Day: September 14, 2024

A Delaware bankruptcy court provided some clarity late Friday regarding $6.5 billion in withdrawal liability claims against Yellow Corp. The total amount the bankrupt less-than-truckload company will actually pay, however, remains to be decided. The mere fact that the estate will have to make good on some portion of the claims sent Yellow’s stock spiraling.

Shares of Yellow (OTC: YELLQ) fell 90% on Friday to 50 cents per share as stockholders realized their bet that the company’s asset value would exceed amounts owed to creditors may not come to fruition.

MFN Partners, which acquired a more than 40% equity stake in Yellow in the day’s leading up to a bankruptcy filing last summer, is the largest holder. However, the Boston-based private equity firm provided the company with bankruptcy financing during its liquidation, the interest and fees from which have helped offset its equity exposure.

The U.S. Treasury holds a 30% stake in Yellow. The equity was issued as part of a collateral package for a $700 million Covid-relief loan it provided to the company in 2020.

Multiemployer pension plans (MEPPs) to which Yellow once contributed claim the carrier’s abrupt shutdown a year ago means it’s now on the hook for its allocable share of unfunded vested benefits. However, Yellow has said that the plans are fully funded now, following a 2021 pension fund bailout package (the American Rescue Plan Act). Yellow contends its exposure is a fraction of the amounts claimed, if anything.

The legislation provided pension insurer Pension Benefit Guaranty Corp. the authority to craft guidelines to make sure the money would only be used to cover plan benefits and costs, and not to allow employers to skirt withdrawal liability.

Pension Benefit Guaranty Corp. created two regulations. The first said special financial assistance awarded to the MEPPs wouldn’t be recognized as a plan asset until the money was actually received. The second mandated the recognition of the funds would be phased in over time even though they were distributed in a lump sum.

The organization said the goal was to keep other contributing employers from using the bailout as a way to exit the plans. Immediate recognition would mean the MEPPs are fully funded, removing any unfunded vested benefits and consequently an employer’s withdrawal liability. That could have created a mass exodus from the plans, PBGC claimed.

Judge Craig Goldblatt’s Friday opinion sided with both the MEPPs and to an extent Yellow.

He said PBGC acted within its authority when putting up the guardrails on the program and that the MEPPs didn’t have to recognize the payments as an asset until received, and that they could be phased in. The implication is that Yellow is now responsible for some form of withdrawal liability to 11 different MEPPs that received government funds.

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Central States Pension Fund holds nearly $5 billion in withdrawal liability claims against Yellow. It was awarded $35.8 billion in special financial assistance on Dec. 5, 2022, but didn’t receive the funds until Jan. 12, 2023, after its plan year ended. Yellow filed for bankruptcy on Aug. 6, 2023. The unfunded vested benefit calculation used plan year 2022 to determine the amount owed.

“The regulations implement Congress’s specific directive in the American Rescue Plan Act that special financial assistance be used only to pay plan benefits and costs,” Goldblatt said. “The regulations prevent such funds from instead being used, in effect, to reduce amounts that employers would otherwise be required to pay upon withdrawal from a plan.”

However, Goldblatt also entered a partial summary judgment in favor of Yellow, citing that the 20-year cap (established by the Employee Retirement Income Security Act) should be placed on the company’s total withdrawal exposure. Essentially, the court ruled that Yellow is responsible for 20 times its annual contribution amount per the statute. Past court filings from Yellow have estimated a total liability of roughly $1 billion when using the 20-year cap.

Yellow previously asserted discounting to present value should apply to the 20-year stream of payments. However, Goldblatt said its default on the contributions accelerates the amounts to “presently due and owing,” and no discounting is needed.

He also upheld an agreement inked between Yellow and Teamsters funds in New York and Western Pennsylvania. Yellow reentered those funds in 2013 under a deal in which it would contribute just 25% of the usual rate, but it would repay any withdrawal liabilities assuming a 100% contribution rate if it withdrew.

Goldblatt directed the parties to hash out the actual amounts due. He said the task may be “relatively easy to resolve” now that the court has ruled on the disputed legal questions.

Yellow still faces a much smaller pool of withdrawal liability claims from pensions that didn’t receive special financial assistance.

The 11 MEPPs party to the Friday opinion received more than $40 billion in assistance from the government.

More FreightWaves articles by Todd Maiden

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Big data software stock Palantir (NYSE: PLTR) is having a moment today. Revenue is accelerating, profitability has flipped to the positive — somewhat of a rarity for a software stock — and the artificial intelligence revolution appears to be reinvigorating demand in its platforms.

Founded in 2003, Palantir began assisting the U.S. military and intelligence agencies during the War on Terror. But the company appears to be making a transition to become more of a commercially focused company now. That’s good news for shareholders, as the commercial market is far bigger.

The commercial business has been kick-started

Last quarter, Palantir showed a marked acceleration in its commercial business. Commercial revenue was up 33% to $307 million, making up 45.3% of revenue. That’s gaining fast on the traditional government segment, which held its own with a fine 23% growth to $371 million. Both segments accelerated relative to last year, enabling the company to more than double its growth rate relative to the year-ago quarter, from 13% growth in Q2 2023 to 27% total growth in Q2 2024.

That’s a rather stunning pickup in the growth rate, which typically gets harder, not easier, as a company gets bigger. But under the hood, things look even rosier in the forward outlook for commercial revenue, especially the dynamic U.S. market.

In Q2, U.S. commercial revenue grew 55% but would have been up 70% if not for discounted initial low-revenue deployments with “strategic” customers. The overall U.S. commercial customer count was up 83% to 295 commercial customers, with total customers up 41% year over year. Finally, U.S. commercial remaining deal value (RDV), which totals all the remaining value of outstanding contracts, was up a whopping 103% relative to the prior year.

Of note, the U.S. now accounts for just over 50% of total commercial revenue.

Acceleration coinciding with the unveiling of the AI Palantir (AIP) platform

In his letter to shareholders, CEO Alex Karp included this graphic about customer adoption:

As you can see, there appears to be a big acceleration in customer adoption starting around one year ago — exactly when Palantir launched its AIP platform. AIP is Palantir’s artificial intelligence software that helps companies harness the power of large language models (LLMs) and employ them within real-world contexts for businesses to generate tangible outcomes. CEO Alex Karp said that AIP is disrupting or “deprecating” enterprises’ back-end application development processes, akin to the way cloud computing disrupted traditional enterprise tech infrastructure.

From the looks of the chart above, it appears Karp and Palantir are onto something with AIP. In his letter to shareholders, Karp highlighted the ability of AIP to harness the power of large language models toward actual business outcomes, saying that using LLMs without the full context of the business and AIP won’t work:

AIP is also leading to new vertical products

But the growth doesn’t stop there. Karp and his team also noted Palantir would be coming out with a new software platform called Warp Speed, built on top of AIP. Warp Speed will be a back-end platform specifically designed for modern industrial manufacturing businesses. “The American manufacturing operating system” is what Karp called it, built from Palantir’s past experience in the military and heavy industrial industries.

From the call with analysts, it appears Warp Speed will tie all the elements of manufacturing together, from the enterprise resource planning (ERP) system, to the Manufacturing Execution System (MES), to the Production Lifecycle Management system (PLM), to the Programmable Logic Controller (PLCs) for factory automation, to the workers on the factory floor.

With Warp Speed, Palantir is adapting AI for specific vertical industries in a way that has the potential to disrupt legacy enterprise software businesses — and those markets are quite large.

Peering into the decade ahead

The defense segment is still an important one for Palantir, and somewhat defines its corporate brand. However, it’s highly likely that the commercial segment will soon become its largest. Ten years out, it stands to dwarf the defense business, which is somewhat limited in its potential size.

Palantir made about $2.5 billion in revenue over the past 12 months, but is also profitable on a generally accepted accounting principles (GAAP) basis. Still, at 33 times sales, the stock is also extremely expensive.

But, given the much larger private sector relative to the U.S. and allied defense industries, Palantir’s accelerated commercial traction appears to have brightened its long-term growth prospects. If the commercial segment keeps growing as it is, Palantir could make a sizable dent in several enterprise software segments. For instance, in the context of Warp Speed, the ERP software market alone was $71 billion in 2023 but is projected to grow at a 14.4% rate through 2032, reaching $238 billion by that time, according to Fortune Business Insights.

Therefore, should Palantir stay on the cutting edge of AI-powered enterprise software with AIP, Warp Speed, and other future potential offerings, it may very well have a lot of runway in front of it, potentially justifying its current valuation.

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Builders FirstSource, Inc. (NYSE:BLDR) can “go higher,” Cramer said, “This is precisely the kind of stock you should be buying at this stage in the cycle. Hold on.”

On Aug. 6, Builders FirstSource reported second-quarter adjusted earnings per share of $3.50, beating the street view of $3.02. Quarterly sales of $4.456 billion missed the street view of $4.483 billion.

“Here’s the problem: it costs so much money to build the factories, they’re going to have to get a takeover to be able to do that,” Cramer said about Viking Therapeutics, Inc. (NASDAQ:VXTX) On July 24, Viking Therapeutics reported better-than-expected second-quarter EPS results.

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