NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YRC Worldwide Inc. and Subsidiaries
(Unaudited)
Certain of these Notes to Consolidated Financial Statements contain forward-looking statements, as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Cautionary Note Regarding Forward-Looking Statements.”
1. Description of Business
YRC Worldwide Inc. (also referred to as “YRC Worldwide,” the “Company,” “we,” “us” or “our”), one of the largest transportation service providers, is a holding company that, through wholly owned operating subsidiaries and its interest in a Chinese joint venture, 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:
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YRC Freight is the reporting segment that focuses on longer haul business opportunities in national, regional and international services. YRC Freight provides for the movement of industrial, commercial and retail goods, primarily through centralized management and customer facing organizations. This reporting segment includes our LTL subsidiary YRC Inc. (our YRC Freight operations in the United States) and Reimer Express, 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, Puerto Rico and Guam.
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•
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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 Inc. (“Holland”), New Penn Motor Express, Inc. (“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, Mexico and Puerto Rico.
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At
March 31, 2014
, approximately
78%
of our labor force is subject to collective bargaining agreements, which predominantly expire in March 2019.
2. Principles of Consolidation
The accompanying Consolidated Financial Statements include the accounts of YRC Worldwide and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. We report on a calendar year basis. The quarters of the Regional Transportation companies (with the exception of New Penn) consist of thirteen weeks that end on a Saturday either before or after the end of March, June and September, whereas all other operating segment quarters end on the natural calendar quarter end. Investments in non-majority owned affiliates, or those in which we do not have control where the entity is either not a variable interest entity or we are not the primary beneficiary, are accounted for on the equity method.
We make estimates and assumptions that affect the amounts reported in the consolidated financial statements and notes. Actual results could differ from those estimates. We have prepared the Consolidated Financial Statements, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In our opinion, all normal recurring adjustments necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods included in these financial statements herein have been made. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) have been condensed or omitted from these statements pursuant to SEC rules and regulations. Accordingly, the accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended
December 31, 2013
.
Assets Held for Sale
When we plan to dispose of property or equipment by sale, the asset is recorded in the financial statements at the lower of the carrying amount or estimated fair value, less cost to sell, and is reclassified to assets held for sale. Additionally, after such reclassification, there is no further depreciation taken on the asset. For an asset to be classified as held for sale, management must approve and commit to a formal plan, the sale should be anticipated during the ensuing year and the asset must be actively marketed,
be available for immediate sale, and meet certain other specified criteria. We use level 3 inputs to determine the fair value of each property considered held for sale.
At
March 31, 2014
and
December 31, 2013
, the net book value of assets held for sale was
$20.3 million
and
$17.2 million
, respectively. This amount is included in “Property and Equipment” in the accompanying consolidated balance sheets. We recorded charges of
$0.6 million
for the
three months ended March 31, 2014
, and
$0.6 million
for the
three months ended March 31, 2013
, to reduce properties held for sale to estimated fair value, less cost to sell. These charges are included in “(Gains) losses on property disposals, net” in the accompanying statements of consolidated comprehensive loss.
Fair Value of Financial Instruments
The following table summarizes the fair value hierarchy of our financial assets and liabilities carried at fair value on a recurring basis as of
March 31, 2014
:
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Fair Value Measurement Hierarchy
|
(in millions)
|
Total Carrying
Value
|
|
Quoted prices
in active market
(Level 1)
|
|
Significant
other
observable
inputs (Level 2)
|
|
Significant
unobservable
inputs
(Level 3)
|
Restricted amounts held in escrow-current
|
$
|
171.6
|
|
|
$
|
171.6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Restricted amounts held in escrow-long term
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total assets at fair value
|
$
|
171.6
|
|
|
$
|
171.6
|
|
|
$
|
—
|
|
|
$
|
—
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Restricted amounts held in escrow are invested in money market accounts and are recorded at fair value based on quoted market prices. The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximates their fair value due to the short-term nature of these instruments.
Reclassifications Out of Accumulated Other Comprehensive Loss
For the
three months ended March 31, 2014
and 2013, we reclassified the amortization of our net pension loss totaling
$2.0 million
and
$3.7 million
, respectively, net of tax, from accumulated other comprehensive loss to net loss. This reclassification is a component of net periodic pension cost and is discussed in the “Employees’ Benefits” footnote.
3. 2014 Financing Transactions
On January 31, 2014, we issued
14,333,334
shares of our Common Stock and
583,334
shares of our Convertible Preferred Stock pursuant to certain stock purchase agreements, dated as of December 22, 2013 (the “Stock Purchase Agreements”), for an aggregate
$250.0 million
in cash. We used the proceeds from these transactions to, among other things, (i) deposit with the trustee funds sufficient to repay our
6%
Convertible Senior Notes (“
6%
Notes”) at their maturity on February 15, 2014 and (ii) repurchase
$90.9 million
of our Series A Convertible Senior Secured Notes (“Series A Notes”). The Company will redeem the remaining Series A Notes on August 5, 2014. In February 2014, the Company deposited
$89.6 million
with the trustee in order to fund the redemption (including accrued interest), and thereby discharged the indenture governing the Series A Notes.
Also on January 31, 2014, certain holders of our 10% Series B Convertible Senior Secured Notes (“Series B Notes”) exchanged their outstanding balances at a conversion price of
$15.00
per share, while another holder converted their Series B Notes in accordance with their terms. We also amended the indenture governing our Series B Notes to eliminate substantially all of the restrictive covenants, certain events of default and other related provisions contained in the indenture and to release and discharge the liens on the collateral securing the Series B Notes.
Effective January 31, 2014, certain of our subsidiaries, various pension funds party thereto, and Wilmington Trust Company, as agent for such pension funds, entered into the Second Amended and Restated Contribution Deferral Agreement (“Second A&R CDA”), which, among other things (i) amended and restated the Amended and Restated Contribution Deferral Agreement (“A&R CDA”), (ii) released the agent’s security interest in third priority collateral on the Collateral Release Date, (iii) limited the value of obligations secured by the collateral to the Secured Obligations and (iv) extended the maturity of deferred pension payments and deferred interest from March 31, 2015 to December 31, 2019.
On February 13, 2014, we replaced our existing credit facilities with a new
$450 million
asset-based loan (the “New ABL Facility”) and a new
$700 million
term loan facility (“New Term Loan”). The New ABL Facility supports our outstanding letters of credit commitments.
We refer to transactions described above collectively as the “2014 Financing Transactions.” The table below summarizes the cash flow activity for the 2014 Financing Transactions:
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Cash Sources (in millions)
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Cash Uses (in millions)
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New Term Loan
|
$
|
700.0
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Extinguish Prior ABL Facility (includes accrued interest)
|
$
|
326.0
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Proceeds from sale of common stock
|
215.0
|
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Extinguish Prior Term Loan (includes accrued interest)
|
299.7
|
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Proceeds from sale of convertible preferred stock
|
35.0
|
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Retire 6% Notes
|
71.5
|
|
Cash proceeds from restricted amounts held in escrow - existing ABL facility
|
90.0
|
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Repurchase Series A Notes (includes accrued interest)
|
93.9
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|
New ABL Facility
|
—
|
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|
Redeem Series A Notes (on August 5, 2014 and includes accrued interest)
|
89.6
|
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Fees, Expenses and Original Issuance Discount
|
50.8
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Restricted Cash to Balance Sheet
(a)
|
92.0
|
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Cash to Balance Sheet
|
16.5
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Total sources
|
$
|
1,040.0
|
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Total uses
|
$
|
1,040.0
|
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|
(a)
|
Under the terms of the New ABL facility, this amount was classified as “restricted cash” in the consolidated balance sheet at the closing date of the New ABL Facility.
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The table below summarizes the non-cash activity for the 2014 Financing Transactions:
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Non-Cash Sources (in millions)
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Non-Cash Uses (in millions)
|
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Secured Second A&R CDA
|
$
|
51.0
|
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|
A&R CDA
|
$
|
124.2
|
|
Unsecured Second A&R CDA
|
73.2
|
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|
Exchange/conversion of Series B Notes to common stock
|
50.6
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|
Exchange/conversion of Series B Notes to common stock
|
50.6
|
|
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Total sources
|
$
|
174.8
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Total uses
|
$
|
174.8
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We accounted for the A&R CDA maturity extension as a debt modification and the remaining transactions as extinguishment of debt and issuance of new debt. We recorded a gain on extinguishment of debt of
$11.2 million
associated with this transaction in the first quarter of 2014,
$16.3 million
of which 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 Series B Note holders who exchanged their outstanding balances at a conversion price of
$15.00
per share. We recorded, in “interest expense” on the statement of consolidated comprehensive loss,
$8.0 million
of make-whole interest related to the Series B Notes exchanged in the first quarter of 2014. We paid
$43.8 million
of fees associated with these transactions of which
$26.7 million
was recorded as unamortized deferred debt costs in “other assets” in the consolidated balance sheet in the first quarter of 2014 and will be recognized as interest expense over the term of the New Term Loan and New ABL Facility and
$17.1 million
offset the equity proceeds of our stock purchase agreements.
On March 14, 2014, the Company held a special meeting of stockholders at which our stockholders approved amending our Certificate of Incorporation to increase the number of authorized shares of Common Stock and to allow an individual investor to own more than
19.99%
of outstanding Common Stock. Upon approval of these amendments, each outstanding share of Convertible Preferred Stock automatically converted into four shares of Common Stock and the Company recorded
$18.1 million
related to the amortization of the beneficial conversion feature on preferred stock on the Statement of Consolidated Comprehensive Loss.
$700 Million First Lien Term Loan
On February 13, 2014, we borrowed in full
$700 million
, less a
1%
discount, from a syndicate of banks and other financial institutions arranged by Credit Suisse Securities (USA) and RBS Citizens, N.A. No amounts under this New Term Loan, once repaid, may be reborrowed. Certain material provisions of the New Term Loan are summarized below:
-
Maturity and Amortization
: The New Term Loan matures on February 13, 2019. The New Term Loan will amortize in equal quarterly installments in an aggregate annual amount equal to
1%
of the original principal amount of the New Term Loan.
-
Incremental
: Subject to finding current or new lenders willing to provide such commitments, the Company has the right to incur one or more increases to the New Term Loan and/or one or more new tranches of term loans (which may be unsecured or secured on a junior basis) to be made available under the New Term Loan credit agreement which shall not exceed (i)
$250 million
so long as the senior secured leverage ratio on a pro forma basis does not exceed
3.25
to
1.0
, plus (ii) all voluntary prepayments of the New Term Loan.
-
Interest and Fees
: The New Term Loan bears interest, at the election of the borrower, at either the applicable London interbank offer rate (“LIBOR”) (subject to a floor of
1.00%
) plus a margin of
7.00%
per annum, or a rate determined by reference to the alternate base rate (the greater of the prime rate established by the administrative agent, the federal fund rate plus
0.50%
and one month, LIBOR plus
1.00%
) plus a margin of
6.00%
.
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Guarantors
: The obligations of the borrower under the New Term Loan are unconditionally guaranteed by certain wholly owned domestic restricted subsidiaries of the Company (the “Term Guarantors”).
-
Collateral
: The New Term Loan is secured by a perfected first priority security interest in (subject to permitted liens) substantially all assets of the Company and the guarantors under the New Term Loan (the “Term Guarantors”), except that accounts receivable, cash, deposit accounts and other assets related to accounts receivable are subject to a second priority interest (subject to permitted liens) and certain owned real property securing the obligations under the Second A&R CDA filed January 31, 2014, do not secure the obligations under the New Term Loan credit agreement (the “CDA Collateral”).
-
Mandatory Prepayments
: The New Term Loan includes the following mandatory prepayments:
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•
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50%
of excess cash flow (paid if permitted under the New ABL Facility), subject to step downs to (x)
25%
if the total leverage ratio is less than or equal to
3.50
to
1.00
but greater than
3.00
to
1.00
and (y)
0%
if the total leverage ratio is less than or equal to
3.00
to
1.00
.
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•
|
100%
of the net cash proceeds of all asset sales or similar dispositions outside of the ordinary course of business and casualty events (subject to materiality thresholds and customary reinvestment rights).
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•
|
100%
of cash proceeds from debt issuances that are not permitted by the New Term Loan documentation.
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Events of Default
: The New Term Loan documentation contains certain customary events of default, including but not limited to the failure to make payments due under the New Term Loan, breach of and failure to cure the breach of certain covenants, the entry of a final unpaid judgment against any of the Term Guarantors in excess of
$30 million
, the commencement of certain insolvency proceedings, liquidations or dissolutions, a cross-default to certain other indebtedness with an outstanding aggregate principal balance of at least
$30 million
(other than the New ABL Facility), and cross-acceleration to the New ABL Facility.
-
Covenants
: The New Term Loan contains certain customary affirmative and negative covenants, including, among others, covenants restricting the incurrences of debt, liens, the making of investments and repurchases, transactions with affiliates, fundamental changes and asset sales, and prepayments of junior debt. In addition, refer to the “Liquidity” footnote for financial covenants for each of the remaining test periods.
$450 Million ABL Facility
On February 13, 2014, we entered into the New ABL Facility which is an asset-based
$450 million
loan facility from a syndicate of banks arranged by RBS Citizens, N.A., Merrill Lynch, Pierce, Fenner & Smith and CIT Finance LLC. The New ABL Facility terminates on February 13, 2019. The Company, YRC Inc., USF Reddaway Inc., USF Holland Inc. and New Penn Motor Express, Inc. are borrowers under the New ABL Facility, and certain of the Company’s domestic subsidiaries are guarantors thereunder. Certain material provisions of the New ABL Facility are summarized below and are qualified in their entirety by reference to the definitive documentation:
-
Availability
: The aggregate amount available under the New ABL Facility cannot be more than the (a) collateral line cap minus (b) the facility exposure. The facility exposure refers to the aggregate amount of loans and letter of credit outstanding (with an
exclusion for certain fees and other amounts owing for letters of credit). The collateral line cap refers to a limit equal to the greater of (a) the commitments by lenders under the facility and (b) the borrowing base. The borrowing base equals the sum of (a)
85%
of the sum of (i) Eligible Accounts (as defined in the New ABL Facility) minus without duplication (ii) the Dilution Reserve (as defined in the New ABL Facility relating to reserves for eligible accounts experiencing bad debt write-downs, discounts, allowances and similar dilutive items), plus (b)
100%
of Eligible Borrowing Base Cash (as defined in the New ABL Facility and described further below), minus (c) the Deferred Revenue Reserve (as defined in the New ABL Facility which constitutes
85%
of the “deferred revenue liability” as reflected on the balance sheet of the Company and its restricted subsidiaries as of the last day of the most recently completed fiscal month), minus (d) the Availability Reserve (as defined in the New ABL Facility) imposed by the agent in its permitted discretion (made in good-faith and using reasonable business judgment) to reduce the amount of the borrowing base in light of pre-determined criteria set forth in the New ABL Facility.
-
Eligible Borrowing Base Cash
: The eligible borrowing base cash is cash that is deposited from time to time into a segregated restricted account maintained at the agent over which the agent has dominion. Such cash can only be withdrawn by us from the account if (i) no event of default exists or would arise as a result of the borrowing base cash release and (ii) availability as of the proposed date of such borrowing base cash release is not less than
15%
of the collateral line cap. Eligible borrowing base cash of
$82.0 million
is included in ‘Restricted amounts held in escrow’ in the accompanying Consolidated Balance Sheet as of March 31, 2014.
-
Interest
: Revolving loans made under the New ABL Facility bear interest, at the Company’s election, of either the applicable LIBOR rate plus
2.5%
or the base rate (the greater of the prime rate established by the agent, the federal funds effective rate plus
0.50%
and one month LIBOR plus
1.00%
) plus
1.5%
from the closing date through March 31, 2014. Thereafter, the interest rates will be subject to the following price grid based on the average quarterly excess availability under the revolver:
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Average Quarterly
|
Base Rate
|
LIBOR
|
Level
|
Excess Capacity
|
Plus
|
Plus
|
I
|
>
$140,000,000
|
1.00%
|
2.00%
|
II
|
>
$70,000,000
|
1.25%
|
2.25%
|
< $140,000,000
|
III
|
< $70,000,000
|
1.50%
|
2.50%
|
The rates set forth above are subject to a
0.25%
reduction during any fiscal quarter for which the Company has a total leverage ratio of less than
2.50
to
1.00
.
-
Letter of Credit Fees
: The New ABL Facility has certain specific fees relating to letters of credit which include: (i) fees payable quarterly in arrears equal to the applicable margin in effect for LIBOR loans (which is listed in the “Interest” description immediately above) multiplied by the average daily stated amount of letters of credit; (ii) fronting fees for letters of credit payable quarterly in arrears equal to
0.125%
of the stated amount of the letters of credit; and (iii) fees to issuing banks to compensate for customary charges related to the issuance and administration of letters of credit.
-
Other Fees
: Other fees in respect of the New ABL Facility include: (i) an unused line fee payable quarterly in arrears calculated by multiplying the amount by which the commitments exceed the loans and letters of credit for any calendar quarter by the unused line fee percentage (such unused line fee percentage initially to
0.25%
per annum through March 31, 2014, and thereafter
0.375%
per annum if the average revolver usage is less than
50%
or
0.25%
per annum if the average revolver usage is greater than
50%
); and (ii) such fees as set forth in the fee letter arrangement dated as of February 13, 2014 by and between the agent and the Company.
-
Collateral
: The obligations under the New ABL Facility are secured by a perfected first priority security interest in (subject to permitted liens) all accounts receivable, cash, deposit accounts and other assets related to accounts receivable of the Company and the other loan parties and an additional second priority security interest in (subject to permitted liens) substantially all remaining assets of the borrowers and the guarantors other than CDA Collateral.
-
Incremental
: The New ABL Facility provides for a
$100 million
uncommitted accordion to increase the revolving commitment in the future to support borrowing base growth.
-
Events of Default
: The New ABL Facility contains certain customary events of default, including but not limited to the failure to make payments due under the New ABL Facility, breach of and failure to cure the breach of certain covenants, the entry of a final unpaid judgment against any of the New ABL Facility loan parties in excess of
$30 million
, the commencement of any
insolvency proceeding, liquidation or dissolution, and a cross-default to certain other indebtedness with an outstanding aggregate principal balance of at least
$30 million
(including the New Term Loan).
-
Covenants
: The New ABL Facility contains certain customary affirmative and negative covenants (including certain customary provisions regarding borrowing base reporting, and including, among others, covenants restricting the incurrences of debt, liens, the making of investments and repurchases, transactions with affiliates, fundamental changes and asset sales, and prepayments of junior debt). Certain of the covenants relating to investments, restricted payments and capital expenditures are relaxed upon meeting specified payment conditions or debt repayment conditions, as applicable. Payment conditions include (i) the absence of an event of default arising from such transaction, (ii) liquidity of at least
$100 million
or availability of at least
$67.5 million
and (iii) the Consolidated Fixed Charge Coverage Ratio (as defined below) for the most recent term period on a pro forma basis is equal to or greater than
1.10
to
1.00
. Debt repayment conditions include (i) the absence of an event of default from repaying such debt and (ii) availability on the date of repayment is not less than
$67.5 million
. During any period commencing when the New ABL Facility borrowers fail to maintain availability in an amount at least equal to
10%
of the collateral line cap and until the borrowers have maintained availability of at least
10%
of the collateral line cap for
30
consecutive calendar days, the New ABL Facility loan parties are required to maintain a Consolidated Fixed Charge Coverage Ratio (as defined below) of at least
1.10
to
1.00
. The “Consolidated Fixed Charge Coverage Ratio” is defined as (a) (i) Consolidated EBITDA (as defined in the New ABL Facility) calculated on a pro forma basis for such period, minus (ii) Capital Expenditures (as defined in the New ABL Facility) made during such period, minus (iii) the aggregate amount of net cash taxes paid in cash during such period, minus (iv) the amount, if any, by which the cash pension contribution for such period exceeds the pension expense for such period, and plus (v) the amount, if any, by which the pension expense for such period exceeds the cash pension contribution for such period, divided by (b) the Consolidated Fixed Charges (as defined in the New ABL Facility) for such period. In addition, refer to the “Liquidity” footnote for covenants for each of the remaining test periods.
4. Debt and Financing
Our outstanding debt as of
March 31, 2014
and
December 31, 2013
consisted of the following:
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|
As of March 31, 2014 (in millions)
|
Par Value
|
|
Premium/
(Discount)
|
|
Book
Value
|
|
Stated
Interest Rate
|
|
Effective
Interest Rate
|
New Term Loan
|
$
|
698.2
|
|
|
$
|
(6.8
|
)
|
|
$
|
691.4
|
|
|
8.0
|
%
|
|
8.2
|
%
|
New ABL Facility
1
|
—
|
|
|
—
|
|
|
—
|
|
|
2.7
|
%
|
|
2.7
|
%
|
Series A Notes
|
86.7
|
|
|
(7.0
|
)
|
|
79.7
|
|
|
10.0
|
%
|
|
18.3
|
%
|
Series B Notes
|
16.5
|
|
|
(2.3
|
)
|
|
14.2
|
|
|
10.0
|
%
|
|
25.6
|
%
|
Secured Second A&R CDA
|
51.0
|
|
|
—
|
|
|
51.0
|
|
|
3.3-18.3%
|
|
|
7.3
|
%
|
Unsecured Second A&R CDA
|
73.2
|
|
|
—
|
|
|
73.2
|
|
|
3.3-18.3%
|
|
|
7.3
|
%
|
Lease financing obligations
|
295.2
|
|
|
—
|
|
|
295.2
|
|
|
10.0-18.2%
|
|
|
11.9
|
%
|
Other
|
0.2
|
|
|
—
|
|
|
0.2
|
|
|
|
|
|
|
|
Total debt
|
$
|
1,221.0
|
|
|
$
|
(16.1
|
)
|
|
$
|
1,204.9
|
|
|
|
|
|
Current maturities of New Term Loan
|
(7.0
|
)
|
|
—
|
|
|
(7.0
|
)
|
|
|
|
|
Current maturities of Series A Notes
|
(86.7
|
)
|
|
7.0
|
|
|
(79.7
|
)
|
|
|
|
|
Current maturities of Series B Notes
|
(16.5
|
)
|
|
2.3
|
|
|
(14.2
|
)
|
|
|
|
|
Current maturities of lease financing obligations
|
(6.3
|
)
|
|
—
|
|
|
(6.3
|
)
|
|
|
|
|
Current maturities of other
|
(0.2
|
)
|
|
—
|
|
|
(0.2
|
)
|
|
|
|
|
Long-term debt
|
$
|
1,104.3
|
|
|
$
|
(6.8
|
)
|
|
$
|
1,097.5
|
|
|
|
|
|
|
|
1
|
As of March 31, 2014, the borrowing base on our New ABL Facility was
$450.0 million
. The availability of
$82.5 million
is derived by reducing the borrowing base by our
$367.5 million
of outstanding letters of credit as of March 31, 2014.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2013 (in millions)
|
Par Value
|
|
Premium/
(Discount)
|
|
Book
Value
|
|
Stated
Interest Rate
|
|
Effective
Interest Rate
|
Restructured Term Loan
|
$
|
298.1
|
|
|
$
|
37.7
|
|
|
$
|
335.8
|
|
|
10.0
|
%
|
|
—
|
%
|
Term A Facility (capacity $175.0, borrowing base $156.5, availability $51.5)
|
105.0
|
|
|
(2.1
|
)
|
|
102.9
|
|
|
8.5
|
%
|
|
15.8
|
%
|
Term B Facility (capacity $219.9, borrowing base $219.9, availability $0.0)
|
219.9
|
|
|
(3.9
|
)
|
|
216.0
|
|
|
11.25
|
%
|
|
15.0
|
%
|
Series A Notes
|
177.8
|
|
|
(17.8
|
)
|
|
160.0
|
|
|
10.0
|
%
|
|
18.3
|
%
|
Series B Notes
|
69.2
|
|
|
(10.5
|
)
|
|
58.7
|
|
|
10.0
|
%
|
|
25.6
|
%
|
6% Notes
|
69.4
|
|
|
(1.1
|
)
|
|
68.3
|
|
|
6.0
|
%
|
|
15.5
|
%
|
A&R CDA
|
124.2
|
|
|
(0.2
|
)
|
|
124.0
|
|
|
3.25-18.3%
|
|
|
7.3
|
%
|
Lease financing obligations
|
297.5
|
|
|
—
|
|
|
297.5
|
|
|
10.0-18.2%
|
|
|
11.9
|
%
|
Other
|
0.2
|
|
|
—
|
|
|
0.2
|
|
|
|
|
|
Total debt
|
$
|
1,361.3
|
|
|
$
|
2.1
|
|
|
$
|
1,363.4
|
|
|
|
|
|
Current maturities of lease financing obligations
|
(8.4
|
)
|
|
—
|
|
|
(8.4
|
)
|
|
|
|
|
Current maturities of other
|
(0.2
|
)
|
|
—
|
|
|
(0.2
|
)
|
|
|
|
|
Long-term debt
|
$
|
1,352.7
|
|
|
$
|
2.1
|
|
|
$
|
1,354.8
|
|
|
|
|
|
Conversions
Our Series A Notes were convertible into our common stock beginning July 22, 2013 at the conversion price per share of
$34.0059
and a conversion rate of
29.4067
common shares per
$1,000
of Series A Notes. As discussed in the “2014 Financing Transactions” footnote, in February 2014, the Company deposited
$89.6 million
with the trustee in order to fund the redemption of our outstanding Series A Notes on August 5, 2014.
Our Series B Notes are convertible into our common stock, at any time at the conversion price per share of approximately
$18.5334
and a conversion rate of
53.9567
common shares per
$1,000
of the Series B Notes (such conversion price and conversion rate
applying also to the Series B Notes make whole premium). As of
March 31, 2014
, the effective conversion price and conversion rate for our Series B Notes (after taking into account the make whole premium) was
$16.8103
and
59.4873
common shares per
$1,000
of Series B Notes, respectively.
As of
March 31, 2014
, there was
$16.5 million
in aggregate principal amount of Series B Notes outstanding that are convertible into approximately
981,000
shares of our common stock (after taking into account the make whole premium). As discussed in the “2014 Financing Transactions” footnote, on January 31, 2014, certain holders of our Series B Notes exchanged their outstanding notes as part of an exchange agreement. Outside of these exchange agreements, during the
three months ended March 31, 2014
and 2013,
$1.2 million
and
$5.8 million
of aggregate principal amount of Series B Notes were converted into
75,900
and
398,000
shares of our common stock, which includes the make whole premium. Upon conversion, during the three months ended
March 31, 2014
, we recorded
$0.4 million
of additional interest expense representing the
$0.2 million
make whole premium and
$0.2 million
of accelerated amortization of the discount on converted Series B Notes. During the
three months ended March 31, 2013
, we recorded
$3.4 million
of additional interest expense representing the
$1.6 million
make whole premium and
$1.8 million
of accelerated amortization of the discount on converted Series B Notes. There were no Series B Note conversions from
March 31, 2014
through
April 25, 2014
.
Fair Value Measurement
The carrying amounts and estimated fair values of our long-term debt, including current maturities and other financial instruments, are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2014
|
|
December 31, 2013
|
(in millions)
|
Carrying amount
|
|
Fair Value
|
|
Carrying amount
|
|
Fair Value
|
New Term Loan
|
$
|
691.4
|
|
|
$
|
704.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Restructured Term Loan
|
—
|
|
|
—
|
|
|
335.8
|
|
|
289.2
|
|
ABL Facility
|
—
|
|
|
—
|
|
|
318.9
|
|
|
326.1
|
|
Series A Notes and Series B Notes
|
93.9
|
|
|
103.2
|
|
|
218.7
|
|
|
225.8
|
|
Lease financing obligations
|
295.2
|
|
|
295.2
|
|
|
297.5
|
|
|
297.5
|
|
Other
|
124.4
|
|
|
125.4
|
|
|
192.5
|
|
|
179.8
|
|
Total debt
|
$
|
1,204.9
|
|
|
$
|
1,227.8
|
|
|
$
|
1,363.4
|
|
|
$
|
1,318.4
|
|
The fair values of the New Term Loan, New ABL Facility, Restructured Term Loan, ABL Facility, Series A Notes, Series B Notes,
6%
Notes (included in “Other” above) Secured and Unsecured A&R CDA (included in “Other” above) and A&R CDA (included in “Other” above) were estimated based on observable prices (level two inputs for fair value measurements). The carrying amount of the lease financing obligations approximates fair value (level two input for fair value measurement).
5. Liquidity
For a description of our outstanding debt as of March 31, 2014, please refer to the “Debt and Financing” footnote in our consolidated financial statements.
Credit Facility Covenants
On February 13, 2014, we completed our 2014 Financing Transactions and refinanced the debt associated with our prior credit facilities. We entered into a New Term Loan credit agreement with new financial covenants that, among other things, restricts certain capital expenditures and requires us to maintain a maximum total leverage ratio (defined as Consolidated Total Debt divided by Consolidated Adjusted EBITDA as defined below) for future test periods as follows:
|
|
|
|
|
|
Four Consecutive Fiscal Quarters Ending
|
Maximum Total
Leverage Ratio
|
|
Four Consecutive Fiscal Quarters Ending
|
Maximum Total
Leverage Ratio
|
June 30, 2014
|
6.00 to 1.00
|
|
June 30, 2016
|
3.50 to 1.00
|
September 30, 2014
|
5.00 to 1.00
|
|
September 30, 2016
|
3.50 to 1.00
|
December 31, 2014
|
4.50 to 1.00
|
|
December 31, 2016
|
3.25 to 1.00
|
March 31, 2015
|
4.00 to 1.00
|
|
March 31, 2017
|
3.25 to 1.00
|
June 30, 2015
|
3.75 to 1.00
|
|
June 30, 2017
|
3.25 to 1.00
|
September 30, 2015
|
3.75 to 1.00
|
|
September 30, 2017
|
3.25 to 1.00
|
December 31, 2015
|
3.75 to 1.00
|
|
December 31, 2017 and thereafter
|
3.00 to 1.00
|
March 31, 2016
|
3.50 to 1.00
|
|
|
|
Consolidated Adjusted EBITDA, as defined in our New Term Loan credit agreement, 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 and certain other items, including restructuring professional fees, expenses associated with certain lump sum payments to our IBT employees and the results of permitted dispositions and discontinued operations. Consolidated Total Debt, as defined in our New Term Loan credit agreement, is the aggregate principal amount of indebtedness outstanding excluding our fully discharged Series A Notes and our outstanding letters of credit.
On February 13, 2014, we also entered into the New ABL Facility credit agreement which, among other things, restricts certain capital expenditures and requires that the Company, in effect, maintain availability of at least
10%
of the lesser of the aggregate amount of commitments from all lenders or the borrowing base.
We believe that our results of operations will be sufficient to allow us to comply with the covenants in our new credit agreement, fund our operations, increase working capital as necessary to support our planned revenue growth and fund capital expenditures for the foreseeable future, including the next twelve months.
Our ability to satisfy our liquidity needs and meet future stepped-up covenants beyond the next twelve months is dependent on a number of factors, some of which are outside of our control. These factors include:
|
|
•
|
we must achieve improvements in our operating results, primarily at our YRC Freight operating segment, which rely upon pricing and shipping volumes and network efficiencies;
|
|
|
•
|
we must continue to implement and realize cost saving measures, including those identified in the new MOU, to match our costs with business levels and in a manner that does not harm operations and our productivity and efficiency initiatives must be successful; and
|
|
|
•
|
we must be able to generate operating cash flows that are sufficient to meet the cash requirements for pension contributions to our single and multi-employer pension funds, cash interest and principal payments on our funded debt, payments on our equipment leases, and for capital expenditures or additional lease payments for new revenue equipment.
|
In the event our operating results indicate we will not meet our maximum total leverage ratio, we will take action to improve our maximum total leverage ratio which will include paying down our outstanding indebtedness with either cash on hand or from cash proceeds from equity issuances. The issuance of equity is outside of our control and there can be no assurance that we will be able to issue additional equity at terms that are agreeable to us.
In the event that we fail to comply with any New Term Loan covenant or any New ABL Facility covenant, we would be considered in default, which would enable applicable lenders to accelerate the repayment of amounts outstanding, require the cash collateralization of letters of credit (in the case of the New ABL Facility) and exercise remedies with respect to collateral and we would need to seek an amendment or waiver from the applicable lender groups. In the event that our lenders under our New Term Loan or New ABL Facility demand payment or cash collateralization (in the case of the New ABL Facility), we will not have sufficient cash to repay such indebtedness. In addition, a default under our New Term Loan or New ABL Facility or the applicable
lenders exercising their remedies thereunder would trigger cross-default provisions in our other indebtedness and certain other operating agreements. Our ability to amend our New Term Loan or our New ABL Facility or otherwise obtain waivers from the applicable lenders depends on matters that are outside of our control and there can be no assurance that we will be successful in that regard.
Risks and Uncertainties Regarding Future Liquidity
Our principal sources of liquidity are cash and cash equivalents, available borrowings under our New ABL facility and any prospective net operating cash flows from operations. As of
March 31, 2014
, we had cash and cash equivalents and availability under our New ABL facility totaling
$223.0 million
. For the
three months ended March 31, 2014
, our cash flow from operating activities
used
net cash of
$56.2 million
.
Our principal uses of cash are to fund our operations, including making contributions to our single-employer pension plans and various multi-employer pension funds, and to meet our other cash obligations including, but not limited to, paying cash interest and principal on our funded debt, payments on our equipment leases, letter of credit fees under our credit facilities and funding capital expenditures.
We have a considerable amount of indebtedness. As of
March 31, 2014
, we had
$1,221.0 million
in aggregate par value of outstanding indebtedness, the majority of which matures in 2019. We also have considerable future funding obligations for our single-employer pension plans and various multi-employer pension funds. We expect our funding obligations for the remainder of 2014 for our single-employer pension plans and multi-employer pension funds will be
$66.1 million
and
$63.7 million
, respectively. In addition, we have, and will continue to have, substantial operating lease obligations. As of
March 31, 2014
, our minimum rental expense under operating leases for the remainder of the year is
$40.9 million
. As of
March 31, 2014
, our operating lease obligations through 2025 totaled
$149.3 million
and is expected to increase as we lease additional revenue equipment.
Our capital expenditures for the
three months ended March 31, 2014
and
2013
were
$11.7 million
and
$17.2 million
, respectively. These amounts were principally used to fund replacement engines and trailer refurbishments for our revenue fleet and capitalized costs for our network facilities and technology infrastructure. Additionally, for the
three months ended March 31, 2014
, we entered into new operating leases for revenue equipment for
$6.4 million
, payable over the average lease term of
three
years. In light of our recent operating results and liquidity needs, we have deferred certain capital expenditures and expect to continue to do so for the foreseeable future, including the remainder of 2014. As a result, the average age of our fleet is increasing, which may affect our maintenance costs and operational efficiency unless we are able to obtain suitable lease financing to meet our replacement equipment needs.
6. Employees’ Benefits
The following table presents the components of our company-sponsored pension costs for the
three months
ended
March 31
:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
(in millions)
|
|
2014
|
|
2013
|
Service cost
|
|
$
|
1.0
|
|
|
$
|
1.1
|
|
Interest cost
|
|
15.2
|
|
|
14.0
|
|
Expected return on plan assets
|
|
(13.4
|
)
|
|
(13.9
|
)
|
Amortization of net loss
|
|
3.2
|
|
|
3.7
|
|
Total periodic pension cost
|
|
$
|
6.0
|
|
|
$
|
4.9
|
|
We expect to contribute
$79.9 million
to our company-sponsored pension plans in
2014
of which we have contributed
$13.8 million
through
March 31, 2014
.
7. Income Taxes
Our effective tax rate for the
three months ended March 31, 2014
was
5.5%
, compared to
15.5%
, for the
three months ended March 31, 2013
. The significant items impacting the
2014
rate include a net state and foreign tax provision, certain permanent items, an intraperiod tax allocation required by ASC 740 and a change in the valuation allowance established for the net deferred tax asset balance projected for
December 31, 2014
. 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-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. At
March 31, 2014
and
December 31, 2013
, substantially all of our net deferred tax assets were subject to a valuation allowance.
Concurrent with the financing transactions of January 31, 2014 described in the "2014 Financing Transactions" footnote, the Company experienced a change of ownership as described in Section 382 of the Internal Revenue Code. The impact of the 2014 ownership change on the Company’s ability to utilize its Net Operating Loss carryforwards and other tax attributes is not expected to be material
as the carryforwards to which this ownership change applies already have been significantly limited by previous ownership changes occurring in 2011 and 2013.
.
8. Shareholders’ Deficit
The following reflects the activity in the shares of our common stock for the
three months ended March 31, 2014
:
|
|
|
|
(shares in thousands)
|
2014
|
Beginning balance
|
10,173
|
|
Conversion of preferred stock to common stock
|
2,333
|
|
Issuance of common stock
|
14,333
|
|
Issuance of equity awards
|
294
|
|
Issuance of common stock upon conversion or exchange of Series B Notes
|
3,470
|
|
Ending balance
|
30,603
|
|
9. Loss Per Share
Given our net loss position for the three months ended
March 31, 2014
and
March 31, 2013
, there were no dilutive securities for these periods.
Anti-dilutive options and share units were
713,600
and
857,600
at
March 31, 2014
and
2013
, respectively. Anti-dilutive 6% Note conversion shares, including the make whole premium, were
17,600
at March 31,
2013
. There were no such anti-dilutive 6% Note conversion shares at
March 31, 2014
. Anti-dilutive Series A Note conversion shares were
2,675,000
and
4,857,000
at
March 31, 2014
and
2013
, respectively. Anti-dilutive Series B Note conversion shares, including the make whole premiums, were
981,500
and
5,751,000
at
March 31, 2014
and
2013
, respectively.
10. Business Segments
We report financial and descriptive information about our reporting segments on a basis consistent with that used internally for evaluating segment performance and allocating resources to segments. We evaluate segment performance primarily on revenue and operating income.
We have the following reportable segments, which are strategic business units that offer complementary transportation services to our customers:
|
|
•
|
YRC Freight
is the reporting segment for our transportation service providers focused on business opportunities in national, regional and international services. YRC Freight provides for the movement of industrial, commercial and retail goods, primarily through centralized management and customer facing organizations. This unit includes our LTL subsidiary YRC Inc. (our YRC Freight operations in the United States) and Reimer Express, 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, Puerto Rico and Guam.
|
|
|
•
|
Regional Transportation
is the reporting segment for our transportation service providers focused on business opportunities in the regional and next-day delivery markets. The Regional Transportation companies each provide regional, next-day ground services in their respective regions through a network of facilities located across the United States, Canada, Mexico and Puerto Rico.
|
We charge management fees and other corporate service fees to our reportable segments based on the direct benefits received or an overhead allocation basis. Corporate and other operating losses represent residual operating expenses of the holding company.
Corporate identifiable assets primarily consist of cash, cash equivalents, an investment in an equity method affiliate and deferred debt issuance costs. Intersegment revenue primarily relates to transportation services between our segments.
The following table summarizes our operations by business segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
YRC Freight
|
|
Regional
Transportation
|
|
Corporate/
Eliminations
|
|
Consolidated
|
As of March 31, 2014
|
|
|
|
|
|
|
|
Identifiable assets
|
$
|
1,563.2
|
|
|
$
|
753.4
|
|
|
$
|
(101.5
|
)
|
|
$
|
2,215.1
|
|
As of December 31, 2013
|
|
|
|
|
|
|
|
Identifiable assets
|
$
|
1,513.4
|
|
|
$
|
698.4
|
|
|
$
|
(146.9
|
)
|
|
$
|
2,064.9
|
|
Three Months Ended March 31, 2014
|
|
|
|
|
|
|
|
External revenue
|
$
|
756.8
|
|
|
$
|
454.1
|
|
|
$
|
—
|
|
|
$
|
1,210.9
|
|
Operating income (loss)
|
$
|
(32.5
|
)
|
|
$
|
7.9
|
|
|
$
|
(7.8
|
)
|
|
$
|
(32.4
|
)
|
Three Months Ended March 31, 2013
|
|
|
|
|
|
|
|
External revenue
|
$
|
753.8
|
|
|
$
|
408.7
|
|
|
$
|
—
|
|
|
$
|
1,162.5
|
|
Operating income (loss)
|
$
|
2.4
|
|
|
$
|
12.0
|
|
|
$
|
(4.5
|
)
|
|
$
|
9.9
|
|
11. Commitments, Contingencies and Uncertainties
Bryant Holdings Securities Litigation
On February 7, 2011, a putative class action was filed by Bryant Holdings LLC (“Bryant”) in the U.S. District Court for the District of Kansas on behalf of purchasers of our common stock between April 24, 2008 and November 2, 2009, inclusive (the “Class Period”), seeking damages under the federal securities laws for statements and/or omissions allegedly made by us and the individual defendants during the Class Period which plaintiffs claimed to be false and misleading.
The individual defendants are former officers of our Company. No current officers or directors were named in the lawsuit. The parties participated in voluntary mediation between March 11, 2013 and April 15, 2013. The mediation resulted in the execution of a mutually acceptable settlement agreement by the parties, which agreement remains subject to approval by the court. Court approval cannot be assured. Substantially all of the payments contemplated by the settlement will be covered by our liability insurance. The self-insured retention on this matter has been accrued as of
March 31, 2014
.
The settlement agreement requires court approval. On August 19, 2013, the Court entered an Order denying plaintiffs’ Motion for Preliminary Approval of the Settlement. Plaintiffs filed an Amended Motion for Preliminary Approval and, on November 18, 2013, the Court denied that Motion. Each denial was based primarily on deficiencies that the Court perceived in the plan that plaintiffs proposed for allocation of the settlement proceeds among class members. Plaintiffs have revised the plan of allocation and, on February 18, 2014, filed a Second Amended Motion for Preliminary Approval.
Other Legal Matters
We are involved in other litigation or proceedings that arise in ordinary business activities. 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 financial statements, we believe that our 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.