Will YRC's improving quarterly results persuade the previously un-persuadable?

Along with hell freezing over, the national debt being retired, and a write-in candidate winning today, add this to the list of improbable scenarios: David G. Ross may be changing his tune on YRC Worldwide Inc.

Ross, a Baltimore-based analyst who covers the trucking industry for investment firm Stifel, Nicolaus & Co., has been one of Wall Street's biggest bears on the Overland Park, Kan.-based less-than-truckload (LTL) carrier. And given YRC's myriad of difficulties over the past five or so years, Ross' extreme bearishness has been justified.

However, YRC on Friday reported its best quarterly results in several years. For the first time since 2008—excluding the second quarter of 2010 when it benefited from an $83 million noncash reduction in equity-based compensation expense—YRC reported positive operating income for both its YRC Regional subsidiary and its long-troubled YRC Freight long-haul unit, which is the amalgamation of the old Yellow Freight and Roadway Express.

YRC Regional, which is made up of regional carriers New Penn, Holland, and Reddaway, posted a 3-percent year-over-year gain in operating revenues. Yields rose as the unit posted a 2.9-percent increase in revenue per hundredweight and a 3.6-percent increase in revenue per shipment. Tonnage rose slightly while daily shipment volume fell slightly.

At YRC Freight, revenue per hundredweight rose 3.4 percent and revenue per shipment increased 3.2 percent from the 2011 quarter. Ross said in a research note that this is a sign the unit may be finally "getting tough" with large national accounts by shedding some of the traffic that the carrier has been losing money on for years.

YRC executives acknowledge that the unit has been top-heavy with big customers who tender large blocs of freight that the carrier hauls at either a loss or at very thin margins. Analysts have long worried that these customers have YRC Freight over a barrel because the carrier would effectively be history if their freight went elsewhere.

Ross said that "YRC Freight is finally making some progress" under YRC CEO James Welch, who took over in 2011, and Jeff Rogers, who ran the very successful Holland regional unit before being named to turn around YRC Freight. However, lest anyone think Ross is turning bullish, he cautioned that YRC Freight has "much farther to go if the segment is to be economically sustainable."

By contrast, Ross wrote that YRC Regional has attained "rock-star" status by turning in an operating ratio of 93 in the third quarter. Operating ratio is the ratio of expenses to revenues and is considered a key metric of a transportation company's operating efficiency. At a ratio of 93, YRC Regional spends 93 cents for every revenue dollar it takes in. That is the second-best LTL operating ratio behind Old Dominion Freight Line, considered the top company in the field.

MAJOR CHALLENGES STILL EXIST
Overall, however, YRC faces major challenges that could more than offset the success at YRC Regional or the nascent turnaround at YRC Freight. Ross wrote that YRC must spend large sums to modernize its aging fleet and must eventually deal with a looming $5 billion pension liability. In the note, the analyst said, "We do not know where the money will come from to pay for new equipment and pay its retirees."

Under terms of an agreement with the Teamsters Union, YRC is currently required to pay only one-fourth of its normal pension obligations into the plan. YRC's existing contract with the union doesn't expire until 2015.

As of the end of the third quarter, YRC had liquidity—defined as cash, cash equivalents, and availability of funds under a $400 million asset-based loan facility—of $237.6 million. That is down $11 million from second-quarter totals, the company said.

Jamie Pierson, YRC's CFO, said in a statement that the small decline in liquidity is a testament to the company's "effective working capital management."

According to Ross, the ideal scenario is for YRC to sell the regional unit or spin it off—free from any pension liabilities—to shareholders. Then it should shut down YRC Freight, sell off its assets, and use the proceeds to provide some sort of pension to workers who "are highly unlikely, in our view, to realize what they were promised."