"YRC Worldwide ... is the holding company for a portfolio of less-than-truckload (LTL) companies including YRC Freight, YRC Reimer, Holland, Reddaway, and New Penn. Collectively, YRC Worldwide companies have one of the largest, most comprehensive LTL networks in North America."
It's true: Comprising 14,700 owned and leased tractors, and some 45,800 trailers, the combined fleets of YRC Worldwide's (NASDAQ:YRCW) Freight and Regional Transportation divisions make this company a true transportation stalwart -- one of the biggest trucking companies in the nation.
But how long will that remain true?
The bull case for YRC
In an ideal world, YRC's huge size should bring with it revenue riches, enviable efficiencies of scale, and beaucoup profits. In reality, only one of these is true. With $5.1 billion in trailing revenues, the company is nearly as big as trucking rivals Old Dominion Freight and ArcBest Corporation combined. Yet YRC's minuscule operating profit margin (just 0.7%) is worse than either of these companies', and YRC ended 2014 in the red with an $86 million net loss.
Still, some investors see hope for the company. In a mostly positive article on YRC's "turnaround," CFO magazine praised YRC in February for engineering a return to "positive net income" in Q3 2014, "even if it was just $1.2 million and enabled by a $4.4 million net operating loss carryforward. In the fourth quarter net income climbed to $6.2 million, and full-year 2014 operating earnings surged."
CFO attributed this success to YRC's "big break" in early 2014, when the Teamsters union voted 66% to 34% in favor of a new contract extending wage cuts for YRC's truckers through 2019. That vote helped YRC to win favorable terms for refinancing its debt from lenders. It's helped YRC to slash its long-term debt 25% to "only" $800 million (plus another $278 million in capital leases, and $460 million in pension and other retirement obligations, according to S&P Capital IQ).
...and the bear case
That's the good news. Now here's the bad: For years, YRC has been struggling under a debt load requiring it to pay out more than $150 million in annual interest -- several times more than its annual operating earnings over the past three years. YRC's been saved by the bell, and by its workers' agreeing to take a pay cut, and by its lenders agreeing to more lenient terms. But the company has to act fast to take advantage of this breathing room to pay down its debt.
In theory, this should be possible. Free cash flow at YRC, which was negative $41 million last year, turned positive toward year-end. In fact, YRC generated enough cash in its last six months to give it an $80 million annual free cash flow run-rate (if all goes well). Applying this cash to paying down debt as quickly as possible could still save the company.
But if YRC doesn't act fast, well... even with its lighter debt load, YRC looks to be on the hook for about $110 million in annual interest payments. That's still more than it's earning in operating profit. Meanwhile, by all indications, YRC may be more interested in using its breathing room to add more debt rather than subtract it.
In 2013, YRC tried to buy rival ArcBest in a deal that (at today's valuations) holds the potential to add $1 billion to its debt. We haven't heard anything to confirm that YRC is still in the hunt for acquisitions -- but we haven't heard anything to suggest it isn't, either. And if YRC does do such a deal, it could easily wind up right back in the same debt trap that it squeezed out of last year.
Long story short, unless YRC changes its debt-loving ways, the future for YRC stock could still look like this:
Rich Smith does not own shares of, nor is he short, any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 304 out of more than 75,000 rated members.
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