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EX-32.2 - SECTION 906 CFO CERTIFICATION - YRC Worldwide Inc.yrcw-20161231xex322.htm
EX-32.1 - SECTION 906 CEO CERTIFICATION - YRC Worldwide Inc.yrcw-20161231xex321.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - YRC Worldwide Inc.yrcw-20161231xex312.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - YRC Worldwide Inc.yrcw-20161231xex311.htm
EX-23.1 - CONSENT OF KPMG, LLP - YRC Worldwide Inc.yrcw-20161231xex231.htm
EX-21.1 - SUBSIDIARIES OF THE COMPANY - YRC Worldwide Inc.yrcw-20161231xex211.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, 2016
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. ý

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, 2016, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $285.7 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 10, 2017
Common Stock, $0.01 par value per share
 
33,221,499 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
16
 
 
 
 
 


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Note on Forward-Looking Statements

This entire report, including (among other items) Item 1, “Business” and 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 “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 its operating subsidiaries, offers its customers a wide range of transportation services. We have one of the largest, most comprehensive less-than-truckload (“LTL”) networks in North America with local, regional, national and international capabilities. Through our team of experienced service professionals, we offer expertise in LTL shipments and flexible supply chain solutions, ensuring customers can ship industrial, commercial and retail goods with confidence. 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. (doing business as, and hereinafter referred to as, “YRC Freight”) and Reimer Express Lines Ltd. (“YRC Reimer”), a subsidiary located in Canada that specializes in shipments into, across and out of Canada. In addition to the United States and Canada, YRC Freight also serves parts of Mexico and Puerto Rico.
    
Regional Transportation is the reporting segment for our transportation service providers focused on business opportunities in the regional and next-day delivery markets. Regional Transportation is comprised of USF Holland LLC (“Holland”), New Penn Motor Express, LLC (“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, 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, 2016. 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 approximate 20,000 employees are dedicated to operating its extensive network which supports approximately 10.4 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 our distribution network. On December 31, 2016, YRC Freight’s revenue fleet was comprised of approximately 7,700 tractors, including approximately 6,200 owned tractors and 1,500 leased tractors, and approximately 31,000 trailers, including approximately 24,900 owned trailers and 6,100 leased trailers. The YRC Freight network includes 260 strategically located service facilities including 125 owned facilities with 8,217 doors and 135 leased facilities with 6,062 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.

Accelerated: a faster option to our Standard service that moves through YRC Freight’s faster network to increase our customers’ speed to market.

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.   

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%, 63% and 64% of our consolidated operating revenue in 2016, 2015 and 2014, respectively.

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Regional Transportation

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

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 12 western states spanning California, the Pacific Northwest, the Rocky Mountain States and the Southwest. Additionally, Reddaway provides services to Alaska, Hawaii and to the province of 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; truckload and a variety of other specialized offerings.

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

Interregional delivery: combining our best-in-class regional networks, 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, and Puerto Rico.

hollandregional.com, reddawayregional.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 10.3 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, 2016, the Regional Transportation network includes 127 service facilities including 62 owned facilities with 3,978 doors and 65 leased facilities with 2,886 doors. The Regional Transportation revenue fleet includes approximately 6,600 tractors including approximately 5,000 owned and 1,600 leased and approximately 13,500 trailers including approximately 10,800 owned and 2,700 leased.

The Regional Transportation companies accounted for 37%, 37% and 36% of our consolidated operating revenue in 2016, 2015 and 2014, 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, sales, 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

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(including intermodal providers); regional or interregional carriers; third party logistics providers; and small, intraregional transportation companies. The entire trucking industry also faces emerging competition from online crowd-sourcing technology firms that specialize in load-matching services.

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.

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 and may involve just one leg of a shipment’s movement between countries.
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.
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 shipping 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 completed purchases of asset-based LTL carriers, which might alter the competitive landscape in the future.
Several technology firms have introduced, or are in the process of introducing, load-matching technologies for heavyweight freight. Whereas these firms operate similar to a third party logistics firm, they allow any carrier to bid on specific shipment opportunities. Successfully winning a bid opportunity could be based on a truck’s proximity to the pick-up location, price, or other factors. Just as in the 3PL scenario, we view these as potential opportunities as well as a competitive risk.
Competitive cost of entry into the asset-based LTL sector on a small scale, within a limited service area, is relatively low (although more so 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 continue to make investments in scanning and measuring technologies. We have already

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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. Some regulatory changes could potentially 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, fuel efficiency, 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 are subject to hours of service regulations, all of which are subject to change. We are also subject to regulations to combat terrorism imposed by the U.S. Department of Homeland Security and other federal and state 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 251 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.
During 2016, we spent approximately $9.1 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 2017, we expect to spend approximately $9.2 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 former Yellow Transportation (now a part of YRC Freight) has been alleged to be 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, there is little, if any evidence that YRC Freight contributed to any contamination and these allegations are not believed to present material exposure. The former Roadway Express (now a part of YRC Freight) has been alleged to be a PRP for three locations: Ward Transformer, Raleigh, NC, Roosevelt Irrigation District, Phoenix, AZ and Berry's Creek, Carlstadt, NJ. There is scant evidence connecting YRC Freight with either the Ward Transformer site or to the Roosevelt Irrigation District’s contaminated groundwater wells and any potential exposure is believed to be immaterial. 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.


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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. None of YRC Worldwide’s operating companies have 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.

USF Red Star, a non-operating subsidiary, has been alleged to be a PRP at three locations: Booth Oil, N. Tonawanda, NY and two separate landfills in Byron, NY, and Moira, NY. Holland has been alleged to be 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:

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;
Other PRPs involved in the sites have substantial assets and may reasonably be expected to pay a larger share of the cost of remediation; and
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 customers’ 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, 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.

Business Risks

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, license and registration fees, insurance premiums, self-insurance levels, letters of credit required to support outstanding claims, and increasing equipment and operational costs, as well as the other factors discussed in these risk 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 and/or newer 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; and
As a union carrier, we may have a competitive disadvantage compared to non-union carriers with lower cost 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, 2016. 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.
We cannot 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, supplemented by 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

11



our ability to self-insure, our insurance costs could materially increase, and we may find it difficult to obtain adequate levels of insurance coverage. 
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 insurance coverage with respect to each of workers’ compensation, property damage and liability claims, and cargo claims is subject to policy limits. Although we believe our aggregate insurance policy 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, 2016 and 2015 were $100.6 million and $108.0 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 that have higher scores. Additionally, competition for drivers with favorable safety ratings may increase and thus result in increases in driver-related compensation costs.
Like many trucking companies, we compensate our drivers based primarily on piece-rate and activity-based formulas.  California 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

12



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 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 application of this legislation to the Company and its operations, which currently remains ambiguous, could increase our operating costs, including labor costs and legal exposure.

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. 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 continue to implement 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

13



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 and which use is limited under our Memorandum of Understanding (“MOU”) with the International Brotherhood of Teamsters. 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 ransom or other coordinated attacks that may cause service outages or other interruptions in our business and access to our data. 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. Our revenue from foreign sources totaled $101.0 million, $116.5 million, and $137.5 million in 2016, 2015 and 2014, respectively, and our long-lived assets located in foreign countries totaled $5.2 million, $6.5 million and $8.7 million at December 31, 2016, 2015, and 2014, 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;

14



compliance with the requirements of applicable anti-bribery laws, including the U.S. Foreign Corrupt Practices Act;
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.

We are dependent on the services of key employees and the loss of any substantial number of these individuals or an inability to hire additional personnel could adversely affect us.

Our success is dependent upon our ability to attract and retain skilled employees, particularly personnel with significant management and leadership skills. If we are unable to attract and retain skilled key employees, we may be unable to accomplish the objectives set forth in our business and strategic plans.

Seasonality and the impact of weather affect our operations and profitability.

As is common in the trucking industry, our revenues are subject to seasonal variations. During late fourth quarter and early first quarter each year, we expect operating expenses as a percent of revenue to increase and operating cash flows as a percent of revenue to decrease as compared to the rest of the year. The seasonal impact is primarily due to inclement weather, seasonally lower levels of shipments, and the seasonal timing of expenditures. We anticipate these seasonal trends will continue to impact our business and our results.

Changes in fuel prices and shortages of fuel can have a material adverse effect on the results of operations and profitability.
To lessen the effect of fluctuating fuel prices on our margins, we utilize a fuel surcharge program with our customers. These programs are common in the trucking industry and involve adjusting amounts charged to customers as fuel prices fluctuate. In the short term, under our present fuel surcharge program, rising fuel costs generally benefit us while falling fuel costs have a negative impact on our results of operations, though these effects are typically moderated over time. However, rapid material changes in the index upon which we base our program or on our cost of fuel could significantly impact our revenue and operating income, resulting in a material adverse effect on our financial condition.

In addition, fuel shortages and petroleum product rationing could have a material adverse impact on our operations and profitability.

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, 2016, we had $1,010.3 million in aggregate principal amount of outstanding indebtedness. We also have, and will continue to have, substantial lease obligations. As of December 31, 2016, our expected minimum cash payments under our operating leases for 2017 were $107.4 million and our operating lease obligations totaled $334.7 million, which are payable through 2030. We currently plan to procure a portion of our new revenue equipment using operating leases in 2017 and beyond. We expect our funding obligations in 2017 under our single-employer pension plans and the multi-employer pension funds will be approximately $143.0 million. Our indebtedness, lease obligations and pension funding obligations could continue to have an impact on our business.

For example, these obligations could:

increase our vulnerability to adverse changes or persistent slow growth in general economic, industry and competitive conditions;
require us to dedicate a portion of our cash flow from operations to make principal and interest 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

15



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. 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 lowering 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 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 or guarantee additional 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 pledged 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. We amended the agreement (“Term Loan Agreement”) for our $700 million term loan facility (“Term Loan”) in January 2017 to, among other things, adjust the total leverage ratio covenant. If going forward we are unsuccessful in meeting our stepped up financial covenants, we will need again 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

16



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
commentary about us or our stock price by the financial press and in online investor communities.

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.
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. In addition, shares of our Common Stock are reserved for issuance, exercise of outstanding stock options and vesting of outstanding share units. As of December 31, 2016, 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 1.4 million shares of Common Stock upon vesting, and an aggregate of approximately 2.1 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 generally can be freely sold in the public market upon issuance. 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 other obligations, such as lease and pension funding requirements, and to use for other corporate needs. Further, our credit facilities limit our ability to pay cash dividends.

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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.
Item 1B. Unresolved Staff Comments

Not applicable.

Item 2. Properties

At December 31, 2016, we operated a total of 387 transportation service facilities located in 50 states, Puerto Rico and Canada. Of this total, we own 187 and we lease 200, generally with lease terms ranging from one month to ten years with right of renewal options. The number of customer freight servicing doors totaled 21,143, of which 12,195 are at owned facilities and 8,948 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 2017. 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 2017.

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
62
YRC Worldwide: Chief Executive Officer (since July 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); Former Director: Dynamex Inc., Spirit AeroSystems Holdings Inc. (commercial airplane assemblies and components), Roadrunner Transportation (transportation and logistics services), and Erickson Air Crane, Inc. (heavy lift helicopter company).

 
 
 
Stephanie D. Fisher

40
Acting Chief Financial Officer (since January 2017) and 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).

 
 
 
James A. Fry
55
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).
 
 
 
Justin Hall
37
Chief Customer Officer of YRC Worldwide (since June 2016); President of Logistics Planning Services (transportation management and logistics software) (2006-2016).
 
 
 
Mark D. Boehmer
56
Vice President and Treasurer of YRC Worldwide (since July 2013); Vice President and Treasurer of Sealy Corporation (bedding manufacturer) (2003-2013).
 
 
 
Darren D. Hawkins
47
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
56
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
56
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
59
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 10, 2017, 347 stockholders of record held YRC Worldwide common stock. Trading activity averaged 706,869 shares per day during 2016, up from 636,524 per day in 2015. The NASDAQ Stock Market quotes prices for our common stock under the symbol “YRCW.”

Quarterly Financial Information (unaudited)
 
2016
(in millions, except per share and share data)
First
Quarter
  Second Quarter
Third
Quarter
Fourth
Quarter
Operating revenue
$
1,120.3

$
1,207.6

$
1,221.3

$
1,148.3

(Gains) losses on property disposals, net
(0.3
)
(11.1
)
0.2

(3.4
)
Operating income
13.4

57.2

38.8

14.9

Net income (loss)
(12.0
)
27.1

13.9

(7.5
)
Diluted income (loss) per share(a)
(0.37
)
0.83

0.42

(0.23
)
Market price of common stock per share:
 
 
 
 
 High
14.37

10.52

12.75

16.97

 Low
6.25

7.91

8.56

7.98

 
 
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


(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 2016, 2015 or 2014. The Term Loan Agreement 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 2016, 2015 or 2014. Our Term Loan Agreement limits our ability 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, 2011 and ending December 31, 2016.

stockchart2016a01.jpg


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)
 
2016
 
2015
 
2014
 
2013
 
2012
For the Year
 
 
 
 
 
 
 
 
 
 
Operating revenue
 
$
4,697.5

 
$
4,832.4

 
$
5,068.8

 
$
4,865.4

 
$
4,850.5

Operating income
 
124.3

 
93.0

 
45.5

 
28.4

 
24.1

Net income (loss)
 
21.5

 
0.7

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

 

 

 

 
3.9

Net income (loss) attributable to YRC Worldwide Inc.
 
21.5

 
0.7

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

 

 
(18.1
)
 

 

Net income (loss) attributable to common shareholders
 
21.5

 
0.7

 
(85.8
)
 
(83.6
)
 
(140.4
)
Acquisition of property and equipment
 
(100.6
)
 
(108.0
)
 
(69.2
)
 
(66.9
)
 
(66.4
)
Proceeds from disposal of property and equipment
 
35.1

 
17.5

 
20.8

 
9.8

 
50.4

Net cash provided by (used in) operating activities
 
103.1

 
140.8

 
28.5

 
12.1

 
(25.9
)
Net cash provided by (used in) investing activities
 
(67.7
)
 
(121.4
)
 
(41.6
)
 
(23.5
)
 
19.8

Net cash provided by (used in) financing activities
 
(72.5
)
 
(16.7
)
 
7.9

 
(21.0
)
 
14.3

 
 
 
 
 
 
 
 
 
 
 
At Year-End
 
 
 
 
 
 
 
 
 
 
Total assets (b)
 
$
1,770.0

 
$
1,879.4

 
$
1,965.1

 
$
2,046.4

 
$
2,211.1

Total debt (b)
 
997.1

 
1,062.4

 
1,090.0

 
1,344.9

 
1,361.0

Total shareholders’ deficit
 
(416.2
)
 
(379.4
)
 
(474.3
)
 
(597.4
)
 
(629.1
)
 
 
 
 
 
 
 
 
 
 
 
Per Share Measurements 
 
 
 
 
 
 
 
 
 
 
Basic per share data: 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
0.66

 
0.02

 
(3.00
)
 
(8.96
)
 
(19.20
)
Average common shares outstanding
 
32,416

 
31,736

 
28,592

 
9,332

 
7,311

Diluted per share data: 

 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
0.65

 
0.02

 
(3.00
)
 
(8.96
)
 
(19.20
)
Average common shares outstanding
 
33,040

 
32,592

 
28,592

 
9,332

 
7,311

 
 
 
 
 
 
 
 
 
 
 
Other Data
 
 
 
 
 
 
 
 
 
 
Number of employees
 
32,000

 
32,000

 
33,000

 
32,000

 
32,000

Operating ratio:(a)
 
 
 
 
 
 
 
 
 
 
  YRC Freight
 
98.2
%
 
99.4
%
 
100.0
%
 
101.0
%
 
101.2
%
  Regional Transportation
 
95.3
%
 
95.2
%
 
96.4
%
 
95.4
%
 
95.7
%
Consolidated
 
97.4
%
 
98.1
%
 
99.1
%
 
99.4
%
 
99.5
%

(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.
(b)
Due to the adoption of Accounting Standards Update (“ASU”) 2015-03, Interest - Imputation of Interest, “Total assets” and “Total debt” were updated to reflect the reclassification of unamortized debt issuance costs.


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, 2016, 2015 and 2014
Reporting Segment Results of Operations: an analysis of our results of operations for the years ended December 31, 2016, 2015 and 2014 for our two reporting segments: YRC Freight and Regional Transportation
Certain Non-GAAP Financial Measures: an analysis of our results using certain non-GAAP financial measures, for the years ended December 31, 2016, 2015 and 2014
Liquidity and Capital Resources: a discussion of our major sources and uses of cash as well as an analysis of our cash flows and aggregate contractual obligations and commercial commitments

Our Business
YRC Worldwide is a holding company that, through its operating subsidiaries, offers its customers a wide range of transportation services. YRC Worldwide has one of the largest, most comprehensive LTL networks in North America with local, regional, national and international capabilities. Through its team of experienced service professionals, YRC Worldwide offers industry-leading expertise in heavyweight shipments and flexible supply chain solutions, ensuring customers can ship industrial, commercial and retail goods with confidence.
We measure the performance of our business both on a consolidated and reporting segment basis and using several metrics, but rely primarily upon (without limitation) operating revenue, operating income (loss), and operating ratio. We also use certain non-GAAP financial measures as secondary measures to assess our operating performance.
Operating Revenue: Operating revenue has two primary components: volume (commonly evaluated using tonnage, tonnage per day, number of shipments, shipments per day or weight per shipment) and yield or price (commonly evaluated using picked up revenue, revenue per hundredweight or revenue per shipment). Yield includes fuel surcharge revenue which is common in the trucking industry and represents an amount charged to customers that adjusts with changing fuel prices. We base our fuel surcharges on the U.S. Department of Energy fuel index and adjust them weekly. Rapid material changes in the index or our cost of fuel can positively or negatively impact our revenue and operating income as a result of changes in our fuel surcharge. We believe that fuel surcharge is an accepted and important component of the overall pricing of our services to our customers. Without an industry accepted fuel surcharge program, our base pricing for our transportation services would require changes. We believe the distinction between base rates and fuel surcharge has blurred over time, and it is impractical to clearly separate all the different factors that influence the price that our customers are willing to pay. In general, under our present fuel surcharge program, we believe rising fuel costs are beneficial to us and falling fuel costs are detrimental to us in the short term, the effects of which are mitigated over time.

Operating Income (Loss): Operating income (loss) is operating revenue less operating expenses. Consolidated operating income (loss) includes certain corporate charges that are not allocated to our reporting segments.

Operating Ratio: Operating ratio is a common operating performance measure used in the trucking industry. It is calculated as (i) 100 percent (ii) minus the result of dividing operating income by operating revenue or (iii) plus the result of dividing operating loss by operating revenue, and is expressed as a percentage.

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


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

Our non-GAAP financial measures have the following limitations:

EBITDA does not reflect the interest expense or the cash requirements necessary to service interest or fund principal payments on our outstanding debt;
Adjusted EBITDA does not reflect the interest expense or the cash requirements necessary to fund restructuring professional fees, nonrecurring consulting fees, letter of credit fees, service interest or principal payments on our outstanding debt or fund our lump sum payments to our union employees required under the MOU;
Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements;
Equity based compensation is an element of our long-term incentive compensation package, although adjusted EBITDA excludes employee equity-based compensation expense when presenting our ongoing operating performance for a particular period; and
Other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

Because of these limitations, our non-GAAP measures should not be considered a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and use our non-GAAP measures as secondary measures.

Consolidated Results of Operations
Our consolidated results for 2016, 2015 and 2014 include the consolidated results of our reporting segments and unallocated corporate charges. A more detailed discussion of the operating results of our reporting segments is presented in the “Reporting Segment Results of Operations” section below.
The table below provides summary consolidated financial information for the three years ended December 31:
 
 
 
 
 
 
 
 
Percent Change
 
(in millions)
 
2016
 
2015
 
2014
 
2016 vs. 2015
 
2015 vs. 2014
 
Operating revenue
 
$
4,697.5

 
$
4,832.4

 
$
5,068.8

 
(2.8
)%
 
(4.7
)%
 
Operating income
 
124.3

 
93.0

 
45.5

 
33.7
 %
 
104.4
 %
 
Nonoperating expenses, net
 
99.7

 
97.4

 
129.3

 
2.4
 %
 
(24.7
)%
 
Net income (loss)
 
21.5

 
0.7

 
(67.7
)
 
NM

 
NM

(a) 
(a)
Not Meaningful

2016 Compared to 2015

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

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


24



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

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

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

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

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

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

Our effective tax rate for the years ended December 31, 2016 and 2015 was 12.6% and 115.9%, respectively. Significant items impacting the 2016 rate include a refund from a prior year amended return, a net state and foreign tax provision, certain permanent items, and a change in the valuation allowance established for the net deferred tax asset balance at December 31, 2016. We recognize valuation allowances on deferred tax assets if, based on the weight of the evidence, we believe that some or all of our deferred tax assets will not be realized. Changes in valuation allowances are included in our tax provision or in equity if directly related to other comprehensive income (loss) in the period of change. In determining whether a valuation allowance is warranted, we evaluate factors such as prior years’ earnings history, expected future earnings, loss carry-back and carry-forward periods, reversals of existing deferred tax liabilities and tax planning strategies that potentially enhance the likelihood of the realization of a deferred tax asset. Accordingly, as of December 31, 2016 and 2015, we have a full valuation allowance against our net deferred tax assets, exclusive of a deferred tax liability related to a foreign jurisdiction.

In July 2011, July 2013, and January 2014, we experienced significant changes in the ownership of our stock, as measured for Federal income tax purposes. These changes triggered the application of Section 382 of the Internal Revenue Code, as amended (the “Code”), which will likely have no substantial impact on the use of tax net operating loss carryovers (“NOLs”) generated through January 31, 2014 and prior to offset future taxable income. The deferred tax assets resulting from the existing NOLs for which a Section 382 change applies are already fully offset by a valuation allowance.

2015 Compared to 2014

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

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

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

25



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

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

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

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

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

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

Our effective tax rate for the years ended December 31, 2015 and 2014 was 115.9% and 19.2%, respectively. Significant items impacting the 2015 rate include a benefit recognized due to application of ASC 740, “Income Taxes” (“ASC 740”), rules regarding intra-period tax allocation, a state tax provision, a foreign tax provision, certain permanent items, a decrease in the reserve for uncertain tax positions and an increase in the valuation allowance established for the net deferred tax asset balance at December 31, 2015. Significant items impacting the 2014 rate include a state tax provision, a foreign tax provision, certain permanent items, a decrease in the reserve for uncertain tax positions and an increase in the valuation allowance established for the net deferred tax asset balance at December 31, 2014. We recognize valuation allowances on deferred tax assets if, based on the weight of the evidence, we believe that some or all of our deferred tax assets will not be realized. Changes in valuation allowances are included in our tax provision or in equity if directly related to other comprehensive income (loss) in the period of change. In determining whether a valuation allowance is warranted, we evaluate factors such as prior years’ earnings history, expected future earnings, loss carry-back and carry-forward periods, reversals of existing deferred tax liabilities and tax planning strategies that potentially enhance the likelihood of the realization of a deferred tax asset. Accordingly, as of December 31, 2015 and 2014, we have a full valuation allowance against our net deferred tax assets, exclusive of a deferred tax liability related to a foreign jurisdiction.

Reporting Segment Results of Operations

We evaluate our business using our two reporting segments:
YRC Freight is the reporting segment that focuses on longer haul business opportunities with national, regional and international services. YRC Freight provides for the movement of industrial, commercial and retail goods, primarily through centralized management. This reporting segment includes our LTL subsidiary YRC Freight and YRC Reimer, a subsidiary located in Canada that specializes in shipments into, across and out of Canada. In addition to the United States and Canada, YRC Freight also serves parts of Mexico and Puerto Rico.


26



Regional Transportation is the reporting segment for our transportation service providers focused on business opportunities in the regional and next-day delivery markets. Regional Transportation is comprised of Holland, New Penn and Reddaway. These companies each provide regional, next-day ground services in their respective regions through a network of facilities located across the United States, Canada, and Puerto Rico.

YRC Freight Results

YRC Freight represented 63%, 63% and 64% of our consolidated operating revenue in 2016, 2015 and 2014, respectively. The table below provides summary financial information for YRC Freight for the years ended December 31:
 
 
 
 
Percent Change
 
(in millions)
2016
 
2015
 
2014
 
2016 vs. 2015
 
2015 vs. 2014
 
Operating revenue
$
2,958.9

 
$
3,055.7

 
$
3,237.4

 
(3.2
)%
 
(5.6
)%
 
Operating income
53.2

 
18.0

 
0.5

 
195.6
 %
 
NM

(b) 
Operating ratio(a)
98.2
%
 
99.4
%
 
100.0
%
 
1.2pp
 
0.6pp
 
 
(a)
pp represents the change in percentage points
(b)
Not Meaningful

2016 Compared to 2015

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

 
2016
 
2015
 
Percent Change(b)
Workdays
252.5

 
251.5

 

 
 
 
 
 
 
Total picked up revenue (in millions)(a)
$
2,922.7

 
$
3,033.4

 
(3.7
)%
Total tonnage (in thousands)
6,221

 
6,396

 
(2.7
)%
Total tonnage per workday (in thousands)
24.64

 
25.43

 
(3.1
)%
Total shipments (in thousands)
10,368

 
10,651

 
(2.7
)%
Total shipments per workday (in thousands)
41.06

 
42.35

 
(3.0
)%
Total picked up revenue per hundred weight
$
23.49

 
$
23.71

 
(0.9
)%
Total picked up revenue per hundred weight (excluding fuel surcharge)
$
21.30

 
$
21.01

 
1.3
 %
Total picked up revenue per shipment
$
282

 
$
285

 
(1.0
)%
Total picked up revenue per shipment (excluding fuel surcharge)
$
256

 
$
252

 
1.3
 %
Total weight per shipment (in pounds)
1,200

 
1,201

 
(0.1
)%
 

(in millions)
2016
 
2015
(a)Reconciliation of operating revenue to total picked up revenue:
 
 
 
Operating revenue
$
2,958.9

 
$
3,055.7

Change in revenue deferral and other
(36.2
)
 
(22.3
)
Total picked up revenue
$
2,922.7

 
$
3,033.4

(a) Does not equal financial statement revenue due to revenue adjustments for shipments in transit and the impact of other revenue.
(b) Percent change based on unrounded figures and not rounded figures presented.
Operating income for YRC Freight was $53.2 million for the year ended December 31, 2016, an increase of $35.2 million from the same period in 2015, consisting of a $96.8 million decrease in revenue and a $132.0 million decrease in operating expenses. The decrease in operating expense consisted primarily of a reduction in salaries and wages expense, lower fuel costs and a decrease in purchased transportation.

27



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

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

 
2015
 
2014
 
Percent Change(b)
Workdays
251.5

 
252.0

 
 
 
 
 
 
 
 
Total picked up revenue (in millions)(a)
$
3,033.4

 
$
3,219.6

 
(5.8
)%
Total tonnage (in thousands)
6,396

 
6,807

 
(6.0
)%
Total tonnage per workday (in thousands)
25.43

 
27.01

 
(5.8
)%
Total shipments (in thousands)
10,651

 
11,502

 
(7.4
)%
Total shipments per workday (in thousands)
42.35

 
45.64

 
(7.2
)%
Total picked up revenue per hundred weight
$
23.71

 
$
23.65

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

 
$
19.80

 
6.1
 %
Total picked up revenue per shipment
$
285

 
$
280

 
1.7
 %
Total picked up revenue per shipment (excluding 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 adjustments for shipments in transit and the impact of other revenue.
(b) Percent change based on unrounded figures and not rounded figures presented.

28



Operating income for YRC Freight was $18.0 million for the year ended December 31, 2015, an increase of $17.5 million from the same period in 2014, consisting of a $181.7 million decrease in revenue and a $199.2 million decrease in operating expenses. The decrease in operating expense consisted primarily of a reduction in salaries and wages expense, lower fuel costs, and a decrease in purchased transportation.
Salaries, wages and employee benefits. Salaries, wages and employee benefits decreased $44.9 million, or 2.5%, primarily due to a $38.3 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 $16.9 million decrease in workers’ compensation expenses 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 included 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.
Operating expenses and supplies. Operating expenses and supplies decreased $128.7 million, or 18.6%, primarily due to a $131.6 million decrease in fuel expenses driven by lower fuel prices on a per gallon basis, as well as fewer miles driven. The decrease was also related to 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.
Purchased Transportation. Purchased transportation decreased $38.1 million, or 8.0%, 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 was principally related to lower fuel surcharges charged by our providers, combined with a reduction in shipment volumes in 2015, as compared to 2014. Offsetting this decrease, we incurred an increase of $12.0 million higher vehicle lease expense due to increased usage of operating leases for revenue equipment.
Gains/losses on property disposals. Net losses on disposals of property were $1.9 million in 2015 compared to net gains of $15.9 million in 2014.

Regional Transportation Results

Regional Transportation represented 37%, 37% and 36% of consolidated operating revenue in 2016, 2015 and 2014, respectively. The table below provides summary financial information for Regional Transportation for the years ended December 31:
 
 
 
 
Percent Change
(in millions)
2016
 
2015
 
2014
 
2016 vs. 2015
 
2015 vs. 2014
Operating revenue
$
1,739.3

 
$
1,776.9

 
$
1,831.4

 
(2.1
)%
 
(3.0
)%
Operating income
81.3

 
85.4

 
66.1

 
(4.8
)%
 
29.2
 %
Operating ratio(a)
95.3
%
 
95.2
%
 
96.4
%
 
(0.1)pp
 
1.2pp
 
(a)
pp represents the change in percentage points

2016 Compared to 2015

Regional Transportation reported operating revenue of $1,739.3 million for 2016, representing a decrease of $37.6 million, or 2.1%, from 2015. 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:


29



 
2016
 
2015
 
Percent Change(b)
Workdays
252.0

 
251.0

 
 
 
 
 
 
 
 
Total picked up revenue (in millions)(a)
$
1,740.7

 
$
1,776.5

 
(2.0
)%
Total tonnage (in thousands)
7,585

 
7,708

 
(1.6
)%
Total tonnage per workday (in thousands)
30.10

 
30.71

 
(2.0
)%
Total shipments (in thousands)
10,291

 
10,375

 
(0.8
)%
Total shipments per workday (in thousands)
40.84

 
41.33

 
(1.2
)%
Total picked up revenue per hundred weight
$
11.47

 
$
11.52

 
(0.4
)%
Total picked up revenue per hundred weight (excluding fuel surcharge)
$
10.42

 
$
10.26

 
1.6
 %
Total picked up revenue per shipment
$
169

 
$
171

 
(1.2
)%
Total picked up revenue per shipment (excluding fuel surcharge)
$
154

 
$
152

 
0.8
 %
Total weight per shipment (in pounds)
1,474

 
1,486

 
(0.8
)%
 

(in millions)
2016
 
2015
(a) Reconciliation of operating revenue to total picked up revenue:
 
 
 
Operating revenue
$
1,739.3

 
$
1,776.9

Change in revenue deferral and other
1.4

 
(0.4
)
Total picked up revenue
$
1,740.7

 
$
1,776.5

(a) Does not equal financial statement revenue due to revenue adjustments for shipments in transit.
(b) Percent change based on unrounded figures and not rounded figures presented.


Operating income for Regional Transportation was $81.3 million for the year ended December 31, 2016, a decrease of $4.1 million from the same period in 2015, which consisted of a $37.6 million decrease in revenue and a $33.5 million decrease in operating expenses. The decrease in operating expense consisted primarily of lower fuel costs and a reduction in liability claims expense.
Salaries, wages and employee benefits. Salaries, wages and employee benefits increased $5.4 million, or 0.5%, primarily due to an increase of $11.4 million in union and non-union employee benefit costs due to the increase in contractual rate increases and higher usage, respectively, offset by a net decrease of $4.6 million in salaries and wages. The decrease in salaries and wages is principally related to a Regional Transportation segment profit sharing bonus that was paid to eligible union employees in 2015, with no similar bonus paid in 2016, offset by an overall increase in annual wage rates.
Operating expenses and supplies. Operating expenses and supplies decreased $30.8 million, or 8.8%, primarily due to a $26.1 million decrease in fuel expenses driven by lower fuel prices on a per gallon basis, as well as fewer miles driven.
Purchased Transportation. Purchased transportation increased $9.8 million, or 8.0%, primarily due to a $13.6 million increase in vehicle rent expense resulting from higher usage of leased revenue equipment. This was offset by a decrease of $3.2 million in local purchased transportation.
Other operating expenses. Other operating expenses decreased $17.5 million, or 16.3%, primarily due to a decrease of $15.5 million in our liability claims expense due to favorable development on our prior year outstanding claims in 2016, as compared to 2015.

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:


30



 
2015
 
2014
 
Percent Change(b)
Workdays
251.0

 
252.0

 
 
 
 
 
 
 
 
Total picked up revenue (in millions)(a)
$
1,776.5

 
$
1,833.0

 
(3.1
)%
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 picked up revenue per hundred weight
$
11.52

 
$
11.59

 
(0.6
)%
Total picked up revenue per hundred weight (excluding fuel surcharge)
$
10.26

 
$
9.80

 
4.7
 %
Total picked up revenue per shipment
$
171

 
$
171

 
0.4
 %
Total picked up revenue/shipment (excluding fuel surcharge)
$
152

 
$
144

 
5.7
 %
Total weight per shipment (in pounds)
1,486

 
1,472

 
0.9
 %
 

(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
(0.4
)
 
1.6

Total picked up revenue
$
1,776.5

 
$
1,833.0

(a) Does not equal financial statement revenue due to revenue adjustments for shipments in transit.
(b) Percent change based on unrounded figures and not rounded figures presented.

Operating income for Regional Transportation was $85.4 million for the year ended December 31, 2015, an increase of $19.3 million from the same period in 2014, which consisted of a $54.5 million decrease in revenue and a $73.8 million decrease in operating expenses. The decrease in operating expense consisted primarily of lower fuel costs, offset by an increase in salaries, wages and employee benefits expense.
Salaries, wages and employee benefits. Salaries, wages and employee benefits increased $9.0 million, or 0.9%, primarily due to a $4.5 million increase in salaries and wages, principally related to a Regional transportation segment profit sharing bonus paid to eligible union employees, and an $8.9 million increase in employee benefits. The increase in salaries, wages and employee benefits was 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.
Operating expenses and supplies. Operating expenses and supplies decreased $91.9 million, or 20.8%, primarily due to a $97.2 million decrease in fuel expenses driven by lower fuel prices on a per gallon basis, as well as fewer miles driven.
Purchased Transportation. Purchased transportation increased $8.4 million, or 7.4%, primarily due to an $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 in 2015, when compared to 2014.
Gains/losses on property disposals. Net losses on disposals of property were $0.2 million in 2015 compared to $4.0 million in 2014.

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.
                                                                                                              

31



Consolidated Adjusted EBITDA

The reconciliation of net income (loss) to EBITDA and EBITDA to Adjusted EBITDA (defined in our Term Loan Agreement as “Consolidated EBITDA”) for the years ended December 31, 2016, 2015 and 2014. is as follows:
 
(in millions)
2016
 
2015
 
2014
Reconciliation of net income (loss) to Adjusted EBITDA:
 
 
 
 
 
Net income (loss)
$
21.5

 
$
0.7

 
$
(67.7
)
Interest expense, net
103.0

 
107.1

 
149.5

Income tax expense (benefit)
3.1

 
(5.1
)
 
(16.1
)
Depreciation and amortization
159.8

 
163.7

 
163.6

EBITDA
287.4

 
266.4

 
229.3

Adjustments for Term Loan Agreement:
 
 
 
 
 
(Gains) losses on property disposals, net
(14.6
)
 
1.9

 
(11.9
)
Letter of credit expense
7.7

 
8.8

 
12.1

Restructuring professional fees

 
0.2

 
4.2

Nonrecurring consulting fees

 
5.1

 

Permitted dispositions and other
3.0

 
0.4

 
1.8

Equity-based compensation expense
7.3

 
8.5

 
14.3

Amortization of ratification bonus
4.6

 
18.9

 
15.6

(Gain) loss on extinguishment of debt

 
0.6

 
(11.2
)
Non-union pension settlement charge

 
28.7

 

Other, net(a)
2.1

 
(6.2
)
 
(9.7
)
Adjusted EBITDA
$
297.5

 
$
333.3

 
$
244.5

(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.

Segment Adjusted EBITDA

The following represents Adjusted EBITDA by segment for the years ended December 31, 2016, 2015 and 2014:
 
(in millions)
2016
 
2015
 
2014
Adjusted EBITDA by segment:
 
 
 
 
 
YRC Freight
$
140.1

 
$
167.2

 
$
99.8

Regional Transportation
156.5

 
165.9

 
144.4

Corporate and other
0.9

 
0.2

 
0.3

Adjusted EBITDA
$
297.5

 
$
333.3

 
$
244.5



32



The reconciliation of operating income, by segment, to Adjusted EBITDA for the years ended December 31, 2016, 2015 and 2014 is as follows:

YRC Freight segment (in millions)
2016
 
2015
 
2014
Reconciliation of operating income to Adjusted EBITDA:
 
 
 
 
 
Operating income
$
53.2

 
$
18.0

 
$
0.5

Depreciation and amortization
90.3

 
93.1

 
98.0

(Gains) losses on property disposals, net
(15.7
)
 
1.9

 
(15.9
)
Letter of credit expense
5.0

 
6.1

 
8.3

Nonrecurring consulting fees

 
5.1

 

Amortization of ratification bonus
3.0

 
12.2

 
10.0

Non-union pension settlement charge

 
28.7

 

Other, net(a)
4.3

 
2.1

 
(1.1
)
Adjusted EBITDA
$
140.1

 
$
167.2

 
$
99.8

(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.
Regional Transportation segment (in millions)
2016
 
2015
 
2014
Reconciliation of operating income to Adjusted EBITDA:
 
 
 
 
 
Operating income
$
81.3

 
$
85.4

 
$
66.1

Depreciation and amortization
69.5

 
70.7

 
65.8

Losses on property disposals, net
1.1

 
0.2

 
4.0

Letter of credit expense
2.5

 
2.1

 
2.9

Amortization of ratification bonus
1.6

 
6.7

 
5.6

Other, net(a)
0.5

 
0.8

 

Adjusted EBITDA
$
156.5

 
$
165.9

 
$
144.4

(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)
2016
 
2015
 
2014
Reconciliation of operating loss to Adjusted EBITDA:
 
 
 
 
 
Operating loss
$
(10.2
)
 
$
(10.4
)
 
$
(21.1
)
Depreciation and amortization

 
(0.1
)
 
(0.2
)
Gains on property disposals, net

 
(0.2
)
 

Letter of credit expense
0.2

 
0.6

 
0.9

Restructuring professional fees

 
0.2

 
4.2

Permitted dispositions and other
3.0

 
0.4

 
1.8

Equity-based compensation expense
7.3

 
8.5

 
14.3

Other, net(a)
0.6

 
1.2

 
0.4

Adjusted EBITDA
$
0.9

 
$
0.2

 
$
0.3

(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 any prospective net cash flow from operations. As of December 31, 2016, our availability under our ABL Facility was $89.0 million, which is derived by reducing the amount that may be advanced against eligible receivables plus eligible borrowing base cash by certain reserves imposed by the ABL Agent and our $357.2 million of outstanding letters of credit. Of the $89.0 million in availability, we do not expect to access more than $44.4 million (“Managed Accessibility”) based on our springing fixed charge coverage ratio (as set forth in our ABL Facility). Our cash and cash equivalents and Managed Accessibility was $181.1 million as of December 31, 2016.


33



As of December 31, 2015, our availability under our ABL Facility was $79.7 million. Of the $79.7 million in availability, Managed Accessibility was $35.5 million. Our cash and cash equivalents and Managed Accessibility was $209.3 million as of December 31, 2015.

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, 2016, 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 on January 31, 2017, that, among other things, restrict certain capital expenditures and require us to comply with a maximum total leverage ratio covenant (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, 2016
3.50 to 1.00
March 31, 2018
3.50 to 1.00
March 31, 2017
3.85 to 1.00
June 30, 2018
3.50 to 1.00
June 30, 2017
3.85 to 1.00
September 30, 2018
3.25 to 1.00
September 30, 2017
3.75 to 1.00
December 31, 2018
3.25 to 1.00
December 31, 2017
3.50 to 1.00



Refer to our “Debt and Financing” footnote of our consolidated financial statements for a description of Consolidated Adjusted EBITDA, defined in our Term Loan Agreement as “Consolidated EBITDA.” Consolidated Total Debt, as defined in our Term Loan Agreement, is the principal amount of indebtedness outstanding. Our total leverage ratio for the four quarters ending December 31, 2016 was 3.40 to 1.00.

We believe that our results of operations will be sufficient to allow us to comply with the covenants in the Term Loan Agreement, fund our operations, increase working capital as necessary to support our planned revenue growth, and fund capital expenditures for at least the next twelve months. To maintain compliance with the maximum total leverage ratio over the tenor of the Term Loan and satisfy our liquidity needs, we would have to achieve operating results that reflect slight improvement over our 2016 results. Means for improving 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

Cash flow from operations decreased by $37.7 million to $103.1 million for the year ended December 31, 2016 compared to $140.8 million for the year ended December 31, 2015. The decrease in operating cash flows is primarily related to a $61.7 million decrease in cash flow from accounts receivable, offset by a $20.8 million year-over-year increase in net income.

Cash flow from operations increased by $112.3 million to $140.8 million for the year ended December 31, 2015 compared to $28.5 million for the year ended December 31, 2014. The favorable cash flow impact is largely related to a $68.4 million year-over-year improvement in net income (loss) and increased cash inflow from accounts receivable, which is attributed to improved management of days sales outstanding and lower revenue.

Investing Cash Flow

Investing cash flows used $67.7 million of cash in 2016 compared to $121.4 million in 2015, primarily due to an increase of $17.6 million in proceeds from the disposal of property and equipment resulting from significant property sales in 2016 and proceeds of $14.6 million related to the sale of JHJ. This was offset by an increase of $16.3 million in net amounts deposited into our

34



restricted escrow account. See a detailed discussion of 2016 and 2015 capital expenditures below in “Capital Expenditures” for further information.

Investing cash flows used $121.4 million in 2015 compared to $41.6 million of cash in 2014. In 2015, we made net deposits of $33.1 million in restricted escrow refunds, compared to net receipts of $1.6 million increase in 2014. Also, proceeds from the disposal of property and equipment increased by $3.3 million in 2015 as compared to 2014. See a detailed discussion of 2015 and 2014 capital expenditures below in “Capital Expenditures” for further information.

Financing Cash Flow

Net cash used in financing activities for 2016 was $72.5 million, which consists primarily of $70.7 million in repayments of our long-term debt, of which $40.5 million was in addition to regularly scheduled principal payments.

Net cash used in financing activities for 2015 was $16.7 million, which consists solely in 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 paid $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.

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.

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

(in millions)
2016
 
2015
 
2014
Acquisition of property and equipment
 
 
 
 
 
Revenue equipment
$
30.6

 
$
49.8

 
$
27.4

Land and structures
12.5

 
11.1

 
6.0

Technology
42.7

 
36.5

 
18.3

Other
14.8

 
10.6

 
17.5

Total capital expenditures
100.6

 
108.0

 
69.2

Proceeds from disposal of property and equipment
 
 
 
 
 
Revenue equipment
(2.5
)
 
(7.1
)
 
(2.0
)
Land and structures
(32.5
)
 
(7.7
)
 
(18.0
)
Technology
(0.1
)
 

 

Other

 
(2.7
)
 
(0.8
)
Total proceeds
(35.1
)
 
(17.5
)
 
(20.8
)
Total net capital expenditures
$
65.5

 
$
90.5

 
$
48.4


Our capital expenditures for revenue equipment were used primarily to fund the purchase of used tractors and trailers and to refurbish engines for our revenue fleet. The decrease in capital expenditures for revenue equipment for the year ended December 31, 2016, as compared to 2015, is due to our decision to increase our usage of leased revenue equipment. In 2016, the capital value equivalent of operating leases for revenue equipment totaled $152.5 million. Other capital expenditures in 2016 consisted primarily of in-cab safety technology. In 2014, other capital expenditures consisted primarily of new dimensioners, which are used to measure shipment size at our distribution centers.


35



For the year ended December 31, 2016, we entered into new operating lease commitments for revenue equipment totaling $126.4 million, with such payments to be made over the average lease term of 5 years. As of December 31, 2016, our operating lease obligations through 2030 totaled $334.7 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, 2016.

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 9,000 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 2016, our net pension expense was $19.9 million and our cash contributions were $56.5 million. Using our current plan assumptions, which include an assumed 7.0% return on assets and a discount rate of 4.27%, we expect to record expense of $13.2 million for the year ended December 31, 2017. We expect our cash contributions for our non-union sponsored pension plans for the next five years to be as follows:
(in millions)
Expected Cash Contributions
2017
$
53.9

2018
49.7

2019
35.8

2020
30.2

2021
27.0


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 $10.8 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 $11.0 million lower over the next five years.
If future interest rates decrease 100 basis points from January 1, 2017 levels, total cash contributions would be $35.3 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, 2017 levels, total cash contributions would be $38.6 million higher over the next five years.

36



Contractual Cash Obligations

The following table reflects our cash outflows that we are contractually obligated to make as of December 31, 2016:
 
 
 
Payments Due by Period
(in millions)
Total
 
Less than 1 year
 
1-3 years
 
3-5 years
 
After 5 years
ABL Facility(a)
$
16.9

 
$
7.1

 
$
9.8

 
$

 
$

Term Loan(b)
764.1

 
66.8

 
697.3

 

 

Lease financing obligations(c)
142.2

 
42.4

 
63.6

 
17.1

 
19.1

Pension deferral obligations(d)
124.7

 
7.6

 
117.1

 

 

Workers’ compensation and property damage and liability claims obligations(e)
372.3

 
105.5

 
117.1

 
52.0

 
97.7

Operating leases(f)
334.7

 
107.4

 
149.8

 
58.4

 
19.1

Other contractual obligations(g)
18.0

 
17.1

 
0.6

 
0.3

 

Capital expenditure obligations(h)
6.5

 
6.5

 

 

 

Total contractual obligations
$
1,779.4

 
$
360.4

 
$
1,155.3

 
$
127.8

 
$
135.9

 
(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, which has been updated to reflect the Term Loan Amendment on January 31, 2017, includes principal and interest payments, but excludes the unamortized discounts.
(c)
The lease financing obligations include interest payments of $95.1 million and principal payments of $47.1 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 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 statements of work for technology solutions and are not included on the Company’s consolidated balance sheets.

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)
Total
 
Less than 1 year
 
1-3 years
 
3-5 years
 
After 5 years
ABL Facility availability (a)
$
89.0

 
$

 
$
89.0

 
$

 
$

Letters of credit(b)
357.2

 

 
357.2

 

 

Surety bonds(c)
125.4

 
120.5

 
4.8

 
0.1

 

Total commercial commitments
$
571.6

 
$
120.5

 
$
451.0

 
$
0.1

 
$

 
(a)
Availability under the ABL Facility is derived by reducing the amount that may be advanced against eligible receivables plus eligible borrowing base cash by certain reserves imposed by the ABL Agent and our outstanding letters of credit. Managed Accessibility, as previously defined, was $44.4 million.
(b)
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.
(c)
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.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements other than operating leases, other contractual obligations for service agreements and capital purchases, letters of credit and surety bonds, which are reflected in the above tables.

37



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 and 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, 2016 and 2015, our financial statements included deferred revenue as a reduction to “Accounts Receivable” of $25.0 million and $24.0 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, 2016 and 2015, our financial statements included a rerate reserve as a reduction to “Accounts Receivable” of $10.4 million and $8.1 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 $9.5 million and $7.4 million as of December 31, 2016 and 2015, respectively.

Self-Insurance for Claims

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

38



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, 2016 and 2015, we had $364.4 million and $392.7 million accrued for outstanding claims, 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 $878.7 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 $8.4 million and would have no effect on the underfunded pension liability reflected on the balance sheet at December 31, 2016.
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, 2016 and 2015, and targeted long-term asset allocation for the plans are as follows:
 
2016
2015
Target
Equities
38.0
%
37.0
%
37.0
%
Debt Securities
30.0
%
30.0
%
33.0
%
Absolute Return
32.0
%
33.0
%
30.0
%
Based on various market factors, we selected an expected rate of return on assets of 7.0% effective for the 2016 and 2015 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, our 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 $75.3 million. That same change would decrease our annual pension expense by approximately $9.0 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, 2016 and 2015, we used a discount rate to determine benefit obligations of 4.27% and 4.81%, 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 being 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.

39



As of December 31, 2016, the pension plans have net losses of $462.1 million and a projected benefit obligation of $1,233.6 million. The average remaining life expectancy of plan participants is approximately 23 years. For 2017, we expect to amortize approximately $15.7 million of the net loss. The comparable amortization amounts for 2016 and 2015 were $13.7 million and $16.0 million, respectively.
At December 31, 2016, our plan assets included $496.3 million of investments that are measured at net asset value (“NAV”) per share (or its equivalent) using the practical expedient in accordance with the fair value measurement and $41.8 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 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 determining these fair values.
Multi-Employer Pension Plans

YRC Freight, Holland, Reddaway and New Penn, contribute to 32 separate multi-employer pension plans for employees covered by our collective bargaining agreements (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.


40



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, but not limited to, The Central States Southeast and Southwest Areas Pension Plan, Road Carriers Local 707 Pension Fund, New York State Teamsters Conference Pension and Retirement 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

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.

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, 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

41



of tax provision included in each category. In 2015, 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 in income tax benefit (as reported on the Consolidated Statement of Operations) and an offsetting tax expense of $11.7 million in total other comprehensive income (loss) for the year ended December 31, 2015. The total income tax benefit did not change, and the total provision continued to be impacted by the full valuation allowance on our U.S. deferred tax assets.


42



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, 2016, we had approximately 28% of our outstanding debt at fixed rates. As amended, 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 7.5%. 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 $7.0 million and $4.2 million for the years ended December 31, 2016 and 2015, respectively.

The table below provides information regarding the interest rates on our fixed-rate debt as of December 31, 2016.

(in millions)
2017

2018

2019

2020

2021

Thereafter

Total

Fixed-rate debt
$
10.1

$
11.8

$
16.4

$
4.2

$
3.2

$
234.0

$
279.7

Interest rate
9.0 - 18.3%

9.0 - 18.3%

7.3 - 18.3%

9.0 - 14.5%

9.0%

10 - 16.8%

 

Foreign Exchange Rates

Revenue, operating expenses, assets and liabilities of our Canadian and Mexican subsidiaries are denominated in local currencies, thereby creating exposure to fluctuations in exchange rates. The risks related to foreign currency exchange rates are not significant to our consolidated financial position or results of operations.

Fuel Prices

YRC Freight and Regional Transportation currently have fuel surcharge programs in place. These programs are well established within the industry and customer acceptance of fuel surcharges remains high. Since the amount of fuel surcharge is based on average, national diesel fuel prices and is reset weekly, our exposure to fuel price volatility is reduced. In general, under our present fuel surcharge program, we believe rising fuel prices are beneficial to us, and falling fuel prices are detrimental to us, in the short term, the effects of which are mitigated over time.


43



Item 8. Financial Statements and Supplementary Data

CONSOLIDATED BALANCE SHEETS
YRC Worldwide Inc. and Subsidiaries
(Amounts in millions except share and per share data) 
December 31,
2016
 
December 31,
2015
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
136.7

 
$
173.8

Restricted amounts held in escrow
126.7

 
58.8

Accounts receivable, less allowances of $9.5 and $7.4