In the fast-paced world of logistics and transportation, one company's struggles can send ripples across entire supply chains. One such case is that of Yellow Corporation (Yellow), a company that faced significant challenges leading up to its recent bankruptcy. In this blog, we will dive into the intricacies of Yellow's situation and explore the four fundamentals of risk measured by RapidRatings that played a crucial role in its downfall.
Background: A Struggling Giant
Yellow handles pallet-sized shipments of freight, moving shipments for numerous customers in the same truck, a segment of the trucking industry known as less-than-truckload, or LTL. A prominent player in the LTL industry, Yellow recently found itself in a precarious situation as it grappled with a labor dispute and potential strike with the Teamsters, which represents Yellow’s 22,000 unionized workers. Although the strike was averted, the ordeal took its toll on the company's reputation and customer base. Just one year before, Yellow managed around 49,000 shipments per day. By 2023, shipments had plummeted to around 10,000 to 15,000 per day, highlighting the challenges they were facing.
Fundamental #1: What—and when—is the risk?
At the heart of every risk assessment is understanding what the risk is and when it emerges. On March 31, 2023, Yellow’s FHR® stood at 41 out of 100, placing the company squarely at the bottom of the medium-risk zone. An FHR of 41 serves as a clear warning sign to Yellow’s customers that potential disruptions were brewing within their supply chain.
Fundamental #2: How is the risk changing overtime?
A company's risk profile is not static; it evolves over time due to various internal and external factors. When examining Yellow’s FHR over the years, it's evident that the company's risk level has been in flux. Back in 2018, Yellow had an FHR of a 57, placing them in the low-to-medium risk zone. Since then, the truckload company experienced a consistent downward trend with occasional fluctuations. In the early days of the pandemic, Yellow had begun experiencing a bevy of issues, causing a substantial drop in their FHR followed by a modest recovery and subsequent declines.
This continuous negative trajectory in FHR since 2018 was a red flag for Yellow’s customers who were watching and assessing the risk, as they depend on reliable and stable transportation partners for their supply chains.
Fundamental #3: Why is the risk what it is?
Understanding the "why" behind a company's risk is crucial for effective risk management. On July 31, 2023, the day Yellow shut down operations, their Financial Dialogue Report highlighted three key areas of concern:
- Significant Levels of Debt: Yellow's staggering $1.5 billion debt accounted for almost 70% of its total assets, raising significant questions about the company's financial stability. A significant portion of this debt, almost $1.3 billion, was also coming due within the next 15 months.
- Low Profit Margins: Although the operating profit margin was a modest 3.5%, the net profit margin was a concerning (0.1%), indicating that the company's operations were barely generating any net profit.
- Decline in Sales: Yellow experienced a 1.9% decrease in sales over the last 12 months, signaling a potential inability to attract and retain customers.
Other financial indicators, such as the cash ratio and interest coverage, further demonstrated Yellow's deteriorating financial state. These alarming signs showed that with an FHR of 41, Yellow’s risk profile was a result of longtime underlying financial issues.
Fundamental #4: How does the risk compare to peers?
Benchmarking a company's risk against its peers provides valuable context. In the case of Yellow, their FHR has historically underperformed their peers in the General Freight Trucking in the United States. Yellow’s FHR of 41 on March 31, 2023 was 35 points below the industry average FHR of 76.
This becomes even more alarming when evaluated next to its most comparable peers, those in the LTL Sector. Yellow's FHR of 41 paled in comparison to the average FHR of 90 or higher for its sector peers.
Why was Yellow rated much more poorly than its peers? Profitability and debt are key reasons. As shown in the figures below, Yellow had significantly more debt on its balance sheet than other LTL companies, and much weaker profit margins. These comparisons highlight Yellow’s unique elevated risk position.
A Predictable Outcome
For supply chain managers who scrutinize risk from all angles, the writing was on the wall for Yellow. The four fundamentals of risk shown by RapidRatings' analysis left little room for doubt. Yellow’s bankruptcy was no shock for RapidRatings clients who had been closely monitoring Yellow’s FHR timeline, financial dialogue, and peer benchmark report and had seen the deterioration in financial health in real time.
Yellow’s downfall demonstrates the crucial role that risk management plays in supply chain success. By analyzing the four fundamentals of risk—what (and when) is the risk, how is the risk changing over time, why is the risk what it is, and how does the risk compare to peers—companies can avoid being caught off guard and take proactive measures to navigate turbulent relationships.
As today's risks continue to evolve, Yellow Corporation's story is a stark reminder that financial health is the ultimate indicator of major distress to come. One lesson stands true: companies that implement sound risk management and use financial health as a risk indicator will be stronger, and better protected.
