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YRCW > SEC Filings for YRCW > Form 10-K on 17-Feb-2017All Recent SEC Filings

Show all filings for YRC WORLDWIDE INC.

Form 10-K for YRC WORLDWIDE INC.


17-Feb-2017

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
"Management's Discussion and Analysis of Financial Condition and Results of Operations" 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
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, 2016, 2015 and 2014 Reporting Segment Results of Operations: an analysis of our results of operations for the years ended December 31, 2016, 2015 and 2014 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, 2016, 2015 and 2014
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 its 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 heavyweight shipments and flexible supply chain solutions, ensuring customers can ship industrial, commercial and retail goods with confidence. We measure the performance of our business both on 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: 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.

Certain Non-GAAP Financial Measures: We use EBITDA and Adjusted EBITDA, which are non-GAAP financial measures, to assess the following:


            EBITDA: a non-GAAP measure that reflects our earnings before
             interest, taxes, depreciation, and amortization expense. EBITDA is
             used for internal management purposes as a financial measure that
             reflects our core operating performance.



            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
             professional fees, non-recurring consulting fees, expenses
             associated with certain lump sum payments to our union employees,
             and gains or losses from permitted dispositions and discontinued
             operations, among other items, as defined in our credit facilities.
             Adjusted EBITDA is used for internal management purposes as a
             financial measure that reflects core operating performance, to
             measure compliance with certain financial covenants in our credit
             facilities and to determine certain executive bonus compensation.

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 fund restructuring professional fees,
             nonrecurring consulting fees, letter of credit fees, service
             interest or principal payments on our outstanding debt or fund our
             lump sum payments to our union employees required under the MOU;


            Although depreciation and amortization are non-cash charges, the
             assets being depreciated and amortized will often have 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, 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.

Consolidated Results of Operations
Our consolidated results for 2016, 2015 and 2014 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)                     2016          2015          2014        2016 vs. 2015      2015 vs. 2014
Operating revenue              $ 4,697.5     $ 4,832.4     $ 5,068.8          (2.8 )%             (4.7 )%
Operating income                   124.3          93.0          45.5          33.7  %            104.4  %
Nonoperating expenses, net          99.7          97.4         129.3           2.4  %            (24.7 )%
Net income (loss)                   21.5           0.7         (67.7 )          NM                  NM      (a)

(a) Not Meaningful

2016 Compared to 2015

Our consolidated operating revenue decreased $134.9 million, or 2.8%, for the year ended December 31, 2016 compared to 2015. The decrease in revenue was largely attributed to the reduction in fuel surcharge revenue and declines in volume, partially offset by improved yield (excluding fuel surcharge).

Operating expenses decreased $166.2 million, or 3.5%, for the year ended December 31, 2016 compared to 2015, due to a reduction in salaries, wages and employee benefits, lower fuel costs, and a decrease in liability claims expense, in addition to gains on property disposals.


Salaries, wages and employee benefits. Salaries, wages and employee benefits decreased $45.1 million, or 1.6%, primarily due to a $35.2 million decrease in salaries and wages resulting from a decrease in shipping volumes, which required fewer employee hours to process freight, and a reduction in incentive compensation expense. Workers' compensation decreased $6.3 million primarily due to a reduction in new claim frequency driven by safety initiatives and favorable development of outstanding claims. Additionally, employee benefit costs decreased by $2.1 million, which included the impact of a non-union pension settlement charge of $28.7 million recognized in the fourth quarter of 2015 as a result of pension settlements from lump sum payouts during the year, partially offset by higher overall employee benefits costs for both non-union and union employees. The increase in union and non-union employee benefit costs is due to contractual rate increases and higher usage, respectively.

Operating expenses and supplies. Operating expenses and supplies decreased $79.3 million, or 9.0%, primarily due to a $60.9 million decrease in fuel expenses driven by lower fuel prices on a per gallon basis, as well as fewer miles driven. Additionally, vehicle maintenance expense decreased by $15.3 million due to lower maintenance costs per mile and fewer miles driven.

Purchased transportation. Purchased transportation decreased $7.5 million, or 1.3%, primarily due to a $29.1 million decrease in rail purchased transportation expense, driven by a reduction in rail miles and lower rail rates, which is principally related to lower fuel surcharges charged by our providers. This was offset by an increase of $16.2 million in vehicle rent expense due to higher usage of operating leases for revenue equipment.

Other operating expenses. Other operating expenses decreased $13.9 million, or 5.2%, primarily due to a decrease of $11.2 million in our liability claims expense primarily due to lower frequency and severity in the current year and favorable development on our prior year outstanding claims.

Gains/losses on property disposals. Net gains on disposals of property were $14.6 million in 2016 compared to net losses of $1.9 million in 2015.

Nonoperating expenses, net. Nonoperating expenses increased $2.3 million for the year ended December 31, 2016 compared to 2015 primarily due to an $8.4 million increase in foreign currency transaction losses, offset by a decrease in interest expense of $4.2 million.

Our effective tax rate for the years ended December 31, 2016 and 2015 was 12.6% and 115.9%, respectively. Significant items impacting the 2016 rate include a refund from a prior year amended return, 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 at December 31, 2016. 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, 2016 and 2015, we have a full valuation allowance against our net deferred tax assets, exclusive of a deferred tax 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. The deferred tax assets resulting from the existing NOLs for which a Section 382 change applies are already fully offset by a valuation allowance.

2015 Compared to 2014

Our consolidated operating revenue decreased $236.4 million for the year ended December 31, 2015 compared to 2014. The decrease in revenue was largely attributed to a reduction in fuel surcharge revenue and declines in volume, partially offset by yield improvements due to our actions to improve price and freight mix.

Operating expenses decreased $283.9 million, or 5.7%, for the year ended December 31, 2015 compared to 2014 due to a reduction in salaries, wages and employee benefits, lower fuel costs, and a decrease in purchased transportation expense.

Salaries, wages and employee benefits. Salaries, wages and employee benefits decreased $33.0 million, or 1.1%, due to a $32.2 million decrease in salaries and wages, resulting from a decrease in shipping volumes, which required fewer employee hours to process freight, combined with a $20.8 million decrease in workers' compensation expenses primarily due to a reduction in new claim frequency driven by safety initiatives and favorable development of prior year claims. These decreases were offset by a


$19.9 million increase in employee benefits expense, primarily due to a non-union pension settlement charge of $28.7 million recognized in the fourth quarter of 2015 as a result of pension settlements from lump sum payouts during the year. This was partially offset by lower overall employee benefits costs at our YRC Freight segment due to a decrease in shipping volumes and employee hours worked in 2015.

Operating expenses and supplies. Operating expenses and supplies decreased $232.3 million, or 20.9%, due to a $228.7 million decrease in fuel expenses driven by lower fuel prices on a per gallon basis, as well as fewer miles driven. The decrease was also related to a reduction in vehicle maintenance expense of $5.1 million, proceeds of $4.1 million for a legal settlement in first quarter 2015 and a reduction in bad debt expense of $5.8 million due to improved aging of accounts receivable. This decrease was partially offset by $5.1 million of nonrecurring consulting fees incurred at the YRC Freight segment.

Purchased transportation. Purchased transportation decreased $29.8 million, or 5.0%, due to a $51.3 million decrease in rail, local and over-the-road purchased transportation expense due to a reduction in shipment volumes and lower rail and road rates, which was principally related to lower fuel surcharges charged by our providers in 2015, when compared to 2014. Offsetting this decrease, we experienced an increase of $23.4 million in vehicle rent expense resulting from higher usage of leased revenue equipment.

Other operating expenses. Other operating expenses decreased $2.7 million, or 1.0%, due to a $6.5 million decrease in cargo claims expense due to improved frequency of new claims and less severity of outstanding claims in 2015, as compared to 2014, offset by a $3.3 million increase in our liability claims expense primarily due to unfavorable development on our outstanding claims.

Gains/losses on property disposals. Net losses on disposals of property were $1.9 million in 2015 compared to net gains of $11.9 million in 2014.

Nonoperating expenses, net. Nonoperating expenses decreased $31.9 million, or 24.7%, for the year ended December 31, 2015 compared to 2014. The decrease was primarily driven by a $42.4 million reduction in interest expense. In the first quarter of 2014, we incurred additional interest expense due to the acceleration of the amortization of the deferred debt costs on our then-existing term loan facility and then-existing asset based loan facility when they were extinguished in the first quarter of 2014. The higher interest expense in 2014 was partially offset by the gain on extinguishment of debt of $11.2 million we recorded in the first quarter of 2014, comprised of $16.3 million related to the acceleration of net premiums on our old debt, partially offset by $5.1 million of additional expense related to the fair value of the incremental shares provided to those holders of our 10% Series B Convertible Senior Secured Notes ("Series B Notes") who exchanged their outstanding balances at a price of $15.00 per share. The higher interest expense in 2014 was also attributable to the additional interest expense incurred in third quarter of 2014 due to the redemption of our Series A Convertible Senior Secured Notes ("Series A Notes").

Our effective tax rate for the years ended December 31, 2015 and 2014 was 115.9% and 19.2%, respectively. Significant items impacting the 2015 rate include a benefit recognized due to application of ASC 740, "Income Taxes" ("ASC 740"), rules regarding intra-period tax allocation, a state tax provision, a foreign tax provision, certain permanent items, a decrease in the reserve for uncertain tax positions and an increase in the valuation allowance established for the net deferred tax asset balance at December 31, 2015. Significant items impacting the 2014 rate include a state tax provision, a foreign tax provision, certain permanent items, a decrease in the reserve for uncertain tax positions and an increase in the valuation allowance established for the net deferred tax asset balance at December 31, 2014. 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, 2015 and 2014, we have a full valuation allowance against our net deferred tax assets, exclusive of a deferred tax liability related to a foreign jurisdiction.

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, primarily through centralized management. This reporting segment includes our LTL subsidiary YRC Freight and YRC Reimer, a subsidiary located in Canada that specializes in shipments into, across and out of Canada. 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%, 63% and 64% of our consolidated operating revenue
in 2016, 2015 and 2014, respectively. The table below provides summary financial
information for YRC Freight for the years ended December 31:

                                                                                     Percent Change
(in millions)                        2016          2015          2014        2016 vs. 2015     2015 vs. 2014
Operating revenue                 $ 2,958.9     $ 3,055.7     $ 3,237.4           (3.2 )%          (5.6 )%
Operating income                       53.2          18.0           0.5          195.6  %            NM       (b)
Operating ratio(a)                     98.2 %        99.4 %       100.0 %             1.2pp             0.6pp

(a) pp represents the change in percentage points

(b) Not Meaningful

2016 Compared to 2015

YRC Freight reported operating revenue of $2,958.9 million in 2016, a decrease
of $96.8 million or 3.2% compared to 2015. The decrease in revenue was largely
driven by a reduction in fuel surcharge revenue and declines in volume,
partially offset by improved yield (excluding fuel surcharge). The table below
summarizes the key revenue metrics for the YRC Freight reporting segment for the
years ended December 31:

                                                    2016           2015        Percent Change(b)
Workdays                                             252.5          251.5

Total picked up revenue (in millions)(a)        $  2,922.7     $  3,033.4             (3.7 )%
Total tonnage (in thousands)                         6,221          6,396             (2.7 )%
Total tonnage per workday (in thousands)             24.64          25.43             (3.1 )%
Total shipments (in thousands)                      10,368         10,651             (2.7 )%
Total shipments per workday (in thousands)           41.06          42.35             (3.0 )%
Total picked up revenue per hundred weight      $    23.49     $    23.71             (0.9 )%
Total picked up revenue per hundred weight
(excluding fuel surcharge)                      $    21.30     $    21.01              1.3  %
Total picked up revenue per shipment            $      282     $      285             (1.0 )%
Total picked up revenue per shipment (excluding
fuel surcharge)                                 $      256     $      252              1.3  %
Total weight per shipment (in pounds)                1,200          1,201             (0.1 )%




(in millions)                                      2016            2015
(a)Reconciliation of operating revenue to
total picked up revenue:
Operating revenue                              $   2,958.9     $   3,055.7
Change in revenue deferral and other                 (36.2 )         (22.3 )
Total picked up revenue                        $   2,922.7     $   3,033.4

(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 $53.2 million for the year ended December 31, 2016, an increase of $35.2 million from the same period in 2015, consisting of a $96.8 million decrease in revenue and a $132.0 million decrease in operating expenses. The decrease in operating expense consisted primarily of a reduction in salaries and wages expense, lower fuel costs and a decrease in purchased transportation.


Salaries, wages and employee benefits. Salaries, wages and employee benefits decreased $42.5 million, or 2.4%, due to a $21.5 million decrease in salaries and wages, which is primarily driven by a decrease in shipping volumes, which required fewer employee hours to process freight. Workers' compensation expense decreased $4.9 million due to a reduction in new claim frequency driven by safety initiatives and favorable development of prior year claims. Additionally, employee benefit costs decreased by $16.1 million, which includes the impact of a non-union pension settlement charge of $28.7 million recognized in the fourth quarter of 2015 as a result of pension settlements from lump sum payouts during the year, partially offset by higher overall employee benefit costs for both union and non-union employees. The increase in union and non-union employee benefit costs is due to contractual rate increases and higher usage, respectively.
Operating expenses and supplies. Operating expenses and supplies decreased $55.7 million, or 9.9%, primarily due to a $34.8 million decrease in fuel expenses driven by lower fuel prices on a per gallon basis, as well as fewer miles driven. Additionally, vehicle maintenance expense decreased by $13.7 million due to lower maintenance costs per mile and fewer miles driven and we had $5.1 million decrease in nonrecurring consulting fees in 2016.
Purchased Transportation. Purchased transportation decreased $16.8 million, or 3.8%, primarily due to a $29.1 million decrease in rail purchased transportation expense due to a reduction in rail miles and lower rail rates, which is principally related to lower fuel surcharges charged by our providers. This was offset by an increase of $9.7 million in local purchased transportation expense, in addition to a $2.6 million increase in vehicle rent expense, which is due to higher usage of operating leases for revenue equipment.
Gains/losses on property disposals. Net gains on disposals of property were $15.7 million in 2016 compared to net losses of $1.9 million in 2015. 2015 Compared to 2014

YRC Freight reported operating revenue of $3,055.7 million in 2015, a decrease of $181.7 million or 5.6% compared to 2014. The decrease in revenue was largely driven by a reduction in fuel surcharge revenue and declines in volume, partially offset by improvements in yield. The increases in yield were attributed to a stronger overall pricing environment, particularly in the first half of 2015, successful contract negotiations with our customers, and improvements in billing and collecting the appropriate accessorial revenue associated with our shipments. The table below summarizes the key revenue metrics for the YRC Freight reporting segment for the years ended December 31:

                                                    2015           2014        Percent Change(b)
Workdays                                             251.5          252.0

Total picked up revenue (in millions)(a)        $  3,033.4     $  3,219.6             (5.8 )%
Total tonnage (in thousands)                         6,396          6,807             (6.0 )%
Total tonnage per workday (in thousands)             25.43          27.01             (5.8 )%
Total shipments (in thousands)                      10,651         11,502             (7.4 )%
Total shipments per workday (in thousands)           42.35          45.64             (7.2 )%
Total picked up revenue per hundred weight      $    23.71     $    23.65              0.3  %
Total picked up revenue per hundred weight
(excluding fuel surcharge)                      $    21.01     $    19.80              6.1  %
Total picked up revenue per shipment            $      285     $      280              1.7  %
Total picked up revenue per shipment (excluding
. . .
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