‘New day’ coming at YRC as trucking companies grapple with COVID disruptions

By John D. Schulz · August 19, 2020

Major trucking companies reported uneven financial results as effects from the COVID-19 pandemic played havoc with freight volumes.

Then there was YRC Worldwide, whose four operating trucking company units control 10% of the $46 billion less-than-truckload (LTL) sector, and continued to lose money in the second quarter.

But those losses may soon be a thing of the past. YRC, citing its strategic position as a key carrier for the Defense Department, recently secured $700 million in financial aid from the federal government in exchange for a 30% stake in the company.

YRC lost $37.1 million in the second quarter on revenue of $1.015 billion, compared with a $23.6 million loss on $1.273 billion in the year-ago second quarter. Operating loss was $4.6 million, which included a $6 million net gain on property disposals. By comparison, operating revenue in the second quarter of 2019 was $1.273 billion and operating income was $14.3 million, which included a $6.2 million net gain on property disposals.

On July 7, YRC successfully secured a loan from the Treasury Department for up to $700 million under the CARES Act. The significant terms of the loan are:

Tranche A of up to $300 million to satisfy previously deferred short-term contractual obligations such as healthcare payments and some lease obligations with the remaining amount going to fund an increase in liquidity.

Tranche B of up to $400 million to reinvest back into the business via purchases of tractors and trailers. YRC says it intends to pay the government back.

“It is a new day at YRC Worldwide,” YRC CEO Darren Hawkins said in a statement. “During this pandemic and historically difficult economic backdrop, we were able to secure financing that not only took care of our employees’ healthcare coverage but also will allow us to significantly upgrade the condition, age and efficiency of our rolling stock.”

Hawkins said YRC was also able to gain additional covenant relief and maturity extension of other substantive debt instruments “simultaneously.”

But some are questioning YRC’s fitness for the loan. The Congressional Oversight Commission is looking into whether YRC is that essential. There’s no question YRC is well-connected in Washington. Its largest shareholder is Apollo Global Management, a private equity firm with close ties to Trump administration that also has lent money to Jared Kushner, son-in-law of President Donald Trump.

Operationally, YRC volumes declined year-over-year in the second quarter. However, after bottoming out in April, Hawkins said volumes have “steadily improved” through the quarter with rate of improvement slowing since late June.

“I would like to say the worst is behind us, but this virus and the spread thereof is too unpredictable,” Hawkins added.

To that end, YRC built liquidity which allowed it to improve its cash position and end the quarter at just over $300 million in liquidity, the company said. YRC has outstanding debt of $909.8 million, an increase of $44.8 million compared to $865 million as of June 30, 2019.

Operationally, YRC continued to erode with a consolidated operating ratio for the quarter of 100.5 compared to 98.9 in 2Q19. LTL revenue per hundredweight including fuel surcharge decreased 5.7%.

But weight per shipment increased 1.4% resulting in a LTL revenue per shipment decrease of 4.4% when compared to the same period in 2019. Excluding fuel surcharge, LTL revenue per hundredweight was down 2.6% and LTL revenue per shipment was down 1.2%. LTL tonnage per day decreased 14.8% when compared to 2Q19.

In other major trucking company earnings:

XPO Logistics, parent of the nation’s third-largest LTL company, said its second quarter results were impacted by the COVID-19 pandemic. It suffered a net loss of $132 million on revenue of $3.50 billion for the quarter, compared with $132 million net income on $4.24 billion for the same period in 2019.

XPO’s adjusted earnings before interest, taxes, depreciation and amortization (“adjusted EBITDA”) was $172 million for the second quarter 2020, compared with $455 million for the same period in 2019. XPO’s adjusted EBITDA for the second quarter 2020 excluded $50 million of restructuring costs, and $46 million of transaction and integration costs, primarily related to the company’s terminated review of strategic alternatives.

“The ramifications of COVID-19 dominated the second quarter,” CEO Bradley Jacobs said in a statement. “Nevertheless, we beat expectations on revenue, adjusted EBITDA and adjusted Earnings Per Share, and generated notably high cash flow from operations of $214 million and free cash flow of $121 million.”

Jacobs said business trends improved across its segments and geographies as the third quarter progressed, and continued in July.

“We’ve seen a recovery take hold in Europe and start in North America,” Jacobs said. “E-commerce continues to be our strongest tailwind, benefitting contract logistics and last mile.”

Jacobs said XPO’s last mile network in North America generated year-over-year revenue growth of 3% in the quarter, with a net revenue margin of 37%.

XPO’s second quarter operating ratio for LTL was 93.6% and the adjusted operating ratio was 90.1%, both of which include the impact of $20 million of COVID-related costs, the company said.

Jacobs said there were “two big factors” that led to the significant drop in OR at XPO’s LTL division: the drop in tonnage and “an intense focus on employee safety.”

XPO’s tonnage in April was down 24% from 2019. By July, he said, the decline was in unspecified single digits.

Old Dominion Freight Line, the nation’s second-largest LTL, continued to shine COVID or not, posting a yearly best 77.8 operating ratio even as revenue fell 15.5% and net profit dropped 15.1%.

ODFL earned $147.8 million on $896.2 million revenue in the second quarter, compared with $174.1 million earnings on $1.06 billion revenue in the 2019 second quarter.

Analysts noted that while industrial freight demand lags retail, LTL carriers with a more tightly focus on retail are likely to better in the short term.

“The second quarter of 2020 was one of the most difficult periods we have experienced, although our team responded quickly to efficiently manage our operations in this environment,” ODFL CEO Greg Gantt said in a statement. “Given the circumstances with the domestic economy, the decrease in our quarterly revenue was not entirely unexpected.”

ODFL’s decrease in revenue compared to the second quarter of 2019 was primarily due to a 12.1% decrease in LTL tons per day and a 3.8% decrease in LTL revenue per hundredweight, the company said. ODFL’s revenue per hundredweight was negatively affected by the significant decline in the average price of diesel fuel and the 5.3% increase in average weight per shipment, which generally has the effect of reducing revenue per hundredweight.

Excluding fuel surcharges, LTL revenue per hundredweight decreased 0.5% over the same period of the prior year, the company said.

On the truckload said, Knight-Swift, the nation’s largest TL carrier, posted net income of $80.2 million on a 14.6% drop in revenue of $106 billion, compared with year-ago earnings of $79.2 million on $1.24 billion revenue.

Knight-Swift said it was able to maintain earnings because of a diversified customer base of shippers, operational expertise and cost controls.

J.B. Hunt, the nation’s third-largest TL, posted a slight decline in earnings of $121.7 million on a 5% drop in revenue of $2.15 billion, compared with earnings of $133.6 million on $2.26 billion revenue in the year-ago quarter.

“While it’s still too early to call, at least we have some potential signs of inflection in the demand curve,” Hunt CEO John Roberts said in a conference call with investors. “Having said all that, we are cautious.”

August 17, 2020

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