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 Period ended
September 8, 2001.
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 000-32821
ROADWAY CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 34-1956254
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(State or other jurisdiction (I.R.S. Employer Identification No)
of incorporation or organization)
1077 Gorge Boulevard, Akron, OH 44310
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (330) 384-1717
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Roadway Express, Inc.
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(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 Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No .
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The number of shares of common stock ($.01 par value) outstanding as
of October 3, 2001 was 19,224,463.
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ROADWAY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 8, 2001 December 31, 2000
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(in thousands, except share data)
Assets
Current assets:
Cash and cash equivalents $ 82,554 $ 64,939
Accounts receivable, net 283,319 299,179
Prepaid expenses and supplies 20,316 16,760
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Total current assets 386,189 380,878
Carrier operating property, at cost 1,426,141 1,430,074
Less allowance for depreciation 1,001,747 1,001,389
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Net carrier operating property 424,394 428,685
Goodwill, net 15,206 16,086
Deferred income taxes 46,375 44,756
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Total assets $ 872,164 $ 870,405
=====================================================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 180,012 $ 178,890
Salaries and wages 108,304 122,280
Freight and casualty claims payable 51,680 51,876
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Total current liabilities 339,996 353,046
Long-term liabilities:
Casualty claims and other 62,685 60,904
Accrued pension and retiree medical 119,617 116,584
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Total long-term liabilities 182,302 177,488
Shareholders' equity:
Common Stock - $.01 par value
Authorized - 100,000,000 shares
Issued - 20,556,714 shares 206 206
Other shareholders' equity 349,660 339,665
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Total shareholders' equity 349,866 339,871
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Total liabilities and shareholders' equity $ 872,164 $ 870,405
=====================================================
Note: The balance sheet at December 31, 2000 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
The number of shares of common stock outstanding at September 8, 2001 and
December 31, 2000 were 19,363,075 and 19,390,328 respectively.
See notes to condensed consolidated financial statements.
1
ROADWAY CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
Twelve Weeks Ended
(Third Quarter)
September 8, 2001 September 9, 2000
----------------------------------------------------
(in thousands, except per share data)
Revenue $ 631,657 $ 698,867
Operating expenses:
Salaries, wages and benefits 404,722 437,729
Operating supplies and expenses 107,199 123,380
Purchased transportation 63,866 74,383
Operating taxes and licenses 16,342 17,645
Insurance and claims expense 8,777 13,070
Provision for depreciation 16,678 13,315
Net (gain) loss on disposal of operating property (88) 743
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Total operating expenses 617,496 680,265
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Operating income 14,161 18,602
Other income, net 314 290
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Income before income taxes 14,475 18,892
Provision for income taxes 6,302 8,047
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Net income $ 8,173 $ 10,845
====================================================
Earnings per share - basic $ .44 $ 0.58
Earnings per share - diluted $ .43 $ 0.57
Average shares outstanding - basic 18,455 18,649
Average shares outstanding - diluted 18,987 19,011
Dividends declared per share $ 0.05 $ 0.05
See notes to condensed consolidated financial statements.
2
ROADWAY CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
Thirty-six Weeks Ended
(Three Quarters)
September 8, 2001 September 9, 2000
----------------------------------------------------
(in thousands, except per share data)
Revenue $ 1,924,251 $ 2,083,545
Operating expenses:
Salaries, wages and benefits 1,229,033 1,306,220
Operating supplies and expenses 336,833 376,811
Purchased transportation 191,954 213,731
Operating taxes and licenses 49,829 54,861
Insurance and claims expense 34,044 40,994
Provision for depreciation 47,617 36,973
Net loss on disposal of operating property 534 1,257
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Total operating expenses 1,889,844 2,030,847
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Operating income 34,407 52,698
Other (expense) income, net (4,257) 1,495
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Income before income taxes 30,150 54,193
Provision for income taxes 12,964 23,086
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Net income $ 17,186 $ 31,107
====================================================
Earnings per share - basic $ .93 $ 1.67
Earnings per share - diluted $ .91 $ 1.64
Average shares outstanding - basic 18,449 18,664
Average shares outstanding - diluted 18,938 19,005
Dividends declared per share $ 0.15 $ 0.15
See notes to condensed consolidated financial statements.
3
ROADWAY CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
Thirty-six Weeks Ended
(Three Quarters)
September 8, 2001 September 9, 2000
----------------------------------------------------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 17,186 $ 31,107
Depreciation and amortization 48,497 37,440
Other operating adjustments (748) (16,035)
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Net cash provided by operating activities 64,935 52,512
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of carrier operating property (46,305) (81,936)
Sales of carrier operating property 2,445 2,895
----------------------------------------------------
Net cash used by investing activities (43,860) (79,041)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (2,906) (2,894)
Treasury stock activity, net (709) (411)
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Net cash used by financing activities (3,615) (3,305)
Effect of exchange rate on cash 155 0
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Net increase (decrease) in cash and cash equivalents 17,615 (29,834)
Cash and cash equivalents at beginning of period 64,939 80,797
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Cash and cash equivalents at end of period $ 82,554 $ 50,963
====================================================
See notes to condensed consolidated financial statements.
4
Roadway Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
Note 1--Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the twelve weeks ending September 8, 2001
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2001. For further information, refer to the consolidated
financial statements and footnotes thereto included in the registrant's Annual
Report on Form 10-K for the year ended December 31, 2000.
Note 2--Accounting Period
The registrant operates on 13 four-week accounting periods with 12 weeks in each
of the first three quarters and 16 weeks in the fourth quarter.
Note 3--Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share:
Twelve Weeks Ended Thirty-six Weeks Ended
(Third Quarter) (Three Quarters)
Sept. 8, 2001 Sept. 9, 2000 Sept. 8, 2001 Sept. 9, 2000
------------------------------------------------------------------------------
(in thousands, except per share data)
Net income $ 8,173 $ 10,845 $ 17,186 $ 31,107
==============================================================================
Weighted-average shares for
basic earnings per share 18,455 18,649 18,449 18,664
Management incentive stock plans 532 362 489 341
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Weighted-average shares for
diluted earnings per share 18,987 19,011 18,938 19,005
==============================================================================
Earnings per share - basic $ 0.44 $ 0.58 $ 0.93 $ 1.67
Earnings per share - diluted $ 0.43 $ 0.57 $ 0.91 $ 1.64
5
Note 4--Comprehensive Income
Comprehensive income differs from net income due to foreign currency translation
adjustments as shown below:
Twelve Weeks Ended Thirty-six Weeks Ended
(Third Quarter) (Three Quarters)
Sept. 8, 2001 Sept. 9, 2000 Sept. 8, 2001 Sept. 9, 2000
------------------ ----------------- ------------------ --------------------
(in thousands)
Net income $ 8,173 $ 10,845 $ 17,186 $ 31,107
Foreign currency translation
adjustments (471) 559 93 (150)
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Comprehensive income $ 7,702 $ 11,404 $ 17,279 $ 30,957
=============================================================================
Note 5--Contingent Matter
The Company's former parent is currently under examination by the Internal
Revenue Service for tax years 1994 and 1995, years prior to the spin-off of the
Company. The IRS has proposed substantial adjustments for these tax years for
multiemployer pension plan deductions. The IRS is challenging the timing, not
the validity of these deductions. The Company is unable to predict the ultimate
outcome of this matter, however, its former parent intends to vigorously contest
these proposed adjustments.
Under a tax sharing agreement entered into by the Company and its former parent
at the time of the spin-off, the Company is obligated to reimburse the former
parent for any additional taxes and interest which relate to the Company's
business prior to the spin-off. The amount and timing of such payments, if any,
is dependent on the ultimate resolution of the former parent's disputes with the
IRS and the determination of the nature and extent of the obligations under the
tax sharing agreement. The Company has established certain reserves with respect
to these proposed adjustments. There can be no assurance, however, that the
amount or timing of any liability of the Company to the former parent will not
have a material adverse effect on the Company's results of operations and
financial position.
Note 6--Impact of Recently Issued Accounting Standards
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities, effective January
1, 2001. The effect of the adoption of SFAS No. 133 was not material to the
Company's earnings, financial position, or cash flows.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations, which is effective for business combinations completed
subsequent to June 30, 2001. This standard eliminates the pooling-of-interests
method of accounting for business combinations and requires the purchase method.
SFAS No. 141 also clarifies the criteria for recognition of intangible assets
separately from goodwill.
SFAS No. 142, Goodwill and Other Intangible Assets, which is effective for the
Company on January 1, 2002, eliminates the amortization of goodwill and
indefinite-lived intangible assets. This statement also requires an initial
goodwill impairment assessment in the year of adoption and annual impairment
tests thereafter. As of September 8, 2001, the Company had net unamortized
goodwill if $15.2 million and amortization expense on an annual basis of
approximately $1.0 million.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company had net income of $8.2 million or $0.43 per share (diluted), for the
third quarter ended September 8, 2001, compared to income of $10.8 million, or
$0.57 per share (diluted) in the same quarter last year, a decrease of 24.6%.
Revenues were $632 million in the current quarter, a 9.6% decrease from third
quarter 2000.
The Company delivered 1.7 million tons of freight in the current quarter, down
13% compared to the prior year quarter. Less-than-truckload (LTL) and truckload
tons were both down 13%. The tonnage decline is primarily attributable to the
national economic slowdown. Net revenue per ton was $374.09, up 4.1% compared to
the same quarter last year. The industry's pricing environment continues to
remain firm, which mitigates some of the impact of the reduced tonnage. The
improvement in revenue per ton was due to the general rate increase in the
fourth quarter of 2000, and adjustments in contract rates. The variable rate
fuel surcharge averaged 2.6% of revenue in the current quarter compared to 3.0%
in the prior-year quarter. Total operating expenses were down $63 million, but
increased 4.6% on a per-ton basis with the decline in tonnage. The operating
ratio deteriorated to 97.8% of revenue, compared to 97.3% in the same quarter
last year. When looking at the current year, the 97.8% operating ratio compares
favorably with the 98.4% operating ratio in the first half of 2001. Cost
controls and staffing reductions led to this improvement, despite the tonnage
decline.
Salaries, wages, and benefits increased to 64.1% of revenue, up from 62.6% in
the third quarter of 2000 due to increases in the cost of health care, pension
benefits, and driver wages. Reductions in variable pay related to performance
and workers compensation costs offset part of this increase. The reduction of
workers compensation expense is the result of the Company's Challenge 2000
program, which is a comprehensive effort to mobilize the entire workforce to
reduce the frequency and severity of injuries and accidents. Other salary and
wage expenses were up slightly as a percentage of revenue. Due to the reduced
business levels, the Company's workforce has been reduced by 10% through layoffs
and hiring restrictions, when compared to the third quarter of 2000.
Operating supplies and expenses were down 13%, reflecting reduced business
levels. Significant reductions in excess of the decline in business levels
occurred in the areas of fuel, pickup and delivery equipment rents, and terminal
supplies and services.
Purchased transportation expenses declined 14%, primarily due to a 23% reduction
of railroad miles in linehaul service. Rail miles were 25% of total miles,
compared to 28% in the same quarter last year. Canadian and Mexican
owner-operators miles were down 6% from last year.
Improved cargo handling performance, improvements in highway safety, and the
reduction in tonnage led to the 33% decline in claims and insurance expense. The
decrease in operating taxes reflects lower fuel taxes associated with the
decline in business levels. Depreciation expense increased $3 million and
reflects recent capital expenditures, primarily for revenue equipment and
information technology.
The tax rate for the third quarter of 2001 and 2000 differs from the Federal
statutory rate due to the impact of state taxes, taxes on foreign operations,
and non-deductible operating expenses. The variation in the tax rate from the
first half of 2001 resulted from changes in the annual effective rate due to
expectations of reduced earnings.
On August 20, 2001, the Company implemented a general freight rate increase of
approximately 5.9% that had a minor impact on third quarter results. Revenue is
only recognized as earned when freight is delivered. The full benefit of this
increase will become evident in the fourth quarter. Roadway continues to take
actions to increase operating margins and yield on freight, such as working with
specific customers to improve efficiencies and reduce unnecessary transportation
costs. Pricing adjustments are negotiated with contract customers throughout the
year under terms of the agreements.
At the end of the quarter, the Roadway's cash and marketable securities amounted
to $82 million, a $18 million increase from year-end 2000. This increase is due
to a reduction of capital expenditures during the current year, and an increase
in cash flow from operations. Capital expenditures for the year are expected to
be $75 million, which has been reduced from second quarter expectations of $80
million. Cash flow from operations and current and proposed financing sources
will be sufficient to meet working capital needs. The Company currently has no
long-term debt.
7
On August 21, 2001, Roadway entered into an agreement to acquire Arnold
Industries, Inc. (Arnold) of Lebanon, Pennsylvania (NASDAQ: AIND) for $21.75 per
share in cash, an aggregate consideration of approximately $550 million.
Arnold's subsidiaries are New Penn Motor Express, a regional next-day LTL
carrier and Arnold Transportation Services, an irregular route truckload
carrier. New Penn and Arnold Transportation will operate independently under
their respective brand names. The acquisition is expected to have an immediate,
positive impact on Roadway's earnings. The completion of this transaction is
subject to the approval of Arnold's shareholders. The transaction is expected to
close before the end of 2001, and will be accounted for as a purchase business
combination.
SUBSEQUENT EVENTS
On October 17, 2001, Roadway entered into a definitive agreement with E. H.
Arnold, CEO of Arnold and Arnold Logistics, Inc. to sell Arnold's logistics
operations for $105 million in cash after Roadway's acquisition of Arnold is
completed. The transaction is subject to customary regulatory approval.
In conjunction with the acquisition of Arnold, Roadway has obtained financing
commitments for an additional $700 million to finance the acquisition and to
provide for future working capital needs. The financing commitments include a
five-year term loan of $175 million, an accounts receivable securitization
facility of up to $200 million, an offering of seven-year notes of $225 million,
and a revolving line of credit of $150 million, which will replace the existing
$50 million line of credit. The Company intends to use the net after-tax
proceeds from the sale of Arnold Logistics to repay a significant portion of the
term loan. Management believes that consolidated cash flow from operations and
financing sources will be sufficient to meet working capital needs.
The portions of narrative set forth in this discussion that are not historical
in nature are forward-looking statements. The Company's actual future
performance and operating and financial results may differ from those described
in the forward-looking statements as a result of a variety of factors that,
besides those mentioned, include the condition of the industry and the economy,
capacity and rate levels in the motor freight industry, fuel prices, labor
relations, and the success of the Company's operating plans, including the
consummation of its pending acquisition of Arnold. These forward-looking
statements reflect management's analysis only as of the date of this filing. The
Company undertakes no obligation to publicly revise these forward-looking
statements to reflect events or circumstances that arise after the date hereof.
In addition to the disclosure contained herein, readers should carefully review
risks and uncertainties contained in other documents the Company files from time
to time with the Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not hold any market risk sensitive instruments for trading
purposes. The Company's primary market risks include fluctuations in interest
rates, currency exchange rates, and fuel prices.
The Company has interest rate swap agreements with major commercial banks to fix
the interest rate of its trailer leases from previous variable interest rates.
The value of the leases upon which the payments are based was not changed. The
agreements, which expire from 2002 to 2004, fix the Company's interest costs at
rates varying from 6.07% to 7.12% on leases valued at $25 million, and prevent
the Company's earnings from being directly affected by changes in interest rates
related to its trailer leases.
Roadway may incur some economic losses due to adverse changes in foreign
currency exchange rates, primarily with fluctuations in the Canadian dollar and
Mexican peso. A 10% adverse change in foreign currency exchange rates would have
no material impact on future cash flows and earnings of the Company.
Fuel price increases are mitigated by a variable rate fuel surcharge when the
national average diesel fuel price exceeds $1.10 per gallon. This surcharge has
been in place at varying rates since the third quarter of 1999, and was
discussed in Item 2 above.
8
PART II -- OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On October 3, 2001, the Board of Directors declared a cash dividend of $0.05 per
share on the Company's common stock payable on December 3, 2001, to shareholders
of record on November 9, 2001.
ITEM 6. EXHIBIT INDEX AND REPORTS ON FORM 8-K
Exhibit No.
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none
List of the Current Reports on Form 8-K which were filed during the current
quarter:
Date of Form 8-K Description
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August 21, 2001 Announcement of Roadway's agreement to acquire
Arnold Industries, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ROADWAY CORPORATION
Date: October 23, 2001 By: /s/ J. Dawson Cunningham
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J. Dawson Cunningham, Executive Vice President
and Chief Financial Officer
Date: October 23, 2001 By: /s/ John G. Coleman
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John G. Coleman, Controller
9