10-Q 1 l84548ae10-q.txt ROADWAY EXPRESS, INC. FORM 10-Q 1 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 9, 2000. 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 0-600 ROADWAY EXPRESS, INC. ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 34-0492670 --------------------------------------------- ------------------------- (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No) 1077 Gorge Boulevard, Akron, OH 44310 ------------------------------------ --------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (330) 384-1717 -------------- 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 . ---------- -------- The number of shares of common stock ($.01 par value) outstanding as of October 7, 2000 was 19,329,933. 2 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ROADWAY EXPRESS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

~~June~~September 179, 2000 December 31, 1999 ----------------------------------------------------------------------- (in thousands, except share data) Assets Current assets: Cash and cash equivalents $ 6150,~~032~~963 $ 80,797 Accounts receivable, net ~~295~~312,~~381~~778 299,599 Prepaid expenses and supplies 1815,~~478~~370 17,940 ----------------------------------------------------------------------- Total current assets ~~374~~379,~~891~~111 398,336 Carrier operating property, at cost 1,~~399~~412,~~631~~795 1,356,533 Less allowance for depreciation ~~986~~991,~~873~~656 976,205 ----------------------------------------------------------------------- Net carrier operating property ~~412~~421,~~758~~139 380,328 Goodwill, net 1413,~~084~~937 15,360 Deferred income taxes 41,~~597~~733 37,384 ----------------------------------------------------------------------- Total assets $ ~~843~~855,~~330~~920 $ 831,408 ======================================================================= Liabilities and shareholders' equity Current liabilities: Accounts payable $ ~~183~~194,~~489~~093 $ 190,499 Salaries and wages ~~129~~124,~~047~~516 120,695 Freight and casualty claims payable 54,~~606~~091 52,165 ----------------------------------------------------------------------- Total current liabilities ~~367~~372,~~142~~700 363,359 Long-term liabilities: Casualty claims payable 4746,~~485~~092 49,077 Future equipment repairs 76,~~727~~134 9,805 Accrued pension and retiree medical ~~116~~115,~~504~~651 118,212 ----------------------------------------------------------------------- Total long-term liabilities ~~171~~167,~~716~~877 177,094 Shareholders' equity: Common Stock - $.01 par value Authorized - 100,000,000 shares Issued - 20,556,714 shares 206 206 Other shareholders' equity ~~304~~315,~~266~~137 290,749 ----------------------------------------------------------------------- Total shareholders' equity ~~304~~315,~~472~~343 290,955 ----------------------------------------------------------------------- Total liabilities and shareholders' equity $ ~~843~~855,~~330~~920 $ 831,408 =======================================================================

Note: The balance sheet at December 31, 1999 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. See notes to condensed consolidated financial statements. 1 3 ROADWAY EXPRESS, INC. AND SUBSIDIARIES CONDENSED STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)

Twelve Weeks Ended (~~Second~~Third Quarter) ~~June~~September 179, 2000 ~~June~~September 1911, 1999 ---------------------------------------------------- (in thousands, except per share data) Revenue $ ~~707~~698,~~359~~867 $ ~~621~~652,~~122~~218 Operating expenses: Salaries, wages and benefits ~~446~~437,~~376~~729 ~~400~~421,~~524~~904 Operating supplies and expenses ~~126~~123,~~807~~380 ~~105~~103,~~242~~981 Purchased transportation 7174,~~850~~383 6169,~~789~~072 Operating taxes and licenses 1817,~~169~~645 17,~~483~~180 Insurance and claims expense 1513,~~155~~070 1213,~~843~~169 Provision for depreciation 1213,~~307~~315 10,~~228~~694 Net loss (gain) ~~loss~~ on disposal of operating property 743 (551) ~~232~~ ---------------------------------------------------- Total operating expenses ~~690~~680,~~609~~265 ~~608~~635,~~341~~999 ---------------------------------------------------- Operating income 1618,~~750~~602 1216,~~781~~219 Other income, net ~~449~~290 ~~594~~396 ---------------------------------------------------- Income before income taxes 1718,~~199~~892 1316,~~375~~615 Provision for income taxes 78,~~327~~047 56,~~751~~970 ---------------------------------------------------- Net income $ 910,~~872~~845 $ 79,~~624~~645 ==================================================== Earnings per share - basic $ 0.5358 $ 0.4151 Earnings per share - diluted $ 0.5257 $ 0.4050 Average shares outstanding - basic 18,~~650~~649 18,~~803~~815 Average shares outstanding - diluted 1819,~~977~~011 19,~~072~~122 Dividends declared per share $ 0.05 $ 0.05

See notes to condensed consolidated financial statements. 2 4 ROADWAY EXPRESS, INC. AND SUBSIDIARIES CONDENSED STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)

~~Twenty~~Thirty-~~four~~six Weeks Ended (~~Two~~Three Quarters) ~~June~~September 179, 2000 ~~June~~September 1911, 1999 ---------------------------------------------------- (in thousands, except per share data) Revenue $ 12,~~384~~083,~~678~~545 $ 1,~~226~~878,~~400~~618 Operating expenses: Salaries, wages and benefits ~~868~~1,~~491~~306,220 ~~795~~1,~~854~~217,758 Operating supplies and expenses ~~253~~376,~~431~~811 ~~203~~307,~~159~~140 Purchased transportation ~~139~~213,~~348~~731 ~~120~~189,~~123~~195 Operating taxes and licenses 3754,~~216~~861 3552,~~621~~801 Insurance and claims expense 2740,~~924~~994 2539,~~945~~114 Provision for depreciation 2336,~~658~~973 1930,~~567~~261 Net loss (gain) on disposal of operating property ~~514~~1,257 (~~122~~123) ---------------------------------------------------- Total operating expenses 12,~~350~~030,~~582~~847 1,~~200~~836,~~147~~146 ---------------------------------------------------- Operating income 3452,~~096~~698 2642,~~253~~472 Other income, net 1,~~205~~495 1,~~049~~445 ---------------------------------------------------- Income before income taxes 3554,~~301~~193 2743,~~302~~917 Provision for income taxes 1523,~~039~~086 1118,~~739~~709 ---------------------------------------------------- Net income $ 2031,~~262~~107 1525,~~563~~208 ==================================================== Net income per share - basic $ 1.0967 $ 01.8334 Net income per share - diluted $ 1.0764 $ 01.8232 Average shares outstanding - basic 18,~~672~~664 18,~~801~~806 Average shares outstanding - diluted 1819,~~992~~005 19,~~047~~085 Dividends declared per share $ 0.1015 $ 0.1015

See notes to condensed consolidated financial statements. 3 5 ROADWAY EXPRESS, INC. AND SUBSIDIARIES CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)

~~Twenty~~Thirty-~~four~~six Weeks Ended (~~Two~~Three Quarters) ~~June~~September 179, 2000 ~~June~~September 1911, 1999 ---------------------------------------------------- (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 2031,~~262~~107 $ 1525,~~563~~208 Depreciation and amortization 2337,~~979~~440 1930,~~443~~009 Other operating adjustments (516,~~148~~035) 1118,~~090~~606 ---------------------------------------------------- Net cash provided by operating activities 3952,~~093~~512 4673,~~096~~823 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of carrier operating property (5881,~~791~~936) (3143,~~893~~697) Sales of carrier operating property 2,~~188~~895 35,~~959~~225 ---------------------------------------------------- Net cash used by investing activities (5679,~~603~~041) (2738,~~934~~472) CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid (12,~~925~~894) (12,~~926~~905) Treasury stock activity, net (~~330~~411) 27(84) ---------------------------------------------------- Net cash used by financing activities (23,~~255~~305) (12,~~899~~989) Net (decrease) increase in cash and cash equivalents (1929,~~765~~834) 1632,~~263~~362 Cash and cash equivalents at beginning of period 80,797 60,232 ---------------------------------------------------- Cash and cash equivalents at end of period $ 6150,~~032~~963 $ 7692,~~495~~594 ====================================================

See notes to condensed consolidated financial statements. 4 6 Roadway Express, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements Note A--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 9, 2000 are not necessarily indicative of the results that may be expected for the year ended December 31, 2000. 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, 1999. Note B--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 C--Earnings per Share The following table sets forth the computation of basic and diluted earnings per share:

Twelve Weeks Ended ~~Twenty~~Thirty-~~four~~six Weeks Ended (~~Second~~Third Quarter) (~~Two~~Three Quarters) ~~June~~Sept 179, 2000 ~~June~~Sept 1911, 1999 ~~June~~Sept 179, 2000 ~~June~~Sept 1911, 1999 ------------------------------------------------------------------------------ (in thousands, except per share data) Net income $ 910,~~872~~845 $ 79,~~624~~645 $ 2031,~~262~~107 $ 1525,~~563~~208 ============================================================================== Weighted-average shares for Basic earnings per share 18,~~650~~649 18,~~803~~815 18,~~672~~664 18,~~801~~806 Management incentive stock plans ~~327~~362 ~~269~~307 ~~320~~341 ~~246~~279 ------------------------------------------------------------------------------ Weighted-average shares for Diluted earnings per share 1819,~~977~~011 19,~~072~~122 1819,~~992~~005 19,~~047~~085 ============================================================================== Earnings per share - basic $ 0.5358 $ 0.4151 $ 1.0967 $ 01.8334 Earnings per share - diluted $ 0.5257 $ 0.4050 $ 1.0764 $ 01.8232

5 7 Note D--Comprehensive Income Comprehensive income differs from net income due to foreign currency translation adjustments as shown below:

Note E--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. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company had net income of $10.8 million or $0.57 per share (diluted), for the third quarter ended September 9, 2000, compared to income of $9.6 million, or $0.50 per share (diluted) in the same quarter last year, an increase of 12.4%. Revenues were $699 million in the current quarter, a 7.2% increase from third quarter 1999. The Company delivered 1.9 million tons of freight in the current quarter, down 1.7% compared to the prior year quarter. Less-than-truckload (LTL) tons were down 0.2% and truckload tons were down 7.8%. Tonnage in the third quarter of 1999 benefited from LTL industry consolidation due to discontinued operations of two mid-sized competitors and some freight diversion to the trucking industry resulting from consolidation in the rail transportation industry. Net revenue per ton was $359.35, up 9.0% compared to the same quarter last year. The improvement in revenue per ton was driven by the continuing impact of a general rate increase in the fourth quarter of 1999, adjustments in contract rates, freight mix changes, and a variable rate fuel surcharge that averaged 3.0% of revenue in the current quarter compared to 0.4% of revenue in the prior-year quarter. Total operating expenses were up $44.3 million, or 8.8% per ton, compared to the third quarter of 1999. Salaries, wages, and benefits were up $15.8 million, or 5.5% per ton compared to the third quarter of 1999. Direct wages and benefits for drivers and dock workers accounted for $11.5 million of this increase, primarily due to the April 6 8 1, 2000 wage and benefit increases of 3.2% under our labor contract. The remaining $4.3 million increase resulted from management, administrative, and other indirect salaries, wages, and benefits. Operating supplies and expenses were up $19.4 million, or 20.7% per ton over the prior year quarter. Escalating prices for fuel directly consumed in Company operations caused $7.5 million of this increase. Other operating and purchased transportation cost components have also been affected to varying degrees by the fuel price increases. Higher equipment rental and other direct terminal operating expenses together accounted for $10.8 million of the cost increase. The rental costs reflect the Company's replacement of older linehaul tractors with leased units and rental of equipment for use in city operations. Purchased transportation expenses were up $5.3 million, or 9.5% per ton, driven by increased use of owner-operators by our subsidiaries and purchased pickup and delivery (P&D) services for our seamless P&D offering. Depreciation expense increased $2.6 million over the third quarter of 1999. This increase reflects recent capital expenditures, primarily for revenue equipment and information technology. The tax rate for the third quarter of 2000 and 1999 differs from the Federal statutory rate due to the impact of state taxes, taxes on foreign operations, and non-deductible operating expenses. At the end of the quarter, cash and marketable securities amounted to $51 million, a $30 million decrease from year-end 1999, largely due to increased capital expenditures in 2000. Net acquisitions of equipment through the third quarter of 2000 amounted to $79 million, primarily for revenue equipment and data processing equipment. Cash flow from operations has been and is expected to be sufficient to meet working capital needs. The Company has no long-term debt. On September 1, 2000, the Company implemented a general freight rate increase of approximately 5.6% that had a very 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. The Company is also taking actions to improve operating margins such as working with specific customers to improve the yield on freight. 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, fuel prices, labor relations, and the success of the Company's operating plans. 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's earnings are affected by changes in interest rates related to its trailer leases. The Company has in place 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 $34.5 million. An interest rate variation of 1% would have no material impact on the Company. Roadway may incur 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 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 above. 7 9 PART II -- OTHER INFORMATION ITEM 5. OTHER INFORMATION On October 4, 2000, the Board of Directors declared a cash dividend of $0.05 per share on the Company's common stock payable on December 1, 2000, to shareholders of record on November 10, 2000. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibit No. ----------- 27 Financial Data Schedule. No Current Reports on Form 8-K were filed during the current quarter. 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 EXPRESS, INC. Date: October 23, 2000 By: /s/ J. Dawson Cunningham ---------------- --------------------------- J. Dawson Cunningham, Executive Vice President, Chief Financial Officer, and Treasurer Date: October 23, 2000 By: /s/ John G. Coleman ---------------- ---------------------- John G. Coleman, Controller 8

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