ITEM 1B.
UNRESOLVED STAFF COMMENTS
None
Our corporate, LTL, and TL headquarters, where senior management resides, is located in Cudahy, Wisconsin, where we lease 28,824 square feet of space. The primary functions performed at this location are accounting, treasury, marketing, human resources, linehaul support, claims, safety, and information technology support. We lease 24,000 square feet of space in Hudson, Ohio, which houses our TMS headquarters.
We lease 29 of our 36 service centers for our LTL business throughout the United States, each of which is interactively connected. Each service center manages and is responsible for the freight that originates in its service area. The typical service center is configured to perform cross-dock and limited short-term warehouse operations. For our TL business, we own one office for operations in Maine and lease 18 of our 20 company dispatch offices throughout the United States and Canada. We own one and lease 27 of our 28 TL service centers throughout the Unites States and lease five freight consolidation and inventory management centers throughout the United States. In addition, for our TMS business, we own one and lease two service centers throughout the northeast region of the United States.
We believe that our current facilities are in good working order and are capable of supporting our operations for the foreseeable future; however, we will continue to evaluate leasing additional space as needed to accommodate our growth.
ITEM 3.
ITEM 3.
LEGAL PROCEEDINGS
From time to time, we are involved in litigation and proceedings in the ordinary course of our business. We are not currently involved in any legal proceeding that we believe would have a material effect on our business or financial condition.
ITEM 4.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable
PART II
ITEM 5.
ITEM 5.
MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information on Common Stock
Our common stock has been trading on The New York Stock Exchange under the symbol “RRTS” since May 13, 2010. Prior to that time, there was no public market for our common stock. The following table sets forth, for the periods indicated, the high and low sales prices of our common stock as quoted on The New York Stock Exchange.
Stockholders
As of March 12, 2013, there were approximately 39 holders of record of our common stock. On March 12, 2013, the closing sale price of our common stock on The New York Stock Exchange was $22.93 per share.
Dividends
We have never declared or paid cash dividends on our common stock. We currently plan to retain any earnings to finance the growth of our business rather than to pay cash dividends. Payments of any cash dividends in the future will depend on our financial condition, results of operations, and capital requirements, as well as other factors deemed relevant by our board of directors. Our current debt agreements prohibit us from paying dividends without the consent of our lenders.
Performance Graph
The following line graph compares cumulative total shareholder returns for the period from May 13, 2010 through December 31, 2012 for (1) our common stock; (2) the Nasdaq Composite Index; and (3) the Nasdaq Transportation Index. The graph assumes an investment of $100 on May 13, 2010, which is the first day on which our stock was listed on The New York Stock Exchange. The calculations of cumulative stockholder return on the Nasdaq Composite Index and the Nasdaq Transportation Index include reinvestment of dividends. The calculation of cumulative stockholder return on our common stock does not include reinvestment of dividends because we did not pay any dividends during the measurement period. The historical performance shown is not necessarily indicative of future performance.
The performance graph shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section. The performance graph will not be deemed incorporated by reference into any filing of our company under the Exchange Act or the Securities Act.
ITEM 6.
ITEM 6.
SELECTED FINANCIAL DATA
The following presents selected financial data for each fiscal year in the five-year period ended December 31, 2012. As our past operating results are not necessarily indicative of our future operating results, and since the consolidated statement of operations includes the results of operations of our acquired companies since the date of their acquisition, you should read the selected financial data below in conjunction with Item 7.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This financial review presents our operating results for each of our three most recent fiscal years and our financial condition as of December 31, 2012. You should read the following discussion and analysis in conjunction with our financial statements and related notes contained elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including those set forth under Item 1A. “Risk Factors.”
Overview
We are a leading asset-light transportation and logistics service provider offering a full suite of solutions, including customized and expedited LTL, TL, TMS, intermodal solutions (transporting a shipment by more than one mode, primarily via rail and truck), freight consolidation, inventory management, and domestic and international air. We utilize a broad third-party network of transportation providers, comprised of ICs and purchased power providers, to serve a diverse customer base in terms of end market focus and annual freight expenditures. Although we service large national accounts, we primarily focus on small to mid-size shippers, which we believe represent an expansive and underserved market. Our business model is highly scalable and flexible, featuring a variable cost structure that requires minimal investment (as a percentage of revenues) in transportation equipment and facilities, thereby enhancing free cash flow generation and returns on our invested capital and assets.
We have three operating segments:
Less-than-Truckload. Our LTL business involves the pickup, consolidation, linehaul, deconsolidation, and delivery of LTL shipments throughout the United States and into Mexico, Puerto Rico, and Canada. With a network of 36 LTL service centers and over 200 third-party delivery agents, we employ a point-to-point LTL model that we believe provides us with a competitive advantage over the traditional hub and spoke LTL model in terms of faster transit times, lower incidence of damage, and reduced fuel consumption. Our LTL segment also includes domestic and international air transportation services.
Truckload and Logistics. Within our TL business, we arrange the pickup, delivery, and inventory management of TL freight through our network of 28 TL service centers, five freight consolidation and inventory management centers, 20 company dispatch offices, and 75 independent brokerage agents located throughout the United States and Canada. We offer temperature-controlled, dry van, intermodal drayage, and flatbed services and specialize in the transport of refrigerated foods, poultry, and beverages. We believe this specialization provides consistent shipping volume year-over-year.
Transportation Management Solutions. Within our TMS business, we offer a “one-stop” transportation and logistics solution, including access to the most cost-effective and time-sensitive modes of transportation within our broad network. Specifically, our TMS offering includes pricing, contract management, transportation mode and carrier selection, freight tracking, freight bill payment and audit, cost reporting and analysis, and dispatch. Our customized TMS offering is designed to allow our customers to reduce operating costs, redirect resources to core competencies, improve supply chain efficiency, and enhance customer service.
Recent Acquisitions
In February 2012, we acquired all of the outstanding stock of Capital Transportation Logistics (“CTL”) for the purpose of expanding our presence within the TMS segment. Headquartered in New Hampshire, CTL primarily provides transportation management solutions on LTL freight as well as truckload brokerage and freight bill audit and payment services. See Note 2 to our consolidated financial statements included in this Annual Report on Form 10-K.
In April 2012, we acquired all of the outstanding stock of Grundman Holdings, Inc., which wholly owned both D&E Transport, Inc. and D&E Leasing, Inc. (collectively, “D&E”), for the purpose of expanding our presence within the TL segment. Headquartered in Minnesota, D&E is an asset-light flatbed carrier focused primarily on food and agricultural products. See Note 2 to our consolidated financial statements included in this Annual Report on Form 10-K.
In June 2012, we acquired all of the outstanding stock of CTW Transport (“CTW”) for the purpose expanding our presence within the TL segment. Headquartered in Massachusetts, CTW focuses primarily on refrigerated food products. See Note 2 to our consolidated financial statements included in this Annual Report on Form 10-K.
In August 2012, we acquired all of the operating assets of R&M Transportation and all of the outstanding stock of Sortino Transportation (collectively, “R&M”) for the purpose of expanding our presence within the TL segment. Headquartered in Nebraska, R&M is an asset-light carrier focused primarily on refrigerated truckload services. See Note 2 to our consolidated financial statements included in this Annual Report on Form 10-K.
In August 2012, we acquired all of the outstanding stock of Expedited Freight Systems, Inc. ("EFS") for the purpose of expanding our presence within the LTL segment. EFS is a Midwest regional overnight LTL provider based in Wisconsin. See Note 2 to our consolidated financial statements included in this Annual Report on Form 10-K.
In November 2012, we acquired all of the outstanding stock of Central Cal Transportation (“Central Cal”) for the purpose of expanding our presence within the TL segment. Headquartered in Northern California, Central Cal is an intermodal carrier focused primarily on the transportation of agricultural products and commodities. See Note 2 to our consolidated financial statements included in this Annual Report on Form 10-K.
In November 2012, we acquired all of the outstanding stock of Brandon Carrier Group, Inc. ("A&A"), a truckload service provider headquartered in South Dakota, for the purpose of expanding our presence within the TL segment. See Note 2 to our consolidated financial statements included in this Annual Report on Form 10-K.
In December 2012, we acquired all of the outstanding stock of Direct Connection Transportation ("DCT"), a non-asset truckload service provider headquartered in Arizona, for the purpose of expanding our presence within the TL segment. See Note 2 to our consolidated financial statements included in this Annual Report on Form 10-K.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires that we make estimates and assumptions. In certain circumstances, those estimates and assumptions can affect amounts reported in the accompanying consolidated financial statements and related footnotes. In preparing our financial statements, we have made our best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable. Application of the accounting policies described below involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. The following is a brief discussion of our critical accounting policies and estimates.
Goodwill and Other Intangibles
Goodwill represents the excess of purchase price over the estimated fair value assigned to the net tangible and identifiable intangible assets of a business acquired. Goodwill is tested for impairment at least annually using a two-step process that begins with an estimation of the fair value at the “reporting unit” level. We have four reporting units for our three operating segments. We have one reporting unit for our LTL and TMS segments and two reporting units for our TL segment as this is the lowest level for which discrete financial information is prepared and regularly reviewed by segment management. The impairment test for goodwill involves comparing the fair value of a reporting unit to its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, a second step is required to measure the goodwill impairment loss. The second step includes hypothetically valuing all the tangible and intangible assets of the reporting unit as if the reporting unit had been acquired in a business combination. Then, the implied fair value of the reporting unit’s goodwill is compared to the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of the goodwill, we recognize an impairment loss in an amount equal to the excess, not to exceed the carrying amount. For purposes of our impairment test, the fair value of our reporting units are calculated based upon an average of an income fair value approach and market fair value approach. Based on the test performed in 2012, we concluded that the fair value for all reporting units was significantly in excess of the respective reporting unit’s carrying value.
Other intangible assets recorded consist of definite-lived customer lists. We evaluate our other intangible assets for impairment when current facts or circumstances indicate that the carrying value of the assets to be held and used may not be recoverable.
Revenue Recognition
LTL revenue is recorded when all of the following have occurred: an agreement of sale exists; pricing is fixed or determinable; and collection of revenue is reasonably assured. We use a percentage of services completed method to recognize revenue, which results in an allocation of revenue between reporting periods based on the distinctive phases of each LTL transaction completed in each reporting period, with expenses recognized as incurred. We believe that this is the most appropriate method for LTL revenue recognition based on the multiple distinct phases of a typical LTL transaction, which is in contrast to the single phase of a typical TL transaction.
TL revenue is recorded when all of the following have occurred: an agreement of sale exists; pricing is fixed or determinable; delivery has occurred; and our obligation to fulfill a transaction is complete and collection of revenue is reasonably assured. This occurs when we complete the delivery of a shipment or the service has been fulfilled.
TMS transportation revenue and related transportation costs are recognized when the shipment has been delivered by a third-party carrier. Fee for services revenue is recognized when the services have been rendered. At the time of delivery or rendering of services, as applicable, our obligation to fulfill a transaction is complete and collection of revenue is reasonably assured. We offer volume discounts to certain customers. Revenue is reduced as discounts are earned.
We typically recognize revenue on a gross basis, as opposed to a net basis, because we bear the risks and benefits associated with revenue-generated activities by, among other things, (1) acting as a principal in the transaction, (2) establishing prices, (3) managing all aspects of the shipping process, and (4) taking the risk of loss for collection, delivery, and returns. Certain TMS transactions to provide specific services are recorded at the net amount charged to the client due to the following factors: (A) we do not have latitude in establishing pricing, and (B) we do not bear the risk of loss for delivery and returns; these items are the risk of the carrier.
Results of Operations
The following table sets forth, for the periods indicated, summary LTL, TL, TMS, corporate, and consolidated statement of operations data. Such revenue data for our LTL, TL, and TMS business segments are expressed as a percentage of consolidated revenues. Other statement of operations data for our LTL, TL, and TMS business segments are expressed as a percentage of segment revenues. Total statement of operations and corporate and eliminations data are expressed as a percentage of consolidated revenues.
(1) Reflects revenues less purchased transportation costs.
(2) Reflects the sum of personnel and related benefits, other operating expenses, acquisition transaction expenses, and restructuring and IPO related expenses.
Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
Revenues
Consolidated revenues increased by $229.8 million, or 27.2%, to $1,073.4 million in 2012 from $843.6 million in 2011, more than half of which was attributable to the impact of recent acquisitions.
LTL revenues increased by $44.2 million, or 9.5%, to $511.0 million in 2012 from $466.8 million in 2011. This reflected the acquisition of EFS, which contributed revenues of $9.2 million, and year-over-year LTL tonnage growth of 8.9%, driven by a 9.7% increase in the number of LTL shipments. These increases were slightly offset by a 0.7% decline in weight per shipment. Our LTL tonnage increase was primarily due to new customer growth.
TL revenues increased by $175.3 million, or 58.2%, to $476.6 million in 2012 from $301.3 million in 2011. This growth was primarily driven by the 2011 acquisitions of Morgan Southern, Bruenger, James Brooks, and Prime, and the 2012 acquisitions of D&E, CTW, R&M, Central Cal, A&A, and DCT, which collectively contributed $142.7 million of the revenue increase. The remaining $32.6 million of the revenue increase was driven primarily by increases in market pricing and load growth as well as increased utilization of the broker agent network.
TMS revenues increased by $12.4 million, or 15.6%, to $91.6 million in 2012 from $79.2 million in 2011, primarily as a result of new and existing customer growth and the acquisition of CTL, which contributed revenues of $5.4 million in 2012.
Purchased Transportation Costs
Purchased transportation costs increased by $133.2 million, or 21.5%, to $753.5 million in 2012 from $620.3 million in 2011.
LTL purchased transportation costs increased by $20.8 million, or 5.9%, to $373.7 million in 2012 from $352.9 million in 2011. This increase was primarily the result of rising fuel costs and increases in tonnage and shipments reflected above in LTL revenues. Excluding fuel surcharges, our average linehaul cost per mile was $1.24 during 2012 and 2011. LTL purchased transportation costs as a percentage of LTL revenues decreased to 73.1% in 2012 from 75.6% in 2011 primarily as a result of ongoing pricing and cost initiatives and additional lane density.
TL purchased transportation costs increased by $107.8 million, or 50.7%, to $320.2 million in 2012 from $212.4 million in 2011, primarily as a result of our 2011 and 2012 TL acquisitions. TL purchased transportation costs as a percentage of TL revenues decreased to 67.2% in 2012 from 70.5% in 2011, primarily due to the fact that Prime's freight storage and handling expenses, as well as Bruenger, D&E, CTW, R&M and A&A employee drivers and leased and owned equipment expenses are excluded from transportation costs and instead are included in other operating expenses. Our other TL businesses typically use ICs rather than employee drivers and do not lease equipment. Additionally, increases in market pricing and increased utilization of our TL agent network reduced the percentage of purchased transportation costs to TL revenues.
TMS purchased transportation costs increased by $6.7 million, or 11.4%, to $65.4 million in 2012 from $58.7 million in 2011. TMS purchased transportation costs as a percentage of TMS revenues decreased to 71.4% in 2012 from 74.1% in 2011, primarily as a result of higher margin services due to the acquisition of CTL.
Other Operating Expenses
Other operating expenses, which reflect the sum of the personnel and related benefits, other operating expenses, and acquisition transaction expenses line items shown in our consolidated statements of operations, increased by $69.2 million, or 40.2%, to $241.4 million in 2012 from $172.2 million in 2011.
Within our LTL business, other operating expenses increased by $11.5 million, or 13.0%, to $99.4 million in 2012 from $87.9 million in 2011, primarily as a result of the incremental costs associated with the 9.7% increase in shipment count, expanded infrastructure costs to support new business initiatives, the reinstatement of our 401(k) match and our August 2012 acquisition of EFS, which contributed $8.2 million of the total increase. As a percentage of LTL revenues, other operating expenses increased to 19.4% in 2012 from 18.8% in 2011, primarily due to the employee drivers of EFS being included in other operating expenses.
Within our TL business, other operating expenses increased by $53.8 million to $120.0 million in 2012 from $66.2 million in 2011. As a percentage of TL revenues, other operating expenses increased to 25.2% in 2012 from 22.0% in 2011, primarily due to the 2011 and 2012 TL acquisitions, which incrementally contributed $49.9 million of the total increase. Prime's freight storage and handling expenses, as well as Bruenger, D&E, CTW, R&M and A&A employee drivers and leased and owned equipment expenses are included in other operating expenses.
Within our TMS business, other operating expenses increased by $2.7 million, or 21.8% to $14.9 million in 2012 from $12.2 million in 2011, primarily as a result of the acquisition of CTL, which contributed $2.4 million of the total increase. TMS other operating expenses, as a percentage of TMS revenues, increased to 16.3% in 2012 from 15.4% in 2011.
Other operating expenses that were not allocated to our LTL, TL, or TMS businesses increased to $7.2 million in 2012 from $5.8 million in 2011. This increase was a result of $1.8 million of incremental infrastructure costs incurred in 2012 offset by a decrease in acquisition expenses of $0.6 million.
Depreciation and Amortization
Depreciation and amortization increased to $9.5 million in 2012 from $5.0 million in 2011, reflecting increases in property, plant, and equipment primarily due to our various 2011 and 2012 acquisitions, which provided us with additional capacity to support our customer base. Within our LTL business, depreciation and amortization increased to $2.4 million in 2012 from $1.7 million in 2011, primarily as a result of the acquisition of EFS. Depreciation and amortization within our TL business increased to $6.3 million in 2012 from $2.6 million in 2011 primarily as a result of the acquisitions of Bruenger, D&E, CTW, R&M and A&A. Within our TMS business, depreciation and amortization was $0.8 million in 2012 and $0.7 million in 2011.
Operating Income
Operating income increased by $22.9 million, or 49.5%, to $69.0 million in 2012 from $46.1 million in 2011, primarily as a result of the factors above. As a percentage of revenues, operating income increased to 6.4% in 2012 from 5.5% in 2011.
Within our LTL business, operating income increased by $11.2 million, or 45.9%, to $35.5 million from $24.3 million, and also increased as a percentage of LTL revenues to 6.9% in 2012 from 5.2% in 2011, primarily as a result of the factors above.
Within our TL business, operating income increased by $10.1 million, or 50.0%, to $30.1 million from $20.0 million. However, operating income in our TL business decreased as a percentage of TL revenues to 6.3% in 2012 from 6.7% in 2011, primarily as a result of the factors above.
Within our TMS business, operating income increased by $2.9 million, or 38.6%, to $10.5 million from $7.6 million, and also increased as a percentage of TMS revenues to 11.5% in 2012 from 9.6% in 2011, primarily as a result of the factors above.
Interest Expense
Interest expense increased by $3.7 million to $8.0 million in 2012 from $4.3 million in 2011, primarily attributable to the borrowings we incurred to finance our 2011 and 2012 acquisitions.
Income Tax
Income tax provision was $23.4 million in 2012 compared to $15.9 million in 2011. The effective tax rate was 38.4% in 2012 compared to 38.1% in 2011. The effective income tax rate varies from the federal statutory rate of 35.0% primarily due to state and Canadian income taxes as well as the impact of items causing permanent differences.
Net Income Available to Common Stockholders
Net income available to common stockholders was $37.5 million in 2012 compared to $25.9 million in 2011.
Year Ended December 31, 2011 Compared to Year Ended December 31, 2010
Revenues
Consolidated revenues increased by $211.6 million, or 33.5%, to $843.6 million in 2011 from $632.0 million in 2010, approximately half of which was attributable to the impact of the TL acquisitions.
LTL revenues increased by $56.9 million, or 13.9%, to $466.8 million in 2011 from $409.9 million in 2010. This reflected year-over-year LTL tonnage growth of 4.3%, driven by a 4.8% increase in the number of LTL shipments, slightly offset by a 0.5% decline in weight per shipment. Our LTL tonnage increase was driven by new customer growth. In addition to growth in tonnage and shipments, our revenue per hundredweight including fuel surcharges increased during the year by 9.9%. This reflected increased fuel prices year-over-year and an increase in revenue per hundredweight excluding fuel of 4.3%, which resulted from stabilization in the LTL pricing environment, our yield improvement initiatives, and a change in freight mix that provided an increased revenue per hundredweight. Our yield improvement initiatives included surcharges in certain geographic locations and renegotiations of accounts that have fuel caps or waivers in effect.
TL revenues increased by $142.6 million, or 89.8%, to $301.3 million in 2011 from $158.7 million 2010. This growth was primarily driven by the acquisitions of Morgan Southern, Bruenger, James Brooks, and Prime, 18.8% organic growth due to a 5.1%
increase in the number of loads, a year-over-year increase in revenue per load of 12.3%, and the continued expansion of our TL agent network. Our 2011 TL acquisitions contributed revenues of $112.8 million.
TMS revenues increased by $13.3 million, or 20.2%, to $79.2 million in 2011 from $65.9 million in 2010, primarily as a result of new and existing customer growth.
Purchased Transportation Costs
Purchased transportation costs increased by $126.3 million, or 25.6%, to $620.3 million in 2011 from $494.0 million in 2010.
LTL purchased transportation costs increased by $45.2 million, or 14.7%, to $352.9 million in 2011 from $307.7 million in 2010, and increased as a percentage of LTL revenues to 75.6% in 2011 from 75.1% in 2010. This increase was primarily the result of rising fuel costs in 2011. Excluding fuel surcharges, our average linehaul cost per mile increased to $1.24 in 2011 from $1.22 in 2010. This increase was mitigated by our yield improvement initiatives and linehaul cost reduction initiatives that included the utilization of our ICs on lanes most impacted by rising rates.
TL purchased transportation costs increased by $72.0 million, or 51.3%, to $212.4 million in 2011 from $140.4 million in 2010, primarily as a result of our 2011 TL acquisitions. TL purchased transportation costs as a percentage of TL revenues decreased to 70.5% in 2011 from 88.4% in 2010, primarily due to the fact that Morgan Southern and Bruenger employee drivers and leased equipment expenses are included in other operating expenses. Our other TL businesses typically use ICs rather than employee drivers and do not lease equipment. Additionally, increases in market pricing and increased utilization of our TL agent network reduced the percentage of purchased transportation costs to TL revenues.
TMS purchased transportation costs increased by $10.2 million, or 21.1%, to $58.7 million in 2011 from $48.5 million in 2010. TMS purchased transportation costs as a percentage of TMS revenues increased to 74.1% in 2011 from 73.5% in 2010, primarily as a result of increased fuel prices and increased carrier costs.
Other Operating Expenses
Other operating expenses, which reflect the sum of the personnel and related benefits, other operating expenses, acquisition transaction expenses, and IPO related expenses line items shown in our consolidated statements of operations, increased by $67.1 million, or 63.8%, to $172.2 million in 2011 from $105.1 million in 2010.
Within our LTL business, other operating expenses increased by $9.0 million, or 11.5%, to $87.9 million in 2011 from $78.9 million in 2010, primarily as a result of increased insurance costs, increased dock labor costs associated with the 4.8% increase in shipment count, and expanded infrastructure costs to support new business initiatives. As a percentage of LTL revenues, other operating expenses decreased to 18.8% in 2011 from 19.2% in 2010, primarily due to implementing operating initiatives to reduce the amount of labor cost per shipment to reduce the overall percentage of costs from 2010 to 2011.
Within our TL business, other operating expenses increased by $55.1 million to $66.2 million in 2011 from $11.1 million in 2010. As a percentage of TL revenues, other operating expenses increased to 22.0% in 2011 from 7.0% in 2010, primarily a result of including Prime's freight storage and handling expenses, as well as Morgan Southern and Bruenger employee drivers and leased equipment expenses in other operating expenses.
Within our TMS business, other operating expenses increased by $0.7 million, or 6.7%, to $12.2 million in 2011 from $11.5 million in 2010. TMS other operating expenses, as a percentage of TMS revenues, decreased to 15.4% in 2011 from 17.4% in 2010.
Other operating expenses that were not allocated to our LTL, TL, or TMS businesses increased to $5.8 million in 2011 from $3.6 million in 2010. This increase was primarily a result of $1.4 million of incremental public company costs and $0.8 million of additional acquisition expenses incurred in 2011.
Depreciation and Amortization
Depreciation and amortization increased to $5.0 million in 2011 from $3.1 million in 2010, reflecting increases in property, plant, and equipment. Within our LTL business, depreciation and amortization was $1.7 million in both 2011 and 2010. Depreciation and amortization within our TL business was $2.6 million in 2011 and $0.7 million in 2010. Within our TMS business, depreciation and amortization was $0.7 million in both 2011 and 2010.
Operating Income
Operating income increased by $16.3 million, or 55.0%, to $46.1 million in 2011 from $29.8 million in 2010, primarily as a result of the factors above. As a percentage of revenues, operating income increased to 5.5% in 2011 from 4.7% in 2010.
Within our LTL business, operating income increased by $2.6 million, or 12.3%, to $24.3 million from $21.7 million. However, operating income in our LTL business decreased as a percentage of LTL revenues to 5.2% in 2011 from 5.3% in 2010, primarily as a result of the factors above.
Within our TL business, operating income increased by $13.5 million to $20.0 million from $6.5 million, and also increased as a percentage of TL revenues to 6.7% in 2011 from 4.1% in 2010, primarily as a result of the factors above.
Within our TMS business, operating income increased by $2.3 million, or 43.8%, to $7.6 million from $5.3 million, and also increased as a percentage of TMS revenues to 9.6% in 2011 from 8.0% in 2010, primarily as a result of the factors above.
Interest Expense
Interest expense decreased by $3.9 million, or 46.8%, to $4.3 million in 2011 from $8.2 million in 2010, primarily attributable to the reduction of our outstanding indebtedness resulting from the application of the net proceeds from our IPO, partially offset by interest expense attributable to the borrowings we incurred to finance our Morgan Southern, Bruenger, James Brooks, and Prime acquisitions.
Loss on Early Extinguishment of Debt
In connection with the reduction of our outstanding indebtedness as a result of our IPO in 2010 and our entering into a new credit agreement in 2010, we incurred a loss on early extinguishment of debt of $15.9 million in 2010 that we did not incur in 2011. This charge consisted of: $10.6 million of prepayment penalties; the payment of $2.6 million of unaccreted discount on our junior subordinated notes; the non-cash write-off of $2.2 million of deferred debt issuance costs; and the payment of legal and other miscellaneous fees of $0.5 million.
Income Tax
Income tax provision was $15.9 million in 2011 compared to $2.1 million in 2010. The effective tax rate was 38.1% in 2011 compared to 37.0% in 2010. The effective income tax rate varies from the federal statutory rate of 35.0% primarily due to state and Canadian income taxes as well as the impact of items causing permanent differences.
Net Income Available to Common Stockholders
Net income available to common stockholders was $25.9 million in 2011 compared to $2.8 million in 2010. Net income available to common stockholders during 2010 was impacted by $0.8 million of accretion of Series B preferred stock dividends. Upon completion of our IPO, our shares of Series B preferred stock were converted into shares of our common stock and such accretion was eliminated as of the date of conversion.
Liquidity and Capital Resources
In recent years, our primary sources of cash have been borrowings under our revolving credit facility, cash flows from operations, sale of securities, and equity contributions. Our primary cash needs are and have been to execute our acquisition strategy, fund normal working capital requirements, finance capital expenditures, and repay our indebtedness. As of December 31, 2012, we had $11.9 million in cash and cash equivalents, $117.2 million of availability under our credit facility, and $52.2 million in net working capital, all increases since December 31, 2011.
Although we can provide no assurances, amounts available under our credit facility, net cash provided by operating activities, and available cash and cash equivalents should be adequate to finance working capital and planned capital expenditures for at least the next 12 months. Thereafter, we may find it necessary to obtain additional equity or debt financing as we continue to execute our business strategy.
Our credit facility consists of a $170.0 million term loan, a revolving credit facility up to a maximum aggregate amount of $125.0 million. We may use up to $10.0 million of the revolving credit facility for swing line loans (as defined in our credit agreement) and up to $25.0 million of the revolving credit facility for letters of credit. The credit facility matures on August 3, 2017.
Advances under our credit facility bear interest at either (a) the Eurocurrency Rate (as defined in the credit agreement), plus an applicable margin in the range of 2.0% to 3.8%, or (b) the Base Rate (as defined in our credit agreement), plus an applicable margin in the range of 1.5% to 2.8%. In 2012, the weighted average interest rate on our credit facility was 3.2%.
Our credit agreement requires us to meet financial tests, including a minimum fixed charge coverage ratio and a maximum cash flow leverage ratio. In addition, our credit agreement contains negative covenants limiting, among other things, additional indebtedness, capital expenditures, transactions with affiliates, additional liens, sales of assets, dividends, investments and advances, prepayments of debt, mergers and acquisitions, and other matters customarily restricted in such agreements. Our credit agreement also contains customary events of default, including payment defaults, breaches of representations and warranties, covenant defaults,
events of bankruptcy and insolvency, failure of any guaranty or security document supporting the credit agreement to be in full force and effect, and a change of control of our business. As of December 31, 2012, we were in compliance with all debt covenants.
Cash Flows
A summary of operating, investing, and financing activities are shown in the following table (in thousands):
Cash Flows from Operating Activities
Cash provided by operating activities primarily consists of net income adjusted for certain non-cash items, including depreciation and amortization, deferred interest, share-based compensation, provision for bad debts, deferred taxes and the effect of changes in working capital and other activities.
The difference between our $37.5 million 2012 net income and the $36.7 million cash provided by operating activities during 2012 was primarily attributable to a $6.3 million increase in our accounts receivable, a $8.6 million increase in prepaid expenses and other assets, a $5.6 million decrease in accounts payable, and a $2.4 million decrease in accrued expenses and other liabilities, substantially all of which was offset by $10.1 million of deferred income taxes, $11.1 million of depreciation and amortization, and $1.1 million of provision for bad debt. The overall changes in cash flow from operating activities were impacted by both the organic and acquisition growth in 2012.
Cash Flows from Investing Activities
Cash used in investing activities was $103.6 million during 2012, which reflects $89.0 million used for business acquisitions and $15.1 million of capital expenditures used to support our operations. These payments were offset by the proceeds from the sale of equipment of $0.5 million.
Cash Flows from Financing Activities
Cash provided by financing activities was $75.5 million during 2012, which primarily reflects our December 2012 offering of 3.4 million shares of our common stock, which yielded proceeds of $57.1 million, net borrowings of $25.0 million under our credit facility, and the excess tax benefit of $0.8 million, offset by payments of debt issuance costs of $2.2 million, the redemption of our mandatory redeemable preferred stock of $5.0 million, and payments of $0.2 million for capital leases. We used approximately $52.0 million of the net proceeds from our stock offering to repay the outstanding indebtedness under our revolving line of credit included in our credit facility. We intend to use the remaining net proceeds from our stock offering for working capital and other general corporate purposes.
Quarterly Results of Operations
The following table presents unaudited consolidated statement of operations data for each of the four quarters ended December 31, 2012 and December 31, 2011. We believe that all necessary adjustments have been included to fairly present the quarterly information when read in conjunction with our annual consolidated financial statements and related notes. The operating results for any quarter are not necessarily indicative of the results for any subsequent quarter.
Contractual Obligations and Commercial Commitments
The following table sets forth a summary of our material contractual obligations and commercial commitments as of December 31, 2012 (in thousands):
(1) The contingent earnout payments resulting from the acquisitions, which are included in other long-term liabilities, are not included in the above schedule due to the uncertainty of final payouts as well as the timing of those payments.
Off-Balance Sheet Arrangements
We do not have any transactions, arrangements, or other relationships with unconsolidated entities that are reasonably likely to materially affect our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, or capital resources. We have no special purpose or limited purpose entities that provide off-balance sheet financing, liquidity, or market or credit risk support; engage in leasing, hedging, or research and development services; or have other relationships that expose us to liability that is not reflected in the financial statements. However, as of December 31, 2012, we had outstanding letters of credit totaling $7.8 million.
Seasonality
Our operations are subject to seasonal trends that have been common in the North American over-the-road freight sector for many years. Our results of operations for the quarter ending in March are on average lower than the quarters ending in June, September, and December. Typically, this pattern has been the result of factors such as inclement weather, national holidays, customer demand, and economic conditions. In 2012, however, the impact of seasonality was less apparent than previous years due to our organic growth and acquisitions.
Effects of Inflation
Based on our analysis of the periods presented, we believe that inflation has not had a material effect on our operating results as inflationary increases in fuel and labor costs have generally been offset through fuel surcharges and price increases.
ITEM 7A.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Commodity Risk
In our LTL, TL, and TMS businesses, our primary market risk centers on fluctuations in fuel prices, which can affect our profitability. Diesel fuel prices fluctuate significantly due to economic, political, and other factors beyond our control. Our ICs and purchased power providers pass along the cost of diesel fuel to us, and we in turn attempt to pass along some or all of these costs to our customers through fuel surcharge revenue programs. There can be no assurance that our fuel surcharge revenue programs will be effective in the future. Market pressures may limit our ability to pass along our fuel surcharges.
Interest Rate Risk
We have exposure to changes in interest rates on our revolving credit facility and term loan. The interest rates on our revolving credit facility and term loan fluctuate based on the prime rate or LIBOR plus an applicable margin. Assuming our $125.0 million revolving credit facility was fully drawn and taking into consideration the outstanding term loan of $161.5 million as of December 31, 2012, a 1.0% increase in the borrowing rate would increase our annual interest expense by $2.9 million. We do not use derivative financial instruments for speculative trading purposes and are not engaged in any interest rate swap agreements.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements, the reports of our independent registered public accounting firm, and the notes thereto commencing at page of this Annual Report on Form 10-K, which financial statements, reports, and notes are incorporated herein by reference. For the Quarterly Results of Operations, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations."
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2012, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is (i) recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Due to 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 due to changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. As allowed by the SEC guidance, we excluded from our assessment the following subsidiaries which were acquired in 2012: Capital Transportation Logistics; D&E Transport, Inc. and D&E Leasing, Inc., collectively, “D&E”; CTW Transport; R&M Transportation and Sortino Transportation, collectively, “R&M”; Expedited Freight Systems, Inc.; Central Cal Transportation; Brandon Carrier Group, Inc. ("A&A"); and Direct Connection Transportation. These acquisitions, in the aggregate, constituted 17.9% and 23.5% of total assets and net assets, respectively, as of December 31, 2012 and 6.9% and 14.0% of revenues and net income for the year then ended. Based on our evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2012.
Deloitte & Touche, LLP, an independent registered public accounting firm, has audited the consolidated financial statements included in this Annual Report on Form 10-K and, as part of its audit, has issued an attestation report, included herein, on the effectiveness of our internal control over financial reporting.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls over financial reporting will prevent all error and all fraud. 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 design of a control system must reflect the fact that there are resource constraints, and 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 control issues, misstatements, errors, and instances of fraud, if any, within our company have been or will be prevented or detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls also can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on 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. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, internal controls may become inadequate as a result of changes in conditions, or through the deterioration of the degree of compliance with policies or procedures.
ITEM 9B.
ITEM 9B.
OTHER INFORMATION
Not applicable
PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item relating to our directors and corporate governance is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2013 Annual Meeting of Stockholders. The information required by this Item relating to our executive officers is included under the caption “Executive Officers” within Item 1.
The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2013 Annual Meeting of Stockholders.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2013 Annual Meeting of Stockholders.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2013 Annual Meeting of Stockholders.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2013 Annual Meeting of Stockholders.
PART IV
ITEM 15.
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements and Financial Statement Schedules
(1) Financial Statements are listed in the Index to Consolidated Financial Statements on page of this Annual Report on From 10-K.
(2) Other schedules are omitted because they are not applicable, not required, or because required information is included in the consolidated financial statements or notes thereto.
(b) Exhibits
(1)
Incorporated by reference to the registrant’s registration statement on Form S-1 (Registration No. 333-152504) as filed with the SEC on May 7, 2010.
(2)
Incorporated by reference to the registrant’s registration statement on Form S-1 (Registration No. 333-152504) as filed with the SEC on September 11, 2008.
(3)
Incorporated by reference to the registrant’s registration statement on Form S-3 (Registration No. 333-176225) as filed with the SEC on August 10, 2011.
(4)
Incorporated by reference to the registrant’s registration statement on Form S-1 (Registration No. 333-152504) as filed with the SEC on March 4, 2010.
(5)
Incorporated by reference to the registrant’s registration statement on Form S-1 (Registration No. 333-152504) as filed with the SEC on April 5, 2010.
(6)
Incorporated by reference to the registrant’s Quarterly Report on Form 10-Q as filed with the SEC on November 14, 2011.
(7)
Incorporated by reference to the registrant’s Current Report on Form 8-K as filed with the SEC on March 7, 2011.
(8)
Incorporated by reference to the registrant’s Current Report on Form 8-K as filed with the SEC on August 26, 2011.
(9)
Incorporated by reference to the Registrant's Current Report on Form 8-K as filed with the SEC on August 8, 2012.
*
Indicates management contract or compensation plan or agreement
**
Pursuant to Rule 406 of Regulation S-T, these interactive date files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise not subject to liability under those sections.
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.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Mark A. DiBlasi and Peter R. Armbruster, and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place, and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing required and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
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.
ROADRUNNER TRANSPORTATION SYSTEMS, INC.
AND SUBSIDIARIES
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders’ Investment
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Roadrunner Transportation Systems, Inc. and subsidiaries
Cudahy, Wisconsin
We have audited the accompanying consolidated balance sheets of Roadrunner Transportation Systems, Inc. and subsidiaries (the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of operations, stockholders' investment, and cash flows for each of the three years in the period ended December 31, 2012. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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, such consolidated financial statements present fairly, in all material respects, the financial position of Roadrunner Transportation Systems, Inc. and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2012 based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 14, 2013 expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
March 14, 2013
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Roadrunner Transportation Systems, Inc. and subsidiaries
Cudahy, Wisconsin
We have audited the internal control over financial reporting of Roadrunner Transportation Systems, Inc. and subsidiaries (the “Company”) as of December 31, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. As described in Management’s Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at the following subsidiaries which were acquired in 2012: Capital Transportation Logistics; D&E Transport, Inc. and D&E Leasing, Inc., collectively, “D&E”; CTW Transport; R&M Transportation and Sortino Transportation, collectively, “R&M”; Expedited Freight Systems, Inc.; Central Cal Transportation; Brandon Carrier Group, Inc. ("A&A"); and Direct Connection Transportation. These acquisitions, in the aggregate, constitute 23.5% and 17.9% of net and total assets, respectively, 6.9% of revenues, and 14.0% of net income of the consolidated financial statement amounts as of and for the year ended December 31, 2012. Accordingly, our audit did not include the internal control over financial reporting at these subsidiaries. The Company'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 included in the accompanying Management’s Report on Internal Control Over Financial Reporting. 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, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and 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 by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel 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 the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the 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, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2012 of the Company and our report dated March 14, 2013 expressed an unqualified opinion on those financial statements.
/s/ DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
March 14, 2013
ROADRUNNER TRANSPORTATION SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements.
ROADRUNNER TRANSPORTATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to consolidated financial statements.
ROADRUNNER TRANSPORTATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ INVESTMENT
See accompanying notes to consolidated financial statements.
ROADRUNNER TRANSPORTATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements.
Roadrunner Transportation Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Organization, Nature of Business and Significant Accounting Policies
Nature of Business
Roadrunner Transportation Systems, Inc. (the “Company”) is headquartered in Cudahy, Wisconsin and has the following three operating segments: less-than-truckload (“LTL”); truckload and logistics (“TL”); and transportation management solutions (“TMS”). Within its LTL business, the Company operates 36 LTL service centers throughout the United States, complemented by relationships with over 200 delivery agents. Within its TL business, the Company operates a network of 28 TL service centers, five freight consolidation and inventory management centers, and 20 dispatch offices and is augmented by 75 independent brokerage agents. The Company operates its TMS business from four service centers throughout the United States. From pickup to delivery, the Company leverages relationships with a diverse group of third-party carriers to provide scalable capacity and reliable, customized service to customers in North America. The Company operates primarily in the United States.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries. As of December 31, 2012, all subsidiaries were 100% owned. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements, in conformity with accounting principles generally accepted in the 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 reporting period. Actual results could differ from those estimates.
Segment Reporting
The Company determines its operating segments based on the information utilized by the chief operating decision maker, the Company’s Chief Executive Officer, to allocate resources and assess performance. Based on this information, the Company has determined that it has three operating segments, which are also reportable segments: LTL; TL; and TMS.
Cash and Cash Equivalents
Cash equivalents are defined as short-term investments that have an original maturity of three months or less at the date of purchase and are readily convertible into cash. The Company maintains cash in several banks and, at times, the balances may exceed federally insured limits. The Company does not believe it is exposed to any material credit risk on cash. As of December 31, 2012 and 2011, approximately $8.3 million and $13.0 million, respectively, of checks drawn in excess of book balances were classified as accounts payable in the accompanying consolidated balance sheets. Cash equivalents consist of overnight investments in an interest bearing sweep account.
Accounts Receivable and Related Reserves
Accounts receivable represent trade receivables from customers and are stated net of an allowance for doubtful accounts and pricing allowances of approximately $1.5 million as of December 31, 2012 and 2011. Management estimates the portion of accounts receivable that will not be collected and accounts are written off when they are determined to be uncollectible. Accounts receivable are uncollateralized and are generally due 30 days from the invoice date.
The Company provides reserves for accounts receivable. The rollforward of the allowance for doubtful accounts is as follows (in thousands):
Roadrunner Transportation Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Property and Equipment
Property and equipment are stated at cost. Maintenance and repair costs are charged to expense as incurred. For financial reporting purposes, depreciation is calculated using the straight-line method over the following estimated useful lives:
Accelerated depreciation methods are used for tax reporting purposes.
Property and equipment and other long-lived assets are reviewed periodically for possible impairment. The Company evaluates whether current facts or circumstances indicate that the carrying value of the assets to be held and used may not be recoverable. If such circumstances are determined to exist, an estimate of undiscounted future cash flows produced by the long-lived asset, or the appropriate grouping of assets, is compared to the carrying value to determine whether impairment exists. If an asset is determined to be impaired, the loss is measured and recorded based on quoted market prices in active markets, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including discounted value of estimated future cash flows. The Company reports an asset to be disposed of at the lower of its carrying value or its fair value less the cost to sell.
Goodwill and Other Intangibles
Goodwill and other intangible assets result from business acquisitions. The Company accounts for business acquisitions by assigning the purchase price to tangible and intangible assets and liabilities. Assets acquired and liabilities assumed are recorded at their fair values and the excess of the purchase price over amounts assigned is recorded as goodwill.
Goodwill is tested for impairment at least annually on July 1st using a two-step process that begins with an estimation of the fair value at the “reporting unit” level. The Company has four reporting units as this is the lowest level for which discrete financial information is prepared and regularly reviewed by segment management. The impairment test for goodwill involves comparing the fair value of a reporting unit to its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, a second step is required to measure the goodwill impairment loss. The second step includes hypothetically valuing all the tangible and intangible assets of the reporting unit as if the reporting unit had been acquired in a business combination. Then, the implied fair value of the reporting unit’s goodwill is compared to the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of the goodwill, the Company recognizes an impairment loss in an amount equal to the excess, not to exceed the carrying amount. For purposes of the Company’s impairment test, the fair value of its reporting units are calculated based upon an average of an income fair value approach and market fair value approach. Based on these tests, the Company concluded that the fair value for all reporting units is in excess of the respective reporting unit’s carrying value. Accordingly, no goodwill impairments were identified in 2012, 2011 or 2010.
Other intangible assets recorded consist of definite lived customer relationships. The Company evaluates its other intangible assets for impairment when current facts or circumstances indicate that the carrying value of the assets to be held and used may not be recoverable. No indicators of impairment were identified in 2012, 2011 or 2010. See Note 4 for additional information on the Company's goodwill and intangible assets.
Debt Issue Costs
Debt issue costs represent costs incurred in connection with the financing agreements described in Note 6. The unamortized debt issue costs aggregate to $5.5 million and $4.5 million as of December 31, 2012 and 2011, respectively, and have been classified in the consolidated balance sheets as other noncurrent assets. Such costs are being amortized over the expected maturity of the financing agreements using the effective interest rate method.
Share-Based Compensation
The Company’s share based payment awards are comprised of stock options and restricted stock units. The cost for the Company’s stock options and restricted stock units is measured at fair value using the Black-Scholes option pricing model for stock options and the stock price at the grant date for restricted stock units. The cost is recognized over the vesting period of the award, which is typically four years.
Roadrunner Transportation Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Income Taxes
Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. The provision for income taxes is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.
Fair Value of Financial Instruments
The fair value of cash approximates cost. The estimated fair value of the Company's debt approximated its carrying value as of December 31, 2012 and 2011 as the debt agreement bears interest based on prevailing variable market rates currently available and as such is categorized as a Level 2 in the fair value hierarchy as defined in Note 5.
Revenue Recognition
LTL revenue is recorded when all of the following have occurred: an agreement of sale exists; pricing is fixed or determinable; and collection of revenue is reasonably assured. The Company recognizes revenue based on a percentage of services completed for freight in-transit as of the balance sheet date.
TL revenue is recorded when all of the following have occurred: an agreement of sale exists; pricing is fixed or determinable; delivery has occurred; and the Company’s obligation to fulfill a transaction is complete and collection of revenue is reasonably assured. This occurs when the Company completes the delivery of a shipment or the service has been fulfilled.
TMS revenue is recorded when the shipment has been delivered by a third-party carrier. Fee for services revenue is recognized when the services have been rendered. At the time of delivery or rendering of services, as applicable, the Company’s obligation to fulfill a transaction is complete and collection of revenue is reasonably assured. The Company offers volume discounts to certain customers. Revenue is reduced as discounts are earned.
The Company typically recognizes revenue on a gross basis, as opposed to a net basis, because it bears the risks and benefits associated with revenue-generated activities by, among other things, (1) acting as a principal in the transaction, (2) establishing prices, (3) managing all aspects of the shipping process, and (4) taking the risk of loss for collection, delivery and returns. Certain TMS transactions to provide specific services are recorded at the net amount charged to the client due to the following factors: (A) the Company does not have latitude in establishing pricing and (B) the Company does not bear the risk of loss for delivery and returns; these items are the risk of the carrier.
Insurance
The Company uses a combination of purchased insurance and self-insurance programs to provide for the cost of vehicle liability, cargo damage, and workers’ compensation claims. The portion of self-insurance accruals which is included in accrued expenses and other liabilities relates primarily to vehicle liability and cargo damage claims. The Company periodically evaluates the level of insurance coverage and adjusts insurance levels based on risk tolerance and premium expense.
The measurement and classification of self-insured costs requires the consideration of historical cost experience, demographic and severity factors, and judgments about the current and expected levels of cost per claim and retention levels. These methods provide estimates of the liability associated with claims incurred as of the balance sheet date, including claims not reported. The Company believes these methods are appropriate for measuring these highly judgmental self-insurance accruals. However, the use of any estimation method is sensitive to the assumptions and factors described above, based on the magnitude of claims and the length of time from the date the claim is incurred to ultimate settlement. Accordingly, changes in these assumptions and factors can materially affect actual costs paid to settle the claims and those amounts may be different than estimates.
2. Acquisitions
On February 4, 2011, the Company acquired all the outstanding stock of Morgan Southern Inc. ("Morgan Southern") for the purpose of expanding its current market presence and service offerings in the TL segment. Cash consideration paid was $19.4 million after a working capital adjustment. The acquisition price was financed with borrowings under the Company’s credit facility discussed in Note 6.
On May 31, 2011, the Company acquired all the outstanding stock of Bruenger Trucking Company ("Bruenger") for the purpose of expanding its current market presence in the TL segment. Cash consideration paid was $10.6 million after a working capital adjustment. The acquisition price was financed with borrowings under the Company’s amended and restated credit facility discussed in Note 6. The Bruenger purchase agreement calls for contingent consideration in the form of an earnout capped at $3.0 million. The former owners of Bruenger are entitled to receive a payment equal to the amount by which Bruenger’s annual operating
Roadrunner Transportation Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
income, as defined in the purchase agreement, exceeds $1.1 million for the six months ending December 31, 2011 and $2.1 million for the years ending December 31, 2012, 2013 and 2014. Approximately $2.6 million has been included in the TL purchase price allocation related to the earnout.
On August 1, 2011, the Company acquired all the outstanding stock of James Brooks Company, Inc. and C.A.L Transport, Inc. (collectively, "James Brooks"), for the purpose of expanding its market presence in the TL segment. Cash consideration paid was $7.6 million. The acquisition price was financed with borrowings under the Company’s amended and restated credit facility discussed in Note 6.
On August 31, 2011, the Company acquired all the outstanding stock of Prime Logistics Corporation ("Prime") for the purpose of expanding its current market presence in the TL segment. Total consideration paid was $96.8 million after a working capital adjustment. The acquisition price was financed with $3.0 million of the Company’s stock and the remainder was financed with borrowings under the Company’s amended and restated credit facility discussed in Note 6.
On February 24, 2012, the Company acquired all of the outstanding stock of Capital Transportation Logistics (“CTL”) for the purpose of expanding its current market presence in the TMS segment. Cash consideration paid was $6.2 million. The acquisition was financed with borrowings under the Company’s second amended and restated credit facility discussed in Note 6. The CTL purchase agreement calls for a contingent consideration in the form of an earnout capped at $0.8 million. The former owners of CTL are entitled to receive a payment equal to the amount by which CTL’s aggregate operating income, as defined in the purchase agreement, exceeds $1.8 million for the years ending December 31, 2012 and 2013. Approximately $0.7 million has been included in the TMS purchase price allocation related to this earnout.
On April 19, 2012, the Company acquired all of the outstanding stock of Grundman Holdings, Inc., which wholly owned both D&E Transport, Inc. and D&E Leasing, Inc. (collectively, “D&E”), for the purpose of expanding its current market presence in the TL segment. Cash consideration paid was $11.4 million. The acquisition was financed with borrowings under the Company’s second amended and restated credit facility discussed in Note 6. The D&E purchase agreement calls for a contingent consideration in the form of an earnout capped at $0.7 million per year. The former owners of D&E are entitled to receive a payment equal to the amount by which D&E’s operating income, as defined in the purchase agreement, exceeds $2.0 million for the years ending December 31, 2012, 2013 and 2014. The annual payment starts at $0.1 million if operating income exceeds $2.0 million and escalates up to $0.7 million if operating income exceeds $5.0 million. Approximately $1.0 million has been included in the TL purchase price allocation related to this earnout.
On June 4, 2012, the Company acquired all of the outstanding stock of CTW Transport (“CTW”) for the purpose of expanding its current market presence in the TL segment. Cash consideration paid was $7.6 million. The acquisition was financed with borrowings under the Company’s second amended and restated credit facility discussed in Note 6. The CTW purchase agreement calls for a contingent consideration in the form of an earnout capped at $3.5 million. The former owner of CTW is entitled to receive a payment equal to the amount by which CTW’s operating income before depreciation and amortization, as defined in the purchase agreement, exceeds $2.0 million for the years ending December 31, 2012, 2013 and 2014. Approximately $2.6 million has been included in the TL purchase price allocation related to this earnout.
On August 1, 2012, the Company acquired all of the operating assets of R&M Transportation and all of the outstanding stock of Sortino Transportation (collectively, “R&M”) for the purpose of expanding its current market presence in the TL segment. Cash consideration paid was $24.2 million. The acquisition was financed with borrowings under the Company's second amended and restated credit facility discussed in Note 6. The R&M purchase agreement calls for a contingent consideration in the form of an earnout capped at $5.0 million. The former owners of R&M are entitled to receive a payment equal to the amount by which R&M's operating income before depreciation and amortization, as defined in the purchase agreement, exceeds $1.7 million for the five months ending December 31, 2012 and $4.5 million for the years ending December 31, 2013, 2014 and 2015. Approximately $4.2 million has been included in the TL purchase price allocation related to this earnout.
On August 10, 2012, the Company acquired all of the outstanding stock of Expedited Freight Systems, Inc. (“EFS”) for the purpose of expanding its current market presence in the LTL segment. Cash consideration paid was $10.0 million. The acquisition was financed with borrowings under the Company's third amended and restated credit facility discussed in Note 6. The EFS purchase agreement calls for a contingent consideration in the form of an earnout capped at $4.0 million. The former owners of EFS are entitled to receive a payment equal to the amount by which EFS's operating income before depreciation and amortization, as defined in the purchase agreement, exceeds $0.9 million for the period from the closing date through December 31, 2012, $2.3 million for the year ending December 31, 2013, $2.5 million for the years ending December 31, 2014 and 2015, and $2.8 million for the year ending December 31, 2016. Approximately $3.1 million has been included in the LTL purchase price allocation related to this earnout.
On November 5, 2012, the Company acquired all of the outstanding stock of Central Cal Transportation ("Central Cal") for the purpose of expanding its current presence in the TL segment. Cash consideration paid was $3.8 million. The acquisition was
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financed with borrowings under the Company's third amended and restated credit facility discussed in Note 6. The Central Cal purchase agreement calls for contingent consideration in the form of an earnout capped at $4.0 million. The former owners of Central Cal are entitled to receive a payment equal to $0.8 million when Central Cal's combined operating income before depreciation and amortization, as defined in the purchase agreement, exceeds $1.4 million for the period from the closing date through December 31, 2013 and for the years ending December 31, 2014, 2015 and 2016. The purchase agreement also calls for an additional payment of 75% of the amount that Central Cal's combined operating income before depreciation and amortization exceeds $1.4 million. Approximately $3.1 million has been included in the TL purchase price allocation related to this earnout.
On November 12, 2012, the Company acquired all of the outstanding stock of Brandon Carrier Group, Inc. ("A&A") for the purpose of expanding its current presence in the TL segment. Cash consideration paid was $24.1 million. The acquisition was financed with borrowings under the Company's third amended and restated credit facility discussed in Note 6. The A&A purchase agreement calls for contingent consideration in the form of an earnout capped at $2.5 million. The former owners of A&A are entitled to receive a payment equal to the amount by which A&A's operating income before amortization, as defined in the purchase agreement, exceeds $3.0 million for the years ending December 31, 2013, 2014, 2015, and 2016. Approximately $1.9 million has been included in the TL purchase price allocation related to this earnout.
On December 21, 2012, the Company acquired all of the outstanding stock of Direct Connection Transportation ("DCT") for the purpose of expanding its current presence in the TL segment. Cash consideration paid was $1.0 million. The acquisition was financed with cash on-hand. The DCT purchase agreement calls for contingent consideration in the form of an earnout capped at $1.0 million. The former owners of DCT are entitled to receive a payment equal to the amount by which DCT's operating income before amortization, as defined in the purchase agreement, exceeds $0.4 million for the years ending December 31, 2013, 2014, and 2015. Approximately $1.0 million has been included in the TL purchase price allocation related to this earnout.
The following is a summary of the allocation of the purchase price paid to the fair value of the net assets for our acquisitions (in thousands):
2011 Acquisitions
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2012 Acquisitions
The goodwill for each acquisition is a result of acquiring and retaining their existing workforces and expected synergies from integrating their operations into the Company. Purchase accounting is considered preliminary for CTL, D&E, CTW, R&M, and EFS with respect to deferred taxes and goodwill as final information was not available as of December 31, 2012. Due to the limited amount of time since the acquisitions of Central Cal, A&A, and DCT, the initial purchase price allocation is preliminary as of December 31, 2012. The measurement period adjustments from the previous recorded opening balances relate primarily to fair value measurement changes in customer relationship intangible assets and changes in acquired deferred tax assets and liabilities.
After the December 31, 2011 financial statements were issued, the Company completed the 2011 tax returns. After considering the results of the tax returns, the Company estimated a change to the current deferred tax assets and non-current deferred tax liabilities associated with the acquisitions of James Brooks and Prime. As a result, measurement period adjustments were recorded to increase the carrying amount of Prime's current deferred tax assets and non-current deferred tax liabilities by $0.6 million and $0.3 million, respectively, on August 31, 2011, with a corresponding decrease of $0.3 million to goodwill. Additionally, the carrying amount of James Brooks' current deferred tax assets was decreased by $0.6 million on August 1, 2011 with a corresponding increase to goodwill.
From the acquisition of Morgan Southern on February 4, 2011 through December 31, 2011, Morgan Southern contributed $63.3 million of revenues and $2.0 million of net income to the Company. The following supplemental unaudited pro forma financial information of the Company for the year ended December 31, 2010 includes the results of operations as if the Morgan Southern acquisition had been completed on January 1, 2010. The Company's results of operations were not materially affected by the revenue and net income of Morgan Southern for the period from January 1, 2011 through February 4, 2011.
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From the acquisition of Prime on August 31, 2011 through December 31, 2011, Prime contributed $29.9 million of revenues and $1.4 million of net income to the Company. The following supplemental unaudited pro forma financial information of the Company for the years ended December 31, 2011 and 2010 includes the results of operations as if the Prime acquisition had been completed on January 1, 2010.
From the dates of acquisition through December 31, 2012, the acquisitions of CTL, D&E, CTW, R&M, EFS, Central Cal, A&A and DCT contributed, in the aggregate, $73.7 million of revenues and $5.3 million of net income to the Company. The following supplemental unaudited pro forma financial information of the Company for the years ended December 31, 2012 and 2011 includes the results of operations for the 2012 acquisitions of CTL, D&E, CTW, R&M, EFS, Central Cal, A&A, and DCT, in the aggregate, as if the acquisitions had been completed on January 1, 2011.
The supplemental unaudited pro forma financial information above is presented for information purposes only. It is not necessarily indicative of what the Company's financial position or results of operations actually would have been had the Company completed the acquisition at the dates indicated, nor is it intended to project the future financial position or operating results of the combined company.
The Company’s results of operations were not materially impacted by the 2011 acquisitions of Bruenger and James Brooks, individually or in aggregate. The results of operations and financial condition of these acquisitions have been included in our consolidated financial statements since their acquisition dates.
3. Property and Equipment
Property and equipment consisted of the following at December 31 (in thousands):
Depreciation expense was $7.8 million, $4.2 million, and $2.5 million for the years ended December 31, 2012, 2011 and 2010, respectively.
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Capital Leases
The Company has a building and certain equipment classified as capital leases. The recorded value of the building and the equipment is included in property and equipment, net as of December 31 as follows (in thousands):
The following is a schedule of future minimum lease payments under the capital leases with the present value of the net minimum lease payments as of December 31, 2012 (in thousands):
(1)
Reflected in the consolidated balance sheets as accrued expenses and other liabilities and other long-term liabilities of $0.1 million and $1.0 million, respectively.
4. Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price of all acquisitions over the estimated fair value of the net assets acquired. The Company completes an impairment test of goodwill annually. This impairment test did not result in any impairment losses. There is no goodwill impairment for any of the periods presented in our financial statements.
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The following is a rollforward of goodwill from December 31, 2010 to December 31, 2012 by reportable segment (in thousands):
Intangible assets consist of customer relationships acquired from business acquisitions. Intangible assets as of December 31, 2012 and 2011 were as follows (in thousands):
The customer relationships intangible assets are amortized over their estimated five to ten year useful lives. Amortization expense for the years ended December 31, 2012, 2011 and 2010 was $1.7 million, $0.7 million, and $0.6 million, respectively. Estimated amortization expense for each of the next five years based on the intangible assets at December 31, 2012 is as follows (in thousands):
5. Fair Value Measurement
Accounting guidance on fair value measurements for certain financial assets and liabilities requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
Level 1 - Quoted market prices in active markets for identical assets or liabilities.
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Level 2 - Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3 - Unobservable inputs reflecting the reporting entity’s own assumptions or external inputs from inactive markets.
A financial asset or liability’s classification within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement.
The following table presents information, as of December 31, 2012 and December 31, 2011, about the Company’s financial liabilities. Contingent purchase price related to acquisitions are measured at fair value on a recurring basis, according to the valuation techniques the Company used to determine their fair values (in thousands):
In measuring the fair value of the contingent payment liability, the Company used an income approach that considers the expected future earnings of the acquired businesses and the resulting contingent payments, discounted at a risk-adjusted rate.
The table below sets forth a reconciliation of the Company’s beginning and ending Level 3 financial liability balance for the year ended December 31, 2012 (in thousands):
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6. Long-Term Debt
Long-Term Debt
Long-term debt consisted of the following at December 31 (in thousands):
In connection with the Company’s initial public offering (IPO), the Company entered into a credit agreement on May 18, 2010 with U.S. Bank National Association (U.S. Bank). The credit agreement included a $55.0 million revolving credit facility. On May 31, 2011, in connection with the Company’s acquisition of Bruenger, the Company entered into an amended and restated credit agreement with U.S. Bank and the other lenders, which maintained the $55.0 million revolving credit facility and also included a $30.0 million term loan. On August 31, 2011, in connection with the Company’s acquisition of Prime, the Company entered into a second amended and restated credit agreement with U.S. Bank and other lenders, which increased the revolving credit facility to $100.0 million and the term loan to $140.0 million. On August 3, 2012, the Company entered into a third amended and restated credit agreement with U.S. Bank and other lenders, which increased the revolving credit facility to $125.0 million and the term loan to $170.0 million. The credit facility matures on August 3, 2017. Principal on the term loan is due in quarterly installments of $4.3 million per quarter until 2017. The third amended and restated credit agreement is collateralized by all assets of the Company and the revolving credit facility is subject to a borrowing base equal to 85% of the Company's eligible receivables. The third amended and restated credit agreement contains certain financial covenants, including a minimum fixed charge coverage ratio and a maximum cash flow leverage ratio. Additionally, our credit agreement contains negative covenants limiting, among other things, additional indebtedness, capital expenditures, transactions with affiliates, additional liens, sales of assets, dividends, investments and advances, prepayments of debt, mergers and acquisitions, and other matters customarily restricted in such agreements. As of December 31, 2012, the Company was in compliance with all covenants contained in the credit agreement. Borrowings under the credit agreement bear interest at either (a) the Eurocurrency Rate (as defined in the credit agreement), plus an applicable margin in the range of 2.0% to 3.8%, or (b) the Base Rate (as defined in the credit agreement), plus an applicable margin in the range of 1.5% to 2.8%. The revolving credit facility also provides for the issuance of up to $25.0 million in letters of credit. As of December 31, 2012, the Company had outstanding letters of credit totaling $7.8 million. Total availability under the revolving credit facility was $117.2 million as of December 31, 2012. At December 31, 2012, the average interest rate on the credit agreement was 3.2%.
7. Stockholders’ Investment
Common Stock
Common stock has voting rights - one vote for each share of common stock. Class A common stock had voting rights and Class B common stock did not have voting rights. All classes of common stock participate equally in earnings and dividends. All common stock is subject to a Shareholders’ Agreement which includes restrictions on transferability and “piggyback” registration rights. Such agreement provides that if, at any time after an initial public offering, the Company files a registration statement under the Securities Act of 1933, as amended, for any underwritten sale of shares of any of the Company’s equity securities, the stockholders may request that the Company include in such registration the shares of common stock held by them on the same terms and conditions as the securities otherwise being sold in such registration.
In addition to piggyback registration rights discussed above, certain of the Company’s stockholders have demand registration rights. In March 2007, the Company entered into a second amended and restated stockholders’ agreement, pursuant to which certain of the Company’s stockholders were granted Form S-3 registration rights. The second amended and restated stockholders’ agreement provides that, any time after the Company is eligible to register its common stock on a Form S-3 registration statement under the Securities Act, certain of the Company’s stockholders may request registration under the Securities Act of all or any portion of their shares of common stock. These stockholders are limited to a total of two of such registrations. In addition, if the Company proposes to file a registration statement under the Securities Act for any underwritten sale of shares of any of its securities, stockholders party to the second amended and restated stockholders’ agreement may request that the Company include in such
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registration the shares of common stock held by them on the same terms and conditions as the securities otherwise being sold in such registration.
The Shareholder’s Agreement defines certain circumstances, including a change in control, whereby all stockholders are obligated to sell their common stock on the same terms as Thayer Equity Investors V, L.P., the majority shareholder of the Company and an affiliate of HCI Equity Management L.P. (HCI).
In December 2012, the Company issued and sold 3.4 million shares of its common stock at a public offering price of $17.25 per share for an aggregate offering proceeds of $55.3 million, net of $3.4 million of underwriting discounts and commissions. In connection with the public offering, the Company incurred additional expenses of $0.3 million. Additionally, the Company granted the underwriters an option to purchase up to 525,000 additional shares at the public offering price less the underwriting discount to cover any over-allotments. The underwriters exercised this option subsequent to year end as discussed in Note 15.
Warrants to Acquire Common Stock
In connection with a business combination entered in 2007, the Company issued to existing Sargent Transportation Group, Inc. stockholders warrants to acquire 2,269,263 shares of Class A common stock at an exercise price of $13.39 per share. The warrants are exercisable at the option of the holder any time prior to March 13, 2017. No warrants were exercised during the years ended December 31, 2012 or 2011.
On December 11, 2009, in connection with financing of the Bullet acquisition, the Company issued warrants to acquire 1,746,971 shares of Class A common stock at an exercise price of $8.37 per share. The warrants are exercisable at the option of the holder any time prior to December 11, 2017. The $3 million fair value of the warrants at the date of issuance has been reflected as a component of additional paid-in capital in stockholders’ investment in the accompanying consolidated balance sheets. Certain holders exercised 44,794 and 554,328 warrants during the years ended December 31, 2012 and 2011, respectively.
8. Preferred Stock
Series A Redeemable Preferred Stock
In March 2007, the Company issued and had outstanding 5,000 shares of non-voting Series A Preferred Stock (Series A Preferred Stock), which were mandatorily redeemable by the Company at $1,000 per share, in cash, on November 30, 2012. The Series A Preferred Stock received cash dividends annually on April 30 at an annual rate equal to $40 per share. As of December 31, 2011, $142,000 was recorded as a current liability. In March 2012, the Company repurchased the 5,000 shares of Series A Preferred Stock and paid the corresponding dividends through the date of the repurchase.
9. Share-Based Compensation
In 2010, the Company adopted its 2010 Incentive Compensation Plan (the “2010 Plan”), which allows for the issuance of 2,500,000 shares of common stock. The 2010 Plan provides for the grant of stock options, restricted stock units, and other awards to its employees and directors.
The Company awards restricted stock unites to certain key employees and non-employee directors. The restricted stock units vest ratably over a four year service period from the grant date. Restricted stock units are valued based on the market price on the date of the grant and are amortized on a straight-line basis over the vesting period. Compensation expense for restricted stock units is based on fair market value at the grant date.
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The following table summarizes the nonvested restricted stock units as of December 31, 2012 and 2011:
Unrecognized stock compensation expense was $1.8 million and $0.8 million for the years ended December 31, 2012 and 2011, respectively.
The Company previously maintained a Key Employee Equity Plan (“Equity Plan”), a stock-based compensation plan that permitted the grant of stock options to Company employees and directors. Stock options under the Equity Plan were granted with an exercise price equal to or in excess of the fair value of the Company’s stock on the date of grant. Such options vest ratably over a two or four year service period and are exercisable ten years from the date of grant, but only to the extent vested as specified in each option agreement.
GTS previously maintained a Key Employee Equity Plan (“GTS Plan”), which permitted the grant of stock options to employees and directors. Stock options under the GTS Plan were granted with an exercise price equal to or in excess of the fair value of GTS’ stock on the date of grant. Such options vest ratably over a two or four year service period and are exercisable ten years from the date of grant, but only to the extent vested as specified in each option agreement. In connection with the Company’s merger with GTS effective upon the IPO, all options granted pursuant to the GTS Plan outstanding at the effective time of the merger became options to purchase shares of the Company’s common stock.
No options were granted by the Company in 2010, 2011 or 2012. Stock-based compensation expense was $0.7 million, $0.5 million, and $0.5 million for the years ended December 31, 2012, 2011 and 2010, respectively. The related estimated income tax benefit recognized in the accompanying consolidated statements of operations, net of estimated forfeitures, was $0.3 million, $0.2 million, and $0.2 million, respectively.
A summary of the option activity under the equity plans for the year ended December 31, 2012 and 2011, respectively, is as follows:
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There were 1,563,725, 1,684,140, and 1,638,623 options exercisable at December 31, 2012, 2011 and 2010, respectively. At December 31, 2012, for exercisable options, the weighted-average exercise price was $11.67, the weighted average remaining contractual term was 3.8 years, and the estimated aggregate intrinsic value was $6.47 per share. All granted options are non-qualified options. The amount of options vested or expected to vest as of December 31, 2012 does not differ significantly from the amount outstanding.
As of December 31, 2012, there was $0.1 million of total unrecognized compensation cost related to non-vested options granted under the Equity Plan. This cost is recognized over a period extending four years from each grant date.
10. Earning Per Share
Basic earnings per common share is calculated by dividing net income available to common stockholders by the weighted average number of common stock outstanding during the period. Diluted earnings per share is calculated by dividing net income by the weighted average common stock outstanding plus stock equivalents that would arise from the assumed exercise of stock options and conversion of warrants using the treasury stock method.
The following table reconciles basic weighted average stock outstanding to diluted weighted average stock outstanding (in thousands):
The Company had additional stock options and warrants outstanding of 308,698 as of December 31, 2012 and 2011, and 3,122,836 as of December 31, 2010. These shares were not included in the computation of diluted earnings per share because they were not assumed to be exercised under the treasury stock method or were anti-dilutive.
11. Income Taxes
The components of the Company’s provision for income taxes were as follows (in thousands):
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The Company’s income tax provision varied from the amounts calculated by applying the U.S. statutory income tax rate to the pretax income as shown in the following reconciliations (in thousands):
The tax rate effects of temporary differences that give rise to significant elements of deferred tax assets and deferred tax liabilities at December 31, 2012 and 2011 were as follows (in thousands):
The net noncurrent deferred income tax liability of $40.7 million and $26.2 million is classified in the consolidated balance sheets as a component of other long-term liabilities at December 31, 2012 and 2011, respectively.
There were no unrecognized tax benefits recorded as of December 31, 2012 and 2011. It is the Company’s policy to recognize interest and penalties related to unrecognized tax benefits within the income tax expense line in the accompanying consolidated statements of operations. Income tax related interest and penalties were immaterial as of December 31, 2012 or 2011. The Company is subject to federal and state tax examinations for all tax years subsequent to December 31, 2008. Although the pre-2009 years are no longer subject to examinations by the Internal Revenue Service (IRS) and various state taxing authorities, net operating loss carryforwards generated in those years were used by the Company during 2011 and 2012 and may still be adjusted upon examination by the IRS or state taxing authorities given they were used in a future period.
12. Commitments and Contingencies
Employee Benefit Plans
The Company sponsors defined contribution profit sharing plans for substantially all employees of the Company and its subsidiaries. The Company provides matching contributions on some of these plans. Total expense under these plans was $1.1 million, $0.2 million, and $0.2 million for the years ended December 31, 2012, 2011 and 2010, respectively.
Operating Leases
The Company leases terminals and office space under noncancelable operating leases expiring on various dates through 2020. The Company incurred rent expense from operating leases of $24.0 million, $13.5 million, and $9.3 million for the years ended December 31, 2012, 2011 and 2010, respectively.
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Aggregate future minimum lease payments under noncancelable operating leases with an initial term in excess of one year were as follows as of December 31, 2012 (in thousands):
Contingencies
In the ordinary course of business, the Company is a defendant in several property and other claims. In the aggregate, the Company does not believe any of these claims will have a material impact on its consolidated financial statements. The Company maintains liability insurance coverage for claims in excess of $500,000 per occurrence and cargo coverage for claims in excess of $100,000 per occurrence. Management believes it has adequate insurance to cover losses in excess of the deductible amount. As of December 31, 2012 and 2011, the Company had reserves for estimated uninsured losses of $5.0 million and $4.3 million, respectively.
13. Related Party Transactions
In 2010, the Company paid an aggregate of $3.5 million to THC Management and EOS Management for the termination of the management agreement of GTS and the IPO of the Company and related debt refinancing.
On September 12, 2011, the Company amended its advisory agreement with HCI, formerly Thayer | Hidden Creek Management, L.P., to pay them a transaction fee for each acquisition and an annual advisory fee of $0.1 million. The Company paid an aggregate of $0.9 million and $0.7 million to HCI for services performed in conjunction with acquisitions and debt financing during 2012 and 2011, respectively.
As part of the 2007 acquisition of Big Rock Transportation, Inc., Midwest Carriers, Inc., Sargent Trucking, Inc., B&J Transportation, Inc., and Smith Truck Brokers, Inc. (collectively, Sargent), the Company was required to pay an earnout to the former Sargent owners. The Company’s obligation to make further contingent payments to the former Sargent owners terminated as of December 31, 2009. The Company paid $0.8 million during 2012 related to the amounts earned in 2006 and 2007.
As part of the Bullet acquisition in 2009, the Company issued eight-year warrants exercisable for an aggregate of 268,765 shares of Class A common stock payable to the former Bullet owners. These warrants were exercised in July of 2010. Additionally, certain existing stockholders and their affiliates also received eight-year warrants exercisable for an aggregate of 1,388,620 shares of Class A common stock payable to existing stockholders and their affiliates. Certain stockholders exercised 554,328 of these warrants during 2011. No warrants were exercised by affiliated parties during 2012. As of December 31, 2012, 834,292 were still outstanding.
14. Segment Reporting
The Company determines its operating segments based on the information utilized by the chief operating decision maker, the Company’s Chief Executive Officer, to allocate resources and assess performance. Based on this information, the Company has determined that it has three operating segments, which are also reportable segments: LTL; TL; and TMS.
These reportable segments are strategic business units through which the Company offers different services. The Company evaluates the performance of the segments primarily based on their respective revenues and operating income. Accordingly, interest expense and other non-operating items are not reported in segment results. In addition, the Company has disclosed a corporate segment, which is not an operating segment and includes IPO related expenses, acquisition transaction expenses, corporate salaries, and stock-based compensation expense.
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The following table reflects certain financial data of the Company’s reportable segments (in thousands):
15. Subsequent Event
On January 4, 2013, the underwriters for the Company's public offering of common stock exercised in full their over-allotment option to purchase an additional 525,000 shares of common stock at a price of $17.25 per share to the public. The sale of the additional shares resulted in additional net proceeds to the Company of $8.5 million after deducting the underwriting discount and estimated expenses.