Why YRC Worldwide’s Operating Margin Slid in 2Q17
YRC Worldwide’s operating margin
In this part of the series, we’ll review YRC Worldwide’s (YRCW) operating margins in 2Q17. Its operating margin is operating profit expressed as a percentage of total revenues. The company’s revenues in the reported quarter rose 4.4%, whereas its operating expenses rose 5.2%. Operating expenses rose at a faster pace than revenues.
YRC Worldwide’s operating margin was 4.0% in 2Q17 compared to 4.7% in the second quarter last year. Let’s look now at the contraction of 70 basis points in its operating margins.
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Breakdown of operating expenses in 2Q17
In 2Q17, YRCW’s salaries, wages, and employee benefit expenses rose ~3.0% to $739.6 million, from $718.7 million in the same quarter last year. The contractual rate hikes and higher volumes led to the rise in employee benefit expenses.
Operating expenses and supplies rose $11.1 million, or 5.6%, in 2Q17. It was mainly due to a $7.2 million rise in fuel expenses. YRCW’s purchased transportation expenses rose 16.8% to $159.6 million. The high double-digit rise was due to a $7.8 million rise in rail purchased transportation resulting from higher rail miles and increased rail rates.
The company’s other operating expenses fell $3.5 million, or 5.1%, in 2Q17. A reduction in property damage and liability claims expenses of $6.3 million led to the fall in other operating expenses. YRC Freight’s operating income contracted slightly to $28.0 million in 2Q17. However, the Regional Transportation vertical recorded a 17.3% fall in the same quarter to $25.3 million.
Peer group operating margins
Less-than-truckload carriers (IYJ) will walk a tight rope balancing higher volumes and resulting cost escalations going forward. Let’s look at YRCW’s peers’ operating margins in 2Q17 versus 2Q16:
- Old Dominion Freight Lines (ODFL): 19.1% versus 16.2%
- FedEx (FDX): 10.0% versus 8.4%
- XPO Logistics (XPO): 5.0% versus 3.0%
- Saia (SAIA): 8.3% versus 6.5%
Recently, Moody’s (MCO) upgraded YRCW’s outlook from “stable” to “positive.” Next, let’s take a look at YRCW’s debt.