yrcw-10k_20191231.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2019  

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to 

Commission file number: 0-12255

 

YRC Worldwide Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

48-0948788

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

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

 

Securities registered pursuant to Section 12(g) of the Act: NONE

 

Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.

Yes      No  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.

Yes      No  

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.

 

Large accelerated filer

 

 

Accelerated filer

 

Non-accelerated filer

 

 

Smaller reporting company

 

 

 

 

 

Emerging growth company

 

 

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  

As of June 28, 2019, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $134.0 million based on the closing price as reported on the NASDAQ Global Select Market.

 

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 March 6, 2020

Common Stock, $0.01 par value per share

 

36,081,170 shares

 

DOCUMENTS INCORPORATED BY REFERENCE

Pursuant to General Instruction G to Form 10-K, information required by Part III of this Form 10-K, either is incorporated herein by reference to a definitive proxy statement filed with the SEC no later than 120 days after the end of the fiscal year covered by this Form 10-K or will be included in an amendment to this Form 10-K filed with the SEC no later than 120 days after the end of the fiscal year covered by this Form 10-K.

 

 

 


 

INDEX

 

Item

 

Page

 

PART I

 

1

Business

4

1A

Risk Factors

9

1B

Unresolved Staff Comments

18

2

Properties

18

3

Legal Proceedings

18

4

Mine Safety Disclosures

18

 

Information about our Executive Officers

19

 

 

 

 

PART II

 

5

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

20

6

Selected Financial Data

22

7

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

7A

Quantitative and Qualitative Disclosures About Market Risk

46

8

Financial Statements and Supplementary Data

47

9

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

81

9A

Controls and Procedures

81

9B

Other Information

81

 

 

 

 

PART III

 

10

Directors, Executive Officers and Corporate Governance

82

11

Executive Compensation

82

12

Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

82

13

Certain Relationships and Related Transactions, and Director Independence

82

14

Principal Accountant Fees and Services

82

 

 

 

 

PART IV

 

15

Exhibits and Financial Statement Schedules

83

16

Form 10-K Summary

87

 

 

 

 

Exhibits Index

83

 

Signatures

88

 

 

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Note on Forward-Looking Statements

This entire report, including (among other items) Item 1, “Business,” Item 1A, “Risk Factors,” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other documents incorporated herein by reference includes forward-looking statements (each a “forward-looking statement”) within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include those preceded by, followed by or including the words “will,” “may,” “should,” “expect,” “intend,” “anticipate,” “believe,” “project,” “forecast,” “propose,” “plan,” “designed,” “estimate,” “enable” and similar expressions. Those forward-looking statements speak only as of the date of this report. We disclaim any obligation to update those statements, except as applicable law may require us to do so, and we caution you not to rely unduly on them. We have based those forward-looking statements on our current expectations and assumptions about future events, which may prove to be inaccurate. While our management considers those expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory (including environmental), legal and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements.  Factors that might cause or contribute to such differences include, but are not limited to, those we discuss in this report under the section entitled “Risk Factors” in Item 1A and the section entitled “Liquidity and Capital Resources” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in other reports we file with the Securities and Exchange Commission (the “SEC”).  The factors we discuss in this report are not necessarily all the important factors that could affect us. Unpredictable or unknown factors we have not discussed in this report also could have material adverse effects on actual results of matters that are the subject of our forward-looking statements. We do not intend to update our description of important factors each time a potentially important factor arises. We advise our existing and potential security holders that they should (1) be aware that important factors to which we do not refer in this report could affect the accuracy of our forward-looking statements and (2) use caution and common sense when considering our forward-looking statements.

 

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PART I

Item 1. Business

General Description of the 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. 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, specializing in truckload, residential, and warehouse solutions. 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.

Incorporated in Delaware in 1983 and headquartered in Overland Park, Kansas, we employed approximately 29,000 people as of December 31, 2019. The mailing address of our headquarters is 10990 Roe Avenue, Overland Park, Kansas 66211, and our telephone number is (913) 696-6100. Our website is www.yrcw.com. Through the “SEC Filings” link on our website, we make available the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the SEC: our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. All of these filings may be viewed or printed from our website free of charge.

Narrative Description of the Business

YRC Freight

YRC Freight offers a full range of services for the transportation of industrial, commercial and retail goods in national, regional and international markets, primarily through the operation of owned or leased equipment in its North American ground distribution network.  Transportation services are provided for various categories of goods, which may include (among others) apparel, appliances, automotive parts, chemicals, food, furniture, glass, machinery, metal, metal products, non-bulk petroleum products, rubber, textiles, wood and other manufactured products or components.  YRC Freight provides both LTL services, which combine shipments from multiple customers on a single trailer and truckload services. Deliveries are predominately LTL shipments with truckload services offered to maximize equipment utilization and reduce empty miles (the distance empty or partially full trailers travel to balance the network). YRC Freight also provides higher-margin specialized services, including guaranteed expedited services, time-specific deliveries, cross-border services, coast-to-coast air delivery, product returns, temperature-sensitive shipment protection and government material shipments.

YRC Freight serves manufacturing, wholesale, retail and government customers throughout North America. YRC Freight’s approximate 18,000 employees are dedicated to operating its extensive network which supports approximately 9.6 million shipments annually.  YRC Freight shipments have an average shipment size of approximately 1,100 pounds and travel an average distance of roughly 1,240 miles. Operations research and engineering teams coordinate the equipment, routing, sequencing and timing necessary to efficiently transport shipments through our distribution network. On December 31, 2019, YRC Freight’s revenue fleet was comprised of approximately 7,700 tractors, including approximately 5,500 owned tractors and 2,200 leased tractors, and approximately 29,800 trailers, including approximately 21,500 owned trailers and 8,300 leased trailers. The YRC Freight network includes 241 strategically located service facilities including 123 owned facilities with approximately 7,600 doors and 118 leased facilities with approximately 6,000 doors, in addition to 5 warehouses managed by our logistics solution provider, HNRY.

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YRC Freight provides services throughout North America, has one of the largest networks of LTL service centers, equipment and transportation professionals and provides flexible and efficient supply chain solutions including:

 

Standard LTL: one-stop shopping for all big-shipment national LTL freight needs with centralized customer service for LTL shipping among the countries of North America.  YRC Freight offers flexibility, convenience and reliability that comes with one national freight shipping provider.

 

Guaranteed Standard: services moving on our Standard network, with guaranteed on-time delivery by a specific day or within a multi-day window.  Our guaranteed multiple-day window service is designed to meet retail industry needs to reduce chargeback fees.

 

Accelerated: a faster option to our Standard service that moves through YRC Freight’s faster network to increase our customers’ speed to market.

 

Time-Critical: for expedited and specialized shipments including emergency and window deliveries via ground or air anywhere in North America with shipment arrival timed to the hour or day, proactive notification and a 100% on-time guarantee.

 

Logistics Solutions: includes a variety of services to meet industry and customer-specific needs with offerings such as custom projects, consolidation and distribution, reverse logistics, residential white glove, and exhibit services.  These services are provided under HNRY Logistics.

 

yrcfreight.com and HNRYLogistics.com:  secure e-commerce websites offering online resources for supply chain visibility and shipment management in real time.

YRC Freight includes the operations of its wholly owned Canadian subsidiary, YRC Freight Canada, and wholly owned logistics solutions subsidiary, HNRY Logistics. Founded in 1952, YRC Freight Canada offers Canadian shippers a selection of direct connections within Canada and throughout North America. YRC Freight Canada’s operating network and information systems are completely integrated with those of YRC Freight, enabling YRC Freight Canada to provide seamless cross-border services between Canada, Mexico and the United States and markets overseas.  Formed in 2018, HNRY Logistics is a coast-to-coast logistics brokerage company utilizing the YRC Worldwide portfolio of LTL companies to provide a full suite of logistics solutions to our customers.

YRC Freight represented 63% of our consolidated operating revenue in 2019, 2018 and 2017.

Regional Transportation

Regional Transportation is comprised of Holland, New Penn and Reddaway:

 

Holland:  headquartered in Holland, Michigan, provides next-day, regional and expedited services through a network located in 21 states in the Central, Midwestern and Southeastern portions of the United States. Holland also provides service to and from the provinces of Ontario and Quebec, Canada.

 

New Penn: headquartered in Overland Park, Kansas, provides next-day, day-definite, and time-definite services through a network located in the Northeastern United States; Eastern Canada; and Puerto Rico.

 

Reddaway: headquartered in Tualatin, Oregon, provides next-day, regional and expedited services through a network located in 12 western states spanning California, the Pacific Northwest, the Rocky Mountain States and the Southwest. Additionally, Reddaway provides services to and from Alaska, Hawaii and the province of British Columbia, Canada.

Together, the Regional Transportation companies deliver services in the standard, next-day, second-day and time-sensitive markets, which are among the fastest-growing transportation segments. The Regional Transportation service portfolio includes:

 

Regional delivery: including next-day and second-day services; consolidation/distribution services; protect-from-freezing and hazardous materials handling; truckload and a variety of other specialized offerings.

 

Guaranteed and expedited delivery: including day-definite, hour-definite and time-definite capabilities.

 

Interregional delivery: combining our best-in-class regional networks, Regional Transportation provides reliable, high-value services between our regional operations.

 

Cross-border delivery: through strategic partnerships, the Regional Transportation companies provide full-service capabilities between the United States, Canada, and Puerto Rico.

 

hollandregional.com, newpenn.com, and reddawayregional.com: our e-commerce websites offering secure and customized online resources to manage transportation activity.

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The approximate 11,000 employees of our Regional Transportation companies serve and support manufacturing, wholesale, retail and government customers throughout North America and transport approximately 9.2 million shipments annually.  Regional Transportation shipments have an average shipment size of approximately 1,400 pounds and travel an average distance of roughly 360 miles.  As of December 31, 2019, the Regional Transportation revenue fleet includes approximately 6,400 tractors including approximately 4,800 owned and 1,600 leased and approximately 13,900 trailers including approximately 9,800 owned and 4,100 leased.  The Regional Transportation network includes 110 service facilities including 59 owned facilities with approximately 3,700 doors and 51 leased facilities with approximately 3,000 doors.

The Regional Transportation companies accounted for 37% of our consolidated operating revenue in 2019, 2018 and 2017.

Parent Company

YRC Worldwide, headquartered in Overland Park, Kansas, has approximately 525 employees. The parent company provides centrally-managed support to our operating companies that spans a variety of functions, including information technology, finance and accounting, legal, revenue management, risk management, procurement, and security. On January 1, 2020 all sales, marketing, and sales operations personnel were transferred to the parent company due to the reorganization towards an enterprise-wide sales force during 2019.

Each of our shared services organizations charges the operating companies for their services, either based upon usage or on an overhead allocation basis.

Competition

Our companies operate in a highly competitive environment. Our competitors include global, integrated freight transportation services providers, global freight forwarders, national freight services providers (including intermodal providers), regional or interregional carriers, third-party logistics providers, and small, intraregional transportation companies. The entire trucking industry also faces emerging competition from online technology firms that specialize in load-matching services and large customers that may use their significant scale advantages to offer transportation solutions to their suppliers and customers.

Our companies also have competitors within several different modes of transportation including: LTL, truckload, air and ocean cargo, intermodal rail, parcel and package companies, transportation consolidators, reverse logistics firms, and privately-owned fleets.

Ground-based transportation includes private fleets and “for-hire” provider groups. The private provider segment consists of fleets owned by companies that move their own goods and materials. The “for-hire” groups are classified based on the typical shipment sizes that they handle. Truckload refers to providers transporting shipments that generally fill an entire van, and LTL refers to providers transporting goods from multiple shippers in a single trailer.

LTL transportation providers consolidate numerous shipments (generally ranging from 100 to 20,000 pounds) from varying businesses at service centers within close proximity to where those shipments originated. Utilizing expansive networks of pickup and delivery operations around local service centers, shipments are moved between origin and destination using distribution centers when necessary, where consolidation and deconsolidation of shipments occur. Depending on the distance shipped, LTL carriers are often classified into one of four sub-groups:

 

Regional - Average distance is typically fewer than 500 miles with a focus on one- and two-day delivery times. Regional transportation companies can move shipments directly to their respective destination centers, which increases service reliability and avoids costs associated with intermediate handling.  

 

Interregional - Average distance is usually between 500 and 1,000 miles with a focus on two- and three-day delivery times. There is a competitive overlap between regional and national providers in this category, as each group sees the interregional segment as a growth opportunity, and few providers focus exclusively on this sector.

 

National - Average distance is typically in excess of 1,000 miles with focus on two- to five-day delivery times. National providers rely on intermediate shipment handling through a network of facilities, which require numerous satellite service centers, multiple distribution centers and a relay network. To gain service and cost advantages, they often ship directly between service centers, minimizing intermediate handling.

 

Global - Providing freight forwarding and final-mile delivery services to companies shipping to and from multiple regions around the world. This service can be offered through a combination of owned assets or through a purchased transportation model and may involve just one leg of a shipment’s movement between countries.

YRC Freight provides services in all four sub-groups in North America. Holland, New Penn and Reddaway directly compete in the regional market and use intracompany and external interline relationships to provide service to the interregional and national transportation marketplace. HNRY Logistics is a non-asset-based provider of transportation solutions and competes with asset-based carriers, third-party logistics (“3PL”) firms, forwarders and global integrated freight transportation service

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providers. Each brand competes against a number of providers in these markets, from small firms with one or two vehicles to global competitors with thousands of physical assets and non-asset-based logistics solutions. While we have competitors with a similar multi-dimensional approach, there are few in the traditional LTL segment with as comprehensive an offering in those categories as our family of companies provides.

Asset-based LTL carriers utilize 3PL firms. These asset-light service providers are both our customers and competitors. As customers, these firms aggregate truck shipment demand and distribute that demand across the transportation sector. Asset-based LTL carriers are the providers of shipping capacity to 3PL companies and thus our LTL offerings can benefit from the relationships with 3PL firms. As competitors, 3PLs often control shipper relationships and can shift shipment volumes away from specific carriers. Certain 3PLs have completed purchases of asset-based LTL carriers and certain LTL carriers have completed purchases of 3PLs, both which have and will continue to alter the competitive landscape in the future.

Several technology firms have introduced, or are in the process of introducing, load-matching technologies for heavyweight freight. Whereas these firms operate similar to a third-party logistics firm, they allow any carrier, of any size, to bid on specific shipment opportunities. They aggregate independent operators into streamlined solutions, giving shippers an easier means of engaging what has been a highly fragmented segment of trucking. Successfully winning a bid opportunity could be based on a truck’s proximity to the pick-up location, price, or other factors. Just as in the 3PL scenario, we view these as potential opportunities as well as a competitive risk.

Large shippers with significant freight volume scale and advanced technologies offer transportation management services to their suppliers and customers. These companies often operate their own private fleets and can merge asset and non-asset based transportation solutions to create a competitive, market-facing offer.

Competitive cost of entry into the asset-based LTL sector on a small scale, within a limited service area, is relatively low (although more so than in other sectors of the transportation industry). The larger the service area, the greater the barriers to entry, due primarily to the need for additional equipment and facilities associated with broader geographic service coverage. Broader market coverage in the competitive transportation landscape also requires increased technology investment and the ability to capture cost efficiencies from shipment density (scale), making entry on a national basis more difficult.

Technological investments to improve network efficiency and optimize asset utilization can provide carriers with cost advantages. Further development of density-based pricing strategies require carriers to continue to make investments in scanning and measuring technologies.  We have already taken significant steps toward implementing these various types of technologies, and other competitors in our industry are also making investments in these technologies at varying speeds.

Regulation

Our operating companies and other interstate motor carriers were substantially deregulated following the enactment of the Motor Carrier Act of 1980, the Trucking Industry Regulatory Reform Act of 1994, the Federal Aviation Administration Authorization of 1994 and the ICC Termination Act of 1995. Prices and services are now largely free of regulatory controls, although states retain the right to require compliance with safety and insurance requirements, and interstate motor carriers remain subject to regulatory controls imposed by agencies within the U.S. Department of Transportation.

Our companies are subject to regulatory and legislative changes, which can affect our economics and those of our competitors. Various federal and state agencies regulate us and our operations are also subject to various federal, foreign, state, provincial and local environmental laws and regulations dealing with transportation, storage, presence, use, disposal and handling of hazardous materials, emissions related to the use of petroleum-based fuels, fuel efficiency, discharge of storm-water and underground fuel storage tanks. Our drivers and facility employees are protected by occupational safety and health regulations and our drivers are subject to hours of service regulations.  Some regulatory changes could potentially impact the pool of available drivers. We are also subject to security regulations intended to combat terrorism imposed by the U.S. Department of Homeland Security and other federal and state agencies. See the Risk Factors section related to our compliance with laws and regulations in Item 1A of this report.

Environmental Matters

Our operations are subject to U.S. federal, foreign, state, provincial and local regulations with regard to air and water quality and other environmental matters. We believe that we are in substantial compliance with these regulations. Regulation in this area continues to evolve and changes in standards of enforcement of existing regulations, as well as the enactment and enforcement of new legislation or regulation, may require us and our customers to modify, supplement or replace equipment or facilities or to change or discontinue present methods of operation.

Our operating companies store fuel and lubricating oils for use in our revenue equipment in approximately 212 underground storage tanks (“USTs”) located throughout the United States. Maintenance of such USTs is regulated at the federal and, in some cases, state level. The USTs are required to have leak detection systems and are required to be extracted upon our exiting the property.

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During 2019, we spent approximately $8.9 million to comply with U.S. federal, state and local provisions regulating the discharge of materials into the environment or otherwise relating to the protection of the environment (collectively, “Environmental Regulations”). In 2020, we expect to spend approximately $9.0 million to comply with the Environmental Regulations. Based upon current information, we believe that our compliance with Environmental Regulations will not have a material adverse effect upon our capital expenditures, results of operations and competitive position because we have either made adequate reserves for such compliance expenditures or the cost for such compliance is expected to be small in comparison with our overall expenses.

The Comprehensive Environmental Response, Compensation and Liability Act (known as the “Superfund Act”) imposes liability for the release of a “hazardous substance” into the environment. Superfund liability is imposed without regard to fault and even if the waste disposal was in compliance with then-current laws and regulations. With the joint and several liabilities imposed under the Superfund Act, a potentially responsible party (“PRP”) may be required to pay more than its proportional share of any required environmental remediation. Several of our subsidiaries have been identified as PRPs at various sites discussed below. The U.S. Environmental Protection Agency (the “EPA”) and appropriate state agencies are supervising investigative and cleanup activities at these sites.

The former Yellow Transportation (now a part of YRC Freight) has been alleged to be a PRP for two locations: Angeles Chemical Co., Santa Fe Springs, CA and Alburn Incinerator, Inc., Chicago, IL, which is included in the Lake Calumet Cluster Site. The EPA has issued YRC Freight a Request for Information (“RFI”) regarding Omega Chemical Corporation Superfund Site – Operable Unit 2, Santa Fe Springs, CA. With respect to these sites, there is little, if any evidence that YRC Freight contributed to any contamination and these allegations are not believed to present material exposure, but YRC Freight has entered into a tolling agreement with the Omega Chemical PRP Organized Group.

The former Roadway Express (now a part of YRC Freight) has been alleged to be a PRP for three locations: Ward Transformer, Raleigh, NC, Roosevelt Irrigation District, Phoenix, AZ and Berry's Creek, Carlstadt, NJ.  There is scant evidence connecting YRC Freight with either the Ward Transformer site or to the Roosevelt Irrigation District’s contaminated groundwater wells and any potential exposure is believed to be immaterial. The EPA and a number of potentially responsible parties have performed a Remedial Investigation and Feasibility Study (“RI/FS”) and the EPA has issued a record of decision for an interim remedy for the Berry’s Creek Study Area (“BCSA”). The EPA has requested that YRC Freight participate in designing the remedy (“Remedial Design”) for the BCSA. YRC Freight does not believe that it is a PRP for the BCSA and has, therefore, declined to participate in the Remedial Design.

The EPA has issued YRC Worldwide an RFI regarding current and former Yellow Transportation and Roadway Express (now YRC Freight) facilities adjacent to or in close proximity of Newtown Creek, NY and its tributaries. None of YRC Worldwide’s operating companies have been named as a PRP in this matter, but YRC Freight has entered into a tolling agreement with the Newtown Creek Group (“NCG”).  The NCG is comprised of five companies and the City of New York who, per Consent Order, have agreed to perform a RI/FS under the supervision of the EPA. The EPA’s website regarding this matter provides status updates of site investigations and study.

USF RedStar LLC, a non-operating subsidiary, has been alleged to be a PRP at three locations: Booth Oil, N. Tonawanda, NY and two separate landfills in Byron, NY, and Moira, NY. Holland has been alleged to be a PRP in an RFI for one location, Horton Sales Piedmont Site, Greenville County, SC.

Although the outcome of any legal matter is subject to uncertainties, based on our current knowledge, we believe the potential combined costs at all of the above sites will not be significant and we believe we have made adequate reserves for complying with future EPA demands at such sites.

While PRPs in Superfund actions have joint and several liabilities for all costs of remediation, it is not possible at this time to quantify our ultimate exposure because the projects are either in the investigative or early remediation stage. Based upon current information, we do not believe that probable or reasonably possible expenditures in connection with the sites described above are likely to have a material adverse effect on our financial condition or results of operations because:

 

To the extent necessary, we have established adequate reserves to cover the estimate we presently believe will be our liability with respect to the matter;

 

We and our subsidiaries have only limited or de minimis involvement in the sites based upon volumetric calculations;

 

Other PRPs involved in the sites have substantial assets and may reasonably be expected to pay a larger share of the cost of remediation; and

 

We believe that our ultimate liability is relatively small compared with our overall expenses.

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We are subject to various other governmental proceedings and regulations, including foreign regulations, relating to environmental matters, and are investigating potential violations of Environmental Regulations with respect to certain sites, but we do not believe that any of these matters or investigations is likely to have a material adverse effect on our business, financial condition, liquidity or results of operations.

Economic Factors and Seasonality

Our business is subject to a number of general economic factors that may have a material adverse effect on the results of our operations, many of which are largely out of our control. These include the impact of recessionary economic cycles and downturns in our customers’ business cycles, particularly in market segments and industries, such as retail and manufacturing, where we have a significant concentration of customers. Economic conditions may adversely affect our customers’ business levels, the amount of transportation services they need and their ability to pay for our services. We operate in a highly price-sensitive and competitive industry, making industry pricing actions, quality of customer service, effective asset utilization and cost control major competitive factors.

 

As of the date of this filing, the impact of the coronavirus outbreak has not had a significant impact on our 2020 financials. The extent to which the coronavirus may impact our future results is uncertain and we will monitor evolving trends and make necessary adjustments as facts and circumstances dictate.

All of our revenues are subject to seasonal variations which are common in the trucking industry. Customers tend to reduce shipments just prior to and after the winter holiday season. Operating expenses as a percent of revenue tend to be higher, and operating cash flows as a percent of revenue tend to be lower in the winter months, primarily due to colder weather and seasonally lower levels of shipments and the seasonal timing of expenditures. Generally, most of the first quarter and the latter part of the fourth quarter are the seasonally weakest while the second and third quarters are the seasonally strongest. The availability and cost of labor and other operating cost inputs, such as fuel, equipment maintenance and equipment replacements, can significantly impact our overall cost, competitive position within our industry and our resulting earnings and cash flows.

Item 1A. Risk Factors

In addition to the risks and uncertainties described elsewhere in this report or in our other SEC filings, the following risk factors should be considered carefully in evaluating us. These risks could have a material adverse effect on our business, financial condition and results of operations.

Business Risks

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 represent 79% of our workforce at December 31, 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 supplemental agreements that remain in effect through March 31, 2024, and Reddaway employs most of their unionized employees under a collective bargaining agreement that expires March 31, 2021. 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 this entity.

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. We cannot predict the outcome of any of these matters. These matters, if resolved in a manner unfavorable to us, could have a material adverse effect on our business, financial condition, liquidity and results of operations.

 

We are subject to general economic factors that are largely out of our control, any of which could have a material adverse effect on our business, financial condition and results of operations.

 

Our business is subject to a number of general economic factors, including the health of the industrial economy, global trade tensions, global or national health epidemics such as the recent coronavirus outbreak, among others that may adversely affect our business, financial condition and results of operations, many of which are largely out of our control. These factors include

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recessionary economic cycles and downturns in customers’ business cycles and changes in their business practices, particularly in market segments and industries, such as retail and manufacturing, where we have a significant concentration of customers. Economic conditions may adversely affect our customers’ business levels, the amount of transportation services they need and their ability to pay for our services. Because a portion of our costs are fixed, it may be difficult for us to quickly adjust our cost structure proportionally with fluctuations in volume levels. Customers encountering adverse economic conditions represent a greater potential for loss, and we may be required to increase our reserve for bad debt losses. Further, we depend on our suppliers for equipment, parts and services that are critical to our business. A disruption in the availability of these supplies or a material increase in their cost due to adverse economic conditions or financial constraints of our suppliers could adversely impact our business, results of operations and liquidity.

 

We are subject to business risks and increasing costs associated with the transportation industry that are largely out of our control, any of which could have a material adverse effect on our business, financial condition and results of operations.

 

We are subject to business risks and increasing costs associated with the transportation industry that are largely out of our control, any of which could adversely affect our business, financial condition and results of operations. The factors contributing to these risks and costs include increasing equipment and operational costs, weather, fuel prices, interest rates, insurance premiums, self-insurance levels, letters of credit required to support outstanding claims, license and registration fees, and excess capacity in the transportation industry, as well as the other factors discussed in this risk factor section. Further, we periodically need to upgrade or change our technology systems, which may be costly and could disrupt or reduce the efficiency of our operations.

We operate in a highly competitive industry, and our business will suffer if we are unable to adapt to competitive pressures which could have a material adverse effect on our business, financial condition and results of operations.

 

Numerous competitive factors could adversely affect our business, financial condition and results of operations. These factors include the following:

 

We compete with many other transportation service providers of varying sizes and types, many of which have a lower cost structure, more and/or newer equipment and greater capital resources than we do or have other competitive advantages;

 

Some of our competitors periodically reduce their prices to gain business, especially during times of reduced growth rates in the economy, which limits our ability to maintain or increase prices or maintain or grow our business;

 

Our customers may negotiate rates or contracts that minimize or eliminate our ability to offset fuel prices through fuel surcharges;

 

Many customers reduce the number of carriers they use by selecting so-called “core carriers” as approved transportation service providers, and in some instances, we may not be selected;

 

Many customers periodically accept bids from multiple carriers for their shipping needs, which may depress prices or result in the loss of some business to competitors;

 

The trend towards consolidation in the ground transportation industry may create other large carriers with greater financial resources and other competitive advantages relating to their size;

 

Advances in technology require increased investments to remain competitive and our customers may not be willing to accept higher prices to cover the cost of these investments;

 

Competition from non-asset-based logistics and freight brokerage companies may adversely affect our customer relationships and prices; and

 

As a union carrier, we may have a competitive disadvantage compared to non-union carriers with lower costs and greater operating flexibility.

 

Our pension expense could increase significantly and have a material adverse effect on our business, financial condition and results of operations.

 

Our subsidiaries began making contributions to most of the multi-employer pension funds (the “funds”) beginning June 1, 2011 at the rate of 25% of the contribution rate in effect on July 1, 2009. Any fund that did not allow our subsidiaries to begin making contributions at a reduced rate elected to either (i) apply the amount of the contributions toward paying down previously deferred contributions under our Contribution Deferral Agreement, or (ii) have the amount of the contributions placed in escrow until such time when the fund is able to accept re-entry at the reduced rate.

 

If contributions to the funds do not reach certain goals (including those required not to enter endangered or critical status or those required by a fund’s funding improvement or rehabilitation plan), our pension expenses and required cash contributions could further increase upon the expiration of our collective bargaining agreements and, as a result, could materially adversely affect our business, financial condition and results of operations. Decreases in investment returns that are not offset by contributions could also increase our obligations under such plans.

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YRC Freight, Holland, Reddaway and New Penn also contribute to various separate multi-employer health and welfare plans for employees that are covered by our collective bargaining agreements.

Based on information obtained from public filings and from plan administrators and trustees, we believe our portion of the contingent liability in the case of a full withdrawal from or termination of all of the multi-employer pension plans would be an estimated $8 billion on a pre-tax basis. If we were subject to withdrawal liability with respect to a multi-employer plan, the Employment Retirement Income Security Act of 1974, as amended (“ERISA”), provides that a withdrawing employer can pay the obligation in a lump sum or over time based upon an annual payment that is the highest contribution rate to the relevant plan multiplied by the average of the three highest consecutive years measured in contribution base units, which, in some cases, could be up to 20 years. Even so, our applicable subsidiaries have no current intention of taking any action that would subject us to payment of material withdrawal obligations; however, we cannot provide any assurance that such obligations will not arise in the future which would have a material adverse effect on our business, financial condition, liquidity and results of operations.

Ongoing self-insurance and claims expenses could have a material adverse effect on our business, financial condition and results of operations.

Our future insurance and claims expenses might exceed historical levels. We currently self-insure for a majority of our claims exposure resulting from workers’ compensation, third-party liability claims, and cargo, supplemented by high deductible purchased insurance. If the number or severity of claims for which we are self-insured increases, our business, financial condition and results of operations could be adversely affected, and we may have to post additional letters of credit or cash collateral to state workers’ compensation authorities or insurers to support our insurance policies, which may adversely affect our liquidity. Although we have significantly reduced our letter of credit expense in recent years, there is no assurance this trend will continue. If we lose our ability to self-insure or have to increase retention limits to offset rising insurance premium costs our insurance costs could materially increase, and we may find it difficult to obtain adequate levels of insurance coverage.

Our self-insured retention limits can make our insurance and claims expense higher and/or more volatile. We accrue for the costs of the uninsured portion of pending claims based on the nature and severity of individual claims and historical claims development trends. Estimating the number and severity of claims, as well as related judgment or settlement amounts is inherently difficult. This, along with legal expenses associated with claims, incurred but not reported claims, and other uncertainties can cause unfavorable differences between actual self-insurance costs and our reserve estimates.

In general, our insurance coverage with respect to each of workers’ compensation, property damage and liability claims, and cargo claims is subject to policy limits. Although we believe our aggregate insurance policy limits are sufficient to cover reasonably expected claims, it is possible that one or more claims could exceed those limits. In this case, we would bear the excess expense, in addition to the amount of our self-insurance retention. Our insurance and claims expense could increase, or we could find it necessary to raise our self-insured retention or decrease our aggregate coverage limits when our policies are renewed or replaced.

We have significant ongoing capital expenditure requirements that could have a material adverse effect on our business, financial condition and results of operations if we are unable to generate sufficient cash from operations.

Our business is capital intensive. For 2019, our capital expenditures focused primarily on revenue equipment replacement, investments in information technology and improvements to land and structures. Our capital expenditures for each of the years ended December 31, 2019 and 2018 were $143.2 million and $145.4 million, respectively. These amounts were principally used to fund the purchase of used tractors and trailers, to refurbish engines for our revenue fleet, and capitalized costs for our network facilities and technology infrastructure. We will need to continue to update our fleet. If we are unable to generate sufficient cash from operations to fund our capital requirements, we may have to limit our growth, utilize our existing liquidity, or enter into additional financing arrangements, including leasing arrangements, or operate our revenue equipment (including tractors and trailers) for longer periods resulting in increased maintenance costs, any of which could reduce our operating income. If our cash from operations and existing financing arrangements are not sufficient to fund our capital expenditure requirements, we may not be able to obtain additional financing at all or on terms acceptable to us.

We operate in an industry subject to extensive government regulations, and costs of compliance with, or liability for violation of, existing or future regulations could significantly increase our costs of doing business.

The U.S. Departments of Transportation and Homeland Security and various federal, state, local and foreign agencies exercise broad powers over our business, generally governing such activities as authorization to engage in motor carrier operations, safety and permits to conduct transportation business. Our drivers are also subject to hours-of-service rules of the Federal Motor Carrier Safety Administration (“FMCSA”). In the future, we may become subject to new or more restrictive regulations that the FMCSA, Departments of Transportation and Homeland Security, the Occupational Safety and Health Administration, the Environmental Protection Agency or other authorities impose, including regulations relating to engine exhaust emissions,

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fuel efficiency, the hours of service that our drivers may provide in any one-time period, security and other matters. Compliance with these regulations could substantially impair productivity and increase our costs.

In December 2010, the FMCSA established the Compliance Safety Accountability (“CSA”) motor carrier oversight program under which drivers and fleets are evaluated based on certain safety-related standards. Carriers’ safety and fitness ratings under CSA include the on-road safety performance of the carriers’ drivers. The FMCSA has also implemented changes to the hours of service (“HOS”) regulations which govern the work hours of commercial drivers. At any given time, there are also other proposals for safety-related standards that are pending legislative or administrative approval or adoption. If additional or more stringent standards are adopted, such may result in a reduction of the pool of qualified drivers available for employment by us. If we experience safety and fitness violations, our safety and fitness scores could be adversely impacted and out fleet could be ranked poorly as compared to our peers. A reduction in our safety and fitness scores or those of our drivers could also reduce our competitiveness in relation to other companies that have higher scores. Additionally, competition for qualified drivers with favorable safety ratings may increase and thus result in increases in driver-related recruiting and compensation costs.

Like many trucking companies, we compensate our drivers based primarily on mileage rate and activity-based formulas. The state of California adopted legislation that sets forth requirements for the payment of a separate hourly wage for “nonproductive” time worked by piece-rate employees, and separate payment for compensable rest and recovery periods to those employees. Specifically, the new legislation, which became effective January 1, 2016, codified three basic statutory requirements for the payment of employees on a piece-rate basis: (i) employees must be separately compensated at their regular rate for the time during which they take rest and recovery breaks; (ii) employees must be separately compensated for “other nonproductive time,” which is defined as “time under the employer’s control, exclusive of rest and recovery periods, that is not directly related to the activity being compensated on a piece-rate basis;” and (iii) this “other nonproduction time” time must be compensated at an hourly rate no less than the applicable minimum wage. The application of this legislation to the Company and its operations could increase our operating costs, including labor costs and legal exposure.

We are subject to various environmental regulations and climate change initiatives, and costs of compliance with, or liabilities for violations of, existing or future laws, regulations and initiatives could significantly increase our costs of doing business.

Our operations are subject to environmental regulations dealing with, among other things, the handling of hazardous materials, underground fuel storage tanks, and the discharge and retention of storm water. We operate in industrial areas where terminals and other industrial activities are located, and where groundwater or other forms of environmental contamination may have occurred. Our operations involve the risks of fuel spillage or seepage, environmental damage and hazardous waste disposal, among others. If we are involved in a spill or other accident involving hazardous substances, or if we are found to be in violation of applicable environmental laws or regulations, it could significantly increase our cost of doing business. Under specific environmental laws and regulations, we could be held responsible for all of the costs relating to any contamination at our past or present terminals and at third-party waste disposal sites. If we fail to comply with applicable environmental laws and regulations, we could be subject to substantial fines or penalties and to civil and criminal liability.

In addition, as climate change initiatives become more prevalent, federal, state and local governments and our customers are beginning to promulgate solutions for these issues. The increased focus on greenhouse gas emission reductions and corporate environmental sustainability may result in new regulations and customer requirements that could negatively affect us. This could cause us to incur additional direct costs or to make changes to our operations in order to comply with any new regulations and customer requirements. We could also lose revenue if our customers divert business from us because we have not complied with their sustainability requirements. These costs, changes and loss of revenue could have a material adverse effect on our business, financial condition, liquidity and results of operations.

Current or future litigation may adversely affect our business, financial condition, liquidity or results of operations.

We have been and continue to be involved in legal proceedings, claims and other litigation that arise in the ordinary course of business. Litigation may be related to labor and employment, competitive matters, third-party liability claims, safety and contract compliance, environmental liability, our past financial restructurings and other matters. We discuss legal proceedings in the “Commitments, Contingencies, and Uncertainties” footnote to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Some or all of our expenditures to defend, settle or litigate these matters may not be covered by insurance or could impact our cost and ability to obtain insurance in the future. Litigation can be expensive, lengthy and disruptive to normal business operations, including to our management due to the increased time and resources required to respond to and address the litigation. The results of complex legal proceedings are often uncertain and difficult to predict. An unfavorable outcome of any particular matter or any future legal proceedings could have a material adverse effect on our business, financial condition, liquidity or results of operations. In the future, we could incur judgments or enter into settlements of claims that could harm our financial position, liquidity and results of operations.

 

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In addition, in December 2018, the United States on behalf of the United States Department of Defense filed a complaint (the “DOD Complaint”) against the Company alleging 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. In January 2019, a purported class action lawsuit (the “Securities Class Action”) was filed against the Company and certain of our current and former officers. The Securities Class Action complaint generally alleges that the Company made false and misleading statements relating to its freight billing practices as alleged in the Department of Defense complaint described above. In May 2019, a putative shareholder filed an action derivatively and on behalf of the Company (the "First Derivative Suit") naming certain individuals as defendants and the Company as the nominal defendant. The First Derivative Suit alleges that the Company was harmed as a result of the individual defendants' purported conduct concerning the Company's freight-billing practices as alleged in the DOD Complaint and the Securities Class Action described above. A second shareholder derivative complaint, naming the same defendants and making similar claims as the First Derivative Suit, was filed in October 2019 (together with the First Derivative Suit, the "Shareholder Derivative Suits").

 

Although the Company believes it has meritorious defenses and intends to vigorously defend these actions, the DOD Complaint,  Securities Class Action and Shareholder Derivative Suits each assert claims that, if resolved against us, could give rise to substantial damages, and an unfavorable outcome or settlement may result in a significant monetary judgment or award against us or a significant monetary payment by us, and could have a material adverse effect on our business, financial conditions and results of operations.

We may not realize the expected benefits and cost savings from operational changes and performance improvement initiatives.

We initiate operational changes and process improvements to reduce costs and improve financial performance. These changes and initiatives typically include evaluating management talent, reducing overhead costs, closing facilities, making upgrades to our technology, eliminating non-core assets and unnecessary activities and implementing changes of operations under our labor agreements. There is no assurance that any changes and improvements will be successful, that their implementation may not have an adverse impact on our operating results or that we will not have to initiate additional changes and improvements in order to achieve the projected benefits and cost savings.

Difficulties attracting and retaining qualified drivers could result in increases in driver compensation and purchased transportation costs and could adversely affect our profitability and our ability to maintain our fleet.

We may need to attract new qualified drivers and may face difficulty doing so. Like many in the trucking industry, it is important to our business that we retain the necessary number of qualified drivers to operate efficiently. Regulatory requirements, including the CSA program of the FMCSA, have reduced the number of eligible employee drivers and independent contractors and may continue to do so in the future. Future Company driver shortages may result in less than optimal use of rail and over-the-road purchased transportation, which may result in higher costs to the Company and which use is limited under our collective bargaining agreement with the IBT. The compensation we offer our drivers is subject to market conditions, and we may find it necessary to increase driver compensation in future periods if we must attract new drivers. In addition, we and our industry suffer from a high driver turnover rate. Driver turnover requires us to continually recruit a substantial number of drivers in order to operate existing revenue equipment. If we are unable to continue to retain drivers and attract new drivers when needed, we could be required to adjust our compensation packages, increase our use of purchased transportation, let tractors sit idle, or operate with fewer tractors and face difficulty meeting customer demands, any of which would adversely affect our growth and profitability.

A significant privacy breach or IT system disruption could adversely affect our business and we may be required to increase our spending on data and system security.

We rely on information technology networks and systems, including the Internet, to process, transmit and store electronic information, and to manage or support a variety of business processes and activities. In addition, the provision of service to our customers and the operation of our networks and systems involve the storage and transmission of proprietary information and sensitive or confidential data, including personal information of customers, employees and others.

Our information technology systems, some of which are managed by third-parties, may be susceptible to damage, disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or components thereof, power outages, hardware failures, computer viruses, attacks by computer hackers, malicious insiders, telecommunication failures, user errors or catastrophic events. Hackers, acting individually or in coordinated groups, may also launch distributed denial of service attacks or ransom or other coordinated attacks that may cause service outages or other interruptions in our business and access to our data. In addition, breaches in security could expose us, our customers, our suppliers, our employees, or the individuals affected, to a risk of loss or misuse of proprietary information and sensitive or confidential data.

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The techniques used to obtain unauthorized access, disable or degrade service or sabotage systems change frequently, may be difficult to detect for a long time and often are not recognized until launched against a target. As a result, we may be unable to anticipate these techniques or to implement adequate preventative measures.

Any of these occurrences could result in disruptions in our operations, the loss of existing or potential customers, damage to our brand and reputation, and litigation and potential liability for the Company. In addition, the cost and operational consequences of implementing further data or system protection measures could be significant and our efforts to deter, identify, mitigate and/or eliminate any security breaches may not be successful.

We are dependent on the services of key employees and the loss of any substantial number of these individuals or an inability to hire additional personnel could adversely affect us.

Our success is dependent upon our ability to attract and retain skilled employees, particularly personnel with significant management and leadership skills.  If we are unable to attract and retain skilled key employees, we may be unable to accomplish the objectives set forth in our business and strategic plans.

Seasonality and the impact of weather affect our operations and profitability.

As is common in the trucking industry, our revenues are subject to seasonal variations.  During late fourth quarter and early first quarter each year, we expect operating expenses as a percent of revenue to increase and operating cash flows as a percent of revenue to decrease as compared to the rest of the year.  The seasonal impact is primarily due to inclement weather, seasonally lower levels of shipments, and the seasonal timing of expenditures.  We anticipate these seasonal trends will continue to impact our financial results and liquidity.

Changes in fuel prices and shortages of fuel can have a material adverse effect on the results of operations and profitability.

To lessen the effect of fluctuating fuel prices on our margins, we utilize a fuel surcharge program with our customers. These programs are common in the trucking industry and involve adjusting amounts charged to customers as fuel prices fluctuate.  In the short term, under our present fuel surcharge program, rising fuel costs generally benefit us while falling fuel costs have a negative impact on our results of operations, though these effects are typically moderated over time. However, rapid material changes in the index upon which we base our program or our cost of fuel could significantly impact our revenue and operating income, resulting in a material adverse effect on our financial condition.

In addition, fuel shortages and petroleum product rationing could have a material adverse impact on our operations and profitability.

We face risks associated with doing business in foreign countries.

We conduct a portion of our operations in Canada and, to a lesser extent, Mexico. Our revenue from foreign sources totaled $79.6 million, $104.1 million, and $99.3 million in 2019, 2018 and 2017, respectively, and our long-lived assets located in foreign countries totaled $7.2 million, $6.5 million and $5.3 million at December 31, 2019, 2018, and 2017, respectively. As a participating carrier in the Customs and Trade Partnership Against Terrorism (“C-TPAT”) program, we and our contractors are able to cross into these countries more efficiently, thereby avoiding substantial delays. If we should lose the ability to participate in the C-TPAT program, we could experience significant border delays which could have a negative impact on our ability to remain competitive and operate efficiently in those countries. 

In addition, we are subject to certain risks inherent in doing business in foreign countries, including, but not limited to, compliance with the requirements of applicable anti-bribery laws (including the U.S. Foreign Corrupt Practices Act), political instability, controls on the repatriation of cash, currency fluctuations and the imposition of tariffs, import and export controls and other non-tariff barriers.

Our business may be harmed by anti-terrorism measures.

In the aftermath of terrorist attacks on the United States, federal, state and municipal authorities have implemented and continue to implement security measures, including checkpoints and travel restrictions on large trucks. Although many companies would be adversely affected by any slowdown in the availability of freight transportation, the negative impact could affect our business disproportionately. For example, we offer specialized services that guarantee on-time delivery. If the security measures disrupt or impede the timing of our deliveries, we may fail to meet the needs of our customers, or may incur increased expenses to do so. We cannot assure you that these measures will not significantly increase our costs and reduce our operating margins and income.

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Financial and Liquidity Risks

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 New Term Loan Agreement contains a financial covenant that requires us to maintain minimum trailing-twelve-month (“TTM”) Adjusted EBITDA of $200.0 million, measured quarterly.  Our ABL Facility also contains certain affirmative and negative covenants with which we must comply.  Our TTM Adjusted EBITDA as of December 31, 2019 was $210.6 million.

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 Adjusted EBITDA in such future period to the extent paid).  As compared to the definition of Adjusted EBITDA in our Prior Term Loan Agreement, certain expenses that qualify as adjustments are capped at 10.0% of the trailing-twelve-month Adjusted EBITDA. 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 prior to our Quarterly Report on Form 10-Q for the quarter ended September 30 2019 in 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.

Our ability to meet our minimum Adjusted EBITDA requirement during the next twelve months and thereafter is dependent upon our ability to improve operating performance over 2019 to offset the contractual wage increases under our new five-year national master contract (“New NMFA”) and other inflationary expense increases associated with, among other things, our employees and insurance programs. Our 2019 operating results were negatively impacted by the freight recession our industry experienced in 2019, and that has persisted into early first quarter 2020.  This recession impacted our ability to fully realize operational efficiencies arising from the New NMFA primarily due to the ensuing depressed volume levels and the inherent contractual cost associated with the New NMFA.   We have taken actions that include headcount reductions commensurate with our current volume levels, a hiring freeze on new and replacement positions, temporary elimination of short-term incentive compensation, and a reduction in discretionary spend.  We began taking these actions because we have not been able to fully realize operational efficiencies arising from our new five-year national master contract due to depressed volume levels.  We may extend and supplement these actions if we experience adverse conditions that impact our ability to achieve a minimum Adjusted EBITDA above $200.0 million on a TTM basis. Significant adverse conditions, which may result from changes in global trade policies or increased contraction in the general economy, may impact our ability to achieve a minimum Adjusted EBITDA above $200.0 million on a TTM basis. Means for improving our profitability include accelerated implementation of network optimization, specific initiatives in the areas of pricing and customer engagement, and other operational actions to improve productivity and efficiency, as well as increased volume, all of which may not be within our control. If we are unable to achieve the results required to comply with this covenant in one or more quarters over the next twelve months, we may be required to take specific actions in addition to those described above, including but not limited to, additional reductions in headcount and targeted procurement initiatives to reduce operating costs and, or alternatively, seeking a waiver or an amendment from our lenders. If we are unable to satisfy our financial covenants or obtain a waiver or an amendment from our lenders, or take other remedial measures, we will be in default under our credit facilities, which would 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 as well as increase our funding obligations under our pension plans. Our ability to amend our credit facilities or otherwise obtain waivers from our lenders depends on matters that are outside of our control and there can be no assurance that we will be successful in that regard. 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.

Our indebtedness and cash interest payment obligations, lease obligations and pension funding obligations, as well as our liquidity position, could adversely affect our financial flexibility and our competitive position.

As of December 31, 2019, we had $902.8 million in aggregate principal amount of outstanding indebtedness.  We also have, and will continue to have, substantial lease obligations. We currently plan to procure the majority of our new revenue equipment using operating leases in 2020 and beyond.  As of December 31, 2019, our expected minimum cash payments for our operating leases for 2020 are $154.1 million, and our total operating lease obligations payable through 2030 are $451.1

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million. We expect our required contributions in 2020 under our multi-employer pension funds and single-employer pension plans will be approximately $152.4 million. Our indebtedness, lease obligations and pension funding obligations could continue to have an impact on our business. Our principal sources of liquidity are cash and cash equivalents, available borrowings under our ABL Facility and any prospective cash flow from operations. As of December 31, 2019, our availability under our ABL facility was $37.7 million and our Managed Accessibility was $0.2 million. “Managed Accessibility” represents the maximum amount we would access on the ABL Facility and is adjusted for eligible receivables plus eligible borrowing base cash measured as of December 31, 2019. If eligible receivables fall below the threshold management uses to measure availability, which is 10% of the borrowing line, the credit agreement governing the ABL Facility permits adjustments from eligible borrowing base cash to restricted cash prior to the compliance measurement date of January 15, 2020.  Cash and cash equivalents and Managed Accessibility totaled $80.4 million at December 31, 2019.

For example, these obligations and liquidity limitations could:

 

increase our vulnerability to adverse changes or persistent slow growth in general economic, industry and competitive conditions;

 

require us to dedicate a portion of our cash flow from operations to make principal and interest payments on our indebtedness, leases and pension funding obligations, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;

 

limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

 

restrict us from taking advantage of business opportunities;

 

make it more difficult to satisfy our financial obligations and meet future stepped up financial covenants in our credit facilities;

 

place us at a competitive disadvantage compared to our competitors that have less debt, lease obligations, and pension funding obligations; and

 

limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business strategy or other general corporate purposes on satisfactory terms or at all.

Our ability to service all of our indebtedness and satisfy all of other obligations depends on many factors beyond our control, and if we cannot generate enough cash to service our indebtedness and satisfy such other obligations, we may be forced to take one or more actions, which may not be successful.

Cash flows from operations are the principal source of funding for us. Our business may not generate cash flow from operations in an amount sufficient to fund our liquidity needs. If our cash flows are insufficient to service our indebtedness and satisfy our other obligations, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or restructure or refinance our indebtedness or other financial obligations. Our ability to restructure or refinance our indebtedness will depend on the condition of the capital and credit markets and our financial condition at such time. Any refinancing of our indebtedness could be at higher interest rates.  In addition, any refinancing of our indebtedness or restructuring of our other obligations may require us to comply with more onerous covenants, which could further restrict our business operations and limit our financial flexibility. In addition, the terms of existing or future debt agreements may restrict us from adopting some of these alternatives. Any failure to make payments of interest and principal on our outstanding indebtedness or satisfy our other financial obligations on a timely basis would likely result in a lowering of our credit rating, which could harm our ability to incur additional indebtedness. These alternative measures may not be successful and, as a result, our liquidity and financial condition could be adversely affected and we may not be able to meet our scheduled debt service obligations. If for any reason we are unable to meet our debt service obligations, we would be in default under the terms of the agreements governing our outstanding debt.

Restrictive covenants in the documents governing our existing and future indebtedness may limit our current and future operations, particularly our ability to respond to changes in our business or to pursue our business strategies.

The documents governing our existing indebtedness contain, and the documents governing any future indebtedness will likely contain, a number of restrictive covenants that impose significant operating and financial restrictions, including restrictions on our ability to take actions that we believe may be in our interest. The documents governing our existing indebtedness, among other things, limit our ability to:

 

incur or guarantee additional indebtedness;

 

make certain restricted payments or investments;

 

enter into agreements that restrict distributions from restricted subsidiaries;

 

sell or otherwise dispose of assets, including capital stock of restricted subsidiaries;

 

enter into transactions with affiliates;

 

create or incur liens;

 

enter into sale/leaseback transactions;

 

merge, consolidate or sell substantially all of our assets; and

 

make certain investments and acquire certain assets.

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The restrictions could adversely affect our ability to:

 

finance our operations;

 

make strategic acquisitions or investments or enter into alliances;

 

withstand a future downturn in our business or the economy in general;

 

engage in business activities, including future opportunities, that may be in our interest; and

 

plan for or react to market conditions or otherwise execute our business strategies.

Our ability to obtain future financing or to sell assets could be adversely affected because substantially all of our assets have been pledged as collateral for the benefit of the holders of our indebtedness.

Risks Related to Our Common Stock

The price of our Common Stock may fluctuate significantly, and this may make it difficult to resell our Common Stock when holders want or at prices they find attractive.

The market price for our Common Stock has been highly volatile and subject to significant fluctuations. We expect the market price of our Common Stock to continue to be volatile and subject to these fluctuations in response to a wide variety of factors, including the following:

 

fluctuations in stock market prices and trading volumes of securities of similar companies;

 

labor disputes;

 

general market conditions and overall fluctuations in U.S. equity markets;

 

large blocks of stockholders selling via automated trading systems;

 

variations in our operating results, or the operating results of our competitors;

 

changes in our financial guidance, if any, or securities analysts’ estimates of our financial performance;

 

sales of large blocks of our Common Stock, including sales by our executive officers, directors and significant stockholders;

 

additions or departures of any of our key personnel;

 

announcements related to litigation;

 

changing legal or regulatory developments in the United States and other countries; and

 

commentary about us or our stock price by the financial press and in online investor communities.

In addition, the stock markets from time to time experience price and volume fluctuations that may be unrelated or disproportionate to the operating performance of companies and that may be extreme. These fluctuations may adversely affect the trading price of our Common Stock, regardless of our actual operating performance.

Future issuances of our Common Stock or equity-related securities in the public market could adversely affect the trading price of our Common Stock and our ability to raise funds in new stock offerings.

In the future, we may issue additional shares of our Common Stock to raise capital or in connection with a restructuring or refinancing of our indebtedness. In addition, shares of our Common Stock are reserved for issuance, exercise of outstanding stock options and vesting of outstanding share units. As of December 31, 2019, we had outstanding options to purchase an aggregate of approximately 33,000 shares of Common Stock, outstanding vested restricted stock and share units and performance based share units representing the right to receive a total of approximately 3.3 million shares of Common Stock upon vesting, and an aggregate of approximately 1.9 million shares of our Common Stock was reserved for future issuance under our 2019 Incentive and Equity Award Plan (the “2019 Plan”). We have registered under the Securities Act all of the shares of Common Stock that we may issue upon the exercise of our outstanding options and the vesting of outstanding share units and on account of future awards made under the 2019 Plan. All of these registered shares generally can be freely sold in the public market upon issuance. If a large number of these shares are sold in the public market, the sales could reduce the trading price of our Common Stock.

We cannot predict the size of future issuances or the effect, if any, that such issuances may have on the market price for our Common Stock. Sales of significant amounts of our Common Stock or equity-related securities in the public market, or the perception that such sales may occur, could adversely affect prevailing trading prices of our Common Stock and could impair our ability to raise capital through future offerings of equity or equity-related securities. Further sales of shares of our Common Stock or the availability of shares of our Common Stock for future sale or in connection with hedging and arbitrage activity that may develop with respect to our Common Stock, could adversely affect the trading price of our Common Stock.

We do not intend to pay dividends on our Common Stock in the foreseeable future.

We do not anticipate that we will pay any dividends on shares of our Common Stock in the foreseeable future. We intend to retain any future earnings to fund operations, invest in new revenue equipment, to service debt and other obligations, such as

17


 

lease and pension funding requirements, and to use for other corporate needs. Further, our credit facilities limit our ability to pay cash dividends.

We can issue shares of preferred stock that may adversely affect the rights of holders of our Common Stock.

Our certificate of incorporation currently authorizes the issuance of 7.5 million shares of preferred stock. Our Board of Directors is authorized to approve the issuance of one or more series of preferred stock without further authorization of our shareholders and to fix the number of shares, the designations, the relative rights and the limitations of any series of preferred stock. As a result, our Board, without shareholder approval, could authorize the issuance of preferred stock with voting, conversion and other rights that could proportionately reduce, minimize or otherwise adversely affect the voting power and other rights of holders of our Common Stock or other series of preferred stock or that could have the effect of delaying, deferring or preventing a change in our control.

Item 1B. Unresolved Staff Comments

Not applicable.

Item 2. Properties

At December 31, 2019, we operated a total of 351 transportation service facilities located in 50 states, Puerto Rico and Canada. Of this total, we own 182 and we lease 169, generally with lease terms ranging from one month to ten years with right of renewal options. The number of customer freight servicing doors totaled approximately 20,300, of which approximately 11,300 are at owned facilities and approximately 9,000 are at leased facilities. The transportation service centers vary in size ranging from one to three doors at small local facilities to 426 doors at the largest consolidation and distribution facility. In addition, we own and occupy a general office building in Lebanon, Pennsylvania. We also lease and occupy general office buildings in Holland, Michigan, Overland Park, Kansas, Tualatin, Oregon and Winnipeg, Manitoba. Our owned transportation service facilities and office buildings serve as collateral under our credit agreements.

We believe our facilities and equipment are more than adequate to meet current business requirements in 2020.  Refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a more detailed discussion of expectations regarding capital spending in 2020.

Top 10 YRCW Service Facilities by Number of Doors at December 31, 2019

 

Location

 

Doors

 

Owned/Leased

 

Segment

Chicago Heights, IL

 

426

 

Owned

 

YRC Freight

Winston-Salem, NC

 

349

 

Owned

 

YRC Freight

Bloomington, CA

 

325

 

Leased

 

YRC Freight

Maybrook, NY

 

304

 

Owned

 

YRC Freight

Harrisburg, PA

 

281

 

Owned

 

YRC Freight

Charlotte, NC

 

274

 

Leased

 

YRC Freight

Atlanta, GA

 

227

 

Leased

 

YRC Freight

Cincinnati, OH

 

216

 

Owned

 

YRC Freight

Greenville, SC

 

214

 

Owned

 

YRC Freight

Nashville, TN

 

213

 

Owned

 

YRC Freight

 

Item 3. Legal Proceedings

We discuss legal proceedings in the “Commitments, Contingencies and Uncertainties” footnote of our consolidated financial statements included in this Annual Report on Form 10-K as well as in “Environmental Matters” in Part I hereof.

Item 4. Mine Safety Disclosures

Not applicable.


18


 

Information about our Executive Officers

 

Name

Age

Position(s) Held

 

 

 

Darren D. Hawkins

50

Chief Executive Officer of the Company (since April 2018); President and Chief Operating Officer of the Company (January 2018-April 2018), President (February 2014-December 2017), Senior Vice President - Sales and Marketing (January 2013-February 2014) of YRC Freight; Director of Operations (December 2011-January 2013) and Director of Sales (January 2009-December 2011) for Con-Way Freight, a subsidiary of Con-Way, Inc.; various positions of increasing responsibility with Yellow Transportation, Inc. (1991-2009).

 

 

 

Jamie G. Pierson

 

50

Chief Financial Officer of the Company (since December 2019); Chief Financial Officer for Horizon Global Corporation (designer, manufacturer and distributor of towing, trailering, cargo management and related accessory products) (June 2019-December 2019); Chief Financial Officer for PrimeSource Building Products, Inc. (distributor of building products) (2017-2019); Chief Financial Officer for the Company (2011-2016).

 

Jason Bergman

49

Chief Customer Officer of the Company (since July 2019); Chief Commercial Officer of Dicom Transportation Group (courier and expedited transportation services) (2017-2019); executive Vice President of Global Transport for BDP International (transportation logistics) (2014-2016); Vice President, Strategic Sales, North America for Damco (global logistics) (2013-2014).

 

 

 

Thomas J. O’Connor

59

Chief Operating Officer of the Company (since June 2019); President of YRC Freight (January 2018-October 2019); President of Reddaway (January 2007-December 2017); President of USF Bestway (subsidiary of the Company) (2005-2007); Vice President Western Division and officer (1999-2005), District Manager (1995-1999) and various management positions of increasing responsibility (1982-1995) of Roadway Express, Inc. (subsidiary of the Company).

 

 

 

Jason T. Ringgenberg

54

Chief Information Officer of the Company (since March 2017); Sr. Vice President and Chief Information Officer of YRC Freight (April 2014-March 2017); various positions of increasing responsibility with Accenture, most recently Managing Director of North American Freight (June 1992-April 2014).

 

 

 

Scott D. Ware

59

Chief Network Officer of the Company (since October 2019); President of Holland and Chief Network Officer of the Company (October 2018-October 2019); President (2012-2018), Vice President Operations and Linehaul (2009-2012) and Vice President Linehaul (2007-2009) of Holland; Director of Linehaul of SAIA Inc. (2002-2007); Director of Linehaul of JEVIC (2000-2002); various industry management roles with Preston, Overnite, Con-Way and Spartan Express (1985-2000).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19


 

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

As of March 6, 2020, 317 stockholders of record held YRC Worldwide common stock. The NASDAQ Global Select Market quotes prices for our common stock under the symbol “YRCW.”

Quarterly Financial Information (unaudited)

 

 

 

2019

 

(in millions, except per share and share data)

 

First

Quarter

 

 

Second

Quarter

 

 

Third

Quarter

 

 

Fourth

Quarter

 

Operating revenue

 

$

1,182.3

 

 

$

1,272.6

 

 

$

1,256.8

 

 

$

1,159.5

 

(Gains) losses on property disposals, net

 

 

1.6

 

 

 

(6.2

)

 

 

1.0

 

 

 

(10.1

)

Operating income (loss)

 

 

(31.7

)

 

 

14.3

 

 

 

23.8

 

 

 

9.8

 

Net loss

 

 

(49.1

)

 

 

(23.6

)

 

 

(16.0

)

 

 

(15.3

)

Diluted loss per share(a)

 

 

(1.48

)

 

 

(0.71

)

 

 

(0.48

)

 

 

(0.46

)

 

 

 

2018

 

(in millions, except per share and share data)

 

First

Quarter

 

 

Second

Quarter

 

 

Third

Quarter

 

 

Fourth

Quarter

 

Operating revenue

 

$

1,214.5

 

 

$

1,326.5

 

 

$

1,303.6

 

 

$

1,247.4

 

(Gains) losses on property disposals, net

 

 

3.2

 

 

 

2.2

 

 

 

1.9

 

 

 

(28.1

)

Operating income (loss)

 

 

(4.3

)

 

 

50.9

 

 

 

41.2

 

 

 

55.1

 

Net income (loss)

 

 

(14.6

)

 

 

14.4

 

 

 

2.9

 

 

 

17.5

 

Diluted income (loss) per share(a)

 

 

(0.44

)

 

 

0.43

 

 

 

0.09

 

 

 

0.52

 

 

 

(a)

Diluted income (loss) per share amounts were computed independently for each of the quarters presented. The sum of the quarters may differ from the total annual amount primarily due to change in the number of outstanding shares in the year and the impact of the if-converted method used to calculate earnings per share.

20


 

Common Stock Performance

Set forth below is a line graph comparing the quarterly percentage change in the cumulative total stockholder return of the Company’s common stock against the cumulative total return of the S&P Composite-500 Stock Index and the Dow Jones Transportation Average Stock Index for the period of five years commencing December 31, 2014 and ending December 31, 2019.

 

 

 

21


 

Item 6. Selected Financial Data

Our selected financial data below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Financial Statements and Supplementary Data” included in this Form10-K.

 

(dollars in millions, except per share data. shares in thousands)

 

2019

 

 

2018

 

 

2017

 

 

For the Year

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenue

 

$

4,871.2

 

 

$

5,092.0

 

 

$

4,891.0

 

 

Operating income

 

 

16.2

 

 

 

142.9

 

 

 

119.0

 

 

Net income (loss)

 

 

(104.0

)

 

 

20.2

 

 

 

(10.8

)

 

Acquisition of property and equipment

 

 

(143.2

)

 

 

(145.4

)

 

 

(103.3

)

 

Proceeds from disposal of property and equipment

 

 

25.9

 

 

 

36.4

 

 

 

8.8

 

 

Net cash provided by operating activities

 

 

21.5

 

 

 

224.8

 

 

 

60.7

 

 

Net cash used in investing activities

 

 

(117.3

)

 

 

(109.0

)

 

 

(94.5

)

 

Net cash used in financing activities

 

 

(22.6

)

 

 

(33.9

)

 

 

(96.2

)

 

At Year-End

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,831.6

 

 

$

1,617.1

 

 

$

1,585.5

 

 

Total debt

 

 

862.2

 

 

 

874.9

 

 

 

906.1

 

 

Total shareholders’ deficit

 

 

(441.2

)

 

 

(305.5

)

 

 

(353.5

)

 

Per Share Measurements

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic per share data:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

(3.13

)

 

 

0.61

 

 

 

(0.33

)

 

Average common shares outstanding

 

 

33,252

 

 

 

32,983

 

 

 

32,685

 

 

Diluted per share data:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

(3.13

)

 

 

0.60

 

 

 

(0.33

)

 

Average common shares outstanding

 

 

33,252

 

 

 

33,859

 

 

 

32,685

 

 

Other Data

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of employees (a)

 

 

29,000

 

 

 

31,000

 

 

 

32,000

 

 

Operating ratio:(b)

 

 

 

 

 

 

 

 

 

 

 

 

 

YRC Freight

 

 

98.8

%

 

 

97.3

%

 

 

98.0

%

 

Regional Transportation

 

 

100.3

%

 

 

96.3

%

 

 

96.3

%

 

Consolidated

 

 

99.7

%

 

 

97.2

%

 

 

97.6

%

 

 

(a)

Rounded to the nearest thousand.

(b)

Operating ratio 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 expressed as a percentage.

 

22


 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “MD&A”, contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act.  See the introductory section immediately prior to “Part I” and Risk Factors in “Item 1A” of this report regarding these statements.

Overview

This 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 years ended December 31, 2019, 2018 and 2017

Reporting Segment Results of Operations: an analysis of our results of operations for the years ended December 31, 2019, 2018 and 2017 for our two reporting segments:  YRC Freight and Regional Transportation

Certain Non-GAAP Financial Measures: an analysis of our results using certain non-GAAP financial measures, for the years ended December 31, 2019, 2018 and 2017

Liquidity and Capital Resources: a discussion of our major sources and uses of cash as well as an analysis of our cash flows and aggregate contractual obligations and commercial commitments

 

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:

23


 

 

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.

 

Adjusted EBITDA: a non-GAAP measure that reflects EBITDA, and further adjusts for 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 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). All references to “Adjusted EBITDA” throughout this section and the rest of this report refer to “Adjusted EBITDA” calculated under our New Term Loan Agreement (defined therein as “Consolidated EBITDA” unless otherwise specified).  Consolidated EBITDA is also a defined term in our ABL Agreement and the definition there aligns with the prior definition of Consolidated EBITDA under the Prior Term Loan Agreement.  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 credit facilities 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 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:

 

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 fees, restructuring charges, transaction costs related to the issuance of debt, non-cash expenses, charges or losses (subject to the conditions above), 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.

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

24


 

 

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 NMFA that were paid retroactively to April 1, 2019 include one additional week of vacation that was retroactively applied to 2018. 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.

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 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 Company accomplished four foundational components during 2019:

 

1.

Ratified a new five-year labor contract

 

2.

Refinanced a term loan with improved and more flexible terms

 

3.

Reorganized the field leadership structure to streamline decision making and enhance execution

 

4.

Completed the reorganization of the enterprise-wide sales force

Labor contract: During the first half of 2019, the Company ratified the New NMFA for the employees of Holland, New Penn and YRC Freight. The New NMFA is a critical element to the comprehensive strategic plan as it provides the Company with important changes to create a foundation for operational excellence and capacity expansion, which should lead to improved profitability.  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 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 have the opportunity to expand 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 (increased to 29% of total linehaul miles for YRC Freight and introduced an 8% limit for Holland) 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.  Further, on September 27, 2019, the Company ratified a new two-year collective bargaining agreement for the employees of Reddaway, who were previously party to multiple bargaining agreements, and have now been combined into one collective agreement.

Capital Structure Update: The Company announced a refinancing of its term loan obligations on September 11, 2019 and entered into a New Term Loan Agreement, which provides for additional liquidity, less restrictive financial covenants, a lower interest rate and extends the maturity of the facility to June 2024. The New Term Loan eliminates the annual principal amortization of 3.0%, which approximated $18.0 million in principal payments per year, and provides the ability to reinvest the first $40.0 million in cash proceeds earned from the sale of certain owned properties.

25


 

Enhanced Organization Structure: Creating simplified engagement for customers and an improved service offering is 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-wide 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 all our 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 allows us to better service our customers with a full suite of logistics solutions. In addition, we implemented a new field operations structure to align with our enterprise transformation strategy to streamline decision making and enhance execution of our network enhancements

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

 

1.

Operational optimization

 

2.

Technology migration

 

3.

Facility evaluation

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, 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 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 continue to provide the same service level to 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 investment in revenue equipment to improve the age of our fleet as there is an immediate return in improved fuel miles per gallon and reduced vehicle maintenance expense.

 

Segments

 

Effective January 1, 2020, the Company will realign its reportable segments as a result of an enhanced organizational structure implemented in the back half of 2019 designed to better align resources and provide greater focus on the Company’s multi-year enterprise transformation strategy. The strategy is designed to improve the long-term profitability and stability of the Company, with key focus on enhancing competitive value proposition. Key elements of the enterprise transformation include operational optimization to bolster asset utilization and to leverage flexibilities gained from the new labor contract; facility evaluation to build density and create cost savings by consolidating service centers while fully protecting all brands and areas of service; and customer growth/engagement initiatives to enhance customer experience and improve our value proposition by supplying all of our service offerings and brands as one.  We realigned sales to consolidate 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. 

 

We also implemented a new field structure to align with our enterprise transformation strategy to streamline decision making and enhance execution of our network enhancements. With the ratification of the New NMFA on May 14, 2019, the Company may now combine service centers across our operating companies to optimize utilization of our assets and resources, and the companies that operate in the same service territory will be serviced through one primary carrier.

 

The presentation of financial results as one reportable segment is consistent with the way the Company has transformed its operational leadership team under the Chief Operating Decision Maker (“CODM”) where he formerly had the operating company presidents as direct reports and now has direct reports who are functional leaders whose roles span across the entire

26


 

enterprise.  Starting in 2020, the CODM will be evaluating our performance and business results, as well as making resource and operating decisions under the single segment view.

Consolidated Results of Operations

Our consolidated results for 2019, 2018 and 2017 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 three years ended December 31:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent Change

 

(in millions)

 

2019

 

 

2018

 

 

2017

 

 

2019 vs. 2018

 

 

2018 vs. 2017

 

Operating revenue

 

$

4,871.2

 

 

$

5,092.0

 

 

$

4,891.0

 

 

 

(4.3

)%

 

 

4.1

%

Operating income

 

 

16.2

 

 

 

142.9

 

 

 

119.0

 

 

 

(88.7

)%

 

 

20.1

%

Nonoperating expenses, net

 

 

124.5

 

 

 

111.6

 

 

 

137.1

 

 

 

11.6

%

 

 

(18.6

)%

Net income (loss)

 

 

(104.0

)

 

 

20.2

 

 

 

(10.8

)

 

N/M*

 

 

 

287.0

%

 

(*) not meaningful

2019 Compared to 2018

Our consolidated operating revenue decreased $220.8 million, or 4.3%, for the year ended December 31, 2019 compared to 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.

Operating expenses decreased $94.1 million, or 1.9%, for the year ended December 31, 2019 compared to 2018, primarily due to lower purchased transportation expense and lower fuel, operating expenses and supplies, partially offset by increased salaries, wages and employee benefits.

Salaries, wages and employee benefits. Salaries, wages and employee benefits increased $13.7 million, or 0.5%, primarily due to a $35.5 million increase in benefits costs which was largely driven by a $25.8 increase in union vacation expense due to restoration of benefits from the passage of the New NMFA, a $15.7 million increase in workers’ compensation expense, and a $6.8 million increase in salaries expense. These increases were partially offset by a $32.9 million reduction in short-term incentive compensation and an $11.3 million decrease in wages expense as a result of tonnage decreases that reduced the number of hours needed to process freight which were partially offset by contractual rate increases due to the New NMFA.

 

Fuel, operating expenses and supplies.  Fuel, operating expenses and supplies decreased $51.2 million, or 5.4%, primarily due to a $48.1 million decrease in fuel expense, which was largely a result of lower fuel prices and fewer miles driven.

Purchased transportation. Purchased transportation decreased $69.0 million, or 10.1%, primarily due to a $68.3 million decrease in rail and over-the-road purchased transportation expense as a result of reduced tonnage, a $9.3 million decrease from reduced usage of local purchased transportation, and a $5.9 million decrease in short-term vehicle rents.  These decreases were partially offset by an $18.5 million increase in third-party costs due to the expansion in third-party logistics solutions.

Other operating expenses. Other operating expenses decreased $7.6 million, or 3.1%, primarily due to a decrease of $4.2 million in cargo claims expense, and a $4.0 million reduction in operating taxes as a result of fewer miles driven.

Gains/losses on property disposals.  Net gains on disposals of property were $13.7 million during 2019 as compared to $20.8 million in 2018.  The gains in 2019 and 2018 were primarily related to the sale of real properties, including a $29.3 million gain from the sale of one excess property at YRC Freight during 2018.

Nonoperating expenses, net.  Nonoperating expenses increased $12.9 million for the year ended December 31, 2019 compared to 2018 primarily due to an $11.2 million expense in 2019 related to the extinguishment of debt with no such charge in 2018, a $5.4 million increase in interest expense due to higher interest rates and outstanding debt balances during 2019, which were partially offset by a $6.3 million decrease in non-union pension costs due mainly to a reduction in non-cash pension settlement expenses.

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

 

27


 

Our effective tax rate for the years ended December 31, 2019 and 2018 was 4.0% and 35.5%, respectively. Significant items impacting the 2019 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 at December 31, 2019. We recognize valuation allowances on deferred tax assets, if, based on the weight of the evidence, we believe that some or all of our deferred tax assets will not be realized. Changes in valuation allowances are included in our tax provision or in equity if directly related to other comprehensive income (loss) 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-back and 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. Accordingly, as of December 31, 2019 and 2018, we have a full valuation allowance against our net deferred tax assets, exclusive of a deferred tax (asset) liability related to a foreign jurisdiction.

 

In July 2011, July 2013, and January 2014, we experienced significant changes in the ownership of our stock, as measured for Federal income tax purposes. These changes triggered the application of Section 382 of the Internal Revenue Code, as amended (the “Code”), which will likely have no substantial impact on the use of tax net operating loss carryovers (“NOLs”) generated through January 31, 2014 and prior to offset future taxable income. While Section 382 changes may adversely affect cash flow, they have no impact on our current financial statements. The deferred tax assets resulting from the existing NOLs to which a Section 382 change applies are already fully offset by a valuation allowance.

2018 Compared to 2017

Our consolidated operating revenue increased $201.0 million, or 4.1%, for the year ended December 31, 2018 compared to 2017. The increase in revenue was largely attributed to increased base yield excluding fuel surcharge and fuel surcharge revenue, while partially offset by a decrease in tonnage.

Operating expenses increased $177.1 million, or 3.7%, for the year ended December 31, 2018 compared to 2017, due to an increase in salaries, wages and employee benefits, an increase in purchased transportation expense, and higher fuel costs, which were partially offset by an increase in gains on property disposals.

Salaries, wages and employee benefits.  Salaries, wages and employee benefits increased $65.8 million, or 2.3%, primarily due to a $49.2 million increase in employee benefit costs, which are primarily related to contractual rate increases for union employees, and a $29.8 million increase in short-term incentive compensation for employees at various levels in the organization.  These increases were partially offset by a $10.9 million decrease in wages due to a decrease in shipping volumes, which required fewer employee hours to process freight.

Fuel, operating expenses and supplies.  Fuel, operating expenses and supplies increased $72.7 million, or 8.4%, primarily due to a $52.7 million increase in fuel expenses driven by higher fuel prices on a per gallon basis, partially offset by fewer miles driven and improved miles per gallon.  The increase in operating expenses was also due to an increase of $6.9 million in facility related expense primarily due to increased rent expense at our leased terminal locations.

Purchased transportation. Purchased transportation increased $55.7 million, or 8.9%, primarily due to a $35.8 million increase in vehicle rent expense, mostly related to a $32.9 million increase in long-term rental expense in conjunction with the Company’s leasing strategy to invest in revenue equipment.  Purchased transportation expense also includes a $29.6 million increase in third-party costs due to the expansion in customer-specific logistics solutions.  These increases were partially offset by a $12.2 million decrease in local purchased transportation due to reduced usage.

Other operating expenses. Other operating expenses increased $3.1 million, or 1.3%, primarily due to an increase of $8.1 million in our third-party liability claims expense primarily due to current year claims, partially offset by a $4.6 million decrease in cargo claims expense.

Gains/losses on property disposals.  Net gains on disposals of property were $20.8 million in 2018 compared to net gains of $0.6 million in 2017.  The gains in 2018 were primarily related to the sale of real properties, including a $29.3 million gain from the sale of an excess property at YRC Freight.

Nonoperating expenses, net.  Nonoperating expenses decreased $25.5 million for the year ended December 31, 2018 compared to 2017 primarily due to an $11.2 million decrease in net periodic pension cost.  Additionally, in 2017 we incurred $8.1 million in transaction costs related to debt amendments with no corresponding expense in 2018.

 

Our effective tax rate for the years ended December 31, 2018 and 2017 was 35.5% and 40.3%, respectively. 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 at December 31, 2018. Significant items impacting the 2017 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,

28


 

and a change in the valuation allowance established for the net deferred tax asset balance at December 31, 2017. We recognize valuation allowances on deferred tax assets, if, based on the weight of the evidence, we believe that some or all of our deferred tax assets will not be realized. Changes in valuation allowances are included in our tax provision or in equity if directly related to other comprehensive income (loss) 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-back and 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. Accordingly, as of December 31, 2018 and 2017, we have a full valuation allowance against our net deferred tax assets, exclusive of a deferred tax liability related to a foreign jurisdiction.

 

The Tax Cuts and Jobs Act (the “Tax Act”) was enacted in the U.S. on December 22, 2017. The Tax Act reduced the US federal corporate income tax rate to 21% from 35%, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and created new taxes on certain foreign-sourced earnings. The Company adopted the guidance provided by Securities and Exchange Staff Accounting Bulletin No. 118 (“SAB 118”) regarding the public disclosures of certain accounting impacts of the Tax Act.  In 2017 and the first nine months of 2018, the Company recorded provisional amounts for certain enactment date effects by applying the guidance in SAB 118 because we had not yet completed our enactment date accounting for these effects.  All provisional amounts were finalized for the 2018 Form 10-K as required by SAB 118. This includes the federal and state income tax effects of newly enacted one-time transition tax. Such finalization had no net impact on the tax provision for 2018, as it merely adjusted net operating loss carry-forward amounts and was fully offset by a valuation allowance.

 

Reporting Segment Results of Operations

We evaluate our business using our two 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. This reporting segment includes YRC Freight, our LTL subsidiary, YRC Freight Canada, a subsidiary located in Canada that specializes in shipments into, across and out of Canada, and HNRY Logistics, our 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.

YRC Freight Results

YRC Freight represented 63% of our consolidated operating revenue in 2019, 2018 and 2017. The table below provides summary financial information for YRC Freight for the years ended December 31:

 

 

 

 

 

 

Percent Change

 

(in millions)

 

2019

 

 

2018

 

 

2017

 

 

2019 vs. 2018

 

 

2018 vs. 2017

 

Operating revenue

 

$

3,088.7

 

 

$

3,197.3

 

 

$

3,067.9

 

 

 

(3.4

)%

 

 

4.2

%

Operating income

 

 

38.3

 

 

 

85.0

 

 

 

60.7

 

 

 

(54.9

)%

 

 

40.0

%

Operating ratio(a)

 

 

98.8

%

 

 

97.3

%

 

 

98.0

%

 

(1.5pp)

 

 

0.7pp

 

 

(a)

pp represents the change in percentage points

29


 

2019 Compared to 2018

YRC Freight reported operating revenue of $3,088.7 million in 2019, a decrease of $108.6 million, or 3.4%, compared to 2018.  The decrease in revenue was largely driven by a decrease in tonnage and fuel surcharge revenue, while partially offset by an increase in base LTL yield excluding fuel surcharge. The table below summarizes the key revenue metrics for the YRC Freight reporting segment for the years ended December 31:

 

 

 

2019

 

 

2018

 

 

Percent Change(b)

 

Workdays

 

 

251.5

 

 

 

252.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LTL picked up revenue (in millions)

 

$

2,840.7

 

 

$

2,945.4

 

 

 

(3.6

)%

LTL tonnage (in thousands)

 

 

4,739

 

 

 

5,040

 

 

 

(6.0

)%

LTL tonnage per workday (in thousands)

 

 

18.84

 

 

 

20.00

 

 

 

(5.8

)%

LTL shipments (in thousands)

 

 

9,434

 

 

 

9,982

 

 

 

(5.5

)%

LTL shipments per workday (in thousands)

 

 

37.51

 

 

 

39.61

 

 

 

(5.3

)%

LTL picked up revenue per hundred weight

 

$

29.97

 

 

$

29.22

 

 

 

2.6

%

LTL picked up revenue per hundred weight (excluding fuel surcharge)

 

$

26.43

 

 

$

25.58

 

 

 

3.3

%

LTL picked up revenue per shipment

 

$

301

 

 

$

295

 

 

 

2.1

%

LTL picked up revenue per shipment (excluding fuel surcharge)

 

$

266

 

 

$

258

 

 

 

2.8

%

LTL weight per shipment (in pounds)

 

 

1,005

 

 

 

1,010

 

 

 

(0.5

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

Total picked up revenue (in millions)(a)

 

$

3,049.1

 

 

$

3,153.3

 

 

 

(3.3

)%

Total tonnage (in thousands)

 

 

6,034

 

 

 

6,136

 

 

 

(1.7

)%

Total tonnage per workday (in thousands)

 

 

23.99

 

 

 

24.35

 

 

 

(1.5

)%

Total shipments (in thousands)

 

 

9,579

 

 

 

10,122

 

 

 

(5.4

)%

Total shipments per workday (in thousands)

 

 

38.09

 

 

 

40.17

 

 

 

(5.2

)%

Total picked up revenue per hundred weight

 

$

25.27

 

 

$

25.70

 

 

 

(1.7

)%

Total picked up revenue per hundred weight (excluding fuel surcharge)

 

$

22.35

 

 

$

22.52

 

 

 

(0.8

)%

Total picked up revenue per shipment

 

$

318

 

 

$

312

 

 

 

2.2

%

Total picked up revenue per shipment (excluding fuel surcharge)

 

$

282

 

 

$

273

 

 

 

3.1

%

Total weight per shipment (in pounds)

 

 

1,260

 

 

 

1,212

 

 

 

3.9

%

 

(in millions)

 

2019

 

 

2018

 

(a)Reconciliation of operating revenue to total picked up revenue:

 

 

 

 

 

 

 

 

Operating revenue

 

$

3,088.7

 

 

$

3,197.3

 

Change in revenue deferral and other

 

 

(39.6

)

 

 

(44.0

)

Total picked up revenue

 

$

3,049.1

 

 

$

3,153.3

 

 

 

(a)

Does not equal financial statement revenue due to revenue adjustments for shipments in transit and the impact of other revenue.

 

(b)

Percent change based on unrounded figures and not rounded figures presented.

Operating income for YRC Freight was $38.3 million for the year ended December 31, 2019, a decrease of $46.7 million from the same period in 2018.  Operating expenses decreased $61.9 million primarily due to decreases in purchased transportation expense and fuel, operating expenses and supplies.  These decreases were partially offset by increased salaries, wages and employee benefits.

Salaries, wages and employee benefits. Salaries, wages and employee benefits increased $7.2 million, or 0.4%, primarily due to a $21.9 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, and a $2.9 million increase in salaries expense. These increases were partially offset by a $9.0 million decrease in wage expense as a result of a decrease in tonnage that reduced the number of hours needed to process freight, which was partially offset by contractual rate increases as a result of the New NMFA, as well as an $8.2 million reduction in short-term incentive compensation.

Fuel, operating expenses and supplies. Fuel, operating expenses and supplies decreased $42.9 million, or 7.2%, primarily due to a $28.7 million decrease in fuel expenses driven by lower fuel prices on a per gallon basis, fewer miles driven and improved miles per gallon.  Also, professional fees decreased by $9.2 million primarily due to decreased management fees of corporate and other enterprise-wide shared services and other corporate service fees and consulting fees.

Purchased Transportation. Purchased transportation decreased $49.7 million, or 9.3%, primarily due to a $49.8 million decrease in rail and over-the-road purchased transportation expense as a result of reduced shipping volumes, an $11.1 million

30


 

decrease from reduced usage of local purchased transportation, and a $5.5 million decrease in short-term vehicle rents.  These decreases were partially offset by an $18.5 million increase in third-party costs due to the expansion in customer-specific logistics solutions.

Gains/losses on property disposals. Net gains on disposals of property were $9.8 million during 2019 as compared to $20.2 million in 2018.  The gains in 2019 and 2018 were primarily related to the sale of real properties, including a $29.3 million gain from the sale of one excess property during 2018.

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

2018 Compared to 2017

YRC Freight reported operating revenue of $3,197.3 million in 2018, an increase of $129.4 million, or 4.2%, compared to 2017.  The increase in revenue was largely driven by an increase in base yield excluding fuel surcharge and fuel surcharge revenue, partially offset by a decrease in tonnage. The table below summarizes the key revenue metrics for the YRC Freight reporting segment for the years ended December 31:

 

 

 

2018

 

 

2017

 

 

Percent Change(b)

 

Workdays

 

 

252.0

 

 

 

251.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LTL picked up revenue (in millions)

 

$

2,945.4

 

 

$

2,854.5

 

 

 

3.2

%

LTL tonnage (in thousands)

 

 

5,040

 

 

 

5,304

 

 

 

(5.0

)%

LTL tonnage per workday (in thousands)

 

 

20.00

 

 

 

21.09

 

 

 

(5.2

)%

LTL shipments (in thousands)

 

 

9,982

 

 

 

10,331

 

 

 

(3.4

)%

LTL shipments per workday (in thousands)

 

 

39.61

 

 

 

41.08

 

 

 

(3.6

)%

LTL picked up revenue per hundred weight

 

$

29.22

 

 

$

26.91

 

 

 

8.6

%

LTL picked up revenue per hundred weight (excluding fuel surcharge)

 

$

25.58

 

 

$

24.02

 

 

 

6.5

%

LTL picked up revenue per shipment

 

$

295

 

 

$

276

 

 

 

6.8

%

LTL picked up revenue per shipment (excluding fuel surcharge)

 

$

258

 

 

$

247

 

 

 

4.7

%

LTL weight per shipment (in pounds)

 

 

1,010

 

 

 

1,027

 

 

 

(1.6

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

Total picked up revenue (in millions)(a)

 

$

3,153.3

 

 

$

3,033.0

 

 

 

4.0

%

Total tonnage (in thousands)

 

 

6,136

 

 

 

6,291

 

 

 

(2.5

)%

Total tonnage per workday (in thousands)

 

 

24.35

 

 

 

25.01

 

 

 

(2.7

)%

Total shipments (in thousands)

 

 

10,122

 

 

 

10,465

 

 

 

(3.3

)%

Total shipments per workday (in thousands)

 

 

40.17

 

 

 

41.61

 

 

 

(3.5

)%

Total picked up revenue per hundred weight

 

$

25.70

 

 

$

24.11

 

 

 

6.6

%

Total picked up revenue per hundred weight (excluding fuel surcharge)

 

$

22.52

 

 

$

21.53

 

 

 

4.6

%

Total picked up revenue per shipment

 

$

312

 

 

$

290

 

 

 

7.5

%

Total picked up revenue per shipment (excluding fuel surcharge)

 

$

273

 

 

$

259

 

 

 

5.5

%

Total weight per shipment (in pounds)

 

 

1,212

 

 

 

1,202

 

 

 

0.8

%

 

(in millions)

 

2018

 

 

2017

 

(a) Reconciliation of operating revenue to total picked up revenue:

 

 

 

 

 

 

 

 

Operating revenue

 

$

3,197.3

 

 

$

3,067.9

 

Change in revenue deferral and other

 

 

(44.0

)

 

 

(34.9

)

Total picked up revenue

 

$

3,153.3

 

 

$

3,033.0

 

 

 

(a)

Does not equal financial statement revenue due to revenue adjustments for shipments in transit and the impact of other revenue.

 

(b)

Percent change based on unrounded figures and not rounded figures presented.

31


 

Operating income for YRC Freight was $85.0 million for the year ended December 31, 2018, an increase of $24.3 million from the same period in 2017.  Operating expenses increased $105.1 million primarily due to an increase in salaries, wages and employee benefits, an increase in purchased transportation expense, and higher fuel costs, which were partially offset by an increase in gains on property disposals.

Salaries, wages and employee benefits. Salaries, wages and employee benefits increased $21.3 million, or 1.2%, primarily due to a $33.0 million increase in employee benefit costs, which are primarily related to contractual rate increases for union employees, and a $6.1 million increase in short-term incentive compensation for employees at various levels in the organization.  These increases were partially offset by an $11.7 million decrease in wages due to a decrease in shipping volumes, which required fewer employee hours to process freight.  Additionally, workers’ compensation expense decreased $6.1 million mainly due to favorable development on prior year claims.

Fuel, operating expenses and supplies. Fuel, operating expenses and supplies increased $51.7 million, or 9.5%, primarily due to a $26.2 million increase in fuel expenses driven by higher fuel prices on a per gallon basis, partially offset by fewer miles driven and improved miles per gallon.  Also, professional fees increased by $21.0 million primarily due to increased management fees and other corporate service fees and non-recurring consulting fees.

Purchased Transportation. Purchased transportation increased $55.0 million, or 11.5%, primarily due to a $33.5 million increase in vehicle rent expense of which $30.6 million was attributable to long-term rentals in conjunction with the Company’s leasing strategy to invest in revenue equipment.  Purchased transportation expense also includes a $29.6 million increase in third-party costs due to the expansion in customer-specific logistics solutions.  These costs were partially offset by an $11.3 million decrease from reduced usage of local purchased transportation.

Other operating expenses. Other operating expenses decreased $2.1 million, or 1.4%, primarily due to a $6.1 million decrease in cargo claims expense, partially offset by an increase of $4.1 million in our third-party liability claims expense primarily due to current year claims.

Gains/losses on property disposals. Net gains on disposals of property were $20.2 million in 2018 compared to net gains of $2.2 million in 2017, primarily due to the sale of real properties.  The 2018 gain includes a $29.3 million gain on the sale of an excess property.

Regional Transportation Results

Regional Transportation represented 37% of consolidated operating revenue in 2019, 2018 and 2017. The table below provides summary financial information for Regional Transportation for the years ended December 31:

 

 

 

 

 

 

Percent Change

 

(in millions)

 

2019

 

 

2018

 

 

2017

 

 

2019 vs. 2018

 

 

2018 vs. 2017

 

Operating revenue

 

$

1,782.7

 

 

$

1,895.0

 

 

$

1,823.4

 

 

 

(5.9

)%

 

 

3.9

%

Operating income (loss)

 

 

(4.8

)

 

 

70.7

 

 

 

67.9

 

 

 

(106.8

)%

 

 

4.1

%

Operating ratio(a)

 

 

100.3

%

 

 

96.3

%

 

 

96.3