) for the three months ended March 31, 2007. The change in estimate also increased diluted earnings per share by $0.14 for the three months ended March 31, 2007.

 

3. Restructuring and Reorganization

In January 2007, we announced the consolidation of USF Reddaway and USF Bestway, two subsidiaries within our Regional Transportation segment. As part of the consolidation, effective February 12, 2007, we no longer market the USF Bestway brand. We incurred certain restructuring and other closure related charges in conjunction with this organizational change consisting primarily of employee separation and contract termination costs.

In addition, in January 2007 we announced further organizational changes that brought the management of Yellow Transportation and Roadway under one organization established as YRC National Transportation. We incurred employee separation charges in the first quarter of 2007 related to these changes.

As a part of our 2005 acquisition of USF Corporation, we closed an operating subsidiary (USF Dugan) and consolidated certain administrative functions and locations. We incurred restructuring and other closure related charges related to these actions. During 2007, we have continued to make payments under these obligations.

We reassess the reserve requirements under the above restructuring efforts at the end of each reporting period. A rollforward of the restructuring accrual is set forth below:

 

(in millions)

  

Employee

Separation

   

Contract Termination

and Other Costs

   Total  

Balance at December 31, 2006

   $ 1.0     $ 6.5    $ 7.5  

2007 Provision

     7.4       0.7      8.1  

Less Payments

     (1.0 )     —        (1.0 )
                       

Balance at March 31, 2007

   $ 7.4     $ 7.2    $ 14.6  
                       

In addition to the restructuring charges of $8.1 million, we incurred reorganization and other closure related charges of $6.4 million during the three months ended March 31, 2007. These charges are included in the ‘Reorganization charges’ caption in the consolidated statements of operations. Other charges included $2.3 million of stock-based compensation related to the acceleration of the vesting period for restricted stock units awarded to certain terminated executives. The remaining $4.1 million of other closure related charges represents incremental costs associated with the USF Bestway closure.

 

8


4. Debt and Financing

Total debt consisted of the following:

 

(in millions)

  

March 31,

2007

    December 31,
2006
 

Asset backed securitization borrowings, secured by accounts receivable

   $ 250.0     $ 225.0  

Floating rate notes

     150.0       150.0  

USF senior notes

     263.5       264.7  

Roadway senior notes

     233.1       234.3  

Contingent convertible senior notes

     400.0       400.0  

Revolving credit facility

     3.0       —    

Other

     9.5       9.5  
                

Total debt

   $ 1,309.1     $ 1,283.5  

Asset backed securitization borrowings

     (250.0 )     (225.0 )
                

Long-term debt

   $ 1,059.1     $ 1,058.5  
                

 

5. Employee Benefits

Components of Net Periodic Pension and Other Postretirement Cost

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

 

     Pension Costs     Other Postretirement Costs  

(in millions)

   2007     2006     2007     2006  

Service cost

   $ 9.8     $ 10.9     $ 0.1     $ 0.2  

Interest cost

     16.4       15.7       0.5       0.5  

Expected return on plan assets

     (17.6 )     (14.8 )     —         —    

Amortization of prior service cost

     0.3       0.4       0.1       0.1  

Amortization of net loss (gain)

     2.0       2.5       (0.1 )     (0.1 )
                                

Net periodic pension cost

   $ 10.9     $ 14.7     $ 0.6     $ 0.7  

Settlement cost

     1.4       —         —         —    

Special termination benefit cost

     1.5       —         —         —    
                                

Total periodic pension cost

   $ 13.8     $ 14.7     $ 0.6     $ 0.7  
                                

The settlement and special termination benefits costs of $2.9 million presented above are included in reorganization charges in our consolidated statement of operations for the three months ended March 31, 2007.

 

6. Uncertain Tax Positions

The Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized a $7.1 million increase in the liability for unrecognized tax benefits, which was accounted for as a reduction of $5.7 million to the January 1, 2007 balance of retained earnings and an increase of $1.4 million to goodwill resulting from prior acquisitions. Additionally, we reclassed a $53 million credit from “Prepaid Expenses and Other” to “Other Current and Accrued Liabilities” effective January 1, 2007. The Company has elected to treat interest and penalties on uncertain tax positions as interest expense and other operating expenses, respectively, rather than continue the pre-FIN 48 treatment as components of the income tax provision.

The total amounts of unrecognized tax benefits and accrued interest as of the date of adoption were $74.7 million and $2.1 million, respectively. Both are classified on the Company’s consolidated balance sheet within “Other Current and Accrued Liabilities”. The Company has accrued no penalties relative to uncertain tax positions.

 

9


The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of the date of adoption was $5 million.

Tax years that remain subject to examination for the Company’s major tax jurisdictions as of the date of adoption:

 

           Pre-acquisition tax years
      YRC Worldwide    USF Corporation (a)    Roadway (b)
Statute remains open    2003-2006    2000-2005    2001-03
Tax years currently under examination/exam completed    2003-2005    2000-2005    2001-03
Tax years not examined    2006    None    None

(a) Years ending on or before May 24, 2005.
(b) Years ending on or before December 11, 2003.

Reasonably possible changes in the next 12 months in the amount of unrecognized tax benefits relate to the following tax positions:

The United States Internal Revenue Service (“IRS”) has begun an audit of the Company’s 2005 tax return and indicated that it will propose an adjustment relative to the deduction claimed for contributions to union pension plans. The Company intends to protest the adjustment. The additional tax that could result from the adjustment is approximately $51 million. Pursuant to the provisions of FIN 48, the Company has posted no tax benefit for this deduction. This audit could be resolved in 2007.

The IRS has audited certain pre-acquisition tax returns for a consolidated group acquired in 2005 and disallowed a 2002 loss related to the disposition of the stock of a member of that group. The Company believes the loss is fully deductible and has protested the IRS adjustment. The additional tax that could result should the loss ultimately be totally denied is approximately $50 million. This audit could be resolved in 2007. Any tax liability resulting from the audit would affect only goodwill recognized in the allocation of the purchase price of the acquired subsidiary.

 

7. Earnings Per Share

Dilutive securities, consisting of options to purchase our common stock or rights to receive common stock in the future, included in the calculation of diluted weighted average common shares were 638,000 for the three months ended March 31, 2007 and 554,000 for the three ended March 31, 2006. In addition, dilutive securities related to our net share settle contingent convertible notes were 639,000 for the three months ended March 31, 2007 and 1,200,000 for the three months ended March 31, 2006.

The impact of certain other options were excluded from the calculation of diluted earnings per share because average exercise prices were greater than the average market price of common shares. In addition, the computation of the assumed conversion of the convertible senior notes includes inputs of the year-to-date average stock price relative to the stated conversion price. If this relationship is such that the year-to-date average stock price is less then the stated conversion price, the computed shares would be antidilutive under the treasury stock method. Data regarding antidilutive securities for the three months ended March 31 is summarized below:

 

(in thousands except per share data)

   2007    2006

Weighted average exercise price per share

   $ 43.46    $ —  

Weighted average option shares outstanding

     23      —  

Antidilutive convertible senior note conversion shares

     272      —  

 

8. 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 evaluate performance primarily on adjusted operating income and return on capital.

We have three reportable segments, which are strategic business units that offer complementary transportation services to their customers. National Transportation includes carriers that provide comprehensive regional, national and international transportation services. Regional Transportation is comprised of carriers that focus primarily on business opportunities in the

 

10


regional and next-day delivery markets. Logistics, previously referred to as our Meridian IQ segment, provides domestic and international freight forwarding, warehousing and cross-dock services, multi-modal brokerage services, and transportation management services.

Information relative to USF Red Star and USF Dugan, previously included in Regional Transportation, has been included in the Corporate segment in 2007 as these entities are no longer operating.

Prior to 2007 we reported four operating segments. In January 2007, we consolidated the management structure of Yellow Transportation and Roadway to form YRC National Transportation. As a result, these two previously separate segments have been combined in 2007. Amounts presented for 2006 have been reclassified to reflect this change.

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, 2006. We charge management fees and other corporate services to our segments based on the direct benefits received or as a percentage of revenue. Corporate and other operating losses represent residual operating expenses of the holding company, including compensation and benefits and professional services for all periods presented. Corporate identifiable assets primarily refer to cash, cash equivalents and deferred debt issuance costs. Intersegment revenue relates to transportation services between our segments.

The following table summarizes our operations by business segment:

 

(in millions)

  

National

Transportation

  

Regional

Transportation

    Logistics     Corporate/
Eliminations
    Consolidated

As of March 31, 2007

           

Identifiable assets

   $ 3,362.8    $ 2,229.8     $ 433.0     $ 42.9     $ 6,068.5

As of December 31, 2006

           

Identifiable assets

     3,269.1      2,179.2       413.5       90.4       5,952.2

Three months ended March 31, 2007

           

External revenue

     1,607.4      575.9       145.0       —         2,328.3

Intersegment revenue

     1.0      —         4.8       (5.8 )     —  

Operating income (loss)

     33.1      (5.0 )     (1.1 )     (6.6 )     20.4

Adjustments to operating income(a)

     6.8      6.5       0.1       4.0       17.4

Adjusted operating income (loss)(b)

     39.9      1.5       (1.0 )     (2.6 )     37.8

Three months ended March 31, 2006

           

External revenue

     1,642.5      592.1       139.6       —         2,374.2

Intersegment revenue

     1.4      —         0.2       (1.6 )     —  

Operating income (loss)

     69.2      21.4       2.5       (5.3 )     87.8

Adjustments to operating income(a)

     —        —         —         0.9       0.9

Adjusted operating income (loss)(b)

     69.2      21.4       2.5       (4.4 )     88.7

(a) Management excludes these items when evaluating operating income and segment performance to better evaluate the results of our core operations. In the periods presented, adjustments consisted of losses (gains) on property disposals and reorganization charges.
(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.

 

9. Comprehensive Income

Comprehensive income for the three months ended March 31 follows:

 

(in millions)

   2007    2006

Net income

   $ 1.3    $ 42.1

Other comprehensive income, net of tax:

     

Amortization of pension costs

     1.4      —  

Changes in foreign currency translation adjustments

     0.6      2.3
             

Other comprehensive income

     2.0      2.3
             

Comprehensive income

   $ 3.3    $ 44.4
             

 

11


10. Guarantees of the Contingent Convertible Senior Notes

In August 2003, YRC Worldwide issued 5.0% contingent convertible senior notes due 2023. In November 2003, we issued 3.375% contingent convertible senior notes (the August and November issuances, collectively, may also be known as the “contingent convertible senior notes”) due 2023. 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 part of the exchange offers. In May 2005, we completed the private placement of $150 million in aggregate principle 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 YRC Worldwide have issued guarantees in favor of the holders of the net share settled contingent convertible senior notes and floating rate notes: Yellow Transportation, Inc., Mission Supply Company, Yellow Relocation Services, Inc., YRC Worldwide Technologies, Inc., Meridian IQ Inc., MIQ LLC, Globe.com Lines, Inc., Roadway LLC, Roadway Next Day Corporation, Roadway Express, Inc., USF Holland and Regional Transportation. Each of the guarantees is full and unconditional and joint and several.

The condensed 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 separate financial statements and related disclosures would be material to investors. There are currently no significant restrictions on the ability of YRC Worldwide or any guarantor to obtain funds from its subsidiaries by dividend or loan.

The following represents condensed consolidating financial information as of March 31, 2007 and December 31, 2006 with respect to the financial position and for the three months ended March 31, 2007 and 2006 for results of operations and cash flows of YRC Worldwide and its subsidiaries. The Parent column presents the financial information of YRC Worldwide, 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 that are governed by foreign laws, Yellow Roadway Receivables Funding Corporation, Yellow Receivables Corporation and Roadway Funding, Inc., the special-purpose entities that are or were associated with our ABS agreements.

Condensed Consolidating Balance Sheets

 

March 31, 2007

(in millions)

   Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash and cash equivalents

   $ 71     $ 20     $ 16     $ —       $ 107  

Intercompany advances receivable

     —         (76 )     76       —         —    

Accounts receivable, net

     4       3       1,240       (17 )     1,230  

Prepaid expenses and other

     1       147       156       —         304  
                                        

Total current assets

     76       94       1,488       (17 )     1,641  

Property and equipment

     —         3,347       574       —         3,921  

Less – accumulated depreciation

     —         (1,480 )     (104 )     —         (1,584 )
                                        

Net property and equipment

     —         1,867       470       —         2,337  

Investment in subsidiaries

     3,860       459       (28 )     (4,291 )     —    

Receivable from affiliate

     (527 )     503       24       —         —    

Goodwill and other assets

     263       1,868       309       (350 )     2,090  
                                        

Total assets

   $ 3,672     $ 4,791     $ 2,263     $ (4,658 )   $ 6,068  
                                        

Intercompany advances payable

   $ 432     $ (550 )   $ 327     $ (209 )   $ —    

Accounts payable

     37       297       77       (8 )     403  

Wages, vacations and employees’ benefits

     23       368       49       —         440  

Other current and accrued liabilities

     81       126       153       —         360  

Asset backed securitization borrowings

     —         —         250       —         250  
                                        

Total current liabilities

     573       241       856       (217 )     1,453  

Payable to affiliate

     (117 )     44       223       (150 )     —    

Long-term debt, less current portion

     553       506       —         —         1,059  

Deferred income taxes, net

     17       431       162       —         610  

Pension and postretirement

     360       —         —         —         360  

Claims and other liabilities

     107       5       268       —         380  

Commitments and contingencies

          

Shareholders’ equity

     2,179       3,564       754       (4,291 )     2,206  
                                        

Total liabilities and shareholders’ equity

   $ 3,672     $ 4,791     $ 2,263     $ (4,658 )   $ 6,068  
                                        

 

12


December 31, 2006

(in millions)

   Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash and cash equivalents

   $ 20     $ 21     $ 35     $ —       $ 76  

Intercompany advances receivable

     —         (68 )     68       —         —    

Accounts receivable, net

     5       11       1,193       (18 )     1,191  

Prepaid expenses and other

     22       193       109       —         324  
                                        

Total current assets

     47       157       1,405       (18 )     1,591  

Property and equipment

     1       3,258       583       —         3,842  

Less – accumulated depreciation

     (1 )     (1,461 )     (110 )     —         (1,572 )
                                        

Net property and equipment

     —         1,797       473       —         2,270  

Investment in subsidiaries

     3,372       254       5       (3,631 )     —    

Receivable from affiliate

     (563 )     426       137       —         —    

Goodwill and other assets

     262       1,869       310       (350 )     2,091  
                                        

Total assets

   $ 3,118     $ 4,503     $ 2,330     $ (3,999 )   $ 5,952  
                                        

Intercompany advances payable

   $ 402     $ (548 )   $ 355     $ (209 )   $ —    

Accounts payable

     15       321       71       (9 )     398  

Wages, vacations and employees’ benefits

     15       338       61       —         414  

Other current and accrued liabilities

     18       135       171       —         324  

Asset backed securitization borrowings

     —         —         225       —         225  
                                        

Total current liabilities

     450       246       883       (218 )     1,361  

Payable to affiliate

     (101 )     28       223       (150 )     —    

Long-term debt, less current portion

     550       508       —         —         1,058  

Deferred income taxes, net

     18       430       161       —         609  

Pension and postretirement

     350       —         —         —         350  

Claims and other liabilities

     12       38       332       —         382  

Commitments and contingencies

          

Shareholders’ equity

     1,839       3,253       731       (3,631 )     2,192  
                                        

Total liabilities and shareholders’ equity

   $ 3,118     $ 4,503     $ 2,330     $ (3,999 )   $ 5,952  
                                        
Condensed Consolidating Statements of Operations  

For the three months ended March 31, 2007

(in millions)

   Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Operating revenue

   $ 13     $ 1,989     $ 419     $ (93 )   $ 2,328  
                                        

Operating expenses:

          

Salaries, wages and employees’ benefits

     11       1,173       238       —         1,422  

Operating expenses and supplies

     7       396       125       (86 )     442  

Purchased transportation

     —         197       62       (7 )     252  

Depreciation and amortization

     —         46       13       —         59  

Other operating expenses

     —         99       17       —         116  

Losses on property disposals, net

     —         1       2       —         3  

Reorganization charges

     3       6       5       —         14  
                                        

Total operating expenses

     21       1,918       462       (93 )     2,308  
                                        

Operating income (loss)

     (8 )     71       (43 )     —         20  
                                        

Nonoperating (income) expenses:

          

Interest expense

     8       7       5       —         20  

Other, net

     11       49       (62 )     —         (2 )
                                        

Nonoperating (income) expenses, net

     19       56       (57 )     —         18  
                                        

Income (loss) before income taxes

     (27 )     15       14       —         2  

Income tax provision (benefit)

     (8 )     5       5       (1 )     1  
                                        

Net income (loss)

   $ (19 )   $ 10     $ 9     $ 1     $ 1  
                                        

 

13


For the three months ended March 31, 2006

(in millions)

   Parent     Guarantor
Subsidiaries
   Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Operating revenue

   $ 18     $ 2,033    $ 424     $ (101 )   $ 2,374  

Operating expenses:

           

Salaries, wages and employees’ benefits

     11       1,192      206       (7 )     1,402  

Operating expenses and supplies

     12       413      113       (88 )     450  

Purchased transportation

     —         196      61       (4 )     253  

Depreciation and amortization

     —         58      15       —         73  

Other operating expenses

     —         89      18       —         107  

Losses on property disposals, net

     —         —        1       —         1  
                                       

Total operating expenses

     23       1,948      414       (99 )     2,286  
                                       

Operating income (loss)

     (5 )     85      10       (2 )     88  
                                       

Nonoperating (income) expenses:

           

Interest expense

     8       7      6       —         21  

Other, net

     1       35      (35 )     (2 )     (1 )
                                       

Nonoperating (income) expenses, net

     9       42      (29 )     (2 )     20  
                                       

Income (loss) before income taxes

     (14 )     43      39       —         68  

Income tax provision (benefit)

     (3 )     16      16       (3 )     26  
                                       

Net income (loss)

   $ (11 )   $ 27    $ 23     $ 3     $ 42  
                                       
Condensed Consolidating Statements of Cash Flows  

For the three months ended March 31, 2007

(in millions)

   Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations    Consolidated  

Operating activities:

           

Net cash provided by (used in) operating activities

   $ 63     $ 152     $ (92 )   $ —      $ 123  
                                       

Investing activities:

           

Acquisition of property and equipment

     —         (108 )     (24 )     —        (132 )

Proceeds from disposal of property and equipment

     —         —         7       —        7  

Other

     —           (1 )     —        (1 )
                                       

Net cash used in investing activities

     —         (108 )     (18 )     —        (126 )
                                       

Financing activities:

           

Asset backed securitization borrowings, net

     —         —         25       —        25  

Borrowing of long-term debt, net

     3       —         —         —        3  

Proceeds from exercise of stock options

     6       —         —         —        6  

Intercompany advances / repayments

     (21 )     (45 )     66       —        —    
                                       

Net cash provided by (used in) financing activities

     (12 )     (45 )     91       —        34  
                                       

Net increase (decrease) in cash and cash equivalents

     51       (1 )     (19 )     —        31  

Cash and cash equivalents, beginning of period

     20       21       35       —        76  
                                       

Cash and cash equivalents, end of period

   $ 71     $ 20     $ 16     $ —      $ 107  
                                       

 

14


For the three months ended March 31, 2006

(in millions)

   Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations    Consolidated  

Operating activities:

           

Net cash provided by (used in) operating activities

   $ (63 )   $ 73     $ (9 )   $ —      $ 1  
                                       

Investing activities:

           

Acquisition of property and equipment

     —         (110 )     (8 )     —        (118 )

Proceeds from disposal of property and equipment

     —         9       —         —        9  

Acquisition of companies

     (12 )     —         —         —        (12 )

Other

     —         4       —         —        4  
                                       

Net cash used in investing activities

     (12 )     (97 )     (8 )     —        (117 )
                                       

Financing activities:

           

Asset backed securitization borrowings, net

     —         —         74       —        74  

Borrowing of long-term debt, net

     13       —         —         —        13  

Proceeds from exercise of stock options

     2       —         —         —        2  

Intercompany advances / repayments

     55       17       (72 )     —        —    
                                       

Net cash provided by financing activities

     70       17       2       —        89  
                                       

Net decrease in cash and cash equivalents

     (5 )     (7 )     (15 )     —        (27 )

Cash and cash equivalents, beginning of period

     20       18       44       —        82  
                                       

Cash and cash equivalents, end of period

   $ 15     $ 11     $ 29     $ —      $ 55  
                                       

 

15


11. Guarantees of the Senior Notes Due 2008

In connection with the senior notes due 2008, the Company assumed by virtue of the Roadway merger agreement, and in addition to the primary obligor, Roadway LLC, YRC Worldwide 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 condensed 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 separate financial statements and related disclosures would be material to investors. There are currently no significant restrictions on the ability of YRC Worldwide or any guarantor subsidiary to obtain funds from its subsidiaries by dividend or loan.

The following represents condensed consolidating financial information of YRC Worldwide and its subsidiaries as of March 31, 2007 and December 31, 2006 with respect to the financial position, and for the three months ended March 31, 2007 and 2006 for results of operations and cash flows. The primary obligor column presents the financial information of Roadway LLC. The Guarantor Subsidiaries column presents the financial information of all guarantor subsidiaries of the senior notes due 2008 including YRC Worldwide, the holding company. The Non-Guarantor Subsidiaries column presents the financial information of all non-guarantor subsidiaries, including those subsidiaries that are governed by foreign laws and Yellow Roadway Receivables Funding Corporation, Yellow Receivables Corporation and Roadway Funding, Inc., the special-purpose entities that are or were associated with our ABS agreements.

Condensed Consolidating Balance Sheets

 

March 31, 2007

(in millions)

   Primary
Obligor
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash and cash equivalents

   $ —       $ 87     $ 20     $ —       $ 107  

Intercompany advances receivable

     —         (14 )     14       —         —    

Accounts receivable, net

     —         (39 )     1,282       (13 )     1,230  

Prepaid expenses and other

     —         44       260       —         304  
                                        

Total current assets

     —         78       1,576       (13 )     1,641  

Property and equipment

     —         1,056       2,865       —         3,921  

Less – accumulated depreciation

     —         (214 )     (1,370 )     —         (1,584 )
                                        

Net property and equipment

     —         842       1,495       —         2,337  

Investment in subsidiaries

     97       3,890       200       (4,187 )     —    

Receivable from affiliate

     168       (524 )     356       —         —    

Goodwill and other assets

     653       1,259       1,028       (850 )     2,090  
                                        

Total assets

   $ 918     $ 5,545     $ 4,655     $ (5,050 )   $ 6,068  
                                        

Intercompany advances payable

   $ —       $ 75     $ 134     $ (209 )   $ —    

Accounts payable

     —         135       272       (4 )     403  

Wages, vacations and employees’ benefits

     —         185       255       —         440  

Other current and accrued liabilities

     14       119       228       (1 )     360  

Asset backed securitization borrowings

     —         —         250       —         250  
                                        

Total current liabilities

     14       514       1,139       (214 )     1,453  

Payable to affiliate

     —         533       117       (650 )     —    

Long-term debt, less current portion

     233       553       273       —         1,059  

Deferred income taxes, net

     (5 )     237       378       —         610  

Pension and postretirement

     —         360       —         —         360  

Claims and other liabilities

     —         108       272       —         380  

Commitments and contingencies

          

Shareholders’ equity

     676       3,240       2,476       (4,186 )     2,206  
                                        

Total liabilities and shareholders’ equity

   $ 918     $ 5,545     $ 4,655     $ (5,050 )   $ 6,068  
                                        

 

16


December 31, 2006

(in millions)

   Primary
Obligor
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash and cash equivalents

   $ —       $ 38     $ 38     $ —       $ 76  

Intercompany advances receivable

     —         (14 )     14       —         —    

Accounts receivable, net

     —         (20 )     1,222       (11 )     1,191  

Prepaid expenses and other

     (2 )     83       243       —         324  
                                        

Total current assets

     (2 )     87       1,517       (11 )     1,591  

Property and equipment

     —         1,019       2,823       —         3,842  

Less – accumulated depreciation

     —         (199 )     (1,373 )     —         (1,572 )
                                        

Net property and equipment

     —         820       1,450       —         2,270  

Investment in subsidiaries

     —         3,377       208       (3,585 )     —    

Receivable from affiliate

     155       (552 )     397       —         —    

Goodwill and other assets

     651       1,257       1,033       (850 )     2,091  
                                        

Total assets

   $ 804     $ 4,989     $ 4,605     $ (4,446 )   $ 5,952  
                                        

Intercompany advances payable

   $ —       $ 87     $ 122     $ (209 )   $ —    

Accounts payable

     —         114       286       (2 )     398  

Wages, vacations and employees’ benefits

     —         165       249       —         414  

Other current and accrued liabilities

     2       76       246       —         324  

Asset backed securitization borrowings

     —         —         225       —         225  
                                        

Total current liabilities

     2       442       1,128       (211 )     1,361  

Payable to affiliate

     —         549       101       (650 )     —    

Long-term debt, less current portion

     234       550       274       —         1,058  

Deferred income taxes, net

     (5 )     234       380       —         609  

Pension and postretirement

     —         350       —         —         350  

Claims and other liabilities

     —         26       356       —         382  

Commitments and contingencies

          

Shareholders’ equity

     573       2,838       2,366       (3,585 )     2,192  
                                        

Total liabilities and shareholders’ equity

   $ 804     $ 4,989     $ 4,605     $ (4,446 )   $ 5,952  
                                        
Condensed Consolidating Statements of Operations  

For the three months ended March 31, 2007

(in millions)

   Primary
Obligor
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Operating revenue

   $ —       $ 832     $ 1,587     $ (91 )   $ 2,328  
                                        

Operating expenses:

          

Salaries, wages and employees’ benefits

     —         498       924       —         1,422  

Operating expenses and supplies

     —         158       367       (83 )     442  

Purchased transportation

     —         84       177       (9 )     252  

Depreciation and amortization

     —         19       40       —         59  

Other operating expenses

     —         38       78       —         116  

Losses on property disposals, net

     —         1       2       —         3  

Reorganization charges

     —         4       10       —         14  
                                        

Total operating expenses

     —         802       1,598       (92 )     2,308  
                                        

Operating income (loss)

     —         30       (11 )     1       20  
                                        

Nonoperating (income) expenses:

          

Interest expense

     4       8       8       —         20  

Other, net

     (13 )     42       (32 )     1       (2 )
                                        

Nonoperating (income) expenses, net

     (9 )     50       (24 )     1       18  
                                        

Income (loss) before income taxes

     9       (20 )     13       —         2  

Income tax provision (benefit)

     3       (5 )     4       (1 )     1  
                                        

Net income (loss)

   $ 6     $ (15 )   $ 9     $ 1     $ 1  
                                        

 

17


For the three months ended March 31, 2006

(in millions)

   Primary
Obligor
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Operating revenue

   $ —       $ 849     $ 1,619     $ (94 )   $ 2,374  
                                        

Operating expenses:

          

Salaries, wages and employees’ benefits

     —         503       906       (7 )     1,402  

Operating expenses and supplies

     —         168       364       (82 )     450  

Purchased transportation

     —         82       175       (4 )     253  

Depreciation and amortization

     —         22       51       —         73  

Other operating expenses

     —         34       73       —         107  

Losses on property disposals, net

     —         1       —         —         1  
                                        

Total operating expenses

     —         810       1,569       (93 )     2,286  
                                        

Operating income (loss)

     —         39       50       (1 )     88  
                                        

Nonoperating (income) expenses:

          

Interest expense

     4       8       9       —         21  

Other, net

     (14 )     26       (12 )     (1 )     (1 )
                                        

Nonoperating (income) expenses, net

     (10 )     34       (3 )     (1 )     20  
                                        

Income before income taxes

     10       5       53       —         68  

Income tax provision (benefit)

     3       4       22       (3 )     26  
                                        

Net income

   $ 7     $ 1     $ 31     $ 3     $ 42  
                                        
Condensed Consolidating Statements of Cash Flows  

For the three months ended March 31, 2007

(in millions)

   Primary
Obligor
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Operating activities:

          

Net cash provided by (used in) operating activities

   $ 13     $ 136     $ (26 )   $ —       $ 123  
                                        

Investing activities:

          

Acquisition of property and equipment

     —         (42 )     (90 )     —         (132 )

Proceeds from disposal of property and equipment

     —         3       4       —         7  

Other

     —         —         (1 )     —         (1 )
                                        

Net cash used in investing activities

     —         (39 )     (87 )     —         (126 )
                                        

Financing activities:

          

Asset backed securitization borrowings, net

     —         —         25       —         25  

Borrowing of long-term debt, net

     —         3       —         —         3  

Proceeds from exercise of stock options

     —         6       —         —         6  

Intercompany advances / repayments

     (13 )     (57 )     70       —         —    
                                        

Net cash provided by (used in) financing activities

     (13 )     (48 )     95       —         34  
                                        

Net increase (decrease) in cash and cash equivalents

     —         49       (18 )     —         31  

Cash and cash equivalents, beginning of period

     —         38       38       —         76  
                                        

Cash and cash equivalents, end of period

   $ —       $ 87     $ 20     $ —       $ 107  
                                        

 

18


Condensed Consolidating Statements of Cash Flows

 

For the three months ended March 31, 2006

(in millions)

   Primary
Obligor
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations    Consolidated  

Operating activities:

           

Net cash provided by (used in) operating activities

   $ 14     $ (25 )   $ 12     $ —      $ 1  
                                       

Investing activities:

           

Acquisition of property and equipment

     —         (40 )     (78 )     —        (118 )

Proceeds from disposal of property and equipment

     —         —         9       —        9  

Acquisition of companies

     —         (12 )     —         —        (12 )

Other

     4       —         —         —        4  
                                       

Net cash provided by (used in) investing activities

     4       (52 )     (69 )     —        (117 )
                                       

Financing activities:

           

Asset backed securitization borrowings, net

     —         —         74       —        74  

Borrowing of long-term debt, net

     —         13       —         —        13  

Proceeds from exercise of stock options

     —         2       —         —        2  

Intercompany advances / repayments

     (18 )     54       (36 )     —        —    
                                       

Net cash provided by (used in) financing activities

     (18 )     69       38       —        89  
                                       

Net decrease in cash and cash equivalents

     —         (8 )     (19 )     —        (27 )

Cash and cash equivalents, beginning of period

     —         34       48       —        82  
                                       

Cash and cash equivalents, end of period

   $ —       $ 26     $ 29     $ —      $ 55  
                                       

 

19


12. Guarantees of the Senior Notes Due 2009 and 2010

In connection with the senior notes due 2009 and 2010 that YRC Worldwide assumed by virtue of its merger with USF, and in addition to the primary obligor, USF, YRC Worldwide and its following 100% owned subsidiaries have issued guarantees in favor of the holders of the senior notes due 2009 and 2010: USF Sales Corporation, USF Holland Inc., USF Bestway Inc., USF Bestway Leasing Inc., USF Reddaway Inc., USF Glen Moore Inc., Meridian IQ Services Inc. and IMUA Handling Corporation. Each of the guarantees is full and unconditional and joint and several.

The condensed 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 condensed consolidating financial information of YRC Worldwide and its subsidiaries as of March 31, 2007 and December 31, 2006 with respect to the financial position and for the three months ended March 31, 2007 and 2006 for results of operations and cash flows. The primary obligor column presents the financial information of Regional Transportation (formerly USF Corporation). The Guarantor Subsidiaries column presents the financial information of all guarantor subsidiaries of the senior notes due 2009 and 2010 including YRC Worldwide, 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 Sheet

 

March 31, 2007

(in millions)

   Primary
Obligor
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash and cash equivalents

   $ —       $ 74     $ 33     $ —       $ 107  

Intercompany advances receivable

     —         (13 )     13       —         —    

Accounts receivable, net

     —         (7 )     1,240       (3 )     1,230  

Prepaid expenses and other

     3       61       240       —         304  
                                        

Total current assets

     3       115       1,526       (3 )     1,641  

Property and equipment

     2       857       3,062       —         3,921  

Less – accumulated depreciation

     (1 )     (118 )     (1,465 )     —         (1,584 )
                                        

Net property and equipment

     1       739       1,597       —         2,337  

Investment in subsidiaries

     329       3,863       5       (4,197 )     —    

Receivable from affiliate

     485       (816 )     331       —         —    

Goodwill and other assets

     805       380       1,255       (350 )     2,090  
                                        

Total assets

   $ 1,623     $ 4,281     $ 4,714     $ (4,550 )   $ 6,068  
                                        

Intercompany advances payable

   $ 65     $ 137     $ (2 )   $ (200 )   $ —    

Accounts payable

     7       115       284       (3 )     403  

Wages, vacations and employees’ benefits

     1       108       331       —         440  

Other current and accrued liabilities

     33       90       238       (1 )     360  

Asset backed securitization borrowings

     —         —         250       —         250  
                                        

Total current liabilities

     106       450       1,101       (204 )     1,453  

Payable to affiliate

     —         (44 )     194       (150 )     —    

Long-term debt, less current portion

     263       553       243       —         1,059  

Deferred income taxes, net

     80       113       417       —         610  

Pension and postretirement

     —         360       —         —         360  

Claims and other liabilities

     2       107       271       —         380  

Commitments and contingencies

          

Shareholders’ equity

     1,172       2,742       2,488       (4,196 )     2,206  
                                        

Total liabilities and shareholders’ equity

   $ 1,623     $ 4,281     $ 4,714     $ (4,550 )   $ 6,068  
                                        

 

20


December 31, 2006

(in millions)

   Primary
Obligor
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash and cash equivalents

   $ —       $ 23     $ 53     $ —       $ 76  

Intercompany advances receivable

     —         (10 )     10       —         —    

Accounts receivable, net

     —         1       1,192       (2 )     1,191  

Prepaid expenses and other

     (17 )     96       245       —         324  
                                        

Total current assets

     (17 )     110       1,500       (2 )     1,591  

Property and equipment

     2       836       3,004       —         3,842  

Less – accumulated depreciation

     (1 )     (115 )     (1,456 )     —         (1,572 )
                                        

Net property and equipment

     1       721       1,548       —         2,270  

Investment in subsidiaries

     247       3,373       6       (3,626 )     —    

Receivable from affiliate

     399       (714 )     315       —         —    

Goodwill and other assets

     809       380       1,252       (350 )     2,091  
                                        

Total assets

   $ 1,439     $ 3,870     $ 4,621     $ (3,978 )   $ 5,952  
                                        

Intercompany advances payable

   $ —       $ 193     $ 7     $ (200 )   $ —    

Accounts payable

     3       97       300       (2 )     398  

Wages, vacations and employees’ benefits

     (1 )     105       310       —         414  

Other current and accrued liabilities

     6       55       263       —         324  

Asset backed securitization borrowings

     —         —         225       —         225  
                                        

Total current liabilities

     8       450       1,105       (202 )     1,361  

Payable to affiliate

     —         (29 )     179       (150 )     —    

Long-term debt, less current portion

     265       550       243       —         1,058  

Deferred income taxes, net

     80       117       412       —         609  

Pension and postretirement

     —         350       —         —         350  

Claims and other liabilities

     1       45       336       —         382  

Commitments and contingencies

          

Shareholders’ equity

     1,085       2,387       2,346       (3,626 )     2,192  
                                        

Total liabilities and shareholders’ equity

   $ 1,439     $ 3,870     $ 4,621     $ (3,978 )   $ 5,952  
                                        

Condensed Consolidating Statements of Operations

 

For the three months ended March 31, 2007

(in millions)

   Primary
Obligor
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Operating revenue

   $ 6     $ 582     $ 1,832     $ (92 )   $ 2,328  
                                        

Operating expenses:

          

Salaries, wages and employees’ benefits

     2       353       1,067       —         1,422  

Operating expenses and supplies

     1       158       369       (86 )     442  

Purchased transportation

     —         30       228       (6 )     252  

Depreciation and amortization

     2       16       41       —         59  

Other operating expenses

     —         33       83       —         116  

Losses on property disposals, net

     —         1       2       —         3  

Reorganization charges

     —         7       7       —         14  
                                        

Total operating expenses

     5       598       1,797       (92 )     2,308  
                                        

Operating income (loss)

     1       (16 )     35       —         20  
                                        

Nonoperating (income) expenses:

          

Interest expense

     4       8       8       —         20  

Other, net

     (8 )     33       (28 )     1       (2 )
                                        

Nonoperating (income) expenses, net

     (4 )     41       (20 )     1       18  
                                        

Income (loss) before income taxes

     5       (57 )     55       (1 )     2  

Income tax provision (benefit)

     2       (20 )     20       (1 )     1  
                                        

Net income (loss)

   $ 3     $ (37 )   $ 35     $ —       $ 1  
                                        

 

21


For the three months ended March 31, 2006

(in millions)

   Primary
Obligor
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Operating revenue

   $ 6     $ 598     $ 1,871     $ (101 )   $ 2,374  
                                        

Operating expenses:

          

Salaries, wages and employees’ benefits

     2       341       1,066       (7 )     1,402  

Operating expenses and supplies

     1       158       379       (88 )     450  

Purchased transportation

     —         35       222       (4 )     253  

Depreciation and amortization

     2       20       51       —         73  

Other operating expenses

     —         31       76       —         107  

Losses on property disposals, net

     —         1       —         —         1  
                                        

Total operating expenses

     5       586       1,794       (99 )     2,286  
                                        

Operating income (loss)

     1       12       77       (2 )     88  
                                        

Nonoperating (income) expenses:

          

Interest expense

     4       8       9       —         21  

Other, net

     (2 )     17       (14 )     (2 )     (1 )
                                        

Nonoperating (income) expenses, net

     2       25       (5 )     (2 )     20  
                                        

Income (loss) before income taxes

     (1 )     (13 )     82       —         68  

Income tax provision (benefit)

     (1 )     (1 )     31       (3 )     26  
                                        

Net income (loss)

   $ —       $ (12 )   $ 51     $ 3     $ 42  
                                        

Condensed Consolidating Statement of Cash Flows

 

For the three months ended March 31, 2007

(in millions)

   Primary
Obligor
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations    Consolidated  

Operating activities:

           

Net cash provided by operating activities

   $ 19     $ 60     $ 44     $ —      $ 123  
                                       

Investing activities:

           

Acquisition of property and equipment

     —         (37 )     (95 )     —        (132 )

Proceeds from disposal of property and equipment

     —         3       4       —        7  

Other

     —         —         (1 )     —        (1 )
                                       

Net cash used in investing activities

     —         (34 )     (92 )     —        (126 )
                                       

Financing activities:

           

Asset backed securitization borrowings, net

     —         —         25       —        25  

Borrowing of long-term debt, net

     —         3       —         —        3  

Proceeds from exercise of stock options

     —         6       —         —        6  

Intercompany advances / repayments

     (19 )     16       3       —        —    
                                       

Net cash provided by (used in) financing activities

     (19 )     25       28       —        34  
                                       

Net increase (decrease) in cash and cash equivalents

     —         51       (20 )     —        31  

Cash and cash equivalents, beginning of Period

     —         23       53       —        76  
                                       

Cash and cash equivalents, end of year

   $ —       $ 74     $ 33     $ —      $ 107  
                                       

 

22


For the three months ended March 31, 2006

(in millions)

   Primary
Obligor
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations    Consolidated  

Operating activities:

           

Net cash provided by (used in) operating activities

   $ 3     $ (21 )   $ 19     $ —      $ 1  
                                       

Investing activities:

           

Acquisition of property and equipment

     —         (14 )     (104 )     —        (118 )

Proceeds from disposal of property and equipment

     —         4       5       —        9  

Acquisition of companies

     —         (12 )     —         —        (12 )

Other

     —         —         4       —        4  
                                       

Net cash used in investing activities

     —         (22 )     (95 )     —        (117 )
                                       

Financing activities:

           

Asset backed securitization borrowings, net

     —         —         74       —        74  

Borrowing of long-term debt, net

     —         13       —         —        13  

Proceeds from exercise of stock options

     —         2       —         —        2  

Intercompany advances / repayments

     (3 )     6       (3 )     —        —    
                                       

Net cash provided by (used in) financing activities

     (3 )     21       71       —        89  
                                       

Net decrease in cash and cash equivalents

     —         (22 )     (5 )     —        (27 )

Cash and cash equivalents, beginning of Period

     —         42       40       —        82  
                                       

Cash and cash equivalents, end of year

   $ —       $ 20     $ 35     $ —      $ 55  
                                       

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements of YRC Worldwide Inc. (also referred to as “YRC Worldwide”, the “Company”, “we” or “our”). MD&A and certain statements in the Notes to Consolidated Financial Statements include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (each a “forward-looking statement”). Forward-looking statements include those preceded by, followed by or include the words “should,” “could,” “would,” “will,” “may,” “expect,” “believe,” or similar expressions. Our actual results could differ materially from those projected by these forward-looking statements due to a number of factors, including (without limitation), inflation, inclement weather, price and availability of fuel, sudden changes in the cost of fuel or the index upon which the Company bases its fuel surcharge, competitor pricing activity, expense volatility, including (without limitation) expense volatility due to changes in rail service or pricing for rail service, ability to capture cost reductions, including (without limitation) those cost reduction opportunities arising from acquisitions, changes in equity and debt markets, a downturn in general or regional economic activity, effects of a terrorist attack, and labor relations, including (without limitation), the impact of work rules, work stoppages, strikes or other disruptions, any obligations to multi-employer health, welfare and pension plans, wage requirements and employee satisfaction.

Results of Operations

Our Results of Operations section focuses on the highlights and significant items that impacted our operating results during the first quarter. We have presented a discussion regarding the operating results of each of our three operating segments: National Transportation, Regional Transportation and Logistics. Prior to 2007, we reported results for four operating segments that included Yellow Transportation and Roadway whose management structures were combined in January 2007 to form National Transportation. The prior year results for Yellow Transportation and Roadway have been combined, including proper eliminations, to present comparative information. Prior year segments also included Regional Transportation, which is unchanged in the current year, and Meridian IQ which is now being referred to as our Logistics segment. Our discussion also identifies the adjustments to operating income that management excludes when internally evaluating segment performance because the items are not related to the segments’ core operations. Please refer to our Business Segments note for further discussion.

Consolidated Results

Our consolidated results for the three months ended March 31, 2007 include the results of each of the operating segments discussed below and corporate charges. A more detailed discussion of the operating results of our segments is presented below.

Three months ended March 31, 2007 compared to three months ended March 31, 2006

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

 

(in millions)

   2007    2006    Percent Change  

Operating revenue

   $ 2,328.3    $ 2,374.2    (1.9 )%

Operating income

     20.4      87.8    (76.8 )%

Nonoperating expenses, net

     18.3      19.8    (7.6 )%

Net income

     1.3      42.1    (96.9 )%
                    

Our consolidated operating revenue decreased slightly during the three months ended March 31, 2007 versus 2006 primarily due to a slower economy in the United States, especially the Upper Midwest, and a challenging operating environment mostly attributed to harsh weather conditions for a significant portion of the quarter. In general, pricing or yield increased modestly while overall volumes were down slightly compared to the comparable prior year quarter.

Consolidated operating revenue includes fuel surcharge revenue. Fuel surcharges are common throughout our industry and represent an amount that we charge to customers that adjusts with changing fuel prices. We base our fuel surcharge on a published national index and adjust it weekly. Rapid material changes in the index or our cost of fuel can positively or negatively impact our revenue and operating income versus prior periods as there is a lag in the Company’s adjustment of base rates in response to changes in fuel surcharge. Fuel surcharge is an accepted and important component of the overall pricing of our services to our customers. Without an industry accepted fuel surcharge program, our base pricing for our transportation services would require changes. We believe the distinction between base rates and fuel surcharge has been blurring over time, and it is impractical to clearly separate all the different factors that influence the price that our customers are willing to pay. In general, under our present fuel surcharge program, we believe rising fuel costs are beneficial to us in the short term.

 

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Consolidated operating income decreased significantly during the three months ended March 31, 2007 as compared to 2006 and is reflective of decreased operating revenue at all of our operating companies, with the largest decline experienced at Regional Transportation. Given its regional concentration, the depressed economy in the Upper Midwest impacted this segment the most. Our consolidated operating income during the first quarter of 2007 was also unfavorably impacted by a $14.5 million charge related to restructuring and reorganization and $2.9 million of losses generated from the sale of property and equipment. During the three months ended March 31, 2007, we combined USF Reddaway and USF Bestway and after February 12, 2007 no longer market the USF Bestway brand. This combination contributed to approximately $5.5 million of the reorganization and restructuring charges. In addition, as previously discussed, we combined the management structures of Yellow Transportation and Roadway during the first quarter of 2007 which also resulted in certain reorganization charges of approximately $6.1 million, primarily severance. The $14.5 million reorganization charge also included $2.8 million in the Corporate segment of severance and expense associated with the acceleration of vesting of restricted stock units due to certain management separations. This charge is a non-cash item and is included in the “Reorganization charges” line in our consolidated Statement of Operations. These amounts were partially offset by a $13.5 million reduction in depreciation expense for the three months ended March 31, 2007 versus 2006 resulting from a change in depreciable lives and salvage values effective July 1, 2006.

Nonoperating expenses consist primarily of interest expense which decreased slightly from 2006.

Our effective tax rate for the three months ended March 31, 2007 was 39.0% compared to 38.1% for the three months ended March 31, 2006. Variations in the rate could result from our income allocation among subsidiaries and their relative state tax rates, in addition to the tax planning strategies that may be implemented throughout the year.

Adjustments to operating income presented in the segment discussion below represent charges that management excludes when evaluating segment performance to better understand the results of our core operations. With the exception of property disposals, these charges do not occur on a regular basis and can distort our operating results. Management excludes the impact of gains and losses from the disposal of property as it reflects charges not related to the segment’s primary business.

National Transportation Results

National Transportation represented approximately 69% of our consolidated revenue in the first quarters of 2007 and 2006. The table below provides summary financial information for National Transportation for the three months ended March 31:

 

(in millions)

   2007     2006     Percent Change  

Operating revenue

   $ 1,608.4     $ 1,643.9     (2.2 )%

Operating income

     33.1       69.2     (52.1 )%

Adjustments to operating income(a)

     6.8       —       n/m (c)

Adjusted operating income(b)

     39.9       69.2     (42.3 )%

Operating ratio

     97.9 %     95.8 %   (2.1 )pp(d)

Adjusted operating ratio

     97.5 %     95.8 %   (1.7 )pp

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

Three months ended March 31, 2007 compared to three months ended March 31, 2006

National Transportation reported first quarter 2007 operating revenue of $1,608.4 million, representing a decrease of $35.5 million or 2.2% from the first quarter of 2006. The two primary components of operating revenue are volume, comprised of the number of shipments and the weight per shipment, and price, usually evaluated on a per hundred weight basis for less-than-truckload (“LTL”) business. With the same number of workdays in both quarters, the decline in operating revenue was largely driven by a 4.5% decline in total tonnage picked up per day, with truckload tonnage being down more dramatically at 7.3% and LTL tonnage down 3.8%. Both of these tonnage declines are primarily the result of a slowing economy, and we believe the majority of the freight transportation sector has also experienced softening business levels based on reports of tonnage declines. As the economy slowed, capacity became more readily available particularly in the truckload portion of our business and competition for available loads increased. The decline in LTL tonnage was made up of a 2.6% decline in shipments per day and a 1.3% decline in weight per shipment. In addition to the slowing economy, the first quarter of 2007 had more severe weather than 2006, which contributed to the decline in tonnage as customers where unable to ship goods on several days, particularly in February.

 

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The decline in tonnage was partially offset by a 2.0% increase in LTL revenue per hundred weight. Fuel surcharge revenue was down just slightly from 2006 and was not a major factor in either the change in revenue or revenue per hundred weight.

Operating income for National Transportation decreased by $36.1 million or 52.1% from the first quarter of 2006. Revenue was lower by $35.5 million while total costs increased by $0.6 million. The cost increases consisted of higher salaries, wages and benefits of $9.5 million, higher other operating expenses of $7.4 million and reorganization charges of $6.1 million which were offset by lower operating expenses and supplies of $16.6 million and lower depreciation expense of $10.0 million.

The largest cause of the increase in salaries, wages and benefits was $16.1 million or 2.1% higher hourly wages and benefits, which were the result of annual contractual wage and benefit increases, a higher cost mix of workers and challenging weather conditions, offset by lower business levels which require fewer hours to be worked. The higher cost mix of workers is the result of having fewer new hire employees on union wage progression and also working fewer casual (i.e. supplemental) employees. Both of these employee groups have lower overall costs to the Company than regular full time employees. The lower use of casual employees is a direct result of lower tonnage levels, as these employees normally supplement our regular work force. The weather conditions resulted in lower productivity levels across several work groups than would have otherwise been expected. Workers’ compensation costs were lower by $4.4 million or 13.6% due to less unfavorable development of old claims compared with that experienced in the prior year.

Other operating expenses were higher due to a $4.5 million or 22.3% increase in cargo claims expense and a $2.5 million or 29.2% increase in bodily injury and property damage claims. The cargo claims increase is the result of higher claim frequency, which the Company has addressed by allocating additional resources to ensure a consistent approach to achieving our high standards of quality.

The reorganization charges, primarily severance costs, were a result of the combination of the management structures of Yellow Transportation and Roadway to form National Transportation as previously discussed.

Operating expenses and supplies were lower due to a number of relatively small factors that were all favorable compared to last year, many of which were the result of lower business levels and stringent cost controls put in place during this challenging period of time. The following costs all experienced relatively similar declines of approximately $2-3 million each compared to 2006: vehicle maintenance expenses, travel and employee expenses, miscellaneous operating expenses and supplies, and professional service fees from affiliates as they also had cost reduction programs in place. Additionally, in the first quarter of 2006, Yellow Transportation incurred $3.5 million of costs associated with hosting an industry conference. No such conference was held in 2007, thus resulting in lower costs compared to the prior year. Slightly offsetting these declines were increased costs related to adverse weather in several cost categories.

Depreciation expense was lower primarily because of a change in depreciable lives and salvage values of property and equipment that was made in the third quarter of 2006.

Lower revenue and the slight increase in expenses resulted in an operating ratio of 97.9 for the first quarter of 2007, which is 2.1 percentage points higher than the prior year. Operating ratio refers to a common industry measurement calculated by dividing a company’s operating expenses by its operating revenue.

 

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Regional Transportation Results

Regional Transportation represented approximately 25% of our consolidated revenue in the first quarters of 2007 and 2006. The table below provides summary financial information for YRC Regional Transportation for the three months ended March 31:

 

(in millions)

   2007     2006     Percent Change  

Operating revenue

   $ 575.9     $ 592.1     (2.7 )%

Operating income

     (5.0 )     21.4     n/m (a)

Adjustments to operating income(b)

     6.5       —       n/m  

Adjusted operating income(c)

     1.5       21.4     n/m  

Operating ratio

     100.9 %     96.4 %   (4.5 )pp(d)

Adjusted operating ratio

     99.7 %     96.4 %   (3.3 )pp

(a) Not meaningful.
(b) Represents charges that management excludes when evaluating segment performance to better understand our core operations.
(c) 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.
(d) Percentage points.

Three months ended March 31, 2007 compared to three months ended March 31, 2006

Regional Transportation reported operating revenue of $575.9 million for the quarter ended March 31, 2007, representing a decrease of $16.2 million or 2.7% from the quarter ended March 31, 2006. The decreased operating revenue is due to lower volume and revenue per shipment resulting from a challenging business environment, especially in the upper Midwest, where economic conditions are adversely impacted by the automotive sector. While LTL revenue per hundred weight increased 1.1% in the first quarter 2007 as compared to the first quarter 2006, LTL weight per shipment declined 1.6% and LTL shipments per day declined by 0.9% compared to the first quarter of 2006. Regional Transportation has a fuel surcharge program that is substantially similar to that of the other YRC Worldwide companies.

Regional Transportation reported an operating loss of $5.0 million for the quarter ended March 31, 2007, a decrease of $26.4 million over the first quarter of 2006. Decreases in overall revenue of $16.2 million, increased wage and benefit expenses of $7.7 million resulting primarily from union contractual rate increases and adverse we