ITEM 1 - BUSINESS
OVERVIEW
Vitran Corporation Inc. (“Vitran” or the “Company”) is a leading, predominantly non-union, provider of freight surface transportation and related supply chain services throughout Canada and in 34 states in the eastern, southeastern, central, southwestern, and western United States. The Company’s business consists of Less-than-truckload services (“LTL”) and Supply Chain Operation (“SCO) services. These services are provided by stand-alone business units within their respective regions. The business units operate independently or in a complementary manner to provide solutions depending on a customer’s needs. For the years ended December 31, 2011 and 2010, the Company had revenues of $805.6 million and $672.6 million, respectively.
CORPORATE STRUCTURE
Vitran’s principal executive and registered office is located at 185 The West Mall, Suite 701, Toronto, Ontario, Canada, M9C 5L5. Vitran Corporation Inc. was incorporated in Ontario under the Business Corporation Act (Ontario) on April 29, 1981.
Vitran’s business is carried on through its subsidiaries which hold the relevant licenses and permits required to carry on business. The following are Vitran’s principal operating subsidiaries (including their jurisdiction of incorporation), all wholly owned as at December 31, 2011: Vitran Express Canada Inc. (Ontario); Can-Am Logistics Inc. (Ontario); Vitran Logistics Ltd. (Ontario); Expéditeur T.W. Ltée (Canada); Vitran Corporation (Nevada); Vitran Express Inc. (Pennsylvania); Vitran Logistics Corp. (Delaware); Vitran Logistics Inc. (Indiana); and Las Vegas/L.A. Express, Inc. (California).
OPERATING SEGMENTS
Segment financial information is included in Note 13 to the Consolidated Financial Statements.
LTL Services
Vitran has grown organically and made strategic acquisitions to build a comprehensive LTL network throughout Canada and in the eastern, southeastern, central, southwestern, and western United States. Vitran’s LTL business represented approximately 85.2% of its revenue for the year ended December 31, 2011.
On May 31, 2005, Vitran expanded into the southwestern United States by acquiring Chris Truck Line (“CTL”), a Kansas-based regional less-than-truckload carrier serving 11 states. With the acquisition of CTL, Vitran obtained an additional 19 service centers covering 11 states, including new territory in Colorado, Kansas, Oklahoma, and Texas. On January 3, 2006, Vitran, through its subsidiary Vitran Express West Inc., expanded into the western United States by acquiring the assets of Sierra West Express (“SWE”), a Nevada-based regional less-than-truckload carrier serving three states. With the acquisition of SWE, Vitran expanded its footprint to California, Nevada, and Arizona. On October 2, 2006, Vitran expanded into the eastern United States by acquiring PJAX Freight System (“PJAX”), a Pennsylvania-based regional less-than-truckload carrier serving 11 states. With the acquisition of
PJAX, Vitran obtained 22 service centers including expanded and new state coverage in New Jersey, Pennsylvania, Delaware, Maryland, West Virginia and Virginia. During 2008, the U.S. LTL business unit launched a new integrated operating system and completed the physical and operational integrations of all its LTL companies. On December 31, 2009, these acquired companies were re-organized for tax purposes with Vitran’s existing LTL operation, Vitran Express Inc. (Indiana), to form Vitran Express Inc. (Pennsylvania). On February 19, 2011, Vitran acquired selected assets of Milan Express Inc.’s (“Milan”) LTL division, a private LTL carrier headquartered in Milan, Tennessee. With the acquisition of Milan, Vitran added 19 service centers including expanded and new state coverage in Alabama, Georgia, Mississippi, North Carolina and South Carolina.
Within the United States, the Company operates primarily within the eastern, southeastern, central, southwestern and western United States and delivers approximately 80.0% of its freight shipments within one or two days. In addition, the Company offers its services to the other regions in the United States (other than Alaska and Hawaii) through its strategic inter-regional relationships. The service is provided over-the-road, mostly by Company drivers, which allows more control in servicing these time-sensitive shipments. Vitran’s U.S. LTL business represented approximately 72.0% of total LTL revenues for the year ended December 31, 2011.
Within Canada, the Company provides next-day service within Ontario, Quebec and parts of western Canada, and generates most of its revenue from the movement of LTL freight within the three- to five-day east-west service lanes. The majority of its trans-Canada freight is shipped intermodally, whereby the Company’s containers are loaded onto rail cars and trans-loaded to Vitran facilities where Vitran’s network of owner operators pick up and deliver the freight to various destinations. An expedited service solution is also offered nationally using over-the-road driver teams to complete these deliveries in a shorter time frame. Vitran’s Canadian LTL business represented approximately 28.0% of total LTL revenues for the year ended December 31, 2011.
Vitran’s Transborder Service Solution (inter-regional) provides over-the-road service between its Canadian LTL and U.S. LTL business units. This is the Company’s highest margin and fastest growing service, achieving a five-year compounded average growth rate of approximately 10% per annum at December 31, 2011.
Supply Chain Operation
Vitran’s SCO segment represented approximately 14.8% of its revenues for the year ended December 31, 2011. The SCO involves the management and transportation of goods and the provision of information about such goods as they pass through the supply chain from manufacturer to end user. The SCO’s role is to design a supply chain network for a customer, contract with the necessary suppliers (including Vitran’s LTL services), as well as implement the design and management of the logistical system. Vitran’s SCO offers a range of services in Canada and the United States including cross-docks, inventory management, flow-through distribution facilities, and dedicated distribution facilities that focus primarily on long-term customized supply chain solutions. In addition, SCO provides over-the-road or intermodal freight brokerage services with sales offices in Toronto, Montreal and Los Angeles, so as to capitalize on international traffic flows in North America.
Over the past decade, Vitran has grown its SCO segment organically, and on November 30, 2007, announced the strategic acquisition of Las Vegas/L.A. Express Inc. (“LVLA”), a retail supply-chain management specialist based in Ontario, California. LVLA operated six facilities, and its acquisition by Vitran added 470,000 square feet of logistics space. As at December 31, 2011, Vitran’s SCO had approximately 2.0 million square feet of warehouse and distribution space under management.
Truckload
On November 30, 2010, the Company sold the majority of the rolling stock of the former Truckload segment for proceeds of $3.0 million and retained the net working capital of $2.0 million. The Company recorded a gain of $2.2 million on the equipment sold and wrote off the remaining $4.8 million of goodwill attributable to this business in Fiscal 2010. The operating results and divestiture of the segment have been recorded as a discontinued operation.
THE TRUCKING INDUSTRY
The trucking industry consists of two segments, specifically private fleets and “for-hire” carriers. The private carrier segment consists of fleets owned and operated by shippers who move their own goods. The “for-hire” segment is further divided into Truckload (“TL”) and LTL sub-segments, based on the typical shipment size handled by the carrier. TL refers to carriers transporting shipments greater than 10,000 pounds and LTL refers to carriers generally transporting shipments of less than 10,000 pounds. Vitran is predominantly an LTL carrier with a focus on regional and inter-regional LTL lanes.
LTL carriers transport freight for multiple customers to multiple destinations on each trailer. This service requires a network of local pick-up and delivery terminals, hub facilities, and driver fleets. The LTL business is capital intensive, and achieving significant density of operations in a given region can afford a competitive advantage since greater freight volumes are better able to support fixed costs. Vitran believes the regional LTL industry offers a favorable operating model and provides substantial growth opportunities for the following reasons:
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the trend among shippers toward minimal inventories, deferred air freight, and regional distribution has increased the demand for next-day and second-day delivery service;
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regional carriers with sufficient scale and freight density to support local terminal networks can offer greater service reliability and minimize the costs associated with intermediate handling;
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regional carriers are predominantly non-union, which offers cost savings, greater flexibility, and a lower likelihood of service disruptions, compared with unionized carriers; and
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there has been a reduction of capacity as weaker competitors exit the business.
MARKETING AND CUSTOMERS
Vitran derives its revenue from thousands of customers from a variety of geographic regions and industries in Canada and the United States. The Company has no customer that represents more than 5.3% of Vitran’s revenues. At December 31, 2011, the Company employed 134 sales associates. Sales associates maintain a dialogue with new and existing customers within the geographic market. New customers are obtained through referrals, cold calls and trade publications. The sales associates receive a base salary and, depending on the business unit, a variable compensation package that can be linked to revenue generation, business unit profitability and days-sales outstanding.
The LTL segment analyzes the price level that is appropriate for each particular shipment of freight. When necessary, Vitran competes to secure revenue by participating in bid solicitations, provided its customer recognizes the Company as a core carrier over a contracted period of time.
In SCO, Vitran customizes each solution to fit the needs of the customer. The SCO pursues opportunities that will not only increase the profitability of that segment but will supplement activity in Vitran’s LTL segment as well.
EMPLOYEES
At December 31, 2011 Vitran employed approximately 6,031 full- and part-time employees and contracted with approximately 251 owner operators. The vast majority of our employees are not represented by unionized collective bargaining agreements. The advantage of employing predominantly non-union labour is more work rules flexibility with respect to work schedules, routes and other similar items. Work rule flexibility is important in our business segments to meet the service level requirements of our customers.
A total of 115 Vitran employees are represented by two labor unions, representing 1.8% of the Company’s labour force. The International Brotherhood of Teamsters and the Canadian Auto Workers Association represent dock workers in two of Vitran’s Canadian terminals. The Company has never had a work stoppage. The collective bargaining agreements between the Company and its unionized employees expire on February 28, 2014 and on March 31, 2015, respectively.
INFORMATION TECHNOLOGY
Vitran uses technology to reduce costs, improve productivity, and enhance its customer service. Vitran allows its customers to access or exchange information with the Company via Vitran’s website, published web services, electronic data interchange, or over the telephone. The Company uses sophisticated freight handling software to maximize its load average, reduce freight handling, reduce transit times, and improve tracking of shipments through its system. In the second quarter of 2008, Vitran’s U.S. LTL business unit completed the process of migrating all of its U.S. LTL operations to a common transportation operating system that further enhanced the Company’s technology platform and helped deliver superior service to its customers. Vitran continues to develop its transportation operating systems to enhance the efficiency and effectiveness of service to its customers and improve productivity throughout the organization. Vitran’s SCO segment customizes the technology platform to its client requirements spanning the simplest of connections to highly integrated solutions.
SEASONALITY
In the trucking industry for a typical year, the months of September and October usually have the highest business levels, while the months of December, January and February generally have the lowest business levels. Adverse weather conditions generally experienced in the first quarter of the year, such as heavy snow and ice storms, have a negative impact on operating results. Accordingly, revenue and profitability are normally lowest in the first quarter.
REGULATION
Regulatory agencies exercise broad powers over the trucking industry, generally governing such activities as authorization to engage in motor carrier operations, safety and financial reporting. The industry also may become subject to new or more restrictive regulations relating to fuel emissions, ergonomics, or limits on vehicle weight and size. Additional changes in the laws and regulations governing the trucking industry could affect the economics of the industry by requiring changes in operating practices or by influencing the demand for and the costs of providing services to customers. In addition to the U.S. Department of Transportation (“DOT”), Vitran is subject to regulations from, but not limited to, the Department for Homeland Security, Environmental Protection Agency, and the Food and Drug Administration.
From time to time, various legislative proposals that might affect the trucking industry are introduced, including proposals to increase federal, state, provincial or local taxes, including taxes on motor fuels. Vitran cannot predict whether, or in what form, any increase in such taxes applicable to the Company will be enacted. Increased taxes could adversely affect Vitran’s profitability.
Vitran’s employees and owner operators also must comply with the safety and fitness regulations promulgated by the DOT, specifically, Comprehensive Safety Analysis 2010 (“CSA 2010”) mandated by the Federal Motor Carrier Safety Administration (“FMSCA”) and various regulatory authorities in Canada, including those relating to drug and alcohol testing and hours of service.
COMPETITION
Vitran competes with many other transportation service providers of varying sizes within Canada and the United States. In the United States, Vitran competes mainly in the eastern, southeastern, central, southwestern and western states. The transportation industry is highly competitive on the basis of both price and service. The Company competes with regional, inter-regional and national LTL carriers, truckload carriers, third-party logistics companies and, to a lesser extent, small-package carriers, air freight carriers and railroads. The Company competes effectively in its markets by providing high quality and timely service at competitive prices.
AVAILABLE INFORMATION
Vitran makes available free of charge on or through its website at www.vitran.com its Annual Report on Form 10-K (including the Company management’s discussion and analysis (“MD&A”) at December 31, 2011), Quarterly Reports on Form 10-Q, current reports on Form 8-K and other information releases, including all amendments to those reports, as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (“SEC”) and System for Electronic Document Analysis and Retrieval (“SEDAR”). The information can also be accessed through EDGAR at www.sec.gov or SEDAR at www.sedar.com.
ITEM 1. A-RISK FACTORS
RISKS AND UNCERTAINTIES
An investment in our Company involves a high degree of risk. Before making an investment in the common shares of the Company, you should carefully consider the risks described below and the other information contained in this Annual Report on Form 10-K. The risks described below are not the only ones facing our Company or otherwise associated with an investment in our Company. If we do not successfully address any of the risks described herein or therein, there could be a material adverse effect on our financial condition, operating results and business, and the trading price of our common shares may decline. We can provide no assurance that we will successfully address these risks.
Risks Relating to Our Company
Our industry is highly competitive, and our business will suffer if we are unable to adequately address potential downward pricing pressures and other factors that may adversely affect operations and profitability.
The transportation industry is highly competitive on the basis of both price and service. We compete with regional, inter-regional and national LTL carriers, truckload carriers, third party logistics companies and, to a lesser extent, small-package carriers, air freight carriers and railroads. Numerous competitive factors could impair our ability to maintain our current profitability. These factors include the following:
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we compete with many other transportation service providers of varying sizes, many of which have more equipment, a broader coverage network, a wider range of services and greater capital resources than we do or have other competitive advantages;
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some of our competitors periodically reduce their prices to gain business, especially during times of reduced growth rates in the economy, which may limit our ability to maintain or increase our prices or maintain significant growth in our business;
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many customers reduce the number of carriers they use by selecting so-called “core carriers” as approved transportation service providers, and in some instances we may not be selected;
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our customers may negotiate rates or contracts that minimize or eliminate our ability to offset fuel price increases through a fuel surcharge on our customers;
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many customers periodically accept bids from multiple carriers for their shipping needs, and this process may depress prices or result in the loss of some business to competitors;
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the trend towards consolidation in the surface transportation industry may create other large carriers with greater financial resources than us and other competitive advantages relating to their size;
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advances in technology require increased investments to remain competitive, and our customers may not be willing to accept higher prices to cover the cost of these investments; and
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competition from non-asset-based logistics and freight brokerage companies may adversely affect our customer relationships and prices.
We are subject to financial covenants under our revolving credit facility.
Under our current revolving credit facility, we are subject to a minimum fixed charge coverage ratio that requires compliance only when certain triggering events occur. This financial covenant, as well as other financial covenants that may in the future be imposed under our current or future credit facilities, could limit our ability to raise additional capital to fund future growth. In addition, any adverse change to our business that has a material negative impact on our financial performance could cause us not to be able to be in compliance with these covenants. Our inability to remain in compliance with our financial covenants could result in a default under our credit facilities which would require us to attempt to re-negotiate these financial covenants, attempt to obtain new financing or scale back our business operations to achieve compliance. There is no assurance that we would be able to re-negotiate our financial covenants in this event, which could reduce the amount of credit available under our credit facilities.
We are subject to general economic factors that are largely out of our control, any of which could have a material adverse effect on the results of our operations.
Our business is subject to a number of general economic factors that may have a material adverse effect on the results of our operations, many of which are largely out of our control. These include recessionary economic cycles and downturns in customer business cycles, particularly in market segments and industries, such as retail, manufacturing and chemical, where we have a significant concentration of customers. Economic conditions may adversely affect the business levels of our customers, the amount of transportation services they need and their ability to pay for our services. It is not possible to predict the long-term effects of above-mentioned factors on the economy or on customer confidence in Canada or the United States, or the impact, if any, on our future results of operations. Adverse changes in economic conditions could result in declines to our revenues and a reduction in our current level of profitability.
If the world-wide financial crisis worsens, it could adversely impact demand for our services.
The global capital markets have been experiencing significant disruption and volatility over the past few years as evidenced by a lack of liquidity in the debt markets, significant write-offs in the financial services sector, the re-pricing of credit risk in the broadly syndicated credit market and failure of certain major financial institutions. Continued market disruptions could cause broader economic downturns which may lead to lower demand for our services, increased incidence of customers’ inability to pay their accounts, or insolvency of our customers, any of which could adversely affect our results of operations, liquidity, cash flows and financial condition.
Moreover, such market disruptions may increase our cost of borrowing or affect our ability to access debt and equity capital markets. Market conditions may affect our ability to refinance indebtedness as and when it becomes due. We are unable to predict the effect the uncertainty in the capital markets may have on our financial condition, results of operations or cash flows. Our ability to repay or refinance our indebtedness will depend upon our future operating performance which will be affected by general economic, financial, competitive, legislative, regulatory and other factors beyond our control.
Our supply chain operation business is dependent upon long-term relationships with our customers.
We have entered into long-term relationships with our customers whereby we have agreed to provide supply chain solutions to our customers which involve the establishment and operation of warehousing, inventory management and flow-through distribution facilities. The success of these relationships is dependent upon our continued ability to meet the requirements under our customers’ contracts, as well as the continued financial success and business operations of our customers. If we are unable to continue to deliver our supply chain solutions to our customers, either as a result of a determination by our customers not to continue to use our services or our customer ceasing to operate its business for any reason, our revenues from our supply chain solutions business may decline and we may not be able to recover our investment in the distribution facilities that we have established to deliver these services to our customers.
Increases in our operating expenses could cause our profitability to decline.
Our significant cash operating expenses include: salaries, wages and employee benefits, purchased transportation, maintenance expenses, rents and leases, purchased labor and owner operators, fuel and fuel-related expenses. Increases in our operating expenses will adversely impact on our profitability to the extent that we are not able to pass these increased expenses on to our customers through increased rates for our transportation services. Many of these operating expenses are beyond our control and, in addition, are subject to competitive forces. Further, we operate in a price sensitive industry where customers have many alternatives for their transportation services and, as a result, we may have limited ability to pass on increased operating expenses to our customers.
Unsuccessful execution of our acquisition strategy could cause our business and future growth prospects to suffer.
We may not be able to implement our strategy to acquire other transportation companies, which depends in part on the availability of suitable candidates. In addition, we may face competition for the acquisition of attractive carriers from other consolidators in the freight transportation industry who may be larger or better financed than we are. Furthermore, there can be no assurance that if we acquire what we consider to be a suitable candidate in
accordance with our growth strategy, we will be able to successfully integrate the operations of the acquired company into our operations on an accretive basis. If we are unable to successfully integrate the operations of the acquired company, we may not be able to achieve the anticipated benefits of such acquisition and the performance of our operations after completion of such acquisition could be adversely affected.
Significant ongoing capital requirements could limit growth and affect profitability.
Our business is capital intensive. If we are unable to generate sufficient cash from operations to fund our capital requirements, we may have to limit our growth, utilize our existing revolving credit facility, or enter into additional, financing arrangements. While we intend to finance expansion and renovation projects with existing cash, cash flow from operations and available borrowings under our existing credit agreement, we may require additional financing to support our continued growth. However, due to the existing uncertainty in the capital and credit markets, capital may not be available on terms acceptable to us. If we are unable in the future to generate sufficient cash flow from operations or borrow the necessary capital to fund our planned capital expenditures, we will be forced to limit our growth and/or operate our equipment for longer periods of time, resulting in increased maintenance costs, any of which could have a material adverse effect on our operating results.
If any of the financial institutions that have extended credit commitments to us are or continue to be adversely affected by current economic conditions and disruption to the capital and credit markets, they may become unable to fund borrowings under their credit commitments or otherwise fulfill their obligations to us, which could have a material adverse impact on our financial condition and our ability to borrow additional funds, if needed, for working capital, capital expenditures, acquisitions and other corporate purposes.
Availability and cost of real estate could limit growth and affect profitability.
Our businesses in the United States and Canada are dependent on the cost and availability of terminal facilities and distribution centers within key markets. Shortages in the availability of existing facilities and distribution centers for sale or lease could increase our operating expenses and prevent us from effectively serving certain markets. Unavailability of land for purchase and construction delays due to various reasons such as delays in obtaining permits may also adversely impact cash flows.
The engines in our newer tractors are subject to new emissions-control regulations which could substantially increase operating expenses.
Tractor engines that comply with the Environmental Protection Agency (EPA) emission-control design requirements that took effect on January 1, 2007 are possibly less fuel-efficient and have increased maintenance costs compared to engines in tractors manufactured before these requirements became effective. In addition, compliance with the more stringent EPA requirements that were made effective in 2010 could result in further declines in fuel efficiency and increases in maintenance costs. If we are unable to offset resulting increases in fuel expenses or maintenance costs with higher freight rates, our results of operations could be adversely affected.
We are a corporation based outside the United States.
We are a Canadian-based corporation with substantial operations in the United States. Changes in United States laws or the application thereof, including regulatory, homeland security or taxation, that primarily impact foreign corporations could have a material adverse effect on our prospects, business, financial condition and results of operations. Increased regulation could increase both the time and cost of transportation across the United States/ Canada border with the result that demand for cross-border transportation services may decline and our costs of providing these services may increase.
Fluctuations in the price and availability of fuel may adversely impact profitability.
Fuel is a significant operating expense. We do not hedge against the risk of fuel price increases. Any increase in fuel taxes or fuel prices or any change in federal, state or provincial regulations that results in such an increase, to the extent that the increase is not offset by freight rate increases or fuel surcharges to customers, or any interruption in the supply of fuel, could have a material adverse effect on our business, operations or financial condition.
While we have historically been able to adjust our pricing to offset changes to the cost of fuel through changes to base rates and/or fuel surcharges, we cannot be certain that we will be able to do so in the future. In addition, we are subject to risks associated with the availability of fuel, which are subject to political, economic and market factors that are outside of our control. We would be adversely affected by an inability to obtain fuel in the future. Although historically we have been able to obtain fuel from various sources and in the desired quantities, there can be no assurance that this will continue to be the case in the future.
Our industry is subject to numerous laws and regulations in Canada and the United States, exposing us to potential claims and compliance costs that could have a material adverse effect on our business.
We are subject to numerous laws and regulations by the U.S. Department of Transportation (“DOT”), Environmental Protection Agency, Internal Revenue Service, Canada Revenue Agency and various other federal, state, provincial and municipal authorities. Such regulatory agencies exercise broad powers over our business, generally governing such activities as authorization to engage in motor carrier operations and safety, and financial reporting. Our employees and owner operators must also comply with the safety and fitness regulations promulgated by the DOT, including those relating to drug and alcohol testing, driver hours-of-service limitations, labour-organizing activities, stricter cargo-security requirements, tax laws and environmental matters, including potential limits on carbon emissions under climate-change legislation. We may become subject to new or more restrictive regulations relating to fuel emissions, ergonomics, or limits on vehicle weight and size.
We are not able to accurately predict how new governmental laws and regulations, or changes to existing laws and regulations, will affect the transportation industry generally, or us in particular. Although government regulation that affects us and our competitors may simply result in higher costs that can be passed to customers, there can be no assurance that this will be the case. Any additional measures that may be required by future laws and regulations or changes to existing laws and regulations may require us to make changes to our operating practices or services provided to our customers and may result in additional costs, all of which could have an adverse effect on us.
The Federal Motor Carrier Safety Administration’s (“FMCSA”) Compliance, Safety, Accountability initiative (“CSA”) could adversely impact our ability to hire qualified drivers and maintain customer relationships.
In December 2010, the FMSCA implemented CSA 2010, a new compliance and enforcement initiative designed to monitor commercial motor vehicle safety. Under CSA 2010, carriers and individual drivers are evaluated and ranked based on certain safety-related standards. Our CSA scores are dependent upon our safety and compliance experience, which could change at any time. In addition, the safety standards set by the FMCSA could change and affect our ability to maintain a satisfactory score. If we obtain an unsatisfactory score it could adversely impact our relationships with customers and result in a loss of business. CSA 2010 could also cause a reduction in the driver pool as those with unfavorable scores could leave the industry increasing our operating costs to attract, train and retain qualified drivers.
Changes in governmental regulation may impact future cash flows and profitability.
In Canada, carriers must obtain licenses issued by each provincial transport board in order to carry goods extra-provincially or to transport goods within any province. Licensing from U.S. regulatory authorities is also required for the transportation of goods between Canada and the United States and within the United States. Any change in these regulations could have an impact on the scope of our activities. There is no assurance that we will be in full compliance at all times with such policies and guidelines. As a result, we could be required, at some future date, to incur significant costs in order to maintain or improve our compliance record.
Results of operations may be affected by seasonal factors and harsh weather conditions.
Our business is subject to seasonal fluctuations. In the trucking industry for a typical year, the second and third quarters usually have the highest business levels, while the first and fourth quarters generally have the lowest business levels. The fourth quarter holiday season and adverse weather conditions generally experienced in the first quarter of the year, such as heavy snow and ice storms, have a negative impact on operating results.
If additional employees unionize, our operating costs would increase.
We have a history of positive labour relations that will continue to be important to future success. Two of our terminals in Canada, representing 1.8% of our labour force, are represented by the International Brotherhood of Teamsters and the Canadian Auto Workers Association. The collective bargaining agreements between us and our unionized employees expire on February 28, 2014, and on March 31, 2015, respectively. There can be no assurance that the collective bargaining agreements will be renegotiated on terms acceptable or favourable to us. There can be no assurance that other employees will not unionize in the future. From time to time there could be efforts to organize our employees at various other terminals, which could increase our operating costs and force us to alter our operating methods. This could, in turn, have a material adverse effect on our business, operations or financial condition.
Changes to our compensation and benefits could adversely affect our ability to attract and retain employees.
Like many other companies, we had implemented certain salary and wage cost initiatives in 2009. Such initiatives include the suspension of our 401(k) matching program and a 5 percent compensation reduction across all employees of the Company. The Company had returned the 5% salary and wage reduction by the beginning of the fourth quarter in 2011. However, due to the salary and wage cost initiatives that we took in 2009, we may still find it difficult to attract, retain and motivate employees, and any such difficulty could materially adversely affect our business.
Various environmental laws and regulations, and costs of compliance with, liabilities under, or violations of, existing or future environmental laws or regulations could adversely affect our results.
Our operations are subject to environmental laws and regulations dealing with the handling of hazardous materials, underground fuel storage tanks and discharge and retention of storm water. We operate in industrial areas where truck terminals and other industrial activities are located and where groundwater or other forms of environmental contamination may have occurred. Our operations involve the risks of fuel spillage or seepage, environmental damage and hazardous waste disposal, among others. If we are involved in a spill or other accident involving hazardous substances or if we are found to be in violation of applicable laws or regulations, it could have a material adverse effect on our business and operating results. If we fail to comply with applicable environmental regulations, we could be subject to substantial fines or penalties and to civil and criminal liability.
In addition, as global warming issues become more prevalent, federal and local governments and our customers are beginning to respond to these issues. This increased focus on sustainability may result in new regulations and customer requirements that could negatively affect us. This could cause us to incur additional direct costs or to make changes to our operations in order to comply with any new regulations and customer requirements, as well as increased indirect costs or loss of revenue resulting from, among other things, our customers incurring additional compliance costs that affect our costs and revenues. We could also lose revenue if our customers divert business from us because we have not complied with their sustainability requirements. These costs, changes and loss of revenue could have a material adverse effect on our business, financial condition and results of operations.
Loss of key personnel could harm our business, operations or financial condition.
The success of our business is dependent upon the active participation of certain management personnel who have extensive experience in the industry. The loss of the services of one or more of such personnel for any reason may have an adverse effect on our business if we are unable to secure replacement personnel that have sufficient experience in our industry and in the management of a transportation business such as ours. Our inability to successfully replace management personnel could result in a disruption to our business that could adversely impact our profitability and financial condition.
We face litigation risks that could have a material adverse effect on the operation of our business.
From time to time we face litigation regarding various alleged violations of state labor laws. These proceedings may be time-consuming, expensive and disruptive to normal business operations. The defense of such lawsuits could result in significant expense and the diversion of our management’s time and attention from operation of our business. Some or all of the amount we may be required to pay to defend or to satisfy a judgment or settlement of any or all these proceedings may not be covered by insurance and could have a material adverse effect on us.
Exchange rate and currency risks may impact our financial results.
As we operate both in the United States and in Canada, our financial results are affected by changes in the U.S. dollar exchange rate relative to the currencies of other countries including the Canadian dollar. To reduce the exposure to currency fluctuations, we may enter into limited foreign exchange contracts from time to time, but these hedges do not eliminate the potential that such fluctuations may have an adverse effect on us. In addition, foreign exchange contracts expose us to the risk of default by the counterparties to such contracts, which could have a material adverse effect on our business. Our inability to successfully mitigate our exposure to currency fluctuations could result in increased expenses attributable to foreign exchange loss.
Insurance and claims expenses could significantly reduce our profitability.
Our operations are subject to risks normally inherent in the freight transportation industry, including potential liability which could result from, among other circumstances, personal injury or property damage arising from accidents or incidents involving trucks operated by us or our agents. The availability of, and ability to collect on, insurance coverage is subject to factors beyond our control. In addition, we may become subject to liability for hazards which we cannot or may not elect to insure against because of high premium costs or other reasons, or for occurrences which exceed maximum coverage under our policies. Our future insurance and claims expenses might exceed historical levels, which could reduce our earnings. Increases to our premiums could further increase our insurance and claims expenses as current coverages expire or cause us to raise our self-insured retention. If the number or severity of claims for which we are self-insured increases, or we suffer adverse development in claims compared with our reserves, or any claim exceeded the limits of our insurance coverage, this could have a material adverse effect on our business, operations or financial condition.
Moreover, any accident or incident involving us, even if we are fully insured or held not to be liable, could negatively affect our reputation among customers and the public, thereby making it more difficult for us to compete effectively, and could significantly affect the cost and availability of insurance in the future.
We rely on purchased transportation, making us vulnerable to increases in costs of these services.
In Canada, we use purchased transportation, primarily intermodal rail from CN and CP Rail, to provide cost effective service on our east-west national LTL service offering. Any reduction in service by the railroads or increase in the cost of such rail services is likely to increase costs for us and reduce the reliability, timeliness and overall attractiveness of rail-based services. This would negatively impact our ability to provide our services, with the result that we may be forced to use more expensive or less efficient alternative modes of transportation to provide our services to our customers.
In the United States, we use purchased transportation primarily to handle lane imbalances and to accommodate surges in business. We will also, on occasion, augment our linehaul capacity during certain peak periods through the use of purchased transportation. A reduction in the availability of purchased transportation may require us to incur increased costs to satisfy customer shipping orders and we may be unable to pass along increases in third party shipping prices to our customers.
Our business may be adversely affected by anti-terrorism measures.
Federal, state, provincial and municipal authorities have implemented and are continuing to implement various anti-terrorism measures, including checkpoints and travel restrictions on large trucks. If additional security measures disrupt or impede the timing of our deliveries, we may fail to meet the needs of our customers or may
incur increased expenses to do so. This could result in a reduction in demand for our cross-border transportation services and increase the cost of providing these services, each of which could negatively impact our profitability. There can be no assurance that new anti-terrorism measures will not be implemented and that such new measures will not have a material adverse effect on our business, operations or financial condition.
Interest rate fluctuations will impact our financial results.
In order to mitigate the exposure to interest rate risk in 2011, we entered into floating-to-fixed interest rate swap contracts which expired December 31, 2011. Management continues to evaluate our need to fix interest rate exposure. Our inability to successfully mitigate our exposure to interest rate risk could result in us being exposed to increases to interest rates, which interest rate increases would increase our operating costs.
Difficulty in attracting qualified drivers could adversely affect our profitability and ability to grow.
We are dependent on our ability to hire and retain qualified drivers, including owner operators. There is significant competition for qualified drivers within the trucking industry and attracting and retaining drivers has become more challenging. If we are unable to attract drivers and contract with owner operators, we may experience shortages of qualified drivers that could result in us not meeting customer demands, pressure to upwardly adjust our driver compensation package, underutilization of our truck fleet and/or use of higher cost purchased transportation, all of which could have a material adverse effect on our operating results, our growth and profitability.
Our information technology systems are subject to certain risks that we cannot control.
We depend on our information technology systems in order to deliver reliable transportation services to our customers in an efficient and timely manner. We have integrated the information technology and operations of our acquired companies and will integrate future acquisitions within our U.S. LTL business unit. Any disruption to our technology infrastructure could result in delays in delivery of transportation services to our clients and increased operating costs as a result of decreased operating efficiencies, each of which could adversely impact our customer service, revenues and profitability. While we have invested and continue to invest in technology security initiatives and disaster recovery plans, these measures cannot fully protect us from technology disruptions that could have a material adverse effect on us. Our information technology remains susceptible to outages, computer viruses, break-ins and similar disruptions that may inhibit our ability to provide services to our customers and the ability of our customers to access our systems. This may result in the loss of customers or a reduction in demand for our services. Integration initiatives may not realize the anticipated benefits due to operational issues, disruptions and distractions for employees and management, and potential failures in due diligence.
An increase in the cost of healthcare benefits in the United States could have a negative impact on our profitability.
We maintain and sponsor health insurance for our employees, retirees and their dependents in the United States through preferred provider organizations, and offer a competitive healthcare program to attract and retain our employees. These benefits comprise a significant portion of our operating expenses. Lower interest rates and/or lower returns on plan assets may cause increases in the expense of, and funding requirements for, our healthcare plans. We remain subject to volatility associated with interest rates, returns on plan assets, and funding requirements. It is possible that healthcare costs could become increasingly cost prohibitive, either forcing us to make changes to our benefits program or negatively impacting our future profitability.
As a holding company, Vitran is dependent on various factors to meet its financial obligations.
Vitran is a holding company. Vitran’s ability to meet its financial obligations is dependant primarily upon the receipt of interest and principal payments on intercompany advances, management fee payments, cash dividends and other payments from Vitran’s subsidiaries together with the proceeds raised through the issuance of securities.
Risks Related to our Common Shares
The board of directors of Vitran does not intend to declare or pay any cash dividends in the foreseeable future.
The board of directors of Vitran has not declared dividends on our common shares since December 2001. We currently anticipate that we will retain future earnings and other cash resources to repay debt and to support future capital expenditure programs and for acquisitions. Vitran does not intend to declare or pay any cash dividends in the foreseeable future. Payment of any future dividends will be at the discretion of the board of directors of Vitran after taking into account many factors, including our operating results, financial condition and current and anticipated cash needs.
If additional equity financing is required, you may suffer dilution of your investment.
We may require additional financing in order to make further investments, respond to competitive pressures or take advantage of unanticipated opportunities including acquisitions. Our ability to arrange such financing in the future will depend in part upon prevailing capital market conditions, as well as our business success. If additional financing is raised by the issuance of shares from Vitran’s treasury, control of Vitran may change and/or shareholders of Vitran may suffer additional dilution.
Investors who purchase the common shares may pay more for the common shares than the amounts paid by existing shareholders of Vitran for their common shares. As a result, investors in the offering may incur immediate and substantial dilution. In the past, Vitran has issued options and other convertible securities to acquire the common shares at prices below the prevailing market prices or prices that may be negotiated with selling shareholders. To the extent these outstanding options and other convertible securities are ultimately exercised, investors in the offering will incur further dilution.
The price of our common shares may fluctuate significantly.
Volatility in the market price of our common shares may prevent an investor from being able to sell the Common Shares at, or above, the price paid for the common shares. The market price of our common shares could fluctuate significantly for various reasons which include:
•
our quarterly or annual earnings or those of other companies in our industry;
•
the public’s reaction to our press releases, our other public announcements and our regulatory filings;
•
changes in earnings estimates or recommendations by research analysts who follow our stock or the stock of other trucking companies;
•
changes in general conditions in the Canadian, U.S. and global economy, financial markets or trucking industry, including those resulting from war, incidents of terrorism or responses to such events;
•
sales of common shares by our directors and executive officers; and
•
other factors beyond our control, including those described in these “Risk Factors”.
In addition, in recent years, the stock market has experienced extreme price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies, including companies in our industry. The changes frequently appear to occur without regard to the operating performance of these companies. The price of the common shares could fluctuate based upon factors that have little or nothing to do with our business, and these fluctuations could materially reduce the price of the common shares.
An investment in our common shares is highly speculative.
An investment in our common shares is highly speculative and may result in the loss of an investor’s entire investment. Only potential investors who are experienced in high risk investments and who can afford to lose their entire investment should consider an investment in the common shares. Additional risks not currently known to us or that we currently deem immaterial may also impair our operations.
It may be difficult to maintain and enforce judgments against us because of our Canadian residency.
Vitran is a Canadian corporation, and some of its assets and operations are located, and some of its revenues are derived, outside the United States. In addition, a majority of Vitran’s directors and officers are residents of Canada and all or a substantial portion of the assets of those directors and officers are or may be located outside the United States. As a result, it may not be possible for investors to effect service of process within the United States upon those persons, or to enforce against them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of United States federal and state securities laws.
ITEM 1. B-UNRESOLVED STAFF COMMENTS
None
ITEM 2 - PROPERTIES
Vitran’s corporate office is located at 185 The West Mall, Suite 701, Toronto, Ontario, Canada, M9C 5L5. The 3,900 square foot office is occupied under a lease expiring in September 2015.
Each of Vitran’s operating subsidiaries also maintains a head office as well as numerous operating facilities. Vitran has not experienced and does not anticipate difficulties in renewing existing leases on favorable terms or obtaining new facilities as and when required.
Vitran operates 131 facilities, 24 of which are located in Canada and 107 of which are located in the United States. The Company’s LTL segment operates 114 terminals with a total of 3,743 loading doors in the United States and with a total of 552 loading doors in Canada. The 10 largest operating terminals in Vitran’s LTL segment, in terms of the number of loading doors, are listed below.
SCO operates 16 facilities, six in Canada, and ten in the United States, for major retailers in their respective markets. SCO has approximately 2.0 million square feet of warehouse and distribution space under management at December 31, 2011.
As at December 31, 2011, the Company operated 10,586 pieces of owned or leased rolling stock. The Company primarily purchases or utilizes operating lease facilities for the acquisition of new rolling stock for its operations; however, the Company occasionally purchases pre-owned equipment that meets its specifications. As at December 31, 2011, the Company owned or leased the following equipment.
ITEM 3 - LEGAL PROCEEDINGS
Vitran 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 material adverse effect upon Vitran’s financial condition, results of operations, or cash flows.
ITEM 4 - (REMOVED AND RESERVED)
PART II
ITEM 5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF SECURITIES
Description of Share Capital
At December 31, 2011, there was an unlimited number of common shares authorized and 16,331,241 common shares issued and outstanding. The holders of the common shares are entitled to one vote for each common share on all matters voted on at any meetings of Vitran’s shareholders to any dividends that may be declared by the Company’s Board of Directors thereon, and in the event of the liquidation, dissolution or winding up of the Company, will be entitled to receive the remaining property.
Vitran’s common shares trade on the Toronto Stock Exchange (“TSX”) and the NASDAQ Global Select Market under the symbols VTN and VTNC, respectively. On February 9, 2012, there were approximately 41 registered holders of record of the Company’s common shares. Because many of such shares are held by brokers and other institutions on behalf of shareholders, we are unable to estimate the total number of shareholders represented by these record holders.
Vitran did not pay any dividends on common shares in fiscal 2011 and 2010. The Board of Directors is responsible for determining the Company’s dividend policy and does not intend to declare dividends in the foreseeable future.
The following table sets forth the high and low bid prices of our common stock for the periods indicated, as reported by the TSX and the NASDAQ:
Stock Option Plan
(1) As at December 31, 2011.
Vitran maintains a stock option plan to assist in attracting, retaining and motivating its directors, officers and employees. The details of the Company’s authorized stock option plan are described in Note 10 of the Consolidated Financial Statements.
Purchases of Equity Securities
None
Transfer Agents
Computershare Investor Services Inc.
Montreal, Toronto
Canada
Computershare Trust Company Inc.
Denver
United States
ITEM 6 - SELECTED FINANCIAL DATA
The following selected financial data is derived from and should be read in conjunction with the Consolidated Financial Statements and Notes under Item 8 of this Annual Report on Form 10-K. For a summary of quarterly financial data for fiscal 2011 and 2010, please see the Supplemental Schedule of Quarterly Financial Information included in the Consolidated Financial Statements. The selected financial data should also be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
Selected Financial Data (Thousands of dollars, except per share amounts)
Selected Financial Data (continued) (Thousands of dollars, except per share amounts)
Notes:
(1) Vitran recorded a pre-tax non-cash goodwill impairment charge of $107.4 million at December 31, 2008. The assessment of the Company’s goodwill for impairment is discussed further in Item 7 under “Critical Accounting Policies and Estimates.”
(2) Vitran recorded a loss on sale of properties and a write-down to estimated fair value for held for sale properties totaling $2.1 million.
(3) Vitran recorded a non-cash tax expense of $38.9 million to establish a valuation allowance for deferred tax assets related to net operating losses and tax deductible goodwill in the United States.
(4) Operating ratio (“OR”) is a non-GAAP financial measure which does not have any standardized meaning prescribed by GAAP. OR is the sum of total operating expenses minus goodwill impairment charge, divided by revenue. OR excludes the impact of the goodwill impairment charge. 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:
ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
In addition to historical information, this Annual Report on Form 10-K and MD&A 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.
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.
These forward-looking statements contain forward-looking statements regarding, but not limited to, the following:
•
the Company’s expectation that efficiencies 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 and length of haul will increase in upcoming quarters as the freight environment improves and the LTL segment continues to cross-sell the newly acquired territory;
•
the Company’s intention to reduce purchased transportation expense by replacing purchased linehaul expense with Company drivers and Company operated rolling stock;
•
the Company’s expectation that it will be able to reduce maintenance expense in 2012;
•
the Company’s expectation that fuel and fuel-related expenses will decline with the addition of new tractors;
•
the Company’s expectation that the additional density from the Milan acquisition and the cross-sell into the newly acquired territory will improve financial results;
•
the Company’s expectation that operational improvements within the U.S. LTL business unit will have a positive impact in 2012;
•
the Company’s expectation that activity levels and pricing trends will improve year-over-year results;
•
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 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 exceed prior year results in the SCO segment if trends in current activity levels within the segment persist and open additional facilities in the next twelve months;
•
the Company’s operational plan will improve service and efficiencies in the U.S. LTL business unit;
•
the Company’s ability to benefit from an improvement in the economic and pricing environment; and
•
the Company’s expectation to introduce supply chain operation clients to the services of the less-than-truckload segment.
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, 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 and in Item 1A
ITEM 7. A-QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
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. We estimate that the fair value of the long-term debt approximates its carrying value.
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 $0.5 million is designated as a hedge of the investment in the United States’ self-sustaining foreign operations.
In addition to the information disclosed above, further information required by Item 7A
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Balance Sheets as at December 31, 2011 and 2010 and the Consolidated Statements of Income (Loss), Shareholders’ Equity and Cash Flows for the years ended December 31, 2011, 2010 and 2009, are reported on by KPMG LLP, Chartered Accountants. These statements are prepared in accordance with United States GAAP.
MANAGEMENT RESPONSIBILITY OVER FINANCIAL REPORTING
The Consolidated Financial Statements of the Company are the responsibility of management and have been prepared in accordance with United States GAAP and, where appropriate, reflect estimates based on management’s judgement. In addition, all other information contained in the Annual Report on Form 10-K is also the responsibility of management.
The Company maintains systems of internal accounting and administrative controls designed to provide reasonable assurance that the financial information provided is accurate and complete and that all assets are properly safeguarded.
The Board of Directors is responsible for ensuring that management fulfills its responsibility for financial reporting and is ultimately responsible for reviewing and approving the Consolidated Financial Statements. The Board appoints the Audit Committee, comprised of non-management directors, which meets with management and KPMG LLP, the external auditors, at least once a year to review, among other things, accounting policies, annual financial statements, the result of the external audit examination, and the management discussion and analysis included in the Annual Report on Form 10-K. The Audit Committee reports its findings to the Board of Directors so that the Board may properly approve the financial statements. Additional commentary on corporate governance appears in the Company’s proxy statement for the 2012 Annual Meeting of its Shareholders and the information therein is incorporated herein by reference.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Vitran Corporation Inc.
We have audited the accompanying consolidated balance sheets of Vitran Corporation Inc. as of December 31, 2011 and December 31, 2010 and the related consolidated statements of income (loss), shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2011. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule included in Item 15(a)(2) of Form 10-K. These consolidated financial statements are the responsibility of Vitran Corporation Inc.’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Vitran Corporation Inc. as at December 31, 2011 and December 31, 2010, and its consolidated results of operations and its consolidated cash flows for the years in the three-year period then ended in conformity with U.S. generally accepted accounting principles.
As discussed in note 1 to the consolidated financial statements, on January 1, 2011, Vitran Corporation Inc. adopted FASB Accounting Standards Update (“ASU”) No. 2010-06, Improving Disclosure about Fair Value Measurements, for requirements to separately disclose purchases sales, issuances and settlements of recurring Level 3 fair value measurements. On January 1, 2010, Vitran Corporation Inc. adopted FASB ASU No. 2010-06, Improving Disclosure about Fair Value Measurements except for the requirement to separately disclose purchases, sales, issuances and settlements of recurring Level 3 fair value measurements which is effective January 1, 2011.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Vitran Corporation Inc.’s internal control over financial reporting as of December 31, 2011, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 7, 2012 expressed an unqualified opinion on the effectiveness of Vitran Corporation Inc.’s internal control over financial reporting.
/s/ KPMG LLP
Chartered Accountants, Licensed Public Accountants
Toronto, Canada
February 7, 2012
VITRAN CORPORATION INC.
Consolidated Balance Sheets
(Amounts in thousands of United States dollars)
December 31, 2011 and 2010
See accompanying notes to consolidated financial statements.
VITRAN CORPORATION INC.
Consolidated Statements of Income (Loss)
(Amounts in thousands of United States dollars, except per share amounts)
Years ended December 31, 2011, 2010 and 2009
See accompanying notes to consolidated financial statements.
VITRAN CORPORATION INC.
Consolidated Statements of Shareholders’ Equity
(Amounts in thousands of United States dollars)
Years ended December 31, 2011, 2010 and 2009
See accompanying notes to consolidated financial statements.
VITRAN CORPORATION INC.
Consolidated Statements of Cash Flows
(Amounts in thousands of United States dollars)
Years ended December 31, 2011, 2010 and 2009
See accompanying notes to consolidated financial statements.
VITRAN CORPORATION INC.
Notes to Consolidated Financial Statements
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2011, 2010 and 2009
1. Significant accounting policies:
(a) Description of the business:
Vitran Corporation Inc. (“Vitran” or the “Company”) is a North American provider of freight services and distribution solutions to a wide variety of companies and industries. Vitran offers less-than-truckload (“LTL”) service throughout Canada and the United States. Vitran’s supply chain operation (“SCO”) offers logistics solutions in Canada and the United States, including warehousing, inventory management and flow-through distribution facilities, as well as freight brokerage services.
(b) Basis of presentation:
These consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany transactions and balances have been eliminated on consolidation.
These consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”). Canadian Securities 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. All amounts in these consolidated financial statements are expressed in United States dollars, unless otherwise stated.
(c) New accounting pronouncements:
FASB Accounting Standard Update (“ASU”) No. 2011-08, Testing Goodwill for Impairment, permits entities to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. FASB ASU No. 2011-08 will be adopted by the Company on January 1, 2012.
FASB ASU No. 2011-05, Presentation of Comprehensive Income, requires entities to present net income and comprehensive income in either a single continuous statement or in two separate, but consecutive, statements of net income and comprehensive income. FASB has amended FASB ASU No. 2011-05 with FASB ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards No. 2011-05, which defers the effective date of certain requirements outlined in FASB ASU No. 2011-05 until further deliberated and reinstates the requirements for presentation of reclassifications out of accumulated other comprehensive income that were in place before the issuance of FASB ASU No. 2011-05. FASB ASU No. 2011-05 will be adopted by the Company on January 1, 2012.
FASB ASU No. 2010-06, Improving Disclosure about Fair Value Measurements, requires enhanced disclosures about recurring and nonrecurring fair-value measurements including significant transfers in and out of Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances and settlements on a gross basis for Level 3 fair-value measurements. FASB ASU No. 2010-06 was adopted January 1, 2010 except for the requirement to separately disclose purchases, sales, issuances and settlements of recurring Level 3 fair value measurements, which was adopted January 1, 2011.
VITRAN CORPORATION INC.
Notes to Consolidated Financial Statements
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2011, 2010 and 2009
1. Significant accounting policies (continued):
(d) Foreign currency translation:
A majority of the Company’s shareholders, customers and industry analysts are located in the United States. Accordingly, the Company has adopted the United States dollar as its reporting currency.
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 a foreign currency are translated into the functional currency of the operation using the year-end rate of exchange giving rise to a gain or loss that is recognized in income during the current year.
The revaluation of United States dollar denominated debt held by the parent entity with a Canadian functional currency, that hedges the net investment in the Company’s United States dollar denominated self-sustaining subsidiaries, is recorded to other comprehensive income. In a hedge of a net investment in self-sustaining foreign subsidiaries, the portion of the gain or loss on the hedging item that is determined to be an effective hedge is recognized in other comprehensive income and the ineffective portion is recognized in earnings. For consolidation purposes, the United States operations are translated into Canadian dollars using the current period-end rate with the resulting translation adjustment recorded in other comprehensive income. For reporting purposes, the consolidated 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.
In respect of other transactions denominated in currencies other than the Canadian dollar, the monetary assets and liabilities of the Company are translated at the year-end rates. Revenue and expenses are translated at rates of exchange prevailing on the transaction dates. All of the exchange gains or losses resulting from these other transactions are recognized in income.
(e) Revenue recognition:
The Company’s LTL segment and freight brokerage business unit recognize revenue upon the delivery of the related freight and direct shipment costs as incurred. For the LTL segment, revenue for transportation services not completed at the end of a reporting period is recognized based on relative transit time in each period with expenses recognized as incurred. Revenue for the SCO operation is recognized as the management services are provided.
Within the LTL business unit, revenue adjustments are estimated at the end of each quarterly reporting period. These adjustments result from several factors, including weight and freight classification verifications, shipper bill of lading errors, pricing discounts and other miscellaneous revenue adjustments. The revenue adjustments are recorded as a reduction in revenue from operations and accrued for as part of the allowance for doubtful accounts. Allowance for doubtful accounts is recorded as a contra-account to accounts receivable.
VITRAN CORPORATION INC.
Notes to Consolidated Financial Statements
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2011, 2010 and 2009
1. Significant accounting policies (continued):
Historical experience, trends and current information are used to update and evaluate the estimate. As at December 31, 2011, revenue adjustments as a percentage of revenue were not material.
(f) Accounts receivable:
Accounts receivable are presented, net of allowance for doubtful accounts of $2.9 million at December 31, 2011 (2010 - $2.7 million).
(g) Cash and cash equivalents:
Cash and cash equivalents include cash on account and short-term investments with original maturities of three months or less and are stated at cost, which approximates market value.
(h) Inventory:
Inventory consists of tires and spare parts and is valued at the lower of average cost and replacement cost.
(i) Property and equipment:
Property and equipment are recorded at cost. Depreciation of property and equipment is provided on a straight-line basis from the date assets are put in service over their estimated useful lives as follows:
Tires purchased as part of a vehicle are capitalized as a cost to the vehicle. Replacement tires are expensed when placed in service.
(j) Assets held for sale:
The Company has certain assets that are classified as assets held for sale. These assets are carried on the balance sheet at the lower of the carrying amount or estimated fair value, less cost to sell. Once an asset is classified as held for sale, there is no further depreciation taken on the asset. At December 31, 2011, the net book value of assets held for sale was approximately $3.5 million. This amount is included in property and equipment on the consolidated balance sheets. The Company recorded charges of $1.5 million for the year ended December 31, 2011 to reduce properties held for sale to estimate fair value, less cost to sell. These charges are included in loss (gain) on sale of property and equipment in the accompanying statements of consolidated income (loss).
VITRAN CORPORATION INC.
Notes to Consolidated Financial Statements
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2011, 2010 and 2009
1. Significant accounting policies (continued):
(k) Goodwill and intangible assets:
FASB Accounting Standards Codification (“ASC”) 350 requires that goodwill and certain intangible assets be assessed for impairment on an annual basis and, more frequently, if indicators of impairment exist, using fair value measurement techniques. The fair value based test involves assumptions regarding long-term future performance of the reporting units, fair value of the assets and liabilities, cost of capital rates, capital re-investment and other assumptions. Actual recovery of goodwill could differ from these assumptions based on the market conditions and other factors. In the event goodwill is determined to be impaired, a charge to earnings would be required. As at September 30, 2011, the Company completed its annual goodwill impairment test and concluded that there was no impairment.
At December 31, 2011, the Company has not identified any indicators that would require re-testing for impairment.
Intangible assets consist of not-to-compete covenants and customer relationships and are amortized on a straight-line basis over their expected lives ranging from three to eight years. During 2011 and 2010, the Company has not identified any indicators that would require testing for an impairment.
FASB ASC 820-10-05 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). The determined fair value of reporting units is a Level 3 measurement.
(l) Income taxes:
The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the deferred tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Significant judgment is required in determining whether deferred tax assets will be realized in full or in part. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the year that includes the date of enactment. FASB ASC 740-10, Accounting for Uncertainty in Income Taxes, requires that uncertain tax positions are evaluated in a two-step process, whereby (i) the Company determines whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position and (ii) for those tax positions that meet the more-likely-than-not recognition threshold, the Company would recognize the largest amount of tax benefit that is greater than fifty percent likely of being realized upon ultimate settlement with the related tax authority.
(m) Share-based compensation:
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 by the Board of Directors or by the Company’s Compensation Committee. There are 841,900 options outstanding under the plan. The term of each option is 10 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.
Note 10(b) provides supplemental disclosure for the Company’s stock options.
VITRAN CORPORATION INC.
Notes to Consolidated Financial Statements
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2011, 2010 and 2009
1. Significant accounting policies (continued):
(n) Advertising costs:
Advertising costs are expensed as incurred. Advertising costs amounted to $408 in 2011 (2010 - $324; 2009 - $376).
(o) Impairment of long-lived assets:
An impairment is recognized when the carrying amount of a long-lived asset to be held and used exceeds the sum of undiscounted cash flows expected from its use and disposal, and is measured as the amount by which the carrying amount of an asset exceeds its fair value. A long-lived asset should be tested when events or circumstances indicate that its carrying amount may not be recoverable. During 2011 and 2010, the Company has not identified any indicators that would require testing for an impairment.
(p) Derivative instruments:
Derivative instruments are used to hedge the Company’s exposure to changes in interest rates. All derivatives are recognized on the consolidated balance sheets at fair value based on quoted market prices and are recorded in either current or non-current assets or liabilities based on their maturity. Changes in the fair values of derivatives are recorded in income or other comprehensive income, based on whether the instrument is designated as a hedge transaction and, if so, the type of hedge transaction. Gains or losses on derivative instruments reported in other comprehensive income are reclassified to income in the period the hedged item affects income. If the underlying hedged transaction ceases to exist, any associated amounts reported in other comprehensive income are reclassified into income at that time. Any ineffectiveness is recognized in income in the current year.
The Company formally documents all significant relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives to specific assets and liabilities on the balance sheet or to specific firm commitments or anticipated transactions. The Company assesses all hedging relationships to determine whether the criteria for hedge accounting are met. To qualify for hedge accounting, the hedging relationship must be appropriately documented at inception of the hedge and there must be reasonable assurance, both at the inception and throughout the term of the hedge, that the hedging relationship will be effective. Effectiveness requires a high degree of correlation of changes in fair values or cash flows between the hedged item and the hedging instrument. Effectiveness is assessed on an ongoing basis through the term of the hedge in order to determine if hedge accounting remains appropriate.
(q) Claims and insurance accruals:
Claims and insurance accruals reflect the estimated total cost of claims, including amounts for claims incurred but not reported, for cargo loss and damage, bodily injury and property damage, workers’ compensation, long-term disability and group health. In Canada and the United States, the Company has self-insurance retention amounts per incident for auto liability, casualty and cargo claims. In the United States, the Company has self-insurance retention amounts per incident for workers’ compensation and employee medical. In establishing these accruals, management evaluates and monitors each claim individually, and uses factors, such as historical experience, known trends and third party estimates to determine the appropriate reserves for potential liability.
VITRAN CORPORATION INC.
Notes to Consolidated Financial Statements
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2011, 2010 and 2009
1. Significant accounting policies (continued):
(r) Accounts payable and accrued liabilities:
(s) Deferred share units:
The Company maintains a deferred share unit (“DSU”) plan for all directors. Under this plan, all directors receive units at the end of each quarter based on the market price of common shares equivalent to Cdn. $2,500.00. The Company records compensation expense and the corresponding liability each period initially for Cdn. $2,500.00 and subsequently based on changes in the market price of common shares.
In addition to the directors’ DSU plan, the Company adopted a DSU plan for senior executives. Under this plan, eligible senior executives receive units at the end of each quarter based on the market price of common shares equivalent to the senior executive’s entitlement. The entitlement amount varies based on the senior executive’s position in the Company and the years of eligible service. The maximum entitlement amount varies between $2,500.00 and $20,000.00 per annum. The Company records compensation expense and the corresponding liability each period based on the market price of common shares.
(t) Use of estimates:
The preparation of financial statements in accordance with United States GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the year. Significant estimates are used in determining, but not limited to, the allowance for doubtful accounts, deferred tax assets, claims and insurance accruals, share-based compensation, fair value measurements, intangible asset values and the fair value of reporting units for purposes of goodwill impairment tests. Actual results could differ from those estimates.
VITRAN CORPORATION INC.
Notes to Consolidated Financial Statements
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2011, 2010 and 2009
2. Discontinued operations:
During 2010, the Company completed the sale of selected assets of Frontier Transport Corporation (“Frontier”), Vitran’s truckload operation, which was previously a reportable segment. The proceeds from the transaction were $3.0 million plus a $0.1 million working capital adjustment.
The following table summarizes the operations for all periods presented to classify Frontier’s operations as discontinued operations:
The following table summarizes the assets and liabilities from discontinued operations:
3. Acquisition:
On February 19, 2011, the Company acquired selected assets of Milan Express Inc.’s (“Milan”) LTL business, a private carrier headquartered in Milan, Tennessee for $7.6 million. Milan added new coverage to Vitran’s network in the states of Alabama, Georgia, Mississippi, North Carolina and South Carolina. The total purchase price was allocated to the fair value of tractor, trailer and other capital assets acquired. A majority of the tractors and trailers were financed by Milan with third parties. As part of the purchase, Vitran identified a third party finance company who agreed to consolidate Milan’s financing and provide the Company a $6.0 million operating lease. The ownership of the assets resides with the finance company and these assets are being leased to Vitran in the form of an operating lease.
VITRAN CORPORATION INC.
Notes to Consolidated Financial Statements
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2011, 2010 and 2009
3. Acquisition (continued):
The lease meets the criteria of an operating lease pursuant to United States GAAP. The remaining $1.7 million of the purchase price was financed by the Company’s revolving credit facility of which $0.1 million of cash consideration was due in six months from the closing date contingent on Vitran continuing to operate in three out of the five aforementioned states that were added to the Company’s existing network. During the third quarter of 2011, the condition for payment was met and therefore the Company paid the additional consideration due. The results of operations of Milan are included as part of the LTL segment in the consolidated results of the Company commencing on February 19, 2011.
4. Comprehensive income (loss):
The components of other comprehensive income (loss), such as changes in foreign currency translation adjustments, are required to be added to the Company’s reported net income (loss), net of tax to arrive at comprehensive income (loss). Other comprehensive income (loss) items have no impact on the reported net income (loss) as presented on the consolidated statements of income (loss).
VITRAN CORPORATION INC.
Notes to Consolidated Financial Statements
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2011, 2010 and 2009
4. Comprehensive income (loss) (continued):
5. Property and equipment:
Depreciation expense was $13.9 million in 2011 (2010 - $15.9 million).
6. Intangible assets:
VITRAN CORPORATION INC.
Notes to Consolidated Financial Statements
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2011, 2010 and 2009
6. Intangible assets (continued):
Amortization expense was $2.5 million in 2011 (2010 - $2.5 million). Amortization expense for the following four years is estimated to be as follows:
7. Goodwill:
8. Long-term debt:
VITRAN CORPORATION INC.
Notes to Consolidated Financial Statements
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2011, 2010 and 2009
8. Long-term debt (continued):
On November 30, 2011, the Company entered into a new three-year bank syndicated asset based revolving credit agreement providing up to $85 million. In addition, on November 30, 2011, the Company entered into a new seven-year Cdn. $45.7 million real estate term credit facility, secured by specific real estate in Canada. The proceeds from the new credit facilities were used to extinguish the previous senior term and revolving credit facilities which were to mature in July 2012. Deferred financing costs of $1.0 million related to the previous credit agreement were written off in 2011.
(a) During the previous year, the Company entered into a $3.5 million term credit facility secured by specific real estate of the Company in the United States. In 2011, the maturity date of the term credit facility was amended from July 31, 2012, which was connected to the previous senior credit facilities, to June 30, 2012. The Company had $3.5 million (2010- $3.5 million), bearing interest at 3.1% (2010- 2.8%) outstanding under the term facility at December 31, 2011.
At December 31, 2010, the Company had $16.0 million outstanding under its previous senior term credit facility, bearing interest at 5.37%.
(b) The Company’s asset based revolving credit facility is secured by accounts receivable, certain equipment and general security agreements of the Company and all of its subsidiaries. The revolving credit facility provides up to $85.0 million, maturing on November 30, 2014. The Company had $21.9 million outstanding at December 31, 2011, bearing interest at 2.8% to 4.75%. The provisions of the revolving credit facility impose certain financial maintenance tests if availability falls below a certain threshold. At December 31, 2011, the Company was not required to measure these covenants.
At December 31, 2010, the Company had $44.1 million outstanding under its previous senior revolving credit facility, bearing interest at 2.8% to 4.75%.
(c) The Company’s real estate term facility is secured by four transportation terminals in Canada. The real estate term facility provided Cdn. $45.7 million and matures on November 30, 2018. The Company has $45.0 million outstanding at December 31, 2011, bearing interest at 4.75%.
(d) During 2011, the Company financed certain equipment by entering into additional capital leases of $1.3 million. The Company had $3.5 million (2010 - $5.8 million) of capital leases remaining at December 31, 2011.
At December 31, 2011, the required future principal repayments on all long-term debt and capital leases are as follows:
VITRAN CORPORATION INC.
Notes to Consolidated Financial Statements
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2011, 2010 and 2009
9. Income taxes:
Income tax expense (recovery) differs from the amount that would be obtained by applying statutory federal, state and provincial income tax rates to the respective year’s income (loss) from continuing operations before income taxes as follows:
Income tax expense (recovery):
VITRAN CORPORATION INC.
Notes to Consolidated Financial Statements
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2011, 2010 and 2009
9. Income taxes (continued):
A summary of the principal components of deferred income tax assets and liabilities is as follows:
At December 31, 2011, the Company had approximately $65.0 million (2010 - $55.0 million) of net operating loss carryforwards available to reduce future years’ taxable income. The net operating loss will expire between 2027 and 2031 if not utilized. As required by FASB ASC 740-10, the Company increased its valuation allowance by $8.7 million in 2011 and the valuation allowance recorded at December 31, 2011 was $48.4 million.
The Company and its subsidiaries file income tax returns in U.S. and Canadian federal jurisdictions, and various states, provinces and foreign jurisdictions. Overall, the years 2008 to 2010 remain open to examination by tax authorities.
VITRAN CORPORATION INC.
Notes to Consolidated Financial Statements
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2011, 2010 and 2009
10. Common shares:
(a) Private placement:
During 2009, the Company completed a delayed registration private placement of 2,698,282 common shares to several accredited investors at $8.50 per share. This resulted in gross proceeds of $22.9 million to the Company before expenses of issue of $1.2 million, net of deferred income taxes of $0.4 million.
(b) Stock options:
The Company provides a stock option plan to key employees, officers and directors to encourage executives to acquire a meaningful equity ownership interest in the Company over a period of time and, as a result, reinforce executives’ attention on the long-term interest of the Company and its shareholders. Under the plan, options to purchase common shares of the Company may be granted to key employees, officers and directors of the Company by the Board of Directors or by the Company’s Compensation Committee. There are 841,900 options outstanding under the plan. The term of each option is 10 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 weighted average estimated fair value at the date of the grant for the options granted during 2011 was $2.96 (2010 - $5.34; 2009 - $4.61) per share.
The fair value of each option granted was estimated on the date of grant using the Black-Scholes-Merton fair value option pricing model with the following assumptions:
VITRAN CORPORATION INC.
Notes to Consolidated Financial Statements
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2011, 2010 and 2009
10. Common shares (continued):
Details of stock options are as follows:
At December 31, 2011, the range of exercise prices, the weighted average exercise price and the weighted average remaining contractual life are as follows:
Compensation expense related to stock options was $501 for the year ended December 31, 2011 (2010 - $574; 2009 - $739).
VITRAN CORPORATION INC.
Notes to Consolidated Financial Statements
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2011, 2010 and 2009
11. Computation of income (loss) per share:
Diluted income per share excludes the effect of 773,900 anti-dilutive options for the year ended December 31, 2011 (2010 - 765,500; 2009 - 773,900). Due to the net loss for the years ended December 31, 2011, 2010 and 2009, the 46,100 (2010 - 84,025; 2009 - 87,400) dilutive shares have no effect on the loss per share.
12. Risk management activities:
The Company is exposed to market risks, including the effect of changes in foreign currency exchange rates and interest rates, and uses derivatives to manage financial exposures that occur in the normal course of business. The Company does not hold or issue derivatives for trading purposes.
Interest rate swaps:
The Company is exposed to interest rate volatility with regard to existing variable rate debt. The Company had entered into variable-to-fixed interest rate swaps on variable rate term debt and revolving debt to limit its exposure to changing interest rates and future cash flows for interest. The interest rate swaps provided for the Company to pay an amount equal to a specified fixed rate of interest times a notional principal amount and to receive in return an amount equal to a variable rate of interest times the same notional amount. The swaps were accounted for as cash flow hedges. The effective portions of
VITRAN CORPORATION INC.
Notes to Consolidated Financial Statements
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2011, 2010 and 2009
12. Risk management activities (continued):
changes in fair value of the interest rate swaps were recorded in accumulated other comprehensive income and were recognized into income in the same year in which the hedged forecasted transaction affects income. Ineffective portions of changes in fair value are recognized into income as they occur. At December 31, 2011, there were no interest rate swaps outstanding.
Effective January 1, 2008, the Company adopted FASB ASC 820-10, which provides a framework for measuring fair value under United States GAAP. As defined in FASB ASC 820-10, 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 income approach for recurring fair value measurements and endeavours 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.
FASB ASC 820-10-05 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 December 31:
VITRAN CORPORATION INC.
Notes to Consolidated Financial Statements
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2011, 2010 and 2009
12. Risk management activities (continued):
Hedges of net investment in self-sustaining operations:
United States dollar denominated debt of $0.5 million held by an entity with a Canadian dollar functional currency is designated as a hedge against the Company’s exposure for a portion of its net investment in self-sustaining U.S. dollar denominated subsidiaries with a view to reducing the impact of foreign exchange fluctuations. The foreign exchange effect of both the U.S. dollar debt and the net investment in U.S. dollar denominated subsidiaries is reported in other comprehensive income. As at December 31, 2011, the Company’s net investment in U.S. dollar denominated subsidiaries totalled $240.5 million (2010 - $268.9 million). No ineffectiveness has been recorded in earnings as the notional amounts of the hedging item equals the portion of the net investment balance being hedged.
The following table presents the fair value of derivative instruments for the year ended December 31:
VITRAN CORPORATION INC.
Notes to Consolidated Financial Statements
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2011, 2010 and 2009
13. Segmented information:
The Company’s continuing business operations are grouped into two operating segments: LTL and SCO, which provide transportation and supply chain services in Canada and the United States.
VITRAN CORPORATION INC.
Notes to Consolidated Financial Statements
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2011, 2010 and 2009
13. Segmented information (continued):
Geographic information for revenue from point of origin and total assets is as follows:
Long-lived assets include property and equipment, goodwill and intangible assets.
14. Financial instruments:
The fair values of cash and cash equivalents, bank overdraft, accounts receivable and accounts payable and accrued liabilities approximate their carrying values because of the short-term nature of these financial instruments. The fair value of the Company’s long-term debt, determined based on the future cash flows associated with each debt instrument discounted using an estimate of the Company’s current borrowing rate for similar debt instruments of comparable maturity, is approximately equal to their carrying value at December 31, 2011 and 2010.
VITRAN CORPORATION INC.
Notes to Consolidated Financial Statements
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2011, 2010 and 2009
15. Lease commitments:
At December 31, 2011, future minimum rental payments relating to operating leases for premises and equipment are as follows:
Total rental expense under operating leases was $31.9 million for the year ended December 31, 2011 (2010 - $25.7 million; 2009 - $22.7 million).
The Company has guaranteed a portion of the residual values of certain assets under operating leases. If the market value of the assets at the end of the lease terms is less than the guaranteed residual value, the Company must, under certain circumstances, compensate the lessor for a portion of the shortfall. The maximum exposure under these guarantees is $18.6 million.
During 2011, the Company completed a sale-leaseback transaction related to a SCO facility. The transaction included the sale of the land, buildings and improvements associated with the facility for total proceeds of $6.5 million. The facility will be leased under an operating lease with a term of seven years. The gain on the sale of the property was deferred and will be amortized over the minimum term of the related lease.
16. Employee benefits:
The Company sponsors defined contribution plans in Canada and the United States. In Canada, the Company matches the employee’s contribution to their registered retirement savings plan up to a maximum contribution. In the United States, the Company sponsors 401(k) savings plans. The Company matches a percentage of the employee’s contribution subject to a maximum contribution. The expense related to the plans was $0.5 million for the year ended December 31, 2011 (2010 - $0.5 million; 2009 - $0.5 million).
17. 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.
VITRAN CORPORATION INC.
Consolidated Supplemental Schedule of Quarterly Financial Information
(In thousands of United States dollars, except per share amounts where noted)
Years ended December 31, 2011 and 2010
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
During the Company’s last two fiscal years, there were no disagreements with KPMG LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of KPMG LLP, would have caused them to make reference to the subject matter of the disagreement in connection with their reports.
ITEM 9. A-CONTROLS AND PROCEDURES
Disclosure controls and procedures, as such term is defined in Rule 13a-15(e) of the Exchange Act, are controls and other procedures that are designed to ensure that information required to be disclosed by our Company is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by our Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our Company’s management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure. Our CEO and CFO are responsible for establishing and maintaining disclosure controls and procedures for our Company.
As of the end of the period covered by this Annual Report on Form 10-K, the Company carried out an evaluation, under the supervision and with the participation of Company management, including our CEO and CFO, of the effectiveness of the design, implementation and operation of its disclosure controls and procedures. Based on this evaluation, the Company’s CEO and CFO have concluded that the Company’s disclosure controls and procedures are effective as of December 31, 2011.
There have been no significant changes in our internal control over financial reporting, which we define in accordance with Exchange Act Rule 13a-15(f) to include our control environment, control procedures, and accounting systems, or any other factors that could materially affect or are reasonably likely to materially affect our internal control over financial reporting during the fourth quarter of 2011.
Inherent Limitation of the Effectiveness of Internal Control
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all the control issues and instances of management override or improper acts, if any, have been detected. These inherent limitations include the realities that judgment in decision making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to management override or loss may have adverse and material effects on our business, financial condition and results of operations.
Management’s Report on Internal Control over Financial Reporting
The management of Vitran Corporation Inc. (“Vitran”) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Vitran’s management team assessed the effectiveness of its internal control over financial reporting using the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and based on that assessment concluded that internal control over financial reporting was effective as of December 31, 2011.
KPMG LLP, an independent public accounting firm registered with the PCAOB, has issued an attestation report on the effectiveness of Vitran’s internal control over financial reporting, as stated in their report which is included herein.
February 9, 2012
/s/ Richard E. Gaetz, President and Chief Executive Officer
/s/ Fayaz D. Suleman, Vice President Finance and Chief Financial Officer
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Vitran Corporation Inc.:
We have audited Vitran Corporation Inc.’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Vitran Corporation Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, under the heading Management’s Report on Internal Control over Financial Reporting included in Form 10-K. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Vitran Corporation Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Vitran Corporation Inc.as of December 31, 2011 and 2010, and the related consolidated statements of income (loss), shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2011, and our report dated February 7, 2012 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Chartered Accountant, Licensed Public Accountants
Toronto, Canada
February 7, 2012
ITEM 9. B-OTHER INFORMATION
None.
PART III
ITEM 10
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information for directors, Section 16(a) beneficial ownership reporting and other compliance as required by Item 407 of Regulation S-K, is reported in the Company’s definitive proxy statement filed pursuant to Regulation 14A and is incorporated herein by reference. The following table sets forth certain information concerning our executive officers:
CODE OF ETHICS
The Company has adopted a Code of Ethics and Professional Conduct (the “Code”) for all senior executives and directors, including the Chief Executive Officer, Chief Financial Officer and Principal Accounting Officer. The Code is available free of charge on the Company’s website at www.vitran.com. The Code requires that the Company’s senior executives and directors deal fairly with customers, suppliers, fellow employees and the general public. Acceptance of the Code is mandatory for the Company’s senior executives and directors.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION
The information required by Item 11 of Form 10-K appears in the Company’s definitive proxy statement for the 2012 Annual Meeting of its Shareholders, reference to which is hereby made, and the information therein is incorporated herein by reference.
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by Item 12 of Form 10-K appears in the Company’s proxy statement for the 2012 Annual Meeting of its Shareholders, reference to which is hereby made, and the information therein is incorporated herein by reference.
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
None
ITEM 14
ITEM 14 - PRINCIPAL ACCOUNTING FEES AND SERVICES
KPMG LLP has served as the Company’s auditors since 1989. For the fiscal years ended December 31, 2011 and 2010, fees billed by KPMG LLP to Vitran for services were:
All services provided by KPMG to Vitran for 2011 and 2010 were approved by the Audit Committee. The Audit Committee pre-approves all non-audit services to be provided to the Company or its subsidiary entities by its independent auditors. For further details regarding the Audit Committee approval process, please review the Audit Committee charter which is available free of charge on Vitran’s website at www.vitran.com.
For information regarding the members and other applicable information of the Audit Committee, please review the Company’s proxy statement for the 2012 Annual Meeting of its Shareholders, reference to which is hereby made, and the information therein is incorporated herein by reference.
PART IV
ITEM 15
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) (1) Financial Statements
Consolidated Balance Sheets as at December 31, 2011 and 2010 and the Consolidated Statements of Income (Loss), Shareholders’ Equity and Cash Flows for the years ended December 31, 2011, 2010, and 2009 are reported on by KPMG LLP, Chartered Accountants. These statements are prepared in accordance with United States GAAP.
(2) Financial Statement Schedules:
Schedule II-Valuation and Qualifying Accounts
Vitran Corporation Inc.
Three years ended December 31, 2011
(3) Exhibits Filed
The exhibits listed in the accompanying Exhibit Index are filed as part of this Annual Report on Form 10-K.
(b) Separate Financial Statements
None
Notes:
(1) Filed as Exhibit 1.1 to the Registrant’s Registration Statement on Form 20-F filed with the Commission on June 14, 1995.
(2) Filed as Exhibit 1.2 to the Registrant’s Registration Statement on Form 20-F filed with the Commission on June 14, 1995.
(3) Filed as Exhibit 1.3 to the Registrant’s Registration Statement on Form 20-F filed with the Commission on June 14, 1995.
(4) Filed as Exhibit 1.4 to the Registrant’s Registration Statement on Form 20-F filed with the Commission on June 14, 1995.
(5) Filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on May 7, 2004.
(6) Filed as Exhibit 4.6 to the Registrant’s Registration Statement on Form S-8 filed with the Commission on September 11, 2009
(7) Filed as Exhibit 1.6 to the Registrant’s Registration Statement on Form 20-F filed with the Commission on June 14, 1995.
(8) Filed as Exhibit 99.1 to the Registrant’s Registration Statement on Form S-8 filed with the Commission on September 11, 2009.
(9) Filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on September 15, 2005.
(10) Filed as Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on March 13, 2006.
(11) Filed as Exhibit 10.23 to the Registrant’s Current Report on Form 8-K filed on March 17, 2009.
(12) Filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on September 18, 2009.
(13) Filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on September 22, 2009.
(14) Filed as Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed on August 3, 2004.
(15) Filed as Exhibit 99.2 to the Registrant’s Current Report on Form 8-K filed on August 3, 2004.
(16) Filed as an exhibit to this Annual Report on Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Toronto, Province of Ontario, on the 9th day of February, 2012.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.