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Speculation On YRC's Survival Ramps Up

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Speculation On YRC's Survival Ramps Up

One sell-side analyst has thrown in the towel on YRC Worldwide (NASDAQ: YRCW).

Following a mixed bag first quarter 2020, in which the carrier reported better-than-expected results, announced it was unlikely to meet future financial covenants and opted out of taking questions from analysts on its earnings call, Stifel Financial (NYSE: SF) equity research analyst David Ross has tapped out.

In a Tuesday report to clients, Ross announced that he has suspended his rating and estimates for the less-than-truckload (LTL) carrier.

"Due to uncertainty around the current liquidity situation and no ability to predict the outcome of YRC's requests for external relief, we are suspending our rating on the shares," stated Ross. He went on to state that he views the stock as a "trading vehicle and highly volatile," noting that it could see 50% or more swings in share price in the weeks and months to come.

The Overland Park, Kansas-based company ended the quarter with $880 million in debt, down approximately $23 million from the close of 2019, and available liquidity increased nearly $38 million to $118 million over the same period. The carrier would have met its adjusted last 12 months' (LTM) earnings before interest, taxes, depreciation and amortization (EBITDA) covenant requirement of $200 million had it not received a waiver on the requirement for all of 2020 from lenders previously.

YRC reported net income of $4.3 million in first quarter 2020, 12 cents per share on a diluted basis and well ahead of the consensus estimate of a 57-cent-per-share loss. The after-the-market-close quarterly report sent shares surging more than 40% in after-hours trading on Monday. Shares of YRCW closed the trading session up almost 15% on Tuesday.

That's about where the feel-good quarter ends.

The quarterly result included $39.3 million in net gains on property sales versus a $1.6 million loss on property disposals in the prior-year period. The gains more than saved the quarter and many don't view them as a recurring tailwind to profitability.

Further, the company said it was unlikely that it would meet the $200 million adjusted EBITDA threshold during the first quarter of 2021 and would likely seek another waiver. The recent waiver allowed the carrier to convert most of its cash interest payments for the first half of 2020 to noncash payable-in-kind.

On its earnings call with analysts, management said that they wouldn't be fielding questions from analysts due to a "tremendous amount of uncertainty surrounding COVID-19 and the rapidly changing environment."

Ross notes that the first quarter "wasn't too bad." Revenue declined 2.7% year-over-year to $1.15 billion as tonnage per day declined 3% and revenue per hundredweight excluding fuel was down 3.9%. This was partially offset by a 3.9% increase in weight per shipment and 2.5 more operating days in the first quarter 2020 period compared to the first quarter 2019. Operating ratio improved 510 basis points, inclusive of the gains, to 97.6%.

However, Ross said the first quarter is "in the rearview," pointing to a 23.9% year-over-year decline in LTL volumes for YRC during the month of April, significantly worse than competitors like Old Dominion Freight Line (NASDAQ: ODFL), ArcBest Corp. (NASDAQ: ARCB) and Saia Inc. (NASDAQ: SAIA) that recorded declines of 15.3%, 14% and 13%, respectively, during the month.

Also troubling are recent notices that the company has fallen behind on its commitments.

In a Friday letter to local unions with YRC members, the Central States Health and Welfare Fund noted that YRC was delinquent paying health contributions owed for the month of March and that the carrier advised them that it would be unable to make these payments in April and May. The fund estimates the three-month period will result in a nearly $75 million delinquency, in addition to the more than $48 million already owed by YRC to the pension fund from a prior debt restructuring.

Previously, YRC received a grace period for health and welfare and pension fund contributions to its union employees. The original grace period was for March contributions to be paid in April, but International Brotherhood of Teamsters management warned in a letter to the rank and file that additional extensions may be sought.

The company remains in perpetual turnaround mode, the latest referred to as a "multi-year enterprise transformation strategy," that includes asset utilization initiatives, migrating all of its separate operating units onto the same technology platform, reporting all five brands on a consolidated basis, favorable work rules following the 2019 labor contract implementation, shuttering terminals, closing New Penn's headquarters, debt restructuring, headcount reductions, a hiring freeze and suspension of short-term incentives.

Ross' thoughts on the transformation: "A main result of COVID-19, in our view, has been to act as an accelerant on trends (that may have been moving too slowly) — essentially pressing ‘fast forward' on life for both aging individuals and aging companies in poor health. YRC certainly fits into the ‘vulnerable population' category, as it has been lumbering around with multiple preexisting conditions that made it vulnerable to shocks for years now."

Ross sees the second quarter as "make or break" for the carrier and questions the company's survival.

"At this point, we believe it's dependent on two things: a) U.S. government assistance in the form of a grant to cover payroll, health care, and/or other expenses, and b) how quickly volume returns as the economy reopens this month. If we don't get any good news in the next 30 days, we would not be surprised to see a wind down of operations on or before July 4th weekend."

 

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