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”) is a holding company that, through wholly owned operating subsidiaries, offers its customers a wide range of transportation services. We have one of the largest, most comprehensive less-than-truckload (“LTL”) networks in North America with local, regional, national and international capabilities. Through our team of experienced service professionals, we offer expertise in LTL shipments and flexible supply chain solutions, ensuring customers can ship industrial, commercial and retail goods with confidence. Our reporting segments include the following:
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•
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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 YRC Inc. (“YRC Freight”), a U.S. LTL subsidiary, and Reimer Express (“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, 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, 2016
, 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. Our investment in our Chinese joint venture, a non-majority owned affiliate, was sold in March 2016 and 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, we have made 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. 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, 2015
.
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, 2016
:
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Fair Value Measurement Hierarchy
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(in millions)
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Total Carrying
Value
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|
Quoted prices
in active market
(Level 1)
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Significant
other
observable
inputs (Level 2)
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Significant
unobservable
inputs
(Level 3)
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Restricted amounts held in escrow-current
|
$
|
20.5
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$
|
20.5
|
|
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$
|
—
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|
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$
|
—
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Restricted amounts held in escrow-long term
|
74.5
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|
|
74.5
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|
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—
|
|
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—
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Total assets at fair value
|
$
|
95.0
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|
|
$
|
95.0
|
|
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$
|
—
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|
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$
|
—
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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 approximate their fair value due to the short-term nature of these instruments.
Equity Method Investment
On October 23, 2015, the Company entered into a sale and purchase agreement to sell its
fifty
percent equity interest in its Chinese joint venture, JHJ International Transportation Co., Ltd. (“JHJ”), for a purchase price of
$16.3 million
, which subsequently closed on March 30, 2016. At closing, we received proceeds of
$16.3 million
and paid transaction fees of
$1.7 million
. As of March 30, 2016, the carrying value of the investment was
$22.7 million
with an offsetting cumulative foreign translation adjustment of
$10.4 million
, resulting in a net gain on the transaction of
$2.3 million
. The gain on the transaction is reflected in “Nonoperating expense - other, net” in the accompanying statement of consolidated comprehensive loss.
Reclassifications Out of Accumulated Other Comprehensive Loss
For the
three months ended March 31, 2016
and
2015
, we reclassified the amortization of our net pension loss totaling
$3.4 million
and
$4.1 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 “Employee Benefits” footnote.
Impact of Recently Issued Accounting Standards
In March 2016, the
Financial Accounting Standards Board (“FASB”)
issued
Accounting Standards Update (“ASU”)
2016-09,
Improvements to Employee Share-Based Payment Accounting,
which simplifies several aspects of the accounting for employee share-based payment transactions including the accounting for income taxes, statutory tax withholding requirements, and classification of related amounts within the statement of cash flows. The new standard will become effective for the Company beginning with the first quarter of 2017, with early adoption permitted. The Company is currently evaluating the impacts the adoption of this accounting guidance will have on the consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases
, which requires lessees to recognize most leases, including operating leases, on-balance sheet via a right of use asset and lease liability. Lessees are permitted to make an accounting policy election to not recognize an asset or liability for leases with a term of 12 months or less. Additional qualitative and quantitative disclosures will be required. The new standard will be effective for the Company for its annual reporting period beginning January 1, 2019, including interim periods within that reporting period. Early application is permitted. The ASU requires a modified retrospective transition, which means the Company will be required to apply the new guidance at the beginning of the earliest period presented in the financial statements; however, companies may elect to apply certain practical expedients on transition. The Company is currently evaluating the impacts of this new standard to its consolidated balance sheets, results of operations and related disclosures.
In August 2015, the FASB issued ASU 2015-14,
Revenue from Contracts with Customers, Deferral of the Effective date,
which defers the effective date of ASU 2014-9,
Revenue from Contracts with Customers
. The new standard will supersede much of the previous requirements in ASU-605,
Revenue Recognition
and most industry specific guidance and introduces a five-step model to determine when and how revenue is recognized. The premise of the new model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard will be effective for the Company for its annual reporting period beginning January 1, 2018, including interim periods within that reporting period. Early application is permitted for annual periods beginning January 1, 2017. Entities are allowed to transition to the new standard by either recasting prior periods or
recognizing the cumulative effect. The Company continues to assess the method of application and impact, if any, on our consolidated balance sheets, results of operations and related disclosures.
In April 2015, the FASB issued ASU 2015-03,
Interest - Imputation of Interest
, which required debt issue costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with the accounting treatment for debt discounts. The Company adopted the standard as of January 1, 2016 and applied it retrospectively. The December 31, 2015 consolidated balance sheet was adjusted to reflect the reclassification of
$15.2 million
in debt issuance costs from “Other assets” to “Long-term debt.” There was no other impact as a result of the adoption of this standard.
3. Debt and Financing
Our outstanding debt as of
March 31, 2016
consisted of the following:
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As of March 31, 2016 (in millions)
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Par Value
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Discount
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Debt Issuance Costs
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Book
Value
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Stated
Interest Rate
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Average Effective
Interest Rate
|
Term Loan
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$
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684.3
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$
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(3.9
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)
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$
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(11.7
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)
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$
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668.7
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8.00
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%
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(a)
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8.20
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%
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ABL Facility
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—
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—
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—
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—
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N/A
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N/A
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Secured Second A&R CDA
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44.0
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—
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(0.3
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)
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43.7
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3.3-18.3%
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7.3
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%
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Unsecured Second A&R CDA
|
73.2
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—
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(0.4
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)
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72.8
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3.3-18.3%
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7.3
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%
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Lease financing obligations
|
276.6
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—
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(1.6
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)
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275.0
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9.0-18.2%
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12.0
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%
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Total debt
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$
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1,078.1
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$
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(3.9
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)
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$
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(14.0
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)
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$
|
1,060.2
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Current maturities of Term Loan
|
(7.0
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)
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—
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—
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(7.0
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)
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Current maturities of lease financing obligations
|
(9.0
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)
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—
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—
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|
(9.0
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)
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Long-term debt
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$
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1,062.1
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$
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(3.9
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)
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$
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(14.0
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)
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$
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1,044.2
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(a)
Variable interest rate of 1, 3 or 6-month LIBOR, with a floor of
1.0%
plus a fixed margin of
7.0%
if the total leverage ratio is equal to or less than
3.25
to 1.00, or
7.25%
if the total leverage ratio is higher than 3.25 to 1.00.
ABL Facility Availability
Our principal sources of liquidity are cash and cash equivalents, available borrowings under our ABL Facility and net cash flow from operations. As of
March 31, 2016
, we had cash and cash equivalents of
$184.9 million
and the borrowing base and maximum availability on our asset based loan facility (the “ABL Facility”) were
$442.9 million
and
$81.5 million
, respectively. The maximum availability is calculated in accordance with the terms of the ABL Facility and is derived by reducing the borrowing base by our
$361.4 million
of outstanding letters of credit. While our ABL Agreement permits us to access maximum availability outside of certain financial covenant restrictions (which restrictions did not limit our availability as of
March 31, 2016
), the maximum amount we expect to access on our ABL Facility at any time is maximum availability less the lower of 10% of the borrowing base (
$44.3 million
at
March 31, 2016
) or 10% of the collateral line cap (
$45.0 million
at
March 31, 2016
). Thus, of the
$81.5 million
in maximum availability, we expected to access no more than
$37.2 million
as of
March 31, 2016
(“Managed Accessibility”). As a result, we had cash and cash equivalents and Managed Accessibility of
$222.1 million
as of
March 31, 2016
.
Credit Facility Covenants
The credit agreement (the “Term Loan Agreement”) governing our term loan facility (the “Term Loan”) has certain financial covenants, as amended in September 2014, 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, each as defined below).
Our total maximum leverage ratio covenants are as follows:
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Four Consecutive Fiscal Quarters Ending
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Maximum Total
Leverage Ratio
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Four Consecutive Fiscal Quarters Ending
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Maximum Total
Leverage Ratio
|
March 31, 2016
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4.00 to 1.00
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March 31, 2017
|
3.25 to 1.00
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June 30, 2016
|
3.75 to 1.00
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June 30, 2017
|
3.25 to 1.00
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September 30, 2016
|
3.75 to 1.00
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September 30, 2017
|
3.25 to 1.00
|
December 31, 2016
|
3.50 to 1.00
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December 31, 2017 and thereafter
|
3.00 to 1.00
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Consolidated Adjusted EBITDA, defined in our 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 professional fees, nonrecurring consulting fees, expenses associated with certain lump sum payments to our International Brotherhood of Teamsters (“IBT”) employees and the results of permitted dispositions and discontinued operations. Consolidated Total Debt, as defined in our Term Loan Agreement, is the aggregate principal amount of indebtedness outstanding. Our total leverage ratio for the four consecutive fiscal quarters ending
March 31, 2016
was
3.20
to 1.00.
We believe that our results of operations will be sufficient to allow us to comply with the covenants in the Term Loan Agreement, fund our operations, increase working capital as necessary to support our planned revenue growth and fund capital expenditures for at least the next twelve months. In order for us to maintain compliance with the maximum total leverage ratio over the tenor of the Term Loan and satisfy our liquidity needs, we must achieve slight improvement over our recent results. Improvements to our profitability may include ongoing successful implementation and realization of pricing, productivity and efficiency initiatives, as well as increased volume, some of which are outside of our control.
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:
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March 31, 2016
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December 31, 2015
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(in millions)
|
Book Value
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Fair value
|
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Book Value
|
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Fair value
|
Term Loan
|
$
|
668.7
|
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$
|
555.0
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$
|
669.0
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$
|
594.6
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Lease financing obligations
|
275.0
|
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|
253.1
|
|
|
276.3
|
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|
282.9
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|
Second A&R CDA
|
116.5
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|
95.1
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|
117.1
|
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|
102.1
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Total debt
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$
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1,060.2
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$
|
903.2
|
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$
|
1,062.4
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$
|
979.6
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The fair values of the Term Loan and the Secured and Unsecured 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 is estimated using a publicly traded secured loan with similar characteristics (level three input for fair value measurement).
Leases
As of
March 31, 2016
, our minimum rental expense under operating leases for the remainder of the year was
$67.2 million
. As of
March 31, 2016
, our operating lease payment obligations through
2030
totaled
$290.2 million
and is expected to increase as we lease additional revenue equipment. Additionally, for the
three months ended March 31, 2016
, we entered into new operating leases for revenue equipment totaling
$29.5 million
in future lease payments, payable over an average lease term of
five
years.
Our capital expenditures for the three months ended March 31, 2016 and
2015
were
$19.8 million
and
$21.3 million
, respectively. These amounts were principally used to fund the purchase of used tractors and trailers, to refurbish engines for our revenue fleet, and capitalized costs for technology infrastructure.
4. Employee Benefits
Qualified and Nonqualified Defined Benefit Pension Plans
The following table presents the components of our company-sponsored pension costs for the
three months
ended
March 31
:
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Three Months
|
(in millions)
|
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2016
|
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2015
|
Service cost
|
|
$
|
1.6
|
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|
$
|
1.2
|
|
Interest cost
|
|
14.0
|
|
|
14.3
|
|
Expected return on plan assets
|
|
(14.1
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)
|
|
(15.0
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)
|
Amortization of net pension loss
|
|
3.4
|
|
|
4.0
|
|
Total periodic pension cost
|
|
$
|
4.9
|
|
|
$
|
4.5
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|
We expect to contribute
$45.3 million
to our company-sponsored pension plans in
2016
of which we have contributed
$0.2 million
through
March 31, 2016
.
Performance Incentive Awards
The Company granted performance stock units in February 2016 that will be settled in cash as the stock units vest equally over the next three years, with the first vesting occurring in February 2017. The awards will be liability classified and remeasured to fair value at each reporting date until settlement.
5. Income Taxes
Our effective tax rate for the
three months ended March 31, 2016
was
13.0%
, compared to
(6.9)%
for the
three months ended March 31, 2015
. The significant items impacting the
2016
rate include a provision for federal alternative minimum tax, 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, 2016
. The significant items impacting the
2015
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 projected for
December 31, 2015
. 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, 2016
and
December 31, 2015
, substantially all of our net deferred tax assets were subject to a valuation allowance.
6. Shareholders’ Deficit
The following reflects the activity in the shares of our common stock for the
three months ended March 31, 2016
:
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(shares in thousands)
|
2016
|
Beginning balance
|
32,141
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|
Issuance of equity awards
|
315
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Ending balance
|
32,456
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|
7. Loss Per Share
Given our net loss position for the three months ended
March 31, 2016
and
March 31, 2015
, there were no dilutive securities for these periods. At
March 31
,
2016
and
2015
, our anti-dilutive unvested shares, options, and stock units are approximately
499,000
and
1,154,000
, respectively.
8. 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 external revenue, operating income (loss), and operating ratio.
We charge management fees and other corporate service fees to our reporting segments based on the 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 and cash equivalents. Intersegment revenue primarily relates to transportation services between our segments.
The following table summarizes our operations by business segment:
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(in millions)
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YRC Freight
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|
Regional
Transportation
|
|
Corporate/
Eliminations
|
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Consolidated
|
As of March 31, 2016
|
|
|
|
|
|
|
|
Identifiable assets
|
$
|
1,374.5
|
|
|
$
|
673.6
|
|
|
$
|
(184.3
|
)
|
|
$
|
1,863.8
|
|
As of December 31, 2015
|
|
|
|
|
|
|
|
Identifiable assets
|
$
|
1,351.5
|
|
|
$
|
652.9
|
|
|
$
|
(125.0
|
)
|
|
$
|
1,879.4
|
|
Three Months Ended March 31, 2016
|
|
|
|
|
|
|
|
External revenue
|
$
|
695.7
|
|
|
$
|
424.8
|
|
|
$
|
(0.2
|
)
|
|
$
|
1,120.3
|
|
Operating income (loss)
|
$
|
4.1
|
|
|
$
|
12.4
|
|
|
$
|
(3.1
|
)
|
|
$
|
13.4
|
|
Three Months Ended March 31, 2015
|
|
|
|
|
|
|
|
External revenue
|
$
|
737.6
|
|
|
$
|
448.8
|
|
|
$
|
—
|
|
|
$
|
1,186.4
|
|
Operating income (loss)
|
$
|
0.2
|
|
|
$
|
4.6
|
|
|
$
|
(1.1
|
)
|
|
$
|
3.7
|
|
9. Commitments, Contingencies and Uncertainties
California Labor Law Change
In October 2015, California adopted new rules governing the payment of piece-rate compensation. New California Labor Code section 226.2 sets forth requirements for the payment of a separate hourly wage for “nonproductive” time worked by piece-rate employees, and separate payment for compensable rest and recovery periods to those employees. The Company continues to assess the impact of this new law and ongoing compliance measures. We are currently unable to determine the possible loss or range of loss.
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 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.