Attached files

file filename
EX-23.1 - CONSENT OF KPMG, LLP - YRC Worldwide Inc.yrcw-20151231xex231.htm
EX-21.1 - SUBSIDIARIES OF THE COMPANY - YRC Worldwide Inc.yrcw-20151231xex211.htm
EX-32.2 - SECTION 906 CFO CERTIFICATION - YRC Worldwide Inc.yrcw-20151231xex322.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - YRC Worldwide Inc.yrcw-20151231xex311.htm
EX-32.1 - SECTION 906 CEO CERTIFICATION - YRC Worldwide Inc.yrcw-20151231xex321.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - YRC Worldwide Inc.yrcw-20151231xex312.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K
 
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                    
Commission file number: 0-12255
 
 
YRC Worldwide Inc.
(Exact name of registrant as specified in its charter)
 
 
Delaware
 
48-0948788
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
 
10990 Roe Avenue, Overland Park, Kansas
 
66211
(Address of principal executive offices)
 
(Zip Code)
(913) 696-6100
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, $0.01 par value per share
 
The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: NONE
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.
Yes  o    No  ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes  o    No  ý

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    
Yes  ý    No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    
Yes  ý    No  o




Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by referenced in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 

Large accelerated filer
 
o

 
Accelerated filer
 
ý

 
 
 
 
Non-accelerated filer
 
o  (Do not check if a smaller reporting company)
 
Smaller reporting company
 
o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  o    No  ý

As of June 30, 2015, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $414.6 million based on the closing price as reported on the NASDAQ Global Select Market.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at February 12, 2016
Common Stock, $0.01 par value per share
 
32,611,799 shares

DOCUMENTS INCORPORATED BY REFERENCE

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





INDEX
 
Item
 
Page
 
PART I
 
1
1A 
1B
2
3
4
 
 
 
 
PART II
 
5
6
7
7A
8
9
9A
9B
 
 
 
 
PART III
 
10
11
12
13
14
 
 
 
 
PART IV
 
15
 
 
 
 
 


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Note on Forward-Looking Statements

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

PART I

Item 1. Business

General Description of the Business

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

YRC Freight is the reporting segment that focuses on longer haul business opportunities with national, regional and international services. YRC Freight provides for the movement of industrial, commercial and retail goods, primarily through centralized management. This reporting segment includes our LTL subsidiary YRC Inc. (“YRC Freight”) 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.
    
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.

For revenue and other information regarding our reporting segments, see the “Business Segments” footnote of our consolidated financial statements included in this Annual Report on Form 10-K.

Incorporated in Delaware in 1983 and headquartered in Overland Park, Kansas, we employed approximately 32,000 people as of December 31, 2015. The mailing address of our headquarters is 10990 Roe Avenue, Overland Park, Kansas 66211, and our telephone number is (913) 696-6100. Our website is www.yrcw.com. Through the “SEC Filings” link on our website, we make available the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the SEC: our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports filed

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or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. All of these filings may be viewed or printed from our website free of charge.

Narrative Description of the Business

YRC Freight

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

YRC Freight serves manufacturing, wholesale, retail and government customers throughout North America. YRC Freight’s 20,000 employees are dedicated to operating its extensive network which supports approximately 10.7 million shipments annually. YRC Freight shipments have an average shipment size of approximately 1,200 pounds and travel an average distance of roughly 1,300 miles. Operations research and engineering teams coordinate the equipment, routing, sequencing and timing necessary to efficiently transport shipments through the distribution network. On December 31, 2015, YRC Freight’s revenue fleet was comprised of approximately 8,500 tractors, including approximately 7,300 owned tractors and 1,200 leased tractors, and approximately 32,000 trailers, including approximately 27,300 owned trailers and 4,700 leased trailers. The YRC Freight network includes 258 strategically located service facilities including 125 owned facilities with 8,217 doors and 133 leased facilities with 5,984 doors.

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

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

Guaranteed Standard: a guaranteed on-time service with more direct points than any other guaranteed standard delivery service in North America. Our guaranteed multiple-day window service is designed to meet retail industry needs to reduce chargeback fees.

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

Specialized Solutions: includes a variety of services to meet industry and customer-specific needs with offerings such as Custom Projects, Consolidation and Distribution, Reverse Logistics, Residential White Glove, and Exhibit Services.   

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

YRC Freight includes the operations of its wholly owned Canadian subsidiary, YRC Reimer. Founded in 1952, YRC Reimer offers Canadian shippers a selection of direct connections within Canada, throughout North America and around the world. YRC Reimer’s operating network and information systems are completely integrated with those of YRC Freight, enabling YRC Reimer to provide seamless cross-border services between Canada, Mexico and the United States and markets overseas.

YRC Freight represented 63%, 64% and 64% of our consolidated operating revenue in 2015, 2014 and 2013, respectively.

Regional Transportation

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

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

New Penn: headquartered in Lebanon, Pennsylvania, provides local next-day, day-definite, and time-definite services through a network located in the Northeastern United States; Quebec, Canada; and Puerto Rico.

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

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

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

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

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

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

my.yrcregional.com and NewPenn.com: are e-commerce websites offering secure and customized online resources to manage transportation activity.

The approximately 12,000 employees of our Regional Transportation companies serve and support manufacturing, wholesale, retail and government customers throughout North America and transport approximately 10.4 million shipments annually. Regional Transportation shipments have an average shipment size of approximately 1,500 pounds and travel an average distance of roughly 400 miles. At December 31, 2015, the Regional Transportation network includes 126 service facilities including 61 owned facilities with 3,863 doors and 65 leased facilities with 2,870 doors. The Regional Transportation revenue fleet includes approximately 6,600 tractors including approximately 5,500 owned and 1,100 leased and approximately 13,300 trailers including approximately 11,300 owned and 2,000 leased.

The Regional Transportation companies accounted for 37%, 36% and 36% of our consolidated operating revenue in 2015, 2014 and 2013, respectively.

Parent Company

YRC Worldwide, headquartered in Overland Park, Kansas, has approximately 300 employees. The parent company provides centrally-managed support to our operating companies that spans a variety of functions, including components of finance, legal, risk management and security.

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

Competition

Our companies operate in a highly competitive environment. Given the growth of U.S. import/export trade, our competitors include global, integrated freight transportation services providers; global freight forwarders; national freight services providers (including intermodal providers); regional or interregional carriers; third party logistics providers; and small, intraregional transportation companies. Our companies also have competitors within several different modes of transportation including: LTL, truckload, air and ocean cargo, intermodal rail, parcel and package companies, transportation consolidators, reverse logistics firms, and privately-owned fleets.


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

LTL transportation providers consolidate numerous shipments generally ranging from 100 to 10,000 pounds from varying businesses at individual service centers in close proximity to where those shipments originated. Utilizing expansive networks of pickup and delivery operations around local service centers, shipments are moved between origin and destination using distribution centers when necessary, where consolidation and deconsolidation of shipments occur. Depending on the distance shipped, shared load providers are often classified into one of four sub-groups:

Regional - Average distance is typically fewer than 500 miles with a focus on one- and two-day delivery times. Regional transportation companies can move shipments directly to their respective destination centers, which increases service reliability and avoids costs associated with intermediate handling.
Interregional - Average distance is usually between 500 and 1,000 miles with a focus on two- and three-day delivery times. There is a competitive overlap between regional and national providers in this category, as each group sees the interregional segment as a growth opportunity, and few providers focus exclusively on this sector.
National - Average distance is typically in excess of 1,000 miles with focus on two- to five-day delivery times. National providers rely on intermediate shipment handling through a network of facilities, which require numerous satellite service centers, multiple distribution centers and a relay network. To gain service and cost advantages, they often ship directly between service centers, minimizing intermediate handling.
Global - Providing freight forwarding and final-mile delivery services to companies shipping to and from multiple regions around the world. This service can be offered through a combination of owned assets or through a purchased transportation model.
YRC Freight provides services in all four sub-groups in North America. Holland, New Penn and Reddaway compete in the regional, interregional and national transportation marketplace. Each brand competes against a number of providers in these markets, from small firms with one or two vehicles to global competitors with thousands of physical assets. While we have competitors with a similar multi-dimensional approach, there are few in the traditional LTL segment with as comprehensive an offering in those categories as our family of companies provide.
The asset-based LTL carriers depend on Third Party Logistics (“3PL”) firms. These non-asset based service providers are both our customers and competitors. As clients, these firms aggregate truck shipment demand and distribute that demand across the transportation sector. Asset-based LTL carriers are the primary providers of capacity to these companies and benefit from the relationship. As competitors, 3PLs often control shipper relationships and can shift shipment volumes away from specific carriers. Certain 3PLs have recently completed purchases of asset-based LTL carriers, which might alter the competitive landscape in the future.
Competitive cost of entry into the asset-based LTL sector on a small scale, within a limited service area, is relatively small (although more than in other sectors of the transportation industry). The larger the service area, the greater the barriers to entry, due primarily to the need for additional equipment and facilities associated with broader geographic service coverage. Broader market coverage in the competitive transportation landscape also requires increased technology investment and the ability to capture cost efficiencies from shipment density (scale), making entry on a national basis more difficult. Further development of density-based pricing strategies will require carriers to make investments in scanning and measuring technologies. We have already taken significant steps toward implementing these technologies, and other competitors in our industry are also making investments in this technology at varying speeds.
Regulation

Our operating companies and other interstate carriers were substantially deregulated following the enactment of the Motor Carrier Act of 1980, the Trucking Industry Regulatory Reform Act of 1994, the Federal Aviation Administration Authorization of 1994 and the ICC Termination Act of 1995. Prices and services are now largely free of regulatory controls, although the states retained the right to require compliance with safety and insurance requirements, and interstate motor carriers remain subject to regulatory controls imposed by agencies within the U.S. Department of Transportation.
Our companies are subject to regulatory and legislative changes, which can affect our economics and those of our competitors. Among potential regulatory changes are potential revisions to rules governing hours of service for commercial truck drivers and

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

Our operations are subject to U.S. federal, foreign, state, provincial and local regulations with regard to air and water quality and other environmental matters. We believe that we are in substantial compliance with these regulations. Regulation in this area continues to evolve and changes in standards of enforcement of existing regulations, as well as the enactment and enforcement of new legislation or regulation, may require us and our customers to modify, supplement or replace equipment or facilities or to change or discontinue present methods of operation.
Our operating companies store fuel for use in our revenue equipment in approximately 259 underground storage tanks (“USTs”) located throughout the United States. Maintenance of such USTs is regulated at the federal and, in some cases, state level. The USTs are required to have leak detection systems and are required to be extracted upon our exiting the property. In most cases, we contractually transfer this removal obligation to the buyer, or remove the UST at closing at the Buyer's expense.
During 2015, we spent approximately $8.1 million to comply with U.S. federal, state and local provisions regulating the discharge of materials into the environment or otherwise relating to the protection of the environment (collectively, “Environmental Regulations”). In 2016, we expect to spend approximately $8.3 million to comply with the Environmental Regulations. Based upon current information, we believe that our compliance with Environmental Regulations will not have a material adverse effect upon our capital expenditures, results of operations and competitive position because we have either made adequate reserves for such compliance expenditures or the cost for such compliance is expected to be small in comparison with our overall expenses.
The Comprehensive Environmental Response, Compensation and Liability Act (known as the “Superfund Act”) imposes liability for the release of a “hazardous substance” into the environment. Superfund liability is imposed without regard to fault and even if the waste disposal was in compliance with then-current laws and regulations. With the joint and several liabilities imposed under the Superfund Act, a potentially responsible party (“PRP”) may be required to pay more than its proportional share of any required environmental remediation. Several of our subsidiaries have been identified as PRPs at various sites discussed below. The U.S. Environmental Protection Agency (the “EPA”) and appropriate state agencies are supervising investigative and cleanup activities at these sites.

The EPA has identified the former Yellow Transportation (now a part of YRC Freight) as a PRP for two locations: Angeles Chemical Co., Santa Fe Springs, CA and Alburn Incinerator, Inc., Chicago, IL, which is included in the Lake Calumet Cluster Site. With respect to these sites, it appears that YRC Freight may have delivered minimal amounts of waste, which is de minimis in relation to other respondents and not material with respect to YRC Freight. The EPA has identified the former Roadway Express (now a part of YRC Freight) as a PRP for three locations: Ward Transformer, Raleigh, NC, Roosevelt Irrigation District, Phoenix, AZ and Berry's Creek, Carlstadt, NJ. We are in settlement discussions with Roosevelt Irrigation District to resolve their claim that YRC Freight is responsible for remediation of contaminated groundwater wells. The EPA has notified YRC Freight and 140 other potential parties of their possible responsibility at the Berry's Creek site where YRC Freight owns and operates a service center. The EPA has issued YRC Worldwide a Request for Information (“RFI”) regarding current and former Yellow Transportation and Roadway Express (now YRC Freight) facilities adjacent to or in close proximity of Newtown Creek, NY and its tributaries. YRC Worldwide and its operating companies have not been named as a PRP in this matter, but YRC Freight has entered into a tolling agreement with the Newtown Creek Group (“NCG”). The NCG is comprised of five companies who have agreed to perform a Remedial Investigation and Feasibility Study under the supervision of the EPA. The EPA has identified USF Red Star, a non-operating subsidiary, as a PRP at three locations: Booth Oil, N. Tonawanda, NY and two separate landfills in Byron, NY, and Moira, NY. The EPA has identified Holland as a PRP for one location, Horton Sales Piedmont Site, Greenville County, SC. Although the outcome of any legal matter is subject to uncertainties, based on our current knowledge, we believe the potential combined costs at all of the above sites will not be significant.

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


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To the extent necessary, we have established adequate reserves to cover the estimate we presently believe will be our liability with respect to the matter;
We and our subsidiaries have only limited or de minimis involvement in the sites based upon volumetric calculations; and
Other PRPs involved in the sites have substantial assets and may reasonably be expected to pay a larger share of the cost of remediation.
We believe that our ultimate liability is relatively small compared with our overall expenses.
We are subject to various other governmental proceedings and regulations, including foreign regulations, relating to environmental matters, and are investigating potential violations of Environmental Regulations with respect to certain sites, but we do not believe that any of these matters or investigations is likely to have a material adverse effect on our business, financial condition, liquidity or results of operations.
Economic Factors and Seasonality

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

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

Financial Information About Geographic Areas

Our revenue from foreign sources is mainly derived from Canada and, to a lesser extent, Mexico. We have certain long-lived assets located in these areas as well. We discuss this information in the “Business Segments” footnote of our consolidated financial statements included in this Annual Report on Form 10-K.


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Item 1A. Risk Factors

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

Liquidity Risks

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

As of December 31, 2015, we had $1,081.9 million in aggregate principal amount of outstanding indebtedness. We also have, and will continue to have, lease obligations. As of December 31, 2015, our expected minimum cash payments under our operating leases for 2016 were $80.0 million and our operating lease obligations totaled $269.0 million, which are primarily payable through 2020. We currently plan to procure a portion of our new revenue equipment using operating leases in 2016 and beyond. We expect our funding obligations in 2016 under our single-employer pension plans and the multi-employer pension funds will be approximately $134.7 million. Our indebtedness, lease obligations and pension funding obligations could continue to have an impact on our business.

For example, it could:

increase our vulnerability to adverse changes or sustained slow growth in general economic, industry and competitive conditions;
require us to dedicate a portion of our cash flow from operations to make payments on our indebtedness, leases and pension funding obligations, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
restrict us from taking advantage of business opportunities;
make it more difficult to satisfy our financial obligations and meet future stepped up financial covenants in our credit facilities;
place us at a competitive disadvantage compared to our competitors that have less debt, lease obligations, and pension funding obligations; and
limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business strategy or other general corporate purposes on satisfactory terms or at all.

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

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

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our ability to take actions that we believe may be in our interest. The documents governing our existing indebtedness, among other things, limit our ability to:
incur additional indebtedness and guarantee indebtedness;
make certain restricted payments or investments;
enter into agreements that restrict distributions from restricted subsidiaries;
sell or otherwise dispose of assets, including capital stock of restricted subsidiaries;
enter into transactions with affiliates;
create or incur liens;
enter into sale/leaseback transactions;
merge, consolidate or sell substantially all of our assets; and
make certain investments and acquire certain assets.

The restrictions could adversely affect our ability to:
finance our operations;
make strategic acquisitions or investments or enter into alliances;
withstand a future downturn in our business or the economy in general;
engage in business activities, including future opportunities, that may be in our interest; and
plan for or react to market conditions or otherwise execute our business strategies.

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

Our failure to comply with the covenants in the documents governing our existing and future indebtedness could materially adversely affect our financial condition and liquidity.
The documents governing our indebtedness contain financial covenants, affirmative covenants requiring us to take certain actions and negative covenants restricting our ability to take certain actions. If we are unsuccessful in meeting our stepped up financial covenants, we will need to seek an amendment or waiver from our lenders or otherwise we will be in default under our credit facilities, which would enable lenders thereunder to accelerate the repayment of amounts outstanding and exercise remedies with respect to collateral. If our lenders under our credit facilities demand payment, we will not have sufficient cash to repay such indebtedness. In addition, a default under our credit facilities or the lenders exercising their remedies thereunder could trigger cross-default provisions in our other indebtedness and certain other operating agreements. Our ability to amend our credit facilities or otherwise obtain waivers from our lenders depends on matters that are outside of our control and there can be no assurance that we will be successful in that regard. In addition, any covenant breach or event of default could harm our credit rating and our ability to obtain additional financing on acceptable terms. The occurrence of any of these events could have a material adverse effect on our financial condition and liquidity.
Risks Related to Our Common Stock

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

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

fluctuations in stock market prices and trading volumes of securities of similar companies;
general market conditions and overall fluctuations in U.S. equity markets;
variations in our operating results, or the operating results of our competitors;
changes in our financial guidance, if any, or securities analysts’ estimates of our financial performance;
sales of large blocks of our Common Stock, including sales by our executive officers, directors and significant stockholders;
additions or departures of any of our key personnel;
announcements related to litigation;
changing legal or regulatory developments in the United States and other countries; and
discussion of us or our stock price by the financial press and in online investor communities.


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In addition, the stock markets from time to time experience price and volume fluctuations that may be unrelated or disproportionate to the operating performance of companies and that may be extreme. These fluctuations may adversely affect the trading price of our Common Stock, regardless of our actual operating performance.
We issued a substantial number of shares of Common Stock in connection with our financing transactions that occurred in early 2014 (“2014 Financing Transactions”) and have registered such shares for resale under the Securities Act, which could lead to significant sales of our Common Stock and may adversely affect the market price of our Common Stock.
Pursuant to the 2014 Financing Transactions, which are further described in the “Debt and Financing” footnote of our consolidated financial statements, we issued 14,333,334 shares of our Common Stock and 583,334 shares of our Convertible Preferred Stock, which automatically converted into an aggregate of 2,333,336 shares of Common Stock on March 14, 2014. The registration of these shares facilitates the resale of such shares of Common Stock into the public market, and increase the number of shares of our Common Stock available for public trading. Sales of a substantial number of shares of our Common Stock in the public market, could have a material adverse effect on the market price of our Common Stock.
Future issuances of our Common Stock or equity-related securities in the public market could adversely affect the trading price of our Common Stock and our ability to raise funds in new stock offerings.
In the future, we may issue additional shares of our Common Stock to raise capital or in connection with a restructuring or refinancing of our indebtedness. Shares of our Common Stock are reserved for issuance, exercise of outstanding stock options and vesting of outstanding share units. As of December 31, 2015, we had outstanding options to purchase an aggregate of approximately 33,000 shares of Common Stock, outstanding nonvested restricted stock and share units and performance based share units representing the right to receive a total of approximately 982,000 shares of Common Stock upon vesting, and an aggregate of approximately 2.9 million shares of our Common Stock was reserved for future issuance under our Amended and Restated 2011 Incentive and Equity Award Plan (the “Amended 2011 Plan”). We have registered under the Securities Act all of the shares of Common Stock that we may issue upon the exercise of our outstanding options and the vesting of outstanding share units and on account of future awards made under the Amended 2011 Plan. All of these registered shares can be freely sold in the public market upon issuance, except for shares issued to our directors and executive officers, which sales are subject to certain volume and timing restrictions. If a large number of these shares are sold in the public market, the sales could reduce the trading price of our Common Stock.
We cannot predict the size of future issuances or the effect, if any, that such issuances may have on the market price for our Common Stock. Sales of significant amounts of our Common Stock or equity-related securities in the public market, or the perception that such sales may occur, could adversely affect prevailing trading prices of our Common Stock and could impair our ability to raise capital through future offerings of equity or equity-related securities. Further sales of shares of our Common Stock or the availability of shares of our Common Stock for future sale or in connection with hedging and arbitrage activity that may develop with respect to our Common Stock, could adversely affect the trading price of our Common Stock.
We do not intend to pay dividends on our Common Stock in the foreseeable future.
We do not anticipate that we will pay any dividends on shares of our Common Stock in the foreseeable future. We intend to retain any future earnings to fund operations, to service debt and to use for other corporate needs.
We can issue shares of preferred stock that may adversely affect the rights of holders of our Common Stock.
Our certificate of incorporation currently authorizes the issuance of 5.0 million shares of preferred stock. Our Board of Directors is authorized to approve the issuance of one or more series of preferred stock without further authorization of our shareholders and to fix the number of shares, the designations, the relative rights and the limitations of any series of preferred stock. As a result, our Board, without shareholder approval, could authorize the issuance of preferred stock with voting, conversion and other rights that could proportionately reduce, minimize or otherwise adversely affect the voting power and other rights of holders of our Common Stock or other series of preferred stock or that could have the effect of delaying, deferring or preventing a change in our control.
Business Risks
We are a holding company and we are dependent on the ability of our subsidiaries to distribute funds to us.
We are a holding company and our subsidiaries conduct substantially all of our consolidated operations and own substantially all of our consolidated assets. Consequently, our cash flow and our ability to make payments on our indebtedness substantially depends

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upon our subsidiaries’ cash flow and payments of funds to us by our subsidiaries. Our subsidiaries’ ability to make any advances, distributions or other payments to us may be restricted by, among other things, debt instruments, tax considerations and legal restrictions. If we are unable to obtain funds from our subsidiaries as a result of these restrictions, we may not be able to pay principal of, or cash interest on, our indebtedness when due, and we cannot assure you that we will be able to obtain the necessary funds from other sources.
We are subject to general economic factors that are largely out of our control, any of which could have a material adverse effect on our business, financial condition and results of operations.
Our business is subject to a number of general economic factors that may adversely affect our business, financial condition and results of operations, many of which are largely out of our control. These factors include recessionary economic cycles and downturns in customers’ business cycles and changes in their business practices, particularly in market segments and industries, such as retail and manufacturing, where we have a significant concentration of customers. Economic conditions may adversely affect our customers’ business levels, the amount of transportation services they need and their ability to pay for our services. Because a portion of our costs are fixed, it may be difficult for us to quickly adjust our cost structure proportionally with fluctuations in volume levels. Customers encountering adverse economic conditions represent a greater potential for loss, and we may be required to increase our reserve for bad-debt losses. Further, we depend on our suppliers for equipment, parts and services that are critical to our business. A disruption in the availability of these supplies or a material increase in their cost due to adverse economic conditions or financial constraints of our suppliers could adversely impact our business, results of operations and liquidity.
We are subject to business risks and increasing costs associated with the transportation industry that are largely out of our control, any of which could have a material adverse effect on our business, financial condition and results of operations.
We are subject to business risks and increasing costs associated with the transportation industry that are largely out of our control, any of which could adversely affect our business, financial condition and results of operations. The factors contributing to these risks and costs include weather, excess capacity in the transportation industry, interest rates, fuel prices and taxes, fuel surcharge collection, terrorist attacks, license and registration fees, insurance premiums, self-insurance levels, and letters of credit required to support outstanding claims, difficulty in recruiting and retaining qualified drivers, the risk of widespread disruption of our technology systems, and increasing equipment and operational costs. Our results of operations may also be adversely affected by seasonal factors. Further, the future availability and support available for our current technology may make it necessary for us to upgrade or change these systems, which may be costly and could disrupt or reduce the efficiency of our operations.
We operate in a highly competitive industry, and our business will suffer if we are unable to adequately address potential downward pricing pressures and other factors that could have a material adverse effect on our business, financial condition and results of operations.
Numerous competitive factors could adversely affect our business, financial condition and results of operations. These factors include the following:
We compete with many other transportation service providers of varying sizes and types, some of which have a lower cost structure, more equipment and greater capital resources than we do or have other competitive advantages.
Some of our competitors periodically reduce their prices to gain business, especially during times of reduced growth rates in the economy, which limits our ability to maintain or increase prices or maintain or grow our business.
Our customers may negotiate rates or contracts that minimize or eliminate our ability to offset fuel prices through fuel surcharges.
Many customers reduce the number of carriers they use by selecting so-called “core carriers” as approved transportation service providers, and in some instances, we may not be selected.
Many customers periodically accept bids from multiple carriers for their shipping needs, which may depress prices or result in the loss of some business to competitors.
The trend towards consolidation in the ground transportation industry may create other large carriers with greater financial resources and other competitive advantages relating to their size.
Advances in technology require increased investments to remain competitive, and our customers may not be willing to accept higher prices to cover the cost of these investments.
Competition from non-asset-based logistics and freight brokerage companies may adversely affect our customer relationships and prices.
As a union carrier, we may have a competitive disadvantage compared to non-union carriers with lower cost structures and greater operating flexibility.


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If our relationship with our employees and unions were to deteriorate, we may be faced with labor disruptions or stoppages, which could have a material adverse effect on our business, financial condition and results of operations and place us at a disadvantage relative to non-union competitors.
Each of our operating subsidiaries have employees who are represented by the International Brotherhood of Teamsters (“IBT”). These employees represent the majority of our workforce at December 31, 2015. Salaries, wages and employee benefits compose over half of our operating costs.
Each of our YRC Freight, New Penn, and Holland subsidiaries employ most of their unionized employees under the terms of a common national master freight agreement with the IBT, as supplemented by additional regional supplements and local agreements, a significant majority of which will expire on March 31, 2019. The IBT also represents a number of employees at Reddaway, and YRC Reimer under more localized agreements, which have wages, benefit contributions and other terms and conditions that better fit the cost structure and operating models of these business units. Our subsidiaries are regularly subject to grievances, arbitration proceedings and other claims concerning alleged past and current non-compliance with applicable labor law and collective bargaining agreements.
Neither we nor any of our subsidiaries can predict the outcome of any of these matters. These matters, if resolved in a manner unfavorable to us, could have a material adverse effect on our business, financial condition, liquidity and results of operations. 
Our pension expense and funding obligations could increase significantly and have a material adverse effect on our business, financial condition and results of operations.
Our future funding obligations for our U.S. single-employer defined benefit pension plans qualified with the Internal Revenue Service (“IRS”) depend upon their funded status, the future performance of assets set aside in trusts for these plans, the level of interest rates used to determine funding levels and actuarial experience, and any changes in government laws and regulations.
Our subsidiaries began making contributions to most of the multi-employer pension funds (the “funds”) beginning June 1, 2011 at the rate of 25% of the contribution rate in effect on July 1, 2009. A fund that did not allow our subsidiaries to begin making contributions at a reduced rate elected to either (i) apply the amount of the contributions toward paying down previously deferred contributions under our Contribution Deferral Agreement, or (ii) have the amount of the contributions placed in escrow until such time when the fund is able to accept re-entry at the reduced rate.
If contributions to the funds do not reach certain goals (including those required not to enter endangered or critical status or those required by a fund’s funding improvement or rehabilitation plan), our pension expenses and required cash contributions could further increase upon the expiration of our collective bargaining agreements and, as a result, could materially adversely affect our business, financial condition and results of operations. Decreases in investment returns that are not offset by contributions could also increase our obligations under such plans.
Based on information obtained from public filings and from plan administrators and trustees, we believe our portion of the contingent liability in the case of a full withdrawal from or termination of all of the multi-employer pension plans would be an estimated $10 billion on a pre-tax basis. If we were subject to withdrawal liability with respect to a plan, the Employment Retirement Income Security Act of 1974, as amended (“ERISA”), provides that a withdrawing employer can pay the obligation in a lump sum or over time based upon an annual payment that is the highest contribution rate to the relevant plan multiplied by the average of the three highest consecutive years measured in contribution base units, which, in some cases, could be up to 20 years. Even so, our applicable subsidiaries have no current intention of taking any action that would subject us to payment of material withdrawal obligations; however we cannot provide any assurance that such obligations will not arise in the future which would have a material adverse effect on our business, financial condition, liquidity and results of operations.
Ongoing self-insurance and claims expenses could have a material adverse effect on our business, financial condition and results of operations.
Our future insurance and claims expenses might exceed historical levels. We currently self-insure for a majority of our claims exposure resulting from workers’ compensation, property damage and liability claims, and cargo and have large deductible purchased insurance. If the number or severity of claims for which we are self-insured increases, our business, financial condition and results of operations could be adversely affected, and we may have to post additional letters of credit or cash collateral to state workers’ compensation authorities or insurers to support our insurance policies, which may adversely affect our liquidity. Although we have significantly reduced our letter of credit expense in recent years, there is no assurance this trend will continue. If we lose our ability to self-insure, our insurance costs could materially increase, and we may find it difficult to obtain adequate levels of insurance coverage. 

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Our self-insured retention limits can make our insurance and claims expense higher or more volatile. We accrue for the costs of the uninsured portion of pending claims, based on the nature and severity of individual claims and historical claims development trends. Estimating the number and severity of claims, as well as related judgment or settlement amounts is inherently difficult. This, along with legal expenses, incurred but not reported claims, and other uncertainties can cause unfavorable differences between actual self-insurance costs and our reserve estimates.
In general, our coverage with respect to each of workers’ compensation, property damage and liability claims, and cargo claims is subject to insurance limits. Although we believe our aggregate insurance limits are sufficient to cover reasonably expected claims, it is possible that one or more claims could exceed those limits. In this case, we would bear the excess expense, in addition to the amount of self-insurance. Our insurance and claims expense could increase, or we could find it necessary to raise our self-insured retention or decrease our aggregate coverage limits when our policies are renewed or replaced.

We have significant ongoing capital expenditure requirements that could have a material adverse effect on our business, financial condition and results of operations if we are unable to generate sufficient cash from operations.
Our business is capital intensive. Our capital expenditures focus primarily on revenue equipment replacement, land and structures and investments in information technology. Our capital expenditures for the years ended December 31, 2015 and 2014 were $108.0 million and $69.2 million, respectively. These amounts were principally used to fund the purchase of used tractors and trailers, to refurbish engines for our revenue fleet, and capitalized costs for our network facilities and technology infrastructure. We will need to continue to update our fleet periodically. If we are unable to generate sufficient cash from operations to fund our capital requirements, we may have to limit our growth, utilize our existing liquidity, or enter into additional financing arrangements, including leasing arrangements, or operate our revenue equipment (including tractors and trailers) for longer periods resulting in increased maintenance costs, any of which could reduce our operating income. If our cash from operations and existing financing arrangements are not sufficient to fund our capital expenditure requirements, we may not be able to obtain additional financing at all or on terms acceptable to us. In addition, our credit facilities contain provisions that limit our level of annual capital expenditures.
We operate in an industry subject to extensive government regulations, and costs of compliance with, or liability for violation of, existing or future regulations could significantly increase our costs of doing business.
The U.S. Departments of Transportation and Homeland Security and various federal, state, local and foreign agencies exercise broad powers over our business, generally governing such activities as authorization to engage in motor carrier operations, safety and permits to conduct transportation business. Our drivers are also subject to hours-of-service rules from the Federal Motor Carrier Safety Administration (“FMCSA”). In the future, we may become subject to new or more restrictive regulations that the FMCSA, Departments of Transportation and Homeland Security, the Occupational Safety and Health Administration, the Environmental Protection Agency or other authorities impose, including regulations relating to engine exhaust emissions, the hours of service that our drivers may provide in any one time period, security and other matters. Compliance with these regulations could substantially impair equipment productivity and increase our costs.
In December 2010, the FMSCA established the Compliance Safety Accountability (“CSA”) motor carrier oversight program under which drivers and fleets are evaluated based on certain safety-related standards. Carriers’ safety and fitness ratings under CSA include the on-road safety performance of the carriers’ drivers. The FMSCA has also implemented changes to the hours of service regulations which govern the work hours of commercial drivers and recently adopted a rule that requires commercial drivers who currently use paper log books to maintain hours-of-service records with electronic logging devices (“ELDs”) by December 2017 and commercial drivers who use automatic on-board recording devices to adopt ELDs by December 2019. We are currently in the process of updating our fleet to comply with these new regulations. The FMSCA has announced a number of other safety-related proposals that are pending legislative approval the process of being adopted. As a result of these increased standards, drivers who do not meet such standards are not eligible to drive for us. If we experience safety and fitness violations, our fleet could be ranked poorly as compared to our peers, and our safety and fitness scores could be adversely impacted. A reduction in our safety and fitness scores or those of our drivers could also reduce our competitiveness in relation to other companies who retain higher scores. Additionally, competition for drivers with favorable safety ratings may increase and thus provide for increases in driver-related compensation costs.
Like many trucking companies, we compensate our drivers based primarily on piece-rate and activity-based formulas.  California recently adopted legislation that sets forth requirements for the payment of a separate hourly wage for “nonproductive” time worked by piece-rate employees, and separate payment for compensable rest and recovery periods to those employees.  Specifically, the new legislation, which became effective January 1, 2016, codifies three basic statutory requirements for the payment of employees on a piece-rate basis: (i) employees must be separately compensated for the time during which they take rest and recovery breaks; (ii) employees must be separately compensated for “other nonproductive time,” which is defined as “time under

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the employer’s control, exclusive of rest and recovery periods, that is not directly related to the activity being compensated on a piece-rate basis;” and (iii) that this “other nonproduction time” time must be compensated at an hourly rate no less than the applicable minimum wage. The practical application and reconciliation of this new state legislation to interstate commerce is very complex and ambiguous. Consequently, the ultimate financial and operational impact cannot be determined at this time, but we believe it may increase our operating costs depending on the extent to which the same is applicable to our operations.

We are subject to various Environmental Regulations, and costs of compliance with, or liabilities for violations of, existing or future laws and regulations could significantly increase our costs of doing business.
Our operations are subject to Environmental Regulations dealing with, among other things, the handling of hazardous materials, underground fuel storage tanks and discharge and retention of storm water. We operate in industrial areas, where truck terminals and other industrial activities are located, and where groundwater or other forms of environmental contamination may have occurred. Our operations involve the risks of fuel spillage or seepage, environmental damage and hazardous waste disposal, among others. If we are involved in a spill or other accident involving hazardous substances, or if we are found to be in violation of applicable environmental laws or regulations, it could significantly increase our cost of doing business. Under specific environmental laws and regulations, we could be held responsible for all of the costs relating to any contamination at our past or present terminals and at third-party waste disposal sites. If we fail to comply with applicable environmental laws and regulations, we could be subject to substantial fines or penalties and to civil and criminal liability.
In addition, as climate change initiatives become more prevalent, federal, state and local governments and our customers are beginning to promulgate solutions for these issues. This increased focus on greenhouse gas emission reductions and corporate environmental sustainability may result in new regulations and customer requirements that could negatively affect us. This could cause us to incur additional direct costs or to make changes to our operations in order to comply with any new regulations and customer requirements, as well as increased indirect costs or loss of revenue resulting from, among other things, our customers incurring additional compliance costs that affect our costs and revenues. We could also lose revenue if our customers divert business from us because we have not complied with their sustainability requirements. These costs, changes and loss of revenue could have a material adverse effect on our business, financial condition, liquidity and results of operations.
Our business may be harmed by anti-terrorism measures.
In the aftermath of terrorist attacks on the United States, federal, state and municipal authorities have implemented and are implementing various security measures, including checkpoints and travel restrictions on large trucks. Although many companies would be adversely affected by any slowdown in the availability of freight transportation, the negative impact could affect our business disproportionately. For example, we offer specialized services that guarantee on-time delivery. If the security measures disrupt or impede the timing of our deliveries, we may fail to meet the needs of our customers, or may incur increased expenses to do so. We cannot assure you that these measures will not significantly increase our costs and reduce our operating margins and income.

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

We may not realize the expected benefits and cost savings from operational changes and performance improvement initiatives.
From time to time, we initiate operational changes and process improvements to reduce costs and improve financial performance. These changes and initiatives typically include evaluating management talent, reducing overhead costs, closing redundant facilities, making upgrades to our technology, eliminating non-core assets and unnecessary activities and implementing changes of operations under our labor agreements. There is no assurance that any changes and improvements will be successful, that their implementation

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may not have an adverse impact on our operating results or that we will not have to initiate additional changes and improvements in order to achieve the projected benefits and cost savings.
Difficulties attracting and retaining qualified drivers could result in increases in driver compensation and purchased transportation costs and could adversely affect our profitability and our ability to maintain or grow our fleet.
Should our shipping volumes increase, we may need to attract new qualified drivers and may face difficulty doing so. Like many in the trucking industry, it is important to our business that we retain the necessary number of qualified drivers to operate efficiently. Regulatory requirements, including the CSA program of the FMCSA, have reduced the number of eligible employee drivers and independent contractors and may continue to do so in the future. Future Company driver shortages may result in less than optimal use of purchased transportation, which may result in higher costs to the Company. The compensation we offer our drivers is subject to market conditions, and we may find it necessary to increase driver compensation in future periods if we must attract new drivers. In addition, we and our industry suffer from a high driver turnover rate. Driver turnover requires us to continually recruit a substantial number of drivers in order to operate existing revenue equipment. If we are unable to continue to retain drivers and attract new drivers when needed, we could be required to adjust our compensation packages, increase our use of purchased transportation, let tractors sit idle, or operate with fewer tractors and face difficulty meeting customer demands, any of which would adversely affect our growth and profitability.
A significant privacy breach or IT system disruption could adversely affect our business and we may be required to increase our spending on data and system security.
We rely on information technology networks and systems, including the Internet, to process, transmit and store electronic information, and to manage or support a variety of business processes and activities. In addition, the provision of service to our customers and the operation of our networks and systems involve the storage and transmission of proprietary information and sensitive or confidential data, including personal information of customers, employees and others. Our information technology systems, some of which are managed by third-parties, may be susceptible to damage, disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or components thereof, power outages, hardware failures, computer viruses, attacks by computer hackers, malicious insiders, telecommunication failures, user errors or catastrophic events. Hackers, acting individually or in coordinated groups, may also launch distributed denial of service attacks or other coordinated attacks that may cause service outages or other interruptions in our business. In addition, breaches in security could expose us, our customers, or the individuals affected, to a risk of loss or misuse of proprietary information and sensitive or confidential data. The techniques used to obtain unauthorized access, disable or degrade service or sabotage systems change frequently, may be difficult to detect for a long time and often are not recognized until launched against a target. As a result, we may be unable to anticipate these techniques or to implement adequate preventative measures.
Any of these occurrences could result in disruptions in our operations, the loss of existing or potential customers, damage to our brand and reputation, and litigation and potential liability for the company. In addition, the cost and operational consequences of implementing further data or system protection measures could be significant and our efforts to deter, identify, mitigate and/or eliminate any security breaches may not be successful.
We face risks associated with doing business in foreign countries.
We conduct a portion of our operations in Canada and, to a lesser extent, Mexico. In addition, our JHJ joint venture, which is currently under a contract for sale, operates in China. Our revenue from foreign sources totaled $116.5 million, $137.5 million, and $139.5 million in 2015, 2014 and 2013, respectively, and our long-lived assets located in foreign countries totaled $6.5 million, $8.7 million and $12.4 million at December 31, 2015, 2014, and 2013, respectively. As a participating carrier in the Customs and Trade Partnership Against Terrorism (“C-TPAT”) program, we and our contractors are able to cross into these countries more efficiently, thereby avoiding substantial delays. If we should lose the ability to participate in the C-TPAT program, we could experience significant border delays which could have a negative impact on our ability to remain competitive and operate efficiently in those countries.  In addition, our foreign operations are subject to certain risks inherent in doing business in jurisdictions outside of the United States, including:
exposure to local economic, political and labor conditions;
unexpected changes in laws, regulations, trade, monetary or fiscal policy;
fluctuations in interest rates, foreign currency exchange rates and changes in the rate of inflation;
tariffs, quotas, customs and other import or export restrictions and other trade barriers;
difficulty of enforcing agreements, collecting receivables and protecting assets through non-U.S. legal systems;
withholding and other taxes on remittances and other payments by subsidiaries;
violence and civil unrest in foreign countries;

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compliance with the requirements of applicable anti-bribery laws, including the U.S. Foreign Corrupt Practices Act (“FCPA”);
changes in tax law; and
controls on the repatriation of cash, including the imposition or increase of withholding and other taxes on remittances and other payments by our subsidiaries.

Item 1B. Unresolved Staff Comments

Not applicable.

Item 2. Properties

At December 31, 2015, we operated a total of 384 transportation service facilities located in 50 states, Puerto Rico, Canada and Mexico. Of this total, we own 186 and we lease 198, generally with lease terms ranging from one month to ten years with right of renewal options. The number of customer freight servicing doors totaled 20,934, of which 12,080 are at owned facilities and 8,854 are at leased facilities. The transportation service centers vary in size ranging from one to three doors at small local facilities to 426 doors at the largest consolidation and distribution facility. In addition, we and our subsidiaries own and occupy a general office building in Lebanon, Pennsylvania. We also lease and occupy general office buildings in Holland, Michigan, Overland Park, Kansas, Sioux Falls, South Dakota, Tualatin, Oregon and Winnipeg, Manitoba. Our owned transportation service facilities and office buildings serve as collateral under our credit agreements.

Our facilities and equipment are adequate to meet current business requirements in 2016. Refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a more detailed discussion of expectations regarding capital spending in 2016.

Item 3. Legal Proceedings

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

Item 4. Mine Safety Disclosures

Not applicable.



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Executive Officers of the Registrant

The following are our executive officers, each of whom serves until his or her successor has been elected and qualified or until his or her earlier resignation or removal:
Name
Age
Position(s) Held
James L. Welch
61
YRC Worldwide : Chief Executive Officer (since 2011); Dynamex Inc. (transportation and logistics services): President and Chief Executive Officer (2008 - 2011); JHT Holdings (truck transportation): Interim Chief Executive Officer (2007 - 2008); Yellow Transportation (subsidiary of our Company): President and Chief Executive Officer (2000 - 2007), and various other positions (1978 - 2000); Current Director: SkyWest Inc. (regional airline), and Erickson Air Crane, Inc. (manufacturing and operating); Former Director: Dynamex Inc., Spirit AeroSystems Holdings Inc. (commercial airplane assemblies and components), and Roadrunner Transportation (transportation and logistics services).

 
 
 
Jamie G. Pierson
46
Executive Vice President and Chief Financial Officer of YRC Worldwide (since November 2011); Interim Chief Financial Officer of YRC Worldwide Inc. (August 2011-November 2011); Managing Director, Alvarez & Marsal North America, LLC (professional services) (2008-November 2011); Vice President - Corporate Development and Integration, Greatwide Logistics Services, Inc. (transportation and logistics) (2007-2008); Director, FTI Capital Advisors, LLC (investment bank) (2002-2007); Vice President, FTI Consulting, Inc. (2001-2002); Vice President, Stonegate Securities, Inc. (investment bank) (2000-2001); Associate, Houlihan Lokey Howard & Zukin (investment bank) (1997-2000).
 
 
 
James A. Fry
54
Vice President, General Counsel and Corporate Secretary of YRC Worldwide (since April 2015); Swift Transportation Company: Executive Vice President and General Counsel (2010-2015), Corporate Counsel (2008-2010); General Counsel of Global Aircraft Solutions, Inc. (2003-2008).
 
 
 
Mark D. Boehmer
55
Vice President and Treasurer of YRC Worldwide (since July 2013); Vice President and Treasurer of Sealy Corporation (bedding manufacturer) (2003-2013).
 
 
 
Stephanie D. Fisher
39
Vice President and Controller of YRC Worldwide (since May 2012); Director - Financial Reporting and various positions in the Company’s Corporate Accounting department (2004-2012); Member of the Supervisory Committee of CommunityAmerica Credit Union (since December 2010, Chairman of the Committee since May 2012).
 
 
 
Darren D. Hawkins
46
President (since February 2014), Senior Vice President - Sales and Marketing (January 2013-February 2014) of YRC Freight; Director of Operations (December 2011-January 2013) and Director of Sales (January 2009-December 2011) for Con- Way Freight, a subsidiary of Con-Way, Inc.; various positions of increasing responsibility with Yellow Transportation (1991-2009).

 
 
 
Scott D. Ware
55
President (since May 2012), Vice President Operations & Linehaul (2009-2012) and Vice President Linehaul (2007-2009) of Holland; Director of Linehaul of SAIA Inc. (2002-2007); Director of Linehaul of JEVIC (2000-2002); various industry management roles with Preston, Overnite, Con-Way and Spartan Express (1985-2000).

 
 
 
Thomas J. O’Connor
55
President of Reddaway (since January 2007); President of USF Bestway (subsidiary of the Company) (2005-2007); Vice President - Western Division and officer of the Company (1999-2005), District Manager (1995-1999) and various management positions of increasing responsibility (1982-1995) of Roadway Express, Inc. (subsidiary of the Company).

 
 
 
Donald R. Foust
58
President of New Penn (since August 2014); Regional Vice President, Eastern Sales and Operations (2013-July 2014), Vice President, Sales and Marketing (2012-2013), Director of Corporate Sales (2011-2012), Regional Sales Manager (2009-2011) of Roadrunner Transportation Services (transportation and logistics); various management roles at Yellow Transportation (subsidiary of the Company) (1999-2009).


19




PART II

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

As of February 12, 2016, 285 stockholders of record held YRC Worldwide common stock. Trading activity averaged 636,524 shares per day during 2015, down from 777,130 per day in 2014. The NASDAQ Stock Market quotes prices for our common stock under the symbol “YRCW.” As part of our 2014 Financing Transactions, which is further described in the “Debt and Financing” footnote of our consolidated financial statements, on January 31, 2014, we issued 583,334 shares of YRC Worldwide Class A Convertible preferred stock (“Class A Preferred Stock”) that converted into 2,333,336 shares of Common Stock in August 2014.

Quarterly Financial Information (unaudited)
 
2015
(in millions, except per share and share data)
First
Quarter
  Second Quarter
Third
Quarter
Fourth
Quarter(b)
Operating revenue
$
1,186.4

$
1,258.4

$
1,244.9

$
1,142.7

(Gains) losses on property disposals, net
1.3

(0.7
)
0.9

0.4

Operating income (loss)
3.7

56.9

47.7

(15.3
)
Net income (loss)
(21.6
)
26.0

19.8

(23.5
)
Diluted income (loss) per share(a)
(0.70
)
0.80

0.61

(0.73
)
Market price of common stock per share:
 
 
 
 
 High
22.67

18.10

21.37

18.50

 Low
15.43

12.89

11.90

13.05

 
 
2014
(in millions, except per share and share data)
First
Quarter
  Second Quarter
Third
Quarter
Fourth
Quarter
Operating revenue
$
1,210.9

$
1,317.6

$
1,322.6

$
1,217.7

(Gains) losses on property disposals, net
0.2

(6.5
)
0.2

(5.8
)
Operating income (loss)
(32.4
)
20.0

26.7

31.2

Net income (loss)
(70.2
)
(4.9
)
1.2

6.2

Diluted income (loss) per share(a)
(3.95
)
(0.16
)
(0.03
)
0.16

Market price of common stock per share:
 
 
 
 
 High
27.00

28.73

29.21

25.40

 Low
11.81

18.40

19.47

14.03


(a)
Diluted income (loss) per share amounts were computed independently for each of the quarters presented. The sum of the quarters may differ from the total annual amount primarily due to change in the number of outstanding shares in the year and the impact of the if-converted method used to calculate earnings per share.
(b)
During the fourth quarter of 2015, operating loss and net loss included a non-union pension settlement charge of $28.7 million.

Purchases of Equity Securities by the Issuer

We did not repurchase any shares of our Common Stock in 2015, 2014 or 2013. The agreement (“Term Loan Agreement”) for our $700 million term loan facility (“Term Loan”) does not permit us to purchase shares of our Common Stock outside of limited exceptions.

Dividends

We did not declare any cash dividends on our Common Stock in 2015, 2014 or 2013. Our Term Loan Agreement does not permit us to declare dividends on any of our outstanding common stock.


20



Common Stock Performance

Set forth below is a line graph comparing the quarterly percentage change in the cumulative total stockholder return of the Company’s common stock against the cumulative total return of the S&P Composite-500 Stock Index and the Dow Jones Transportation Average Stock Index for the period of five years commencing December 31, 2010 and ending December 31, 2015.


21



Item 6. Selected Financial Data

Our selected financial data below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Financial Statements and Supplementary Data” included in this Form 10-K.
(dollars in millions, except per share data. shares in thousands)
 
2015
 
2014
 
2013
 
2012
 
2011
For the Year
 
 
 
 
 
 
 
 
 
 
Operating revenue
 
$
4,832.4

 
$
5,068.8

 
$
4,865.4

 
$
4,850.5

 
$
4,868.8

Operating income (loss)
 
93.0

 
45.5

 
28.4

 
24.1

 
(138.2
)
Net income (loss)
 
0.7

 
(67.7
)
 
(83.6
)
 
(136.5
)
 
(354.4
)
Less: Net income (loss) attributable to non-controlling interest
 

 

 

 
3.9

 
(3.1
)
Net income (loss) attributable to YRC Worldwide Inc.
 
0.7

 
(67.7
)
 
(83.6
)
 
(140.4
)
 
(351.3
)
Amortization of beneficial conversion feature on preferred stock
 

 
(18.1
)
 

 

 
(58.0
)
Net income (loss) attributable to common shareholders
 
0.7

 
(85.8
)
 
(83.6
)
 
(140.4
)
 
(409.3
)
Acquisition of property and equipment
 
(108.0
)
 
(69.2
)
 
(66.9
)
 
(66.4
)
 
(71.6
)
Proceeds from disposal of property and equipment
 
17.5

 
20.8

 
9.8

 
50.4

 
67.5

Net cash provided by (used in) operating activities
 
140.8

 
28.5

 
12.1

 
(25.9
)
 
(26.0
)
Net cash provided by (used in) investing activities
 
(121.4
)
 
(41.6
)
 
(23.5
)
 
19.8

 
(156.6
)
Net cash provided by (used in) financing activities
 
(16.7
)
 
7.9

 
(21.0
)
 
14.3

 
240.1

 
 
 
 
 
 
 
 
 
 
 
At Year-End
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
1,894.6

 
$
1,985.0

 
$
2,064.9

 
$
2,225.5

 
$
2,485.8

Total debt
 
1,077.6

 
1,109.9

 
1,363.4

 
1,375.4

 
1,354.7

Total shareholders’ deficit
 
(379.4
)
 
(474.3
)
 
(597.4
)
 
(629.1
)
 
(358.5
)
 
 
 
 
 
 
 
 
 
 
 
Per Share Measurements 
 
 
 
 
 
 
 
 
 
 
Basic per share data: 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
0.02

 
(3.00
)
 
(8.96
)
 
(19.20
)
 
(196.12
)
Average common shares outstanding
 
31,736

 
28,592

 
9,332

 
7,311

 
2,087

Diluted per share data: 

 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
0.02

 
(3.00
)
 
(8.96
)
 
(19.20
)
 
(196.12
)
Average common shares outstanding
 
32,592

 
28,592

 
9,332

 
7,311

 
2,087

 
 
 
 
 
 
 
 
 
 
 
Other Data
 
 
 
 
 
 
 
 
 
 
Number of employees
 
32,000

 
33,000

 
32,000

 
32,000

 
32,000

Operating ratio:(a)
 
 
 
 
 
 
 
 
 
 
  YRC Freight
 
99.4
%
 
100.0
%
 
101.0
%
 
101.2
%
 
102.8
%
  Regional Transportation
 
95.2
%
 
96.4
%
 
95.4
%
 
95.7
%
 
97.9
%
Consolidated
 
98.1
%
 
99.1
%
 
99.4
%
 
99.5
%
 
102.8
%

(a)
Operating ratio is calculated as (i) 100 percent (ii) minus the result of dividing operating income by operating revenue or (iii) plus the result of dividing operating loss by operating revenue and expressed as a percentage.


22



Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
“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, 2015, 2014 and 2013
Reporting Segment Results of Operations: an analysis of our results of operations for the years ended December 31, 2015, 2014 and 2013 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, 2015, 2014 and 2013
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 wholly owned operating subsidiaries and its interest in JHJ, 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 any 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:


23



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

Adjusted EBITDA: a non-GAAP measure that reflects earnings before interest, taxes, depreciation, and amortization expense, 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 IBT employees and the results of permitted dispositions, 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 pay 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 IBT employees required under the Memorandum of Understanding (“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 2015, 2014 and 2013 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)
 
2015
 
2014
 
2013
 
2015 vs. 2014
 
2014 vs. 2013
Operating revenue
 
$
4,832.4

 
$
5,068.8

 
$
4,865.4

 
(4.7
)%
 
4.2
 %
Operating income
 
93.0

 
45.5

 
28.4

 
104.4
 %
 
60.2
 %
Nonoperating expenses, net
 
97.4

 
129.3

 
157.9

 
(24.7
)%
 
(18.1
)%
Net income (loss)
 
0.7

 
(67.7
)
 
(83.6
)
 
NM

(a) 
19.0
 %
(a)
Not Meaningful

2015 Compared to 2014

Our consolidated operating revenue decreased $236.4 million in 2015 compared to 2014. The decrease in revenue was largely attributed to the reduction in fuel surcharge revenue and declines in volume, partially offset by yield improvements due to our strategy of improving price and freight mix.

Operating expenses in 2015 decreased $283.9 million, or 5.7%, compared to 2014. The decrease in operating expenses was primarily driven by a $232.3 million, or 20.9%, decrease in operating expenses and supplies, a $33.0 million, or 1.1%, decrease

24



in salaries, wages and benefits, a $29.8 million, or 5.0%, decrease in purchased transportation and a $2.7 million, or 1.0%, decrease in other operating expense. Additionally, on a year-over-year basis, we recorded losses on disposals of property of $1.9 million in 2015 as compared to gains of $11.9 million in 2014.

The $232.3 million, or 20.9%, decrease in operating expenses and supplies was due to a $228.7 million, or 43.5%, decrease in fuel expenses driven by a lower cost per gallon, 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.

The $33.0 million, or 1.1%, decrease in salaries, wages and employees’ benefits was driven by a $32.2 million decrease in salaries and wages, primarily driven by 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.

The $29.8 million, or 5.0%, decrease in purchased transportation was primarily due to a $51.3 million, or 14.5%, 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 is principally related to lower fuel surcharges paid to our providers, when compared to prior year. Offsetting this decrease, we experienced an increase of $23.4 million, or 33.9%, of vehicle rent expense resulting from higher usage of leased revenue equipment.

The $2.7 million, or 1.0%, decrease in other operating expense resulted from a $6.5 million, or 10.0%, decrease in cargo claims expense due to improved frequency of new claims and less severity of outstanding claims, as compared to prior year, offset by a $3.3 million, or 6.2%, increase in our property damage and liability claims expense primarily due to unfavorable development on our outstanding claims.

Nonoperating expenses decreased $31.9 million, or 24.7%, in 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 decrease in interest expense was partially offset by the gain of $11.2 million we recorded on our extinguishment of debt 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 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. We also attribute our decrease in interest expense 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.

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 substantially limit the use of tax Net Operating Loss carryovers (“NOLs”) generated through January 31, 2014 and prior to offset future taxable income. While Section 382 changes may adversely affect future cash flow,

25



they have no impact on our current financial statements. The deferred tax assets resulting from the existing NOLs for which a Section 382 change would limit financial statement recognition are already fully offset by a valuation allowance.

2014 Compared to 2013

Our consolidated operating revenue increased $203.4 million in 2014 compared to 2013. The increase in revenue was largely driven by increases in yield and shipping volumes. The increases in yield were driven by a stronger overall pricing environment and successful contract negotiations with our customers. We believe the increase in shipping volumes was driven, in large part, by the improvement in the overall economic environment as well as increased shipper confidence due to the finalization of the 2014 Financing Transactions and our MOU entered into in early 2014.

Operating expenses in 2014 increased $186.3 million, or 3.9% ,compared to 2013. The increase in operating expenses was primarily driven by a $98.1 million, or 3.5%, increase in salaries, wages and benefits, a $78.4 million, or 15.3%, increase in purchased transportation and a $34.4 million, or 14.7%, increase in other operating expense. These increases were partially offset by a $6.2 million, or 0.6%, decrease in operating expenses and supplies.

The $98.1 million or 3.5% increase in salaries, wages and employee benefits was driven by a $85.9 million increase in employment costs primarily driven by an increase in shipping volumes and a decrease in our operational productivities. The increase in salaries, wages and employee benefits is also driven by a $29.9 million, or 31.9%, increase in workers’ compensation related expenses primarily due to an increase in new claims despite the safety initiatives implemented in 2013, partially offset by a reduction in letter of credit fees used to support our workers’ compensation claims of $17.7 million, or 63.9%, driven by more favorable terms under our new $450 million asset-based loan facility (“ABL Facility”).

The $78.4 million, or 15.3%, increase in purchased transportation was largely driven by an increase in expense related to YRC Freight’s new over-the-road purchased transportation option as permitted by our MOU that went into effect in February 2014. Additionally, we incurred an increase in local purchased transportation to keep our network in cycle in response to higher volumes and workforce shortages experienced earlier in the year. Finally, we experienced an additional $25.0 million, or 56.9%, increase in vehicle rent expense as our percentage of leased units increased due to our current strategy of using operating leases for our new revenue equipment.

The $34.4 million, or 14.7%, increase in other operating expense was driven by a $23.0 million, or 74.3%, increase in our property damage and liability claims expense due to unfavorable development on our outstanding claims, partially offset by a reduction in letter of credit fees used to support our property damage and liability claims of $4.2 million, or 67.2%, driven by more favorable terms under our ABL Facility. We also experienced an additional $16.8 million, or 35.3%, increase in cargo claims expense due to an increase in the frequency and severity of our outstanding claims.

The $6.2 million, or 0.6%, decrease in operating expenses and supplies was driven by a $22.6 million, or 4.1%, decrease in fuel expenses driven by a lower cost per gallon of fuel, partially offset by more miles driven at our Regional Transportation segment. This decrease was partially offset by a $10.6 million, or 5.4%, increase in vehicle maintenance expenses to support our aging fleet.

Also offsetting the increase in operating expenses were gains on disposals of property, which were $11.9 million in 2014 compared to $2.2 million in 2013.

Nonoperating expenses decreased $28.6 million, or 18.1%, in 2014 compared to 2013. The decrease was primarily driven by the $11.2 million gain we recorded on our extinguishment of debt 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 holders of our 10% Series B Notes who exchanged their outstanding balances at a price of $15.00 per share. We also experienced a decrease in interest expense as a result of the 2014 Financing Transactions which reduced our outstanding debt and lowered the weighted average interest rate on our debt.

Our effective tax rate for the years ended December 31, 2014 and 2013 was 19.2% and 35.4%, respectively. 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. Significant items impacting the 2013 rate include a benefit recognized due to application of 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, 2013. 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

26



or in equity if directly related to other comprehensive income (loss), unless affected by a specific intra-period allocation as happened in 2013 and explained in the “Income Taxes” footnote to our consolidated financial statements, 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, 2014 and 2013, 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 Code Section 382 which will likely substantially limit the use of tax NOLs generated through January 31, 2014 and prior to offset future taxable income. While Section 382 changes may adversely affect future cash flow, they have no impact on our current financial statements. The deferred tax assets resulting from the existing NOLs for which a Section 382 change would limit financial statement recognition are already fully offset by a valuation allowance.

Reporting Segment Results of Operations

We evaluate our business using our two reporting segments:
YRC Freight is the 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, 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. 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, Mexico and Puerto Rico.

YRC Freight Results

YRC Freight represented 63%, 64% and 64% of our consolidated operating revenue in 2015, 2014 and 2013, respectively. The table below provides summary financial information for YRC Freight for the years ended December 31:
 
 
 
 
Percent Change
 
(in millions)
2015
 
2014
 
2013
 
2015 vs. 2014
 
2014 vs. 2013
 
Operating revenue
$
3,055.7

 
$
3,237.4

 
$
3,136.8

 
(5.6
)%
 
3.2
%
 
Operating income (loss)
18.0

 
0.5

 
(31.2
)
 
NM

(b) 
NM

(b) 
Operating ratio(a)
99.4
%
 
100.0
%
 
101.0
%
 
0.6pp
 
1.0pp
 
 
(a)
pp represents the change in percentage points
(b)
Not Meaningful


27



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 the year, 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 revenue per hundred weight
$
23.71

 
$
23.65

 
0.3
 %
Total revenue per hundred weight (excluding fuel surcharge)
$
21.01

 
$
19.80

 
6.1
 %
Total revenue per shipment
$
285

 
$
280

 
1.7
 %
Total picked up revenue per shipment (excluding fuel surcharge)
$
252

 
$
234

 
7.7
 %
Total weight per shipment (in pounds)
1,201

 
1,184

 
1.5
 %
 

(in millions)
2015
 
2014
(a)Reconciliation of operating revenue to total picked up revenue:
 
 
 
Operating revenue
$
3,055.7

 
$
3,237.4

Change in revenue deferral and other
(22.3
)
 
(17.8
)
Total picked up revenue
$
3,033.4

 
$
3,219.6

(a) Does not equal financial statement revenue due to revenue recognition adjustments between accounting periods.
(b) Percent change based on unrounded figures and not rounded figures presented.

Operating income for YRC Freight was $18.0 million in 2015 compared to $0.5 million in 2014. Operating revenue decreased by $181.7 million, offset by a reduction in operating expenses of $199.2 million.
The decrease in operating expenses was due to a $128.7 million, or 18.6%, decrease in operating expenses and supplies, a $44.9 million, or 2.5%, decrease in salaries, wages and employee benefits, and a $38.1 million, or 8.0%, decrease in purchased transportation. These decreases were partially offset by $17.8 million reduction in gains on property disposals.
The $128.7 million, or 18.6%, decrease in operating expenses and supplies was due to a $131.6 million, or 44.4%, decrease in fuel expenses driven by a lower cost per gallon, as well as fewer miles driven. The decrease was also related to proceeds of $4.1 million for a legal settlement in first quarter 2015 and a reduction in bad debt expense of $4.1 million due to improved aging of accounts receivable. This decrease was partially offset by $5.1 million of nonrecurring consulting fees.
The $44.9 million, or 2.5%, decrease in salaries, wages and employees’ benefits was driven by a $38.3 million decrease in salaries and wages, which is primarily driven by a decrease in shipping volumes, which required fewer employee hours to process freight, combined with a $16.9 million decrease in workers’ compensation expenses primarily due to a reduction in new claim frequency and favorable development of prior year claims. The decreases were offset by a $10.3 million increase in employee benefits expense, which includes 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 due to a decrease in shipping volumes and employee hours worked in 2015.

28



The $38.1 million, or 8.0%, decrease in purchased transportation was primarily due to a $49.1 million, or 14.6%, decrease in rail, local and over the road purchased transportation expense due to lower rail and road rates, which is principally related to lower fuel surcharges paid to our providers, combined with a reduction in shipment volumes, as compared to prior year. Offsetting this decrease, we incurred an increase of $12.0 million, or 29.1%, higher vehicle lease expense due to increased usage of operating leases for revenue equipment.
2014 Compared to 2013

YRC Freight reported operating revenue of $3,237.4 million in 2014, an increase of $100.6 million or 3.2% compared to 2013. The table below summarizes the key revenue metrics for the YRC Freight reporting segment for the years ended December 31:

 
2014
 
2013
 
Percent Change(b)
Workdays
252.0

 
252.5

 
 
 
 
 
 
 
 
Total picked up revenue (in millions)(a)
$
3,219.6

 
$
3,126.5

 
3.0
%
Total tonnage (in thousands)
6,807

 
6,717

 
1.3
%
Total tonnage per workday (in thousands)
27.01

 
26.60

 
1.5
%
Total shipments (in thousands)
11,502

 
11,444

 
0.5
%
Total shipments per workday (in thousands)
45.64

 
45.32

 
0.7
%
Total revenue per hundred weight
$
23.65

 
$
23.27

 
1.6
%
Total revenue per hundred weight (excluding fuel surcharge)
$
19.80

 
$
19.35

 
2.3
%
Total revenue per shipment
$
280

 
$
273

 
2.5
%
Total picked up revenue per shipment (excluding fuel surcharge)
$
234

 
$
227

 
3.2
%
Total weight per shipment (in pounds)
1,184

 
1,174

 
0.8
%
 

(in millions)
2014
 
2013
(a) Reconciliation of operating revenue to total picked up revenue:
 
 
 
Operating revenue
$
3,237.4

 
$
3,136.8

Change in revenue deferral and other
(17.8
)
 
(10.3
)
Total picked up revenue
$
3,219.6

 
$
3,126.5

(a) Does not equal financial statement revenue due to revenue recognition adjustments between accounting periods.
(b) Percent change based on unrounded figures and not rounded figures presented.
Operating income for YRC Freight was $0.5 million in 2014 compared to operating loss of $31.2 million in 2013. The operating loss improvement was driven by a $100.6 million increase in operating revenue, which was offset by a $68.9 million increase in operating expenses.
The increase in revenue was largely driven by increases in yield and shipping volumes as noted in the table above. The increases in yield were driven by a stronger overall pricing environment and successful contract negotiations with our customers. We believe the increase in volumes was driven, in large part, by the improvement in the overall economic environment as well as increased shipper confidence due to the finalization of the 2014 Financing Transactions and our MOU in early 2014.
The operating cost increase was driven by a $47.1 million, or 2.6%, increase in salaries, wages and employees’ benefits, a $47.7 million, or 11.1%, increase in purchased transportation, and a $14.5 million, or 10.0%, increase in other operating expenses. These increases were partially offset by $16.4 million, or 2.3%, decrease in operating expenses and supplies.
The $47.1 million, or 2.6%, increase in salaries, wages and employee benefits was driven by a $37.0 million increase in employment costs primarily driven by an increase in shipping volumes and a decrease in our operational productivities. The increase in salaries, wages and employee benefits is also driven by a $24.1 million, or 46.9%, increase in workers’ compensation related expenses primarily due to an increase in the number of new claims, partially offset by a reduction in letter of credit fees used to support our workers’ compensation claims of $14.1 million driven by more favorable terms under our ABL Facility.

29



The $47.7 million, or 11.1%, increase in purchased transportation was largely driven by an increase in expense related to YRC Freight’s new over-the-road purchased transportation option as permitted by our MOU that went into effect in February 2014.
The $14.5 million, or 10.0%, increase in other operating expense was driven by a $12.4 million increase in cargo claims expense due to an increase in the frequency and severity of our claims. We also experienced a $7.4 million, or 43.4%, increase in our property damage and liability claims expense due to unfavorable development on our outstanding claims, partially offset by a reduction in letter of credit fees used to support our property damage and liability claims of $3.4 million, or 70.3%, driven by more favorable terms under our ABL Facility.
The $16.4 million, or 2.3%, decrease in operating expenses and supplies was driven by a $21.9 million decrease in fuel expenses driven by a slightly lower cost per gallon of fuel as well as a higher percentage of our linehaul miles being provided by purchased transportation, thus lowering our fuel usage. This decrease was partially offset by a $5.7 million increase in vehicle maintenance expenses to support our aging fleet.
Also offsetting the increase in operating expenses were gains on disposals of property, which were $15.9 million in 2014 compared to $3.0 million in 2013.

Regional Transportation Results

Regional Transportation represented 37%, 36% and 36% of consolidated operating revenue in 2015, 2014 and 2013, respectively. The table below provides summary financial information for Regional Transportation for the years ended December 31:
 
 
 
 
Percent Change
(in millions)
2015
 
2014
 
2013
 
2015 vs. 2014
 
2014 vs. 2013
Operating revenue
$
1,776.9

 
$
1,831.4

 
$
1,728.6

 
(3.0
)%
 
5.9
 %
Operating income
85.4

 
66.1

 
79.9

 
29.2
 %
 
(17.3
)%
Operating ratio(a)
95.2
%
 
96.4
%
 
95.4
%
 
1.2pp
 
-1.0pp
 
(a)
pp represents the change in percentage points

2015 Compared to 2014

Regional Transportation reported operating revenue of $1,776.9 million for 2015, representing a decrease of $54.5 million, or 3.0%, from 2014. The decrease in revenue was largely driven by a reduction in fuel surcharge revenue and declines in volume, partially offset by improvements to yield. The table below summarizes the key revenue metrics for the Regional Transportation reporting segment for the years ended December 31:

 
2015(c)
 
2014
 
Percent Change(b)
Workdays
251.0

 
252.0

 
 
 
 
 
 
 
 
Total picked up revenue (in millions)(a)
$
1,777.9

 
$
1,832.3

 
(3.0
)%
Total tonnage (in thousands)
7,708

 
7,906

 
(2.5
)%
Total tonnage per workday (in thousands)
30.71

 
31.37

 
(2.1
)%
Total shipments (in thousands)
10,375

 
10,745

 
(3.4
)%
Total shipments per workday (in thousands)
41.33

 
42.64

 
(3.1
)%
Total revenue per hundred weight
$
11.53

 
$
11.59

 
(0.5
)%
Total revenue per hundred weight (excluding fuel surcharge)
$
10.27

 
$
9.80

 
4.8
 %
Total revenue per shipment
$
171

 
$
171

 
0.5
 %
Total picked up revenue per shipment (excluding fuel surcharge)
$
153

 
$
144

 
5.9
 %
Total weight per shipment (in pounds)
1,486

 
1,472

 
0.9
 %
 


30



(in millions)
2015
 
2014
(a) Reconciliation of operating revenue to total picked up revenue:
 
 
 
Operating revenue
$
1,776.9

 
$
1,831.4

Change in revenue deferral and other
1.0

(c) 
0.9

Total picked up revenue
$
1,777.9

 
$
1,832.3

(a) Does not equal financial statement revenue due to revenue recognition adjustments between accounting periods.
(b) Percent change based on unrounded figures and not rounded figures presented.
(c) Operating metrics for 2015 have been updated, as compared to the metrics disclosed in the current report on the Form 8-K filed on February 4, 2016.

Operating income for Regional Transportation was $85.4 million for 2015, an increase of $19.3 million from the same period in 2014, which consisted of a $54.5 million decrease in revenue, offset by a $73.8 million decrease in operating expenses.
The decrease in operating expenses was driven by a $91.9 million, or 20.8%, decrease in operating expenses and supplies, offset by an increase of $9.0 million, or 0.9%, increase in salaries, wages and employee benefits and an $8.4 million, or 7.4%, increase in purchased transportation.
The $91.9 million, or 20.8%, decrease in operating expenses and supplies due to a $97.2 million, or 42.5%, decrease in fuel expenses driven by a lower cost per gallon, as well as fewer miles driven.
The $9.0 million, or 0.9%, increase in salaries, wages and employee benefits was driven by a $4.5 million increase in salaries and wages, principally related to a Regional transportation segment profit sharing bonus to be paid to eligible union employees, and an $8.9 million increase in employee benefits. The increase in salaries, wages and employee benefits is partially offset by a $4.6 million decrease in workers’ compensation expenses due to a reduction in new claim frequency and favorable development of prior year claims.
The $8.4 million, or 7.4%, increase in purchased transportation was driven by a $11.3 million, or 40.9%, increase in vehicle rent expense resulting from higher usage of leased revenue equipment due to our strategy of using operating leases for our new revenue equipment. This was offset by a decrease of $2.1 million in local purchased transportation, when compared to prior year.
Also contributing to the decrease in operating expenses was a year-over-year reduction in losses on disposals of property, which were $0.2 million in 2015 compared to $4.0 million in 2014.

2014 Compared to 2013

Regional Transportation reported operating revenue of $1,831.4 million for 2014, representing an increase of $102.8 million, or 5.9%, from 2013. The table below summarizes the key revenue metrics for the Regional Transportation reporting segment for the years ended December 31:

 
2014
 
2013
 
Percent Change(b)
Workdays
252.0

 
251.5

 
 
 
 
 
 
 
 
Total picked up revenue (in millions)(a)
$
1,832.3

 
$
1,729.6

 
5.9
%
Total tonnage (in thousands)
7,906

 
7,628

 
3.6
%
Total tonnage per workday (in thousands)
31.37

 
30.33

 
3.4
%
Total shipments (in thousands)
10,745

 
10,452

 
2.8
%
Total shipments per workday (in thousands)
42.64

 
41.56

 
2.6
%
Total revenue per hundred weight
$
11.59

 
$
11.34

 
2.2
%
Total revenue per hundred weight (excluding fuel surcharge)
$
9.80

 
$
9.55

 
2.6
%
Total revenue per shipment
$
171

 
$
165

 
3.0
%
Total picked up revenue per shipment (excluding fuel surcharge)
$
144

 
$
139

 
3.4
%
Total weight per shipment (in pounds)
1,472

 
1,460

 
0.8
%
 


31



(in millions)
2014
 
2013
(a) Reconciliation of operating revenue to total picked up revenue:
 
 
 
Operating revenue
$
1,831.4

 
$
1,728.6

Change in revenue deferral and other
0.9

 
1.0

Total picked up revenue
$
1,832.3

 
$
1,729.6

(a) Does not equal financial statement revenue due to revenue recognition adjustments between accounting periods.
(b) Percent change based on unrounded figures and not rounded figures presented.

Operating income for Regional Transportation was $66.1 million for 2014, a decrease of $13.8 million from the same period in 2013, consisting of a $116.6 million increase in operating expenses, partially offset by a $102.8 million increase in revenue.

The increase in operating revenue was largely driven by increases in shipping volumes and yield as noted in the table above. We believe the increase in shipping volumes was driven, in large part, by the improvement in the overall economic environment as well as increased shipper confidence due to the finalization of the 2014 Financing Transactions and our MOU in early 2014. The increases in yield were driven by a stronger overall pricing environment and successful contract negotiations with our customers.
The operating cost increase was driven by a $49.6 million, or 5.1%, increase in salaries, wages and employees’ benefits, a $30.6 million, or 37.0%, increase in purchased transportation, a $19.4 million, or 22.0%, increase in other operating expenses and a $10.7 million, or 2.5%, increase in operating expenses and supplies.
The $49.6 million, or 5.1%, increase in salaries, wages and employee benefits was driven by a $44.0 million increase in employment costs primarily driven by an increase in shipping volumes and a decrease in our operational productivities. The increase in salaries, wages and employee benefits is also driven by an $8.8 million, or 22.5%, increase in workers’ compensation related expenses primarily due to an increase in new claims, partially offset by a reduction in letter of credit fees used to support our workers’ compensation claims of $3.2 million, or 57.5%, driven by more favorable terms under our ABL Facility.
The $30.6 million, or 37.0%, increase in purchased transportation was driven by a $21.5 million, or 350.2%, increase in vehicle rent expense as our percentage of leased units increased due to our current strategy of using operating leases for our new revenue equipment. We also experienced a $9.4 million, or 12.8%, increase in local purchased transportation to keep our network in cycle in response to higher volumes and workforce shortages.
The $19.4 million, or 22.0%, increase in other operating expense was driven by a $15.1 million, or 117.3%, increase in our property damage and liability claims expense due to unfavorable development on our outstanding claims, partially offset by a reduction in letter of credit fees used to support our property damage and liability claims of $0.8 million driven by more favorable terms under our ABL Facility. We also experienced a $4.4 million increase in cargo claims expense due to an increase in the frequency and severity of our outstanding claims.
The $10.7 million, or 2.5%, increase in operating expenses and supplies was driven by a $4.9 million, or 6.2%, increase vehicle maintenance expense to support our aging fleet. Regional Transportation only experienced a small decrease in fuel expense as the reduction in the cost per gallon of fuel was almost entirely offset by an increase in miles driven.
Also contributing to the increase in operating expenses were losses on disposals of property, which were $4.0 million in 2014 compared to $0.6 million in 2013.

Certain Non-GAAP Financial Measures

As discussed in the “Our Business” section, we use certain non-GAAP financial measures to assess performance. These measures should be considered in addition to the results prepared in accordance with GAAP, but should not be considered a substitute for, or superior to, our GAAP financial measures.


32



Consolidated Adjusted EBITDA

The reconciliation of net income (loss) to EBITDA and EBITDA to Adjusted EBITDA, as defined in the Term Loan as “Consolidated EBITDA” for the years ended December 31, 2015, 2014 and 2013 is as follows:
 
(in millions)
2015
 
2014
 
2013
Reconciliation of net income (loss) to Adjusted EBITDA:
 
 
 
 
 
Net income (loss)
$
0.7

 
$
(67.7
)
 
$
(83.6
)
Interest expense, net
107.1

 
149.5

 
163.8

Income tax benefit
(5.1
)
 
(16.1
)
 
(45.9
)
Depreciation and amortization
163.7

 
163.6

 
172.3

EBITDA
266.4

 
229.3

 
206.6

Adjustments for Term Loan Agreement:
 
 
 
 
 
(Gains) losses on property disposals, net
1.9

 
(11.9
)
 
(2.2
)
Letter of credit expense
8.8

 
12.1

 
33.9

Restructuring professional fees
0.2

 
4.2

 
12.0

Nonrecurring consulting fees
5.1

 

 

Permitted dispositions and other
0.4

 
1.8

 
1.7

Equity based compensation expense
8.5

 
14.3

 
5.8

Amortization of ratification bonus
18.9

 
15.6

 

(Gain) loss on extinguishment of debt
0.6

 
(11.2
)
 

Non-union pension settlement charge
28.7

 

 

Other, net(a)
(6.2
)
 
(9.7
)
 
(2.9
)
Adjusted EBITDA
$
333.3

 
$
244.5

 
$
254.9

(a)
As required under our Term Loan Agreement, other, net, shown above consists of the impact of certain items to be included in Adjusted EBITDA.

Segment Adjusted EBITDA

The following represents Adjusted EBITDA by segment for the years ended December 31, 2015, 2014 and 2013 is as follows:
 
(in millions)
2015
 
2014
 
2013
Adjusted EBITDA by segment:
 
 
 
 
 
YRC Freight
$
167.2

 
$
99.8

 
$
105.2

Regional Transportation
165.9

 
144.4

 
150.5

Corporate and other
0.2

 
0.3

 
(0.8
)
Adjusted EBITDA
$
333.3

 
$
244.5

 
$
254.9



33



The reconciliation of operating income (loss), by segment, to Adjusted EBITDA for the years ended December 31, 2015, 2014 and 2013 is as follows:

YRC Freight segment (in millions)
2015
 
2014
 
2013
Reconciliation of operating income (loss) to Adjusted EBITDA:
 
 
 
 
 
Operating income (loss)
$
18.0

 
$
0.5

 
$
(31.2
)
Depreciation and amortization
93.1

 
98.0

 
109.1

(Gains) losses on property disposals, net
1.9

 
(15.9
)
 
(3.0
)
Letter of credit expense
6.1

 
8.3

 
25.8

Nonrecurring consulting fees
5.1

 

 

Amortization of ratification bonus
12.2

 
10.0

 

Non-union pension settlement charge
28.7

 

 

Other, net(a)
2.1

 
(1.1
)
 
4.5

Adjusted EBITDA
$
167.2

 
$
99.8

 
$
105.2

(a)
As required under our Term Loan Agreement, other, net, shown above consists of the impact of certain items to be included in Adjusted EBITDA.
Regional Transportation segment (in millions)
2015
 
2014
 
2013
Reconciliation of operating income to Adjusted EBITDA:
 
 
 
 
 
Operating income
$
85.4

 
$
66.1

 
$
79.9

Depreciation and amortization
70.7

 
65.8

 
63.1

Losses on property disposals, net
0.2

 
4.0

 
0.6

Letter of credit expense
2.1

 
2.9

 
6.8

Amortization of ratification bonus
6.7

 
5.6

 

Other, net(a)
0.8

 

 
0.1

Adjusted EBITDA
$
165.9

 
$
144.4

 
$
150.5

(a)
As required under our Term Loan Agreement, other, net, shown above consists of the impact of certain items to be included in Adjusted EBITDA.
Corporate (in millions)
2015
 
2014
 
2013
Reconciliation of operating loss to Adjusted EBITDA:
 
 
 
 
 
Operating loss
$
(10.4
)
 
$
(21.1
)
 
$
(20.3
)
Depreciation and amortization
(0.1
)
 
(0.2
)
 
0.1

(Gains) losses on property disposals, net
(0.2
)
 

 
0.2

Letter of credit expense
0.6

 
0.9

 
1.3

Restructuring professional fees
0.2

 
4.2

 
12.0

Permitted dispositions and other
0.4

 
1.8

 
1.7

Equity based compensation expense
8.5

 
14.3

 
5.8

Other, net(a)
1.2

 
0.4

 
(1.6
)
Adjusted EBITDA
$
0.2

 
$
0.3

 
$
(0.8
)
(a)
As required under our Term Loan Agreement, other, net, shown above consists of the impact of certain items to be included in Adjusted EBITDA.

Liquidity and Capital Resources

Our principal sources of liquidity are cash and cash equivalents, available borrowings under our ABL Facility and net cash flow from operations. As of December 31, 2015, we had cash and cash equivalents of $173.8 million and the borrowing base and maximum availability on our ABL Facility were $441.7 million and $79.7 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 $362.0 million of outstanding letters of credit. While our ABL Facility permits us to access maximum availability outside of certain financial covenant restrictions (which restrictions did not limit our availability as of December 31, 2015), 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 ($44.2 million at December 31, 2015) or 10% of the collateral line cap ($45.0 million at December 31, 2015). Thus, of the $79.7 million in maximum

34



availability, we expected to access no more than $35.5 million as of December 31, 2015 (“Managed Accessibility”). As a result, we had cash and cash equivalents and Managed Accessibility of $209.3 million as of December 31, 2015.

As of December 31, 2014, we had cash and cash equivalents of $171.1 million and the borrowing base and maximum availability on our ABL Facility were $445.5 million and $71.2 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 $374.3 million of outstanding letters of credit. As of December 31, 2014, amounts able to be drawn on our ABL Facility (which were limited by certain financial covenant restrictions) were $27.1 million, for a total of cash and cash equivalents and amounts able to be drawn on our ABL Facility of $198.2 million.

Outside of funding normal operations, our principal uses of cash include making contributions to our single-employer pension plans and various multi-employer pension funds, and meeting our other cash obligations, including, but not limited to, paying principal and interest on our funded debt, payments on equipment leases and funding capital expenditures.

As of December 31, 2015, our Standard & Poor’s Corporate Family Rating was “B-” and Moody’s Investor Service Corporate Family Rating was “B3.”

Credit Facility Covenants

The Term Loan Agreement governing our Term Loan has certain financial covenants, as amended in September 2014, that, among other things, restrict certain capital expenditures and require us to maintain a maximum total leverage ratio (defined as Consolidated Total Debt divided by Consolidated Adjusted EBITDA as defined below).

Our total maximum leverage ratio covenants are as follows:

Four Consecutive Fiscal Quarters Ending
Maximum Total
Leverage Ratio
 
Four Consecutive Fiscal Quarters Ending
Maximum Total
Leverage Ratio
December 31, 2015
4.25 to 1.00
 
March 31, 2017
3.25 to 1.00
March 31, 2016
4.00 to 1.00
 
June 30, 2017
3.25 to 1.00
June 30, 2016
3.75 to 1.00
 
September 30, 2017
3.25 to 1.00
September 30, 2016
3.75 to 1.00
 
December 31, 2017 and thereafter
3.00 to 1.00
December 31, 2016
3.50 to 1.00
 
 
 

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 IBT employees and the results of permitted dispositions and discontinued operations. Consolidated Total Debt, as defined in our Term Loan Agreement, is the principal amount of indebtedness outstanding. Our total leverage ratio for the year ended December 31, 2015 was 3.25 to 1.00. Additionally, our ABL Facility credit agreement, among other things, restricts certain capital expenditures.

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 2015 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.

Cash Flow

Operating Cash Flow

Operating cash flow was a source of cash of $140.8 million for the year ended December 31, 2015 compared to $28.5 million during the year ended December 31, 2014. The favorable cash flow impact is related to a $68.4 million year-over-year increase in net income (loss) and increased cash inflow from accounts receivable, which is attributed to improved management of day sales outstanding and lower revenue.


35



Operating cash flow was a source of cash of $28.5 million for the year ended December 31, 2014 compared to a source of cash of $12.1 million during the year ended December 31, 2013. The favorable cash flow impact is largely related to a $15.9 million year-over-year decrease in net loss.

Investing Cash Flow

Investing cash flows used $121.4 million of cash in 2015 compared to $41.6 million used in 2014, primarily due to an increase in capital expenditures. Additionally, in 2015, we received a net decrease of $33.1 million in restricted escrow refunds, compared to a net increase of $1.6 million in 2014. Also, proceeds from the disposal of property and equipment decreased in 2015 compared to 2014 by $3.3 million due to additional property sales in 2014. See a detailed discussion of 2015 and 2014 capital expenditures below in “Capital Expenditures” for further information.

Investing cash flows used $41.6 million in 2014 compared to $23.5 million of cash used in 2013. In 2014, we received a net $1.6 million in restricted escrow refunds, compared to $31.8 million in 2013. Also, proceeds from the disposal of property and equipment increased by $11.0 million in 2014 as compared to 2013. See a detailed discussion of 2014 and 2013 capital expenditures below in “Capital Expenditures” for further information.

Financing Cash Flow

Net cash used in financing activities for 2015 was $16.7 million, which consists solely of scheduled repayments of our long-term debt.

Net cash provided by financing activities for 2014 was $7.9 million. The cash provided during 2014 was driven by the issuance of $693.0 million in long-term debt for the Term Loan and $250.0 million in equity issuance proceeds, offset by $892.7 million of repayments of our long-term debt. The repayments primarily consisted of $298.1 million for our previous term loan (the “Prior Term Loan”), $324.9 million for our prior asset-based loan that was replaced by our ABL Facility (“Prior ABL Facility”), $69.4 million for our 6% Convertible Senior Notes (“6% Notes”) and $183.5 million for our Series A Notes. We also had $29.1 million in debt issuance costs and $17.1 million in equity issuance costs related to our new debt and equity issued in 2014.

Net cash used in financing activities for 2013 was $21.0 million. During 2013, we increased our net borrowings under our Prior ABL Facility by $0.3 million, which was offset by a $9.2 million repayment of other long-term debt from asset sale proceeds and $12.1 million in debt issuance costs related to the November 12, 2013 credit agreement amendments.

Capital Expenditures

Our capital expenditures focus primarily on the replacement of revenue equipment, improvements to structures, and investments in information technology. Our business is capital intensive with significant investments in service center facilities and a fleet of tractors and trailers. We determine the amount and timing of capital expenditures based on numerous factors, including fleet age, service center condition, viability of IT systems, anticipated liquidity levels, economic conditions, new or expanded services, regulatory actions and availability of financing.


36



The table below summarizes our actual net capital expenditures (proceeds) by type of investment for the years ended December 31:

(in millions)
2015
 
2014
 
2013
Acquisition of property and equipment
 
 
 
 
 
Revenue equipment
$
49.8

 
$
27.4

 
$
48.0

Land and structures
11.1

 
6.0

 
5.1

Technology
36.5

 
18.3

 
10.3

Other
10.6

 
17.5

 
3.5

Total capital expenditures
108.0

 
69.2

 
66.9

Proceeds from disposal of property and equipment
 
 
 
 
 
Revenue equipment
(7.1
)
 
(2.0
)
 
(4.1
)
Land and structures
(7.7
)
 
(18.0
)
 
(5.7
)
Other
(2.7
)
 
(0.8
)
 

Total proceeds
(17.5
)
 
(20.8
)
 
(9.8
)
Total net capital expenditures
$
90.5

 
$
48.4

 
$
57.1


Our capital expenditures for the years ended December 31, 2015 and 2014 were $108.0 million and $69.2 million, respectively. These amounts were principally used to fund the purchase of used tractors and trailers, to refurbish engines for our revenue fleet and for capitalized costs for our improvements to our service center facilities and technology infrastructure.

Additionally, for the year ended December 31, 2015, we entered into new operating lease commitments for revenue equipment totaling $130.9 million, with such payments to be made over the average lease term of 4 years. The capital value of this revenue equipment, which excludes our recurring leases for sleeper units, totals $131.7 million. As of December 31, 2015, our operating lease obligations for 2016 are $80.0 million. As of December 31, 2015, our operating lease obligations through 2025 totaled $269.0 million and are expected to increase as we lease additional revenue equipment in future years.

Contractual Obligations and Other Commercial Commitments

The following sections provide aggregated information regarding our contractual obligations and commercial commitments as of December 31, 2015.

Non-Union Pension Obligations

We provide defined benefit pension plans for certain employees not covered by collective bargaining agreements. The Yellow Transportation and Roadway qualified plans cover approximately 10,000 employees including those currently receiving benefits and those who have left the company with deferred benefits. On January 1, 2004, the existing qualified benefit plans were closed to new participants. On July 1, 2008, the benefit accrual for participants was frozen.
In 2015, we adopted the legislative changes provided by the Bipartisan Budget Act of 2015 (“BBA 2015”) which was signed into law on November 2, 2015. This legislation extends the use of longer-term, stabilized interest rate assumptions for measuring pension obligations under the minimum funding requirements. We expect to make the plan contributions as required by BBA 2015 and other regulations.
During 2015, our pension expense was $46.6 million. This amount includes a $28.7 million expense recognition of settlements from lump sum payouts during the year. Our cash contributions were $70.9 million. Using our current plan assumptions, which include an assumed 7.0% return on assets and a discount rate of 4.81%, we expect to record expense of $13.2 million for the year ended December 31, 2016. We expect our cash contributions for our non-union sponsored pension plans for the next five years to be as follows:

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(in millions)
Expected Cash Contributions
2016
$
45.3

2017
64.9

2018
51.5

2019
32.4

2020
26.8


Our investment strategy for our pension assets and our related pension contribution funding obligation includes an active interest rate hedging program designed to mitigate the impact of changes in interest rates on each plan’s funded position. If the pension discount rate falls, our investment strategy is designed to significantly mitigate such interest rate risk to each pension plan’s funded status and our contribution funding obligation. Conversely, if the pension discount rate rises, some portion of the beneficial impact of a rising discount rate on the pension liability will be forgone. The investment program is dynamic and the hedging program is designed to adapt to market conditions.
If future actual asset returns fall short of the 7.0% assumption by 1.0% per year, total cash contributions would be $12.7 million higher over the next five years. If future actual asset returns exceed the 7.0% assumption by 1.0% per year, total cash contributions would be $13.0 million lower over the next five years.
If future interest rates decrease 100 basis points from January 1, 2016 levels, total cash contributions would be $34.1 million lower over the next five years. This reflects our liability hedging strategy and the impact of BBA 2015 legislation. The liability hedging strategy results in additional asset returns from decreases in interest rates. However, BBA 2015 limits the increase in liabilities from lower interest rates such that the net effect is lower contributions. If interest rates increase 100 basis points from January 1, 2016 levels, total cash contributions would be $34.6 million higher over the next five years.

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Contractual Cash Obligations

The following table reflects our cash outflows that we are contractually obligated to make as of December 31, 2015:
 
Payments Due by Period
 
 
 
(in millions)
Less than 1 year
 
1-3 years
 
3-5 years
 
After 5 years
 
Total
 
ABL Facility(a)
$
9.1

 
$
18.0

 
$
3.3

 
$

 
$
30.4

 
Term Loan(b)
58.0

 
123.5

 
676.1

 

 
857.6

 
Lease financing obligations(c)
42.1

 
85.8

 
30.7

 
26.2

 
184.8

 
Pension deferral obligations(d)
8.6

 
17.2

 
126.4

 

 
152.2

 
Workers’ compensation and property damage and liability claims obligations(e)
110.7

 
131.1

 
57.9

 
100.7

 
400.4

 
Operating leases(f)
80.0

 
120.0

 
43.3

 
25.7

 
269.0

 
Other contractual obligations(g)
18.3

 
0.6

 
0.3

 

 
19.2

 
Capital expenditure obligations(h)
21.2

 
3.2

 

 

 
24.4

 
Total contractual obligations(i)
$
348.0

 
$
499.4

 
$
938.0

 
$
152.6

 
$
1,938.0

 
 
(a)
The ABL Facility includes future payments for the letter of credit fees and unused line fees and are not included on the Company’s consolidated balance sheets.
(b)
The Term Loan includes principal and interest payments, but excludes the unamortized discounts.
(c)
The lease financing obligations include interest payments of $127.7 million and principal payments of $57.1 million. The remaining principal obligation is offset by the estimated book value of leased property at the expiration date of each lease agreement.
(d)
Pension deferral obligations includes principal and interest payments on the Second Amended and Restated Contribution Deferral Agreement (the “Second A&R CDA”).
(e)
The workers’ compensation and property damage and liability claims obligations represent our estimate of future payments for these obligations, not all of which are contractually required.
(f)
Operating leases represent future payments, which include interest, under contractual lease arrangements primarily for revenue equipment and are not included on the Company’s consolidated balance sheets.
(g)
Other contractual obligations includes future service agreements and certain maintenance agreements and are not included on the Company’s consolidated balance sheets.
(h)
Capital expenditure obligations primarily includes noncancelable purchase orders for revenue equipment scheduled for delivery in 2016 and are not included on the Company’s consolidated balance sheets.
(i)
Total liabilities for uncertain tax positions as of December 31, 2015 were $7.6 million and are classified on the Company’s consolidated balance sheets within “Claims and Other Liabilities” and are excluded from the table above.

Other Commercial Commitments

The following table reflects other commercial commitments or potential cash outflows that may result from a contingent event, such as a need to borrow short-term funds due to insufficient cash flow.
 
 
Amount of Commitment Expiration Per Period
 
 
(in millions)
Less than 1 year
 
1-3 years
 
3-5 years
 
After 5 years
 
Total
Unused line of credit
 
 
 
 
 
 
 
 
 
ABL Facility(a)
$

 
$

 
$
79.7

(b) 
$

 
$
79.7

Letters of credit(c)

 

 
362.0

 

 
362.0

Surety bonds(d)
111.9

 
4.7

 
0.1

 

 
116.7

Total commercial commitments
$
111.9

 
$
4.7

 
$
441.8

 
$


$
558.4

 
(a)
At December 31, 2015, we held $122.2 million in restricted escrow, which represents cash collateral for our outstanding letters of credit on our ABL Facility.
(b)
As of December 31, 2015, Managed Accessibility on the ABL Facility was $35.5 million, which represents maximum availability of $79.7 million less the lower of 10% of the borrowing base or collateral line cap.
(c)
Letters of credit outstanding are generally required as collateral to support self-insurance programs and do not represent additional liabilities as the underlying self-insurance accruals are already included in our consolidated balance sheets.
(d)
Surety bonds are generally required for workers’ compensation to support self-insurance programs, which include certain bonds that do not have an expiration date but are redeemable on demand, and do not represent additional liabilities as the underlying self-insurance accruals are already included in our consolidated balance sheets.




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Critical Accounting Policies

Preparation of our financial statements requires accounting policies that involve significant estimates and judgments regarding the amounts included in the financial statements and disclosed in the accompanying notes to the financial statements. We continually review the appropriateness of our accounting policies and the accuracy of our estimates including discussion with the Audit/Ethics Committee of our Board of Directors who make recommendations to management regarding these policies. Even with a thorough process, estimates must be adjusted based on changing circumstances and new information. Management has identified the policies described below as requiring significant judgment and having a potential material impact to our financial statements.

Revenue Recognition and Revenue-related Reserves

We consider our policies regarding revenue-related reserves as critical based on their significance in evaluating our financial performance. We have an extensive system that allows us to accurately capture, record and control all relevant information necessary to effectively manage our revenue reserves.

YRC Freight and Regional Transportation recognize revenue on a gross basis because they are the primary obligors even when other transportation service providers are used who act on their behalf. YRC Freight and Regional Transportation remain responsible to their customers for complete and proper shipment, including the risk of physical loss or damage of the goods and cargo claims issues. Management believes these policies most accurately reflect revenue as earned. Our revenue-related reserves involve three primary estimates: shipments in transit, rerate reserves and uncollectible accounts.

Shipments in Transit

We assign pricing to bills of lading at the time of shipment based primarily on the weight, general classification of the product, the shipping destination and individual customer discounts. This process is referred to as rating. For shipments in transit, YRC Freight and Regional Transportation record revenue based on the percentage of service completed as of the period end and accrue delivery costs as incurred. The percentage of service completed for each shipment is based on how far along in the shipment cycle each shipment is in relation to standard transit days. Standard transit days are defined as our published service days between origin zip code and destination zip code. Based on historical cost and engineering studies, certain percentages of revenue are determined to be earned during each stage of the shipment cycle, such as initial pick up, long distance transportation, intermediate transfer and customer delivery. Using standard transit times, we analyze each shipment in transit at a particular period end to determine what stage the shipment is in. We apply that stage’s percentage of revenue earned factor to the rated revenue for that shipment to determine the revenue dollars earned by that shipment in the current period. The total revenue earned is accumulated for all shipments in transit at a particular period end and recorded as operating revenue. Management believes this provides a reasonable estimation of the portion of in transit revenue actually earned. At December 31, 2015 and 2014, our financial statements included deferred revenue as a reduction to “Accounts Receivable” of $24.0 million and $27.1 million, respectively.

Rerate Reserves

At various points throughout our customer invoicing process, incorrect ratings (i.e. prices) could be identified based on many factors, including weight verifications or updated customer discounts. Although the majority of rerating occurs in the same month as the original rating, a portion occurs during the following periods. We accrue a reserve for rerating primarily based on historical trends. At December 31, 2015 and 2014, our financial statements included a rerate reserve as a reduction to “Accounts Receivable” of $8.1 million and $12.2 million, respectively.
Uncollectible Accounts

We record an allowance for doubtful accounts primarily based on historical uncollectible amounts. We also take into account known factors surrounding specific customers and overall collection trends. Our process involves performing ongoing credit evaluations of customers, including the market in which they operate and the overall economic conditions. We continually review historical trends and make adjustments to the allowance for doubtful accounts as appropriate. Our allowance for doubtful accounts totaled $7.4 million and $10.0 million as of December 31, 2015 and 2014, respectively.

Claims and Self-Insurance

We are self-insured up to certain limits for workers’ compensation, property damage and liability claims, and cargo loss and damage. We measure the liabilities associated with workers’ compensation and property damage and liability claims primarily through actuarial methods performed by an independent third party. Actuarial methods include estimates for the undiscounted

40



liability for claims reported, for claims incurred but not reported and for certain future administrative costs. These estimates are based on historical loss experience and judgments about the present and expected levels of costs per claim and the time required to settle claims. The effect of future inflation for costs is considered in the actuarial analysis. Actual claims may vary from these estimates due to a number of factors, including but not limited to, accident frequency and severity, claims management, changes in healthcare costs and overall economic conditions. We discount the actuarial calculations of claims liabilities for each calendar year to present value based on the average U.S. Treasury rate, during the calendar year of occurrence, for maturities that match the initial expected payout of the liabilities. As of December 31, 2015 and 2014, we had $392.7 million and $406.6 million accrued for claims and insurance, respectively.

Pension

Effective July 1, 2008, we froze our qualified and nonqualified defined benefit pension plans for all participating employees not covered by collective bargaining agreements. Given the frozen status of the plans, the key estimates in determining pension cost are return on plan assets and discount rate, each of which are discussed below.

Return on Plan Assets

The assumption for expected return on plan assets represents a long-term assumption of our portfolio performance that can impact our pension expense. With $867.1 million of plan assets for the YRC Worldwide funded pension plans, a 100-basis-point decrease in the assumption for expected rate of return on assets would increase annual pension expense by approximately $8.2 million and would have no effect on the underfunded pension liability reflected on the balance sheet at December 31, 2015.
We believe our 2016 expected rate of return of 7.00% is appropriate based on our investment portfolio as well as a review of other objective indices. Although plan investments are subject to short-term market volatility, we believe they are well diversified and closely managed. Our asset allocation as of December 31, 2015 and 2014, and targeted long-term asset allocation for the plans are as follows:
 
2015
2014
Target
Equities
37.0
%
37.0
%
37.0
%
Debt Securities
30.0
%
35.0
%
33.0
%
Absolute Return
33.0
%
28.0
%
30.0
%
Based on various market factors, we selected an expected rate of return on assets of 7.0% effective for the 2015 and 2014 valuations. We will continue to review our expected long-term rate of return on an annual basis and revise appropriately.
Discount Rate

The discount rate refers to the interest rate used to discount the estimated future benefit payments to their present value, also referred to as the benefit obligation. The discount rate allows us to estimate what it would cost to settle the pension obligations as of the measurement date, December 31, and impacts the following year’s pension cost. We determine the discount rate by selecting a portfolio of high quality non-callable bonds with interest payments and maturities generally consistent with our expected benefit payments.
Changes in the discount rate can significantly impact our net pension liability. However, the liability hedging strategy mitigates this impact with additional asset returns. A 100-basis-point decrease in our discount rate would increase our underfunded pension liability by approximately $91.7 million. That same change would decrease our annual pension expense by approximately $6.0 million, driven by the return on assets. The discount rate can fluctuate considerably over periods depending on overall economic conditions that impact long-term corporate bond yields. At December 31, 2015 and 2014, we used a discount rate to determine benefit obligations of 4.81% and 4.33%, respectively.
Gains and Losses

Gains and losses occur due to changes in the amount of either the projected benefit obligation or plan assets from experience different than assumed and from changes in assumptions. We recognize an amortization of the net gain or loss as a component of net pension cost for a year if, as of the beginning of the year, that net gain or loss exceeds ten percent of the greater of the benefit obligation or the market-related value of plan assets. If an amortization is required, it equals the amount of net gain or loss that exceeds the ten percent corridor, amortized over the average remaining life expectancy of plan participants.

41



As of December 31, 2015, the pension plans have net losses of $406.0 million and a projected benefit obligation of $1,202.7 million. The average remaining life expectancy of plan participants is approximately 25 years. For 2016, we expect to amortize approximately $13.2 million of the net loss. The comparable amortization amounts for 2015 and 2014 were $16.0 million and $12.8 million, respectively.
At December 31, 2015, our plan assets included $319.1 million of Level 3 investments. Level 3 market values are based on inputs that are supported by little or no market activity and are significant to the fair value of the investment. These investments are subject to significant estimation to determine fair value which is used to determine components of our annual pension expense and the net liability. We engage a third party expert to assist us in setting these fair values.
Multi-Employer Pension Plans

YRC Freight, New Penn, Holland and Reddaway contribute to 32 separate multi-employer pension plans for employees that our collective bargaining agreements cover (approximately 78% of total YRC Worldwide employees). The pension plans provide defined benefits to retired participants.  

We do not directly manage multi-employer plans. Trustees, half of whom the respective union appoints and half of whom various contributing employers appoint, manage the trusts covering these plans.

Our collective bargaining agreements with the unions determine the amount of our contributions to these plans. We recognize as net pension expense the contractually required contribution for the respective period and recognize as a liability any contributions due and unpaid.

In 2006, the Pension Protection Act became law and modified both the Code, as it applies to multi-employer pension plans and the ERISA. The Code and ERISA (in each case, as so modified) and related regulations establish minimum funding requirements for multi-employer pension plans. The funding status of these plans is determined by many factors.

In 2014, the Multi-Employer Pension Reform Act (“MPRA”) became law which modified the ability to suspend accrued benefits of plans facing insolvency by adding a new zone status of Critical and Declining.

If any of our multi-employer pension plans fail to:

meet minimum funding requirements,
meet a required funding improvement or rehabilitation plan that the Pension Protection Act may require for certain of our underfunded plans,
obtain from the IRS certain changes to or a waiver of the requirements in how the applicable plan calculates its funding levels, or
reduce pension benefits to a level where the requirements are met,

we could be required to make additional contributions to our multi-employer pension plans.

If any of our multi-employer pension plans enters critical status or worse and our contributions are not sufficient to satisfy any rehabilitation plan schedule, the Pension Protection Act could require us to make additional surcharge contributions to the multi-employer pension plan in the amount of five to ten percent of the existing contributions required by our labor agreement for the remaining term of the labor agreement.

If we fail to make our required contributions to a multi-employer plan under a funding improvement or rehabilitation plan, it would expose us to penalties including potential withdrawal liability.  If the benchmarks that an applicable funding improvement or rehabilitation plan provides are not met by the end of a prescribed period, the IRS could impose an excise tax on us and the plan’s other contributing employers.  These excise taxes are not contributed to the deficient funds, but rather are deposited in the United States general treasury funds. The Company does not believe that the temporary cessation of certain of its contributions to applicable multi-employer pension funds from the third quarter of 2009 through May 2011 will give rise to these excise taxes as we believe these contributions were not required for that period.

Depending on the amount involved, a requirement to increase contributions beyond our contractually agreed rate or the imposition of an excise tax on us could have a material adverse impact on our business, financial condition, liquidity, and results of operations.


42



Funded Status of the Multi-Employer Pension Plans and Contingent Withdrawal Liabilities

The plan administrators and trustees of multi-employer pension plans do not routinely provide us with current information regarding the funded status of the plans. Much of our information regarding the funded status has been (i) obtained from public filings using publicly available plan asset values, which are often dated, and (ii) based on the limited information available from plan administrators or trustees, which has not been independently validated.

The Pension Protection Act provides that certain plans with a funded percentage of less than 65%, or that fail other tests, will be deemed to be in critical status. Plans in critical status must create a rehabilitation plan to exit critical status within periods that the Pension Protection Act prescribes. The MPRA created a new zone status of “Critical and Declining” for plans facing insolvency. Based on information obtained from public filings and from plan administrators and trustees, we believe many of the multi-employer pension plans in which we participate, including The Central States Southeast and Southwest Areas Pension Plan, Road Carriers Local 707 Pension Fund and Teamsters Local 641 Pension Fund, are in critical or critical and declining status.  If the funding of the multi-employer pension plans does not reach certain goals (including those required not to enter endangered, critical status or critical and declining or those required by a plan’s funding improvement or rehabilitation plan), our pension expenses could further increase.

Based on information obtained from public filings and from plan administrators and trustees, we believe our portion of the contingent liability in the case of a full withdrawal or termination from all of the multi-employer pension plans would be an estimated $10 billion on a pre-tax basis. Our applicable subsidiaries have no current intention of taking any action that would subject us to payment of material withdrawal obligations.

Property and Equipment and Definite Life Intangibles

Impairment Testing

We review property and equipment and definite life intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We evaluate recoverability of assets to be held and used by comparing the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell.

We believe that the accounting estimate related to asset impairment is a critical accounting estimate because: (1) it requires management to make assumptions about future revenues and expenses over the life of the asset, and (2) the impact that recognizing an impairment would have on our financial position, as well as our results of operations, could be material. Management’s assumptions about future revenues and expenses require significant judgment because actual revenues and expenses have fluctuated in the past and may continue to do so. In estimating future revenues and expenses, we use our internal business forecasts and recent performance. We develop our forecasts based on recent revenue and expense data for existing services and other industry and economic factors. To the extent that the Company is unable to achieve its forecast, it may incur significant impairment losses on property and equipment or intangible assets.

Depreciable Lives of Assets

We review the appropriateness of depreciable lives for each category of property and equipment. These studies utilize models, which take into account actual usage, physical wear and tear, and replacement history to calculate remaining life of our asset base. For revenue equipment, we consider the optimal life cycle usage of each type of equipment, including the ability to utilize the equipment in different parts of the fleet or at different operating units in the organization. Capital, engine replacement, refurbishment and maintenance costs are considered in determining total cost of ownership and related useful lives for purposes of depreciation recognition. We also make assumptions regarding future conditions in determining potential salvage values. These assumptions impact the amount of depreciation expense recognized in the period and any gain or loss once the asset is disposed.


43



Indefinite Life Intangibles

Intangible assets with indefinite lives, which consist of certain acquired tradenames, are not subject to amortization, but are subjected to an impairment test at least annually and as triggering events may occur. The impairment test for tradenames consists of a comparison of the fair value of the tradename with its carrying amount. An impairment loss is recognized for the amount by which the carrying amount exceeds the fair value of the asset. In making this assessment, we utilized the relief from royalty method, an income approach (a level 3 fair value measurement), which includes assumptions as to future revenue, applicable royalty rate and cost of capital, among others.

We believe that the accounting estimate related to indefinite life intangibles is a critical accounting estimate because (1) it requires our management to make assumptions about fair values, and (2) the impact of recognizing an impairment could be material to our financial position, as well as our results of operations. Management’s assumptions about fair values require considerable judgment because changes in broad economic factors and industry factors can result in variable and volatile fair values. Assumptions with respect to rates used to discount cash flows, a key input, are dependent upon interest rates and the cost of capital at a point in time. The carrying value of indefinite life intangibles was $26.9 million and $28.5 million at December 31, 2015 and 2014, respectively.

Accounting for Income Taxes

We use the asset and liability method to reflect income taxes on our financial statements. We recognize deferred tax assets and liabilities by applying enacted tax rates to the differences between the carrying value of existing assets and liabilities and their respective tax basis and to loss carryforwards. Tax credit carryforwards are recorded as deferred tax assets. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that the change occurs. We assess the validity of deferred tax assets and loss and tax credit carryforwards and provide valuation allowances when we determine, based on the weight of evidence, it is more likely than not that such assets, losses, or credits 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), unless affected by a specific intra-period allocation as happened in 2015 and 2013, as described below. In determining whether a valuation allowance is warranted, we evaluate factors such as prior years’ 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. We have not recognized deferred taxes relative to foreign subsidiaries’ earnings that are deemed to be permanently reinvested. Any related taxes associated with such earnings are not material.
 
YRC Worldwide applies the intraperiod tax allocation rules of ASC 740 to allocate income taxes among continuing operations, discontinued operations, extraordinary items, other comprehensive income (loss), and additional paid-in capital when our situation meets the criteria as prescribed in the rule.

While the tax effect of net income (loss) before income taxes generally should be computed without regard to the tax effects of net income (loss) before income taxes from the other categories referenced in the preceding paragraph, an exception applies when there is a loss before income taxes and income from those other categories. In that situation, the appropriate tax provision is allocated to the other categories of earnings and a related tax benefit is recorded in net income (loss). This exception to the general rule applies even when a valuation allowance is in place at the beginning and end of the year. While intraperiod tax allocation does not change the overall tax provision, it may result in a gross-up of the individual components, thereby changing the amount of tax provision included in each category. In 2015 and 2013, the Company met the criteria necessary to apply the exception within the intraperiod tax allocation rules, since it incurred a net loss before income taxes and income was recognized in other comprehensive income (loss). As a result, the Company recorded a tax benefit of $11.7 million and $41.7 million in income tax benefit (as reported on the Consolidated Statement of Operations) and an offsetting tax expense of $11.7 million and $41.7 million in total other comprehensive income (loss) for the years ended December 31, 2015 and 2013, respectively. The total income tax benefit did not change, and continues to be impacted by the full valuation allowance on our U.S. deferred tax assets.

44



Item 7A. Quantitative and Qualitative Disclosures About Market Risk

We have exposure to a variety of market risks, including the effects of interest rates, foreign exchange rates and fuel prices.

Interest Rates

To provide adequate funding through seasonal business cycles and minimize overall borrowing costs, we utilize both fixed rate and variable rate financial instruments with varying maturities. At December 31, 2015, we had approximately 37% of our outstanding debt at fixed rates. At the Company’s election, a significant portion of the remaining variable rate debt may operate at a 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. Based on a 3-month LIBOR, if interest rates for our variable rate long-term debt had increased 100 basis points during the year, our interest expense would have increased, and income before taxes would have decreased by $4.2 million and $1.8 million for the years ended December 31, 2015 and 2014, respectively.

The table below provides information regarding the interest rates on our fixed-rate debt as of December 31, 2015</