Yellow Corp - Quarter Report: 2019 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One) | |
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2019
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 0-12255
YRC Worldwide Inc.
(Exact name of registrant as specified in its charter)
Delaware | 48-0948788 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
10990 Roe Avenue, Overland Park, Kansas | 66211 | |
(Address of principal executive offices) | (Zip Code) | |
(913) 696-6100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, $0.01 par value per share | YRCW | The NASDAQ Stock Market LLC | ||
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 ý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | o | Accelerated filer | ý | |||
Non-accelerated filer | o Smaller reporting company o | Emerging growth company | o | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Outstanding at August 2, 2019 | |
Common Stock, $0.01 par value per share | 36,274,655 shares | |
INDEX
Item | Page | |
1 | ||
2 | ||
3 | ||
4 | ||
1 | ||
1A | ||
2 | Not Applicable | |
3 | Not Applicable | |
4 | Not Applicable | |
5 | ||
6 | ||
3
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
YRC Worldwide Inc. and Subsidiaries
(Amounts in millions except share and per share data)
June 30, 2019 | December 31, 2018 | ||||||
(Unaudited) | |||||||
Assets | |||||||
Current Assets: | |||||||
Cash and cash equivalents | $ | 117.5 | $ | 227.6 | |||
Restricted amounts held in escrow | — | — | |||||
Accounts receivable, net | 538.7 | 470.3 | |||||
Prepaid expenses and other | 52.3 | 58.7 | |||||
Total current assets | 708.5 | 756.6 | |||||
Property and Equipment: | |||||||
Cost | 2,767.2 | 2,765.9 | |||||
Less – accumulated depreciation | (1,986.0 | ) | (1,969.8 | ) | |||
Net property and equipment | 781.2 | 796.1 | |||||
Deferred income taxes, net | 0.4 | — | |||||
Operating lease right-of-use assets | 373.9 | — | |||||
Other assets | 43.3 | 64.4 | |||||
Total Assets | $ | 1,907.3 | $ | 1,617.1 | |||
Liabilities and Shareholders’ Deficit | |||||||
Current Liabilities: | |||||||
Accounts payable | $ | 188.0 | $ | 178.0 | |||
Wages, vacations and employee benefits | 239.1 | 223.6 | |||||
Current operating lease liabilities | 110.5 | — | |||||
Claims and insurance accruals | 113.5 | 112.8 | |||||
Other accrued taxes | 27.2 | 24.7 | |||||
Other current and accrued liabilities | 31.3 | 32.6 | |||||
Current maturities of long-term debt | 18.4 | 20.7 | |||||
Total current liabilities | 728.0 | 592.4 | |||||
Other Liabilities: | |||||||
Long-term debt, less current portion | 833.9 | 854.2 | |||||
Deferred income taxes, net | — | 1.8 | |||||
Pension and postretirement | 194.7 | 202.9 | |||||
Operating lease liabilities | 243.7 | — | |||||
Claims and other liabilities | 277.1 | 271.3 | |||||
Commitments and contingencies | |||||||
Shareholders’ Deficit: | |||||||
Preferred stock, $1 par value per share | — | — | |||||
Common stock, $0.01 par value per share | 0.3 | 0.3 | |||||
Capital surplus | 2,330.2 | 2,327.6 | |||||
Accumulated deficit | (2,281.1 | ) | (2,208.4 | ) | |||
Accumulated other comprehensive loss | (326.8 | ) | (332.3 | ) | |||
Treasury stock, at cost (410 shares) | (92.7 | ) | (92.7 | ) | |||
Total shareholders’ deficit | (370.1 | ) | (305.5 | ) | |||
Total Liabilities and Shareholders’ Deficit | $ | 1,907.3 | $ | 1,617.1 | |||
4
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)
YRC Worldwide Inc. and Subsidiaries
For the Three and Six Months Ended June 30
(Amounts in millions except per share data, shares in thousands)
(Unaudited)
Three Months | Six Months | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Operating Revenue | $ | 1,272.6 | $ | 1,326.5 | $ | 2,454.9 | $ | 2,541.0 | |||||||
Operating Expenses: | |||||||||||||||
Salaries, wages and employee benefits | 782.3 | 756.0 | 1,500.5 | 1,485.7 | |||||||||||
Fuel, operating expenses and supplies | 228.3 | 242.0 | 464.2 | 472.2 | |||||||||||
Purchased transportation | 158.0 | 177.2 | 304.3 | 332.6 | |||||||||||
Depreciation and amortization | 38.5 | 37.6 | 78.5 | 75.3 | |||||||||||
Other operating expenses | 57.4 | 60.6 | 121.2 | 123.2 | |||||||||||
(Gains) losses on property disposals, net | (6.2 | ) | 2.2 | (4.6 | ) | 5.4 | |||||||||
Impairment charges | — | — | 8.2 | — | |||||||||||
Total operating expenses | 1,258.3 | 1,275.6 | 2,472.3 | 2,494.4 | |||||||||||
Operating Income (Loss) | 14.3 | 50.9 | (17.4 | ) | 46.6 | ||||||||||
Nonoperating Expenses: | |||||||||||||||
Interest expense | 28.2 | 25.5 | 55.2 | 51.1 | |||||||||||
Non-union pension and postretirement benefits | 0.5 | (0.4 | ) | 0.8 | (0.9 | ) | |||||||||
Other, net | 0.1 | 1.0 | (0.1 | ) | (0.9 | ) | |||||||||
Nonoperating expenses, net | 28.8 | 26.1 | 55.9 | 49.3 | |||||||||||
Income (loss) before income taxes | (14.5 | ) | 24.8 | (73.3 | ) | (2.7 | ) | ||||||||
Income tax expense (benefit) | 9.1 | 10.4 | (0.6 | ) | (2.5 | ) | |||||||||
Net income (loss) | (23.6 | ) | 14.4 | (72.7 | ) | (0.2 | ) | ||||||||
Other comprehensive income, net of tax | 2.0 | 4.3 | 5.5 | 6.3 | |||||||||||
Comprehensive Income (Loss) | $ | (21.6 | ) | $ | 18.7 | $ | (67.2 | ) | $ | 6.1 | |||||
Average Common Shares Outstanding – Basic | 33,247 | 32,966 | 33,199 | 32,894 | |||||||||||
Average Common Shares Outstanding – Diluted | 33,247 | 33,794 | 33,199 | 32,894 | |||||||||||
Earnings (Loss) Per Share – Basic | $ | (0.71 | ) | $ | 0.44 | $ | (2.19 | ) | $ | 0.00 | |||||
Earnings (Loss) Per Share – Diluted | $ | (0.71 | ) | $ | 0.43 | $ | (2.19 | ) | $ | 0.00 | |||||
The accompanying notes are an integral part of these statements.
5
STATEMENTS OF CONSOLIDATED CASH FLOWS
YRC Worldwide Inc. and Subsidiaries
For the Six Months Ended June 30
(Amounts in millions)
(Unaudited)
2019 | 2018 | ||||||
Operating Activities: | |||||||
Net loss | $ | (72.7 | ) | $ | (0.2 | ) | |
Adjustments to reconcile net loss to cash flows from operating activities: | |||||||
Depreciation and amortization | 78.5 | 75.3 | |||||
Lease amortization and accretion expense | 82.3 | — | |||||
Lease payments | (75.4 | ) | — | ||||
Equity-based compensation and employee benefits expense | 9.5 | 12.1 | |||||
(Gains)/losses on property disposals, net | (4.6 | ) | 5.4 | ||||
Impairment charges | 8.2 | — | |||||
Deferred income tax benefit, net | (1.6 | ) | — | ||||
Other noncash items, net | 2.1 | 3.6 | |||||
Changes in assets and liabilities, net: | |||||||
Accounts receivable | (67.2 | ) | (65.6 | ) | |||
Accounts payable | 5.3 | 17.8 | |||||
Other operating assets | (4.5 | ) | (17.4 | ) | |||
Other operating liabilities | 10.6 | 40.5 | |||||
Net cash provided by (used in) operating activities | (29.5 | ) | 71.5 | ||||
Investing Activities: | |||||||
Acquisition of property and equipment | (70.6 | ) | (46.5 | ) | |||
Proceeds from disposal of property and equipment | 8.3 | 4.2 | |||||
Net cash used in investing activities | (62.3 | ) | (42.3 | ) | |||
Financing Activities: | |||||||
Repayments of long-term debt | (17.5 | ) | (14.6 | ) | |||
Payments for tax withheld on equity-based compensation | (0.8 | ) | (1.6 | ) | |||
Net cash used in financing activities | (18.3 | ) | (16.2 | ) | |||
Net Increase (Decrease) In Cash, Cash Equivalents and Restricted Amounts Held in Escrow | (110.1 | ) | 13.0 | ||||
Cash, Cash Equivalents and Restricted Amounts Held in Escrow, Beginning of Period | 227.6 | 145.7 | |||||
Cash, Cash Equivalents and Restricted Amounts Held in Escrow, End of Period | $ | 117.5 | $ | 158.7 | |||
Supplemental Cash Flow Information: | |||||||
Interest paid | $ | (50.6 | ) | $ | (49.4 | ) | |
Income tax payment, net | (2.5 | ) | (2.9 | ) | |||
The accompanying notes are an integral part of these statements.
6
STATEMENT OF CONSOLIDATED SHAREHOLDERS’ DEFICIT
YRC Worldwide Inc. and Subsidiaries
For the Three and Six Months Ended June 30
(Amounts in millions)
(Unaudited)
Preferred Stock | Common Stock | Capital Surplus | Accumulated Deficit | Accumulated Other Comprehensive Loss | Treasury Stock, At Cost | Total Shareholders' Deficit | |||||||||||||||
Balances at December 31, 2018 | $ | — | $ | 0.3 | $ | 2,327.6 | $ | (2,208.4 | ) | $ | (332.3 | ) | $ | (92.7 | ) | $ | (305.5 | ) | |||
Equity-based compensation | — | — | 1.6 | — | — | — | 1.6 | ||||||||||||||
Net loss | — | — | — | (49.1 | ) | — | — | (49.1 | ) | ||||||||||||
Pension, net of tax: | |||||||||||||||||||||
Amortization of prior net losses | — | — | — | — | 3.2 | — | 3.2 | ||||||||||||||
Amortization of prior service credit | — | — | — | — | (0.1 | ) | — | (0.1 | ) | ||||||||||||
Foreign currency translation adjustments | — | — | — | — | 0.4 | — | 0.4 | ||||||||||||||
Balances at March 31, 2019 | $ | — | $ | 0.3 | $ | 2,329.2 | $ | (2,257.5 | ) | $ | (328.8 | ) | $ | (92.7 | ) | $ | (349.5 | ) | |||
Equity-based compensation | — | — | 1.0 | — | — | — | 1.0 | ||||||||||||||
Net loss | — | — | — | (23.6 | ) | — | — | (23.6 | ) | ||||||||||||
Pension, net of tax: | — | ||||||||||||||||||||
Amortization of prior net losses | — | — | — | — | 1.6 | — | 1.6 | ||||||||||||||
Amortization of prior service credit | — | — | — | — | (0.1 | ) | — | (0.1 | ) | ||||||||||||
Foreign currency translation adjustments | — | — | — | — | 0.5 | — | 0.5 | ||||||||||||||
Balances at June 30, 2019 | $ | — | $ | 0.3 | $ | 2,330.2 | $ | (2,281.1 | ) | $ | (326.8 | ) | $ | (92.7 | ) | $ | (370.1 | ) | |||
Preferred Stock | Common Stock | Capital Surplus | Accumulated Deficit | Accumulated Other Comprehensive Loss | Treasury Stock, At Cost | Total Shareholders' Deficit | |||||||||||||||
Balances at December 31, 2017 | $ | — | $ | 0.3 | $ | 2,323.3 | $ | (2,228.6 | ) | $ | (355.8 | ) | $ | (92.7 | ) | $ | (353.5 | ) | |||
Equity-based compensation | — | — | 0.2 | — | — | — | 0.2 | ||||||||||||||
Net loss | — | — | — | (14.6 | ) | — | — | (14.6 | ) | ||||||||||||
Pension, net of tax: | — | ||||||||||||||||||||
Amortization of prior net losses | — | — | — | — | 3.8 | — | 3.8 | ||||||||||||||
Amortization of prior service credit | — | — | — | — | (0.1 | ) | — | (0.1 | ) | ||||||||||||
Foreign currency translation adjustments | — | — | — | — | (1.7 | ) | — | (1.7 | ) | ||||||||||||
Balances at March 31, 2018 | $ | — | $ | 0.3 | $ | 2,323.5 | $ | (2,243.2 | ) | $ | (353.8 | ) | $ | (92.7 | ) | $ | (365.9 | ) | |||
Equity-based compensation | — | — | 3.1 | — | — | — | 3.1 | ||||||||||||||
Net income | — | — | — | 14.4 | — | — | 14.4 | ||||||||||||||
Pension, net of tax: | — | ||||||||||||||||||||
Amortization of prior net losses | — | — | — | — | 3.8 | — | 3.8 | ||||||||||||||
Amortization of prior service credit | — | — | — | — | (0.1 | ) | — | (0.1 | ) | ||||||||||||
Foreign currency translation adjustments | — | — | — | — | 0.6 | — | 0.6 | ||||||||||||||
Balances at June 30, 2018 | $ | — | $ | 0.3 | $ | 2,326.6 | $ | (2,228.8 | ) | $ | (349.5 | ) | $ | (92.7 | ) | $ | (344.1 | ) | |||
The accompanying notes are an integral part of these statements.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YRC Worldwide Inc. and Subsidiaries
(Unaudited)
1. Description of Business
YRC Worldwide Inc. (also referred to as “YRC Worldwide,” the “Company,” “we,” “us” or “our”) is a holding company that, through its operating subsidiaries, offers its customers a wide range of transportation services. We have one of the largest, most comprehensive less-than-truckload (“LTL”) networks in North America with local, regional, national and international capabilities. Through our team of experienced service professionals, we offer expertise in LTL shipments and flexible supply chain solutions, ensuring customers can ship industrial, commercial and retail goods with confidence. Our reporting segments include the following:
• | YRC Freight is the reporting segment that focuses on longer haul business opportunities with national, regional and international services. YRC Freight provides for the movement of industrial, commercial and retail goods, primarily through centralized management. This reporting segment includes LTL subsidiaries YRC Inc. and YRC Freight Canada Company (both doing business as, and herein referred to as, “YRC Freight”) and HNRY Logistics, Inc. (“HNRY Logistics”), our customer-specific logistics solutions provider. In addition to the United States and Canada, YRC Freight also serves parts of Mexico and Puerto Rico. |
• | Regional Transportation is the reporting segment for our transportation service providers focused on business opportunities in the regional and next-day delivery markets. Regional Transportation is comprised of USF Holland LLC (“Holland”), New Penn Motor Express LLC (“New Penn”) and USF Reddaway Inc. (“Reddaway”). These companies each provide regional, next-day ground services in their respective regions through a network of facilities located across the United States, Canada, and Puerto Rico. |
At June 30, 2019, approximately 79% of our labor force is subject to collective bargaining agreements, which predominantly expire on March 31, 2024.
2. Basis of Presentation
The accompanying Consolidated Financial Statements include the accounts of YRC Worldwide and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. We report on a calendar year basis. The quarters of the Regional Transportation companies (with the exception of New Penn) consist of thirteen weeks that end on a Saturday either before or after the end of March, June and September, whereas all other operating segment quarters end on the natural calendar quarter end. For ease of reference, the calendar quarter end dates are used herein.
We make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and notes. Actual results could differ from those estimates. We have prepared the Consolidated Financial Statements, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In our opinion, we have made all normal recurring adjustments necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods included in these financial statements. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted from these statements pursuant to SEC rules and regulations. Accordingly, the accompanying Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2018.
Revenue Disaggregation
We considered the disclosure requirements for revenue disaggregation guidance in ASC Topic 606, Revenue from Contracts with Customers, and noted that our segments disaggregate our revenues based on geographic and time-based factors as our Regional Transportation segment carriers operate in a smaller geographic footprint and have a shorter length of haul as compared to our YRC Freight segment. For additional information, see the “Business Segments” footnote to the consolidated financial statements. The following table presents disaggregated revenue by revenue source between LTL shipments and total. LTL shipments are defined as shipments less than 10,000 pounds. Beginning in 2019, the Company disaggregated revenue for reporting of key operating metrics, including volume and yield metrics, due to the impacts from shipments over 10,000 pounds.
8
Three Months | Six Months | ||||||||||||||
YRC Freight segment (in millions) | 2019 | 2018 | 2019 | 2018 | |||||||||||
LTL revenue | $ | 737.9 | $ | 760.8 | $ | 1,422.7 | $ | 1,456.7 | |||||||
Other revenue | 62.9 | 66.8 | 121.9 | 122.2 | |||||||||||
Total revenue | $ | 800.8 | $ | 827.6 | $ | 1,544.6 | $ | 1,578.9 | |||||||
Three Months | Six Months | ||||||||||||||
Regional Transportation segment (in millions) | 2019 | 2018 | 2019 | 2018 | |||||||||||
LTL revenue | $ | 438.2 | $ | 458.3 | $ | 843.2 | $ | 882.6 | |||||||
Other revenue | 33.6 | 40.7 | 67.2 | 79.7 | |||||||||||
Total revenue | $ | 471.8 | $ | 499.0 | $ | 910.4 | $ | 962.3 | |||||||
Three Months | Six Months | ||||||||||||||
Consolidated (in millions) | 2019 | 2018 | 2019 | 2018 | |||||||||||
LTL revenue | $ | 1,176.1 | $ | 1,219.1 | $ | 2,265.9 | $ | 2,339.3 | |||||||
Other revenue | 96.5 | 107.4 | 189.0 | 201.7 | |||||||||||
Total revenue | $ | 1,272.6 | $ | 1,326.5 | $ | 2,454.9 | $ | 2,541.0 | |||||||
Newly-Adopted Accounting Standards
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases, which requires lessees to recognize a right-to-use asset and a lease obligation for all leases. Additional qualitative and quantitative disclosures, including significant judgments made by management, are required. The new standard became effective for the Company for its annual reporting period beginning January 1, 2019, including interim periods within that reporting period. The Company adopted the standard using a modified retrospective approach with the effective date of the standard as the date of initial application.
The Company elected the package of three practical expedients which allows entities to not reassess initial direct costs, lease classification for existing or expired leases, and lease definition for existing or expired contracts as of the effective date of January 1, 2019. Additionally, the Company did not elect the hindsight method practical expedient which would have allowed us to reassess lease terms and impairment. For leases with a term of twelve months or less, the Company has made an accounting policy election in which the right of use lease (“ROU”) asset and lease liability will not be recognized on the consolidated balance sheet. The Company does not separate lease and non-lease components for its revenue equipment and real property leases. The Company reassessed the accounting for debt financing obligations under the new standard and determined the historical accounting remained appropriate under the new standard.
The adoption of this standard impacted our consolidated balance sheet through the recognition of $378.8 million in ROU assets and liabilities as of January 1, 2019. Lease deposits in the amount of $25.4 million were reclassified from assets to a reduction of long-term ROU liabilities upon adoption of the new standard.
The new lease standard will not impact the calculation of the total maximum leverage ratio covenant, which is defined under the terms of our credit agreement.
Impact of Recently-Issued Accounting Standards
In August 2018, the FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans. The guidance modifies disclosure requirements for defined benefit plans. This guidance is effective for fiscal years ending after December 15, 2020, and early adoption is permitted. The Company assessed the potential impact of ASU 2018-14 on its consolidated financial statement disclosures and does not expect it to be material.
9
3. Debt and Financing
Our outstanding debt as of June 30, 2019 consisted of the following:
As of June 30, 2019 (in millions) | Par Value | Discount | Debt Issuance Costs | Book Value | Average Effective Interest Rate | |||||||||||||
Term Loan | $ | 558.1 | $ | (6.5 | ) | $ | (5.6 | ) | $ | 546.0 | 11.3 | % | (a) | |||||
ABL Facility | — | — | — | — | N/A | |||||||||||||
Secured Second A&R CDA | 26.8 | — | (0.1 | ) | 26.7 | 8.0 | % | |||||||||||
Unsecured Second A&R CDA | 46.7 | — | (0.2 | ) | 46.5 | 8.0 | % | |||||||||||
Lease financing obligations | 233.4 | — | (0.3 | ) | 233.1 | 16.5 | % | (b) | ||||||||||
Total debt | $ | 865.0 | $ | (6.5 | ) | $ | (6.2 | ) | $ | 852.3 | ||||||||
Current maturities of Term Loan | (14.3 | ) | — | — | (14.3 | ) | ||||||||||||
Current maturities of lease financing obligations | (2.6 | ) | — | — | (2.6 | ) | ||||||||||||
Current maturities of Unsecured Second A&R CDA | (1.5 | ) | — | — | (1.5 | ) | ||||||||||||
Long-term debt | $ | 846.6 | $ | (6.5 | ) | $ | (6.2 | ) | $ | 833.9 | ||||||||
(a) | Variable interest rate of 1, 3 or 6-month LIBOR, with a floor of 1.0%, plus a fixed margin of 8.50%. |
(b) Interest rate for lease financing obligations is derived from the difference between total rent payment and calculated principal amortization over the life of lease agreements.
Liquidity
Our principal sources of liquidity are cash and cash equivalents, available borrowings under our asset-based loan facility (the
“ABL Facility”) and any prospective net cash flow from operations. As of June 30, 2019, our maximum availability under our ABL Facility was $81.6 million. Our Managed Accessibility was $39.3 million, which represents the maximum amount we would access on the ABL Facility and is adjusted for eligible receivables plus eligible borrowing base cash measured at June 30, 2019.
Our cash and cash equivalents and Managed Accessibility were $156.8 million.
For the December 31, 2018 borrowing base certificate, which was filed in January of 2019, we transferred $25.0 million of cash into restricted cash to maintain the 10% threshold, as permitted under the ABL Facility, which transfer effectively put our cash and cash equivalents and Managed Accessibility to $203.8 million.
The table below summarizes cash and cash equivalents and Managed Accessibility as of June 30, 2019 and December 31, 2018:
(in millions) | June 30, 2019 | December 31, 2018 | |||||
Cash and cash equivalents | $ | 117.5 | $ | 227.6 | |||
Changes to restricted cash | — | (25.0 | ) | ||||
Managed Accessibility | 39.3 | 1.2 | |||||
Total cash and cash equivalents and Managed Accessibility | $ | 156.8 | $ | 203.8 | |||
10
Credit Facility Covenants
The credit agreement (the “Term Loan Agreement”) governing our term loan facility (the “Term Loan”) has certain financial covenants, that, among other things, restrict certain capital expenditures and require us to comply with a maximum total leverage ratio covenant (defined as Consolidated Total Debt divided by Consolidated Adjusted EBITDA as defined below).
Our total maximum leverage ratio covenants are as follows:
Four Consecutive Fiscal Quarters Ending | Maximum Total Leverage Ratio | Four Consecutive Fiscal Quarters Ending | Maximum Total Leverage Ratio | |
June 30, 2019 | 3.25 to 1.00 | September 30, 2020 | 2.75 to 1.00 | |
September 30, 2019 | 3.25 to 1.00 | December 31, 2020 | 2.75 to 1.00 | |
December 31, 2019 | 3.00 to 1.00 | March 31, 2021 | 2.75 to 1.00 | |
March 31, 2020 | 3.00 to 1.00 | June 30, 2021 and thereafter | 2.50 to 1.00 | |
June 30, 2020 | 3.00 to 1.00 | |||
Consolidated Adjusted EBITDA, defined in our Term Loan Agreement as “Consolidated EBITDA,” is a measure that reflects our earnings before interest, taxes, depreciation, and amortization expense, and is further adjusted for, among other things, letter of credit fees, equity-based compensation expense, net gains or losses on certain property disposals, restructuring charges, transaction costs related to issuances of debt, non-recurring consulting fees, non-cash impairment charges and the gains or losses from permitted dispositions, union vacation restoration charges and discontinued operations. Consolidated Total Debt, as defined in our Term Loan Agreement, is the aggregate principal amount of indebtedness outstanding. Our total leverage ratio for the four consecutive fiscal quarters ending June 30, 2019 was 3.12 to 1.00.
Impacts to our consolidated financial statements due to the implementation of ASC 842, Leases, on January 1, 2019 did not impact our calculation of the financial covenants included in our Term Loan Agreement as changes in generally accepted accounting principles subsequent to the date of the agreement are not required to be implemented for purposes of covenant calculations.
Risks and Uncertainties Regarding Compliance with Credit Facility Financial Covenants
We believe that our results of operations will be sufficient to allow us to comply with the covenants in the Term Loan Agreement for at least the next twelve months. Our ability to satisfy our liquidity needs and meet our future covenants during the next twelve months and thereafter is dependent upon our ability to achieve operating results that reflect improvement over our first half 2019 results. Although we are currently in compliance with the maximum total leverage ratio covenant under our Term Loan Agreement, the covenant levels tighten in the coming quarters. Means for improving our profitability include successful implementation of network optimization, and the realization of pricing, productivity and efficiency initiatives, as well as increased volume, all of which may not be within our control. If we are unable to achieve the improved results required to comply with this covenant in one or more quarters over the next twelve months, we will need to take more specific actions as described below.
We may decide to pay down a sufficient amount of the Term Loan to comply with the covenant. We currently believe that the results of our operations will be sufficient to allow us to make such payments and fund our operations for the next twelve months. Means for improving our ability to make such payments may include the requirement to pursue certain actions, including but not limited to, reducing capital expenditures for revenue equipment and technology, accelerating terminal closures identified through the network optimization plan, reducing headcount, and seeking additional cost reductions in the organization, all of which may not be within our control. Some of those actions might adversely affect our operations and financial performance over the long-term.
The Company is currently pursuing new financing alternatives, including a potential refinancing of the Term Loan Agreement to provide for less restrictive financial covenants, as well as potentially lowering interest rates and extending the maturity of the facility as compared to our current Term Loan Agreement.
Fair Value Measurement
The book value and estimated fair values of our long-term debt, including current maturities and other financial instruments, are summarized as follows:
11
June 30, 2019 | December 31, 2018 | ||||||||||||||
(in millions) | Book Value | Fair value | Book Value | Fair value | |||||||||||
Term Loan | $ | 546.0 | $ | 555.0 | $ | 559.4 | $ | 546.0 | |||||||
Lease financing obligations | 233.1 | 232.4 | 242.2 | 234.7 | |||||||||||
Second A&R CDA | 73.2 | 73.1 | 73.3 | 70.0 | |||||||||||
Total debt | $ | 852.3 | $ | 860.5 | $ | 874.9 | $ | 850.7 | |||||||
The fair values of the Term Loan and the Second Amended and Restated Contribution Deferral Agreement (the “Second A&R CDA”) were estimated based on observable prices (level two inputs for fair value measurements). The fair value of the lease financing obligations is estimated using a publicly-traded secured loan with similar characteristics (level three input for fair value measurement).
4. Leases
The Company determines if an arrangement is a lease or contains a lease at inception. We lease certain revenue equipment and real estate, predominantly through operating leases, and we have an immaterial number of leases in which we are a lessor. Operating leases are expensed on a straight-line basis over the life of the lease beginning on the lease commencement date. We determine the lease term by assuming the exercise of renewal options that are reasonably certain. The lease term is used to determine whether a lease is finance or operating and is used to calculate rent expense. Additionally, the depreciable life of leased assets and leasehold improvements is limited by the expected lease term. Operating lease balances are classified as operating lease right-of-use (“ROU”) assets and current and long-term operating lease liabilities on our consolidated balance sheet. We have an immaterial amount of finance leases that are included in property and equipment, other current liabilities, and other long-term liabilities on our consolidated balance sheet.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate adjusted for time to represent the rate we would have to pay to borrow on a collateralized basis based on the information available at commencement date in determining the present value of lease payments. Our lease terms may include options to extend or terminate the lease and we will adjust the life of the lease when it is reasonably certain that we will exercise these options.
We have lease agreements with lease and non-lease components, which are generally accounted for as a single lease component. We have variable lease components, including lease payments with payment escalation based on the Consumer Price Index, and other variable items, such as common area maintenance and taxes.
Key assumptions include discount rate, the impact of purchase options and renewal options on our lease term, as well as the assessment of residual value guarantees.
Our revenue equipment leases generally have purchase options. However, in most circumstances we are not typically certain of exercising the purchase option as we may sign a new lease, return the equipment to the lessor, or exercise the option as circumstances dictate. Our revenue equipment leases often contain residual value guarantees, but they are not reflected in our lease liabilities as our lease rates are such that residual value guarantees are not expected to be owed at the end of our leases. Wrecked units are expensed in full upon damage and paid out to the lessor.
Our real estate leases will often have an option to extend the lease, but we are typically not reasonably certain of exercising options to extend as we have the ability to move to more advantageous locations over time, relocate to other leased and owned locations, or discontinue service from particular locations over time as customer demand changes.
12
Leases (in millions) | Classification | June 30, 2019 | |||
Assets | |||||
Operating lease assets | Operating lease right-of-use assets | $ | 373.9 | ||
Finance lease assets | Net property and equipment | 2.7 | |||
Total leased assets | $ | 376.6 | |||
Liabilities | |||||
Current | |||||
Operating | Current operating lease liabilities | $ | 110.5 | ||
Finance | Other current and accrued liabilities | 0.2 | |||
Noncurrent | |||||
Operating | Operating lease liabilities | 243.7 | |||
Finance | Claims and other liabilities | 3.4 | |||
Total lease liabilities | $ | 357.8 | |||
Lease Cost (in millions) | Classification | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | ||||||
Operating lease cost(a) | Purchased transportation; Fuel, operating expenses and supplies | $ | 41.1 | $ | 82.3 | ||||
Short-term cost | Purchased transportation; Fuel, operating expenses and supplies | 3.4 | 6.9 | ||||||
Variable lease cost | Purchased transportation; Fuel, operating expenses and supplies | 1.8 | 3.3 | ||||||
Finance lease cost | |||||||||
Amortization of leased assets | Depreciation and amortization | 0.1 | 0.3 | ||||||
Interest on lease liabilities | Interest expense | 0.1 | 0.2 | ||||||
Total lease cost | $ | 46.5 | $ | 93.0 | |||||
(a) | Operating lease cost represents non-cash amortization of ROU assets and accretion of the discounted lease liabilities and is segregated on the statement of consolidated cash flows. |
Remaining Maturities of Lease Liabilities | Operating Leases | Finance Leases | Total | |||||||||
(in millions) | ||||||||||||
2019 | $ | 76.1 | $ | 0.3 | $ | 76.4 | ||||||
2020 | 134.4 | 0.6 | 135.0 | |||||||||
2021 | 110.5 | 0.6 | 111.1 | |||||||||
2022 | 60.2 | 0.6 | 60.8 | |||||||||
2023 | 27.6 | 0.6 | 28.2 | |||||||||
After 2023 | 17.8 | 4.2 | 22.0 | |||||||||
Total lease payments | $ | 426.6 | $ | 6.9 | $ | 433.5 | ||||||
Less: Imputed interest | 72.4 | 3.3 | 75.7 | |||||||||
Present value of lease liabilities | $ | 354.2 | $ | 3.6 | $ | 357.8 | ||||||
Lease Term and Discount Rate | Weighted-Average Remaining Lease Term | Weighted-Average Discount Rate | |
(years and percent) | |||
Operating leases | 3.5 | 11.0% | |
Finance leases | 10.2 | 11.2% | |
13
Other Information | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | |||||||
(in millions) | |||||||||
Cash paid for amounts included in the measurement of lease liabilities | |||||||||
Operating cash flows from operating leases (a) | $ | 38.9 | $ | 75.2 | |||||
Operating cash flows from finance leases | 0.1 | 0.2 | |||||||
Financing cash flows from finance leases | 0.1 | 0.2 | |||||||
Leased assets obtained in exchange for new operating lease liabilities | $ | 34.7 | $ | 53.8 | |||||
(a) | Payments arising from operating leases and variable lease payments are reported in operating activities on the statements of consolidated cash flows. |
Below is the Company’s contractual cash obligations table as of December 31, 2018, that disclosed operating lease payments for the next five years and thereafter. We had no material capital leases as of December 31, 2018.
Payments Due by Period | |||||||||||||||||||
(in millions) | Total | Less than 1 year | 1-3 years | 3-5 years | After 5 years | ||||||||||||||
Operating leases | $ | 429.2 | $ | 138.4 | $ | 212.0 | $ | 63.3 | $ | 15.5 | |||||||||
5. Employee Benefits
Qualified and Nonqualified Defined Benefit Pension Plans
The following table presents the components of our Company-sponsored pension plan costs for the three and six months ended June 30:
Three Months | Six Months | ||||||||||||||
(in millions) | 2019 | 2018 | 2019 | 2018 | |||||||||||
Service cost | $ | — | $ | 0.1 | $ | — | $ | 0.2 | |||||||
Interest cost | 11.4 | 10.9 | 22.8 | 21.8 | |||||||||||
Expected return on plan assets | (14.3 | ) | (15.1 | ) | (28.6 | ) | (30.2 | ) | |||||||
Amortization of prior service credit | (0.1 | ) | (0.1 | ) | (0.2 | ) | (0.2 | ) | |||||||
Amortization of prior net pension loss | 3.2 | 3.7 | 6.4 | 7.4 | |||||||||||
Total net periodic pension cost | $ | 0.2 | $ | (0.5 | ) | $ | 0.4 | $ | (1.0 | ) | |||||
We expect to contribute $9.9 million to our Company-sponsored pension plans in 2019, of which we have contributed $4.2 million through June 30, 2019.
6. Income Taxes
Our effective tax rate for the three and six months ended June 30, 2019 was (62.8)% and 0.8%, respectively, compared to 41.9% and 92.6%, respectively for the three and six months ended June 30, 2018. The significant items impacting the 2019 rates include a benefit recognized due to application of the exception to the rules regarding intraperiod tax allocation, a provision for net state and foreign taxes, certain permanent items, and a change in the valuation allowance established for the net deferred tax asset balance projected for December 31, 2019. The significant items impacting the 2018 rates include a provision for net state and foreign taxes, foreign withholding taxes related to dividends from a foreign subsidiary, certain permanent items, and a change in the valuation allowance established for the net deferred tax asset balance that had been projected for December 31, 2018. We recognize valuation allowances on deferred tax assets if, based on the weight of the evidence, we determine it is more likely than not such assets will not be realized. Changes in valuation allowances are included in our tax provision in the period of change. In determining whether a valuation allowance is warranted, we evaluate factors such as prior years’ earnings history, expected future earnings, loss carry-forward periods, reversals of existing deferred tax liabilities and tax planning strategies that potentially enhance the likelihood of the realization of a deferred tax asset. At June 30, 2019 and December 31, 2018, substantially all of our net deferred tax assets were subject to a valuation allowance.
14
7. Earnings (Loss) Per Share
We calculate basic earnings (loss) per share by dividing our net earnings (loss) available to common shareholders by our weighted-average shares outstanding at the end of the period. The calculation for diluted earnings (loss) per share adjusts the weighted average shares outstanding for our dilutive unvested shares and stock units using the treasury stock method. Our calculations for basic and dilutive earnings (loss) per share for three and six months ended June 30, 2019 and 2018 are as follows:
Three Months | Six Months | ||||||||||||||
(dollars in millions, except per share data; shares and stock units in thousands) | 2019 | 2018 | 2019 | 2018 | |||||||||||
Basic and dilutive net income (loss) available to common shareholders | $ | (23.6 | ) | $ | 14.4 | $ | (72.7 | ) | $ | (0.2 | ) | ||||
Basic weighted average shares outstanding | 33,247 | 32,966 | 33,199 | 32,894 | |||||||||||
Effect of dilutive securities: | |||||||||||||||
Unvested shares and stock units(a) | — | 828 | — | — | |||||||||||
Dilutive weighted average shares outstanding | 33,247 | 33,794 | 33,199 | 32,894 | |||||||||||
Basic earnings (loss) per share(b) | $ | (0.71 | ) | $ | 0.44 | $ | (2.19 | ) | $ | 0.00 | |||||
Diluted earnings (loss) per share(b) | $ | (0.71 | ) | $ | 0.43 | $ | (2.19 | ) | $ | 0.00 | |||||
(a) | Includes unvested shares of Common Stock, unvested stock units and vested stock units for which the underlying Common Stock has not been distributed. |
(b) | Earnings (loss) per share is based on unrounded figures and not the rounded figures presented. |
At June 30, 2019 and 2018, our anti-dilutive unvested shares, options, and stock units were approximately 325,000 and 57,000, respectively.
8. Business Segments
We report financial and descriptive information about our reporting segments on a basis consistent with that used internally for evaluating segment performance and allocating resources to segments. We evaluate segment performance primarily on external revenue, operating income (loss), and operating ratio.
We charge management fees and other corporate service fees to our reporting segments based on the benefits received or an overhead allocation basis. Shared support functions include information technology, legal, financial services, revenue management, and other company-wide services. Corporate represents residual operating expenses of the holding company that are not attributable to any segment and remain unallocated. It also represents certain items that are permitted to be included in Adjusted EBITDA. Corporate identifiable assets primarily consist of cash and cash equivalents, restricted amounts held in escrow, and information technology assets, which are offset by eliminations with the two business segments.
15
The following table summarizes our operations by business segment:
(in millions) | YRC Freight | Regional Transportation | Corporate/ Eliminations | Consolidated | |||||||||||
As of June 30, 2019 | |||||||||||||||
Identifiable assets | $ | 1,349.6 | $ | 784.6 | $ | (226.9 | ) | $ | 1,907.3 | ||||||
As of December 31, 2018 | |||||||||||||||
Identifiable assets | $ | 973.6 | $ | 626.4 | $ | 17.1 | $ | 1,617.1 | |||||||
Three Months Ended June 30, 2019 | |||||||||||||||
Operating revenue | $ | 800.8 | $ | 471.8 | $ | — | $ | 1,272.6 | |||||||
Operating income (loss) | $ | 16.0 | $ | 2.6 | $ | (4.3 | ) | $ | 14.3 | ||||||
Six Months Ended June 30, 2019 | |||||||||||||||
External revenue | $ | 1,544.6 | $ | 910.4 | $ | (0.1 | ) | $ | 2,454.9 | ||||||
Operating loss | $ | (5.1 | ) | $ | (4.4 | ) | $ | (7.9 | ) | $ | (17.4 | ) | |||
Three Months Ended June 30, 2018 | |||||||||||||||
Operating revenue | $ | 827.6 | $ | 499.0 | $ | (0.1 | ) | $ | 1,326.5 | ||||||
Operating income (loss) | $ | 26.8 | $ | 29.2 | $ | (5.1 | ) | $ | 50.9 | ||||||
Six Months Ended June 30, 2018 | |||||||||||||||
External revenue | $ | 1,578.9 | $ | 962.3 | $ | (0.2 | ) | $ | 2,541.0 | ||||||
Operating income (loss) | $ | 19.9 | $ | 34.4 | $ | (7.7 | ) | $ | 46.6 | ||||||
9. Commitments, Contingencies and Uncertainties
Department of Defense Complaint
In December 2018, the United States on behalf of the United States Department of Defense filed a Complaint in Intervention (“Complaint”) against the Company in the U.S. District in the Western District of New York captioned United States ex rel. James Hannum v. YRC Freight, Inc.; Roadway Express, Inc.; and Yellow Transportation, Inc., Civil Action No. 08-0811(A). The Complaint alleges that the Company violated the False Claims Act by overcharging the Department of Defense for freight carrier services by failing to comply with the contractual terms of freight contracts between the Department of Defense and the Company and related government procurement rules. The Complaint also alleges claims for unjust enrichment and breach of contract. Under the False Claims Act, the Complaint seeks treble damages, civil penalties, attorneys’ fees and costs of suit, all in unspecified amounts. The remaining common causes of action seek an undetermined amount for an alleged breach of contract or alternatively causes constituting unjust enrichment or a payment by mistake. The Company has moved to dismiss the case, and the court is set to hear oral arguments on the motion on August 12, 2019. Management believes the Company has meritorious defenses and intends to vigorously defend this action. We are unable to estimate the possible loss, or range of possible loss, associated with these claims at this time.
Class Action Securities Complaint
In January 2019, a purported class action lawsuit captioned Christina Lewis v. YRC Worldwide Inc., et al., Case No. 1:19-cv-00001, was filed in the United States District Court for the Northern District of New York against the Company and certain of our current and former officers. The complaint was filed on behalf of persons who purchased or otherwise acquired the Company’s publicly traded securities between March 10, 2014 and December 14, 2018. The complaint generally alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by making false and misleading statements relating to its freight billing practices as alleged in the Department of Defense complaint described above. The action includes claims for damages, including interest, and an award of reasonable costs and attorneys’ fees. The co-lead plaintiffs filed an amended complaint on June 14, 2019, and the defendants moved to dismiss it on July 15, 2019. Management believes the Company has meritorious defenses and intends to vigorously defend this action. We are unable to estimate the possible loss, or range of possible loss, associated with these claims at this time.
16
Shareholder Derivative Complaint
In May 2019, a putative shareholder filed an action derivatively and on behalf of the Company naming James L. Welch, Jamie G. Pierson, Stephanie D. Fisher, Raymond J. Bromark, Douglas A. Carty, William R. Davidson, Matthew A. Doheny, Robert L. Friedman, James E. Hoffman, Michael J. Kneeland, Patricia M. Nazemetz, and James F. Winestock individually as defendants and the Company as the nominal defendant. The case is captioned Hastey v. Welch, et al., Case No. 2:19-cf-2266-KGG, and is pending in the United States District Court for the District of Kansas. The Complaint alleges that the Company was exposed to harm by the individual defendants’ purported conduct concerning its freight-billing practices as alleged in the Department of Defense Complaint and the Class Action Securities Complaint described above. The Complaint asserts that the defendants’ purported conduct violated Section 14(a) of the Securities Exchange Act of 1934 and that the individual defendants breached their fiduciary duties, were unjustly enriched, and engaged in corporate waste. The Complaint seeks damages on behalf of the Company.
Other Legal Matters
We are involved in litigation or proceedings that arise in ordinary business activities. When possible, we insure against these risks to the extent we deem prudent, but no assurance can be given that the nature or amount of such insurance will be sufficient to fully indemnify us against liabilities arising out of pending and future legal proceedings. Many of these insurance policies contain self-insured retentions in amounts we deem prudent. Based on our current assessment of information available as of the date of these consolidated financial statements, we believe that our consolidated financial statements include adequate provisions for estimated costs and losses that may be incurred within the litigation and proceedings to which we are a party.
17
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Note Regarding Forward-Looking Statements
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements included elsewhere in this report. This report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). Forward-looking statements include those preceded by, followed by or characterized by words such as “will,” “expect,” “intend,” “anticipate,” “believe,” “could,” “should,” “may,” “project,” “forecast,” “propose,” “plan,” “designed,” “estimate,” “enable” and similar expressions which speak only as of the date the statement was made. Forward-looking statements are inherently uncertain, are based upon current beliefs, assumptions and expectations of Company management and current market conditions, and are subject to significant business, economic, competitive, regulatory and other risks, uncertainties and contingencies, known and unknown, many of which are beyond our control. Readers are cautioned not to place undue reliance on any forward-looking statements. Our future financial condition and results could differ materially from those predicted in such forward-looking statements because of a number of factors, including (without limitation):
• | general economic factors, including (without limitation) customer demand in the retail and manufacturing sectors; |
• | business risks and increasing costs associated with the transportation industry, including increasing equipment, operational and technology costs and disruption from natural disasters; |
• | competition and competitive pressure on pricing; |
• | the risk of labor disruptions or stoppages if our relationship with our employees and unions were to deteriorate; |
• | changes in pension expense and funding obligations, subject to interest rate volatility; |
• | increasing costs relating to our self-insurance claims expenses; |
• | our ability to finance the maintenance, acquisition and replacement of revenue equipment and other necessary capital expenditures; |
• | our ability to comply and the cost of compliance with, or liability resulting from violation of, federal, state, local and foreign laws and regulations, including (without limitation) labor laws and laws and regulations regarding the environment; |
• | impediments to our operations and business resulting from anti-terrorism measures; |
• | the impact of claims and litigation expense to which we are or may become exposed; |
• | that we may not realize the expected benefits and costs savings from our performance and operational improvement initiatives; |
• | our ability to attract and retain qualified drivers and increasing costs of driver compensation; |
• | a significant privacy breach or IT system disruption; |
• | risks of operating in foreign countries; |
• | our dependence on key employees; |
• | seasonality; |
• | shortages of fuel and changes in the cost of fuel or the index upon which we base our fuel surcharge and the effectiveness of our fuel surcharge program in protecting us against fuel price volatility; |
• | our ability to generate sufficient liquidity to satisfy our cash needs and future cash commitments, including (without limitation) our obligations related to our indebtedness and lease and pension funding requirements, and our ability to achieve increased cash flows through improvement in operations; |
• | limitations on our operations, our financing opportunities, potential strategic transactions, acquisitions or dispositions resulting from restrictive covenants in the documents governing our existing and future indebtedness; |
• | our failure to comply with the covenants in the documents governing our existing and future indebtedness, including financial covenants under our credit facilities, in light of recent operating results; |
• | fluctuations in the price of our common stock; |
• | dilution from future issuances of our common stock; |
• | our intention not to pay dividends on our common stock; |
• | that we have the ability to issue preferred stock that may adversely affect the rights of holders of our common stock; and |
18
• | other risks and contingencies, including (without limitation) the risk factors that are included in our reports filed with the SEC, including those described under “Risk Factors” in our annual report on Form 10-K and quarterly reports on Form 10-Q, including this quarterly report. |
19
Overview
MD&A includes the following sections:
Our Business — a brief description of our business and a discussion of how we assess our operating results.
Consolidated Results of Operations — an analysis of our consolidated results of operations for the three and six months ended June 30, 2019 and 2018.
Reporting Segment Results of Operations — an analysis of our results of operations for the three and six months ended June 30, 2019 and 2018 for our YRC Freight and Regional Transportation reporting segments.
Certain Non-GAAP Financial Measures — presentation and an analysis of selected non-GAAP financial measures for the three and six months ended June 30, 2019 and 2018 and trailing twelve months ended June 30, 2019 and 2018.
Financial Condition/Liquidity and Capital Resources — a discussion of our major sources and uses of cash and an analysis of our cash flows and aggregate contractual obligations and commercial commitments.
The “second quarter” and “first half” of the years discussed below refer to the three and six months ended June 30, respectively.
Our Business
YRC Worldwide is a holding company that, through its operating subsidiaries, offers our customers a wide range of transportation services. YRC Worldwide has one of the largest, most comprehensive LTL networks in North America with local, regional, national and international capabilities. Through its team of experienced service professionals, YRC Worldwide offers industry-leading expertise in LTL shipments and flexible supply chain solutions, ensuring customers can ship industrial, commercial and retail goods with confidence.
We measure the performance of our business on both a consolidated and reporting segment basis and using several metrics, but rely primarily upon (without limitation) operating revenue, operating income (loss), and operating ratio. We also use certain non-GAAP financial measures as secondary measures to assess our operating performance.
• | Operating Revenue: Our operating revenue has two primary components: volume (commonly evaluated using tonnage, tonnage per day, number of shipments, shipments per day or weight per shipment) and yield or price (commonly evaluated using picked up revenue, revenue per hundredweight or revenue per shipment). Yield includes fuel surcharge revenue, which is common in the trucking industry and represents an amount charged to customers that adjusts with changing fuel prices. We base our fuel surcharges on the U.S. Department of Energy fuel index and adjust them weekly. Rapid material changes in the index or our cost of fuel can positively or negatively impact our revenue and operating income as a result of changes in our fuel surcharge. We believe that fuel surcharge is an accepted and important component of the overall pricing of our services to our customers. Without an industry accepted fuel surcharge program, our base pricing for our transportation services would require changes. We believe the distinction between base rates and fuel surcharge has blurred over time, and it is impractical to clearly separate all the different factors that influence the price that our customers are willing to pay. In general, under our present fuel surcharge program, we believe rising fuel costs are beneficial to us and falling fuel costs are detrimental to us in the short term, the effects of which are mitigated over time. |
• | Operating Income (Loss): Operating income (loss) is operating revenue less operating expenses. Consolidated operating income (loss) includes certain corporate charges that are not allocated to our reporting segments. |
• | Operating Ratio: Operating ratio is a common operating performance measure used in the trucking industry. It is calculated as (i) 100 percent (ii) minus the result of dividing operating income by operating revenue or (iii) plus the result of dividing operating loss by operating revenue, and is expressed as a percentage. |
• | Non-GAAP Financial Measures: We use EBITDA and Adjusted EBITDA, which are non-GAAP financial measures, to assess the following: |
◦ | EBITDA: a non-GAAP measure that reflects our earnings before interest, taxes, depreciation, and amortization expense. EBITDA is used for internal management purposes as a financial measure that reflects our core operating performance. |
20
◦ | Adjusted EBITDA: a non-GAAP measure that reflects EBITDA, and further adjusts for certain net gains or losses on property disposals, non-cash impairment charges, letter of credit expenses, restructuring charges, transaction costs related to issuances of debt, nonrecurring consulting fees, permitted dispositions and discontinued operations, equity-based compensation expense, union vacation restoration charges and non-union pension settlement charges, among other items, as defined in our credit facilities. Adjusted EBITDA is used for internal management purposes as a financial measure that reflects our core operating performance, to measure compliance with financial covenants in our term loan credit agreement and to determine certain management and employee bonus compensation. |
We believe our presentation of EBITDA and Adjusted EBITDA is useful to investors and other users as these measures represent key supplemental information our management uses to compare and evaluate our core underlying business results both on a consolidated basis and across our business segments, particularly in light of our leverage position and the capital-intensive nature of our business. Further, EBITDA is a measure that is commonly used by other companies in our industry and provides a comparison for investors to evaluate the performance of the companies in the industry. Additionally, Adjusted EBITDA helps investors to understand how the company is tracking against our financial covenants in our term loan credit agreement as this measure is calculated as prescribed in our term loan credit agreement and serves as a driving component of key financial covenants.
Our non-GAAP financial measures have the following limitations:
◦ | EBITDA does not reflect the interest expense or the cash requirements necessary to service interest or fund principal payments on our outstanding debt; |
◦ | Adjusted EBITDA does not reflect the interest expense or the cash requirements necessary to service interest or fund principal payments on our outstanding debt, letter of credit expenses, restructuring charges, transaction costs related to debt, union vacation restoration charges, or nonrecurring consulting fees, among other items; |
◦ | Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will generally need to be replaced in the future and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements; |
◦ | Equity-based compensation is an element of our long-term incentive compensation package, although Adjusted EBITDA excludes employee equity-based compensation expense when presenting our ongoing operating performance for a particular period; and |
◦ | Other companies in our industry may calculate Adjusted EBITDA differently than we do, potentially limiting its usefulness as a comparative measure. |
Because of these limitations, our non-GAAP measures should not be considered a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and use our non-GAAP measures as secondary measures.
Business Strategy Overview
The Company has developed a comprehensive business strategy to achieve long-term profitability and stability. Our strategic roadmap to improved profitability and stability is built upon the proven alliance of our LTL regional and national networks, as well as our recently launched multi-mode freight brokerage solutions, to provide a broad portfolio of freight and business services to our customers.
The key components to our multi-year strategic roadmap include:
1. | Labor contract ratification, along with implementation of operational efficiencies to achieve service excellence |
2. | Capital structure improvement |
3. | Network optimization |
4. | Customer growth/engagement initiatives |
5. | Capital investment in equipment and technology |
Labor contract ratification and implementation of operational efficiencies: During the first half of 2019, the Company ratified a new five-year national master contract (“New NMFA”) for the employees of Holland, New Penn and YRC Freight, which is a critical element for the comprehensive strategic plan for the Company. The New NMFA provides the Company with important changes to create a foundation for revenue growth and operational excellence. The operational changes are expected to provide efficiencies in our workforce by introducing new job classifications and allowing us to employ more flexible work rules to optimize the use of our valuable employee resources. These changes allow us to improve labor mix which should result in reduced costs
21
per labor hour. For example, prior to the New NMFA, we were unable to fill part-time positions in many key markets across our footprint due to a non-competitive wage package for part-time employees. With the New NMFA, we are now expanding our part-time work force which allows us to reposition our commercial driver’s license (“CDL”) drivers to freight delivery and to deploy part-time employees to dock positions, resulting in lower employee compensation expense and improved productivity. The expansion of purchased transportation that is permitted under the New NMFA provides us opportunities to plan and source our operations using more cost-effective resources and to expand our capacity consistent with our customer growth and engagement initiatives. The New NMFA also allows us to introduce new equipment, referred to as box trucks, into our LTL freight operations, which, along with new non-CDL driver classifications, permits us to provide a lower cost solution to local cartage or short-term rentals.
Capital Structure Improvement: The Company is currently pursuing new financing alternatives, including a potential refinancing of the Term Loan Agreement to provide for less restrictive financial covenants, as well as potentially lowering interest rates and extending the maturity of the facility as compared to our current Term Loan Agreement.
Network Optimization: While ongoing investments in equipment and technology remain our primary use of excess operating cash flows, we understand the importance of balancing liquidity and our ongoing investments with the service capacity we need to bring to the market. In the initial phase of our network optimization execution, two of our companies operate independently out of the same service center. Upon implementation of the New NMFA that was ratified on May 14, 2019, we may now consolidate service centers across our operating companies to optimize utilization of our assets and resources, and companies that operate in the same service territory will be serviced through one primary carrier. We believe service center consolidation presents the greatest opportunity for our network optimization initiative. We expect to launch our first consolidation in late 2019, with the majority of network consolidations occurring in 2020. By consolidating service centers, we expect to recognize cost savings in our linehaul and pick-up and delivery operations due to improved density, fewer miles driven and optimization of route planning and labor resources. Over time, this initiative should enhance service and strategically position our network for the growing demand of next-day services, provide productivity improvements and streamline our cost structure as we seek to eliminate redundancies across the network, both in facilities, infrastructure and human capital. Most recently, we have moved forward with certain headcount reductions to remain disciplined with our cost structure, including, but not limited to, the consolidation of the New Penn corporate services.
Customer Growth/Engagement Initiatives: Creating simplified engagement for customers and an increased service offering are a critical part of our strategic focus on growth and engagement. We completed the final phase of our sales restructuring which consolidated our four distinct sales groups into one enterprise sales organization. This allows customers to buy regional, national and brokerage services from a single point of contact at YRCW while introducing existing customers to additional operating companies. The launch of our third-party brokerage solution , HNRY Logistics in late 2018 is the perfect complement to our LTL, asset-based companies and allow us to better service our customers with a full suite of logistics solutions.
Capital Investment: Capital allocation remains a top priority for us. We will continue to invest in revenue equipment to improve the age of our fleet as there is an immediate return in improved fuel miles per gallon, reduced vehicle maintenance expense and improved driver morale. Since 2015, more than 35% of our tractor fleet and nearly 30% of our trailer fleet have been upgraded. While the average age of our fleet still lags the industry, the average age of our fleet is no longer increasing.
New National Master Freight Agreement
On May 14, 2019, union employees at operating companies Holland, New Penn and YRC Freight ratified New NMFA, along with all supplemental agreements. The New NMFA outlines terms and conditions of employment that are customary in collective bargaining agreements and apply at a national level across the covered operations, such as wages, health benefits, multiemployer pension plan contribution rates, and various operational items. A few of the highlights in the New NMFA include:
• | Hourly wage increases in each year of the contract, beginning April 1, 2019 through 2023 |
• | Health and welfare and pension contribution rate increases |
• | Restoration of an additional one-week of vacation |
• | The expanded ability to utilize smaller trucks that can be operated by employees who do not have a CDL |
• | The ability to utilize additional hours of service, in accordance with Department of Transportation regulations |
• | The increased ability to utilize purchased transportation at YRC Freight and Holland |
• | The increased ability to utilize employees in non-driving positions |
• | A newly-structured performance bonus program for employees |
The new wage improvements allow us to advance our driver hiring and retention efforts to ensure we are adequately staffed with professional CDL drivers and other key personnel at our service centers. The contractual wage increases under the New
22
NMFA were paid retroactively to April 1, 2019 including the one week of vacation. Additionally, the Company incurred one-time vacation charges in second quarter operating results of $12.4 million to reflect the full year 2018 and first quarter 2019 vacation benefit increase.
The supplemental agreements cover more localized work rules and other terms and conditions of employment. The Company was unable to commence actions to implement the operational efficiencies until the New NMFA, and all supplements, were fully ratified on May 14, 2019.
Consolidated Results of Operations
Our consolidated results include the consolidated results of our reporting segments and unallocated corporate charges. A more detailed discussion of the operating results of our reporting segments is presented in the “Reporting Segment Results of Operations” section below.
The table below provides summary consolidated financial information for the second quarter and first half of 2019 and 2018:
Second Quarter | First Half | ||||||||||||||||||||
(in millions) | 2019 | 2018 | Percent Change | 2019 | 2018 | Percent Change | |||||||||||||||
Operating revenue | $ | 1,272.6 | $ | 1,326.5 | (4.1 | )% | $ | 2,454.9 | $ | 2,541.0 | (3.4 | )% | |||||||||
Operating income (loss) | 14.3 | 50.9 | (71.9 | )% | (17.4 | ) | 46.6 | (137.3 | )% | ||||||||||||
Nonoperating expenses, net | 28.8 | 26.1 | 10.3 | % | 55.9 | 49.3 | 13.4 | % | |||||||||||||
Net income (loss) | (23.6 | ) | 14.4 | NM* | (72.7 | ) | (0.2 | ) | NM* | ||||||||||||
(*) | not meaningful |
Second Quarter of 2019 Compared to the Second Quarter of 2018
Our consolidated operating revenue decreased $53.9 million, or 4.1%, during the second quarter of 2019 compared to the same period in 2018. The decrease in revenue is primarily attributed to a decrease in tonnage and fuel surcharge revenue, while partially offset by an increase in base yield excluding fuel surcharge.
Total operating expenses decreased $17.3 million, or 1.4%, for the second quarter of 2019 compared to the second quarter of 2018, and consisted primarily of lower purchased transportation expense as well as lower fuel, operating expenses and supplies charges, partially offset by increased salaries, wages and employee benefits.
Salaries, wages and employee benefits. Salaries, wages and employee benefits increased $26.3 million, or 3.5%, primarily due to a $19.9 million increase in benefits costs which was largely driven by a $16.8 million increase in union vacation expense due to restoration of benefits from the passage of the New NMFA, an $8.5 million increase in workers’ compensation expense, and a $4.1 million increase in wage expense as a result of a $25.3 million increase in contractual wages rates due to the New NMFA, which was partially offset by a decrease in tonnage that reduced the number of hours needed to process freight. These increases were partially offset by a $7.6 million decrease in short-term incentive compensation.
Fuel, operating expenses and supplies. Fuel, operating expenses and supplies decreased $13.7 million, or 5.7%, primarily due to a $10.7 million decrease in fuel expense, which was largely a result of fewer miles driven and lower fuel prices, and a $3.8 million decrease in vehicle maintenance expense.
Purchased transportation. Purchased transportation decreased $19.2 million, or 10.8%, primarily due to a $20.9 million decrease in rail and over-the-road purchased transportation expense due partially to reduced shipping volumes and a $2.5 million decrease from reduced usage of local purchased transportation and short-term equipment rentals. Purchased transportation expense also includes a $5.3 million increase in third-party costs for customer-specific logistics solutions.
Other operating expense. Other operating expense decreased $3.2 million, or 5.3%, primarily due to a $2.3 million decrease in cargo claims expense.
(Gains)/losses on property disposals. Net gains on disposals of property were $6.2 million in the second quarter of 2019 which were primarily the result of the sale of real property as well as a deferred gain recognized from changes in contractual lease terms, as compared to a $2.2 million loss in the second quarter of 2018, primarily due to losses on the disposal of revenue equipment.
23
Nonoperating expenses, net. Nonoperating expenses, net, increased $2.7 million in the second quarter of 2019 compared to the second quarter of 2018, primarily driven by a $2.7 million increase in interest expense due to higher variable interest rates.
Our effective tax rate for the second quarter of 2019 and 2018 was (62.8)% and 41.9%, respectively. The significant items impacting the 2019 rate include a benefit recognized due to application of the exception to the rules regarding intraperiod tax allocation, a provision for net state and foreign taxes, certain permanent items, and a change in the valuation allowance established for the net deferred tax asset balance projected for December 31, 2019. The significant items impacting the 2018 rate include a provision for net state and foreign taxes, certain permanent items, and a change in the valuation allowance established for the net deferred tax asset balance that had been projected for December 31, 2018. We recognize valuation allowances on deferred tax assets if, based on the weight of the evidence, we determine it is more likely than not that such assets will not be realized. Changes in valuation allowances are included in our tax provision in the period of change. In determining whether a valuation allowance is warranted, we evaluate factors such as prior years’ earnings history, expected future earnings, loss carry-forward periods, reversals of existing deferred tax liabilities and tax planning strategies that potentially enhance the likelihood of the realization of a deferred tax asset. At June 30, 2019 and December 31, 2018, substantially all of our net deferred tax assets were subject to a valuation allowance.
First Half of 2019 Compared to the First Half of 2018
Our consolidated operating revenue decreased $86.1 million, or 3.4%, during the first half of 2019 compared to the same period in 2018. The decrease in revenue is primarily attributed to a decrease in tonnage and fuel surcharge revenue, while partially offset by an increase in base yield excluding fuel surcharge.
Total operating expenses decreased $22.1 million, or 0.9%, for the first half of 2019 compared to the first half of 2018, and consisted primarily of lower purchased transportation expense as well as lower fuel, operating expenses and supplies charges, partially offset by increased salaries, wages and employee benefits.
Salaries, wages and employee benefits. Salaries, wages and employee benefits increased $14.8 million, or 1.0%, primarily due to a $24.0 million increase in benefits costs which was largely driven by a $16.8 million increase in union vacation expense due to restoration of benefits from the passage of the New NMFA, a $5.4 million increase in workers’ compensation expense, and a $4.3 million increase in salaries expense. These increases were partially offset by a $10.0 million decrease in short-term incentive compensation and an $8.9 million decrease in wage expense as a result of an increase in contractual wages rates due to the New NMFA, which was more than offset by a decrease in tonnage that reduced the number of hours needed to process freight.
Fuel, operating expenses and supplies. Fuel, operating expenses and supplies decreased $8.0 million, or 1.7%, primarily due to a $16.0 million decrease in fuel expense, which was largely a result of fewer miles driven and lower prices and a $4.6 million decrease in vehicle maintenance expense. These increases were partially offset by a $6.1 million increase in other operating expenses as a result of vendor bankruptcy charges and settlement expenses, and a $3.8 million increase in professional fees as a result of fees associated with our New NMFA.
Purchased transportation. Purchased transportation decreased $28.3 million, or 8.5%, primarily due to a $34.2 million decrease in rail and over-the-road purchased transportation expense due partially to reduced shipping volumes and a $5.2 million decrease from reduced usage of local purchased transportation and short-term equipment rentals. Purchased transportation expense also includes a $7.8 million increase in third-party costs for customer-specific logistics solutions and a $4.1 million increase in long-term equipment rentals in conjunction with the Company’s leasing strategy to reinvest in its fleet.
Other operating expense. Other operating expense decreased $2.0 million, or 1.6%, primarily due to a $3.1 million decrease in operating tax expense as a result of fewer miles driven and a $2.5 million decrease in cargo claims expense, partially offset by a $3.3 million increase in third-party liability claims expense largely due to current year claims.
(Gains)/Losses on property disposals. Net gains on disposals of property were $4.6 million in the first half of 2019, which were primarily the result of the sale of real property as well as a deferred gain recognized from changes in contractual lease terms, as compared to a $5.4 million loss in the first half of 2018, primarily due to losses on the disposal of revenue equipment.
Impairment charges. During the first quarter of 2019, we recorded an $8.2 million impairment charge at YRC Freight that reflects the write-down of an intangible asset as a result of rebranding strategies, leading to discontinued use of a tradename.
Nonoperating expenses, net. Nonoperating expenses, net, increased $6.6 million in the first half of 2019 compared to the first half of 2018, primarily driven by a $4.1 million increase in interest expense due to higher variable interest rates and a $1.7 million increase in non-union pension expense.
24
Our effective tax rate for the first half of 2019 and 2018 was 0.8% and 92.6%, respectively. The significant items impacting the 2019 rate include a benefit recognized due to application of the exception to the rules regarding intraperiod tax allocation, a provision for net state and foreign taxes, certain permanent items, and a change in the valuation allowance established for the net deferred tax asset balance projected for December 31, 2019. The significant items impacting the 2018 rate include a provision for net state and foreign taxes, foreign withholding taxes related to dividends from a foreign subsidiary, certain permanent items, and a change in the valuation allowance established for the net deferred tax asset balance that had been projected for December 31, 2018.
Reporting Segment Results of Operations
We evaluate our operating performance using our YRC Freight and Regional Transportation reporting segments:
• | YRC Freight is the reporting segment that focuses on longer haul business opportunities with national, regional and international services. YRC Freight provides for the movement of industrial, commercial and retail goods, primarily through centralized management. This reporting segment includes LTL subsidiaries YRC Inc. and YRC Freight Canada Company (both doing business as, and herein referred to as, “YRC Freight”) and HNRY Logistics, Inc. (“HNRY Logistics”), our customer-specific logistics solutions provider. In addition to the United States and Canada, YRC Freight also serves parts of Mexico and Puerto Rico. |
• | Regional Transportation is the reporting segment for our transportation service providers focused on business opportunities in the regional and next-day delivery markets. Regional Transportation is comprised of Holland, New Penn and Reddaway. These companies each provide regional, next-day ground services in their respective regions through a network of facilities located across the United States, Canada, and Puerto Rico. |
The Company uses key operating metrics to provide a comparison with industry peers. Two primary components include volume (commonly evaluated using tonnage, tonnage per day, total shipments, shipments per day or weight per shipment) and yield or price (commonly evaluated as picked up revenue, revenue per hundredweight, or revenue per shipment). With the enhanced focus of service and product expansion and the launch of HNRY Logistics in late 2018, our increase in shipments over 10,000 pounds is growing, impacting the year-over-year revenue per hundredweight metrics that we have historically presented for YRC Freight, which includes the results of operations for HNRY Logistics.
Therefore, the Company has updated its presentation of operating metrics to separately present LTL operating statistics, which represents shipments less than 10,000 pounds. Shipments greater than 10,000 pounds are primarily transported using third-party purchased transportation.
YRC Freight Results
YRC Freight represented 62.9% of consolidated operating revenue for the second quarter of 2019, as compared to 62.4% for the second quarter of 2018. YRC Freight represented 62.9% of consolidated operating revenue for the first half of 2019, as compared to 62.1% for the first half of 2018. The table below provides summary financial information for YRC Freight for the second quarter and first half of 2019 and 2018:
Second Quarter | First Half | ||||||||||||||||||
(in millions) | 2019 | 2018 | Percent Change | 2019 | 2018 | Percent Change | |||||||||||||
Operating revenue | $ | 800.8 | $ | 827.6 | (3.2)% | $ | 1,544.6 | $ | 1,578.9 | (2.2)% | |||||||||
Operating income (loss) | 16.0 | 26.8 | (40.3)% | (5.1 | ) | 19.9 | NM* | ||||||||||||
Operating ratio(a) | 98.0 | % | 96.8 | % | (1.2) pp | 100.3 | % | 98.7 | % | (1.6) pp | |||||||||
(a) | pp represents the change in percentage points |
(*) not meaningful
Second Quarter of 2019 Compared to the Second Quarter of 2018
YRC Freight reported operating revenue of $800.8 million in the second quarter of 2019, a decrease of $26.8 million, or 3.2%, compared to the same period in 2018. The decrease in revenue is primarily attributed to a decrease in tonnage and fuel surcharge revenue, partially offset by an improvement in base yield, excluding fuel surcharge. The table below summarizes the key revenue metrics for the YRC Freight reporting segment for the second quarter of 2019 compared to the second quarter of 2018:
25
Second Quarter | ||||||||||
2019 | 2018 | Percent Change(b) | ||||||||
Workdays | 63.5 | 64.0 | ||||||||
LTL picked up revenue (in millions) | $ | 738.7 | $ | 765.5 | (3.5 | )% | ||||
LTL tonnage (in thousands) | 1,227 | 1,327 | (7.5 | )% | ||||||
LTL tonnage per day (in thousands) | 19.33 | 20.73 | (6.8 | )% | ||||||
LTL shipments (in thousands) | 2,474 | 2,629 | (5.9 | )% | ||||||
LTL shipments per day (in thousands) | 38.96 | 41.08 | (5.2 | )% | ||||||
LTL picked up revenue per hundred weight | $ | 30.09 | $ | 28.85 | 4.3 | % | ||||
LTL picked up revenue per hundred weight (excluding fuel surcharge) | $ | 26.45 | $ | 25.24 | 4.8 | % | ||||
LTL picked up revenue per shipment | $ | 299 | $ | 291 | 2.6 | % | ||||
LTL picked up revenue per shipment (excluding fuel surcharge) | $ | 262 | $ | 255 | 3.0 | % | ||||
LTL weight per shipment (in pounds) | 992 | 1,009 | (1.7 | )% | ||||||
Total picked up revenue (in millions)(a) | $ | 791.5 | $ | 821.0 | (3.6 | )% | ||||
Total tonnage (in thousands) | 1,554 | 1,623 | (4.3 | )% | ||||||
Total tonnage per day (in thousands) | 24.46 | 25.36 | (3.5 | )% | ||||||
Total shipments (in thousands) | 2,511 | 2,667 | (5.9 | )% | ||||||
Total shipments per day (in thousands) | 39.54 | 41.67 | (5.1 | )% | ||||||
Total picked up revenue per hundred weight | $ | 25.47 | $ | 25.29 | 0.7 | % | ||||
Total picked up revenue per hundred weight (excluding fuel surcharge) | $ | 22.45 | $ | 22.17 | 1.3 | % | ||||
Total picked up revenue per shipment | $ | 315 | $ | 308 | 2.4 | % | ||||
Total picked up revenue per shipment (excluding fuel surcharge) | $ | 278 | $ | 270 | 3.0 | % | ||||
Total weight per shipment (in pounds) | 1,238 | 1,217 | 1.7 | % | ||||||
Second Quarter | |||||||
(in millions) | 2019 | 2018 | |||||
(a) Reconciliation of operating revenue to total picked up revenue: | |||||||
Operating revenue | $ | 800.8 | $ | 827.6 | |||
Change in revenue deferral and other | (9.3 | ) | (6.6 | ) | |||
Total picked up revenue | $ | 791.5 | $ | 821.0 | |||
(a) | Does not equal financial statement revenue due to revenue recognition adjustments between accounting periods and the impact |
of other revenue
(b) | Percent change based on unrounded figures and not the rounded figures presented |
Operating income for YRC Freight was $16.0 million in the second quarter of 2019 compared to operating income of $26.8 million in the second quarter of 2018. Operating expenses decreased $16.0 million, or 2.0%, primarily due to decreases in purchased transportation expense, and fuel, operating expenses and supplies expense. These decreases were partially offset by increased salaries, wages and employee benefits.
Salaries, wages and employee benefits. Salaries, wages and employee benefits increased $17.1 million, or 3.8%, primarily due to a $12.7 million increase in benefits costs which was largely driven by a $10.8 million increase in union vacation expense due to restoration of benefits from the passage of the New NMFA, and a $2.7 million increase in workers’ compensation expense. Wage expense for the quarter increased $1.0 million as a result of a $14.6 million increase in contractual wages rates due to the New NMFA, which was partially offset by a decrease in tonnage that reduced the number of hours needed to process freight.
Fuel, operating expenses and supplies. Fuel, operating expenses and supplies decreased $12.2 million, or 8.1%, primarily due to a $6.9 million decrease in fuel expense, which was largely driven by fewer miles driven and lower prices, a $2.5 million reduction in professional fees largely as a result of lower corporate service fees, and a $2.0 million decrease in vehicle maintenance expense.
26
Purchased transportation. Purchased transportation decreased $14.1 million, or 10.2%, primarily due to a $16.1 million decrease in rail and over-the-road purchased transportation expense due partially to reduced shipping volumes and a $3.7 million decrease from reduced usage of local purchased transportation and short-term equipment rentals. Purchased transportation expense also includes a $5.3 million increase in third-party costs for customer-specific logistics solutions and a $2.1 million increase in long-term equipment rentals in conjunction with the Company’s leasing strategy to reinvest in its fleet.
Other operating expense. Other operating expense decreased $1.8 million, or 5.2%, primarily due to a $1.8 million decrease in cargo claims expense.
(Gains)/Losses on property disposals. Net gains on disposals of property were $3.2 million in the second quarter of 2019 primarily as a result of a deferred gain recognized from changes in contractual lease terms, compared to a $1.8 million loss in the second quarter of 2018, primarily due to losses on the disposal of revenue equipment.
First Half of 2019 Compared to the First Half of 2018
YRC Freight reported operating revenue of $1,544.6 million in the first half of 2019, a decrease of $34.3 million, or 2.2%, compared to the same period in 2018. The decrease in revenue is primarily attributed to a decrease in tonnage and fuel surcharge revenue, partially offset by an improvement in base yield, excluding fuel surcharge. The table below summarizes the key revenue metrics for the YRC Freight reporting segment for the first half of 2019 compared to the first half of 2018:
First Half | ||||||||||
2019 | 2018 | Percent Change(b) | ||||||||
Workdays | 126.5 | 127.5 | ||||||||
LTL picked up revenue (in millions) | $ | 1,427.0 | $ | 1,464.1 | (2.5 | )% | ||||
LTL tonnage (in thousands) | 2,382 | 2,562 | (7.0 | )% | ||||||
LTL tonnage per day (in thousands) | 18.83 | 20.10 | (6.3 | )% | ||||||
LTL shipments (in thousands) | 4,772 | 5,045 | (5.4 | )% | ||||||
LTL shipments per day (in thousands) | 37.72 | 39.57 | (4.7 | )% | ||||||
LTL picked up revenue per hundred weight | $ | 29.95 | $ | 28.57 | 4.8 | % | ||||
LTL picked up revenue per hundred weight (excluding fuel surcharge) | $ | 26.39 | $ | 25.08 | 5.2 | % | ||||
LTL picked up revenue per shipment | $ | 299 | $ | 290 | 3.0 | % | ||||
LTL picked up revenue per shipment (excluding fuel surcharge) | $ | 264 | $ | 255 | 3.5 | % | ||||
LTL weight per shipment (in pounds) | 998 | 1,016 | (1.7 | )% | ||||||
Total picked up revenue (in millions)(a) | $ | 1,529.5 | $ | 1,568.6 | (2.5 | )% | ||||
Total tonnage (in thousands) | 2,996 | 3,122 | (4.0 | )% | ||||||
Total tonnage per day (in thousands) | 23.68 | 24.48 | (3.3 | )% | ||||||
Total shipments (in thousands) | 4,842 | 5,118 | (5.4 | )% | ||||||
Total shipments per day (in thousands) | 38.28 | 40.14 | (4.6 | )% | ||||||
Total picked up revenue per hundred weight | $ | 25.53 | $ | 25.12 | 1.6 | % | ||||
Total picked up revenue per hundred weight (excluding fuel surcharge) | $ | 22.55 | $ | 22.08 | 2.1 | % | ||||
Total picked up revenue per shipment | $ | 316 | $ | 307 | 3.1 | % | ||||
Total picked up revenue per shipment (excluding fuel surcharge) | $ | 279 | $ | 269 | 3.6 | % | ||||
Total weight per shipment (in pounds) | 1,238 | 1,220 | 1.4 | % | ||||||
27
First Half | |||||||
(in millions) | 2019 | 2018 | |||||
(a) Reconciliation of operating revenue to total picked up revenue: | |||||||
Operating revenue | $ | 1,544.6 | $ | 1,578.9 | |||
Change in revenue deferral and other | (15.1 | ) | (10.3 | ) | |||
Total picked up revenue | $ | 1,529.5 | $ | 1,568.6 | |||
(a) | Does not equal financial statement revenue due to revenue recognition adjustments between accounting periods and the impact |
of other revenue
(b) | Percent change based on unrounded figures and not the rounded figures presented |
Operating loss for YRC Freight was $5.1 million in the first half of 2019 compared to operating income of $19.9 million in the first half of 2018. Operating expenses decreased $9.3 million, or 0.6%, primarily due to a decrease in purchased transportation expense and fuel, operating expenses and supplies expense. These decreases were partially offset by increased salaries, wages and employee benefits.
Salaries, wages and employee benefits. Salaries, wages and employee benefits increased $15.2 million, or 1.7%, primarily due to a $17.1 million increase in benefits costs which was largely driven by a $10.8 million increase in union vacation expense due to restoration of benefits from the passage of the New NMFA, and a $3.4 million increase in salaries expense, partially offset by a $5.0 million decrease in wage expense as a result of an increase in contractual wages rates due to the New NMFA, which was more than offset by a decrease in tonnage that reduced the number of hours needed to process freight.
Fuel, operating expenses and supplies. Fuel, operating expenses and supplies decreased $10.0 million, or 3.4%, primarily due to a $9.8 million decrease in fuel expense, which was largely driven by fewer miles driven and lower prices, a $5.2 million decrease in vehicle maintenance expense, and a $3.7 million reduction in professional fees largely as a result of lower corporate service fees. These decreases were partially offset by a $6.6 million increase in other operating expenses as a result of vendor bankruptcy charges and settlement expenses, and a $2.0 million increase in facility maintenance expense.
Purchased transportation. Purchased transportation decreased $18.2 million, or 7.1%, primarily due to a $26.3 million decrease in rail and over-the-road purchased transportation expense due partially to reduced shipping volumes and a $6.0 million decrease from reduced usage of local purchased transportation and short-term equipment rentals. Purchased transportation expense also includes a $7.8 million increase in third-party costs for customer-specific logistics solutions and a $6.9 million increase in long-term equipment rentals in conjunction with the Company’s leasing strategy to reinvest in its fleet.
(Gains)/Losses on property disposals. Net gains on disposals of property were $2.0 million in the first half of 2019 primarily as a result of a deferred gain recognized from changes in contractual lease terms, compared to a $4.5 million loss in the first half of 2018, primarily due to losses on the disposal of revenue equipment.
Impairment charges. During the first quarter of 2019, we recorded an $8.2 million impairment charge that reflects the write-down of an intangible asset as a result of rebranding strategies, leading to discontinued use of a tradename.
Regional Transportation Results
Regional Transportation represented 37.1% of consolidated operating revenue for the second quarter of 2019, as compared to 37.6% for the second quarter of 2018. Regional Transportation represented 37.1% of consolidated operating revenue for the first half of 2019, as compared to 37.9% for the first half of 2018. The table below provides summary financial information for Regional Transportation for the second quarter and first half of 2019 and 2018:
Second Quarter | First Half | ||||||||||||||||||
(in millions) | 2019 | 2018 | Percent Change | 2019 | 2018 | Percent Change | |||||||||||||
Operating revenue | $ | 471.8 | $ | 499.0 | (5.5) % | $ | 910.4 | $ | 962.3 | (5.4)% | |||||||||
Operating income (loss) | 2.6 | 29.2 | (91.1) % | (4.4 | ) | 34.4 | (112.8)% | ||||||||||||
Operating ratio(a) | 99.4 | % | 94.1 | % | (5.3) pp | 100.5 | % | 96.4 | % | (4.1) pp | |||||||||
(*) not meaningful
28
Second Quarter of 2019 Compared to the Second Quarter of 2018
Regional Transportation reported operating revenue of $471.8 million for the second quarter of 2019, a decrease of $27.2 million, or 5.5%, from the second quarter of 2018. The decrease in revenue is primarily attributed to a decrease in tonnage and fuel surcharge revenue, partially offset by an improvement in base yield, excluding fuel surcharge. The table below summarizes the key revenue metrics for the Regional Transportation reporting segment for the second quarter of 2019 compared to the second quarter of 2018:
Second Quarter | ||||||||||
2019 | 2018 | Percent Change(b) | ||||||||
Workdays | 63.5 | 64.0 | ||||||||
LTL picked up revenue (in millions) | $ | 439.0 | $ | 459.1 | (4.4 | )% | ||||
LTL tonnage (in thousands) | 1,499 | 1,590 | (5.7 | )% | ||||||
LTL tonnage per day (in thousands) | 23.61 | 24.84 | (4.9 | )% | ||||||
LTL shipments (in thousands) | 2,383 | 2,531 | (5.9 | )% | ||||||
LTL shipments per day (in thousands) | 37.52 | 39.55 | (5.1 | )% | ||||||
LTL picked up revenue per hundred weight | $ | 14.64 | $ | 14.44 | 1.4 | % | ||||
LTL picked up revenue per hundred weight (excluding fuel surcharge) | $ | 12.90 | $ | 12.68 | 1.8 | % | ||||
LTL picked up revenue per shipment | $ | 184 | $ | 181 | 1.6 | % | ||||
LTL picked up revenue per shipment (excluding fuel surcharge) | $ | 162 | $ | 159 | 2.0 | % | ||||
LTL weight per shipment (in pounds) | 1,259 | 1,256 | 0.2 | % | ||||||
Total picked up revenue (in millions)(a) | $ | 472.6 | $ | 499.8 | (5.4 | )% | ||||
Total tonnage (in thousands) | 1,838 | 2,002 | (8.2 | )% | ||||||
Total tonnage per day (in thousands) | 28.95 | 31.28 | (7.4 | )% | ||||||
Total shipments (in thousands) | 2,432 | 2,590 | (6.1 | )% | ||||||
Total shipments per day (in thousands) | 38.29 | 40.47 | (5.4 | )% | ||||||
Total picked up revenue per hundred weight | $ | 12.85 | $ | 12.48 | 3.0 | % | ||||
Total picked up revenue per hundred weight (excluding fuel surcharge) | $ | 11.34 | $ | 10.97 | 3.3 | % | ||||
Total picked up revenue per shipment | $ | 194 | $ | 193 | 0.7 | % | ||||
Total picked up revenue per shipment (excluding fuel surcharge) | $ | 171 | $ | 170 | 1.1 | % | ||||
Total weight per shipment (in pounds) | 1,512 | 1,546 | (2.2 | )% | ||||||
Second Quarter | |||||||
(in millions) | 2019 | 2018 | |||||
(a) Reconciliation of operating revenue to total picked up revenue: | |||||||
Operating revenue | $ | 471.8 | $ | 499.0 | |||
Change in revenue deferral and other | 0.8 | 0.8 | |||||
Total picked up revenue | $ | 472.6 | $ | 499.8 | |||
(a) | Does not equal financial statement revenue due to revenue recognition adjustments between accounting periods |
(b) | Percent change based on unrounded figures and not the rounded figures presented |
Operating income for Regional Transportation was $2.6 million for the second quarter of 2019 compared to operating income of $29.2 million for the second quarter of 2018. Operating expenses decreased $0.6 million, or 0.1%, primarily due to decreased purchased transportation expense as well as decreased fuel, operating expenses and supplies expense. These decreases were partially offset by increased salaries, wages and employee benefits.
Salaries, wages and employee benefits. Salaries, wages and employee benefits increased $15.6 million, or 5.4%, primarily due to a $7.4 million increase in benefits costs which was largely driven by a $6.0 million increase in union vacation expense due to restoration of benefits from the passage of the New NMFA, a $5.8 million increase in workers’ compensation expense, and a $3.2
29
million increase in wage expense as a result of an increase in contractual wages rates due to the New NMFA, which was partially offset by a decrease in tonnage that reduced the number of hours needed to process freight. These increases were partially offset by a $2.2 million decrease in short-term incentive compensation.
Fuel, operating expenses and supplies. Fuel, operating expenses and supplies decreased $6.9 million, or 6.7%, primarily due to a $3.8 million decrease in fuel expense, which was largely driven by fewer miles driven and lower prices, a $1.8 million decrease in vehicle maintenance expense, and a $1.8 million reduction in professional fees largely as a result of lower corporate service fees.
Purchased transportation. Purchased transportation decreased $5.1 million, or 12.9%, primarily due to a $4.9 million decrease in over-the-road purchased transportation expense due partially to reduced shipping volumes.
Other operating expense. Other operating expense decreased $1.4 million, or 5.6%, primarily due to a $0.9 million decrease in operating taxes as a result of fewer miles driven.
(Gains)/losses on property disposals. Net gains on disposals of property were $2.9 million in 2019 as a result on gains on the sale of real property, as compared to net losses of $0.4 million in 2018, primarily due to losses on the disposal of revenue equipment.
30
First Half of 2019 Compared to the First Half of 2018
Regional Transportation reported operating revenue of $910.4 million for the first half of 2019, a decrease of $51.9 million, or 5.4%, from the first half of 2018. The decrease in revenue is primarily attributed to a decrease in tonnage and fuel surcharge, partially offset by an improvement in base yield, excluding fuel surcharge. The table below summarizes the key revenue metrics for the Regional Transportation reporting segment for the first half of 2019 compared to the first half of 2018:
First Half | ||||||||||
2019 | 2018 | Percent Change(b) | ||||||||
Workdays | 126.5 | 127.5 | ||||||||
LTL picked up revenue (in millions) | $ | 843.8 | $ | 884.1 | (4.5 | )% | ||||
LTL tonnage (in thousands) | 2,887 | 3,101 | (6.9 | )% | ||||||
LTL tonnage per day (in thousands) | 22.82 | 24.32 | (6.2 | )% | ||||||
LTL shipments (in thousands) | 4,576 | 4,918 | (7.0 | )% | ||||||
LTL shipments per day (in thousands) | 36.17 | 38.58 | (6.2 | )% | ||||||
LTL picked up revenue per hundred weight | $ | 14.62 | $ | 14.25 | 2.5 | % | ||||
LTL picked up revenue per hundred weight (excluding fuel surcharge) | $ | 12.91 | $ | 12.55 | 2.9 | % | ||||
LTL picked up revenue per shipment | $ | 184 | $ | 180 | 2.6 | % | ||||
LTL picked up revenue per shipment (excluding fuel surcharge) | $ | 163 | $ | 158 | 3.0 | % | ||||
LTL weight per shipment (in pounds) | 1,262 | 1,261 | 0.1 | % | ||||||
Total picked up revenue (in millions)(a) | $ | 911.0 | $ | 963.8 | (5.5 | )% | ||||
Total tonnage (in thousands) | 3,564 | 3,916 | (9.0 | )% | ||||||
Total tonnage per day (in thousands) | 28.17 | 30.71 | (8.3 | )% | ||||||
Total shipments (in thousands) | 4,673 | 5,034 | (7.2 | )% | ||||||
Total shipments per day (in thousands) | 36.94 | 39.48 | (6.4 | )% | ||||||
Total picked up revenue per hundred weight | $ | 12.78 | $ | 12.31 | 3.9 | % | ||||
Total picked up revenue per hundred weight (excluding fuel surcharge) | $ | 11.30 | $ | 10.84 | 4.2 | % | ||||
Total picked up revenue per shipment | $ | 195 | $ | 191 | 1.8 | % | ||||
Total picked up revenue per shipment (excluding fuel surcharge) | $ | 172 | $ | 169 | 2.2 | % | ||||
Total weight per shipment (in pounds) | 1,525 | 1,556 | (2.0 | )% | ||||||
First Half | |||||||
(in millions) | 2019 | 2018 | |||||
(a) Reconciliation of operating revenue to total picked up revenue: | |||||||
Operating revenue | $ | 910.4 | $ | 962.3 | |||
Change in revenue deferral and other | 0.6 | 1.5 | |||||
Total picked up revenue | $ | 911.0 | $ | 963.8 | |||
(a) | Does not equal financial statement revenue due to revenue recognition adjustments between accounting periods |
(b) | Percent change based on unrounded figures and not the rounded figures presented |
Operating loss for Regional Transportation was $4.4 million for the first half of 2019 compared to operating income of $34.4 million for the first half of 2018. Operating expenses decreased $13.1 million, or 1.4%, primarily due to decreased purchased transportation expense as well as decreased fuel, operating expenses and supplies expense. These decreases were partially offset by increased salaries, wages and employee benefits.
Salaries, wages and employee benefits. Salaries, wages and employee benefits increased $8.0 million, or 1.4%, primarily due to a $7.4 million increase in benefits costs which was largely driven by a $6.0 million increase in union vacation expense due to restoration of benefits from the passage of the New NMFA, a $5.4 million increase in workers’ compensation expense, and a $1.9 million increase in salaries expense. These increases were partially offset by a $3.8 million decrease in wage expense as a result
31
of a $10.7 million increase in contractual wages rates due to the New NMFA, which was more than offset by a decrease in tonnage that reduced the number of hours needed to process freight, and a $2.9 million decrease in short-term incentive compensation.
Fuel, operating expenses and supplies. Fuel, operating expenses and supplies decreased $6.5 million, or 3.3%, primarily due to a $6.2 million decrease in fuel expense, which was largely driven by fewer miles driven and lower prices.
Purchased transportation. Purchased transportation decreased $10.2 million, or 13.3%, primarily due to an $8.0 million decrease in over-the-road purchased transportation expense due partially to reduced shipping volumes, and a $2.9 million decrease in long-term equipment rentals due to increased equipment purchases.
Other operating expense. Other operating expense decreased $2.4 million, or 4.7%, primarily due to a $1.8 million decrease in operating taxes as a result of fewer miles driven.
(Gains)/losses on property disposals. Net gains on disposals of property were $2.5 million in 2019 as a result on gains on the sale of real property, as compared to net losses of $0.8 million in 2018, primarily due to losses on the disposal of revenue equipment.
32
Certain Non-GAAP Financial Measures
As discussed in the “Our Business” section, we use certain non-GAAP financial measures to assess performance. These measures should be considered in addition to the results prepared in accordance with GAAP, but should not be considered a substitute for, or superior to, our GAAP financial measures. For segment Adjusted EBITDA, we present the reconciliation from operating income (loss) to Adjusted EBITDA as it is consistent with how we measure performance.
Consolidated Adjusted EBITDA
The reconciliation of net income (loss) to EBITDA and EBITDA to Adjusted EBITDA (defined in our Term Loan Agreement as “Consolidated EBITDA”) for the second quarter and first half of 2019 and 2018, and the trailing twelve months ended June 30, 2019 and 2018, is as follows:
Second Quarter | First Half | Trailing Twelve Months Ended | |||||||||||||||||||||
(in millions) | 2019 | 2018 | 2019 | 2018 | June 30, 2019 | June 30, 2018 | |||||||||||||||||
Reconciliation of net income (loss) to Adjusted EBITDA(a): | |||||||||||||||||||||||
Net income (loss) | $ | (23.6 | ) | $ | 14.4 | $ | (72.7 | ) | $ | (0.2 | ) | $ | (52.3 | ) | $ | (4.7 | ) | ||||||
Interest expense, net | 27.8 | 25.5 | 54.3 | 51.0 | 107.8 | 102.6 | |||||||||||||||||
Income tax expense (benefit) | 9.1 | 10.4 | (0.6 | ) | (2.5 | ) | 13.0 | (9.3 | ) | ||||||||||||||
Depreciation and amortization | 38.5 | 37.6 | 78.5 | 75.3 | 150.9 | 148.7 | |||||||||||||||||
EBITDA | 51.8 | 87.9 | 59.5 | 123.6 | 219.4 | 237.3 | |||||||||||||||||
Adjustments for Term Loan Agreement: | |||||||||||||||||||||||
(Gains) losses on property disposals, net | (6.2 | ) | 2.2 | (4.6 | ) | 5.4 | (30.8 | ) | 3.1 | ||||||||||||||
Property gains on certain disposals(b) | — | 0.4 | — | 0.4 | 29.3 | 0.4 | |||||||||||||||||
Impairment charges | — | — | 8.2 | — | 8.2 | — | |||||||||||||||||
Letter of credit expense | 1.6 | 1.7 | 3.2 | 3.4 | 6.4 | 6.8 | |||||||||||||||||
Restructuring charges | 0.5 | 0.6 | 0.5 | 1.2 | 1.6 | 2.1 | |||||||||||||||||
Transaction costs related to issuances of debt | — | — | — | — | — | 8.1 | |||||||||||||||||
Nonrecurring consulting fees | 1.9 | 1.7 | 4.3 | 3.2 | 8.8 | 3.2 | |||||||||||||||||
Permitted dispositions and other | — | 0.2 | (1.1 | ) | 0.7 | (1.5 | ) | 1.1 | |||||||||||||||
Equity-based compensation expense | 1.1 | 3.2 | 3.4 | 4.8 | 4.9 | 7.3 | |||||||||||||||||
Union vacation charge | 4.2 | — | 4.2 | — | 4.2 | — | |||||||||||||||||
Non-union pension settlement charge | — | — | — | — | 10.9 | 7.6 | |||||||||||||||||
Nonrecurring item (vendor bankruptcy) | — | — | 3.7 | — | 8.0 | — | |||||||||||||||||
Other, net(c) | 2.7 | 2.9 | 6.4 | 3.8 | 9.3 | 9.4 | |||||||||||||||||
Adjusted EBITDA | $ | 57.6 | $ | 100.8 | $ | 87.7 | $ | 146.5 | $ | 278.7 | $ | 286.4 | |||||||||||
(a) | Certain reclassifications have been made to prior year to conform to current year presentation. |
(b) | Certain property gains are added back in the calculation of Adjusted EBITDA pursuant to the Term Loan Agreement which permits gains from the sale of excess property with continuing operations. |
(c) | As required under our Term Loan Agreement, Other, net shown above consists of the impact of certain items to be included in Adjusted EBITDA. |
33
Segment Adjusted EBITDA
The following represents Adjusted EBITDA by segment for the second quarter and first half of 2019 and 2018:
Second Quarter | First Half | ||||||||||||||
(in millions) | 2019 | 2018 | 2019 | 2018 | |||||||||||
Adjusted EBITDA by segment: | |||||||||||||||
YRC Freight | $ | 39.5 | $ | 54.5 | $ | 57.8 | $ | 76.6 | |||||||
Regional Transportation | 19.1 | 46.8 | 30.4 | 69.4 | |||||||||||
Corporate and other | (1.0 | ) | (0.5 | ) | (0.5 | ) | 0.5 | ||||||||
Adjusted EBITDA | $ | 57.6 | $ | 100.8 | $ | 87.7 | $ | 146.5 | |||||||
34
The reconciliation of operating income (loss), by segment, to Adjusted EBITDA for the second quarter and first half of 2019 and 2018, is as follows:
Second Quarter | First Half | ||||||||||||||
YRC Freight segment (in millions) | 2019 | 2018 | 2019 | 2018 | |||||||||||
Reconciliation of operating income (loss) to Adjusted EBITDA(a): | |||||||||||||||
Operating income (loss) | $ | 16.0 | $ | 26.8 | $ | (5.1 | ) | $ | 19.9 | ||||||
Depreciation and amortization | 21.6 | 21.5 | 44.5 | 43.1 | |||||||||||
(Gains) losses on property disposals, net | (3.2 | ) | 1.7 | (2.1 | ) | 4.5 | |||||||||
Property gains on certain disposals(b) | — | 0.4 | — | 0.4 | |||||||||||
Impairment charges | — | — | 8.2 | — | |||||||||||
Letter of credit expense | 1.0 | 1.1 | 2.0 | 2.1 | |||||||||||
Restructuring charges | — | — | — | 0.1 | |||||||||||
Non-union pension and postretirement benefits | (0.3 | ) | 0.6 | (0.4 | ) | 1.1 | |||||||||
Nonrecurring consulting fees | 1.7 | 1.6 | 3.8 | 3.1 | |||||||||||
Union vacation charge | 2.6 | — | 2.6 | — | |||||||||||
Nonrecurring item (vendor bankruptcy) | — | — | 3.7 | — | |||||||||||
Other, net(c) | 0.1 | 0.8 | 0.6 | 2.3 | |||||||||||
Adjusted EBITDA | $ | 39.5 | $ | 54.5 | $ | 57.8 | $ | 76.6 | |||||||
Second Quarter | First Half | ||||||||||||||
Regional Transportation segment (in millions) | 2019 | 2018 | 2019 | 2018 | |||||||||||
Reconciliation of operating income (loss) to Adjusted EBITDA: | |||||||||||||||
Operating income (loss) | $ | 2.6 | $ | 29.2 | $ | (4.4 | ) | $ | 34.4 | ||||||
Depreciation and amortization | 16.7 | 16.1 | 33.5 | 32.2 | |||||||||||
(Gains) losses on property disposals, net | (3.0 | ) | 0.4 | (2.5 | ) | 0.8 | |||||||||
Letter of credit expense | 0.6 | 0.5 | 1.1 | 1.1 | |||||||||||
Nonrecurring consulting fees | 0.2 | — | 0.5 | — | |||||||||||
Union vacation charge | 1.6 | — | 1.6 | — | |||||||||||
Other, net(c) | 0.4 | 0.6 | 0.6 | 0.9 | |||||||||||
Adjusted EBITDA | $ | 19.1 | $ | 46.8 | $ | 30.4 | $ | 69.4 | |||||||
Second Quarter | First Half | ||||||||||||||
Corporate and other (in millions) | 2019 | 2018 | 2019 | 2018 | |||||||||||
Reconciliation of operating loss to Adjusted EBITDA: | |||||||||||||||
Operating loss | $ | (4.3 | ) | $ | (5.1 | ) | $ | (7.9 | ) | $ | (7.7 | ) | |||
Depreciation and amortization | 0.2 | 0.1 | 0.5 | 0.1 | |||||||||||
Losses on property disposals, net | — | 0.1 | — | 0.1 | |||||||||||
Letter of credit expense | — | — | 0.1 | 0.1 | |||||||||||
Restructuring charges | 0.5 | 0.6 | 0.5 | 1.1 | |||||||||||
Permitted dispositions and other | — | 0.2 | (1.1 | ) | 0.7 | ||||||||||
Non-union pension and postretirement benefits | (0.2 | ) | (0.2 | ) | (0.4 | ) | (0.2 | ) | |||||||
Equity-based compensation expense | 1.1 | 3.2 | 3.4 | 4.8 | |||||||||||
Other, net(c) | 1.7 | 0.6 | 4.4 | 1.5 | |||||||||||
Adjusted EBITDA | $ | (1.0 | ) | $ | (0.5 | ) | $ | (0.5 | ) | $ | 0.5 | ||||
(a) | Certain reclassifications have been made to prior year to conform to current year presentation. |
(b) | Certain property gains are added back in the calculation of Adjusted EBITDA pursuant to the Term Loan Agreement which permits gains from the sale of excess property with continuing operations. |
(c) | As required under our Term Loan Agreement, Other, net shown above consists of the impact of certain items to be included in Adjusted EBITDA. |
35
Liquidity and Capital Resources
Our principal sources of liquidity are cash and cash equivalents, available borrowings under our asset-based loan facility and any prospective net cash flow from operations. As of June 30, 2019, our maximum availability under our ABL Facility was $81.6 million. Our Managed Accessibility was $39.3 million, which represents the maximum amount we would access on the ABL Facility and is adjusted for eligible receivables plus eligible borrowing base cash measured at June 30, 2019. Our cash and cash equivalents and Managed Accessibility were $156.8 million.
For the December 31, 2018 borrowing base certificate, which was filed in January of 2019, we transferred $25.0 million of cash into restricted cash to maintain the 10% threshold, as permitted under the ABL Facility, which transfer effectively put our cash and cash equivalents and Managed Accessibility to $203.8 million.
The table below summarizes cash and cash equivalents and Managed Accessibility as of June 30, 2019 and December 31, 2018:
(in millions) | June 30, 2019 | December 31, 2018 | |||||
Cash and cash equivalents | $ | 117.5 | $ | 227.6 | |||
Changes to restricted cash | — | (25.0 | ) | ||||
Managed Accessibility | 39.3 | 1.2 | |||||
Total cash and cash equivalents and Managed Accessibility | $ | 156.8 | $ | 203.8 | |||
Outside of funding normal operations, our principal uses of cash include making contributions to various multi-employer pension funds and our single-employer pension plans, and meeting our other cash obligations including, but not limited to, paying principal and interest on our funded debt, making payments on our equipment leases, and funding capital expenditures.
As of June 30, 2019, we had $865.0 million in aggregate par value of outstanding indebtedness, the majority of which matures in approximately three years. We also have future funding obligations for our various multi-employer pension funds and single-employer pension plans. We expect our funding obligations for the remainder of 2019 for our multi-employer pension funds and single-employer pension plans will be $62.5 million and $5.7 million, respectively. In addition, we have, and will continue to have, operating lease obligations. As of June 30, 2019, our operating lease payment obligations through 2030 totaled $426.6 million and are expected to increase as we lease additional revenue equipment. For the first half of 2019, we entered into new operating leases for revenue equipment totaling $64.0 million in future lease payments, payable over an average lease term of four years.
Our capital expenditures for the first half of 2019 and 2018 were $70.6 million and $46.5 million, respectively. These amounts were principally used to fund the purchase of used tractors and trailers, for capitalized costs to improve our technology infrastructure and to refurbish engines for our revenue fleet. For the six months ended June 30, 2019 we entered into new operating lease commitments for revenue equipment with a capital equivalent value of $77.9 million.
As of June 30, 2019, our Standard & Poor’s Corporate Family Rating was “B-” with a stable outlook. As of July 25, 2019, our Moody’s Investor Service Corporate Family Rating was “B2” with a stable outlook.
Risks and Uncertainties Regarding Compliance with Credit Facility Financial Covenants
We believe that our results of operations will be sufficient to allow us to comply with the covenants in the Term Loan Agreement for at least the next twelve months. Our ability to satisfy our liquidity needs and meet our future covenants during the next twelve months and thereafter is dependent upon our ability to achieve operating results that reflect improvement over our first half 2019 results. Although we are currently in compliance with the maximum total leverage ratio covenant under our Term Loan Agreement, the covenant levels tighten in the coming quarters. Means for improving our profitability include the successful implementation of network optimization, and the realization of pricing, productivity and efficiency initiatives, as well as increased volume, all of which may not be within our control. If we are unable to achieve the improved results required to comply with this covenant in one or more quarters over the next twelve months, we will need to take more specific actions as described below.
We may decide to pay down a sufficient amount of the Term Loan to comply with the covenant. We currently believe that the results of our operations will be sufficient to allow us to make such payments and fund our operations for the next twelve months. Means for improving our ability to make such payments may include the requirement to pursue certain actions, including but not limited to, reducing capital expenditures for revenue equipment and technology, accelerating terminal closures identified through the network optimization plan, reducing headcount, and seeking additional cost reductions in the organization, all of which may
36
not be within our control. Some of those actions might adversely affect our operations and financial performance over the long-term.
The Company is currently pursuing new financing alternatives, including a potential refinancing of the Term Loan Agreement to provide for less restrictive financial covenants, as well as potentially lowering interest rates and extending the maturity of the facility as compared to our current Term Loan Agreement.
Cash Flows
Operating Cash Flow
Cash used in operating activities was $29.5 million during the first half of 2019, compared to $71.5 million of cash provided during the first half of 2018. The increase in cash used was primarily attributable to a $72.5 million increase in net loss, and the remaining difference is primarily related to timing differences in working capital accounts.
Investing Cash Flow
Cash used in investing activities was $62.3 million during the first half of 2019 compared to $42.3 million during the first half of 2018, the increase of $20.0 million was largely driven by higher revenue equipment acquisitions partially offset by higher cash proceeds from the sale of real property.
Financing Cash Flow
Cash used in financing activities for the first half of 2019 and 2018 was $18.3 million and $16.2 million, respectively, which consist primarily of repayments on our long-term debt.
37
Contractual Obligations and Other Commercial Commitments
The following sections provide aggregated information regarding our contractual cash obligations and other commercial commitments as of June 30, 2019.
Contractual Cash Obligations
The following table reflects our cash outflows that we are contractually obligated to make as of June 30, 2019:
Payments Due by Period | |||||||||||||||||||
(in millions) | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||||
ABL Facility(a) | $ | 15.4 | $ | 6.9 | $ | 8.5 | $ | — | $ | — | |||||||||
Term Loan(b) | 741.5 | 76.0 | 146.9 | 518.6 | — | ||||||||||||||
Lease financing obligations(c) | 386.3 | 42.1 | 81.1 | 79.8 | 183.3 | ||||||||||||||
Pension deferral obligations(d) | 93.5 | 7.3 | 14.0 | 72.2 | — | ||||||||||||||
Workers’ compensation, property damage and liability claims obligations(e) | 358.0 | 100.6 | 115.4 | 50.0 | 92.0 | ||||||||||||||
Operating leases(f) | 426.6 | 145.3 | 209.8 | 60.0 | 11.5 | ||||||||||||||
Other contractual obligations(g) | 19.1 | 13.9 | 5.1 | 0.1 | — | ||||||||||||||
Capital expenditures and other (h) | 35.1 | 35.1 | — | — | — | ||||||||||||||
Total contractual obligations | $ | 2,075.5 | $ | 427.2 | $ | 580.8 | $ | 780.7 | $ | 286.8 | |||||||||
(a) | The ABL Facility includes future payments for the letter of credit and unused line fees and are not included on the Company’s consolidated balance sheets. |
(b) | The Term Loan includes principal and interest payments but excludes unamortized discounts. |
(c) | The lease financing obligations include interest payments of $352.4 million and principal payments of $33.9 million. The remaining principal obligation is offset by the estimated book value of leased property at the expiration date of each lease agreement. |
(d) | Pension deferral obligations includes principal and interest payments on the Second A&R CDA. |
(e) | The workers’ compensation, property damage and liability claims obligations represent our estimate of future payments for these obligations, not all of which are contractually required. |
(f) | Operating leases represent future payments under contractual lease arrangements primarily for revenue equipment. |
(g) | Other contractual obligations include future service agreements and certain maintenance agreements and are not included on the Company’s consolidated balance sheets. |
(h) | Capital expenditure and other obligations primarily includes noncancelable orders for revenue equipment the Company will either purchase or lease. If leased, the cash obligations will be scheduled over the multi-year term of the lease and ROU assets and liabilities will be recorded upon lease execution. |
Other Commercial Commitments
The following table reflects other commercial commitments or potential cash outflows that may result from a contingent event.
Amount of Commitment Expiration Per Period | |||||||||||||||||||
(in millions) | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||||
ABL Facility availability (a) | $ | 81.6 | $ | — | $ | 81.6 | $ | — | $ | — | |||||||||
Letters of credit(b) | 341.3 | — | 341.3 | — | — | ||||||||||||||
Surety bonds(c) | 122.6 | 112.4 | 10.2 | — | — | ||||||||||||||
Total commercial commitments | $ | 545.5 | $ | 112.4 | $ | 433.1 | $ | — | $ | — | |||||||||
(a) | Availability under the ABL Facility is derived by reducing the amount that may be advanced against eligible receivables plus eligible borrowing base cash by certain reserves imposed by the ABL Agent and our outstanding letters of credit. |
(b) | Letters of credit outstanding are generally required as collateral to support self-insurance programs and do not represent additional liabilities as the underlying self-insurance accruals are already included in our consolidated balance sheets. |
(c) | Surety bonds are generally required for workers’ compensation to support self-insurance programs, which include certain bonds that do not have an expiration date but are redeemable on demand, and do not represent additional liabilities as the underlying self-insurance accruals are already included in our consolidated balance sheets. |
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements except for other contractual obligations for service agreements and capital purchases, letters of credit and surety bonds, which are reflected in the above tables.
38
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are primarily exposed to the market risk associated with unfavorable movements in interest rates, foreign currencies, and fuel price volatility. The risk inherent in our market risk-sensitive instruments and positions is the potential loss or increased expense arising from adverse changes in those factors. There have been no material changes to our market risk policies or our market risk-sensitive instruments and positions as described in our annual report on Form 10-K for the year ended December 31, 2018.
Item 4. Controls and Procedures
As required by the Exchange Act, we maintain disclosure controls and procedures designed to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Our management, with the participation of our principal executive and financial officers, has evaluated our disclosure controls and procedures as of June 30, 2019 and have concluded that our disclosure controls and procedures were effective as of June 30, 2019.
We implemented ASC 842, Leases, on January 1, 2019 and the Company implemented internal controls related to lease balances and disclosures on its consolidated financial statements.
There were no other changes in our internal control over financial reporting that occurred during the fiscal quarter ended June 30, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
39
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
We discuss legal proceedings in the “Commitments, Contingencies and Uncertainties” note to our consolidated financial statements included with this quarterly report on Form 10-Q, and that discussion is incorporated by reference herein.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed below and as discussed in Part I, Item IA. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018, which could materially affect our business, financial condition or future results. The risks described below and in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may eventually prove to materially adversely affect our business, financial condition and/or operating results.
Our failure to comply with the covenants in the documents governing our existing and future indebtedness could materially adversely affect our financial condition and liquidity.
The documents governing our indebtedness contain financial covenants, affirmative covenants requiring us to take certain actions and negative covenants restricting our ability to take certain actions. In particular, our Term Loan Agreement for our $600 million term loan facility contains certain financial covenants that, among other things, restrict certain capital expenditures and require us to not exceed a maximum total leverage ratio. For the four consecutive fiscal quarters ending June 30, 2019, our maximum total leverage ratio was 3.25 to 1.00, and our actual total leverage ratio during this period 3.12 to 1.00. The maximum total leverage ratio under the Term Loan steps down to 3.00 for the four consecutive fiscal quarters ending December 31, 2019, then to 2.75 for the four consecutive fiscal quarters ending September 30, 2020. For additional information, see the “Debt and Financing” footnote to the consolidated financial statements.
We believe that our results of operations will be sufficient to allow us to comply with the covenants in the Term Loan Agreement for at least the next twelve months. Our ability to satisfy our liquidity needs and meet our future covenants during the next twelve months and thereafter is dependent upon our ability to achieve operating results that reflect improvement over our first half 2019 results. Means for improving our profitability may include successful implementation of network optimization, and the realization of pricing, productivity and efficiency initiatives, as well as increased volume, all of which may not be within our control. If we are unable to achieve the improved results, we could fail to comply with this covenant in one or more quarters over the next twelve months absent one or more specific actions as described below.
We may seek to pay down a sufficient amount of the Term Loan to comply with the covenant. While we currently believe that the results of our operations will be sufficient to allow us to make such payments and fund our operations for the next twelve months, we may be required to pursue certain actions, including but not limited to, reducing capital expenditures, curtailing actions relating to our planned revenue growth, additional headcount reductions, and/or seeking other cost reductions. Some of those actions might adversely affect our operations and financial performance over the long-term.
Alternatively, we would need to seek an amendment or waiver from our lenders, or take other remedial measures. The Company is currently pursuing new financing alternatives, including a potential refinancing of the Term Loan Agreement to provide for less restrictive financial covenants, as well as potentially lowering interest rates and extending the maturity of the facility as compared to our current Term Loan Agreement. There is no guarantee that the Company will be able to implement available alternatives on terms that are commercially reasonable for the Company. Our ability to refinance our term loan debt, amend our credit facilities, or obtain waivers from our lenders depends on certain matters that are outside of our control and there can be no assurance that we will be successful in that regard.
Any covenant breach or other event of default could enable lenders thereunder to accelerate the repayment of amounts outstanding and exercise remedies with respect to the collateral. If our lenders under our credit facilities demand payment, we will not have sufficient cash to repay such indebtedness. In addition, a default under our credit facilities or the lenders exercising their remedies thereunder could trigger cross-default provisions in our other indebtedness and certain other operating agreements.
In addition, any covenant breach or event of default could harm our credit rating and our ability to obtain financing on acceptable terms. The occurrence of any of these events could have a material adverse effect on our financial condition and liquidity.
40
If our relationship with our employees and unions were to deteriorate, we may be faced with labor disruptions or stoppages or general uncertainty by our customers, which could have a material adverse effect on our business, financial condition and results of operations, result in a loss of customers, and place us at a disadvantage relative to non-union competitors.
Each of our operating subsidiaries has employees who are represented by the International Brotherhood of Teamsters (“IBT”). These employees comprised 79% of our workforce at June 30, 2019. Salaries, wages and employee benefits for both union and non-union employees compose over half of our operating costs. Each of our YRC Freight, New Penn, and Holland subsidiaries employ most of their unionized employees under the terms of a common, master collective bargaining agreement and related areas supplemental agreements that remain in effect through March 31, 2024. Our USF Reddaway subsidiary (“Reddaway”) currently is in the process of renegotiating collective bargaining agreements covering approximately 1,500 IBT-represented employees. Those contracts, which initially were due to expire on March 31, 2019, have been extended through August 16, 2019 to enable the parties to continue the negotiations process while the contracts remain in effect. If we are unable to reach a final, ratified agreement with our unionized IBT employees at Reddaway, we may be subject to threatened or actual work interruptions and/or stoppages. Any work stoppage could immediately and adversely affect Reddaway’s ability to operate its freight transportation services, and could directly or indirectly have an adverse impact on operations at our other subsidiaries. This could have a material adverse effect on our financial condition, results of operations and the price of our common stock. Among other consequences, such a work stoppage could cause potential disruption in service or uneasiness for our customers, who may seek other transportation service alternatives. Moreover, there is a general risk of deterioration in customer accounts during the negotiation process due to uncertainty or potential negative publicity, which may adversely impact our ability to meet volume and revenue expectations.
The IBT also represents a number of employees at YRC Freight in Canada under more localized agreements, which have wages, benefit contributions and other terms and conditions that we believe better fit the cost structure and operating models of these business units. Our subsidiaries are regularly subject to grievances, arbitration proceedings and other claims concerning alleged past and current non-compliance with applicable labor law and collective bargaining agreements.
Any labor dispute or work stoppage, at Reddaway or any of our operating subsidiaries, may materially and adversely impact our results of operations and could cause us to be unable to meet the terms of our term loan facility, ABL Facility, and amended and restated contribution deferral agreements.
41
Item 6. Exhibits
National Master Freight Agreement, effective May 14, 2019, among the International Brotherhood of Teamsters, YRC Inc., USF Holland LLC and New Penn Motor Express LLC (Conformed copy for reference only; not executed in this format; not a legal document) | |
101.INS* | XBRL Instance Document |
101.SCH* | XBRL Taxonomy Extension Schema |
101.CAL* | XBRL Taxonomy Extension Calculation Linkbase |
101.DEF* | XBRL Taxonomy Extension Definition Linkbase |
101.LAB* | XBRL Taxonomy Extension Label Linkbase |
101.PRE* | XBRL Taxonomy Extension Presentation Linkbase |
__________________________
* Indicates documents filed herewith.
42
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.
YRC WORLDWIDE INC. | ||
Date: August 9, 2019 | /s/ Darren D. Hawkins | |
Darren D. Hawkins | ||
Chief Executive Officer | ||
Date: August 9, 2019 | /s/ Stephanie D. Fisher | |
Stephanie D. Fisher | ||
Chief Financial Officer | ||
43