UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended March 31, 2020

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

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

10990 Roe Avenue, Overland Park, Kansas

 

66211

(Address of principal executive offices)

 

(Zip Code)

 

(913) 696-6100

(Registrant’s telephone number, including area code)

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

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, $0.01 par value per share

 

YRCW

 

The NASDAQ Stock Market LLC

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      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  

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 May 7, 2020

Common Stock, $0.01 par value per share

 

37,145,903 shares

 

1


 

INDEX

 

Item

 

Page

 

PART I – FINANCIAL INFORMATION

 

1

Financial Statements

3

 

Consolidated Balance Sheets – March 31, 2020 and December 31, 2019

3

 

Statements of Consolidated Comprehensive Income (Loss) - Three Months Ended March 31, 2020 and 2019

4

 

Statements of Consolidated Cash Flows - Three Months Ended March 31, 2020 and 2019

5

 

Statements of Consolidated Shareholders’ Deficit - Three Months Ended March 31, 2020 and 2019

6

 

Notes to Consolidated Financial Statements

7

2

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

15

3

Quantitative and Qualitative Disclosures About Market Risk

24

4

Controls and Procedures

24

 

PART II – OTHER INFORMATION

 

1

Legal Proceedings

26

1A

Risk Factors

26

2

Not Applicable

 

3

Not Applicable

 

4

Not Applicable

 

5

Not Applicable

 

6

Exhibits

28

 

Signatures

29

 

2


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

YRC Worldwide Inc. and Subsidiaries

(Amounts in millions except share and per share data)

 

 

 

March 31,

2020

 

 

December 31,

2019

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

103.9

 

 

$

109.2

 

Restricted amounts held in escrow

 

 

2.0

 

 

 

 

Accounts receivable, net

 

 

525.2

 

 

 

464.4

 

Prepaid expenses and other

 

 

60.0

 

 

 

44.6

 

Total current assets

 

 

691.1

 

 

 

618.2

 

Property and Equipment:

 

 

 

 

 

 

 

 

Cost

 

 

2,728.9

 

 

 

2,761.6

 

Less – accumulated depreciation

 

 

(1,990.0

)

 

 

(1,991.3

)

Net property and equipment

 

 

738.9

 

 

 

770.3

 

Deferred income taxes, net

 

 

0.5

 

 

 

0.6

 

Operating lease right-of-use assets

 

 

355.5

 

 

 

386.0

 

Other assets

 

 

67.0

 

 

 

56.5

 

Total Assets

 

$

1,853.0

 

 

$

1,831.6

 

Liabilities and Shareholders’ Deficit

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

194.7

 

 

$

163.7

 

Wages, vacations and employee benefits

 

 

212.2

 

 

 

195.9

 

Current operating lease liabilities

 

 

118.6

 

 

 

120.8

 

Claims and insurance accruals

 

 

111.8

 

 

 

120.4

 

Other accrued taxes

 

 

29.8

 

 

 

25.8

 

Other current and accrued liabilities

 

 

33.3

 

 

 

21.3

 

Current maturities of long-term debt

 

 

4.1

 

 

 

4.1

 

Total current liabilities

 

 

704.5

 

 

 

652.0

 

Other Liabilities:

 

 

 

 

 

 

 

 

Long-term debt and financing, less current portion

 

 

838.3

 

 

 

858.1

 

Pension and postretirement

 

 

230.5

 

 

 

236.5

 

Operating lease liabilities

 

 

223.0

 

 

 

246.3

 

Claims and other liabilities

 

 

290.5

 

 

 

279.9

 

Commitments and contingencies

 

 

 

 

 

 

Shareholders’ Deficit:

 

 

 

 

 

 

 

 

Cumulative preferred stock, $1 par value per share

 

 

 

 

 

 

Common stock, $0.01 par value per share

 

 

0.3

 

 

 

0.3

 

Capital surplus

 

 

2,334.7

 

 

 

2,332.9

 

Accumulated deficit

 

 

(2,308.1

)

 

 

(2,312.4

)

Accumulated other comprehensive loss

 

 

(368.0

)

 

 

(369.3

)

Treasury stock, at cost (410 shares)

 

 

(92.7

)

 

 

(92.7

)

Total shareholders’ deficit

 

 

(433.8

)

 

 

(441.2

)

Total Liabilities and Shareholders’ Deficit

 

$

1,853.0

 

 

$

1,831.6

 

The accompanying notes are an integral part of these statements.

3


 

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)

YRC Worldwide Inc. and Subsidiaries

For the Three Months Ended March 31

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

(Unaudited)

 

 

 

 

2020

 

 

2019

 

Operating Revenue

 

$

1,150.4

 

 

$

1,182.3

 

Operating Expenses:

 

 

 

 

 

 

 

 

Salaries, wages and employee benefits

 

 

720.2

 

 

 

718.2

 

Fuel, operating expenses and supplies

 

 

208.0

 

 

 

235.9

 

Purchased transportation

 

 

136.2

 

 

 

146.3

 

Depreciation and amortization

 

 

35.7

 

 

 

40.0

 

Other operating expenses

 

 

61.6

 

 

 

63.8

 

(Gains) losses on property disposals, net

 

 

(39.3

)

 

 

1.6

 

Impairment charges

 

 

 

 

 

8.2

 

Total operating expenses

 

 

1,122.4

 

 

 

1,214.0

 

Operating Income (Loss)

 

 

28.0

 

 

 

(31.7

)

Nonoperating Expenses:

 

 

 

 

 

 

 

 

Interest expense

 

 

28.3

 

 

 

27.0

 

Non-union pension and postretirement benefits

 

 

(1.6

)

 

 

0.3

 

Other, net

 

 

(2.6

)

 

 

(0.2

)

Nonoperating expenses, net

 

 

24.1

 

 

 

27.1

 

Income (loss) before income taxes

 

 

3.9

 

 

 

(58.8

)

Income tax benefit

 

 

(0.4

)

 

 

(9.7

)

Net income (loss)

 

 

4.3

 

 

 

(49.1

)

Other comprehensive income, net of tax

 

 

1.3

 

 

 

3.5

 

Comprehensive Income (Loss)

 

$

5.6

 

 

$

(45.6

)

 

 

 

 

 

 

 

 

 

Average Common Shares Outstanding - Basic

 

 

33,791

 

 

 

33,150

 

Average Common Shares Outstanding - Diluted

 

 

35,630

 

 

 

33,150

 

 

 

 

 

 

 

 

 

 

Earnings (Loss) Per Share - Basic

 

$

0.13

 

 

$

(1.48

)

Earnings (Loss) Per Share - Diluted

 

$

0.12

 

 

$

(1.48

)

 

The accompanying notes are an integral part of these statements.

4


 

STATEMENTS OF CONSOLIDATED CASH FLOWS

YRC Worldwide Inc. and Subsidiaries

For the Three Months Ended March 31

(Amounts in millions)

(Unaudited)

 

 

 

2020

 

 

2019

 

Operating Activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

4.3

 

 

$

(49.1

)

Adjustments to reconcile net income (loss) to cash flows from operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

35.7

 

 

 

40.0

 

Lease amortization and accretion expense

 

 

43.1

 

 

 

41.2

 

Lease payments

 

 

(38.1

)

 

 

(36.4

)

Equity-based compensation and employee benefits expense

 

 

5.6

 

 

 

5.3

 

(Gains) losses on property disposals, net

 

 

(39.3

)

 

 

1.6

 

Impairment charges

 

 

 

 

 

8.2

 

Deferred income tax benefit, net

 

 

(0.4

)

 

 

 

Other noncash items, net

 

 

4.0

 

 

 

0.8

 

Changes in assets and liabilities, net:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(61.0

)

 

 

(42.1

)

Accounts payable

 

 

14.9

 

 

 

12.8

 

Other operating assets

 

 

(3.9

)

 

 

(20.0

)

Other operating liabilities

 

 

19.5

 

 

 

(4.0

)

Net cash used in operating activities

 

 

(15.6

)

 

 

(41.7

)

Investing Activities:

 

 

 

 

 

 

 

 

Acquisition of property and equipment

 

 

(12.4

)

 

 

(32.6

)

Proceeds from disposal of property and equipment

 

 

45.0

 

 

 

0.8

 

Net cash provided by (used in) investing activities

 

 

32.6

 

 

 

(31.8

)

Financing Activities:

 

 

 

 

 

 

 

 

Repayment of long-term debt

 

 

(20.1

)

 

 

(1.9

)

Payments for tax withheld on equity-based compensation

 

 

(0.2

)

 

 

(0.6

)

Net cash used in financing activities

 

 

(20.3

)

 

 

(2.5

)

Net Decrease In Cash and Cash Equivalents and Restricted Amounts Held in Escrow

 

 

(3.3

)

 

 

(76.0

)

Cash and Cash Equivalents and Restricted Amounts Held in Escrow, Beginning of Period

 

 

109.2

 

 

 

227.6

 

Cash and Cash Equivalents and Restricted Amounts Held in Escrow, End of Period

 

$

105.9

 

 

$

151.6

 

 

Supplemental Cash Flow Information:

 

 

 

 

 

 

 

 

Interest paid

 

$

(8.6

)

 

$

(13.3

)

Income tax payment

 

 

(0.5

)

 

 

(1.6

)

 

 

The accompanying notes are an integral part of these statements.

 

 

5


 

STATEMENT OF CONSOLIDATED SHAREHOLDERS’ DEFICIT

YRC Worldwide Inc. and Subsidiaries

For the Three Months Ended March 31

(Amounts in millions)

(Unaudited)

 

 

 

Preferred Stock

 

Common Stock

 

Capital Surplus

 

Accumulated Deficit

 

Accumulated Other Comprehensive Loss

 

Treasury Stock, At Cost

 

Total Shareholders' Deficit

 

Balances at December 31, 2019

 

$

 

$

0.3

 

$

2,332.9

 

$

(2,312.4

)

$

(369.3

)

$

(92.7

)

$

(441.2

)

Equity-based compensation

 

 

 

 

 

 

1.8

 

 

 

 

 

 

 

 

1.8

 

Net income

 

 

 

 

 

 

 

 

4.3

 

 

 

 

 

 

4.3

 

Pension, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior net losses

 

 

 

 

 

 

 

 

 

 

3.3

 

 

 

 

3.3

 

Amortization of prior service credit

 

 

 

 

 

 

 

 

 

 

(0.1

)

 

 

 

(0.1

)

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

(1.9

)

 

 

 

(1.9

)

Balances at March 31, 2020

 

$

 

$

0.3

 

$

2,334.7

 

$

(2,308.1

)

$

(368.0

)

$

(92.7

)

$

(433.8

)

 

 

 

 

Preferred Stock

 

Common Stock

 

Capital Surplus

 

Accumulated Deficit

 

Accumulated Other Comprehensive Loss

 

Treasury Stock, At Cost

 

Total Shareholders' Deficit

 

Balances at December 31, 2018

 

$

 

$

0.3

 

$

2,327.6

 

$

(2,208.4

)

$

(332.3

)

$

(92.7

)

$

(305.5

)

Equity-based compensation

 

 

 

 

 

 

1.6

 

 

 

 

 

 

 

 

1.6

 

Net loss

 

 

 

 

 

 

 

 

(49.1

)

 

 

 

 

 

(49.1

)

Pension, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior net losses

 

 

 

 

 

 

 

 

 

 

3.2

 

 

 

 

3.2

 

Amortization of prior service credit

 

 

 

 

 

 

 

 

 

 

(0.1

)

 

 

 

(0.1

)

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

0.4

 

 

 

 

0.4

 

Balances at March 31, 2019

 

$

 

$

0.3

 

$

2,329.2

 

$

(2,257.5

)

$

(328.8

)

$

(92.7

)

$

(349.5

)

 

 

The accompanying notes are an integral part of these statements.

 

 

6


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YRC Worldwide Inc. and Subsidiaries

(Unaudited)

1. Description of Business

YRC Worldwide Inc. (also referred to as “YRC Worldwide,” the “Company,” “we,” “us” or “our”) is a holding company that, through its operating subsidiaries, offers its customers a wide range of transportation services. We have one of the largest, most comprehensive less-than-truckload (“LTL”) networks in North America with local, regional, national and international capabilities. Through our team of experienced service professionals, we offer expertise in LTL shipments and flexible supply chain solutions, ensuring customers can ship industrial, commercial and retail goods with confidence.

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

At March 31, 2020, approximately 79% of our labor force is subject to collective bargaining agreements, which predominantly expire on March 31, 2024.

2. Basis of Presentation

The accompanying consolidated financial statements include the accounts of YRC Worldwide and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. We report on a calendar year basis. The quarters of Holland and Reddaway consist of thirteen weeks that end on a Saturday either before or after the end of March, June and September, whereas all other companies’ quarters end on the natural calendar quarter end.

 

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

 

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

 

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

 

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

7


 

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

 

Segments

 

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

Revenue Disaggregation

We considered the disclosure requirements for revenue disaggregation guidance in ASC Topic 606, Revenue from Contracts with Customers, and noted that our business transformation has led to one consolidated LTL network as we joined our national and regional operations and no longer measure revenues by geographies. The following table presents disaggregated revenue by revenue source between LTL shipments and total. LTL shipments are defined as shipments less than 10,000 pounds that move in our network.

 

 

Three Months

 

Disaggregated Revenue (in millions)

 

2020

 

 

2019

 

LTL revenue

 

$

1,050.7

 

 

$

1,082.9

 

Other revenue

 

 

99.7

 

 

 

99.4

 

Total revenue

 

$

1,150.4

 

 

$

1,182.3

 

Reclassifications

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

Impact of Recently-Issued Accounting Standards

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

3. Debt and Financing

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

 

As of March 31, 2020 (in millions)

 

Par Value

 

 

Discount

 

 

Debt

Issuance

Costs

 

 

Book Value

 

 

Effective

Interest

Rate

 

New Term Loan

 

$

580.6

 

 

$

(25.7

)

 

$

(11.3

)

 

$

543.6

 

(a)

 

10.0

%

ABL Facility

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured Second A&R CDA

 

 

26.0

 

 

 

 

 

 

(0.1

)

 

 

25.9

 

 

 

7.8

%

Unsecured Second A&R CDA

 

 

45.2

 

 

 

 

 

 

(0.1

)

 

 

45.1

 

 

 

7.8

%

Lease financing obligations

 

 

228.1

 

 

 

 

 

 

(0.3

)

 

 

227.8

 

 

 

16.2

%

Total debt

 

$

879.9

 

 

$

(25.7

)

 

$

(11.8

)

 

$

842.4

 

 

 

 

 

Current maturities of Unsecured Second A&R CDA

 

 

(1.4

)

 

 

 

 

 

 

 

 

(1.4

)

 

 

 

 

Current maturities of lease financing obligations

 

 

(2.7

)

 

 

 

 

 

 

 

 

(2.7

)

 

 

 

 

Long-term debt

 

$

875.8

 

 

$

(25.7

)

 

$

(11.8

)

 

$

838.3

 

 

 

 

 

(a)

Variable interest rate of 1, 3 or 6-month LIBOR, with a floor of 1.0%, plus a fixed margin of 7.5%.  After entering into Amendment No. 1 of the New Term Loan on April 7, 2020, the interest rate was adjusted as described below.

New Term Loan

 

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

8


 

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

 

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

 

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

Liquidity

 

Our principal sources of liquidity are cash and cash equivalents, available borrowings under our asset-based loan facility (the “ABL Facility”) and any prospective net cash flow from operations. As of March 31, 2020, our maximum availability under our ABL Facility was $59.2 million, and our managed accessibility was $19.1 million. Maximum availability is derived by reducing the amount that may be advanced against eligible receivables plus eligible borrowing base cash by certain reserves imposed by the ABL Agent and our $341.3 million of outstanding letters of credit. Our Managed Accessibility of $19.1 million represents the maximum amount we would access on the ABL Facility and is adjusted for eligible receivables plus eligible borrowing base cash measured at March 31, 2020.  The credit agreement governing the ABL Facility permits adjustments from eligible borrowing base cash to restricted cash prior to the compliance measurement date of April 15, 2020.  As of April 15, 2020, we moved $5.0 million of cash into restricted cash, as permitted under the ABL Facility, which effectively put our cash and cash equivalents and Managed Accessibility to $118.0 million as of March 31, 2020. 

For the December 31, 2019 borrowing base certificate, which was filed in January of 2020, we transferred $29.0 million of cash into restricted cash to maintain the 10% threshold, as permitted under the ABL Facility, which transfer effectively put our cash and cash equivalents and Managed Accessibility to $80.4 million.

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

 

(in millions)

 

March 31, 2020

 

 

December 31, 2019

 

Cash and cash equivalents

 

 

103.9

 

 

 

109.2

 

Less: amounts placed into restricted cash subsequent to period end

 

 

(5.0

)

 

 

(29.0

)

Managed Accessibility

 

 

19.1

 

 

 

0.2

 

Total cash and cash equivalents and Managed Accessibility

 

$

118.0

 

 

$

80.4

 

 

Covenants

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

9


 

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

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

 

Risks and Uncertainties Regarding Compliance with Credit Facility Financial Covenants

 

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

 

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

 

Fair Value Measurement

The book value and estimated fair values of our long-term debt, including current maturities and other financial instruments, are summarized as follows:

 

 

 

March 31, 2020

 

 

December 31, 2019

 

(in millions)

 

Book Value

 

 

Fair Value

 

 

Book Value

 

 

Fair Value

 

New Term Loan

 

$

543.6

 

 

$

566.1

 

 

$

559.9

 

 

$

559.3

 

ABL Facility

 

 

 

 

 

 

 

 

 

 

 

 

Lease financing obligations

 

 

227.8

 

 

 

221.3

 

 

 

231.3

 

 

 

233.7

 

Second A&R CDA

 

 

71.0

 

 

 

69.5

 

 

 

71.0

 

 

 

71.7

 

Total debt

 

$

842.4

 

 

$

856.9

 

 

$

862.2

 

 

$

864.7

 

 

The fair values of the New Term Loan and Second Amended and Restated Contribution Deferral Agreement (the “Second A&R CDA”) were estimated based on observable prices (level two inputs for fair value measurements). The fair value of the lease financing obligations are estimated using a publicly traded secured loan with similar characteristics (level three input for fair value measurement).

10


 

 

4. Leases

 

Leases (in millions)

 

Classification

 

March 31, 2020

 

 

December 31, 2019

 

Assets

 

 

 

 

 

 

 

 

 

 

Operating lease assets

 

Operating lease right-of-use assets

 

$

355.5

 

 

$

386.0

 

Finance lease assets

 

Net property and equipment

 

 

2.5

 

 

 

2.6

 

Total leased assets

 

 

 

$

358.0

 

 

$

388.6

 

Liabilities

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

 

 

 

Operating

 

Current operating lease liabilities

 

$

118.6

 

 

$

120.8

 

Finance

 

Other current and accrued liabilities

 

 

0.2

 

 

 

0.2

 

Noncurrent

 

 

 

 

 

 

 

 

 

 

Operating

 

Operating lease liabilities

 

 

223.0

 

 

 

246.3

 

Finance

 

Claims and other liabilities

 

 

3.3

 

 

 

3.3

 

Total lease liabilities

 

 

 

$

345.1

 

 

$

370.6

 

 

Lease Cost (in millions)

 

Classification

 

Three Months Ended March 31, 2020

 

 

Three Months Ended March 31, 2019

 

Operating lease cost(a)

 

Purchased transportation; Fuel, operating expenses and supplies

 

$

43.1

 

 

$

41.2

 

Short-term cost

 

Purchased transportation; Fuel, operating expenses and supplies

 

 

2.0

 

 

3.5

 

Variable lease cost

 

Purchased transportation; Fuel, operating expenses and supplies

 

2.4

 

 

1.5

 

Finance lease cost

 

 

 

 

 

 

 

 

 

 

Amortization of leased assets

 

Depreciation and amortization

 

0.1

 

 

0.2

 

Interest on lease liabilities

 

Interest expense

 

0.1

 

 

0.1

 

Total lease cost

 

 

 

$

47.7

 

 

$

46.5

 

(a)

Operating lease cost represents non-cash amortization of ROU assets and accretion of the discounted lease liabilities and is segregated on the statement of consolidated cash flows.

 

 

Remaining Maturities of Lease Liabilities

 

Operating Leases

 

 

Finance Leases

 

 

Total

 

2020

 

$

114.6

 

 

$

0.5

 

 

$

115.1

 

2021

 

 

129.2

 

 

 

0.6

 

 

 

129.8

 

2022

 

 

77.8

 

 

 

0.6

 

 

 

78.4

 

2023

 

 

40.9

 

 

 

0.6

 

 

 

41.5

 

2024

 

 

16.3

 

 

 

0.7

 

 

 

17.0

 

After 2024

 

 

32.6

 

 

 

3.4

 

 

 

36.0

 

Total lease payments

 

$

411.4

 

 

$

6.4

 

 

$

417.8

 

Less: Imputed Interest

 

 

69.8

 

 

 

2.9

 

 

 

72.7

 

Present value of lease liabilities

 

$

341.6

 

 

$

3.5

 

 

$

345.1

 

 

 

Lease Term and Discount Rate

(years and percent)

 

Weighted-Average Remaining Lease Term

 

 

Weighted-Average Discount Rate

 

Operating leases

 

 

3.6

 

 

11.0%

 

Finance leases

 

 

9.5

 

 

11.3%

 

 

Other Information (in millions)

Three Months Ended March 31, 2020

 

Three Months Ended March 31, 2019

 

Cash paid for amounts included in the measurement of lease liabilities

 

 

 

 

 

 

   Operating cash flows from operating leases(a)

$

38.0

 

$

36.3

 

   Operating cash flows from finance leases

0.1

 

0.1

 

   Financing cash flows from finance leases

0.1

 

0.2

 

Leased assets obtained in exchange for new operating lease liabilities

$

3.7

 

$

19.1

 

(a)

Payments arising from operating leases are reported in operating activities on the statements of consolidated cash flows.

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5. Employee Benefits

Qualified and Nonqualified Defined Benefit Pension Plans

The following table presents the components of our Company-sponsored pension plan costs for the three months ended March 31:

 

 

 

Three Months

 

(in millions)

 

2020

 

 

2019

 

Interest cost

 

$

9.6

 

 

$

11.4

 

Expected return on plan assets

 

 

(14.9

)

 

 

(14.3

)

Amortization of prior service credit

 

 

(0.1

)

 

 

(0.1

)

Amortization of prior net pension loss

 

 

3.7

 

 

 

3.2

 

Total net periodic pension cost

 

$

(1.7

)

 

$

0.2

 

 

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

6. Income Taxes

Our effective tax rate for the three months ended March 31, 2020 was (10.3%) compared to 16.5% for the three months ended March 31, 2019. The significant items impacting the 2020 rate include a benefit recognized due to application of the exception to the rules regarding intraperiod tax allocation, a net state and foreign tax provision, certain permanent items and a change in the valuation allowance established for the net deferred tax asset balance projected for December 31, 2020. The significant items impacting the 2019 rate include a net state and foreign tax provision, certain permanent items and a change in the valuation allowance established for the net deferred tax asset balance that had been projected for December 31, 2019.   We recognize valuation allowances on deferred tax assets if, based on the weight of the evidence, we determine it is more likely than not such assets will not be realized. Changes in valuation allowances are included in our tax provision in the period of change. In determining whether a valuation allowance is warranted, we evaluate factors such as prior years’ earnings history, expected future earnings, loss carry-forward periods, reversals of existing deferred tax liabilities and tax planning strategies that potentially enhance the likelihood of the realization of a deferred tax asset. At March 31, 2020 and December 31, 2019, substantially all of our net deferred tax assets were subject to a valuation allowance.

7. Earnings (Loss) Per Share

We calculate basic earnings (loss) per share by dividing our net earnings (loss) available to common shareholders by our weighted-average shares outstanding at the end of the period. The calculation for diluted earnings (loss) per share adjusts the weighted average shares outstanding for our dilutive unvested shares and stock units using the treasury stock method. Our calculations for basic and dilutive earnings (loss) per share for three months ended March 31, 2020 and 2019 are as follows:

 

 

Three Months

 

(dollars in millions, except per share data; shares and stock units in thousands)

 

2020

 

 

2019

 

Basic and dilutive net income (loss) available to common shareholders

 

$

4.3

 

 

$

(49.1

)

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

 

33,791

 

 

 

33,150

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

Unvested shares and stock units(a)

 

 

1,839

 

 

 

 

Dilutive weighted average shares outstanding

 

 

35,630

 

 

 

33,150

 

Basic earnings (loss) per share(b)

 

$

0.13

 

 

$

(1.48

)

Diluted earnings (loss) per share(b)

 

$

0.12

 

 

$

(1.48

)

(a)

Includes unvested shares of Common Stock, unvested stock units and vested stock units for which the underlying Common Stock has not been distributed.

(b)

Earnings (loss) per share is based on unrounded figures and not the rounded figures presented.

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

 

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8. Commitments, Contingencies and Uncertainties

Department of Defense Complaints

In December 2018, the United States on behalf of the United States Department of Defense filed a Complaint in Intervention (“Complaint”) against the Company in the U.S. District in the Western District of New York captioned United States ex rel. James Hannum v. YRC Freight, Inc.; Roadway Express, Inc.; and Yellow Transportation, Inc., Civil Action No. 08-0811(A). The Complaint alleges that the Company violated the False Claims Act by overcharging the Department of Defense for freight carrier services by failing to comply with the contractual terms of freight contracts between the Department of Defense and the Company and related government procurement rules. The Complaint also alleges claims for unjust enrichment and breach of contract. Under the False Claims Act, the Complaint seeks treble damages, civil penalties, attorneys’ fees and costs of suit, all in unspecified amounts. The remaining common causes of action seek an undetermined amount for an alleged breach of contract or alternatively causes constituting unjust enrichment or a payment by mistake. The Company has moved to dismiss the case, and the court heard oral arguments on the motion on August 12, 2019. Management believes the Company has meritorious defenses and intends to vigorously defend this action. We are unable to estimate the possible loss, or range of possible loss, associated with these claims at this time.

Class Action Securities Complaint

In January 2019, a purported class action lawsuit captioned Christina Lewis v. YRC Worldwide Inc., et al., Case No. 1:19-cv-00001, was filed in the United States District Court for the Northern District of New York against the Company and certain of our current and former officers. The complaint was filed on behalf of persons who purchased or otherwise acquired the Company’s publicly traded securities between March 10, 2014 and December 14, 2018. The complaint generally alleged that the defendants had violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by making false and misleading statements relating to the Company’s freight billing practices as alleged in the Department of Defense complaint described above. The action included claims for damages, including interest, and an award of reasonable costs and attorneys’ fees. The co-lead plaintiffs filed an amended complaint on June 14, 2019, and the defendants moved to dismiss it on July 15, 2019. On March 27, 2020, the court granted defendants’ motion to dismiss in its entirety and entered judgment closing the case. The co-lead plaintiffs filed a notice of appeal to the U.S. Court of Appeals for the Second Circuit on April 27, 2020.

Shareholder Derivative Complaint

In May 2019, a putative shareholder filed an action derivatively and on behalf of the Company naming James L. Welch, Jamie G. Pierson, Stephanie D. Fisher, Raymond J. Bromark, Douglas A. Carty, William R. Davidson, Matthew A. Doheny, Robert L. Friedman, James E. Hoffman, Michael J. Kneeland, Patricia M. Nazemetz, and James F. Winestock individually as defendants and the Company as the nominal defendant. In an amended complaint, filed on October 15, 2019, Darren D. Hawkins was added as a defendant. The case, captioned Hastey v. Welch, et al., Case No. 2:19-cv-2266-KGG, was filed in the United States District Court for the District of Kansas. The Complaint alleged that the Company was exposed to harm by the individual defendants’ purported conduct concerning its freight-billing practices as alleged in the Department of Defense Complaint and the Class Action Securities Complaint described above. The Complaint asserted that the individual defendants’ purported conduct violated Section 14(a) of the Securities Exchange Act of 1934 and that they breached their fiduciary duties, were unjustly enriched, and engaged in corporate waste. On March 30, 2020, the Court granted the Company’s and individual defendants’ motion to dismiss, dismissing Plaintiff’s Section 14(a) claim with prejudice, and declining to exercise supplemental jurisdiction over the remaining claims and thus dismissing them without prejudice. The Court further denied as moot motions to intervene in the action that had been filed by three putative shareholders.

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

Other Legal Matters

We are involved in litigation or proceedings that arise in ordinary business activities. When possible, we insure against these risks to the extent we deem prudent, but no assurance can be given that the nature or amount of such insurance will be sufficient to fully indemnify us against liabilities arising out of pending and future legal proceedings. Many of these insurance policies contain self-insured retentions in amounts we deem prudent. Based on our current assessment of information available as of the date of these consolidated financial statements, we believe that our consolidated financial statements include adequate provisions for estimated costs and losses that may be incurred within the litigation and proceedings to which we are a party.

13


 

9. Subsequent Events

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

 

14


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Note Regarding Forward-Looking Statements

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements included elsewhere in this report. This report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). Forward-looking statements include those preceded by, followed by or characterized by words such as “will,” “expect,” “intend,” “anticipate,” “believe,” “could,” “should,” “may,” “project,” “forecast,” “propose,” “plan,” “designed,” “estimate,” “enable” and similar expressions which speak only as of the date the statement was made. Forward-looking statements are inherently uncertain, are based upon current beliefs, assumptions and expectations of Company management and current market conditions, and are subject to significant business, economic, competitive, regulatory and other risks, uncertainties and contingencies, known and unknown, many of which are beyond our control. Readers are cautioned not to place undue reliance on any forward-looking statements. Our future financial condition and results could differ materially from those predicted in such forward-looking statements because of a number of factors, including (without limitation):

 

our ability to generate sufficient liquidity to satisfy our cash needs and future cash commitments, including (without limitation) our obligations related to our indebtedness and lease and pension funding requirements, and our ability to achieve increased cash flows through improvement in operations;