Yellow Corp - Quarter Report: 2020 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2020

OR

For the transition period from                     to

Commission file number: 0-12255

YRC Worldwide Inc.

(Exact name of registrant as specified in its charter)

(913) 696-6100

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

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  ☒    No  ☐

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  ☒    No  ☐

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.

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. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes  ☐    No  ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

1

INDEX

2

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)

The accompanying notes are an integral part of these statements.

3

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)

YRC Worldwide Inc. and Subsidiaries

For the Three Months Ended March 31

(Amounts in millions except per share data, shares in thousands)

(Unaudited)

The accompanying notes are an integral part of these statements.

4

STATEMENTS OF CONSOLIDATED CASH FLOWS

YRC Worldwide Inc. and Subsidiaries

For the Three Months Ended March 31

(Amounts in millions)

(Unaudited)

The accompanying notes are an integral part of these statements.

5

STATEMENT OF CONSOLIDATED SHAREHOLDERS’ DEFICIT

YRC Worldwide Inc. and Subsidiaries

For the Three Months Ended March 31

(Amounts in millions)

(Unaudited)

The accompanying notes are an integral part of these statements.

6

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.

YRC Worldwide provides for the movement of industrial, commercial and retail goods through our LTL subsidiaries including USF Holland LLC (“Holland”), New Penn Motor Express LLC (“New Penn”), USF Reddaway Inc. (“Reddaway”), YRC Inc. and YRC Freight Canada Company (both doing business as, and herein referred to as, “YRC Freight”). Our LTL companies provide regional, national and international services through a consolidated network of facilities located across the United States, Canada, and Puerto Rico. We also offer services through HNRY Logistics, Inc. (“HNRY Logistics”), our customer-specific logistics solutions provider, specializing in truckload, residential, and warehouse solutions.

At March 31, 2020, 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 significant intercompany accounts and transactions have been eliminated in consolidation. We report on a calendar year basis. The quarters of Holland and Reddaway consist of thirteen weeks that end on a Saturday either before or after the end of March, June and September, whereas all other companies’ quarters end on the natural calendar quarter end.

Covenant Compliance, Liquidity, and Ability to Continue as a Going Concern

The consolidated financial statements have been prepared on the going concern basis of accounting, which assumes the Company will continue to operate as a going concern and which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. However, absent governmental assistance or a meaningful stabilization of the economy in the near-term, our ability to comply with our debt covenants for a period of one year from the date these financial statements have been issued, and our ability to generate sufficient cash flows and liquidity to fund operations raises substantial doubt about our ability to continue as a going concern, as defined in Accounting Standards Codification (“ASC”) 205-40, Going Concern. This interim financial information does not include any adjustments that might result from the outcome of this uncertainty.

During 2019, the freight industry experienced a recession.  This recession appeared to have stabilized in the first quarter of 2020. However, beginning the last two weeks of March our industry and the economy at-large experienced a precipitous and significant decline in economic activity due to the impact that the 2019 novel coronavirus disease (“COVID-19”).  The COVID-19 pandemic and related economic repercussions have created significant uncertainty and has resulted in a significant decrease in the volume that was expected during 2020 by both the Company and the industry as a whole. As COVID-19 is expected to negatively impact our liquidity levels, in order to maintain adequate liquidity to fund our operations, the Company began taking liquidity preservation actions in late March and early April including layoffs, furloughs, further eliminations of short-term incentive compensation and reductions in capital expenditures, and we have sought deferment of payments to various parties. As discussed further in Note 3, we also amended our New Term Loan Agreement to eliminate the vast majority of interest owed in cash for the first half of 2020. Further, we benefited from the support afforded to us under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) which has provided temporary relief related to the payment of employer payroll taxes and non-union pension payments. Further actions are currently being pursued to preserve liquidity as necessary over the duration of the current economic downturn. Not all of these actions are within our control. Given the significant uncertainty arising from the COVID-19 pandemic and the related economic repercussions, there can be no assurance that our efforts to maintain adequate liquidity will be achieved.

Under the New Term Loan, we are required to maintain at least $200.0 million in Adjusted EBITDA on a trailing-twelve-month (“TTM”) basis measured each quarter until maturity. For the TTM period ended March 31, 2020, we achieved Adjusted EBITDA of $214.6 million. In April 2020, we amended the New Term Loan to waive the Adjusted EBITDA covenant for every quarter of the year through and including December 31, 2020. While we obtained relief from this covenant for the duration of 2020, based on current projections and primarily as a result that COVID-19 had on our business, we do not believe that our results of operations will allow us to comply with the minimum Adjusted EBITDA covenant at March 31, 2021, which is within twelve

7

months of the issuance date of these financial statements. We intend to amend the New Term Loan again; however, obtaining an amendment is not within our control. If we are unable to comply with our covenants, the New Term Loan lenders may exercise their rights available to them under the New Term Loan credit agreement.

Segments

As noted in our 2019 annual report on Form 10-K, our Chief Operating Decision Maker began evaluating performance and business results, as well as making resource and operating decisions under the single segment view as a result of the business transformation that began during 2019.  As such, a single segment view is presented in this Form 10-Q.  See further details in our 2019 annual report as filed March 11, 2020.

Revenue Disaggregation

We considered the disclosure requirements for revenue disaggregation guidance in ASC Topic 606, Revenue from Contracts with Customers, and noted that our business transformation has led to one consolidated LTL network as we joined our national and regional operations and no longer measure revenues by geographies. 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 that move in our network.

Reclassifications

Certain reclassifications have been made to prior year’s balances to conform with current year presentation, including lease payments previously reported in “Change in other operating liabilities” operating cash flows in the statement of consolidated cash flows are now reported in “Lease payments” in the operating cash flows.

Impact of Recently-Issued Accounting Standards

While there are recently issued accounting standards that are applicable to the Company, none of these standards are expected to have a material impact on our financial statements.

3. Debt and Financing

Our outstanding debt as of March 31, 2020 consisted of the following:

New Term Loan

On September 11, 2019, the Company and certain of its subsidiaries, as guarantors (the “Term Guarantors”), amended and restated the existing credit facilities under the credit agreement dated February 13, 2014 (the “Prior Term Loan Agreement”) and entered into a $600.0 million term loan agreement (“New Term Loan”) with funds managed by Apollo Global Management, LLC acting collectively as lead lender, and Cortland Products Corp, as administrative agent and collateral agent. The obligations of the

8

Company under the agreement governing (the “New Term Loan Agreement”) are unconditionally guaranteed by the Term Guarantors.

The New Term Loan has a maturity date of June 30, 2024, with a single payment due at maturity of the outstanding balance. The New Term Loan bears interest at LIBOR (subject to a floor of 1.0%) plus a margin of 7.5% per annum, payable at least quarterly in cash, subject to a 1.0% margin step down in the event the Company achieves greater than $400.0 million in trailing-twelve-month Adjusted EBITDA (defined in the New Term Loan Agreement as “Consolidated EBITDA”). Obligations under the New Term Loan are secured by a perfected first priority security interest in (subject to permitted liens) assets of the Company and the Term Guarantors, including but not limited to all of the Company’s wholly owned terminals, tractors and trailers, subject to certain limited exceptions.

On April 7, 2020, the Company and certain of its subsidiaries entered into Amendment No. 1 (the “Amendment”) to the New Term Loan Agreement as a result of expected future covenant and liquidity tightening due to unprecedented economic deterioration resulting from COVID-19 pandemic and shelter-in-place orders made across North America by various governmental entities and private enterprises.  The Amendment principally provides additional liquidity allowing the Company to defer quarterly interest payments for the quarter ended March 31, 2020 and the quarter ending June 30, 2020 with almost all of such interest to be paid-in-kind. The Amendment also provides for a waiver with respect to the Consolidated EBITDA financial covenant during each fiscal quarter during the fiscal year ending December 31, 2020. The interest rate was reset to a fixed 14% during the first six months of 2020.

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 March 31, 2020, our maximum availability under our ABL Facility was $59.2 million, and our managed accessibility was $19.1 million. Maximum availability 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 $341.3 million of outstanding letters of credit. Our Managed Accessibility of $19.1 million represents the maximum amount we would access on the ABL Facility and is adjusted for eligible receivables plus eligible borrowing base cash measured at March 31, 2020.  The credit agreement governing the ABL Facility permits adjustments from eligible borrowing base cash to restricted cash prior to the compliance measurement date of April 15, 2020.  As of April 15, 2020, we moved $5.0 million of cash into restricted cash, as permitted under the ABL Facility, which effectively put our cash and cash equivalents and Managed Accessibility to $118.0 million as of March 31, 2020. 

For the December 31, 2019 borrowing base certificate, which was filed in January of 2020, we transferred $29.0 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 $80.4 million.

The table below summarizes cash and cash equivalents and Managed Accessibility as of March 31, 2020 and December 31, 2019:

Covenants

The New Term Loan Agreement includes a financial covenant requirement for the Company to maintain a minimum of $200.0 million trailing-twelve-month (“TTM”) Adjusted EBITDA, measured quarterly. Consolidated Adjusted EBITDA, defined in our New 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 property disposals, restructuring charges, transaction costs related to issuances of debt, non-recurring consulting fees, non-cash impairment charges, integration costs, severance, non-recurring charges and the gains or losses from permitted dispositions, discontinued operations, and certain non-cash expenses, charges and losses (provided that if any of such non-cash expenses, charges or losses represents an accrual or reserve for potential cash items in any future period, the cash payment in respect thereof in such future period will be subtracted from Consolidated EBITDA in such future period to the extent paid). The definition was further modified under the New Term Loan Agreement such that certain expenses that qualify as adjustments are capped at 10.0% of the trailing-twelve-month Adjusted EBITDA, in aggregate. Adjustments subject to the 10.0% cap include, but are not limited to, restructuring charges, integration costs, severance, and non-recurring charges. Additionally, all net gains from the disposition of properties are excluded from the definition of Adjusted EBITDA, therefore any gains previously recognized in Adjusted EBITDA, as that term was previously defined in our SEC filings, in

9

accordance with its definition in the Prior Term Loan Agreement, will not be included in the calculation of Adjusted EBITDA under the New Term Loan Agreement.

The Amendment provides for a waiver of the minimum Consolidated EBITDA financial covenant for the testing periods ending on each fiscal quarter in the fiscal year ending December 31, 2020.  The Amendment, however, requires that for the period commencing on the effective date of the Amendment and through the first fiscal quarter reporting period after January 1, 2021 in which Consolidated EBITDA for the TTM period ending as of the last day of such fiscal quarter is greater than $200.0 million (the “Specified Period”), the Company maintain $55.0 million of “Liquidity” (such amount being calculated as the Company’s and New Term Loan’s guarantors’ unrestricted cash on hand plus the amount of “Availability” (as defined in the loan agreement for the ABL Facility) to the extent such Availability could be borrowed under the ABL Facility) measured twice each week, also referred to herein as the “Liquidity covenant.”  The Amendment also provides for certain anti-cash hoarding covenants, which require mandatory prepayments of the term loans with the amount of any cash on the Company’s balance sheet in excess of $200.0 million to the extent the condition to make voluntary prepayments of term loans under the ABL Facility is satisfied, which prepayments could adversely affect our cash balances.

Risks and Uncertainties Regarding Compliance with Credit Facility Financial Covenants

Under the New Term Loan, we are required to maintain at least $200.0 million in Adjusted EBITDA on a TTM basis measured each quarter until maturity in June 2024.  For the TTM period ended March 31, 2020, we achieved Adjusted EBITDA of $214.6 million.  While we obtained relief from the minimum Adjusted EBITDA covenant for the duration of 2020 as a result of the Amendment, we do not believe that our results of operations will allow us to comply with this covenant at March 31, 2021, which is inside the next twelve months beyond the issuance date of these financial statements. 

We also cannot provide assurances that we will be able to comply with the Liquidity financial covenant during the Specified Period provided for in the Amendment. While a number of actions are being taken to manage liquidity, the duration of the current economic slowdown is uncertain, and these actions may not be sufficient if the economic environment is impacted for a sustained period of time.

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:

The fair values of the New Term Loan and 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 are estimated using a publicly traded secured loan with similar characteristics (level three input for fair value measurement).

10

4. Leases

11

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 months ended March 31:

We have contributed $2.1 million to our Company-sponsored pension plans through March 31, 2020. Under the CARES Act, we will not be making any additional contributions in 2020.  The $29.3 million in deferred payments will be required to be made on January 1, 2021.

6. Income Taxes

Our effective tax rate for the three months ended March 31, 2020 was (10.3%) compared to 16.5% for the three months ended March 31, 2019. The significant items impacting the 2020 rate include a benefit recognized due to application of the exception to the rules regarding intraperiod tax allocation, a net state and foreign tax provision, certain permanent items and a change in the valuation allowance established for the net deferred tax asset balance projected for December 31, 2020. The significant items impacting the 2019 rate include a net state and foreign tax provision, 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, 2019.   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 March 31, 2020 and December 31, 2019, substantially all of our net deferred tax assets were subject to a valuation allowance.

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 months ended March 31, 2020 and 2019 are as follows:

At March 31, 2020 and 2019, our anti-dilutive unvested shares, options, and stock units were approximately 176,000 and 279,000, respectively.

12

8. Commitments, Contingencies and Uncertainties

Department of Defense Complaints

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 heard 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 alleged that the defendants had violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by making false and misleading statements relating to the Company’s freight billing practices as alleged in the Department of Defense complaint described above. The action included 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. On March 27, 2020, the court granted defendants’ motion to dismiss in its entirety and entered judgment closing the case. The co-lead plaintiffs filed a notice of appeal to the U.S. Court of Appeals for the Second Circuit on April 27, 2020.

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. In an amended complaint, filed on October 15, 2019, Darren D. Hawkins was added as a defendant. The case, captioned Hastey v. Welch, et al., Case No. 2:19-cv-2266-KGG, was filed in the United States District Court for the District of Kansas. The Complaint alleged 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 asserted that the individual defendants’ purported conduct violated Section 14(a) of the Securities Exchange Act of 1934 and that they breached their fiduciary duties, were unjustly enriched, and engaged in corporate waste. On March 30, 2020, the Court granted the Company’s and individual defendants’ motion to dismiss, dismissing Plaintiff’s Section 14(a) claim with prejudice, and declining to exercise supplemental jurisdiction over the remaining claims and thus dismissing them without prejudice. The Court further denied as moot motions to intervene in the action that had been filed by three putative shareholders.

In October 2019, another putative shareholder filed an action derivatively and on behalf of the Company in the United States District Court for the District of Delaware naming the same defendants as did the October 15, 2019 amended complaint in the Hastey case. The case is captioned Broughton v. Hawkins, et al. Case No. 1:19-cv-01958-UNA, and makes claims similar to those made in Hastey.  After a motion to dismiss the Broughton Complaint was filed on December 20, 2019, Plaintiff filed an unopposed motion for voluntary dismissal of her Complaint without prejudice on February 19, 2020. The court granted the motion on April 20, 2020.

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.

13

9. Subsequent Events

On April 7, 2020, the Company and certain of its subsidiaries entered into an Amendment to the New Term Loan Agreement.  The Amendment provides for a waiver with respect to the Consolidated EBITDA financial covenant and allows the Company to defer quarterly interest payments, among other things, as further described in the “Debt and Financing” footnote to the consolidated financial statements.

14

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):

15

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 months ended March 31, 2020 and 2019.

Certain Non-GAAP Financial Measures — presentation and an analysis of selected non-GAAP financial measures for the three months ended March 31, 2020 and 2019 and trailing-twelve-months ended March 31, 2020 and 2019.

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 “first quarter” of the years discussed below refer to the three months ended March 31, 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 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.

16

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, 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 covenant in our term loan credit agreement as this measure is calculated as defined in our term loan credit agreement and serves as a driving component of our key financial covenant.

Our non-GAAP financial measures have the following limitations:

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.

COVID-19

The global outbreak of COVID-19 is expected to significantly impact our 2020 and 2021 results. The full extent of the outbreak, related business and travel restrictions and changes to behavior intended to reduce the virus’s spread are uncertain and continue to evolve. While transportation is an essential business, and we have continued to operate without any material business interruptions, there has been significant negative impact to the demand for transportations services.

Our shipping volumes did not begin to decrease until late March, and the rate of decline increased into the month of April.  Given the amount of economic uncertainty, including uncertainty about how and when federal, state and local governments will lift business and travel restrictions, it is difficult to predict how long we may experience negative year-over-year trends and when or if the economic recovery will begin.  Additionally, the demand for crude oil has seen a sharp decline during second quarter which will continue to put downward pressure on our fuel surcharge revenues. As shipping revenues decrease, the need to manage

17

liquidity becomes increasingly important and actions the Company has taken and is currently taking are more fully described in Liquidity and Capital Resources.  As of the date of this filing, there have been no significant charges related to bad debt.

As we have not experienced any significant information technology outages that have impacted day-to-day operations, our control environment and operations continue to operate as they did before the outbreak of COVID-19.

Business Strategy Overview

During 2019, the Company launched a multi-year enterprise transformation strategy to achieve long-term profitability and cash flow. Our strategic roadmap was 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 Company accomplished four foundational components during 2019:

Going into 2020, the next phase of our transformation includes:

The primary focus for the next phase of the enterprise transformation strategy is to operationally transform the movement of freight through our network and the technology used in the process.  In the initial phase of our plan to optimize operations, which spanned most of 2019, two of our companies operate independently out of the same service center.  Under the New NMFA that was ratified on May 14, 2019, we have the opportunity to consolidate service centers across our operating companies to optimize utilization of our assets and resources. We believe service center consolidation presents the greatest opportunity for this initiative.  We launched our first consolidation in late 2019, with the emphasis of facility evaluation occurring in 2020.  By rationalizing the number of physical locations in the network while maintaining geographic coverage, we will improve density which should allow for improved service for our valued customers. We expect these efforts should allow us to recognize cost savings in our linehaul and pick-up and delivery operations due to improved density, increased asset utilization, 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 our customers and their supply chain needs, provide productivity improvements and streamline our cost structure as we seek to optimize resources across the network, in facilities, infrastructure and human capital.

Capital investment remains a top priority for us.  While ongoing investments in equipment and technology remain our primary use of operating cash flows, we understand the importance of balancing liquidity and our ongoing investments with the service and capacity we need to bring to the market. To properly execute on our transformation plan, we are committed to investing in technology in order to enhance the customer experience and improve our operational flexibilities. We intend to consolidate individual operating company systems into a single platform, with the end goal of improving profitability and the customer experience. By streamlining systems, we are providing our customers access to five brands through one network and one enterprise-wide service offering. We remain committed to long-term investment in revenue equipment, as liquidity allows, to improve the age of our fleet as there is an immediate return in improved fuel miles per gallon and reduced vehicle maintenance expense. While COVID-19 is expected to impact our ability to invest in revenue equipment in the short-run, we are not expecting the level of investment in technology to decrease, as it is key to the execution of our strategy.

18

Consolidated Results of Operations

The table below provides summary consolidated financial information for the first quarter 2020 and 2019:

*Not meaningful

First Quarter of 2020 Compared to the First Quarter of 2019

Results of operations in the first quarter of 2020 were impacted starting the last two weeks of March by the outbreak of COVID-19 as shipping volumes decreased significantly from typical levels. The short-run demand for transportation services has been negatively impacted as the outbreak has already had a material disruption on many of our customers across various industries. Global price wars in crude oil markets provided additional downward pressure on diesel prices that reduced the amount of fuel surcharge revenues the Company was able to price in our services.

Our consolidated operating revenue decreased $31.9 million, or 2.7% during the first quarter primarily as a result of the items noted above that negatively impacted volumes, base yield excluding fuel surcharge and fuel surcharge revenues.

With the downturn in volume the Company quickly reacted to reduce variable expenses including labor, fuel, maintenance, and purchased transportation, among others. Offsetting these variable expense decreases was an increase in contractual wage and benefit rates, as the New NMFA provided for contractual wage and benefit increases that started retroactive to April 1, 2019.  Salaries, wages and employee benefits expenses were impacted by these higher rates as they were not in place during the quarter ending March 31, 2019.

Total operating expenses decreased $91.6 million, or 7.5%, primarily as a result of decreases in variable expense and further details are provided below.

Fuel, operating expenses and supplies. Fuel, operating expenses and supplies decreased $27.9 million, or 11.8%, primarily due to an $11.3 million decrease in fuel expense, which was largely a result of lower fuel prices and fewer miles driven.  Additional decreases resulted from a $7.6 million decrease in other operating expenses related to vendor bankruptcy and settlement charges incurred in the prior year with no such expense in the current year and a $5.0 million reduction in professional fees.

Gains/losses on property disposals, net. Gains on property disposals of $39.3 million in the first quarter of 2020 were primarily the result of the sale of one real property.

Impairment charges. During the first quarter of 2019, we recorded an $8.2 million impairment charge that reflected the write-down of an intangible asset as a result of rebranding strategies, leading to the discontinued use of that tradename.

Our effective tax rate for the first quarter of 2020 and 2019 was (10.3%) and 16.5%, respectively. The significant items impacting the 2020 rate include a benefit recognized due to application of the exception to the rules regarding intraperiod tax allocation, a net state and foreign tax provision, certain permanent items and a change in the valuation allowance established for the net deferred tax asset balance projected for December 31, 2020. The significant items impacting the 2019 rate include a net state and foreign tax provision, certain permanent items and a change in the valuation allowance established for the net deferred tax

19

asset balance that had been projected for December 31, 2019. 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 March 31, 2020 and December 31, 2019, substantially all of our net deferred tax assets were subject to a valuation allowance.

The CARES Act contained certain income tax provisions intended to provide relief to taxpayers, but it will not have any significant impact on our tax rate, current or deferred tax provision, or cash taxes.

The table below summarizes the key revenue metrics for the first quarter of 2020 compared to the first quarter of 2019:

20

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.

Consolidated Adjusted EBITDA

The reconciliation of net income (loss) to EBITDA and EBITDA to Adjusted EBITDA (defined in our New Term Loan Agreement as “Consolidated EBITDA”) for the first quarter of 2020 and 2019, and the trailing twelve months ended March 31, 2020 and 2019, is as follows: