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 June 30, 2008

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, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

  Large accelerated filer   x     Accelerated filer   ¨
  Non-accelerated filer   ¨   (Do not check if a smaller reporting company)   Smaller reporting company   ¨

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 July 31, 2008

Common Stock, $1 Par Value Per Share   57,283,782 shares

 

 

 


Table of Contents

INDEX

 

Item

       Page
PART I – FINANCIAL INFORMATION
1.   Financial Statements   
  Consolidated Balance Sheets - June 30, 2008 and December 31, 2007    3
  Statements of Consolidated Operations - Three and Six Months Ended June 30, 2008 and 2007    4
  Statements of Consolidated Cash Flows - Six Months Ended June 30, 2008 and 2007    5
  Statement of Consolidated Shareholders’ Equity - Six Months Ended June 30, 2008    6
  Notes to Consolidated Financial Statements    7
2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations    31
3.   Quantitative and Qualitative Disclosures About Market Risk    42
4.   Controls and Procedures    42
PART II – OTHER INFORMATION
4.   Submission of Matters to a Vote of Security Holders    43
6.   Exhibits    44
  Signatures    45


Table of Contents

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

YRC Worldwide Inc. and Subsidiaries

(Amounts in thousands except per share data)

 

     June 30,
2008
    December 31,
2007
 
     (Unaudited)        

Assets

    

Current Assets:

    

Cash and cash equivalents

   $ 61,324     $ 58,233  

Accounts receivable, net

     1,116,081       1,073,915  

Prepaid expenses and other

     229,352       245,386  
                

Total current assets

     1,406,757       1,377,534  
                

Property and Equipment:

    

Cost

     4,085,288       4,083,791  

Less – accumulated depreciation

     (1,770,389 )     (1,703,318 )
                

Net property and equipment

     2,314,899       2,380,473  
                

Goodwill

     700,546       700,659  

Intangibles, net

     524,435       533,327  

Other assets

     72,843       70,630  
                

Total assets

   $ 5,019,480     $ 5,062,623  
                

Liabilities and Shareholders’ Equity

    

Current Liabilities:

    

Accounts payable

   $ 368,654     $ 387,740  

Wages, vacations and employees’ benefits

     430,066       426,119  

Other current and accrued liabilities

     379,584       369,725  

Asset backed securitization borrowings

     140,000       180,000  

Current maturities of long-term debt

     331,295       231,955  
                

Total current liabilities

     1,649,599       1,595,539  
                

Other Liabilities:

    

Long-term debt, less current portion

     723,790       822,048  

Deferred income taxes, net

     536,913       521,615  

Pension and postretirement

     162,906       180,166  

Claims and other liabilities

     339,202       330,951  

Commitments and contingencies

    

Shareholders’ Equity:

    

Common stock, $1 par value per share

     62,022       61,514  

Preferred stock, $1 par value per share

     —         —    

Capital surplus

     1,218,533       1,211,956  

Retained earnings

     461,518       471,119  

Accumulated other comprehensive income

     9,611       12,329  

Treasury stock, at cost (4,802 shares)

     (144,614 )     (144,614 )
                

Total shareholders’ equity

     1,607,070       1,612,304  
                

Total liabilities and shareholders’ equity

   $ 5,019,480     $ 5,062,623  
                

The accompanying notes are an integral part of these statements.

 

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STATEMENTS OF CONSOLIDATED OPERATIONS

YRC Worldwide Inc. and Subsidiaries

For the Three and Six Months Ended June 30

(Amounts in thousands except per share data)

(Unaudited)

 

     Three Months     Six Months
     2008     2007     2008     2007

Operating Revenue

   $ 2,398,728     $ 2,486,505     $ 4,631,320     $ 4,814,847
                              

Operating Expenses:

        

Salaries, wages and employees’ benefits

     1,332,137       1,464,840       2,685,283       2,886,365

Operating expenses and supplies

     538,664       469,644       1,024,893       911,572

Purchased transportation

     281,938       273,184       536,250       524,952

Depreciation and amortization

     63,435       60,345       126,748       119,336

Other operating expenses

     105,803       113,464       218,568       229,788

(Gains) losses on property disposals, net

     3,053       (2,788 )     6,539       161

Reorganization and settlements

     2,444       (606 )     15,228       13,851
                              

Total operating expenses

     2,327,474       2,378,083       4,613,509       4,686,025
                              

Operating Income

     71,254       108,422       17,811       128,822
                              

Nonoperating (Income) Expenses:

        

Interest expense

     18,104       21,766       36,670       41,804

Other

     (1,863 )     2,012       (3,834 )     278
                              

Nonoperating expenses, net

     16,241       23,778       32,836       42,082
                              

Income (Loss) Before Income Taxes

     55,013       84,644       (15,025 )     86,740

Income tax provision (benefit)

     18,739       29,277       (5,424 )     30,094
                              

Net Income (Loss)

   $ 36,274     $ 55,367     $ (9,601 )   $ 56,646
                              

Average Common Shares Outstanding – Basic

     57,122       57,514       57,000       57,426

Average Common Shares Outstanding – Diluted

     58,193       58,511       57,000       58,546

Basic Earnings (Loss) Per Share

   $ 0.64     $ 0.96     $ (0.17 )   $ 0.99

Diluted Earnings (Loss) Per Share

   $ 0.62     $ 0.95     $ (0.17 )   $ 0.97

The accompanying notes are an integral part of these statements.

 

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STATEMENTS OF CONSOLIDATED CASH FLOWS

YRC Worldwide Inc. and Subsidiaries

For the Six Months Ended June 30

(Amounts in thousands)

(Unaudited)

 

     2008     2007  

Operating Activities:

    

Net income (loss)

   $ (9,601 )   $ 56,646  

Noncash items included in net income (loss):

    

Depreciation and amortization

     126,748       119,336  

Losses on property disposals, net

     6,508       161  

Deferred income tax provision (benefit), net

     11,844       (842 )

Curtailment gain

     (34,460 )     —    

Other noncash items, net

     966       4,725  

Changes in assets and liabilities, net:

    

Accounts receivable

     (42,165 )     (32,794 )

Accounts payable

     (13,573 )     8,418  

Other operating assets

     23,429       19,774  

Other operating liabilities

     40,891       (12,521 )
                

Net cash provided by operating activities

     110,587       162,903  
                

Investing Activities:

    

Acquisition of property and equipment

     (77,018 )     (241,860 )

Proceeds from disposal of property and equipment

     11,079       27,939  

Other

     (4,201 )     (103 )
                

Net cash used in investing activities

     (70,140 )     (214,024 )
                

Financing Activities:

    

Asset backed securitization borrowings (payments), net

     (40,000 )     25,000  

Borrowing of long-term debt, net

     5,876       —    

Debt issuance costs

     (3,282 )     —    

Proceeds from exercise of stock options

     50       6,405  
                

Net cash (used in) provided by financing activities

     (37,356 )     31,405  
                

Net Increase (Decrease) In Cash and Cash Equivalents

     3,091       (19,716 )

Cash and Cash Equivalents, Beginning of Period

     58,233       76,391  
                

Cash and Cash Equivalents, End of Period

   $ 61,324     $ 56,675  
                

The accompanying notes are an integral part of these statements.

 

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STATEMENT OF CONSOLIDATED SHAREHOLDERS’ EQUITY

YRC Worldwide Inc. and Subsidiaries

For the Six Months Ended June 30

(Amounts in thousands)

(Unaudited)

 

     2008  

Common Stock

  

Beginning balance

   $ 61,514  

Exercise of stock options

     3  

Employer contribution to 401(k) plan

     310  

Issuance of equity awards

     195  
        

Ending balance

   $ 62,022  
        

Capital Surplus

  

Beginning balance

   $ 1,211,956  

Exercise of stock options, including tax benefits

     47  

Employer contribution to 401(k) plan

     4,504  

Share-based compensation

     1,567  

Other, net

     459  
        

Ending balance

   $ 1,218,533  
        

Retained Earnings

  

Beginning balance

   $ 471,119  

Net loss

     (9,601 )
        

Ending balance

   $ 461,518  
        

Accumulated Other Comprehensive Income

  

Beginning balance

   $ 12,329  

Pension, net of tax:

  

Reclassification of net losses to net income

     849  

Curtailment adjustment

     (3,234 )

Foreign currency translation adjustments

     (333 )
        

Ending balance

   $ 9,611  
        

Treasury Stock, At Cost

  

Beginning and ending balance

   $ (144,614 )
        

Total Shareholders’ Equity

   $ 1,607,070  
        

The accompanying notes are an integral part of these statements.

 

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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. Our 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 includes Reimer Express Lines, a Roadway subsidiary 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 (“U.S.”) and Canada, National Transportation also serves parts of Mexico, Puerto Rico and Guam.

 

   

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, 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 U.S., Canada, Mexico and Puerto Rico. Approximately 90% of Regional Transportation less-than-truckload (“LTL”) shipments are completed in two days or less.

 

   

YRC Logistics plans and coordinates the movement of goods worldwide to provide customers a single source for logistics management solutions. YRC 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.

 

   

YRC Truckload (“Truckload”) reflects the results of USF Glen Moore, a provider of truckload services throughout the U.S.

At June 30, 2008, approximately 72% of our labor force is subject to various collective bargaining agreements, which predominantly expire in 2013.

 

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 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, 2007.

Assets Held for Sale

When we plan to dispose of property by sale, the asset is carried in the financial statements at the lower of the carrying amount or estimated fair value, less cost to sell, and is reclassified to assets held for sale. Additionally, after such reclassification, there

 

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is no further depreciation taken on the asset. For an asset to be classified as held for sale, management must approve and commit to a formal plan, the sale should be anticipated during the ensuing year and the asset must be actively marketed, be available for immediate sale, and meet certain other specified criteria. At June 30, 2008 and December 31, 2007, the net book value of assets held for sale was approximately $82.6 million and $26.1 million, respectively. This amount is included in “Property and Equipment” in the accompanying consolidated balance sheets. We recorded charges of $3.7 million and $6.4 million for the three and six months ended June 30, 2008, respectively, to reduce properties held for sale to estimated fair value, less cost to sell. These charges are included in “(Gains) Losses on Property Disposals, Net” in the accompanying statements of consolidated operations. There were no such amounts recorded during the six months ended June 30, 2007.

 

3. Restructuring and Reorganization

In February 2008, we closed 27 service centers that were previously a part of Regional Transportation’s networks. As a part of this action, we incurred certain restructuring charges of approximately $1.3 million and $12.4 million consisting of employee severance, lease cancellations and other incremental costs during the three and six months ended June 30, 2008, respectively.

During 2008, we made payments under previous restructuring programs, primarily those charges incurred as a result of the USF Reddaway and USF Bestway combination.

We reassess the reserve accrual under our 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
    Other     Total  

Balance at December 31, 2007

   $ 3.6     $ 2.4     $ —       $ 6.0  

Restructuring charges

     3.7       6.9       1.8       12.4  

Payments

     (4.5 )     (3.0 )     (1.8 )     (9.3 )
                                

Balance at June 30, 2008

   $ 2.8     $ 6.3     $ —       $ 9.1  
                                

In addition to the above restructuring charges of $12.4 million, we incurred reorganization charges of $1.1 million and $2.8 million during the three and six months ended June 30, 2008, respectively. These charges are included in the “Reorganization and settlements” caption in the consolidated statement of operations and consist primarily of employee separation charges at National Transportation due to certain leadership changes as well as reductions in the general employee population.

 

4. Debt and Financing

Total debt consisted of the following:

 

(in millions)

   June 30,
2008
    December 31,
2007
 

Asset backed securitization borrowings, secured by accounts receivable

   $ 140.0     $ 180.0  

USF senior notes

     257.6       259.9  

Roadway senior notes

     227.0       229.5  

Contingent convertible senior notes

     400.0       400.0  

Term loan

     150.0       150.0  

Revolving credit facility

     11.0       5.1  

Industrial development bonds

     9.5       9.5  
                

Total debt

   $ 1,195.1     $ 1,234.0  

Current maturities of long-term debt

     (331.3 )     (232.0 )

ABS borrowings

     (140.0 )     (180.0 )
                

Long-term debt

   $ 723.8     $ 822.0  
                

Senior Credit Facility

On April 18, 2008, we entered into Amendment No. 1 (the “Credit Agreement Amendment”) to the Credit Agreement, dated as of August 17, 2007 (the “Credit Agreement”). The Credit Agreement, as amended (the “Credit Facility”), continues to provide the Company with a $950 million senior revolving credit facility, including sublimits available for borrowings under certain foreign currencies, and a $150 million senior term loan.

 

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The Credit Agreement Amendment:

 

   

increased, until such time as the Company receives a rating of BBB- or better from Standard & Poor’s and Ba1 or better from Moody’s, in each case with a stable outlook (the “Fall Away Event”), the Company’s Total Leverage Ratio (as defined in the Credit Facility) from 3.0x to (i) 3.75x for each of the fiscal quarters ended March 31, June 30 and September 30, 2008 and (ii) 3.5x for each fiscal quarter thereafter;

 

   

increased the interest rates and fees applicable to the revolving credit facility and term loan as set forth in the definition of “Applicable Rate” in Section 1.01 of the Credit Facility; effective with this amendment, the interest rates under the Credit Facility are correlated to our Credit Ratings; the interest rate on amounts outstanding under the revolving credit facility and term loan is LIBOR plus 120 basis points (3.66% at June 30, 2008) and LIBOR plus 150 basis points (3.96% at June 30, 2008), respectively, and the facility fee for the revolving credit facility is 30 basis points;

 

   

required the Company and its domestic subsidiaries to pledge the following collateral (i) receivables not secured by the ABS facility (as defined below) or the Company’s captive insurance companies, (ii) intercompany notes not secured by the ABS facility, (iii) fee-owned real estate parcels that have an estimated internal market value of $2.5 million or greater, (iv) 100% of the stock of all domestic subsidiaries of the Company and (v) 65% of the stock of first-tier foreign subsidiaries of the Company other than the Company’s captive insurance companies;

 

   

requires the Company and its subsidiaries to pledge additional assets, including rolling stock and the remaining real estate if the Total Leverage Ratio exceeds 3.5x at the end of any Test Period (as defined in the Credit Facility) or if the Company receives a rating of BB- or worse from Standard & Poor’s and Ba3 or worse from Moody’s prior to the Fall Away Event as defined in the Credit Agreement Amendment;

 

   

required each domestic subsidiary of the Company except for Yellow Roadway Receivables Funding Corporation to guarantee the credit facility; and

 

   

modified certain negative covenants (and in certain instances introduces new negative covenants) related to permitted liens, permitted acquisitions, permitted asset sales (and certain related mandatory prepayments from the proceeds thereof) and restricted payments.

Upon the occurrence of the Fall Away Event, (i) security interests in pledged collateral will be released, (ii) all negative covenant provisions (including the Company’s Total Leverage Ratio) and the mandatory prepayment provision will revert to pre-Credit Agreement Amendment levels and concepts and (iii) only material domestic subsidiaries and subsidiaries of the Company that guarantee certain other indebtedness of the Company or its subsidiaries will remain as guarantors.

Asset-Backed Securitization Facility

On April 18, 2008, we renewed our asset-backed securitization (“ABS”) facility. The renewed facility will expire on April 16, 2009. The renewed facility (i) reduced the financing limit available under the ABS facility from $700 million to $600 million, (ii) reduced the letters of credit sublimit from $325 million to $125 million, (iii) modified the Total Leverage Ratio consistent with the Credit Agreement Amendment described above, (iv) increased the loss and discount reserve requirements and (v) increased the administrative fee (calculated based on financing limit) and program fee (calculated based on utilization) to 50 basis points and 75 basis points, respectively. The interest rate under the ABS facility for conduits continues to be a variable rate based on A1/P1 rated commercial paper with an approximate interest rate of 2.5% at June 30, 2008, plus the program fee. The interest rate for Wachovia Bank, National Association is one-month LIBOR, plus 100 basis points, as Wachovia will no longer use a conduit to purchase receivables under the ABS facility.

The ABS facility utilizes the accounts receivable of the following subsidiaries of the Company: Yellow Transportation, Inc.; Roadway Express, Inc.; USF Holland Inc.; and USF Reddaway Inc. (the “Originators”). Yellow Roadway Receivables Funding Corporation (“YRRFC”), a special purpose entity and wholly owned subsidiary of the Company, operates the ABS facility. Under the terms of the renewed ABS facility, the Originators may transfer trade receivables to YRRFC, which is designed to isolate the receivables for bankruptcy purposes. A third-party conduit or committed purchaser must purchase from YRRFC an undivided ownership interest in those receivables. The percentage ownership interest in receivables that the conduits or committed purchasers purchase may increase or decrease over time, depending on the characteristics of the receivables, including delinquency rates and debtor concentrations.

In connection with the renewal of the ABS facility, the Company unconditionally guaranteed to YRRFC the full and punctual payment and performance of each of the Originators obligations under the ABS facility. YRRFC has pledged its right, title and interest in the guarantee to the Administrative Agent, for the benefit of the purchasers, under the Third Amended and Restated Receivables Purchase Agreement.

 

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5. Employee Benefits

Curtailment

During the second quarter of 2008, we amended the postretirement healthcare benefit plan that covers certain current and former Roadway employees. This amendment eliminated cost sharing benefits for active employees that retire on or after June 1, 2008, provided for the current cost sharing provisions to retirees to terminate December 31, 2008 and allows retirees to participate in our healthcare programs on a full-cost basis effective January 1, 2009. The curtailment of this plan resulted in a gain of $34.5 million during the three months ended June 30, 2008 and is included in “Salaries, wages and employees’ benefits” in the accompanying consolidated statement of operations.

Effective July 1, 2008, we curtailed our defined benefit plans that cover approximately 8,000 employees not covered by collective bargaining agreements. As a result of this action, future benefit accruals have been frozen effective July 1, 2008. However, employees may achieve early retirement eligibility based on age and continued service. During the third quarter 2008, we have subsequently recognized curtailment gains of approximately $63 million related to the changes to these plans.

Components of Net Periodic Pension and Other Postretirement Cost

The following table sets forth the components of our company-sponsored pension costs for the three and six months ended June 30:

 

     Three Months     Six Months  

(in millions)

   2008     2007     2008     2007  

Service cost

   $ 8.9     $ 9.8     $ 17.8     $ 19.6  

Interest cost

     17.1       16.3       34.2       32.7  

Expected return on plan assets

     (18.4 )     (17.3 )     (36.8 )     (34.9 )

Amortization of prior service cost

     0.3       0.3       0.6       0.6  

Amortization of net loss

     0.5       2.0       1.0       4.0  
                                

Net periodic pension cost

   $ 8.4     $ 11.1     $ 16.8     $ 22.0  

Settlement cost

     —         —         —         1.4  

Special termination benefit cost

     —         —         —         1.5  
                                

Total periodic pension cost

   $ 8.4     $ 11.1     $ 16.8     $ 24.9  
                                

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

 

     Three Months     Six Months  

(in millions)

   2008     2007     2008     2007  

Service cost

   $ 0.1     $ 0.1     $ 0.2     $ 0.2  

Interest cost

     0.4       0.5       0.8       1.0  

Amortization of prior service cost

     —         0.1       0.1       0.2  

Amortization of net (gain)

     (0.3 )     (0.1 )     (0.6 )     (0.2 )
                                

Other postretirement cost

   $ 0.2     $ 0.6     $ 0.5     $ 1.2  

Curtailment gain

     (34.5 )     —         (34.5 )     —    
                                

Total other postretirement cost

   $ (34.3 )   $ 0.6     $ (34.0 )   $ 1.2  
                                

 

6. Stock-Based Compensation

We maintain a long-term incentive and equity award plan implemented in 2004 that provides for the issuance of stock-based compensation to key management personnel. In May 2008, our stockholders approved an amendment to this plan to increase the number of shares of Company common stock available for awards under the plan by 3 million shares (from 3.43 million to 6.43 million) and to eliminate the requirement that shares available for grant under the plan be reduced by two shares for each share to be issued pursuant to “full value awards”, which are restricted stock, share units, performance awards and other stock-based awards. As of June 30, 2008, 2.6 million shares remain available for issuance. The plan permits the issuance of restricted stock and share units, as well as options, SARs, and performance stock and performance stock unit awards. Awards under the plan can be made in cash and share units at the discretion of the Board of Directors. According to the plan provisions, the share units provide the holders the right to receive one share of our common stock upon vesting of one share unit. The plan requires the exercise price of any option equal to the closing market price of our common stock on the date of grant.

 

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In May 2008, we granted option awards to purchase approximately 1.0 million shares of our common stock to approximately 2,200 employees. This one-time grant was made in lieu of a portion of the employees’ bonus opportunity for 2008. The options vest in one-third increments on January 1, 2009, 2010 and 2011, and expire ten years from the date of the grant. The fair value of each option was estimated on the date of grant using the Black-Scholes-Merton pricing model. Expected volatilities are estimated using historical volatility of our common stock. We use historical data to estimate option exercise and employee termination within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of options granted is derived from the output of the valuation model and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

We valued the options granted in 2008 using the above described model with the following weighted average assumptions:

 

     2008  

Dividend yield

     —   %

Expected volatility

     48.1 %

Risk-free interest rate

     2.7 %

Expected option life (years)

     3.0  

Fair value per option

   $ 6.59  
        

A summary of option activity under the plan as of June 30, 2008, and changes during the six months then ended, is presented in the following table:

 

     Shares
(in thousands)
    Weighted Average
Exercise Price
   Weighted Average
Remaining Contractual
Term (years)
   Aggregate
Intrinsic Value
(in thousands)

Outstanding at December 31, 2007

   216     $ 26.29      

Granted

   1,041       18.82      

Exercised

   (3 )     14.57      

Forfeited / expired

   (19 )     24.94      

Outstanding at June 30, 2008

   1,235       20.05    8.89    $ 8,962
                        

Exercisable at June 30, 2008

   194       25.84    3.90    $ 8,962
                        

The total intrinsic value of options exercised during the six months ended June 30, 2008 was not material.

 

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 894,000 for the three months ended June 30, 2008, and 700,000 and 650,000 for the three and six months ended June 30, 2007, respectively. In addition, dilutive securities related to our net share settle contingent convertible notes were 177,000 for the three months ended June 30, 2008, and 297,000 and 470,000 for the three and six months ended June 30, 2007, respectively. Given our net loss for the six months ended June 30, 2008, there are no dilutive securities for that period.

The impact of certain options and share units were excluded from the calculation of diluted earnings per share because the effects are antidilutive. 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.

 

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Antidilutive options and share units were 1,293,000 and 2,418,000 for the three and six months ended June 30, 2008, respectively, and 23,000 for the three and six months ended June 30, 2007.

Antidilutive convertible senior note conversion shares were 14,970,000 and 15,626,000 for the three and six months ended June 30, 2008, and 472,000 and 371,000 for the three and six months ended June 30, 2007, respectively.

 

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.

During the second quarter 2008, we modified our internal reporting process and in turn, reassessed our segment reporting. As a result of this process we now report four operating segments as compared to three segments before the change. The revised segment reporting is reflected throughout this report for all periods presented. Historical amounts are presented in a manner that is consistent with the revised segment reporting.

We have four 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 regional and next-day delivery markets. YRC Logistics provides domestic and international freight forwarding, warehousing, cross-dock services, multi-modal brokerage services and transportation management services. Truckload, our new segment previously included in the Regional Transportation segment, consists of USF Glen Moore, a domestic truckload carrier.

The accounting policies of the segments are the same as those described in the Summary of Accounting Policies note to our financial statements in our Annual Report on Form 10-K for the year ended December 31, 2007. 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.

 

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The following table summarizes our operations by business segment:

 

(in millions)

   National
Transportation
   Regional
Transportation
    YRC
Logistics
   Truckload     Corporate/
Eliminations
    Consolidated

As of June 30, 2008

              

Identifiable assets

   $ 3,262.5    $ 1,394.0     $ 428.1    $ 77.9     $ (143.0 )   $ 5,019.5

As of December 31, 2007

              

Identifiable assets

     3,139.1      1,424.0       426.4      80.9       (7.8 )     5,062.6

Three months ended June 30, 2008

              

External revenue

     1,692.2      533.4       150.4      22.7       —         2,398.7

Intersegment revenue

     0.6      0.2       9.4      8.8       (19.0 )     —  

Operating income

     74.6      2.1       1.9      (3.9 )     (3.4 )     71.3

Three months ended June 30, 2007

              

External revenue

     1,702.5      604.2       155.5      24.3       —         2,486.5

Intersegment revenue

     1.0      —         2.7      6.4       (10.1 )     —  

Operating income

     92.8      15.6       1.5      (0.8 )     (0.7 )     108.4

Six months ended June 30, 2008

              

External revenue

     3,251.4      1,045.8       291.0      43.1       —         4,631.3

Intersegment revenue

     1.3      0.2       18.6      14.0       (34.1 )     —  

Operating income

     67.3      (35.5 )     0.8      (9.0 )     (5.8 )     17.8

Six months ended June 30, 2007

              

External revenue

     3,309.9      1,155.7       300.5      48.7       —         4,814.8

Intersegment revenue

     2.0      —         7.4      12.6       (22.0 )     —  

Operating income

     125.9      10.2       0.4      (0.5 )     (7.3 )     128.8

 

9. Comprehensive Income

Comprehensive income for the three and six months ended June 30 follows:

 

     Three Months    Six Months

(in millions)

   2008     2007    2008     2007

Net income (loss)

   $ 36.3     $ 55.4    $ (9.6 )   $ 56.6

Other comprehensive income, net of tax:

         

Pension:

         

Net prior service cost

     0.2       0.2      0.4       0.4

Net actuarial gains

     0.2       1.2      0.4       2.4

Curtailment adjustment

     (3.2 )     —        (3.2 )     —  

Changes in foreign currency translation adjustments

     0.9       8.5      (0.3 )     9.1
                             

Other comprehensive income (loss)

     (1.9 )     9.9      (2.7 )     11.9
                             

Comprehensive income (loss)

   $ 34.4     $ 65.3    $ (12.3 )   $ 68.5
                             

 

10. Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141R, Business Combinations, which revises SFAS No. 141, Business Combinations, originally issued in June 2001. SFAS No. 141R will apply to business combinations for which the acquisition date is on or after January 1, 2009, and could have a material impact on us with respect to business combinations completed on or after the effective date. The significant revisions include, but are not limited to the “acquirer” recording 100% of all assets and liabilities, including goodwill, of the acquired business, generally at their fair values, and acquisition-related transaction and restructuring costs will be expensed rather than treated as part of the cost of the acquisition and included in the amount recorded for assets acquired. In addition, as of the effective date, reversals of valuation allowances related to acquired deferred tax assets and changes to acquired income tax uncertainties related to any business combinations, even those completed prior to the effective date, will be recognized in earnings, except for qualified measurement period adjustments.

 

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In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, which amends Accounting Research Bulletin No. 51, Consolidated Financial Statements, to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 will be effective for our quarterly reporting period ending March 31, 2009 and could have a material impact on us to the extent we enter into an arrangement after the effective date of the standard where we are required to consolidate a noncontrolling interest. If such an event occurs, we will report the non-controlling interest’s equity as a component of our equity in our consolidated balance sheet, we will report the component of net income or loss and comprehensive income or loss attributable to the non-controlling interest separately and changes in ownership interests will be treated as equity transactions. Upon a loss of control, any gain or loss on the interest sold will be recognized in earnings.

Effective January 1, 2008, the Company adopted the provisions of SFAS No. 157, Fair Value Measurements, for financial assets and financial liabilities. In accordance with Financial Accounting Standards Board Staff Position No. 157-2, Effective Date of FASB Statement No. 157, the Company will delay application of SFAS No. 157 for non-financial assets and non-financial liabilities, until January 1, 2009. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. Adoption of SFAS No. 157 did not have a material impact on our consolidated financial position, results of operations, or cash flows.

Certain non-financial assets and non-financial liabilities measured at fair value on a recurring basis include reporting units measured at fair value in the first step of a goodwill impairment test. Certain non-financial assets measured at fair value on a non-recurring basis include non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test, as well as intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment. As stated above, SFAS No. 157 will be applicable to these fair value measurements beginning January 1, 2009.

In May 2008, the FASB issued FASB Staff Position (“FSP”) No. APB 14-1, “Accounting for Convertible Debt Instruments that may be Settled in Cash upon Conversion (Including Partial Cash Settlement).” This FSP clarifies that issuers of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. The FSP is effective for our financial statements beginning January 1, 2009, and early adoption is not permitted. This FSP is required to be applied retrospectively to all periods presented. We are still evaluating the impact of this FSP and currently believe that the adoption of this standard will result in higher interest expense and lower earnings per share beginning in 2009.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”. This standard reorganizes the GAAP hierarchy in order to improve financial reporting by providing a consistent framework for determining what accounting principles should be used when preparing U.S. GAAP financial statements. SFAS 162 shall be effective 60 days after the SEC’s approval of the Public Company Accounting Oversight Board’s amendments to Interim Auditing Standard, AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles”. Management is currently evaluating the impact, if any, this new standard may have on our consolidated financial position, results of operations, or cash flows.

 

11. Commitments and Contingencies

Shanghai Jiayu Logistics Co., Ltd.

In December 2007, we entered into a definitive agreement to acquire majority ownership of Shanghai Jiayu Logistics Co., Ltd., a Shanghai, China ground transportation company. Pursuant to the definitive agreement, YRC Logistics will acquire 65% of the stock of Jiayu for Chinese Yuan (“CNY”) 237.4 million plus an additional payment of CNY 79.2 million (approximately $45 million) based upon Jiayu’s 2007 financial performance. If Jiayu meets certain financial performance targets during 2008 and 2009, YRC Logistics will purchase the remaining 35% interest in 2010 for an amount not to exceed CNY 248.0 million (approximately $32 million), as determined by the level of the financial performance. If Jiayu does not meet these financial targets, YRC Logistics has a call option to purchase the remaining 35% of the shares of Jiayu in 2010 for the greater of CNY 77.5 million (approximately $10 million) and 35% of the appraised value of the net assets of Jiayu at that time. All payments will be made in Chinese Yuan, and their estimated U.S. dollar equivalents are provided herein. The acquisition is subject to Chinese regulatory approvals, restructuring of certain of Jiayu’s operations and other ordinary conditions to closing. We are capitalizing transaction costs incurred related to this acquisition, the balance of which is not significant at June 30, 2008.

 

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Class Action Lawsuit

On July 30, 2007, Farm Water Technological Services, Inc. d/b/a Water Tech, and C.B.J.T. d/b/a Agricultural Supply, on behalf of themselves and other plaintiffs, filed a putative class action lawsuit against the Company and 10 other companies engaged in the LTL trucking business in the United States District Court for the Southern District of California. Since that time, other plaintiffs have filed similar cases in various courts across the nation. In December 2007, the courts consolidated these cases in the United States District Court for the Northern District of Georgia. The plaintiffs allege that the defendants, including the Company, conspired to fix fuel surcharges in violation of federal antitrust law and seek unspecified treble damages, injunctive relief, attorneys’ fees and costs of litigation. The Company believes that its fuel surcharge practices are lawful and these suits are without factual basis or legal merit. An appropriate defense has begun, and the Company intends to defend these allegations vigorously. The plaintiffs filed a consolidated amended complaint in May 2008. The defendants, including the Company, have filed in July 2008, a motion to dismiss the complaint. Given that the actions are at a very preliminary stage, the Company is not able to determine that any potential liability that might result is probable or estimable and, therefore, the Company has not recorded a liability related to the actions. If an adverse outcome were to occur, it could have a material adverse effect on the Company’s consolidated financial condition, cash flows and results of operations.

 

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12. 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 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 connection with the net share settled contingent convertible senior 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: Yellow Transportation, Inc., YRC Worldwide Technologies, Inc., YRC Logistics, Inc., YRC Logistics Global, 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 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 June 30, 2008 and December 31, 2007 with respect to the financial position and for the three and six months ended June 30, 2008 and 2007 for results of operations and for the six months ended June 30, 2008 and 2007 for the statements of 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. The Guarantor Subsidiaries column presents the financial information of all guarantor subsidiaries of the net share settled contingent convertible senior notes. The Non-Guarantor Subsidiaries column presents the financial information of all non-guarantor subsidiaries, including those subsidiaries that are governed by foreign laws and Yellow Roadway Receivables Funding Corporation, the special-purpose entity that is associated with our ABS agreement.

Condensed Consolidating Balance Sheets

 

June 30, 2008

(in millions)

   Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash and cash equivalents

   $ 25     $ 15     $ 21     $ —       $ 61  

Intercompany advances receivable

     —         (101 )     101       —         —    

Accounts receivable, net

     3       (6 )     1,126       (7 )     1,116  

Prepaid expenses and other

     60       136       34       —         230  
                                        

Total current assets

     88       44       1,282       (7 )     1,407  

Property and equipment

     1       2,973       1,111       —         4,085  

Less – accumulated depreciation

     —         (1,505 )     (265 )     —         (1,770 )
                                        

Net property and equipment

     1       1,468       846       —         2,315  

Investment in subsidiaries

     3,282       93       203       (3,578 )     —    

Receivable from affiliate

     (907 )     495       412       —         —    

Goodwill and other assets

     259       982       406       (350 )     1,297  
                                        

Total assets

   $ 2,723     $ 3,082     $ 3,149     $ (3,935 )   $ 5,019  
                                        

Intercompany advances payable

   $ 341     $ (323 )   $ 186     $ (204 )   $ —    

Accounts payable

     17       243       111       (2 )     369  

Wages, vacations and employees’ benefits

     25       300       105       —         430  

Other current and accrued liabilities

     54       156       171       (1 )     380  

Asset backed securitization borrowings

     —         —         140       —         140  

Current maturities of long-term debt

     —         230       101       —         331  
                                        

Total current liabilities

     437       606       814       (207 )     1,650  

Payable to affiliate

     (120 )     47       223       (150 )     —    

Long-term debt, less current portion

     558       6       160       —         724  

Deferred income taxes, net

     23       318       196       —         537  

Pension and postretirement

     163       —         —         —         163  

Claims and other liabilities

     95       2       242       —         339  

Commitments and contingencies

     —         —         —         —         —    

Shareholders’ equity

     1,567       2,103       1,514       (3,578 )     1,606  
                                        

Total liabilities and shareholders’ equity

   $ 2,723     $ 3,082     $ 3,149     $ (3,935 )   $ 5,019  
                                        

 

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December 31, 2007

(in millions)

   Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash and cash equivalents

   $ 26     $ 15     $ 17     $ —       $ 58  

Intercompany advances receivable

     —         (65 )     65       —         —    

Accounts receivable, net

     3       (25 )     1,101       (5 )     1,074  

Prepaid expenses and other

     76       99       71       —         246  
                                        

Total current assets

     105       24       1,254       (5 )     1,378  

Property and equipment

     1       2,967       1,116       —         4,084  

Less – accumulated depreciation

     (1 )     (1,468 )     (235 )     —         (1,704 )
                                        

Net property and equipment

     —         1,499       881       —         2,380  

Investment in subsidiaries

     3,280       93       203       (3,576 )     —    

Receivable from affiliate

     (898 )     488       410       —         —    

Goodwill and other assets

     258       985       412       (350 )     1,305  
                                        

Total assets

   $ 2,745     $ 3,089     $ 3,160     $ (3,931 )   $ 5,063  
                                        

Intercompany advances payable

   $ 342     $ (294 )   $ 157     $ (205 )   $ —    

Accounts payable

     12       264       112       —         388  

Wages, vacations and employees’ benefits

     29       285       112       —         426  

Other current and accrued liabilities

     52       149       169       —         370  

Asset backed securitization borrowings

     —         —         180       —         180  

Current maturities of long-term debt

     —         232       —         —         232  
                                        

Total current liabilities

     435       636       730       (205 )     1,596  

Payable to affiliate

     (117 )     44       223       (150 )     —    

Long-term debt, less current portion

     554       7       261       —         822  

Deferred income taxes, net

     19       307       196       —         522  

Pension and postretirement

     180       —         —         —         180  

Claims and other liabilities

     84       3       244       —         331  

Commitments and contingencies

          

Shareholders’ equity

     1,590       2,092       1,506       (3,576 )     1,612  
                                        

Total liabilities and shareholders’ equity

   $ 2,745     $ 3,089     $ 3,160     $ (3,931 )   $ 5,063  
                                        

Condensed Consolidating Statements of Operations

 

For the three months ended June 30, 2008

(in millions)

   Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Operating revenue

   $ —       $ 1,670     $ 739     $ (10 )   $ 2,399  
                                        

Operating expenses:

          

Salaries, wages and employees’ benefits

     8       880       444       —         1,332  

Operating expenses and supplies

     (5 )     367       177       —         539  

Purchased transportation

     —         204       88       (10 )     282  

Depreciation and amortization

     —         40       24       —         64  

Other operating expenses

     —         77       29       —         106  

Losses on property disposals, net

     —         3       —         —         3  

Reorganization and settlements

     —         —         2       —         2  
                                        

Total operating expenses

     3       1,571       764       (10 )     2,328  
                                        

Operating income (loss)

     (3 )     99       (25 )     —         71  
                                        

Nonoperating (income) expenses:

          

Interest expense

     8       4       6       —         18  

Other, net

     3       80       (85 )     —         (2 )
                                        

Nonoperating (income) expenses, net

     11       84       (79 )     —         16  
                                        

Income (loss) before income taxes

     (14 )     15       54       —         55  

Income tax provision (benefit)

     19       (1 )     1       —         19  
                                        

Net income (loss)

   $ (33 )   $ 16     $ 53     $ —       $ 36  
                                        

 

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For the three months ended June 30, 2007

(in millions)

   Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Operating revenue

   $ 11     $ 2,100     $ 466     $ (91 )   $ 2,486  
                                        

Operating expenses:

          

Salaries, wages and employees’ benefits

     9       1,199       257       —         1,465  

Operating expenses and supplies

     8       419       127       (84 )     470  

Purchased transportation

     —         209       67       (3 )     273  

Depreciation and amortization

     —         46       14       —         60  

Other operating expenses

     —         94       20       —         114  

(Gains) losses on property disposals, net

     —         (5 )     2       —         (3 )

Reorganization and settlements

     1       1       (3 )     —         (1 )
                                        

Total operating expenses

     18       1,963       484       (87 )     2,378  
                                        

Operating income (loss)

     (7 )     137       (18 )     (4 )     108  
                                        

Nonoperating (income) expenses:

          

Interest expense

     8       9       5       —         22  

Other, net

     3       58       (60 )     1       2  
                                        

Nonoperating (income) expenses, net

     11       67       (55 )     1       24  
                                        

Income (loss) before income taxes

     (18 )     70       37       (5 )     84  

Income tax provision (benefit)

     (5 )     23       13       (2 )     29  
                                        

Net income (loss)

   $ (13 )   $ 47     $ 24     $ (3 )   $ 55  
                                        

 

For the six months ended June 30, 2008

(in millions)

   Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Operating revenue

   $ —       $ 3,210     $ 1,442     $ (20 )   $ 4,632  
                                        

Operating expenses:

          

Salaries, wages and employees’ benefits

     17       1,775       893       —         2,685  

Operating expenses and supplies

     (10 )     695       340       —         1,025  

Purchased transportation

     —         385       171       (20 )     536  

Depreciation and amortization

     —         78       49       —         127  

Other operating expenses

     —         150       69       —         219  

Losses on property disposals, net

     —         4       3       —         7  

Reorganization and settlements

     —         2       13       —         15  
                                        

Total operating expenses

     7       3,089       1,538       (20 )     4,614  
                                        

Operating income (loss)

     (7 )     121       (96 )     —         18  
                                        

Nonoperating (income) expenses:

          

Interest expense

     15       9       13       —         37  

Other, net

     10       104       (118 )     —         (4 )
                                        

Nonoperating (income) expenses, net

     25       113       (105 )     —         33  
                                        

Income (loss) before income taxes

     (32 )     8       9       —         (15 )

Income tax provision (benefit)

     (5 )     (1 )     1       —         (5 )
                                        

Net income (loss)

   $ (27 )   $ 9     $ 8     $ —       $ (10 )
                                        

 

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For the six months ended June 30, 2007

(in millions)

   Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated

Operating revenue

   $ 24     $ 4,089     $ 886     $ (184 )   $ 4,815
                                      

Operating expenses:

          

Salaries, wages and employees’ benefits

     20       2,372       494       —         2,886

Operating expenses and supplies

     15       815       252       (170 )     912

Purchased transportation

     —         406       129       (10 )     525

Depreciation and amortization

     —         92       27       —         119

Other operating expenses

     —         193       37       —         230

(Gains) losses on property disposals, net

     —         (4 )     4       —         —  

Reorganization and settlements

     4       7       3       —         14
                                      

Total operating expenses

     39       3,881       946       (180 )     4,686
                                      

Operating income (loss)

     (15 )     208       (60 )     (4 )     129
                                      

Nonoperating (income) expenses:

          

Interest expense

     16       16       10       —         42

Other, net

     14       107       (122 )     1       —  
                                      

Nonoperating (income) expenses, net

     30       123       (112 )     1       42
                                      

Income (loss) before income taxes

     (45 )     85       52       (5 )     87

Income tax provision (benefit)

     (13 )     28       18       (3 )     30
                                      

Net income (loss)

   $ (32 )   $ 57     $ 34     $ (2 )   $ 57
                                      

Condensed Consolidating Statements of Cash Flows

 

For the six months ended June 30, 2008

(in millions)

   Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations    Consolidated  

Operating activities:

           

Net cash provided by operating activities

   $ 27     $ 52     $ 31     $ —      $ 110  
                                       

Investing activities:

           

Acquisition of property and equipment

     —         (47 )     (30 )     —        (77 )

Proceeds from disposal of property and equipment

     —         —         11       —        11  

Other

     —         —         (4 )     —        (4 )
                                       

Net cash used in investing activities

     —         (47 )     (23 )     —        (70 )
                                       

Financing activities:

           

Asset backed securitization borrowings, net

       —         (40 )     —        (40 )

Borrowing of long-term debt, net

     4       —         2       —        6  

Debt issuance costs

     (3 )     —         —         —        (3 )

Intercompany advances / repayments

     (29 )     (5 )     34       —        —    
                                       

Net cash used in financing activities

     (28 )     (5 )     (4 )     —        (37 )
                                       

Net increase (decrease) in cash and cash equivalents

     (1 )     —         4       —        3  

Cash and cash equivalents, beginning of period

     26       15       17       —        58  
                                       

Cash and cash equivalents, end of period

   $ 25     $ 15     $ 21     $ —      $ 61  
                                       

 

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For the six months ended June 30, 2007

(in millions)

   Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations    Consolidated  

Operating activities:

           

Net cash provided by (used in) operating activities

   $ (75 )   $ 316     $ (78 )   $ —      $ 163  
                                       

Investing activities:

           

Acquisition of property and equipment

     —         (198 )     (44 )     —        (242 )

Proceeds from disposal of property and equipment

     —         13       15       —        28  

Other

     —         —         —         —        —    
                                       

Net cash used in investing activities

     —         (185 )     (29 )     —        (214 )

Financing activities:

           

Asset backed securitization borrowings, net

     —         —         25       —        25  

Proceeds from exercise of stock options

     7       —         —         —        7  

Intercompany advances / repayments

     63       (129 )     66       —        —    
                                       

Net cash provided by (used in) financing activities

     70       (129 )     91       —        32  
                                       

Net increase (decrease) in cash and cash equivalents

     (5 )     2       (16 )     —        (19 )

Cash and cash equivalents, beginning of period

     20       21       35       —        76  
                                       

Cash and cash equivalents, end of period

   $ 15     $ 23     $ 19     $ —      $ 57  
                                       

 

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13. Guarantees of the Senior Notes Due 2008

In connection with the senior notes due 2008 that 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 June 30, 2008 and December 31, 2007 with respect to the financial position, and for the three and six months ended June 30, 2008 and 2007 for results of operations and for the six months ended June 30, 2008 and 2007 for 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, the special-purpose entity that is associated with our ABS agreement.

Condensed Consolidating Balance Sheets

 

June 30, 2008

(in millions)

   Primary
Obligor
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash and cash equivalents

   $ —       $ 43     $ 18     $ —       $ 61  

Intercompany advances receivable

     —         (17 )     17       —         —    

Accounts receivable, net

     —         (48 )     1,176       (12 )     1,116  

Prepaid expenses and other

     (12 )     134       108       —         230  
                                        

Total current assets

     (12 )     112       1,319       (12 )     1,407  

Property and equipment

     —         1,109       2,976       —         4,085  

Less – accumulated depreciation

     —         (292 )     (1,478 )     —         (1,770 )
                                        

Net property and equipment

     —         817       1,498       —         2,315  

Investment in subsidiaries

     101       3,303       217       (3,621 )     —    

Receivable from affiliate

     203       (706 )     503       —         —    

Goodwill and other assets

     651       1,113       383       (850 )     1,297  
                                        

Total assets

   $ 943     $ 4,639     $ 3,920     $ (4,483 )   $ 5,019  
                                        

Intercompany advances payable

   $ —       $ 62     $ 142     $ (204 )   $ —    

Accounts payable

     —         113       263       (7 )     369  

Wages, vacations and employees’ benefits

     —         183       247       —         430  

Other current and accrued liabilities

     1       103       276       —         380  

Asset backed securitization borrowings

     —         —         140       —         140  

Current maturities of long-term debt

     227       —         104       —         331  
                                        

Total current liabilities

     228       461       1,172       (211 )     1,650  

Payable to affiliate

     —         530       121       (651 )     —    

Long-term debt, less current portion

     —         559       165       —         724  

Deferred income taxes, net

     (3 )     255       285       —         537  

Pension and postretirement

     —         163       —         —         163  

Claims and other liabilities

     —         95       244       —         339  

Commitments and contingencies

          

Shareholders’ equity

     718       2,576       1,933       (3,621 )     1,606  
                                        

Total liabilities and shareholders’ equity

   $ 943     $ 4,639     $ 3,920     $ (4,483 )   $ 5,019  
                                        

 

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Table of Contents

December 31, 2007

(in millions)

   Primary
Obligor
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash and cash equivalents

   $ —       $ 45     $ 13     $ —       $ 58  

Intercompany advances receivable

     —         (17 )     17       —         —    

Accounts receivable, net

     —         (38 )     1,120       (8 )     1,074  

Prepaid expenses and other

     (12 )     102       156       —         246  
                                        

Total current assets

     (12 )     92       1,306       (8 )     1,378  

Property and equipment

     —         1,103       2,981       —         4,084  

Less – accumulated depreciation

     —         (261 )     (1,443 )     —         (1,704 )
                                        

Net property and equipment

     —         842       1,538       —         2,380  

Investment in subsidiaries

     101       3,264       254       (3,619 )     —    

Receivable from affiliate

     186       (722 )     536       —         —    

Goodwill and other assets

     651       1,117       387       (850 )     1,305  
                                        

Total assets

   $ 926     $ 4,593     $ 4,021     $ (4,477 )   $ 5,063  
                                        

Intercompany advances payable

   $ —       $ 78     $ 127     $ (205 )   $ —    

Accounts payable

     —         98       293       (3 )     388  

Wages, vacations and employees’ benefits

     —         181       245       —         426  

Other current and accrued liabilities

     1       98       271       —         370  

Asset backed securitization borrowings

     —         —         180       —         180  

Current maturities of long-term debt

     229       —         3       —         232  
                                        

Total current liabilities

     230       455       1,119       (208 )     1,596  

Payable to affiliate

     —         533       117       (650 )     —    

Long-term debt, less current portion

     —         555       267       —         822  

Deferred income taxes, net

     (3 )     241       284       —         522  

Pension and postretirement

     —         180       —         —         180  

Claims and other liabilities

     —         86       245       —         331  

Commitments and contingencies

          

Shareholders’ equity

     699       2,543       1,989       (3,619 )     1,612  
                                        

Total liabilities and shareholders’ equity

   $ 926     $ 4,593     $ 4,021     $ (4,477 )   $ 5,063  
                                        

Condensed Consolidating Statements of Operations

 

For the three months ended June 30, 2008

(in millions)

   Primary
Obligor
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Operating revenue

   $ —       $ 864     $ 1,552     $ (17 )   $ 2,399  
                                        

Operating expenses:

          

Salaries, wages and employees’ benefits

     —         450       882       —         1,332  

Operating expenses and supplies

     —         192       347       —         539  

Purchased transportation

     —         92       207       (17 )     282  

Depreciation and amortization

     —         20       44       —         64  

Other operating expenses

     —         44       62       —         106  

(Gains) losses on property disposals, net

     —         3       —         —         3  

Reorganization and settlements

     —         —         2       —         2  
                                        

Total operating expenses

     —         801       1,544       (17 )     2,328  
                                        

Operating income

     —         63       8       —         71  
                                        

Nonoperating (income) expenses:

          

Interest expense

     4       8       6       —         18  

Other, net

     (13 )     53       (42 )     —         (2 )
                                        

Nonoperating (income) expenses, net

     (9 )     61       (36 )     —         16  
                                        

Income before income taxes

     9       2       44       —         55  

Income tax provision

     —         19       —         —         19  
                                        

Net income (loss)

   $ 9     $ (17 )   $ 44     $ —       $ 36  
                                        

 

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For the three months ended June 30, 2007

(in millions)

   Primary
Obligor
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Operating revenue

   $ —       $ 881     $ 1,706     $ (101 )   $ 2,486  
                                        

Operating expenses:

          

Salaries, wages and employees’ benefits

     —         504       961       —         1,465  

Operating expenses and supplies

     —         175       389       (94 )     470  

Purchased transportation

     —         88       192       (7 )     273  

Depreciation and amortization

     —         18       42       —         60  

Other operating expenses

     —         39       75       —         114  

(Gains) losses on property disposals, net

     —         (5 )     2       —         (3 )

Reorganization and settlements

     —         1       (2 )     —         (1 )
                                        

Total operating expenses

     —         820       1,659       (101 )     2,378  
                                        

Operating income

     —         61       47       —         108  
                                        

Nonoperating (income) expenses:

          

Interest expense

     3       8       11       —         22  

Other, net

     (13 )     42       (27 )     —         2  
                                        

Nonoperating (income) expenses, net

     (10 )     50       (16 )     —         24  
                                        

Income before income taxes

     10       11       63       —         84  

Income tax provision

     4       5       22       (2 )     29  
                                        

Net income

   $ 6     $ 6     $ 41     $ 2     $ 55  
                                        

 

For the six months ended June 30, 2008

(in millions)

   Primary
Obligor
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Operating revenue

   $ —       $ 1,659     $ 3,004     $ (31 )   $ 4,632  
                                        

Operating expenses:

          

Salaries, wages and employees’ benefits

     —         922       1,763       —         2,685  

Operating expenses and supplies

     —         361       665       (1 )     1,025  

Purchased transportation

     —         173       394       (31 )     536  

Depreciation and amortization

     —         39       88       —         127  

Other operating expenses

     —         83       136       —         219  

(Gains) losses on property disposals, net

     —         4       3       —         7  

Reorganization and settlements

     —         —         15       —         15  
                                        

Total operating expenses

     —         1,582       3,064       (32 )     4,614  
                                        

Operating income

     —         77       (60 )     1       18  
                                        

Nonoperating (income) expenses:

          

Interest expense

     7       15       15       —         37  

Other, net

     (26 )     80       (59 )     1       (4 )
                                        

Nonoperating (income) expenses, net

     (19 )     95       (44 )     1       33  
                                        

Income (loss) before income taxes

     19       (18 )     (16 )     —         (15 )

Income tax benefit

     —         (5 )     —         —         (5 )
                                        

Net income (loss)

   $ 19     $ (13 )   $ (16 )   $ —       $ (10 )
                                        

 

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For the six months ended June 30, 2007

(in millions)

   Primary
Obligor
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated

Operating revenue

   $ —       $ 1,713     $ 3,294     $ (192 )   $ 4,815
                                      

Operating expenses:

          

Salaries, wages and employees’ benefits

     —         1,002       1,884       —         2,886

Operating expenses and supplies

     —         333       756       (177 )     912

Purchased transportation

     —         172       369       (16 )     525

Depreciation and amortization

     —         37       82       —         119

Other operating expenses

     —         77       153       —         230

(Gains) losses on property disposals, net

     —         (4 )     4       —         —  

Reorganization and settlements

     —         5       9       —         14
                                      

Total operating expenses

     —         1,622       3,257       (193 )     4,686
                                      

Operating income

     —         91       37       1       129
                                      

Nonoperating (income) expenses:

          

Interest expense

     7       16       19       —         42

Other, net

     (26 )     84       (59 )     1       —  
                                      

Nonoperating (income) expenses, net

     (19 )     100       (40 )     1       42
                                      

Income (loss) before income taxes

     19       (9 )     77       —         87

Income tax provision

     7       —         26       (3 )     30
                                      

Net income (loss)

   $ 12     $ (9 )   $ 51     $ 3     $ 57
                                      

Condensed Consolidating Statements of Cash Flows

 

For the six months ended June 30, 2008

(in millions)

   Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Operating activities:

          

Net cash provided by (used in) operating activities

   $ 17     $ 45     $ 49     $ (1 )   $ 110  
                                        

Investing activities:

          

Acquisition of property and equipment

     —         (14 )     (63 )     —         (77 )

Proceeds from disposal of property and equipment

     —         1       10       —         11  

Other

     —         —         (4 )     —         (4 )
                                        

Net cash used in investing activities

     —         (13 )     (57 )     —         (70 )
                                        

Financing activities:

          

Asset backed securitization borrowings, net

     —         —         (40 )     —         (40 )

Borrowing of long-term debt, net

     —         4       2       —         6  

Debt issuance costs

     —         (3 )     —         —         (3 )

Intercompany advances / repayments

     (17 )     (35 )     51       1       —    
                                        

Net cash provided by (used in) financing activities

     (17 )     (34 )     13       1       (37 )
                                        

Net increase (decrease) in cash and cash equivalents

     —         (2 )     5       —         3  

Cash and cash equivalents, beginning of Period

     —         45       13       —         58  
                                        

Cash and cash equivalents, end of period

   $ —       $ 43     $ 18     $ —       $ 61  
                                        

 

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For the six months ended June 30, 2007

(in millions)

   Primary
Obligor
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations    Consolidated  

Operating activities:

           

Net cash provided by operating activities

   $ 15     $ 61     $ 87     $ —      $ 163  
                                       

Investing activities:

           

Acquisition of property and equipment

     —         (72 )     (170 )     —        (242 )

Proceeds from disposal of property and equipment

     —         17       11       —        28  

Other

     —         —         —         —        —    
                                       

Net cash used in investing activities

     —         (55 )     (159 )     —        (214 )
                                       

Financing activities:

           

Asset backed securitization borrowings, net

     —         —         25       —        25  

Proceeds from exercise of stock options

     —         7       —         —        7  

Intercompany advances / repayments

     (15 )     (19 )     34       —        —    
                                       

Net cash provided by (used in) financing activities

     (15 )     (12 )     59       —        32  
                                       

Net decrease in cash and cash equivalents

     —         (6 )     (13 )     —        (19 )

Cash and cash equivalents, beginning of period

     —         38       38       —        76  
                                       

Cash and cash equivalents, end of period

   $ —       $ 32     $ 25     $ —      $ 57  
                                       

 

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14. Guarantees of the Senior Notes Due 2009 and 2010

In connection with the senior notes due 2009 and 2010 that the Company assumed by virtue of its merger with USF, and in addition to the primary obligor, Regional Transportation (formerly USF Corporation), 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 Reddaway Inc., USF Glen Moore Inc., YRC Logistics Services (formerly 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 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 June 30, 2008 and December 31, 2007 with respect to the financial position and for the three and six months ended June 30, 2008 and 2007 for results of operations and for the six months ended June 30, 2008 and 2007 for the statement of cash flows. The primary obligor column presents the financial information of Regional Transportation. 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, the special-purpose entity that is associated with our ABS agreement.

Condensed Consolidating Balance Sheets

 

June 30, 2008

(in millions)

   Primary
Obligor
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash and cash equivalents

   $ —       $ 29     $ 32     $ —       $ 61  

Intercompany advances receivable, net

     —         (9 )     9       —         —    

Accounts receivable, net

     (15 )     5       1,153       (27 )     1,116  

Prepaid expenses and other

     (5 )     154       81       —         230  
                                        

Total current assets

     (20 )     179       1,275       (27 )     1,407  

Property and equipment

     —         910       3,175       —         4,085  

Less – accumulated depreciation

     —         (191 )     (1,579 )     —         (1,770 )
                                        

Net property and equipment

     —         719       1,596       —         2,315  

Investment in subsidiaries

     218       3,280       9       (3,507 )     —    

Receivable from affiliate

     507       (1,247 )     740       —         —    

Goodwill and other assets

     157       373       1,118       (351 )     1,297  
                                        

Total assets

   $ 862     $ 3,304     $ 4,738     $ (3,885 )   $ 5,019  
                                        

Intercompany advances payable

   $ 65     $ 135     $ —       $ (200 )   $ —    

Accounts payable

     2       82       297       (12 )     369  

Wages, vacations and employees’ benefits

     1       106       323       —         430  

Other current and accrued liabilities

     23       83       289       (15 )     380  

Asset backed securitization borrowings

     —         —         140       —         140  

Current maturities of long-term debt

     100       —         231       —         331  
                                        

Total current liabilities

     191       406       1,280       (227 )     1,650  

Payable to affiliate

     —         (47 )     198       (151 )     —    

Long-term debt, less current portion

     157       558       9       —         724  

Deferred income taxes, net

     52       131       354       —         537  

Pension and postretirement

     —         163       —         —         163  

Claims and other liabilities

     1       94       244       —         339  

Commitments and contingencies

     —         —         —         —         —    

Shareholders’ equity

     461       1,999