Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Part I. Financial Information
Item 1: Financial Statements
VITRAN CORPORATION INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands of United States dollars except for per share amounts)
| | | Three months Ended June 30, 2008 | | | Three months Ended June 30, 2007 | | | Six months Ended June 30, 2008 | | | Six months Ended June 30, 2007 | |
| | | | | | | | | | | | | |
| Revenue | | $ | 195,990 | | | $ | 170,144 | | | $ | 373,497 | | | $ | 324,280 | |
| Operating expenses | | | 165,102 | | | | 140,780 | | | | 318,201 | | | | 269,236 | |
| Selling, general and administrative expenses | | | 17,769 | | | | 15,283 | | | | 34,690 | | | | 30,382 | |
| Other income | | | (134 | ) | | | (101 | ) | | | (133 | ) | | | (72 | ) |
| Depreciation and amortization expense | | | 5,205 | | | | 5,109 | | | | 10,765 | | | | 10,054 | |
| Total operating expenses | | | 187,942 | | | | 161,071 | | | | 363,523 | | | | 309,600 | |
Income from operations before undernoted | | | 8,048 | | | | 9,073 | | | | 9,974 | | | | 14,680 | |
| Interest expense, net | | | 2,122 | | | | 2,115 | | | | 4,252 | | | | 4,179 | |
| Income from operations before income taxes | | | 5,926 | | | | 6,958 | | | | 5,722 | | | | 10,501 | |
| Income taxes | | | 1,349 | | | | 1,425 | | | | 11 | | | | 1,581 | |
Net income | | $ | 4,577 | | | $ | 5,533 | | | $ | 5,711 | | | $ | 8,920 | |
| Income per share: | | | | | | | | | | | | | | | | |
Basic | | $ | 0.34 | | | $ | 0.41 | | | $ | 0.42 | | | $ | 0.66 | |
Diluted | | $ | 0.34 | | | $ | 0.41 | | | $ | 0.42 | | | $ | 0.65 | |
| | | | | | | | | | | | | | | | | |
| Weighted average number of shares: | | | | | | | | | | | | | | | | |
Basic | | | 13,483,159 | | | | 13,463,374 | | | | 13,474,258 | | | | 13,450,790 | |
Diluted | | | 13,630,974 | | | | 13,661,467 | | | | 13,621,759 | | | | 13,656,765 | |
| | | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements
VITRAN CORPORATION INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of United States dollars)
| | | June 30, 2008 | | | Dec. 31, 2007 | |
| | | (Unaudited) | | | (Audited) | |
| Assets | | | | | | |
| Current assets: | | | | | | |
Accounts receivable | | $ | 93,837 | | | $ | 74,261 | |
Inventory, deposits and prepaid expenses | | | 12,238 | | | | 11,325 | |
Income and other taxes recoverable | | | 1,237 | | | | 2,232 | |
Deferred income taxes | | | 3,205 | | | | 2,599 | |
| | | | 110,517 | | | | 90,417 | |
| Property and equipment | | | 166,881 | | | | 169,062 | |
| Intangible assets | | | 14,542 | | | | 13,645 | |
| Goodwill | | | 121,967 | | | | 124,375 | |
| | | $ | 413,907 | | | $ | 397,499 | |
| Liabilities and Shareholders’ Equity | | | | | | | | |
| Current liabilities: | | | | | | | | |
Bank overdraft | | $ | 3,677 | | | $ | 390 | |
Accounts payable and accrued liabilities | | | 76,457 | | | | 67,468 | |
Current portion of long-term debt | | | 16,755 | | | | 18,144 | |
| | | | 96,889 | | | | 86,002 | |
| Long-term debt | | | 109,858 | | | | 109,831 | |
| Other | | | 3,560 | | | | 3,512 | |
| Deferred income taxes | | | 8,058 | | | | 7,810 | |
| | | | | | | | | |
| Shareholders’ equity: | | | | | | | | |
Common shares, no par value, unlimited authorized, 13,483,159 and 13,448,159 issued and outstanding at June 30, 2008 and December 31, 2007 respectively | | | 77,424 | | | | 77,246 | |
Additional paid-in capital | | | 3,005 | | | | 2,436 | |
Retained earnings | | | 110,189 | | | | 104,478 | |
Accumulated other comprehensive income | | | 4,924 | | | | 6,184 | |
| | | | 195,542 | | | | 190,344 | |
| | | $ | 413,907 | | | $ | 397,499 | |
Contingent liabilities (note 10)
See accompanying notes to consolidated financial statements.
VITRAN CORPORATION INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
(In thousands of United States dollars, except share amounts)
| | | Common shares | | | | | | Retained | | | | | | | |
| | | Shares | | | Amount | | | | | | Earnings | | | | | | | |
December 31, 2007 | | | 13,448,159 | | | $ | 77,246 | | | $ | 2,436 | | | $ | 104,478 | | | $ | 6,184 | | | $ | 190,344 | |
| Shares issued upon exercise of employee stock options | | | 35,000 | | | | 178 | | | | - | | | | - | | | | - | | | | 178 | |
| Net income | | | - | | | | - | | | | - | | | | 5,711 | | | | - | | | | 5,711 | |
| Other comprehensive income (loss) | | | - | | | | - | | | | - | | | | - | | | | (1,260 | ) | | | (1,260 | ) |
| Share-based compensation | | | - | | | | - | | | | 569 | | | | - | | | | - | | | | 569 | |
| June 30, 2008 | | | 13,483,159 | | | $ | 77,424 | | | $ | 3,005 | | | $ | 110,189 | | | $ | 4,924 | | | $ | 195,542 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Common shares | | | Additional
Paid-in | | | Retained | | | Accumulated
other
comprehensive | | | Total
Shareholders’ | |
| | | Shares | | | Amount | | | | | | Earnings | | | | | | | |
December 31, 2006 | | | 13,419,859 | | | $ | 76,913 | | | $ | 1,607 | | | $ | 90,933 | | | $ | 3,844 | | | $ | 173,297 | |
| Shares issued upon exercise of employee stock options | | | 46,500 | | | | 255 | | | | (48 | ) | | | - | | | | - | | | | 207 | |
| Net income | | | - | | | | - | | | | - | | | | 8,920 | | | | - | | | | 8,920 | |
| Other comprehensive income | | | - | | | | - | | | | - | | | | - | | | | 1,722 | | | | 1,722 | |
| Share-based compensation | | | - | | | | - | | | | 459 | | | | - | | | | - | | | | 459 | |
| June 30, 2007 | | | 13,466,359 | | | $ | 77,168 | | | $ | 2,018 | | | $ | 99,853 | | | $ | 5,566 | | | $ | 184,605 | |
VITRAN CORPORATION INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands of United States dollars)
| | | Three months Ended June 30, 2008 | | | Three months Ended June 30, 2007 | | | Six months Ended June 30, 2008 | | | Six months Ended June 30, 2007 | |
| Cash provided by (used in): | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Operations: | | | | | | | | | | | | |
Net income | | $ | 4,577 | | | $ | 5,533 | | | $ | 5,711 | | | $ | 8,920 | |
Items not involving cash from operations | | | | | | | | | | | | | | | | |
Depreciation and amortization expense | | | 5,205 | | | | 5,109 | | | | 10,765 | | | | 10,054 | |
Deferred income taxes | | | 1,302 | | | | 1,628 | | | | 104 | | | | 2,595 | |
Share-based compensation expense | | | 292 | | | | 251 | | | | 569 | | | | 459 | |
Gain on sale of property and equipment | | | (134 | ) | | | (101 | ) | | | (133 | ) | | | (72 | ) |
Change in non-cash working capital components | | | (9,419 | ) | | | (2,066 | ) | | | (10,532 | ) | | | (5,763 | ) |
| | | | 1,823 | | | | 10,354 | | | | 6,484 | | | | 16,193 | |
| Investments: | | | | | | | | | | | | | | | | |
| Purchase of property and equipment | | | (2,040 | ) | | | (6,870 | ) | | | (9,148 | ) | | | (11,420 | ) |
| Proceeds on sale of property and equipment | | | 261 | | | | 167 | | | | 452 | | | | 238 | |
| Additional payment due to acquisition of subsidiary | | | - | | | | (6,383 | ) | | | - | | | | (6,921 | ) |
| | | | (1,779 | ) | | | (13,086 | ) | | | (8,696 | ) | | | (18,103 | ) |
| | | | | | | | | | | | | | | | | |
| Financing: | | | | | | | | | | | | | | | | |
| Change in revolving credit facility and bank overdraft | | | 4,703 | | | | 6,838 | | | | 11,328 | | | | 10,122 | |
| Repayment of long-term debt | | | (2,575 | ) | | | (2,255 | ) | | | (5,146 | ) | | | (4,510 | ) |
| Repayment of capital leases | | | (2,001 | ) | | | (1,674 | ) | | | (4,242 | ) | | | (3,314 | ) |
| Issue of common shares upon exercise of stock options | | | - | | | | 80 | | | | 178 | | | | 207 | |
| | | | 127 | | | | 2,989 | | | | 2,118 | | | | 2,505 | |
| Effect of translation adjustment on cash | | | (171 | ) | | | (753 | ) | | | 94 | | | | (1,002 | ) |
| Increase in cash and cash equivalents | | | - | | | | (496 | ) | | | - | | | | (407 | ) |
| Cash and cash equivalents, beginning of period | | | - | | | | 1,543 | | | | - | | | | 1,454 | |
| Cash and cash equivalents, end of period | | $ | - | | | $ | 1,047 | | | $ | - | | | $ | 1,047 | |
| | | | | | | | | | | | | | | | | |
| Change in non-cash working capital components: | | | | | | | | | | | | | | | | |
Accounts receivable | | $ | (11,905 | ) | | $ | (6,354 | ) | | $ | (19,576 | ) | | $ | (13,364 | ) |
Inventory, deposits and prepaid expenses | | | (512 | ) | | | 696 | | | | (913 | ) | | | 1,083 | |
Income and other taxes recoverable | | | (163 | ) | | | (1,301 | ) | | | 968 | | | | (3,898 | ) |
Accounts payable and accrued liabilities | | | 3,161 | | | | 4,893 | | | | 8,989 | | | | 10,416 | |
| | | $ | (9,419 | ) | | $ | (2,066 | ) | | $ | (10,532 | ) | | $ | (5,763 | ) |
| Supplemental disclosure of non-cash transactions cash flow information: | | | | | | | | | | | | |
Capital lease additions | | $ | - | | | $ | 3,740 | | | $ | - | | | $ | 3,740 | |
See accompanying notes to consolidated financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of United States dollars except for per share amounts)
1. Accounting Policies
The interim consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles. The Ontario Business Corporations Act (“OBCA”) regulations allow issuers that are required to file reports with the Securities and Exchange Commission in the United States to file financial statements under United States GAAP to meet their continuous disclosure obligations in Canada. The interim consolidated financial statements do not contain all the disclosures required by United States generally accepted accounting principles. The interim consolidated financial statements have been prepared in accordance with instructions to Quarterly Report on Form 10-Q. The interim consolidated financial statements should be read in conjunction with 2007 Annual Report on Form 10-K. The interim consolidated financial statements follow the same accounting principles and methods of application as the most recent annual consolidated financial statements.
These unaudited consolidated interim financial statements reflect all adjustments which are, in the opinion of management, necessary to a fair presentation of the results of the interim period presented. Operating results for the quarter and six-months ended June 30, 2008 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2008.
2. New Accounting Pronouncements
SFAS Statement 157, “Fair Value Measurements”, defines fair values, establishes a framework for measuring fair value in GAAP, and requires enhanced disclosures about fair value measurements. This statement applies when other accounting pronouncements require or permit fair value measurements. SFAS Statement 157 was adopted January 1, 2008 as described in note 11.
SFAS Statement 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of SFAS Statement 115” permits entities to choose to measure many financial instruments and certain warranty and insurance contracts at fair value on a contract-by-contract basis. SFAS Statement 159 was adopted January 1, 2008 as required by the statement. The requirements of SFAS Statement 159 did not have an effect on the Company’s consolidated financial statements.
SFAS Statement 161, “Disclosures about Derivative Instruments and Hedging Activities - - an amendment of FASB Statement No. 133”, required enhanced disclosures about the Company’s derivative and hedging activities. The Company will be required to provided enhanced disclosure about a) how and why an entity uses derivative instruments, b) how derivative instruments and related hedged items are accounted for under Statement 133 and c) how derivative instruments and related hedged items affect and entity’s financial position and cash flows. SFAS Statement 161 will be adopted January 1, 2009 as required by the statement.
3. Foreign Currency Translation
The United States dollar is the functional currency of the Company’s operations in the United States. The Canadian dollar is the functional currency of the Company’s Canadian operations. Each operation translates foreign currency denominated transactions into its functional currency using the rate of exchange in effect at the date of the transaction. Monetary assets and liabilities denominated in foreign currency are translated into the functional currency of the operation using the period-end rate of exchange giving rise to a gain or loss that is recognized in income during the current period.
For reporting purposes, the Canadian operations are translated into United States dollars using the current rate method. Under this method, all assets and liabilities are translated at the period-end rate of exchange and all revenue and expense items are translated at the average rate of exchange for the period. The resulting translation adjustment is recorded as a separate component of shareholders’ equity. United States dollar debt of $80.2 million is designated as a hedge of the investment in the United States dollar functional operations, such that related transaction gains and losses are recorded in the separate component of shareholders’ equity.
4. Acquisition
On November 30, 2007, the Company acquired 100 percent of the outstanding shares of Las Vegas/L.A. Express, Inc. ("LVLA"). The aggregate purchase consideration was approximately $8.45 million (including transaction costs). Approximately $4.35 million of additional cash consideration is contingent on LVLA meeting certain future financial metrics. All additional contingent consideration paid to the vendors will be allocated to goodwill. The total amount of goodwill will not be deductible for tax purposes.
The following table summarizes the final estimated fair value of the assets acquired and liabilities assumed at the date of acquisition.
| | | | |
| | $ | 4,146 | |
| | | 2,485 | |
Identifiable intangible assets: | | | | |
Covenants not-to-compete (5-year useful life) | | | 160 | |
Customer relationships (8-year useful life) | | | 2,000 | |
| | | 2,415 | |
| | | | 11,206 | |
| | | 2,611 | |
Deferred income tax liability | | | 92 | |
| | | 624 | |
| | | 1,285 | |
| | | 6,594 | |
5. Goodwill
| | | | | |
Balance at December 31, 2007 | | $ | 124,375 | |
Transfer of goodwill to identifiable intangible assets (note 4) | | | (2,160 | ) |
| | | (248 | ) |
| | $ | 121,967 | |
6. Long-term debt
On April 10, 2008, the Company amended its credit agreement in respect of certain financial maintenance tests. The amendment is effective March 31, 2008 to December 31, 2008. As at June 30, 2008, the Company is in compliance with these amended maintenance tests and management expects to be for the balance of 2008.
7. Stock Option Plan
Under the Company’s stock option plan, options to purchase Common Shares of the Company may be granted to key employees, officers and directors of the Company and its affiliates by the Board of Directors or by the Company’s Compensation Committee. There are 884,200 options outstanding under the plan. The term of each option is ten years and the vesting period is five years. The exercise price for options is the trading price of the Common Shares of the Company on the Toronto Stock Exchange on the day of the grant.
The fair value of each stock option granted was estimated using the Black-Scholes Morton fair value option-pricing model with the following assumptions:
| |
| | | 99,000 | |
| | | 3.93 | % |
| | | - | |
Volatility factor of the future expected market price of the Company’s common shares | | | 34.12 | % |
Expected life of the options | | | |
The weighted average estimated fair value at the date of grant for the options granted in 2008 was $5.27 per share.
8. Comprehensive income (loss)
The components of other comprehensive income (loss) such as changes in foreign currency adjustments are required to be added to the Company’s reported net income to arrive at comprehensive net income (loss). Other comprehensive income (loss) items have no impact on the reported net income as presented on the Consolidated Statements of Income.
The following are the components of other comprehensive income, net of income taxes for the three and six months ended June 30, 2008 and 2007:
| | | Three months Ended June 30, 2008 | | | Three months Ended June 30, 2007 | | | Six months Ended June 30, 2008 | | | Six months Ended June 30, 2007 | |
| Net income | | $ | 4,577 | | | $ | 5,533 | | | $ | 5,711 | | | $ | 8,920 | |
| Translation adjustment | | | (264 | ) | | | 1,652 | | | | (1,289 | ) | | | 1,747 | |
| Interest rate swaps | | | 1,452 | | | | 2 | | | | 55 | | | | (62 | ) |
| Tax effect | | | (481 | ) | | | (1 | ) | | | (26 | ) | | | 37 | |
| Other comprehensive income (loss) | | $ | 707 | | | $ | 1,653 | | | $ | (1,260 | ) | | $ | 1,722 | |
| Comprehensive net income (loss) | | $ | 5,284 | | | $ | 7,186 | | | $ | 4,451 | | | $ | 10,642 | |
9. Computation of Income per Share
| | | Three months Ended June 30, 2008 | | | Three months Ended June 30, 2007 | | | Six months Ended June 30, 2008 | | | Six months Ended June 30, 2007 | |
| Numerator: | | | | | | | | | | | | | | | | |
| Net income | | $ | 4,577 | | | $ | 5,533 | | | $ | 5,711 | | | $ | 8,920 | |
| Denominator: | | | | | | | | | | | | | | | | |
| Basic weighted-average shares outstanding | | | 13,483,159 | | | | 13,463,374 | | | | 13,474,258 | | | | 13,450,790 | |
| Dilutive stock options | | | 147,815 | | | | 198,093 | | | | 147,501 | | | | 205,575 | |
| Dilutive weighted-average shares outstanding | | | 13,630,974 | | | | 13,661,467 | | | | 13,621,759 | | | | 13,656,765 | |
| | | | | | | | | | | | | | | | | |
| Basic income per share | | $ | 0.34 | | | $ | 0.41 | | | $ | 0.42 | | | $ | 0.66 | |
| | | | | | | | | | | | | | | | | |
| Diluted income per share | | $ | 0.34 | | | $ | 0.41 | | | $ | 0.42 | | | $ | 0.65 | |
Diluted income per share excludes the effect of 658,900 (2007 - 575,900) anti-dilutive options.
10. Contingent Liabilities
The Company is subject to legal proceedings that arise in the ordinary course of business. In the opinion of management, the aggregate liability, if any, with respect to these actions will not have a material adverse effect on the consolidated financial position, results of operations or cash flows. Legal costs are expensed as incurred.
11. Risk Management Activities and Fair Value Measurements
The Company is exposed to interest rate volatility with regard to existing variable rate debt. The Company has entered into variable-to-fixed interest rate swaps on variable rate term debt and revolving debt. The swaps are accounted for as cash flow hedges. The effective portions of changes in fair value of the interest rate swaps are recorded in Accumulated Other Comprehensive Income and are recognized into earnings in the same period in which the hedged forecasted transaction affects earnings. Ineffective portions of changes in fair value are recognized into earnings as they occur. At June 30, 2008, the notional amount of the swaps was $64.4 million, with the average pay rate being 4.94% and the average receive rate being 2.8%. The swaps mature at various dates up to December 31, 2011.
Effective January 1, 2008, the Company adopted SFAS No. 157, which provides a framework for measuring fair value under GAAP. As defined in SFAS No. 157, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that the Company believes market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable.
The Company primarily applies the market approach for recurring fair value measurements and endeavors to utilize the best available information. Accordingly, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The Company is able to classify fair value balances based on the observability of those inputs.
SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).
Assets and liabilities measured at fair value on a recurring basis include the following as of June 30, 2008:
| | Fair Value Measurements Using | | Liabilities | |
| (in thousands) | Level 1 | | Level 2 | | Level 3 | | At Fair Value | |
| Liabilities | | | | | | | | | | | | |
| Interest rate swaps | | $ | - | | | $ | 1,500 | | | $ | - | | | $ | 1,500 | |
| Total liabilities | | $ | - | | | $ | 1,500 | | | $ | - | | | $ | 1,500 | |
12. Segmented Information
Three months ended June 30, 2008 | | Less-than- truckload | | | Logistics | | | Truckload | | | Total | | | Corporate Office and Other | | | Consolidated Totals | |
| | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 168,161 | | | $ | 19,314 | | | $ | 8,515 | | | $ | 195,990 | | | $ | - | | | $ | 195,990 | |
| Operating, selling, general and administrative expenses | | | 155,244 | | | | 18,053 | | | | 7,951 | | | | 181,248 | | | | 1,623 | | | | 182,871 | |
| Other expense (income) | | | (124 | ) | | | (4 | ) | | | (6 | ) | | | (134 | ) | | | - | | | | (134 | ) |
| Depreciation and amortization | | | 4,500 | | | | 434 | | | | 249 | | | | 5,183 | | | | 22 | | | | 5,205 | |
| Income (loss) from operations | | $ | 8,541 | | | $ | 831 | | | $ | 321 | | | $ | 9,693 | | | $ | (1,645 | ) | | | 8,048 | |
| Interest expense, net | | | | | | | | | | | | | | | | | | | | | | | 2,122 | |
| Income taxes | | | | | | | | | | | | | | | | | | | | | | | 1,349 | |
| Net income | | | | | | | | | | | | | | | | | | | | | | $ | 4,577 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Three months ended June 30, 2007 | | Less-than- truckload | | | Logistics | | | Truckload | | | Total | | | Corporate Office and Other | | | Consolidated Totals | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 150,615 | | | $ | 11,225 | | | $ | 8,304 | | | $ | 170,144 | | | $ | - | | | $ | 170,144 | |
| Operating, selling, general and administrative expenses | | | 137,022 | | | | 10,348 | | | | 7,643 | | | | 155,013 | | | | 1,050 | | | | 156,063 | |
| Other expense (income) | | | (101 | ) | | | - | | | | - | | | | (101 | ) | | | - | | | | (101 | ) |
| Depreciation and amortization | | | 4,692 | | | | 142 | | | | 256 | | | | 5,090 | | | | 19 | | | | 5,109 | |
| Income (loss) from operations | | $ | 9,002 | | | $ | 735 | | | $ | 405 | | | $ | 10,142 | | | $ | (1,069 | ) | | | 9,073 | |
| Interest expense, net | | | | | | | | | | | | | | | | | | | | | | | 2,115 | |
| Income taxes | | | | | | | | | | | | | | | | | | | | | | | 1,425 | |
| Net income | | | | | | | | | | | | | | | | | | | | | | $ | 5,533 | |
Six months ended June 30, 2008 | | Less-than- truckload | | | Logistics | | | Truckload | | | Total | | | Corporate Office and Other | | | Consolidated Totals | |
| | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 317,576 | | | $ | 39,074 | | | $ | 16,847 | | | $ | 373,497 | | | $ | - | | | $ | 373,497 | |
| Operating, selling, general and administrative expenses | | | 297,641 | | | | 36,690 | | | | 15,648 | | | | 349,979 | | | | 2,912 | | | | 352,891 | |
| Other expense (income) | | | (102 | ) | | | (20 | ) | | | (11 | ) | | | (133 | ) | | | - | | | | (133 | ) |
| Depreciation and amortization | | | 9,359 | | | | 853 | | | | 510 | | | | 10,722 | | | | 43 | | | | 10,765 | |
| Income (loss) from operations | | $ | 10,678 | | | $ | 1,551 | | | $ | 700 | | | $ | 12,929 | | | $ | (2,955 | ) | | | 9,974 | |
| Interest expense, net | | | | | | | | | | | | | | | | | | | | | | | 4,252 | |
| Income taxes | | | | | | | | | | | | | | | | | | | | | | | 11 | |
| Net income | | | | | | | | | | | | | | | | | | | | | | $ | 5,711 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Six months ended June 30, 2007 | | Less-than- truckload | | | Logistics | | | Truckload | | | Total | | | Corporate Office and Other | | | Consolidated Totals | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 286,772 | | | $ | 20,888 | | | $ | 16,620 | | | $ | 324,280 | | | $ | - | | | $ | 324,280 | |
| Operating, selling, general and administrative expenses | | | 262,348 | | | | 19,452 | | | | 15,419 | | | | 297,219 | | | | 2,399 | | | | 299,618 | |
| Other expense (income) | | | (77 | ) | | | - | | | | (5 | ) | | | (72 | ) | | | - | | | | (72 | ) |
| Depreciation and amortization | | | 9,269 | | | | 261 | | | | 496 | | | | 10,026 | | | | 28 | | | | 10,054 | |
| Income (loss) from operations | | $ | 15,232 | | | $ | 1,175 | | | $ | 700 | | | $ | 17,107 | | | $ | (2,427 | ) | | | 14,680 | |
| Interest expense, net | | | | | | | | | | | | | | | | | | | | | | | 4,179 | |
| Income taxes | | | | | | | | | | | | | | | | | | | | | | | 1,581 | |
| Net income | | | | | | | | | | | | | | | | | | | | | | $ | 8,920 | |
13. Comparative figures
Certain comparative figures have been reclassified to conform to the financial statement presentation adopted in the current year.
Item 2. Management’s Discussion and Analysis of Results of Operation
This MD&A and the documents incorporated by reference contains forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 and applicable Canadian securities laws concerning Vitran’s business, operations, and financial performance and condition.
Forward-looking statements may be generally identifiable by use of the words “believe”, “anticipate”, “intend”, “estimate”, “expect”, “project”, “may”, “plans”, “continue”, “will”, “focus”, “should”, “endeavor” or the negative of these words or other variation on these words or comparable terminology. These forward-looking statements are based on current expectations and are subject to uncertainty and changes in circumstances that may cause actual results to differ materially from those expressed or implied by such forward-looking statements.
The MD&A and the documents incorporated by reference herein contain forward-looking statements regarding, but not limited to, the following:
| | • | the Company’s objective to expand or acquire a less-than-truckload (“LTL”) or logistics operations; |
| | • | the Company’s objective to complete the consolidation of employee groups and eliminate redundant facilities within the U.S. LTL business unit; |
| | • | the Company’s objective to realize revenue growth and operating efficiencies and inter-regional revenue growth within its U.S. LTL business unit; |
| | • | the Company’s objective to realize operating efficiencies at the new Toronto service centre and develop revenue growth initiatives in its Canadian LTL business unit; |
| | • | the Company’s objective to fully utilize the new dedicated facility in its Logistics segment and improve revenue and income from operations; |
| | • | the Company’s intention to continue to grow its cross-border and inter-regional LTL revenue at above average rates; |
| | • | the Company’s intention to purchase a specified level of capital assets and to finance such acquisitions with cash flow from operations and, if necessary, from the Company’s revolving credit facilities. |
Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause Vitran’s actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Factors that may cause such differences include but are not limited to technological change, increase in fuel costs, regulatory change, changes in tax legislation, the general health of the economy, changes in labor relations, geographic expansion, capital requirements, availability of financing, claims and insurance costs, environmental hazards, availability of qualified drivers and competitive factors. More detailed information about these and other factors is included in the MD&A. Many of these factors are beyond the Company’s control; therefore, future events may vary substantially from what the Company currently foresees. You should not place undue reliance on such forward-looking statements. Vitran Corporation Inc. does not assume the obligation to revise or update these forward-looking statements after the date of this document or to revise them to reflect the occurrence of future unanticipated events, except as may be required under applicable securities laws.
Unless otherwise indicated all dollar references herein are in U.S. dollars. The Company’s Annual Report on Form 10-K, as well as all the Company’s other required filings, may be obtained from the Company at www.vitran.com or from www.sedar.com or from www.sec.gov/edgar.shtml. This MD&A and the documents incorporated by reference contain forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 and applicable Canadian securities laws concerning Vitran’s business, operations, and financial performance and condition.
Overview
The second quarter of 2008 was a rewarding quarter for Vitran, operating results improved compared to the first quarter of the year despite continued pressures for high fuel prices and a lethargic economic activity in North America. Most importantly on May 19th, Vitran’s LTL segment completed the 18 month development and migration of its four U.S. regional LTL business units to the new common I.T. operating system. Furthermore, late in the second quarter the Canadian LTL business moved into its new Toronto cross-dock and national office and the Logistics segment commenced operations of the new 500,000 dedicated distribution centre.
Revenue for the quarter increased 15.2% to $196.0 million compared to the second quarter of 2007. Notable improvements were shown by the LTL segment which increased 11.6% and the Logistics segment which increased 72.1% compared to the 2007 second quarter. Income from operations for the 2008 second quarter declined 11.3% compared to the 2007 second quarter but increased 317.9% compared to the first quarter of 2008. For the 2008 six-month period the company posted revenue $373.5 million and income from operations of $10.0 million compared to revenue of $324.3 million and income from operations of $14.7 million the same period a year ago. The 2008 results for the Logistics segment included Las Vegas/L.A. Express, Inc. (“LVLA”) acquired November 30, 2007.
CONSOLIDATED RESULTS
The following table summarizes the Consolidated Statements of Income for the three- and six-month periods ended June 30:
| | | For the three months ended June 30 | | | For the six months ended June 30 | |
| (in thousands) | | 2008 | | | 2007 | | | 2008 vs 2007 | | | 2008 | | | 2007 | | | 2008 vs 2007 | |
| | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 195,990 | | | $ | 170,144 | | | | 15.2 | % | | $ | 373,497 | | | $ | 324,280 | | | | 15.2 | % |
| Operating expenses | | | 165,102 | | | | 140,780 | | | | 17.3 | % | | | 318,201 | | | | 269,236 | | | | 18.2 | % |
| SG&A expenses | | | 17,769 | | | | 15,283 | | | | 16.3 | % | | | 34,690 | | | | 30,382 | | | | 14.2 | % |
| Other expense (income) | | | (134 | ) | | | (101 | ) | | | 32.7 | % | | | (133 | ) | | | (72 | ) | | | 84.7 | % |
| Depreciation and amortization | | | 5,205 | | | | 5,109 | | | | 1.9 | % | | | 10,765.765,765 | | | | 10,054 | | | | 7.1 | % |
| Income from operations | | | 8,048 | | | | 9,073 | | | | (11.3 | %) | | | 9,974 | | | | 14,680 | | | | (32.1 | %) |
| Interest expense, net | | | 2,122 | | | | 2,115 | | | | 0.3 | % | | | 4,252 | | | | 4,179 | | | | 1.7 | % |
| Income (recovery) tax | | | 1,349 | | | | 1,425 | | | | (5.3 | %) | | | 11 | | | | 1,581 | | | | (99.3 | %) |
| Net income | | $ | 4,577 | | | $ | 5,533 | | | | (17.3 | %) | | $ | 5,711 | | | $ | 8,920 | | | | (36.0 | %) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Income per share: | | | | | | | | | | | | | | | | | | | | | | | | |
Basic - net income | | $ | 0.34 | | | $ | 0.41 | | | | | | | $ | 0.42 | | | $ | 0.66 | | | | | |
Diluted - net income | | $ | 0.34 | | | $ | 0.41 | | | | | | | $ | 0.42 | | | $ | 0.65 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Operating Ratio (1) | | | 95.9 | % | | | 94.7 | % | | | | | | | 97.3 | % | | | 95.5 | % | | | | |
Revenue increased 15.2% to $196.0 million for the second quarter of 2008 compared to $170.1 million in the second quarter of 2007. Revenue in the LTL, Logistics and Truckload segments increased 11.6%, 72.1% and 2.5%, respectively. Domestic U.S. revenue accounts for 70.3% of total revenue in the second quarter of 2008 compared to 70.0% in the second quarter of 2007. For the six months ended June 30, 2008 revenue increased 15.2% to $373.5 million compared to $324.3 million for the same period in 2007. Revenue for the second quarter and six-month period of 2008 compared to same periods in 2007 were augmented by the contribution of LVLA, acquired on November 30, 2007. Detailed explanations for the fluctuations in revenue are discussed below in “Segmented Results”.
Income from operations for the second quarter declined to $8.0 million compared to $9.1 million in the same quarter a year ago. The Company’s consolidated operating ratio was 95.9% for the second quarter of 2008 compared to 94.7% in the second quarter of 2007. Income from operations for the second quarter of 2008 improved by 317.9% compared to the first quarter of 2008 resulting in a significant improvement in the operating ratio to 95.9% compared to 98.9% in the first quarter. For the six months ended June 30, 2008 income from operations was $10.0 million compared to $14.7 million for the same period in 2007. Detailed explanations for the fluctuations in income from operations are discussed below in “Segmented Results”.
Selling, general and administrative expenses (“SG&A”) increased 16.3% to $17.8 million in the second quarter compared to $15.3 million in the second quarter of 2007. For the six-month period ended June 30, 2008 SG&A increased 14.2% to $34.7 million compared $30.4 million for the same period a year ago. The increase in SG&A expenses for the quarter and six-month period can primarily be attributed to the addition of LVLA, not included in the 2007 comparative figures. The remainder of the increase is due to increased share-based compensation and healthcare expenses. Furthermore, with the addition of LVLA and increases in healthcare and on-going compensation-related expenses, SG&A should continue to be higher than the prior year periods.
The Company incurred interest expense of $2.1 million in the second quarter of 2008 and in the second quarter of 2007. The Company’s total long-term debt increased to $126.6 million at June 30, 2008 compared to the $115.4 million at June 30, 2007. The increase in debt is primarily attributable to facility additions of $7.6 million and $8.5 million for the acquisition of LVLA in the fourth quarter of 2007. Total debt at June 30, 2008 consisted of $53.1 million drawn on the Company’s revolving credit facilities, $54.4 million of term debt, $0.5 million note payable and $18.6 million of capital leases.
Income tax expense for the second quarter of 2008 was $1.3 million compared to $1.4 million for the same quarter a year ago. The effective tax rate was 22.8% for the second quarter of 2008 compared to 20.5% for the second quarter in 2007. The increase in the effective tax rate for the quarter is attributable to a higher portion of Vitran’s income before tax being earned in higher tax jurisdictions compared to the same quarter in 2007. For the six months ended June 30, 2008, income tax expense was negligible compared to $1.6 million for the same period a year ago. For the six-month period, on a consolidated basis, the Company generated taxable losses in the United States, which have been recognized as future tax assets. These taxable losses are the result of tax depreciation and amortization on capital assets and goodwill in excess of GAAP depreciation and amortization attributable to the Company’s acquired businesses over the last three years. Management believes the Company will generate sufficient taxable income to use these losses in the future. Should the Company’s earnings before income tax increase in subsequent quarters, the quarterly effective tax rate should also increase.
Net income decreased by 17.3% to $4.6 million for the 2008 second quarter compared to $5.5 million for the same quarter in 2007. This resulted in basic and diluted income per share of $0.34 for the second quarter of 2008 compared to basic and diluted income per share from operations of $0.41 for the second quarter of 2007. The weighted average number of shares for the current quarter was 13.5 million basic and 13.6 million diluted compared to 13.5 million basic and 13.7 million diluted shares in the second quarter of 2007. For the six months ended June 30, 2008, net income decreased 36.0% to $5.7 million compared to $8.9 million in the same period a year ago. This resulted in basic and diluted earnings per share before change in cumulative effect of change in accounting principle of $0.42 for the 2008 six-month period, compared to basic and diluted earnings per share of $0.66 and $0.65 in the same period in 2007. The weighted average number of shares for the six month period of 2007 was 13.5 million basic and 13.6 million diluted shares compared to 13.5 million basic and 13.7 million diluted shares in the six-month period of 2007.
SEGMENTED RESULTS
Less-Than-Truckload (LTL)
The table below provides summary information for the LTL segment for the three-month periods ended June 30:
| | | For the three months ended June 30 | | | For the six months ended June 30 | |
| (in thousands) | | 2008 | | | 2007 | | | 2008 vs 2007 | | | 2008 | | | 2007 | | | 2008 vs 2007 | |
| | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 168,161 | | | $ | 150,615 | | | | 11.6 | % | | $ | 317,576 | | | $ | 286,772 | | | | 10.7 | % |
| Income from operations | | | 8,541 | | | | 9,002 | | | | (5.1 | %) | | | 10,678 | | | | 15,232 | | | | (29.9 | %) |
| Operating ratio | | | 94.9 | % | | | 94.0 | % | | | | | | | 96.6 | % | | | 94.7 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Number of shipments (2) | | | 1,037,700 | | | | 1,045,730 | | | | (0.8 | %) | | | 2,015,511 | | | | 2,039,106 | | | | (1.2 | %) |
Weight (000s of lbs) (3) | | | 1,587,453 | | | | 1,555,693 | | | | 2.0 | % | | | 3,077,927 | | | | 3,023,539 | | | | 1.8 | % |
Revenue per shipment (4) | | $ | 162.05 | | | $ | 144.03 | | | | 12.5 | % | | $ | 157.57 | | | $ | 140.64 | | | | 12.0 | % |
Revenue per hundredweight (5) | | $ | 10.59 | | | $ | 9.68 | | | | 9.4 | % | | $ | 10.32 | | | $ | 9.48 | | | | 8.9 | % |
Revenue in the LTL segment increased 11.6% to $168.2 million, in the second quarter of 2008 compared to $150.6 million in the same quarter a year ago. The increase in revenue was influenced by the fuel surcharge which represented 19.4% of revenue in the second quarter of 2008 compared to 12.5% of revenue in the second quarter of 2007. U.S. LTL business successfully launched its new I.T. operating system which lead to increased inter-regional sales activity and the development of some new significant clients late in the second quarter. In addition, revenue from the LTL segment’s cross border service offering was up 31.9% compared to the 2007 second quarter. However, these improvements were partially offset by the lacklustre North American economy and competitive pricing pressure compared to the second quarter of 2007. The LTL segment’s shipments were flat and tonnage increased 2.0% in the 2008 second quarter compared to the 2007 second quarter. Revenue per hundredweight increased 9.4% taking into account that the Canadian LTL domestic revenue was translated into US dollars at a more favorable foreign exchange rate compared to the second quarter of 2007. Removing this foreign exchange component revenue per hundredweight increased 7.1% compared to the second quarter of 2007. The increase in revenue per hundredweight is due to the increase in fuel surcharge compared to the 2007 second quarter. Consequently, the 2008 second quarter operating ratio was 94.9% compared to 94.0% in the 2007 second quarter.
For the six-month period ended June 30, 2008, revenue in the LTL segment increased 10.7% to $317.6 million, compared to $286.8 million in the same period a year ago. The increase in revenue was influenced by fuel surcharge which represented 17.7% of revenue in 2008 compared to 11.8% of revenue in the 2007 six-month period. Cross border revenue increased 40.2% for the first six months of 2008 compared to the 2007 period. However, these improvements were mitigated by the persistent slow down in the North American economy, competitive pricing pressure and reduced the fuel surcharge recovery margin compared to 2007 six month period. Furthermore, abnormally severe weather conditions and rail service issues in Canada in February and March in the first quarter of 2008 impacted the six-month results. The LTL segment’s shipments decreased 1.2% and tonnage increased 1.8% in the 2008 six month period compared to the 2007 six month period. Revenue per hundredweight increased 8.9% taking into account that the Canadian LTL domestic revenue was translated into US dollars at a more favorable foreign exchange rate compared to the same 2007 six month period. Removing this foreign exchange component revenue per hundredweight increased 5.3% compared to the same period a year ago. The increase in revenue per hundredweight is due to the increase in fuel surcharge compared to the 2007 first quarter. Consequently, the 2008 six-month period operating ratio was 96.6% compared to 94.7% in the 2007 six-month period.
Logistics
The table below provides summary information for the Logistics segment for the three- and six-month periods ended June 30:
| | | For the three months ended June 30 | | | For the six months ended June 30 | |
| (in thousands) | | 2008 | | | 2007 | | | 2008 vs 2007 | | | 2008 | | | 2007 | | | 2008 vs 2007 | |
| | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 19,314 | | | $ | 11,225 | | | | 72.1 | % | | $ | 39,074 | | | $ | 20,888 | | | | 87.1 | % |
| Income from operations | | | 831 | | | | 735 | | | | 13.1 | % | | | 1,551 | | | | 1,175 | | | | 32.0 | % |
| Operating ratio | | | 95.7 | % | | | 93.4 | % | | | | | | | 96.0 | % | | | 94.4 | % | | | | |
Revenue and income from operations for the Logistics segment increased 72.1% and 13.1%, respectively for the second quarter of 2008 compared to the same quarter in 2007. For the six-month period ended June 30, 2008, revenue and income from operations for the Logistics segment increased 87.1% and 32.0% respectively compared to the same period in 2007. The increase in revenue and income from operations is primarily attributable to the acquisition of LVLA on November 30, 2007. The Logistics segment, excluding LVLA, continued to generate positive revenue growth but operating margins showed the impact of a slowdown in retail sales activity in North America. The 2008 second quarter operating ratio was 95.7% compared to 93.4% in the 2007 second quarter. Revenue and income from operations should increase when the supply chain unit fully utilizes the new 500,000 square foot dedicated retail distribution facility that commenced operations late in the second quarter.
Truckload
The table below provides summary information for the Truckload segment for the three- and six-month periods ended June 30:
| | | For the three months ended June 30 | | | For the six months ended June 30 | |
| (in thousands) | | 2008 | | | 2007 | | | 2008 vs 2007 | | | 2008 | | | 2007 | | | 2008 vs 2007 | |
| | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 8,515 | | | $ | 8,304 | | | | 2.5 | % | | $ | 16,847 | | | $ | 16,620 | | | | 1.4 | % |
| Income from operations | | | 321 | | | | 405 | | | | (20.7 | %) | | | 700 | | | | 700 | | | | 0.0 | % |
| Operating ratio | | | 96.2 | % | | | 95.1 | % | | | | | | | 95.8 | % | | | 95.8 | % | | | | |
Revenue in the Truckload segment improved 2.5% to $8.5 million for the second quarter of 2008 compared to $8.3 million for the second quarter of 2007. In the 2008 second quarter shipments increased by 7.1% but was offset by a decline in revenue per mile(6) of 2.4% and an increase in empty miles of 9.0% compared to the 2007 second quarter. As a result income from operations decreased $0.1 million and the operating ratio was 96.2% for the second quarter of 2008 compared to 95.1% for the second quarter of 2007. Revenue for the six-month period of 2008 was up 1.4% while income from operations was flat compared to the same period in 2007, resulting in and operating ratio of 95.8% for the current and prior year six-month periods.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations including working capital changes decreased to $6.5 million for the 2008 six-month period compared to $16.2 million in the 2007 six-month period. The decline is primarily attributable to a decrease in non-cash deferred income tax expense and the increase in working capital compared to the six-month period of 2007. Accounts receivable increased compared to December 31, 2007 due to higher revenue; average days sales outstanding was 40.5 days compared to 38.9 days for the Company. Accounts payable and accrued liabilities increased compared to December 31, 2007 due to the timing of payments.
Interest-bearing debt, excluding bank overdraft, was $126.6 million at June 30, 2008 consisting of $54.4 million of term debt, capital leases of $18.6 million, $0.5 million note payable and $53.1 million drawn under the revolving credit facility. At December 31, 2007 interest-bearing debt was $128.0 million consisting of $58.9 million of term debt, capital leases of $22.9 million, $1.2 million note payable and $45.0 million drawn under the revolving credit facility. For the six-month period ended June 30, 2008, the Company repaid $5.1 million of term debt and $4.2 million of capital leases. At June 30, 2008, the Company had $22.6 million of unused credit facilities.
Capital expenditures amounted to $2.0 million for the second quarter of 2008 and were funded from operating cash flows and the revolving credit facilities of the Company. The majority of capital expenditures were for the final construction outlays for the new LTL service centre in Toronto (Ontario). The table below sets forth the Company’s capital expenditures for the three- and six-month periods ended June 30, 2008.
| | | For the three months ended June 30, | | | For the six months ended June 30, | |
| (in thousands of dollars) | | 2008 | | | 2007 | | | 2008 | | | 2007 | |
| Real estate and buildings | | $ | 1,261 | | | $ | 2,429 | | | $ | 7,636 | | | $ | 5,675 | |
| Tractors | | | - | | | | 5,343 | | | | 47 | | | | 5,343 | |
| Trailing fleet | | | 450 | | | | 1,717 | | | | 658 | | | | 2,686 | |
| Information technology | | | 56 | | | | 403 | | | | 284 | | | | 572 | |
| Leasehold improvements | | | 20 | | | | 14 | | | | 92 | | | | 32 | |
| Other equipment | | | 253 | | | | 704 | | | | 431 | | | | 852 | |
| Total | | $ | 2,040 | | | $ | 10,610 | | | $ | 9,148 | | | $ | 15,160 | |
Management estimates that cash capital expenditures for the remainder of 2008, will be between $5.0 million and $10.0 million, the majority of which will be fleet replacement and information technology expenditures. The Company also anticipates entering into operating leases to fund the acquisition of equipment with a capital cost of between $5.0 million and $9.0 million. The Company expects to finance its cash capital requirements with cash flow from operations, and if required, its revolving credit facilities.
The Company has contractual obligations for principal payments that include long-term debt consisting of term debt facilities, revolving credit facilities and capital leases for operating equipment. The Company utilizes off-balance sheet operating leases primarily consisting of tractor, trailing fleet and real estate leases. Operating leases form an integral part of the Company’s financial structure and operating methodology as they provide an alternative cost effective and flexible form of financing.
The following table summarizes our significant contractual obligations and commercial commitments as of June 30, 2008:
| (in thousands of dollars) | | | | | Payments due by period | |
| Contractual Obligations | | Total | | | 2008 | | | 2009 & 2010 | | | 2011 & 2012 | | | Thereafter | |
| | | | | | | | | | | | | | | | |
| Term credit facilities | | $ | 54,400 | | | $ | 4,510 | | | $ | 23,890 | | | $ | 26,000 | | | $ Nil | |
| Revolving credit facilities | | | 53,050 | | | Nil | | | Nil | | | | 53,050 | | | Nil | |
| Capital lease obligations | | | 18,618 | | | | 3,767 | | | | 9,239 | | | | 5,612 | | | Nil | |
| Note payable | | | 545 | | | | 545 | | | Nil | | | Nil | | | Nil | |
| Sub-total | | | 126,613 | | | | 8,822 | | | | 33,129 | | | | 84,662 | | | Nil | |
| Operating leases | | | 55,962 | | | | 11,543 | | | | 24,659 | | | | 14,429 | | | | 5,331 | |
| Total Contractual Obligations | | $ | 182,575 | | | $ | 20,365 | | | $ | 57,788 | | | $ | 99,091 | | | $ | 5,331 | |
In addition to the above-noted contractual obligations, the Company, as at June 30, 2008, utilized the revolving credit facilities for standby letters of credit of $18.7 million. The letters of credit are used as collateral for self-insured retention of insurance claims.
A significant decrease in demand for the Company’s services could limit the Company’s ability to generate cash flow and affect its profitability. The Company’s credit agreement contains certain financial maintenance tests that require the Company to achieve stated levels of financial performance, which, if not achieved, could cause an acceleration of the payment schedules. On April 10, 2008, the Company amended its credit agreement in respect of certain financial maintenance tests. The amendment is effective March 31, 2008 to December 31, 2008. As at June 30, 2008, the Company is in compliance with these amended maintenance tests and management expects the Company to be in compliance for the balance of 2008. Management does not anticipate a significant decline in business levels or financial performance and expects that existing working capital, together with available revolving facilities, will be sufficient to fund operating and capital requirements in 2008 as well as to service the contractual obligations.
OUTLOOK
The second quarter of 2008 was a rewarding quarter for Vitran, the U.S. LTL business unit launched its new I.T. operating system, the Canadian LTL business unit moved into is new cross dock and national head office and the Logistics segment commenced operations of its new 500,000 square foot dedicated distribution centre. All these milestone achievements were completed while improving financial results compared to the first quarter of 2008 and the additional challenges of soaring fuel prices, and the lackluster economic environment in North America.
With the launch of the new I.T. operating system, the U.S. LTL business unit is positioned to initiate the all important consolidation of employee groups and elimination of redundant facilities within its U.S. regional overlapping footprints. Upon completion, this should lead to further opportunities to increase revenue and improve operating efficiencies.
The Canadian LTL business unit will focus on service centre efficiencies at its new Toronto location and revenue growth initiatives. The Logistics segment will endeavour to fully utilize its new dedicated logistics facility in Toronto.
Lastly the Company remains committed to its objectives to expand or acquire into new regional LTL markets and opportunistically add complementary Logistics operations.
QUARTERLY RESULTS
| | | | | | | | | | | | | | | | | | | | | | | | | |
(thousands of dollars except per share amounts) | | | 2008 Q2 | | | | 2008 Q1 | | | | 2007 Q4 | | | | 2007 Q3 | | | | 2007 Q2 | | | | 2007 Q1 | | | | 2006 Q4 | | | | 2006 Q3 | |
| Revenue | | $ | 195,990 | | | $ | 177,507 | | | $ | 174,310 | | | $ | 171,927 | | | $ | 170,144 | | | $ | 154,136 | | | $ | 153,779 | | | $ | 121,512 | |
| Income from operations | | | 8,048 | | | | 1,926 | | | | 2,750 | | | | 5,569 | | | | 9,073 | | | | 5,607 | | | | 8,143 | | | | 6,797 | |
| Net Income | | | 4,577 | | | | 1,134 | | | | 1,669 | | | | 3,121 | | | | 5,533 | | | | 3,387 | | | | 4,974 | | | | 4,885 | |
| Income per share: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.34 | | | $ | 0.08 | | | $ | 0.12 | | | $ | 0.23 | | | $ | 0.41 | | | $ | 0.25 | | | $ | 0.37 | | | $ | 0.38 | |
| Diluted | | | 0.34 | | | | 0.08 | | | | 0.12 | | | | 0.23 | | | | 0.41 | | | | 0.25 | | | | 0.37 | | | | 0.38 | |
| Weighted average number of shares: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | | 13,483,159 | | | | 13,465,357 | | | | 13,457,619 | | | | 13,475,685 | | | | 13,463,374 | | | | 13,438,065 | | | | 13,413,153 | | | | 12,744,936 | |
| Diluted | | | 13,630,974 | | | | 13,611,446 | | | | 13,621,272 | | | | 13,668,819 | | | | 13,661,467 | | | | 13,651,872 | | | | 13,624,031 | | | | 12,966,835 | |
Definitions of non-GAAP measures:
| (1) | Operating ratio (“OR”) is a non-GAAP financial measure which does not have any standardized meaning prescribed by GAAP. OR is the sum of operating expenses, selling, general and administrative expenses, other expenses (income), and depreciation and amortization expense, divided by revenue. OR allows management to measure the Company and its various segments’ operating efficiency. OR is a widely recognized measure in the transportation industry which provides a comparable benchmark for evaluating the Company’s performance compared to its competitors. Investors should also note that the Company’s presentation of OR may not be comparable to similarly titled measures by other companies. OR is calculated as follows: |
| | | Three months ended June 30, | | | Six months ended June 30, | |
| (in thousands) | | 2008 | | | 2007 | | | 2008 | | | 2007 | |
| | | | | | | | | | | | | |
| Operating expenses | | $ | 165,102 | | | $ | 140,780 | | | $ | 318,201 | | | $ | 269,236 | |
| Selling, general and administrative expenses | | | 17,769 | | | | 15,283 | | | | 34,690 | | | | 30,382 | |
| Other expenses (income) | | | (134 | ) | | | (101 | ) | | | (133 | ) | | | (72 | ) |
| Depreciation and amortization expense | | | 5,205 | | | | 5,109 | | | | 10,765 | | | | 10,054 | |
| | | $ | 187,942 | | | $ | 161,071 | | | $ | 363,523 | | | $ | 309,600 | |
| Revenue | | $ | 195,990 | | | $ | 170,144 | | | $ | 373,497 | | | $ | 324,280 | |
| Operating ratio (“OR”) | | | 95.9 | % | | | 94.7 | % | | | 97.3 | % | | | 95.5 | % |
| (2) | A shipment is a single movement of goods from a point of origin to its final destination as described on a bill of lading document. |
| (3) | Weight represents the total pounds shipped. |
| (4) | Revenue per shipment represents revenue divided by the number of shipments. |
| (5) | Revenue per hundredweight is the price obtained for transporting 100 pounds of LTL freight from point to point, calculated by dividing the revenue for an LTL shipment by the hundredweight (weight in pounds divided by 100) for a shipment. |
| (6) | Revenue per total mile represents revenue divided by the total miles driven. |
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to the impact of interest rate changes. The Company’s exposure to changes in interest rates is limited to borrowings under the term bank facilities and revolving credit facilities that have variable interest rates tied to the LIBOR rate. As a majority of the Company’s debt is tied to variable interest rates, the Company estimates that the fair value of the long-term debt approximates the carrying value.
| (in thousands of dollars) | | | | | Payments due by period | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | $ | 52,000 | | | $ | 4,000 | | | $ | 22,000 | | | $ | 26,000 | | | $ | Nil | |
Average interest rate (LIBOR) | | | 4.30 | % | | | 4.30 | % | | | 4.30 | % | | | 4.30 | % | | | | |
| | $ | 2,400 | | | $ | 510 | | | $ | 1,890 | | | $ | Nil | | | $ | Nil | |
Average interest rate (LIBOR) | | | 4.55 | % | | | 4.55 | % | | | 4.55 | % | | | | | | | | |
| | $ | 53,050 | | | $ | Nil | | | $ | Nil | | | $ | 53,050 | | | $ | Nil | |
Average interest rate (LIBOR) | | | 4.30 | % | | | | | | | | | | | 4.30 | % | | | | |
| | | | | | | | | | | | | | | | | | | | |
Capital lease obligations | | $ | 18,618 | | | $ | 3,767 | | | $ | 9,239 | | | $ | 5,612 | | | $ | Nil | |
| | | 6.15 | % | | | 6.15 | % | | | 6.15 | % | | | 6.15 | % | | | | |
| | $ | 545 | | | $ | 545 | | | $ | Nil | | | $ | Nil | | | $ | Nil | |
| | | 6.00 | % | | | | | | | | | | | | | | | | |
| | $ | 126,613 | | | $ | 8,822 | | | $ | 33,129 | | | $ | 84,662 | | | $ | Nil | |
The Company uses variable-to-fixed interest rate swaps on its term and revolving credit facilities with a notional amount of $64.4 million at June 30, 2008. The average pay rate on the swaps is 4.94% and the average receive rate is the three-month LIBOR rate which is currently 2.8%. To value the interest rate swaps a discounted cash flow model is utilized. Primary inputs into the model that will cause the fair value to fluctuate period-to-period include the fixed interest rates, the future interest rates, credit risk and the remaining time to maturity of the interest rate swaps. Management’s intention is to hold the interest rate swaps to maturity.
The Company is exposed to foreign currency risk as fluctuations in the United States dollar against the Canadian dollar can impact the financial results of the Company. The Company’s Canadian operations realize foreign currency exchange gains and losses on the United States dollar denominated revenue generated against Canadian dollar denominated expenses. Furthermore, the Company reports its results in United States dollars thereby exposing the results of the Company’s Canadian operations to foreign currency fluctuations. In addition, the Company’s United States dollar debt of $80.2 million is designated as a hedge of the investment in the United States’ self-sustaining foreign operations.
Item 4. Controls and Procedures
| a) | As of July 22, 2008, the Chief Executive Officer and the Chief Financial Officer evaluated the effectiveness of the Company’s disclosure controls and procedures in accordance with Rule 13a-15 under the Exchange Act for the quarter ended June 30, 2008. Based on their evaluation, the Company’s Chief Executive Officer and the Chief Financial Officer concluded that Vitran’s disclosure controls and procedures enable Vitran to record, process, summarize and report in a timely manner the information that we are required to disclose in our Exchange Act reports. |
| b) | During the 2008 second quarter Vitran implemented a new less-than-truckload operating system within its U.S. LTL business unit. In accordance with Vitran’s IT general controls appropriate internal controls were followed in the development and implementation of the system. As a result of the new system a limited number of IT application level controls changed in the quarter. Management ensured that an appropriate level of monitoring controls were in place to ensure that financial information was appropriately recorded, processed and disclosed. Management will test the application level controls in the normal course as part of its annual certification requirements. Management does not believe there is any material affect on the company’s internal control over financial reporting. |
Part II. Other Information
Item 1. Legal Proceedings
The Company is subject to various legal proceedings and claims that have arisen in the ordinary course of its business that have not been fully adjudicated. Many of these are covered in whole or in part by insurance. The management of Vitran does not believe that these actions, when finally concluded and determined, will have a significant adverse effect upon Vitran’s financial condition, results of operations or cash flows.
Item 1A. Risk Factors
See Part 1A of the Company’s 2007 Annual Report on Form 10-K.
Item 2. Unregistered Sale of Equity and Use of Proceeds - - - None
Item 3. Defaults Upon Senior Securities - - - None
Item 4. Submission of Matters to a Vote of Security Holders - - - None
Item 5. Other Information - - - None
Item 6. Exhibits and Reports on Form 8-K
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
