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IMPROVING THE SERVICE YELLOW CORPORATION
1995 ANNUAL REPORT
YELLOW CORPORATION
Yellow Corporation is a holding company with operating subsidiaries
specializing in national, regional, and international less-than-truckload
transportation.
YELLOW FREIGHT SYSTEM, INC.
Yellow Freight System, headquartered in Overland Park, KS is the corporation's
largest subsidiary with 1995 operating revenue of $2.4 billion. As the largest
provider of less-than-truckload services in the nation, Yellow Freight System
employs 24,700 people throughout a network of 445 facilities. It provides
national and regional two-day service as well as international service to
Mexico, Canada and, via alliances, Europe and the Asia/Pacific region.
PRESTON TRUCKING COMPANY, INC.
Preston Trucking Company, headquartered in Preston, MD provides regional
less-than-truckload services in the upper Midwest and Northeast. A network of
75 terminals throughout this geo-graphic region is operated by 5,400 employees.
Preston markets the SuperRegion (TM)--one and two-day service in an expanded
geo-graphic region. It recorded 1995 operating revenue of $411 million.
SAIA MOTOR FREIGHT LINE, INC.
Saia Motor Freight Line, will relocate its headquarters to Atlanta, GA from
Houma, LA in April. Its regional less-than-truckload market consists of eleven
states in the south where it operates 73 terminals and employs 3,500 people.
Saia offers comprehensive overnight and two-day service in its market and
recorded operating revenue of $210 million in 1995.
WESTEX, INC.
WestEx, the newest regional carrier in the corporate family is headquartered in
Phoenix, AZ and provides one and two-day service in California, Arizona and New
Mexico as well as parts of Nevada and Texas. WestEx employs 440 people and
recorded 1995 operating revenue of $17 million.
YELLOW TECHNOLOGY SERVICES, INC.
Yellow Technology Services, headquartered in Overland Park, KS employs 360
people and ensures that the operating companies--primarily Yellow Freight
System--have access to advanced information systems to meet the informational
demands of transportation customers.
FINANCIAL HIGHLIGHTS
Yellow Corporation and Subsidiaries
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(Amounts in thousands except per share data)
<TABLE>
<CAPTION>
1995 1994 1993(a)
<S> <C> <C> <C>
Operating revenue $3,056,640 $2,867,492 $2,856,505
Income (loss) from operations (21,588) 11,011 53,893
Income (loss) before extraordinary item (30,122) (3,848) 18,801
Net income (loss) (30,122) (7,906) 18,801
Per share data:
Income (loss) before extraordinary item (1.07) (.14) .67
Net income (loss) (1.07) (.28) .67
Cash dividends .47 .94 .94
Total debt 353,573 247,760 226,503
Shareholders' equity 422,677 460,843 486,453
</TABLE>
(a) 1993 amounts include the operating results of Preston Corporation effective
March 1, 1993. The 1993 results also include a network development charge of
$11.2 million after taxes and a charge of $1.6 million to reflect the impact of
a higher tax rate on the company's deferred tax liabilities.
TABLE of CONTENTS
Letter To Shareholders 2
Management's Discussion 4
and Analysis
Financial Summary 12
Consolidated Financial 14
Statements and Notes
Report of Independent 24
Public Accountants
Supplementary Information 27
Officers/Directors 28
LETTER TO SHAREHOLDERS
Company Performance
For the less-than-truckload transportation industry, 1995 was arguably the
worst year since it was deregulated in 1980. Barely recovered from the
financial blow dealt by the 24-day Teamsters' strike in 1994, the industry
faced overcapacity and a faltering economy that
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triggered the most extreme price discounting in a decade. The result was a
financial stall for the entire industry segment.
Yellow Corporation was significantly impacted by these circumstances,
recording a loss of $30.1 million, or $1.07 per share, in 1995, compared to a
loss of $7.9 million, or $.28 per share, in 1994.
In mid-year the Yellow Corporation Board of Directors suspended the
company dividend until a return to consistent profitability is attained and
trimmed previously planned capital expenditures. The company's principal
subsidiary, Yellow Freight, began to work aggressively on a focused plan to
address three key issues: transit time improvement, expense reduction and price
improvement. The regional companies, Preston, Saia and WestEx, completed
previously planned expansions, turning their attention to margin improvement.
IMPROVING THE SERVICE
Yellow Freight System, which contributes nearly 80 percent of corporate
revenue, progressed its extensive technological reengineering program. That
effort, in combination with an ongoing terminal consolidation program, created
the foundation for sweeping transit time improvements in the last half of the
year. Yellow's two new services... Further, FasterTM and 2-Day USA,TM shaved
delivery times of one or more days off 70 percent of the shipments delivered by
the company. By the end of the year, Yellow Freight--a national LTL
carrier--was delivering up to 40 percent of its shipments in two days or less
with the most comprehensive transit time reduction program in the industry.
Clearly, these improvements required considerable investment. Keeping
promises to customers for better transit times, trucks were frequently required
to leave terminals with partial loads because it was simply "time to go",
resulting in lower load averages and higher labor costs. Some costs were offset
by reduced shipment handling resulting from increased direct loading.
Furthermore, as customer awareness of these new services grew and employees
embraced the new "time-sensitive" attitude, the company added more business and
began correcting operational inefficiencies. While these new services are
expected to elevate ongoing costs, the company expects a net benefit from
improved prices and volume.
To support the new services, Yellow Freight opened two state-of-the-art
customer service centers during the year replacing terminal-based customer
service functions. This centralization enabled the company to lower fixed
overhead costs while instituting the most convenient, responsive customer
service in the industry. More than 200 highly trained representatives provide
customers a way to expedite their business requests 24 hours a day, seven days
a week.
The investment in transit time improvement combined with weak industry
fundamentals negatively impacted Yellow Freight's overall financial
performance, yet it exceeded the perform-ance of principal competitors
throughout much of the year.
Preston Trucking Company, the company's second largest operation--
a regional LTL provider serving the northeast and central states--experienced
pressures similar to Yellow Freight from the economy and price discounting. Yet
it provided consistently superior on-time service throughout the year.
Bolstered by this service performance, Preston added North Carolina to its
well-received SuperRegionTM which provides customers with one and two-day
transit times over an expanded geographic region. During its 15 months of
operation, the SuperRegionTM has reduced transit time by 12 percent while
length of haul has increased 18 percent. Preston anticipates improved revenue
in 1996 from its new guaranteed, expedited service for time-sensitive shipments
and new direct service to Canada. Market circumstances kept Preston's financial
performance in the red in 1995, but its trends outpaced many competitors--a
tribute to management's attention to cost control and employee commitment to
the customer.
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Saia Motor Freight, serving the southern tier of the United States, was a
small but valuable contributor to the corporation in 1995. As one of two
non-union, regional carriers in the family, Saia saw over 17 percent revenue
growth as it recorded full-year benefits from 1994 expansion activity,
broadened service in the state of Texas and entered the states of North and
South Carolina. While expansion costs and pricing pressures squeezed operating
margins, Saia continued its high service performance and recorded a profitable
year.
California was the 1995 target for WestEx, the company's newest non-union
regional subsidiary. It expanded throughout California providing overnight
intrastate service and two-day service between that state and the southwest.
Twelve facilities were opened in California and Reno, Nevada, expanding the
terminal network to three states and portions of Nevada and Texas. WestEx is
similar to a start-up operation, and as such, is a small contributor to overall
corporate revenue. Nevertheless, it grew according to plan and is expected to
be profitable in 1997.
IMPROVING THE COST
All Yellow companies delivered service improvements in 1995, but in the highly
competitive transportation arena these achievements mean little without
internal expense reduction. It simply isn't good enough any more to have the
best service. You have to have the best service and be highly cost-efficient.
In the third quarter, Yellow Freight initiated a rigorous cost reduction
process that is expected to save $75 million in 1996. Adjustments were made in
the administrative, finance, and sales and marketing areas in December.
Linehaul and terminal operations will be the focus of efficiency and
productivity improvements this year. The company took a one-time, 1995 fourth
quarter charge of $6.6 million, or $.23 per share, related to the
implementation of these cost reduction programs, realignment of the company's
logistics operations and other nonrecurring expenses primarily relating to
severance costs.
Among the cost improvement efforts
at Preston was a majority vote by union employees in February to continue their
current five percent wage reduction and forego scheduled April 1 increases for
the duration of the current National Master Freight Agreement, which will
expire the end of March 1998. This demonstration of employee commitment is
expected to generate more than $15 million in savings in 1996.
Saia and WestEx will turn their attention to performance improvement as
each company focuses on harvesting business from the expansion activities of
1995. The revenue anticipated in 1996 will improve lane density for the
carriers resulting in more efficient operations. Additionally, each company has
the opportunity to reduce expenses as they apply greater cost control in
terminal and linehaul operations. We expect revenue increases combined with
cost containment to produce improved margins for these companies in the coming
year.
IMPROVING THE PRICE
Overcapacity has plagued the LTL industry, if not all trucking modes, and
triggered severe price discounting that has eroded profits. Much of the
industry reacted to this erosion by further discounting rates to protect market
share. The Yellow companies opted for a more long-term strategy--improve the
product and lower internal costs, thereby improving the value customers
receive. With these efforts underway, the companies are now prepared to
negotiate better prices for their services which will help improve
profitability.
In January, rate increases were announced, representing a step toward
closing the gap between the price Yellow companies charge their customers and
the value they offer. For example, over the past ten years the Consumer Price
Index grew by nearly 50 percent
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while the average price per hundred weight for Yellow's companies, adjusted for
freight mix changes, remained nearly the same. We are committed to price
improvement, in view of our service enhancements and the need to improve
shareholder returns.
CHANGE AND COMMITMENT
After twenty-five years of service to the organization, President and CEO
George E. Powell III announced in January his intention to resign. At this
writing the Board of Directors is awaiting the results of a search for a
successor, which we are confident will be concluded shortly.
The outlook for 1996 will be initially marred by the winter blizzards that
idled operations for a few days in various parts of the country and slowed the
movement of freight. Weather complications can be costly and distracting, but
the focus of our management and employees remains sharp. We will build on 1995.
We will maximize the investment in service improvements, further scrutinize
expenses and attain better prices for our services.
Though change is sure to become the hallmark of 1996, our commitment to
improve the business performance of our companies is a constant, as is our goal
of generating positive returns for shareholders.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Results of Operations
1995 vs. 1994
Operating revenue for Yellow Corporation (the company) totaled $3.06
billion in 1995, up 6.6% from $2.87 billion in 1994. The increase in revenue
primarily resulted from the recovery of lost revenue due to the
24-day labor strike in 1994 by the International Brotherhood of Teamsters
(Teamsters) against the company's primary subsidiary, Yellow Freight System,
Inc. (Yellow Freight). Excluding the impact of the strike, operating revenue
increased only nominally due to other volume gains being substantially offset
by lower prices. The lower prices resulted from competitive discounting and
industry overcapacity.
The company had a net loss of $30.1 million, or $1.07 per share, compared
to the strike-induced net loss of $7.9 million, or $.28 per share, last year.
The 1995 loss resulted from the deterioration in prices and a variety of cost
increases. The cost increases varied by operating subsidiary, but in general
involved the following areas: annual labor cost increases; increased expenses
resulting from service enhancements; corporate development costs including
business expansions at Saia Motor Freight Line, Inc. (Saia) and WestEx, Inc.
(WestEx); and certain nonrecurring costs.
Yellow Freight's revenue was $2.36 billion, an increase of 6.4% over 1994.
Yellow Freight experienced a deterioration in its operating ratio from 99.2 in
1994 to 100.1 in 1995. Tonnage increased 7.7%, demonstrating the recovery of
business from the strike-impacted 1994 levels. Despite significant service
enhancements and other cost increases, prices declined for the year. A January
1995 tariff increase of approximately 5.0%, which applied to about half of
Yellow Freight's customers, and attempts to increase contract term rates on
remaining customers were more than offset by price discounting. Overall,
less-than-truckload (LTL) revenue per hundredweight declined 1.5% from $15.77
in 1994 to $15.53 in 1995.
Prices declined and volumes, adjusted for the 1994 strike, remained
relatively static, yet operating costs increased. Approximately 67% of Yellow
Freight's costs pertain
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to salaries, wages and benefits. On April 1, 1995, union wages and benefits
increased approximately 3.2%. In addition, Yellow Freight incurred higher
expenses in the third and fourth quarters when it implemented a transit time
improvement program to enhance its competitive position in the market. These
transit time improvements were made possible by an on-going network development
program, that in the last three years has reduced the number of terminals at
Yellow Freight from 608 to 448 while still maintaining full market coverage.
For 1995 compared to 1994, transit times improved by approximately one day,
resulting in higher costs associated with a 5.7% lower load average and a 14.0%
increase in total linehaul miles. Some cost savings were obtained by an
increase in direct loadings which reduced rehandlings by 8.7%. Additional
savings were achieved through an increased use of rail transportation from
13.1% of total miles in 1994 to 17.5% in 1995 and the elimination of forced
overtime for dockworkers, both provisions of the 1994 labor contract. While
Yellow Freight is working to lessen the cost premiums of the improved service,
it is likely that this new service will carry a higher ongoing cost structure.
However, Yellow Freight intends to receive future benefits through improved
pricing, better customer service and business volume growth. Through
reengineering and the use of new technology, Yellow Freight began achieving
administrative cost reductions in 1995 by consolidating customer service and
cashiering functions from its individual terminals to two centralized
locations.
Preston Trucking Company, Inc. (Preston Trucking) had revenue of $411.2
million, a decrease of 1.3% from 1994. Preston Trucking's operating ratio in
1995 was 101.4 compared to 101.3 in 1994. The 1994 performance was subject to
severe winter weather, impacts from the second quarter strike, including
benefits from an early return to work, and shipper uncertainty concerning a
wage reduction process (see 1994 vs. 1993 discussion), all of which did not
recur in 1995. However, 1995 was subject to severe industry-wide price
discounting as well as a relatively greater labor cost increase. Under the
terms of Preston Trucking's wage reduction program approved in 1994, union
wages and benefits increased approximately 4.9% on April 1, 1995. The higher
wage increase resulted from Preston Trucking employees receiving both the
contractual wage and benefit increases as well as a step-down in the wage
reduction from 7.0% to 5.0%. Improved productivity, positive cargo claims
experience and reductions in purchased transportation expense contributed to
offsetting the higher wage and benefit costs.
Saia revenue grew 17.7% to $209.6 million due to geographical expansions
in Texas, Tennessee and Georgia in mid-1994 and North and South Carolina in
mid-1995. Saia's operating ratio increased to 96.3 in 1995 from 93.5 in 1994.
Saia was impacted by industry price discounting, but the margin deterioration
was primarily caused by increased wages and the expense impacts of the
expansion activities including lighter initial business densities in the new
markets. The deregulation of intrastate markets in January 1995 also increased
competition in Louisiana and Texas, where Saia held operating rights
advantages. This was partially offset by new access for Saia in various other
states' intrastate markets.
The remaining operating entities of the company comprise less than 3% of
consolidated revenue and include Yellow Logistics Services, Inc. (Yellow
Logistics), CSI/ Reeves, Inc. (CSI), WestEx and the Yellow Corporation holding
company. During 1995, Yellow Logistics was realigned and CSI was sold. WestEx
commenced an expansion from its traditional Arizona and New Mexico market into
the state of California, but remains immaterial to overall company results.
Holding company expenses were comparable to 1994 levels.
Corporate interest expense increased from $18.4 million in 1994 to $23.4
million in 1995 due to increased debt levels, primarily resulting from lower
net income, increased working capital requirements, and capital expenditures.
The working capital impacts on interest expense primarily pertained to
increased accounts receivable days outstanding at Yellow Freight due to both
market forces and transition implementation issues related to a new system for
customer billing and stating.
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The fourth quarter 1995 results included nonrecurring charges of $6.6
million after income taxes pertaining to implementation of cost reduction
programs, the realignment of Yellow Logistics and other expenses primarily
related to severance costs.
1994 vs. 1993
Operating revenue for the company totaled $2.87 billion in 1994, an
increase of $11.0 million from 1993. The flat revenue was due to a 24-day
national labor strike in April by the Teamsters against Yellow Freight, which
essentially offset other revenue increases. The strike also impacted most of
Yellow Freight's major unionized competitors. The company realized $85 million
more revenue from the inclusion of Preston Corporation (Preston) for twelve
months in 1994 versus ten months in 1993. An additional $105 million of
increased revenue was generated by full-year growth at the subsidiaries,
exclusive of the labor strike impact. This revenue growth came from rate
increases and geographic expansion and was split evenly between Yellow Freight
and the other subsidiaries as a group.
The company had a net loss of $7.9 million, or $.28 per share, in 1994,
compared to net income of $18.8 million, or $.67 per share in 1993. The 1994
net loss resulted primarily from the labor strike which reduced earnings by an
estimated $1.24 per share. A special charge of $4.1 million after taxes, or
$.14 per share, to write-off the value of intrastate operating rights, also
negatively impacted 1994 results. This write-off was necessitated by federal
legislation that deregulated the entry and rates for intrastate operations of
all transportation companies. Net income in 1993 included an $11.2 million, or
$.40 per share, charge for network development at Yellow Freight as well as a
reduction of $1.6 million, or $.06 per share, from the impact of the statutory
increase in the U.S. federal tax rate on the company's deferred tax
liabilities.
As a result of the labor strike, Yellow Freight experienced a 5.8%
decrease in revenue for 1994 ($2.22 billion) versus 1993 ($2.36 billion). Rate
increases in January 1994 were offset by a 6.6% decrease in tonnage levels and
a 12.3% decline in the number of shipments handled from 1993. However, the new
four-year labor contract provides Yellow Freight greater operational
flexibility while giving Teamster employees increased wages, benefits and job
security. The increased flexibility means that Yellow Freight has the ability
to lower operating costs by gaining the right to use more rail transportation
and dock casual workers whose rate of pay is fixed during the contract. In
return, the carriers agreed to a 14% increase in wages and benefits over the
four-year contract term.
Yellow Freight's earnings were also negatively impacted by severe winter
weather experienced in the first quarter of 1994 which caused significant
business disruptions and higher operating expenses. Salaries, wages and
employees' benefits expense as a percentage of revenue was essentially the same
in 1994 and 1993. Slightly lower employee levels were offset by wage and
benefit increases of approximately 3% effective April 1 under the new labor
agreement. Operating expenses and supplies increased as a percent of revenue,
primarily due to the fixed component of certain of these costs and increases in
equipment maintenance and general expenses. In the third quarter, Yellow
Freight implemented a change of linehaul operations, which allows substantially
more freight to be transported via rail. This change, which was made possible
by the new labor agreement, will hold down operating costs, reduce capital
expenditures for revenue equipment and improve service for customers. Purchased
transportation costs were higher in 1994 as a result of this increased rail
usage in the third and fourth quarters.
Preston Trucking had revenue of $416.8 million in 1994, an annualized
revenue increase of 4.9% compared to 1993. However, their operating margin
deteriorated slightly during the year as a result of severe winter weather in
the Northeast during the first quarter, the impact of the second quarter strike
and shipper uncertainty concerning approval of the wage reduction agreement
described below. Preston Trucking saw a dramatic increase in
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revenue during the second quarter of 1994 as they returned to work under an
interim agreement with the Teamsters after only six days on strike. The
increased business adversely affected service performance and costs, reducing
profitability in the latter part of the second quarter and into the third
quarter. In mid-1994, the Teamster employees of Preston Trucking approved a
plan to reduce wages in return for a share of profits if certain operating
results are achieved. The plan lessened pay by 7.0% from standard wages under
the new contract for the period April 1, 1994 to March 31, 1995 and by 5.0% for
the period April 1, 1995 to March 31, 1996. Pay levels would return to standard
contract wages on April 1, 1996. This plan replaced a one year, 9.0% wage
reduction approved in March 1993, shortly after Preston Trucking was acquired
by the company. Significant service improvements were achieved in the fourth
quarter through the implementation of a new regional concept featuring a
170-door distribution center near Cleveland, Ohio. Called the SuperRegion,TM it
provides reduced transit times and superior service across an expanded
geographic area. This service began attracting new revenue during the quarter.
Saia maintained an operating ratio of 92.0 in 1994 as it expanded
geographically in Texas, Tennessee and Georgia. Start up costs for these
expansions burdened 1994 operating expenses while benefits were realized in
1995 and are expected to continue in subsequent years. Saia, with revenue of
$137.8 million in 1994, achieved a 14.7% increase in revenue compared to 1993
due to growth and second quarter benefits from the labor strike. Smalley
Transportation Company (Smalley) continued to improve its operating ratio, 98.8
for 1994, while maintaining 4.4% revenue growth to $40.3 million. Effective
January 1, 1995, Smalley was merged into Saia to offer customers more
comprehensive regional coverage and to reduce costs. Merger-related costs in
1994 are estimated to have negatively impacted Saia and Smalley's operating
expenses by $1 million.
1993 vs. 1992
Operating revenue for the company totaled $2.86 billion in 1993 versus
$2.26 billion in 1992, an increase of 26.2%. A significant portion of the
increase in 1993 revenue ($500 million) is attributable to the March 1, 1993
acquisition of Preston. The remaining revenue growth came from increases in
rates and the number of shipments handled as well as contributions from new
services started in 1992. Yellow Freight had revenue of $2.36 billion in 1993,
up 4.2% from 1992, with a 4.9% increase in total tonnage. Tonnage levels in
1993 were essentially the same as 1990 due to the growth in the economy during
that period, offset by Yellow Freight's commitment to improving account
profitability and resisting discounting.
Net income for 1993 was $18.8 million, or $.67 per share, compared to 1992
net income of $29.5 million, or $1.05 per share. Earnings for 1993 reflect an
$11.2 million, or $.40 per share, charge for network development at Yellow
Freight as well as a reduction of $1.6 million, or $.06 per share, from the
impact of the statutory increase in the U.S. federal tax rate on the company's
deferred tax liabilities. Net income for 1992 was reduced $11.5 million, or
$.41 per share, due to a change in the company's revenue recognition policy.
Earnings declined in 1993 largely because of competitive pricing
pressures, especially in the first half of the year, and severe winter weather
across the nation in the first quarter. The operations of the Preston
subsidiaries had a small negative impact on earnings in 1993, although they
showed steady improvement during the year and contributed $.02 per share to
fourth quarter earnings.
The company's operating ratio was 98.1 in 1993 compared to 96.3 in 1992.
Purchased transportation increased as a percentage of revenue due to increased
use of rail transportation and the Preston subsidiaries' heavier usage of
purchased transportation. Salaries, wages and employees' benefits decreased as
a percent of revenue despite wage and benefit increases of approximately 3%
effective April 1 for Teamster employees. This
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is due to a wage reduction of 9.0% effective April 1 for employees of Preston
Trucking, a small decrease in the total number of employees and a reduction in
workers' compensation expense. Due to moderate capital expenditures during the
last three years and more efficient use of equipment, depreciation expense also
decreased as a percent of revenue. This resulted in higher equipment
maintenance costs which negated a portion of the depreciation expense savings.
During 1993, Yellow Freight instituted an extensive network development
process by consolidating and realigning terminals to improve customer service
and reduce costs. A charge of $18.0 million, or $11.2 million after taxes, was
recorded for the costs to close certain facilities and dispose of excess
property.
FUTURE OUTLOOK
The company has initiated processes to improve earnings performance and
financial position in 1996 and future years. The subsidiaries implemented
general LTL rate increases in January 1996 in amounts averag-ing in excess of
5.8% and will also seek improved pricing in negotiations with contract
customers during the year. While the company expects pricing to remain highly
competitive, it is cautiously optimistic that the extent of destructive price
discounting that prevailed in 1995 will not recur in 1996, particularly in view
of the service enhancements and the need for virtually all trucking sectors to
improve their shareholder returns.
In addition to pricing improvements, Yellow Freight intends to strengthen
performance through cost reduction initiatives and increased benefits from the
1995 transit time improvements. The cost reduction programs are projected to
save $75 million in 1996 and include administrative staff reductions and
operational efficiency improvements. Yellow Freight believes its transit time
improvements will enhance its price negotiating posture as well as benefit
business volumes through better customer retention and generating new business.
Additionally, Yellow Freight will continue to decrease the cost premiums
associated with the improved service and will pursue other network development
opportunities. On April 1, Yellow Freight's wages and benefits will increase
approximately 3.8% under the terms of the industry collective bargaining
agreement which extends through March 31, 1998. A portion of this increase is
expected to be offset by continuing to leverage advantages of the 1994 labor
agreement. Yellow Freight believes that significant opportunities are still
available to further reduce costs and increase service through ongoing
technological and reengineering investments.
Preston Trucking plans to improve its performance due to pricing gains and
a plan approved in February 1996 by its union employees to freeze wages at
current levels through the remaining term of the industry collective bargaining
agreement. This wage freeze not only maintains the existing 5.0% reduction from
full-scale pay levels but also avoids the scheduled wage increases due April 1
of both 1996 and 1997. However, health, welfare and pension benefit costs will
increase by 9.0% on April 1, 1996 and 8.2% on April 1, 1997.
Saia plans to improve 1996 performance through pricing gains and density
benefits from additional business and improved cost efficiency. No significant
expansions are planned for 1996. Similarly, WestEx plans to improve its
performance through increased business density benefits although a profit is
not expected until 1997.
Holding company expenses are expected to be significantly lower than prior
year, mainly due to cost reduction initiatives. The company has previously
announced the pending resignation of its current president and CEO. The company
believes this announcement has had no significant adverse impact on its
financial condition or results of operations. A search for a successor is in
process and is expected to be completed shortly.
Success of the improvement initiatives will be dependent on the strength
of the economy, competitive conditions including pricing stability, the ability
to hold down costs
<PAGE> 10
and the promptness of the management transition. The company is encouraged that
recent announcements by competitors of reduced capital expenditure plans and
the curtailing of expansions will begin to moderate the industry's overcapacity
in 1996. However, the severe winter weather experienced in the first quarter of
1996 is expected to have an adverse impact on first quarter results of
operations.
OTHER
In March 1995, the Financial Accounting Standards Board issued its
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, which requires adoption in 1996. The
company has not yet determined the impact the adoption will have on its
financial condition or results of operations.
The company uses heating oil swap and fixed price diesel fuel agreements
to manage a portion of its expo-sure to fluctuating diesel prices.
Approximately 50% of the company's anticipated annual fuel usage is covered by
such agreements. Under the heating oil swap and option agreements, the company
receives or makes payments based on the difference between a fixed and a
variable price for heating oil. Historically, the fair values of the hedge
positions have not been materially different from the purchase price. Gains and
losses on the agreements are recognized as a component of fuel expense when the
corresponding fuel is purchased.
The effective income tax rate was (33.1)% in 1995, 14.0% in 1994 and 46.8%
in 1993. The notes to con-solidated financial statements contain an analysis of
the income tax provision and the effective income tax rate.
FINANCIAL CONDITION
The company's liquidity needs arise primarily from capital investment in
new equipment and information technology, and funding working capital
requirements.
Working capital increased from a deficit of $13.5 million in 1994 to a
positive $42.2 million in 1995. Both prepaid expenses and checks outstanding
were significantly increased by the establishment of a Voluntary Employees'
Beneficiary Association (VEBA) near year-end 1995. The VEBA was used to
partially prefund certain benefit expenditures for the company's contract
employees. Other significant working capital changes were increases in accounts
receivable and refundable income taxes. Capital expenditures in 1995 totaled
$140.3 million, down from $150.9 million in 1994. About two-thirds of these
expenditures were made for the benefit of Yellow Freight. The 1995 total was
lower than originally planned because management reduced capital expenditures
during the year as economic and industry conditions weakened. Projected
expenditures for 1996 will be for information technology and replacement of
revenue equipment. Actual and projected net capital expenditures are summarized
below (in millions):
<TABLE>
<CAPTION>
Projected Actual
1996 1995 1994 1993
<S> <C> <C> <C> <C>
Land and structures $ -- $(3) $ 3 $ 12
Revenue equipment 27 74 98 34
Other 38 69 50 21
Total $65 $140 $151 $67
</TABLE>
Capital expenditures are usually financed by internally generated funds,
with depreciation totaling $135.3 million in 1995 and $134.0 million in 1994.
Funds provided
<PAGE> 11
by operations, however, were much lower in 1995 at $44.2 million compared to
$157.4 million in 1994. This was due to a higher net loss in 1995, an increase
in accounts receivable and an increase in refundable income taxes.
As a result of the low levels of cash generated by operations in 1995,
total debt levels increased by $105.8 million. The additional debt was funded
by the company's commercial paper program, whose authorized maximum was
increased to $150 million, and by the issuance of medium-term notes. During
1995 the company entered into a $200 million multi-year bank credit agreement,
replacing a $100 million agreement, to provide additional liquidity backup for
the commercial paper program and for other borrowing needs.
Early in 1996 a major rating agency lowered its rating on the company's
commercial paper. While management intends to continue to finance short-term
working capital needs primarily with the issuance of commercial paper, the
lower rating may require the company to draw on its bank credit agreement from
time to time. This change is not expected to have a material impact on interest
expense.
Management anticipates the company's liquidity and financial position will
improve significantly in 1996 for several reasons. First, planned capital
expenditures for 1996 are only $65 million as the company intends to improve
its asset utilization through transit time improvements and more efficient
operations including the greater use of rail transportation. Also, receivables
are expected to decline as additional efforts are made to accelerate customer
collections and a large income tax refund is due to be received during the
year. In addition, the company suspended its dividend in July 1995. No
dividends are expected to be paid in 1996. Dividend payments of $.47 per share
($13 million) were made in 1995 and $.94 per share ($26 million) in 1994 and
1993. Finally, operating results should improve in 1996 as a result of cost
reduction efforts, transit time improvements and better industry conditions.
Management expects a substantial reduction in total debt outstanding by
year-end.
FINANCIAL SUMMARY
Yellow Corporation and Subsidiaries
(Amounts in thousands except per share data)
<TABLE>
<CAPTION>
1995 1994 1993(a) 1992
<S> <C> <C> <C> <C>
FOR THE YEAR:
Operating revenue $3,056,640 $2,867,492 $2,856,505 $2,262,676
Income (loss) from operations (21,588) 11,011 53,893 82,814
Depreciation 135,265 133,970 132,371 118,419
Interest expense 23,395 18,433 17,668 12,150
Income (loss) before income taxes (45,021) (3,375) 35,358 65,393
Income (loss) before extraordinary items and
cumulative effect of accounting changes (30,122) (3,848) 18,801 41,040
Net income (loss) (30,122) (7,906) 18,801 29,540
Net cash from operating activities 44,166 157,448 138,802 139,438
Capital expenditures, net 140,254 150,940 66,786 78,651
AT YEAR-END:
Net property and equipment 921,848 918,101 892,600 803,779
Total assets 1,434,897 1,307,221 1,265,654 1,061,012
Long-term debt 341,648 240,019 214,176 123,027
Total debt 353,573 247,760 226,503 134,077
</TABLE>
<PAGE> 12
<TABLE>
<S> <C> <C> <C> <C>
Shareholders' equity 422,677 460,843 486,453 485,496
MEASUREMENTS:
Per share data:
Income (loss) before extraordinary
items and cumulative effect of
accounting changes (1.07) (.14) .67 1.46
Net income (loss) (1.07) (.28) .67 1.05
Cash dividends .47 .94 .94 .94
Shareholders' equity 15.04 16.40 17.31 17.28
Total debt as a % of total capitalization 45.5% 35.0% 31.8% 21.6%
Return on average shareholders' equity (6.8)% (1.7)% 3.9% 6.1%
Market price range:
High 24 3/8 30 1/4 29 7/8 32 3/8
Low 11 7/8 16 3/4 16 7/8 21 3/4
Average number of employees 34,700 33,400 35,000 26,800
</TABLE>
(a) 1993 amounts include the operating results of Preston Corporation effective
March 1, 1993. The 1993 results also include a network development charge of
$11.2 million after taxes and a charge of $1.6 million to reflect the impact of
a higher tax rate on the company's deferred tax liabilities.
<TABLE>
<CAPTION>
1995 1994 1993(a) 1992
<S> <C> <C> <C> <C>
FOR THE YEAR:
Operating revenue $3,056,640 $2,867,492 $2,856,505 $2,262,676
Income (loss) from operations (21,588) 11,011 53,893 82,814
Depreciation 135,265 133,970 132,371 118,419
Interest expense 23,395 18,433 17,668 12,150
Income (loss) before income taxes (45,021) (3,375) 35,358 65,393
Income (loss) before extraordinary items and
cumulative effect of accounting changes (30,122) (3,848) 18,801 41,040
Net income (loss) (30,122) (7,906) 18,801 29,540
Net cash from operating activities 44,166 157,448 138,802 139,438
Capital expenditures, net 140,254 150,940 66,786 78,651
AT YEAR-END:
Net property and equipment 921,848 918,101 892,600 803,779
Total assets 1,434,897 1,307,221 1,265,654 1,061,012
Long-term debt 341,648 240,019 214,176 123,027
Total debt 353,573 247,760 226,503 134,077
Shareholders' equity 422,677 460,843 486,453 485,496
MEASUREMENTS:
Per share data:
Income (loss) before extraordinary
items and cumulative effect of
accounting changes (1.07) (.14) .67 1.46
Net income (loss) (1.07) (.28) .67 1.05
Cash dividends .47 .94 .94 .94
Shareholders' equity 15.04 16.40 17.31 17.28
Total debt as a % of total capitalization 45.5% 35.0% 31.8% 21.6%
</TABLE>
<PAGE> 13
<TABLE>
<S> <C> <C> <C> <C>
Return on average shareholders' equity (6.8)% (1.7)% 3.9% 6.1%
Market price range:
High 24 3/8 30 1/4 29 7/8 32 3/8
Low 11 7/8 16 3/4 16 7/8 21 3/4
Average number of employees 34,700 33,400 35,000 26,800
</TABLE>
(a) 1993 amounts include the operating results of Preston Corporation effective
March 1, 1993. The 1993 results also include a network development charge of
$11.2 million after taxes and a charge of $1.6 million to reflect the impact of
a higher tax rate on the company's deferred tax liabilities.
CONSOLIDATED BALANCE SHEETS
Yellow Corporation and Subsidiaries
December 31, 1995 and 1994
(Amounts in thousands except share data)
<TABLE>
<CAPTION>
ASSETS 1995 1994
<S> <C> <C>
CURRENT ASSETS:
Cash $25,861 $17,613
Short-term investments 5,414 7,305
Accounts receivable, less allowances of $16,781 and $13,082
323,814 295,332
Fuel and operating supplies 16,909 21,381
Refundable income taxes 49,529 -
Deferred income taxes - 1,586
Prepaid expenses 63,483 19,323
Total current assets 485,010 362,540
PROPERTY AND EQUIPMENT:
Land 137,112 141,134
Structures 611,284 613,530
Revenue equipment 969,960 938,243
Other 271,033 214,475
1,989,389 1,907,382
Less - Accumulated
depreciation 1,067,541 989,281
Net property and
equipment 921,848 918,101
OTHER ASSETS 28,039 26,580
$1,434,897 $1,307,221
</TABLE>
The notes to consolidated financial statements are an integral part of these
balance sheets.
<PAGE> 14
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1995 1994
<S> <C> <C>
CURRENT LIABILITIES:
Unsecured bank credit lines $9,000 $ -
Checks outstanding 72,667 23,706
Accounts payable 81,986 94,706
Wages, vacations and employees' benefits 134,178 118,364
Deferred income taxes 19,818 -
Claims and insurance accruals 79,853 84,823
Other current and accrued liabilities 42,369 46,651
Current maturities of long-term debt 2,925 7,741
Total current liabilities 442,796 375,991
OTHER LIABILITIES:
Long-term debt 341,648 240,019
Deferred income taxes 56,032 54,481
Claims, insurance and other 171,744 175,887
Total other liabilities 569,424 470,387
SHAREHOLDERS' EQUITY:
Series A $10 Preferred stock, $1 par value -
authorized 750,000 shares, none issued - -
Preferred stock, $1 par value - authorized
4,250,000 shares, none issued - -
Common stock, $1 par value - authorized
120,000,000 shares, issued 28,857,537 shares 28,858 28,858
Capital surplus 6,678 6,678
Retained earnings 404,761 447,887
Shares held by Stock Sharing Plan - (4,961)
Treasury stock, at cost (751,740 and 751,674 shares) (17,620) (17,619)
Total shareholders' equity 422,677 460,843
$ 1,434,897 $ 1,307,221
<CAPTION>
STATEMENTS OF CONSOLIDATED INCOME
1995 1994 1993
<S> <C> <C> <C>
OPERATING REVENUE $3,056,640 $2,867,492 $2,856,505
OPERATING EXPENSES:
Salaries, wages and employees' benefits 2,051,277 1,918,406 1,919,197
Operating expenses and supplies 473,356 433,789 410,679
Operating taxes and licenses 115,120 110,004 104,588
Claims and insurance 70,376 76,953 70,206
Communications and utilities 44,412 41,064 38,643
Depreciation 135,265 133,970 132,371
Purchased transportation 188,422 142,295 108,928
Network development - - 18,000
Total operating expenses 3,078,228 2,856,481 2,802,612
INCOME (LOSS) FROM OPERATIONS (21,588) 11,011 53,893
</TABLE>
<PAGE> 15
<TABLE>
<S> <C> <C> <C>
NONOPERATING (INCOME) EXPENSES:
Interest expense 23,395 18,433 17,668
Interest income (2,100) (2,202) (1,446)
Other, net 2,138 (1,845) 2,313
Nonoperating expenses, net 23,433 14,386 18,535
INCOME (LOSS) BEFORE INCOME TAXES (45,021) (3,375) 35,358
INCOME TAX PROVISION (BENEFIT) (14,899) 473 16,557
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (30,122) (3,848) 18,801
EXTRAORDINARY ITEM - WRITE-OFF OPERATING RIGHTS - (4,058) -
NET INCOME (LOSS) $(30,122) $(7,906) $18,801
AVERAGE COMMON SHARES OUTSTANDING 28,106 28,107 28,105
EARNINGS (LOSS) PER SHARE:
Income (loss) before extraordinary item $(1.07) $(.14) $.67
Extraordinary item - write-off operating rights - (.14) -
Net income (loss) $(1.07) $(.28) $.67
</TABLE>
The notes to consolidated financial statements are an integral part of these
statements.
STATEMENTS OF CONSOLIDATED CASH FLOWS
Yellow Corporation and Subsidiaries
For the Years Ended December 31
(Amounts in thousands)
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(30,122) $(7,906) $18,801
Noncash items included in income (loss):
Depreciation 135,265 133,970 132,371
Network development - - 18,000
Write-off operating rights - 4,058 -
Deferred income tax provision (benefit) 29,641 4,147 (10,819)
Changes in assets and liabilities, net of
acquisitions and dispositions:
Accounts receivable (34,064) (17,263) (27,095)
Accounts payable and checks outstanding 40,273 46,060 1,113
Other working capital items (82,593) (13,477) 9,227
Claims, insurance and other (3,437) 12,007 (277)
Other, net (10,797) (4,148) (2,519)
Net cash from operating activities 44,166 157,448 138,802
INVESTING ACTIVITIES:
Acquisition of property and equipment (163,426) (182,885) (76,886)
Proceeds from disposal of property and equipment 23,172 31,945 10,100
Purchases of short-term investments (7,759) (8,957) (8,086)
Proceeds from maturities of short-term investments 9,650 8,429 14,693
Proceeds from sale of CSI/Reeves, Inc., net 5,106 - -
Acquisitions, net of cash acquired - (6,244) (23,898)
</TABLE>
<PAGE> 16
<TABLE>
<S> <C> <C> <C>
Net cash used in investing activities (133,257) (157,712) (84,077)
FINANCING ACTIVITIES:
Proceeds from unsecured bank credit lines, net 9,000 - -
Commercial paper borrowings, net 69,510 33,981 24,968
Proceeds from issuance of long-term debt 56,497 14,000 37,250
Repayment of long-term debt (24,457) (17,701) (95,553)
Cash dividends paid to shareholders (13,210) (26,416) (26,405)
Other, net (1) 76 (64)
Net cash from (used in) financing activities 97,339 3,940 (59,804)
NET INCREASE (DECREASE) IN CASH 8,248 3,676 (5,079)
CASH, BEGINNING OF YEAR 17,613 13,937 19,016
CASH, END OF YEAR $25,861 $17,613 $13,937
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid $10,793 $1,245 $25,354
Interest paid $21,018 $18,103 $17,715
</TABLE>
The notes to consolidated financial statements are an integral part of these
statements.
STATEMENTS OF CONSOLIDATED
SHAREHOLDERS' EQUITY
Yellow Corporation and Subsidiaries
(Amounts in thousands except share data)
<TABLE>
Shares Held
Common Capital Retained by Stock Treasury
Stock Surplus Earnings Sharing Plan Stock
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1992 $28,846 $6,248 $492,196 $(24,350) $(17,444)
Net income - - 18,801 - -
Cash dividends, $.94 per share - - (26,405) - -
Exercise of stock options, 3,820 shares 4 60 - - -
Amortization of unearned compensation - 161 - - -
Reduction of Stock Sharing Plan debt
guarantee - - - 9,470 -
Purchase of treasury stock - - - - (128)
Foreign equity translation adjustment - - (1,006) - -
BALANCE, DECEMBER 31, 1993 28,850 6,469 483,586 (14,880) (17,572)
Net loss - - (7,906) - -
</TABLE>
<PAGE> 17
<TABLE>
<S> <C> <C> <C> <C> <C>
Cash dividends, $.94 per share - - (26,416) - -
Exercise of stock options, 7,700 shares
8 117 - - -
Amortization of unearned compensation - 92 - - -
Reduction of Stock Sharing Plan debt guarantee - - - 9,919 -
Purchase of treasury stock - - - - (47)
Foreign equity translation adjustment - - (1,377) - -
BALANCE, DECEMBER 31, 1994 28,858 6,678 447,887 (4,961) (17,619)
Net loss - - (30,122) - -
Cash dividends, $.47 per share - - (13,210) - -
Reduction of Stock Sharing Plan
debt guarantee - - - 4,961 -
Purchase of treasury stock - - - - (1)
Foreign equity translation
adjustment - - 206 - -
BALANCE, DECEMBER 31, 1995 $28,858 $6,678 $404,761 $ - $(17,620)
</TABLE>
The notes to consolidated financial statements are an integral part of these
statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Yellow Corporation and Subsidiaries
PRINCIPLES OF CONSOLIDATION AND SUMMARY OF ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts of
Yellow Corporation and its wholly-owned subsidiaries (the company). All
significant intercompany accounts and transactions have been eliminated in
consolidation. Management makes estimates and assumptions which affect the
amounts reported in the financial statements and footnotes. Actual results
could differ from those estimates.
The company provides transportation services primarily to the
less-than-truckload (LTL) market throughout North America. Principal operating
subsidiaries are Yellow Freight System, Inc. (Yellow Freight), Preston Trucking
Company, Inc. (Preston Trucking) and Saia Motor Freight Line, Inc. (Saia).
Major accounting policies and practices used in the preparation of the
accompanying financial statements not covered in other notes to consolidated
financial statements are as follows:
- - Cash includes demand deposits and highly liquid investments purchased with
original maturities of three months or less. All other investments, with
maturities less than
<PAGE> 18
one year, are classified as short-term invest-ments and are stated at cost
which approximates market. The company had cash and short-term investments held
in Canada of US$24.9 million at December 31, 1995 and US$18.5 million at
December 31, 1994.
- - Fuel is carried at cost. The company uses heating oil swap and fixed price
agreements to manage a portion of its exposure to fluctuating diesel prices.
Under the heating oil swap and option agreements the company receives or makes
payments based on the difference between a fixed and a variable price for
heating oil. These agreements provide protection from rising fuel prices, but
limit the ability to benefit from price decreases below the purchase price of
the agreement. At December 31, 1995 the company had agreements with financial
institutions and oil companies to exchange payments on 83.3 million gallons at
a fixed cost averaging $.50 per gallon over the next 14 months, representing
50% of anticipated fuel usage. At December 31, 1994 the company had agreements
on 61.9 million gallons at a fixed cost averaging $.50 per gallon over the next
11 months, representing 50% of anticipated fuel usage. Based on quoted market
prices, the fair value of the hedge position at December 31, 1995 and 1994 was
$2.0 million and $.2 million above its purchase price. Gains and losses on the
agreements are recognized as a component of fuel expense when the corresponding
fuel is purchased.
- - Property and equipment are carried at cost less accumulated depreciation.
Depreciation is computed using the straight-line method based on the following
service lives:
<TABLE>
<CAPTION>
Years
<S> <C>
Structures 10-40
Revenue equipment 5-10
Other operating property 2-10
</TABLE>
- - Maintenance and repairs are charged to operations currently; replacements
and improvements are capitalized. When revenue equipment is traded, the basis
of the new equipment is reduced when the trade-in allowance exceeds the basis
of the old equipment. The gain or loss for all other dispositions is reflected
in other nonoperating (income) expense.
- - The company had previously announced plans to invest over $100 million in
technology over a three year period. The investment was designed to enable
significant improvements in the customer service and freight management areas.
The investment consists primarily of advanced communications equipment and
related software. As of December 31, 1995, the company had invested over $54
million in the projects. Of that amount $22 million has been placed into
service. The remaining $32 million represents other systems applications in
various stages of completion. It is management's intent to continue the
projects; however, economic conditions may restrict the full implemetation on
a system-wide basis in the near term. A substantial delay in implementation
may materially reduce the value of a portion of the investment.
- - Acquisitions have been accounted for by the purchase method. Earnings of
the acquired companies are included in the accompanying consolidated financial
statements since the date of acquisition. The excess of the purchase price over
net assets acquired is included with other long-term assets and is being
amortized over 20 years using the straight-line method.
- - Claims and insurance accruals, both current and long-term, reflect the
estimated cost of claims for workers' compensation, cargo loss and damage, and
bodily injury and property damage not covered by insurance. These costs are
included in claims and insurance expense except for workers' compensation which
is included in employees' benefits expense.
- - Reserves for workers' compensation are based upon actuarial analyses
prepared by independent actuaries and are discounted to present value using a
risk-free rate. The risk-
<PAGE> 19
free rate is the U.S. Treasury rate for maturities that match the expected
pay-out of workers' compensation liabilities. The process of determining
reserve requirements utilizes historical trends and involves an evaluation of
claim frequency, severity and other factors. The effect of future inflation for
both medical costs and lost wages is implicitly considered in the actuarial
analyses. Adjustments to previously established reserves, if required, are
included in operating results.
At December 31, 1995 and 1994, estimated future payments for workers'
compensation claims aggregated $164.9 million and $162.0 million. The present
value of these estimated future payments was $142.6 million at December 31,
1995 and $139.8 million at December 31, 1994.
- - Revenue is recognized on a percentage completion basis while expenses are
recognized as incurred.
- - Certain reclassifications have been made to the prior year consolidated
financial statements to conform with current presentation.
ACQUISITIONS
In November 1994 the company acquired Johnson's Freightlines (renamed
WestEx), a Phoenix, AZ-based regional LTL carrier.
In February 1993 the company acquired the stock of Preston Corporation
(Preston) for $25.3 million, including related expenses. Preston's total debt
at the date of acquisition was $135.0 million, of which $78.1 million was
repaid with funds advanced to Preston by the company. The company recorded fair
values at the date of acquisition of $246.3 million for assets acquired and
$232.4 million for liabilities assumed, resulting in an excess of the purchase
price over net assets acquired of $11.4 million.
The accompanying consolidated financial statements include the results of
Preston effective March 1, 1993. Assuming the acquisition of Preston had
occurred on January 1, 1993, the company's unaudited results of operations for
the twelve months ended December 31, 1993 would have reported operating revenue
of $2.94 billion. Income before the cumulative effect of accounting change
would have been $12.7 million, or $.45 per share, and net income would have
been $11.6 million, or $.41 per share. These results are not necessarily
indicative of what would have occurred if the Preston acquisition had been
consummated at the beginning of 1993, nor are they necessarily indicative of
future results.
DEBT
At December 31, debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Unsecured bank credit lines $9,000 $ -
Commercial paper 128,459 58,949
Medium-term notes 148,500 114,250
Stock Sharing Plan debt guarantee - 4,961
Industrial development bonds 32,100 32,100
Capital leases and other 10,124 12,334
Subordinated debentures 25,390 25,166
Total debt 353,573 247,760
Less - Unsecured bank credit lines 9,000 -
Current maturities 2,925 7,741
Total long-term debt $341,648 $240,019
</TABLE>
<PAGE> 20
On June 23, 1995, the company entered into a five- year $200 million
credit agreement with a group of banks. Interest is based, at the company's
option, on competitive bidding among the banks, at a fixed increment over the
London interbank offered rate, or at the agent bank's base rate. There are no
compensating balances required but a facility fee is charged. Under the terms
of the credit agreement, the company must maintain a minimum consolidated
tangible net worth and annual cash flow, as defined in the agreement, must be
at least a specified ratio of total debt. There were no borrowings under credit
agreements in 1995 or 1994, and at December 31, 1995, the company was in
compliance with all terms of the credit agreement.
The company maintains credit availability under the credit agreement to
support the commercial paper program and provide additional borrowing capacity.
Accordingly, commercial paper and medium-term notes maturing within one year,
and intended to be refinanced, are classified as long-term. The weighted
average interest rates on commercial paper outstanding at December 31, 1995 and
1994 were 6.2% and 6.4%. Medium-term notes have scheduled maturities through
2008 with interest rates ranging from 5.7% to 9.3%.
The company has loan guarantees, mortgages and lease contracts in
connection with the issuance of industrial development bonds used to acquire,
construct or expand terminal facilities. Interest rates on some issues are
variable and rates currently range from 3.6% to 8.0%, with principal payments
due through 2016.
Certain subsidiaries lease operating equipment under capital leases with
scheduled maturities through 1998 and interest rates ranging from 9.0% to 9.9%.
The subordinated debentures have an interest rate of 7.0% and are due in
installments from 1997 to 2011.
The aggregate amounts of principal maturities of long-term debt (excluding
commercial paper and medium-term notes due within one year) for the next five
years are as follows: 1996 - $2,925,000, 1997 - $14,748,000, 1998 - $4,063,000,
1999 - $2,849,000, 2000 - $30,956,000.
The company has short-term unsecured credit lines with domestic and
foreign banks totaling $205 million. There are no compensating balance
requirements or fees associated with these credit lines and the lines can be
cancelled by either the banks or the company at any time. At December 31, 1995,
$9.0 million was outstanding under these lines with a weighted average interest
rate of 6.0%.
Based on the borrowing rates currently available to the company for debt
with similar terms and remaining maturities, the fair value of total debt at
December 31, 1995 and 1994 was approximately $355 million and $242 million.
SPECIAL CHARGES
In the third quarter of 1994, the company recorded a charge to earnings of
$6.7 million, or $4.1 million after taxes. This charge, recorded as an
extraordinary item, was to write-off the book value of its intrastate operating
rights. The non-cash charge resulted from the passage of legislation in 1994
which deregulated the entry and rates for intrastate operations of all
transportation companies.
In the second quarter of 1993, the company's pri-mary subsidiary, Yellow
Freight, recorded a charge of $18.0 million, or $11.2 million after taxes, for
the costs to close certain facilities and dispose of excess property.
INCOME TAXES
<PAGE> 21
The company accounts for income taxes in accordance with the liability
method. Deferred income taxes are determined based upon the difference between
the book and the tax basis of the company's assets and liabilities. Deferred
taxes are provided at the enacted tax rates expected to be in effect when these
differences reverse.
Deferred tax liabilities (assets) are comprised of the following at
December 31 (in thousands):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Depreciation $128,810 $118,469
Employee benefits 19,357 2,148
Prepaids 19,022 19,555
Revenue 7,038 6,040
Other 5,489 9,338
Gross liabilities 179,716 155,550
Claims and insurance (84,779) (84,425)
Bad debts (7,554) (5,466)
Other (11,533) (12,764)
Gross assets (103,866) (102,655)
Net liability $75,850 $52,895
</TABLE>
The income tax provision (benefit) is computed based on the following
amounts of income (loss) before income taxes (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Domestic $(51,120) $(7,276) $31,175
Foreign 6,099 3,901 4,183
Total income (loss)
before income taxes $(45,021) $(3,375) $35,358
</TABLE>
The income tax provision (benefit) consists of the following (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Current:
U.S. federal $(40,370) $(4,158) $21,407
State (7,094) (1,870) 4,814
Foreign 2,924 2,354 2,216
Total current (44,540) (3,674) 28,437
Deferred:
U.S. federal 24,703 4,235 (9,214)
State 4,645 768 (3,244)
Foreign 293 (856) -
Change in U.S. federal tax rate - - 1,639
Total deferred 29,641 4,147 (10,819)
Investment tax credit amortization - - (1,061)
Total provision (benefit) $(14,899) $ 473 $ 16,557
</TABLE>
A reconciliation between income taxes at the federal statutory rate (35%)
and the consolidated provision (benefit) follows:
<PAGE> 22
<TABLE>
1995 1994 1993
<S> <C> <C> <C>
Provision (benefit) at
federal statutory rate $(15,757) $(1,181) $12,375
State income taxes, net (1,592) (716) 1,021
Change in U.S. federal tax rate - - 1,639
Foreign tax rate differential 1,082 133 752
Nondeductible business expenses 3,103 2,571 1,331
Amortization of investment tax credits - - (1,061)
Other, net (1,735) (334) 500
Total provision (benefit) $(14,899) $473 $16,557
Effective tax rate (33.1)% 14.0% 46.8%
</TABLE>
COMMITMENTS AND CONTINGENCIES
The company leases certain terminals and equipment. At December 31, 1995,
the company was committed under noncancellable lease agreements requiring
minimum annual rentals aggregating $82.7 million payable as follows: 1996 -
$32.1 million, 1997 - $18.1 million, 1998 - $10.8 million, 1999 - $5.5 million,
2000 - $3.3 million and thereafter, $12.9 million.
Projected 1996 net capital expenditures are $65 million, of which $14
million was committed at December 31, 1995.
Various claims and legal actions are pending against the company. It is
the opinion of management that these matters will have no significant impact
upon the financial condition or results of operations of the company.
EMPLOYEE BENEFITS
Certain subsidiaries provide defined benefit pension plans for employees
not covered by collective bargaining agreements. The benefits are based on
years of service and the employees' final average earnings. The company's
funding policy is to contribute the minimum required tax-deductible
contribution for the year. The plans' assets consist primarily of U.S.
Government and equity securities.
The following tables set forth the plans' funded status and components of
net pension cost (in thousands):
<TABLE>
<CAPTION>
Funded status at December 31: 1995 1994
Actuarial present value of benefits at current salary levels and service rendered to date:
<S> <C> <C>
Vested benefits $148,691 $114,788
Non-vested benefits 1,042 1,624
Accumulated
benefit obligation 149,733 116,412
Effect of anticipated future
salary increases 25,824 22,165
Projected benefit
obligation 175,557 138,577
Plan assets at fair value 141,442 118,080
Plan assets less than projected
benefit obligation (34,115) (20,497)
Unrecognized net loss 8,618 4,153
Unrecognized initial net asset
being amortized over 17 years (18,058) (20,445)
Pension cost accrued, not funded $(43,555) $(36,789)
</TABLE>
<PAGE> 23
<TABLE>
<CAPTION>
Net pension cost: 1995 1994 1993
<S> <C> <C> <C>
Service cost - benefits earned during the period $7,412 $8,313 $6,919
Interest cost on projected benefit obligation 12,429 11,109 9,954
Actual return on plan assets (27,205) 393 (8,177)
Amortization of unrecognized net assets (2,420) (2,197) (2,393)
Net deferral 16,550 (10,818) (1,683)
Net pension cost $6,766 $6,800 $4,620
<CAPTION>
Assumptions used in the accounting at December 31: 1995 1994 1993
<S> <C> <C> <C>
Discount rate 7.5% 8.5% 7.5%
Rate of increase in compensation levels 5.0% 4.0% 5.5%
Expected rate of return on assets 9.0% 9.0% 9.0%
</TABLE>
The company contributes to multi-employer health, welfare and pension
plans for employees covered by collective bargaining agreements. The health and
welfare plans provide health care and disability benefits to active employees
and retirees. The pension plans provide defined benefits to retired
participants. The company charged to expense and contributed the following
amounts to these plans (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Health and welfare $160,512 $142,695 $138,448
Pension 142,906 129,321 126,449
Total $303,418 $272,016 $264,897
</TABLE>
Under current legislation regarding multi-employer pension plans, a
termination, withdrawal or partial withdrawal from any multi-employer plan that
is in an under-funded status would render the company liable for a
proportionate share of such multi-employer plans' unfunded vested liabilities.
This potential unfunded pension liability applies equally to the company's
unionized competitors who contribute to multi-employer plans. Based on the
limited information available from plan administrators, which the company
cannot independently validate, the company believes that its portion of the
contingent liability would be material to its financial condition and results
of operations. The company's unionized subsidiaries have no intention of taking
any action that would subject the company to obligations under the legislation.
The company had a Stock Sharing Plan for employees of participating
domestic affiliates not covered by collective bargaining agreements. In 1995
this plan merged into another company defined contribution plan. Company
contributions combined with plan earnings were used to meet the plan's debt
service requirements. Expense was recorded as funds were contributed or
committed to be contributed. During 1995, the final debt payment was made and
the remaining shares were allocated to participants in accordance with the
principal and interest method as defined by the Internal Revenue Code. Expenses
and dividends related to the Stock Sharing Plan were (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Employees' benefits expense $4,241 $6,735 $-
Interest expense 195 979 1,746
Total expense $4,436 $7,714 $1,746
Dividends $693 $1,456 $1,532
</TABLE>
<PAGE> 24
Certain subsidiaries also sponsor defined contribution plans, primarily
for employees not covered by collective bargaining agreements. The plans
principally consist of noncontributory profit sharing plans and contributory
401(k) savings plans. Company contributions to the profit sharing plans are
discretionary and are determined annually by the Board of Directors of each
participating company. Contributions for each of the three years in the period
ended December 31, 1995 were not material to the operations of the company.
The company has reserved 800,000 shares of its common stock for issuance
to key employees under a stock option incentive plan. This plan permits three
types of awards: grants of stock options, both qualified and nonqualified,
grants of stock options coupled with a grant of stock appreciation rights, and
grants of restricted stock awards. At December 31, 1995 there were 791,114
shares available for future grants and no options were outstanding.
SERIES A $10 PREFERRED STOCK AND RIGHTS
Each share of the company's common stock carries with it one preferred
stock purchase right. Under certain circumstances, each right may be exercised
to purchase 1/100th of a share of Series A $10 Preferred stock at an exercise
price of $120, subject to adjustment. The rights, which are nonvoting, expire
on December 8, 1996 and may be redeemed by the company at a price of $.05 per
right at any time prior to ten days after public announcement of the
acquisition of 20% or more of the outstanding common stock. During 1995, the
company's Board of Directors voted not to renew the rights upon their scheduled
1996 expiration.
If a person acquires 20% of the company's voting stock or if certain other
transactions occur, each right not owned by a 20% shareholder will entitle the
holder to purchase at the exercise price a number of shares of the common stock
of the company or, depending on the nature of the transaction, the stock of an
acquiring company, having a market value equal to twice the exercise price of
such right.
Dividends and voting rights on each 1/100th share of the Series A $10
Preferred stock will be equal to that of one share of common stock.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Shareholders of Yellow Corporation:
We have audited the accompanying consolidated balance sheets of Yellow
Corporation (a Delaware corporation) and Subsidiaries as of December 31, 1995
and 1994, and the related consolidated statements of income, cash flows and
shareholders' equity for each of the three years in the period ended December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
<PAGE> 25
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Yellow Corporation and
Subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Kansas City, Missouri
January 31, 1996
SUPPLEMENTARY INFORMATION
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
(Amounts in thousands except per share data)
First Second Third Fourth
Quarter Quarter Quarter Quarter
1995 (a) (a)
<S> <C> <C> <C> <C>
Operating revenue $764,998 $773,825 $771,965 $745,852
Income (loss) from operations 8,601 5,866 (12,366) (23,689)
Net income (loss) 3,198 1,039 (11,634) (22,725)
Earnings (loss) per share .11 .04 (.41) (.81)
1994 (b) (c) (d)
Operating revenue $748,159 $592,211 $769,259 $757,863
Income (loss) from operations (4,418) (30,049) 27,176 18,302
Income (loss) before extraordinary item (6,384) (21,876) 13,204 11,208
Net income (loss) (6,384) (21,876) 9,146 11,208
Earnings per share:
Income (loss) before extraordinary item (.23) (.78) .47 .40
Net income (loss) (.23) (.78) .33 .40
</TABLE>
(a) Includes the impact of price discounting and excess industry capacity which
severely diminished operating margins.
(b) Includes the effect of severe winter weather which caused significant
business disruptions and higher operating expenses.
(c) Includes the effect of the 24-day Teamster strike at Yellow Freight.
(d) Includes an extraordinary item of $4.1 million after taxes to write-off
intrastate operating rights.
COMMON STOCK
Yellow Corporation's stock is held by approximately 3,400 shareholders of
record. The company's only class of stock outstanding is common stock, traded
in over-the-counter markets. Trading activity averaged about 130,000 shares per
day during the year, down from 218,000 shares per day in 1994. Prices are
quoted by the National Association of Securities Dealers Automatic Quotation
System National Market (NASDAQ-NMS) under the symbol YELL.
<PAGE> 26
<TABLE>
Quarter Ended
Dividends Dividends
1995 High Low Per Share 1994 High Low Per Share
<S> <C> <C> <C> <C> <C> <C> <C>
March 31 24 3/8 15 7/8 $.235 March 31 30 1/4 23 1/2 $.235
June 30 20 1/8 15 7/8 .235 June 30 24 1/8 16 3/4 .235
September 30 20 13 1/2 - September 30 21 5/8 17 .235
December 31 13 7/8 11 7/8 - December 31 24 1/4 18 1/4 .235
$.470 $.940
</TABLE>
SENIOR OFFICERS
YELLOW CORPORATION
George E. Powell III
President and Chief Executive Officer
William F. Martin
Senior Vice President - Legal/Corporate Secretary
H.A. Trucksess, III
Senior Vice President - Finance/
Chief Financial Officer and Treasurer
YELLOW FREIGHT SYSTEM, INC.
M. Reid Armstrong
President
Robert L. Bostick
Senior Vice President - Operations Administration
J. Kevin Grimsley
Senior Vice President - Marketing and Sales
Ralph P. Nowell
Senior Vice President - Operations
C. Kermit Scarborough
Senior Vice President - Human Resources
PRESTON TRUCKING COMPANY, INC.
Leo H. Suggs
President
J. Sean Callahan
Senior Vice President - Finance and Administration
Gordon S. MacKenzie
Senior Vice President - Operations
Nicholas J. Marino
Senior Vice President - Sales and Marketing
SAIA MOTOR FREIGHT LINE, INC.
Jimmy D. Crisp
President
WESTEX, INC.
Frank E. Myers
President
YELLOW TECHNOLOGY SERVICES, INC.
<PAGE> 27
Gail A. Parris
President
BOARD OF DIRECTORS
GEORGE E. POWELL, JR.
Director since 1952
Chairman of the Board of the Company
KLAUS E. AGTHE
Director since 1984
Director, VIAG North America
M. REID ARMSTRONG
Director since 1992
President of Yellow Freight System, Inc.
HOWARD M. DEAN *
Director since 1987
Chairman and Chief Executive Officer of
Dean Foods Company
DAVID H. HUGHES *
Director since 1973
Retired Vice Chairman of Hallmark Cards, Inc.
RONALD T. LEMAY
Director since 1994
President and Chief Operating Officer of
Sprint Corporation
JOHN C. MCKELVEY
Director since 1977
President and Chief Executive Officer of
Midwest Research Institute
GEORGE E. POWELL III
Director since 1984
President and Chief Executive Officer of the Company
WILLIAM L. TRUBECK *
Director since 1994
Senior Vice President and Chief Financial
Officer of SPX Corporation
WILLIAM F. MARTIN
Secretary to the Board
* Member, Audit Committee
<PAGE> 28
CORPORATE INFORMATION
YELLOW CORPORATION
P.O. Box 7563
Overland Park, Kansas 66207
(913) 967-4300
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP
Kansas City, Missouri
TRANSFER AGENT AND REGISTRAR
Chemical Mellon Shareholder Services, L.L.C.
P.O. Box 590
Ridgefield Park, NJ 07660
(800) 526-0801
ANNUAL MEETING
April 25, 1996, at 9:30 a.m.
Radisson Hotel of Overland Park
I-35 & 87th Street
Overland Park, Kansas 66214
10-K REPORT
Please write to:
Treasurer, Yellow Corporation
YELLOW CORPORATION
P.O. BOX 7563
OVERLAND PARK, KANSAS 66207
PRINTED IN THE U.S.A. #505
