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VTNC > SEC Filings for VTNC > Form 10-Q on 5-Nov-2012All Recent SEC Filings

Show all filings for VITRAN CORP INC

Form 10-Q for VITRAN CORP INC


5-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Results of Operation

The following discussion should be read in conjunction with our unaudited consolidated interim financial statements for the three and nine months ended September 30, 2012 and the notes thereto as included in Item 1 of this Quarterly Report on Form 10-Q.

This Quarterly Report on Form 10-Q 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.

This Quarterly Report on Form 10-Q contains forward-looking statements regarding, but not limited to, the following:

the Company's expectation that efficiencies and optimization of technology within the U.S. LTL business unit will reduce salaries, wages and employee benefits expense as a percentage of revenue;

the Company's expectation that revenue per hundredweight will increase in upcoming quarters as the freight mix and internal leadership in the pricing department impacts the LTL segment;

the Company's expectation that it will be able to reduce maintenance expense in future periods;

the Company's expectation that operating initiatives implemented will continue to improve productivity and service levels within the U.S. LTL business unit;

the Company's expectation that fuel economy will continue to improve moderately and as a result fuel costs will decrease;

the Company's expectation that operational improvements within the U.S. LTL business unit will have a positive impact on future financial results;

the Company's expectation that activity levels will improve;

the Company's ability to maintain DSO below 40 days;

the Company's intention to purchase a specified level of property and equipment and to finance such acquisitions with cash flow from operations, capital and operating leases and, if necessary, from the Company's revolving credit facilities;

the Company's ability to generate future operating cash flows from profitability and managing working capital;

the Company's ability to grow the SCO segment at current margins;

the Company's expectation that the two new dedicated facilities within the SCO segment will positively impact earnings during the remainder of 2012;

the Company's operational plan will improve service and efficiencies in the U.S. LTL business unit; and

the Company's ability to benefit from an improvement in the economic and pricing environment.

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, foreign currency fluctuations, claims and insurance costs, environmental hazards, availability of qualified drivers and competitive factors. More detailed information about these and other factors is included in Item 1A - Risk Factors in the Company's 2011 Annual Report on Form 10-K. 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.


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CONSOLIDATED RESULTS

The following table summarizes the Consolidated Statements of Loss for the three
and nine months ended September 30:



                                            For the three months ended Sept 30,                    For the nine months ended Sept 30,
(in thousands)                           2012              2011          2012 vs 2011           2012             2011          2012 vs 2011
Revenue                               $   206,220        $ 206,159                 0.0 %     $   627,065       $ 600,428                 4.4 %

Salaries, wages and other employee
benefits                                   84,899           79,958                 6.2 %         252,986         229,452                10.3 %
Purchased transportation                   31,853           32,814                (2.9 %)         95,298          97,431                (2.2 %)
Depreciation and amortization               4,277            3,976                 7.6 %          12,436          12,373                 0.5 %
Maintenance                                 9,562            9,656                (1.0 %)         29,438          26,742                10.1 %
Rents and leases                           12,165           10,469                16.2 %          35,183          27,725                26.9 %
Purchased labor and owner operators        19,872           19,579                 1.5 %          56,528          58,163                (2.8 %)
Fuel and fuel-related expenses             33,474           34,509                (3.0 %)        106,441         100,713                 5.7 %
Other operating expenses                   18,211           15,933                14.3 %          53,250          47,403                12.3 %
Other (income) loss                          (188 )              4            (4,800.0 %)           (238 )          (101 )             135.6 %

Total Expenses                        $   214,125        $ 206,898                 3.5 %     $   641,322       $ 599,901                 6.9 %

Income (loss) from operations              (7,905 )           (739 )             969.7 %         (14,257 )           527            (2,805.3 %)
Interest expense, net                       1,353            1,694               (20.1 %)          3,994           4,347                (8.1 %)
Income tax expense                            842              987               (14.7 %)          1,828           2,121               (13.8 %)

Net loss                              $   (10,100 )      $  (3,420 )             195.3 %     $   (20,079 )     $  (5,941 )             238.0 %

Loss per share:
Basic                                 $     (0.62 )      $   (0.21 )                         $     (1.23 )     $   (0.36 )
Diluted                               $     (0.62 )      $   (0.21 )                         $     (1.23 )     $   (0.36 )
Operating Ratio (1)                         103.8 %          100.4 %                               102.3 %          99.9 %

Revenue was flat at $206.2 million for the third quarter of 2012 compared to the third quarter of 2011. Revenue in the LTL segment was level in the current quarter with the third quarter of 2011, while revenue in the SCO segment increased 0.9% compared to the third quarter of 2011. Revenue for the third quarter of 2012 was negatively impacted by one less working day in the third quarter of 2012 compared to the third quarter of 2011. For the nine-months ended September 30, 2012, revenue increased 4.4% to $627.1 million compared to $600.4 million for the nine-month period ended September 30, 2011. Consolidated revenue for the comparable nine-month period was impacted by a weaker Canadian dollar and increase in fuel surcharge revenue accounting for $2.8 million of the total revenue increase. Detailed explanations for the fluctuations in revenue are discussed below in "Segmented Results".

Salaries, wages and other employee benefits increased 6.2% for the third quarter of 2012 compared to the same period a year ago. For the nine-month period ended September 30, 2012, salaries, wages and other employee benefits increased 10.3% compared to the same nine-month period a year ago. This compares with a 5.3% increase in employee headcount compared to September 30, 2011. Headcount increased mid-way through the first quarter of 2011 resulting from the acquisition of the Milan Express Inc. ("Milan") LTL assets on February 19, 2011. The full impact of the increase in headcount is included in the first nine-months of 2012 whereas it was only partially included in the first nine months a year ago. Furthermore, management returned to its U.S. LTL business unit employees the 2008 5% wage reduction at 1.25% per quarter by the end of 2011, therefore, the third quarter of 2012 includes the full 5% wage increase compared to a 3.75% wage increase in the third quarter of 2011. Salary, wages and other employee benefits expenses should outpace the prior year expenses, but as management improves efficiencies within the U.S. LTL business unit, it is expected to decline on a percentage of revenue basis.

Purchased transportation decreased 2.9% and 2.2% for the three-month and nine-month periods ended September 30, 2012 compared to the same periods in 2011, respectively. Purchased transportation decreased 16.2% in the U.S. LTL business unit in the third quarter of 2012 compared to the same quarter a year ago. The additional tractors in 2011 received by the U.S. LTL business unit along with a concerted effort to reduce purchased miles led to the decrease in purchased transportation. Offsetting the decrease is SCO's brokerage business unit as shipments increased 3.6% in the first nine-months of 2012 compared to the same period in 2011.


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Depreciation and amortization expense increased 7.6% for the third quarter of 2012 compared to the same period in 2011, and is primarily attributable to the purchase of rolling stock and buildings in 2012. Depreciation and amortization expense increased 0.5% for the nine-month period ended September 30, 2012 compared to the same period in 2011, and is attributable to the sale of rolling stock and buildings throughout 2011.

Maintenance expense decreased 1.0% and increased 10.1% for the three-month and nine-month periods ended September 30, 2012 compared to the same periods in 2011, respectively. As a percentage of revenue, maintenance expense decreased compared to the second quarter of 2012 as management continues its focus on reducing this expense. The U.S. LTL business unit received 200 additional tractors in the first half of 2012 and it is management's expectation that the Company will continue to reduce its maintenance costs as a percentage of revenue.

Rents and leases expense increased 16.2% and 26.9% for the three-month and nine-month periods ended September 30, 2012 compared to the same periods in 2011. The increase is attributable to the 400 new tractors received in 2011, 200 new tractors received by the U.S LTL business unit in 2012 and approximately 950 new trailers received in 2012, a majority of which were all acquired by the U.S. LTL business unit.

Purchased labor and owner operator expenses, primarily driven by the Canadian LTL business unit and the SCO segment, increased in the comparable three-month periods ended September 30, 2012. The increase is due to the opening of two new dedicated facilities within the SCO segment in the second quarter and early third quarter of 2012. The decrease in the comparable nine-month period ended September 30, 2012 is attributable to a reduction in hours required offset by an increase in LTL shipments.

Fuel and fuel-related expenses decreased 3.0% for the three month period and increased 5.7% for the nine-month period ended September 30, 2012 compared to the same periods a year ago. Fuel consumption in the third quarter of 2012 decreased as shipments were down 1.4% during the quarter compared to the third quarter of 2011. The average price of diesel increased approximately 2.4% compared to the nine-month period ended September 30, 2011. Furthermore, the Company's fuel consumption increased in the nine-month period due to the increase in activity as indicated by the 4.3% increase in shipments within the LTL segment. The Company should continue to receive moderately improved fuel economy from improved operating practices.

The Company incurred interest expense of $1.4 million in the third quarter of 2012 compared to interest expense of $1.7 million for the same quarter a year ago. The Company's total balance sheet debt net of cash at September 30, 2012 is $18.5 million greater than September 30, 2011. However, the interest rate spread on the Company's asset-based revolving credit agreement was 150bps less that the third quarter of 2011.

In accordance with Financial Accounting Standard Board ("FASB") Accounting Standard Codification ("FASB ASC") 740-10, the Company recorded a valuation allowance for all U.S. deferred tax assets. As required by this standard, the Company increased the valuation allowance by $8.5 million, which would have been the tax recovery attributable to the Company's U.S. based companies for the nine-months ended September 30, 2012. Consequently, the Company recorded a consolidated tax expense of $1.8 million for the first nine-months of 2012 compared to a consolidated tax expense of $2.1 million for the first nine-months of 2011.

Net loss for the 2012 third quarter was $10.1 million compared to net loss of $3.4 million for the same quarter in 2011. This resulted in a loss per share of $0.62 for the third quarter of 2012 compared to a loss per share of $0.21 for the third quarter of 2011. The weighted average number of shares for the current quarter was 16.4 million basic and diluted compared to 16.3 million basic and diluted shares in the third quarter of 2011. For the nine months ended September 30, 2012, the Company posted a net loss of $20.1 million compared to a net loss of $5.9 million in the same nine-month period a year ago. This resulted in a loss of $1.23 per share compared to a loss of $0.36 per share for the 2011 nine-month period. The weighted average number of shares for the nine-month period of 2012 was 16.4 million basic and diluted compared to 16.3 million shares basic and diluted in the nine-month period of 2011.


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SEGMENTED RESULTS

Less-Than-Truckload (LTL)

The table below provides summary information for the LTL segment for the three
and nine months ended September 30:



                                               For the three months ended Sept 30,                         For the nine months ended Sept 30,
(in thousands)                             2012                2011           2012 vs 2011             2012               2011          2012 vs 2011
Revenue                                $    176,209        $    176,407                (0.1 %)     $    538,585        $  513,758                 4.8 %
Loss from operations                         (9,178 )            (2,878 )             218.9 %           (17,320 )          (3,135 )             452.5 %
Operating ratio                               105.2 %             101.6 %                                 103.2 %           100.6 %

                                                 For the three months ended Sept 30,                             For the nine months ended Sept 30,
(in thousands)                              2012                 2011            2012 vs 2011               2012                 2011           2012 vs 2011
Number of shipments (2)                     1,096,460           1,112,138                 (1.4 %)           3,378,087           3,238,922                 4.3 %
Weight (000s of lbs) (3)                    1,591,106           1,632,736                 (2.5 %)           4,951,164           4,843,656                 2.2 %
Revenue per shipment (4)               $       160.71        $     158.62                  1.3 %       $       159.43        $     158.62                 0.5 %
Revenue per hundredweight (5)          $        11.07        $      10.80                  2.5 %       $        10.88        $      10.61                 2.5 %

Revenue in the LTL segment was flat at $176.2 million in the third quarter of 2012 compared to $176.4 million in the same period a year ago. Fuel surcharge had a minimal impact on revenue in the third quarter of 2012. Furthermore, shipments and tonnage decreased 1.4% and 2.5%, respectively, compared to the third quarter of 2011. Both metrics were impacted by one less working day in the third quarter of 2012 compared to the third quarter of 2011. On a per day basis, shipments increased 0.2% in the third quarter of 2012 compared to the same quarter in 2011.

Revenue in the LTL segment increased 4.8% to $538.6 million for the nine-month period ended September 30, 2012 compared to $513.8 million for the same nine-month period a year ago. Shipments and tonnage increased 4.3% and 2.2%, respectively, from the comparable nine-month period.

Shipments per day in the U.S. LTL business unit were flat for the third quarter of 2012 compared to the third quarter of 2011. This is attributable to a slight softness in the U.S. market and management's internal focus on improving its operations in the U.S. LTL business unit. On a year-over-year basis from the third quarter of 2012 compared to the third quarter of 2011, average length of haul stayed level and average revenue per hundredweight increased 2.8%. Management expects the revenue per hundredweight to increase in the upcoming quarters as the pricing environment continues to favor LTL carriers in the North American market place.

During the third quarter of 2012, the U.S. LTL business unit continued to add key personnel and in August 2012 added a number of experienced executives to its management team. The build-up of the leadership team at the business unit is now complete. A second initiative completed in the third quarter was the restructuring of the business unit's linehaul network. This initiative has positively resulted in reduced miles and the beginning signs of improved efficiencies in some key areas of operations while management continues to expect improvement in other areas in the near future.

Achievements have been made in improving the customer experience at U.S. LTL, including the introduction of tablet technology to the pick-up and delivery team and an improved dispatch interface. Additional technology was introduced to operations in the third quarter to continue to enhance customer service levels. Although labor costs were comparatively higher in the quarter, it is management's expectation that as the use of the new technology is optimized, the business unit gains traction from a new operations leadership group and the adoption of all the new systems and processes, the Company will reduce labor costs as a percentage of revenue. The new management team's focus continues to be on improving service, sales and operating efficiency and it is management's expectation these initiatives will have a positive impact on future financial results.


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The Canadian LTL business unit posted a solid 2012 third quarter benefiting from a steady Canadian economy and a stable operation compared to the U.S. LTL business unit.

Lastly, management believes that with additional density gains, continued momentum in the North American pricing environment, combined with a continued focus on operational improvements, the LTL segment is well positioned to improve income from operations over the long-term.

Supply Chain Operation (SCO)

The table below provides summary information for the Supply Chain Operation
segment for the three and nine months ended September 30:



                                            For the three months ended Sept 30,                        For the nine months ended Sept 30,
(in thousands)                          2012                2011          2012 vs 2011            2012                2011           2012 vs 2011
Revenue                             $     30,011        $     29,752                0.9 %     $     88,480        $     86,670                 2.1 %
Income from operations                     2,569               2,922              (12.1 %)           7,038               7,349                (4.2 %)
Operating ratio                             91.4 %              90.2 %                                92.0 %              91.5 %

Revenue in the SCO segment increased 0.9% for the third quarter of 2012 compared to the third quarter of 2011. However, income from operations decreased 12.1% in the third quarter of 2012 compared to the same quarter in 2011, and the SCO segment posted an operating ratio of 91.4% in the third quarter of 2012 compared to 90.2% in the third quarter of 2011. On a sequential basis operating income improved 8.4% compared to the second quarter of 2012. The Company renewed a contract with a large customer and shifted the contract to a cost-plus arrangement. By shifting this customer to cost-plus, the SCO segment ensured long-term growth and stability with the customer balanced with a still solid but lower assured margin. Management opened a new dedicated facility in Tacoma, Washington during the second quarter of 2012 and opened a dedicated facility in Kansas City, Kansas in July 2012. Operating results in the upcoming quarters should see continued improvement due to the aforementioned two new facilities and as activity levels improve throughout the balance of the year.

LIQUIDITY AND CAPITAL RESOURCES

Cash flow from continuing operations for the third quarter of 2012 consumed $3.4 million compared to generating $0.3 million in the 2011 third quarter. The Company generated a net loss from operations in the third quarter of 2012; however, this was offset by the improvement in non-cash working capital. Days sales outstanding ("DSO") in the third quarter of 2012 were 39.1 days compared to DSO of 39.3 days for the third quarter of 2011.

The Company's future operating cash flows are largely dependent upon the Company's profitability and its ability to manage its working capital requirements, primarily accounts receivable, accounts payable, and wage and benefit accruals.

As at September 30, 2012, interest-bearing debt was $97.9 million consisting of $42.6 million drawn under the syndicated asset-based revolving credit facility, $45.8 million of real estate term debt, $2.8 million of term debt, and $6.7 million of capital leases. At December 31, 2011, interest-bearing debt was $73.9 million consisting of $21.9 million drawn under the syndicated asset-based revolving credit facility, $45.0 million of real estate term debt, $3.5 million of term debt, and $3.5 million of capital leases.

For the nine months ended September 30, 2012, the Company repaid $0.7 million of real estate term debt, $0.8 million of term debt, $2.5 million of capital leases, and drew down $20.7 million under its revolving credit facilities. At September 30, 2012, the Company had $20.5 million of available credit facilities, net of outstanding letters of credit, to achieve its future operational and capital objectives. The Company was in compliance with all terms under its credit agreements at September 30, 2012.

The Company generated $1.9 million in proceeds on the divestiture of facilities in Springfield, MO, Louisville, KY, Toledo, OH and surplus equipment in the first nine months of 2012. Capital expenditures amounted to $19.5 million for the first nine months of 2012 and were funded out of the revolving credit facilities and capital leases. The majority of the capital expenditures were for a facility in Memphis, TN, construction of the Winnipeg, MB facility, rolling stock and dock equipment.


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The table below sets forth the Company's capital expenditures for the three and nine months ended September 30:

                                For the three months ended Sept 30,             For the nine months ended Sept 30,
(in thousands of dollars)         2012                      2011                   2012                      2011
Real estate and buildings   $           2,296         $              -      $            6,651         $          4,620
Tractors                                  495                         4                  4,993                      766
Trailing fleet                              6                        15                  1,912                      636
Information technology                    161                       452                    818                      774
Leasehold improvements                    845                       112                  1,039                      176
Other equipment                         2,446                       436                  4,124                      655

Total                       $           6,249         $           1,019     $           19,537         $          7,627

Management estimates that cash capital expenditures for the remainder of 2012 will be between $2.0 million and $3.0 million. The Company may enter into operating leases to fund the acquisition of specific equipment should the business levels exceed the current equipment capacity of the Company. The Company expects to finance its capital requirements with cash flow from operations, operating leases, real estate term debt and, if required, its $20.5 million of unused credit facilities.

The Company has contractual obligations that include long-term debt consisting of term debt facilities, revolving credit facilities, capital leases for operating equipment and 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 September 30, 2012:

(in thousands of dollars)                                                   Payments due by period
Contractual Obligations                      Total         2012        2013 & 2014       2015 & 2016       Thereafter
Term credit facilities                     $   2,750     $  1,500     $       1,250     $         Nil     $        Nil
Real estate facility                          45,768          256             2,148             2,353           41,011
Revolving credit facilities                   42,656          Nil            42,656               Nil              Nil
. . .
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