Union Agrees to More Pay Cuts to Save YRC $350 Million a Year

This story appears in the Oct. 4 print edition of Transport Topics.

YRC Worldwide Inc. and the Teamsters last week agreed on a third round of financial concessions that the less-than-truckload carrier said would save it $350 million annually.

YRC separately announced a reverse stock split and the upcoming retirement of CEO William Zollars. YRC said Zollars, 62, plans to retire when YRC’s “comprehensive recovery plan is complete,” sometime next year (see accompanying story).

The union and YRC said Sept. 29 their leaders agreed to extend a previous 15% pay cut for two more years, partially restore pension contributions next year and obtain a $300 million capital infusion from a new investor.

The tentative agreement is subject to ratification by union members, with voting results expected in late October.

Urging ratification, Tyson Johnson, director of the Teamsters’ National Freight Division, said the concessions were “difficult to accept,” but added “if this [contract] modification is rejected, there is no doubt this company will go out of business.” Johnson said the recession “continues to wreak havoc on the trucking industry and threatens our members’ jobs.”

On the financial side, YRC plans to issue one new share for each 25 shares outstanding, a move meant to allow continued trading of its stock on the Nasdaq market.

YRC and the union made two previous agreements, which members ratified. The first was a 10% pay cut in exchange for stock; the second reduced pay 5% more and halted YRC’s pension contributions until the end of 2010. Those agreements helped YRC to steady its finances and post an operational profit last quarter after losses totaling $2.2 billion during 2008 and 2009.

Referring to the newest deal, Mike Smid, chief operations officer of YRC Worldwide, said it “is an important step toward the completion of our comprehensive recovery plan. . . . Implementation of this tentative agreement will allow us to continue to provide our customers with a comprehensive portfolio of services that is competitive and reliable.”

Both YRC’s board and local union leaders approved the package on Sept. 29.

The changes include extending the National Master Freight agreement by two years, to expire in March 2015; pay increases of 40 cents an hour set to start in April will be subject to the 15% reduction.

Contract wages excluding the reduction now are about $23 an hour.

Twenty-five percent of pension contributions would be restored from June 1, 2011, until the contract ends and contributions could rise if financial targets, which weren’t disclosed, are met.

YRC estimated in August that its annual pension costs are at least $300 million a year. Once payments are resumed at 25% of the full rate, it could result in savings of at least $225 million in annual savings and payments of $75 million.

Health and welfare contributions will be increased 35 cents an hour. In addition, union members will be asked to relinquish a week of vacation.

On the financial side, the union would gain a requirement that YRC find $300 million in new equity by Dec. 31 and complete the plan by March 31. If the company fails to do that, the union can demand restoration of full pay and benefits, which also would happen if YRC goes bankrupt or is sold.

The Teamsters said they won the right to name a second board member in addition to the one they have currently on the nine-member body.

In addition, the parties agreed that lenders who agreed to forgo some interest and fees this year would have to take YRC stock instead of cash repayment.

Approximately two-thirds of union members approved the first round of cuts late in 2008. The approval rate sank below 60% for the second round last year.

“The vote may be difficult in an environment where some companies are giving back previously cut wages and others, such as Old Dominion Freight Line, have implemented wage increases,” said Dahlman Rose analyst Jason Seidl in an investor note. He also noted that Teamster employees of ABF Freight System rejected a pay cut earlier this year.

Seidl and Stifel Nicolaus analyst David Ross worried that issuing more equity would further dilute share prices and could drive away investors.

YRC’s market-based value now is about $385 million, based on the stock price of 32 cents a share when trading ended on Sept. 29 and 1.2 billion shares outstanding. By issuing one new share for each 25 outstanding, the total shares could fall to about 48 million, YRC said.

That change could bring the stock to around $8 a share based on the Sept. 29 closing price. Nasdaq has told the company that it risks delisting unless the price rises above $1 a share.