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:

At March 31,September 30, 2019, approximately 78%79% of our labor force is subject to collective bargaining agreements, which predominantly expire on MayMarch 31, 2019.2024.

The accompanying Consolidated Financial Statements include the accounts of YRC Worldwide and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. We report on a calendar year basis. The quarters of the Regional Transportation companies (with the exception of New Penn) consist of thirteen weeks that end on a Saturday either before or after the end of March, June and September, whereas all other operating segment quarters end on the natural calendar quarter end. For ease of reference, the calendar quarter end dates are used herein.

We make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and notes. Actual results could differ from those estimates. We have prepared the Consolidated Financial Statements, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In our opinion, we have made all normal recurring adjustments necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods included in these financial statements. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted from these statements pursuant to SEC rules and regulations. Accordingly, the accompanying Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2018.

The Company elected the package of three practical expedients which allows entities to not reassess initial direct costs, lease classification for existing or expired leases, and lease definition for existing or expired contracts as of the effective date of January 1, 2019. Additionally, the Company did not elect the hindsight method practical expedient which would have allowed us to reassess lease terms and impairment. For leases with a term of twelve months or less, the Company has made an accounting policy election in which the right of use lease (“ROU”) asset and lease liability will not be recognized on the consolidated balance sheet. The Company does not separate lease and non-lease components for its revenue equipment and real property leases. The Company reassessed the accounting for debt financing obligations under the new standard and determined the historical accounting remained appropriate under the new standard.

The adoption of this standard impacted our consolidated balance sheet through the recognition of $378.8 million in ROU assets and liabilities as of January 1, 2019. Lease deposits in the amount of $25.4 million were reclassified from assets to a reduction of long-term ROU liabilities upon adoption of the new standard.

The new lease standard willdid not impact the calculation of the total maximum leverage ratio covenant, which isour financial covenants defined under the terms of our credit agreement.agreements.

 

Our principal sources of liquidity are cash and cash equivalents, available borrowings under our asset-based loan facility (the

“ABL Facility”) and any prospective net cash flow from operations. As of March 31,September 30, 2019, our maximum availability under our ABL Facility was $48.1$69.5 million. Our Managed Accessibility was $9.1$28.8 million, which represents the maximum amount we would access on the ABL Facility and is adjusted for eligible receivables plus eligible borrowing base cash measured at March 31,September 30, 2019.

For the December 31, 2018 borrowing base certificate, which was filed in January of 2019, we transferred $25.0 million of cash into restricted cash to maintain the 10% threshold, as permitted under the ABL Facility, which transfer effectively put our cash and cash equivalents and Managed Accessibility to $203.8 million.

The credit agreement (the “TermNew Term Loan Agreement”) governing our term loan facility (the “Term Loan”) has certainAgreement includes a financial covenants, that, among other things, restrict certain capital expenditures and require uscovenant requirement for the Company to comply withmaintain a maximum total leverage ratio covenant (defined as Consolidated Total Debt divided by Consolidatedminimum of $200.0 million trailing-twelve-month Adjusted EBITDA, as defined below).

We believe that our results of operations will be sufficient to allow us to comply with the covenantsminimum Adjusted EBITDA covenant in the New 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.months, subject to specific actions and cost savings initiatives we are taking in the fourth quarter of 2019 and the first quarter of 2020 to provide additional Adjusted EBITDA. These actions include headcount reductions commensurate with our current volume levels, a hiring freeze on new and replacement positions, temporary elimination of short-term incentive compensation and a reduction in discretionary spend. We are taking these actions because we have not been able to fully realize operational efficiencies arising from our new five-year national master contract (“New NMFA”) due to depressed volume levels. Our ability to satisfy our liquidity needs and meet future stepped-up covenants beyondour minimum Adjusted EBITDA requirement during the next twelve months and thereafter is dependent upon our ability to achieve operating results consistent with levels achieved during 2018. Maintaining results will depend on a number of factors includingthat reflect improvement over our abilityfirst half 2019, which were negatively impacted by the process to successfully implement the provisions of the newobtain our five-year labor agreement with our union employees. The union employees approved the National Master Freight Agreement and all but one supplemental agreement on May 3, 2019. In accordance with the IBT’s ratification procedures, the approved labor agreement will not take effect until the remaining issues pertaining to the one supplemental agreement are resolved. Once effective, the approved labor agreement is setscheduled to expire on March 31, 2024.2019 and successfully ratified on May 14, 2019. Significant adverse conditions, which may result from changes in global trade policies or increased contraction in the general economy, may impact our ability to achieve a minimum Adjusted EBITDA above $200.0 million on a trailing-twelve-month basis. Means for improving our profitability include accelerated

Fair Value Measurement

The book value and estimated fair values of our long-term debt, including current maturities and other financial instruments, are summarized as follows:

The fair valuesvalue of the New Term Loan andwas determined to be equivalent to the book value based on the closing date’s proximity to the balance sheet date. The fair values of the Second Amended and Restated Contribution Deferral Agreement (the “Second A&R CDA”) were estimated based on observable prices (level two inputs for fair value measurements). The fair value ofand the lease financing obligations isare estimated using a publicly-traded secured loan with similar characteristics (level three input for fair value measurement).

The Company determines if an arrangement is a lease or contains a lease at inception. We lease certain revenue equipment and real estate, predominantly through operating leases, and we have an immaterial amountnumber of leases in which we are a lessor. Operating lease rentalsleases are expensed on a straight-line basis over the life of the lease beginning on the lease commencement date. We determine if an arrangement is a lease at inception, and we determine the lease term by assuming the exercise of renewal options that are reasonably certain. The lease term is used to determine whether a lease is finance or operating and is used to calculate rent expense. Additionally, the depreciable life of leased assets and leasehold improvements is limited by the expected lease term. Operating lease balances are classified as operating lease right-of-use (“ROU”) assets and current and long-term operating lease liabilities on our consolidated balance sheet. We have an immaterial amount of finance leases that are included in property and equipment, other current liabilities, and other long-term liabilities on our consolidated balance sheet.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate adjusted for timeduration and other factors to represent the rate we would have to pay to borrow on a collateralized basis based on the information available at commencement date in determining the present value of lease payments. Our lease terms may include options to extend or terminate the lease and we will adjust the life of the lease when it is reasonably certain that we will exercise these options.

 

We have lease agreements with lease and non-lease components, which are generally accounted for as a single lease component. We have variable lease components, including lease payments with payment escalation based on the Consumer Price Index, and other variable items, such as common area maintenance and taxes.

Key assumptions include discount rate, the impact of purchase options and renewal options on our lease term, as well as the assessment of residual value guarantees.

Our revenue equipment leases generally have purchase options. However, in most circumstances we are not typically certain of exercising the purchase option as we may sign a new lease, return the equipment to the lessor, or exercise the option as circumstances dictate. Our revenue equipment leases often contain residual value guarantees, but they are not reflected in our lease liabilities

as our lease rates are such that residual value guarantees are not expected to be owed at the end of our leases. Wrecked units are expensed in full upon damage and paid out to the lessor.

Our real estate leases will often have an option to extend the lease, but we are typically not reasonably certain of exercising options to extend as we have the ability to move to more advantageous locations over time, relocate to other leased and owned locations, or discontinue service from particular locations over time as customer demand changes.

Qualified and Nonqualified Defined Benefit Pension Plans

Our effective tax rate for the three and nine months ended March 31,September 30, 2019 was 16.5%3.0% and 1.2%, respectively, compared to 46.9%61.8% and 44.9%, respectively for the three and nine months ended March 31,September 30, 2018. The significant items impacting the 2019 raterates include a benefit recognized due to application of the exception to the rules regarding intraperiod tax allocation, a provision for net state and foreign tax provision,taxes, certain permanent items and a change in the valuation allowance established for the net deferred tax asset balance projected for December 31, 2019. The significant items impacting the 2018 raterates include a provision for net state and foreign tax provision,taxes, foreign withholding taxes related to dividends from a foreign subsidiary, certain permanent items and a change in the valuation allowance established for the net deferred tax asset balance that had been projected for December 31, 2018. We recognize valuation allowances on deferred tax assets if, based on the weight of the evidence, we determine it is more likely than not such assets will not be realized. Changes in valuation allowances are included in our tax provision 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-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. At March 31,September 30, 2019 and December 31, 2018, substantially all of our net deferred tax assets were subject to a valuation allowance.

GivenWe calculate basic earnings (loss) per share by dividing our net loss position for eachearnings (loss) available to common shareholders by our weighted-average shares outstanding at the end of the period. The calculation for diluted earnings (loss) per share adjusts the weighted average shares outstanding for our dilutive unvested shares and stock units using the treasury stock method. Our calculations for basic and dilutive earnings (loss) per share for three and nine months ended March 31,September 30, 2019 and March 31, 2018 we do not report dilutive securities for these periods. are as follows:

At March 31,September 30, 2019 and 2018, our anti-dilutive unvested shares, options, and stock units were approximately 279,000319,000 and 45,000,54,000, respectively.

We report financial and descriptive information about our reporting segments on a basis consistent with that used internally for evaluating segment performance and allocating resources to segments. We evaluate segment performance primarily on external revenue, operating income (loss), and operating ratio.

We charge management fees and other corporate service fees to our reporting segments based on the benefits received or an overhead allocation basis. Shared support functions include information technology, legal, financial services, revenue management, and other company-wide services. Corporate represents residual operating expenses of the holding company that are not attributable to any segment and remain unallocated. It also represents certain items that are permitted to be included in Adjusted EBITDA. Corporate identifiable assets primarily consist of cash and cash equivalents, restricted amounts held in escrow, and information technology assets, which are offset by eliminations with the two business segments.

The following table summarizes our operations by business segment:

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements included elsewhere in this report. This report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). Forward-looking statements include those preceded by, followed by or characterized by words such as “will,” “expect,” “intend,” “anticipate,” “believe,” “could,” “should,” “may,” “project,” “forecast,” “propose,” “plan,” “designed,” “estimate,” “enable” and similar expressions which speak only as of the date the statement was made. Forward-looking statements are inherently uncertain, are based upon current beliefs, assumptions and expectations of Company management and current market conditions, and are subject to significant business, economic, competitive, regulatory and other risks, uncertainties and contingencies, known and unknown, many of which are beyond our control. Readers are cautioned not to place undue reliance on any forward-looking statements. Our future financial condition and results could differ materially from those predicted in such forward-looking statements because of a number of factors, including (without limitation):

MD&A includes the following sections:

Our consolidated results 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 third quarter and first quarterthree quarters of 2019 and 2018:

Total operating expenses decreased $4.8$29.4 million, or 0.4%2.3%, for the firstthird quarter of 2019 compared to the firstthird quarter of 2018, and consisted primarily of lower purchased transportation expense as well as lower fuel, operating expenses and supplies, partially offset by increased salaries, wages and employee benefits and purchased transportation, partially offset by increased impairment charges.benefits.

Our effective tax rate for the firstthird quarter of 2019 and 2018 was 16.5%3.0% and 46.9%61.8%, respectively. The significant items impacting the 2019 rate include a benefit recognized due to application of the exception to the rules regarding intraperiod tax allocation, a provision for a net state and foreign tax provision,taxes, certain permanent items and a change in the valuation allowance established for the net deferred tax asset balance projected for December 31, 2019. The significant items impacting the 2018 rate include a provision for net state and foreign tax provision,taxes, foreign withholding taxes related to dividendsa dividend from a foreign subsidiary, certain permanent items and a change in the valuation allowance established for the net deferred tax asset balance that had been projected for December 31, 2018. We recognize valuation allowances on deferred tax assets if, based on the weight of the evidence, we determine it is more likely than not that such assets will not be realized. Changes in valuation allowances are included in our tax provision 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-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. At March 31,September 30, 2019 and December 31, 2018, substantially all of our net deferred tax assets were subject to a valuation allowance.