UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2013
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-24180
Quality Distribution, Inc.
(Exact name of registrant as specified in its charter)
Florida | 59-3239073 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
4041 Park Oaks Boulevard, Suite 200, Tampa, FL | 33610 | |
(Address of Principal Executive Offices) | (Zip Code) |
813-630-5826
(Registrants telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer | ¨ | Accelerated filer | x | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ¨ No x
As of May 3, 2013, the registrant had 26,919,535 shares of Common Stock, no par value, outstanding.
QUALITY DISTRIBUTION, INC. AND SUBSIDIARIES
CONTENTS
QUALITY DISTRIBUTION, INC. AND SUBSIDIARIES
PART IFINANCIAL INFORMATION
Consolidated Statements of Operations
Unaudited (In 000s, Except Per Share Amounts)
Three months ended March 31, |
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2013 | 2012 | |||||||
OPERATING REVENUES: |
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Transportation |
$ | 163,994 | $ | 133,206 | ||||
Service revenue |
33,454 | 27,985 | ||||||
Fuel surcharge |
31,974 | 30,724 | ||||||
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Total operating revenues |
229,422 | 191,915 | ||||||
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OPERATING EXPENSES: |
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Purchased transportation |
142,872 | 131,877 | ||||||
Compensation |
26,470 | 16,631 | ||||||
Fuel, supplies and maintenance |
27,018 | 14,466 | ||||||
Depreciation and amortization |
6,693 | 3,791 | ||||||
Selling and administrative |
7,479 | 6,510 | ||||||
Insurance costs |
4,497 | 3,219 | ||||||
Taxes and licenses |
943 | 748 | ||||||
Communication and utilities |
1,095 | 837 | ||||||
Gain on disposal of property and equipment |
(3,089 | ) | (2 | ) | ||||
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Total operating expenses |
213,978 | 178,077 | ||||||
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Operating income |
15,444 | 13,838 | ||||||
Interest expense |
7,723 | 7,189 | ||||||
Interest income |
(211 | ) | (179 | ) | ||||
Other income |
(6,972 | ) | (236 | ) | ||||
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Income before income taxes |
14,904 | 7,064 | ||||||
Provision for income taxes |
5,760 | 364 | ||||||
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Net income |
$ | 9,144 | $ | 6,700 | ||||
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PER SHARE DATA: |
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Net income per common share |
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Basic |
$ | 0.34 | $ | 0.27 | ||||
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Diluted |
$ | 0.34 | $ | 0.26 | ||||
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Weighted-average number of shares |
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Basic |
26,625 | 24,546 | ||||||
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Diluted |
27,134 | 25,413 | ||||||
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The accompanying notes are an integral part of these consolidated financial statements.
1
QUALITY DISTRIBUTION, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Unaudited (In 000s)
Three months ended March 31, |
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2013 | 2012 | |||||||
Net income |
$ | 9,144 | $ | 6,700 | ||||
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Other comprehensive income (loss), net of tax: |
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Amortization of prior service costs and losses |
386 | 388 | ||||||
Translation adjustment |
35 | (39 | ) | |||||
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Total other comprehensive income, net of tax |
421 | 349 | ||||||
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Comprehensive income |
$ | 9,565 | $ | 7,049 | ||||
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The accompanying notes are an integral part of these consolidated financial statements.
2
QUALITY DISTRIBUTION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
Unaudited (In 000s)
March 31, 2013 |
December 31, 2012 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
$ | 1,201 | $ | 2,704 | ||||
Accounts receivable, net |
124,502 | 113,906 | ||||||
Prepaid expenses |
15,672 | 14,651 | ||||||
Deferred tax asset, net |
19,017 | 16,609 | ||||||
Other |
8,496 | 9,694 | ||||||
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Total current assets |
168,888 | 157,564 | ||||||
Property and equipment, net |
184,238 | 190,342 | ||||||
Goodwill |
104,294 | 104,294 | ||||||
Intangibles, net |
36,592 | 37,654 | ||||||
Non-current deferred tax asset, net |
3,975 | 11,713 | ||||||
Other assets |
12,533 | 12,036 | ||||||
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Total assets |
$ | 510,520 | $ | 513,603 | ||||
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LIABILITIES AND SHAREHOLDERS DEFICIT |
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Current liabilities: |
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Current maturities of indebtedness |
$ | 3,035 | $ | 3,918 | ||||
Current maturities of capital lease obligations |
2,125 | 3,913 | ||||||
Accounts payable |
13,911 | 9,966 | ||||||
Independent affiliates and independent owner-operators payable |
16,545 | 14,243 | ||||||
Accrued expenses |
34,765 | 37,889 | ||||||
Environmental liabilities |
2,829 | 2,739 | ||||||
Accrued loss and damage claims |
7,179 | 7,326 | ||||||
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Total current liabilities |
80,389 | 79,994 | ||||||
Long-term indebtedness, less current maturities |
400,681 | 408,850 | ||||||
Capital lease obligations, less current maturities |
1,080 | 2,125 | ||||||
Environmental liabilities |
5,672 | 6,302 | ||||||
Accrued loss and damage claims |
9,459 | 9,494 | ||||||
Other non-current liabilities |
24,358 | 25,278 | ||||||
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Total liabilities |
521,639 | 532,043 | ||||||
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Commitments and contingenciesNote 14 |
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SHAREHOLDERS DEFICIT |
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Common stock, no par value; 49,000 shares authorized; 28,411 issued and 27,049 outstanding at March 31, 2013 and 28,102 issued and 27,223 outstanding at December 31, 2012 |
438,380 | 437,192 | ||||||
Treasury stock, 1,362 shares at March 31, 2013 and 879 shares at December 31, 2012 |
(9,281 | ) | (5,849 | ) | ||||
Accumulated deficit |
(219,323 | ) | (228,467 | ) | ||||
Stock recapitalization |
(189,589 | ) | (189,589 | ) | ||||
Accumulated other comprehensive loss |
(31,331 | ) | (31,752 | ) | ||||
Stock purchase warrants |
25 | 25 | ||||||
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Total shareholders deficit |
(11,119 | ) | (18,440 | ) | ||||
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Total liabilities and shareholders deficit |
$ | 510,520 | $ | 513,603 | ||||
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The accompanying notes are an integral part of these consolidated financial statements.
3
QUALITY DISTRIBUTION, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders Deficit
For the Three Months Ended March 31, 2013 and 2012
Unaudited (In 000s)
Shares of Common Stock |
Shares of Treasury Stock |
Common Stock |
Treasury Stock |
Accumulated Deficit |
Stock Recapitalization |
Accumulated Other Comprehensive Loss |
Stock Purchase Warrants |
Total Shareholders Deficit |
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Balance, December 31, 2011 |
24,207 | (267 | ) | $ | 393,859 | $ | (1,878 | ) | $ | (278,543 | ) | $ | (189,589 | ) | $ | (31,381 | ) | $ | 1,347 | $ | (106,185 | ) | ||||||||||||||
Net income |
| | | | 6,700 | | | | 6,700 | |||||||||||||||||||||||||||
Issuance of restricted stock |
153 | | | | | | | | | |||||||||||||||||||||||||||
Forfeiture of restricted stock |
| (5 | ) | | (66 | ) | | | | | (66 | ) | ||||||||||||||||||||||||
Amortization of restricted stock |
| | 282 | | | | | | 282 | |||||||||||||||||||||||||||
Amortization of stock options |
| | 391 | | | | | | 391 | |||||||||||||||||||||||||||
Stock warrant exercises |
346 | | 1,322 | | | | | (1,322 | ) | | ||||||||||||||||||||||||||
Stock option exercises |
41 | | 235 | | | | | | 235 | |||||||||||||||||||||||||||
Proceeds from equity offering, net of transaction costs |
2,500 | | 30,710 | | | | | | 30,710 | |||||||||||||||||||||||||||
Amortization of prior service costs and losses (pension plans), net of tax |
| | | | | | 388 | | 388 | |||||||||||||||||||||||||||
Foreign currency translation adjustments, net of tax |
| | | | | | (39 | ) | | (39 | ) | |||||||||||||||||||||||||
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Balance, March 31, 2012 |
27,247 | (272 | ) | $ | 426,799 | $ | (1,944 | ) | $ | (271,843 | ) | $ | (189,589 | ) | $ | (31,032 | ) | $ | 25 | $ | (67,584 | ) | ||||||||||||||
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Balance, December 31, 2012 |
28,102 | (879 | ) | $ | 437,192 | $ | (5,849 | ) | $ | (228,467 | ) | $ | (189,589 | ) | $ | (31,752 | ) | $ | 25 | $ | (18,440 | ) | ||||||||||||||
Net income |
| | | | 9,144 | | | | 9,144 | |||||||||||||||||||||||||||
Issuance of restricted stock |
242 | | | | | | | | | |||||||||||||||||||||||||||
Forfeiture of restricted stock |
| | | (4 | ) | | | | | (4 | ) | |||||||||||||||||||||||||
Amortization of restricted stock |
| | 481 | | | | | | 481 | |||||||||||||||||||||||||||
Amortization of stock options |
| | 526 | | | | | | 526 | |||||||||||||||||||||||||||
Stock option exercises |
67 | | 181 | | | | | | 181 | |||||||||||||||||||||||||||
Purchases of treasury stock |
| (483 | ) | | (3,428 | ) | | | | | (3,428 | ) | ||||||||||||||||||||||||
Amortization of prior service costs and losses (pension plans), net of tax |
| | | | | | 386 | | 386 | |||||||||||||||||||||||||||
Foreign currency translation adjustments, net of tax |
| | | | | | 35 | | 35 | |||||||||||||||||||||||||||
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Balance, March 31, 2013 |
28,411 | (1,362 | ) | $ | 438,380 | $ | (9,281 | ) | $ | (219,323 | ) | $ | (189,589 | ) | $ | (31,331 | ) | $ | 25 | $ | (11,119 | ) | ||||||||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
4
QUALITY DISTRIBUTION, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Unaudited (In 000s)
Three Months Ended March 31, |
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2013 | 2012 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income |
$ | 9,144 | $ | 6,700 | ||||
Adjustments to reconcile to net cash and cash equivalents provided by (used in) operating activities: |
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Deferred income tax expense |
5,330 | | ||||||
Depreciation and amortization |
6,693 | 3,791 | ||||||
Bad debt expense |
(106 | ) | 70 | |||||
Gain on disposal of property and equipment |
(3,089 | ) | (2 | ) | ||||
Stock-based compensation |
1,007 | 673 | ||||||
Amortization of deferred financing costs |
558 | 536 | ||||||
Amortization of bond discount |
54 | 54 | ||||||
Contingent consideration adjustment |
(7,050 | ) | | |||||
Changes in assets and liabilities: |
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Accounts and other receivables |
(10,456 | ) | (12,971 | ) | ||||
Prepaid expenses |
(1,021 | ) | (2,988 | ) | ||||
Other assets |
(251 | ) | (2,957 | ) | ||||
Accounts payable |
1,143 | 1,682 | ||||||
Accrued expenses |
4,783 | 4,000 | ||||||
Environmental liabilities |
(540 | ) | (424 | ) | ||||
Accrued loss and damage claims |
(182 | ) | 312 | |||||
Independent affiliates and independent owner-operators payable |
2,302 | 2,628 | ||||||
Other liabilities |
(116 | ) | 937 | |||||
Current income taxes |
416 | (309 | ) | |||||
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Net cash provided by operating activities |
8,619 | 1,732 | ||||||
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Capital expenditures |
(7,413 | ) | (13,498 | ) | ||||
Greensville purchase price adjustment |
| (66 | ) | |||||
Trojan purchase price adjustment |
(857 | ) | | |||||
Proceeds from sales of property and equipment |
8,789 | 2,650 | ||||||
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Net cash provided by (used in) investing activities |
519 | (10,914 | ) | |||||
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Principal payments on long-term debt |
(1,206 | ) | (1,270 | ) | ||||
Principal payments on capital lease obligations |
(648 | ) | (1,033 | ) | ||||
Proceeds from revolver |
46,700 | 25,800 | ||||||
Payments on revolver |
(54,600 | ) | (46,100 | ) | ||||
Payments on acquisition notes |
(421 | ) | (395 | ) | ||||
Deferred financing costs |
(21 | ) | (246 | ) | ||||
Change in book overdraft |
2,802 | 1,295 | ||||||
Purchases of treasury stock |
(3,428 | ) | | |||||
Proceeds from equity offering, net of transaction costs |
| 30,710 | ||||||
Proceeds from exercise of stock options |
181 | 235 | ||||||
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Net cash (used in) provided by financing activities |
(10,641 | ) | 8,996 | |||||
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Net decrease in cash and cash equivalents |
(1,503 | ) | (186 | ) | ||||
Cash and cash equivalents, beginning of period |
2,704 | 4,053 | ||||||
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Cash and cash equivalents, end of period |
$ | 1,201 | $ | 3,867 | ||||
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Supplemental Disclosure of Cash Flow Information |
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Cash paid (received) during the period for: |
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Interest |
$ | 1,725 | $ | 1,020 | ||||
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Income Taxes |
(43 | ) | 587 | |||||
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The accompanying notes are an integral part of these consolidated financial statements.
5
QUALITY DISTRIBUTION, INC. AND SUBSIDIARIES
Quality Distribution, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
1. Summary of Significant Accounting Policies
Basis of Presentation
In this quarterly report, unless the context otherwise requires or indicates, (i) the terms the Company, our Company, Quality Distribution, QDI, we, us and our refer to Quality Distribution, Inc. and its consolidated subsidiaries and their predecessors, (ii) the terms Quality Distribution, LLC and QD LLC refer to our wholly-owned subsidiary, Quality Distribution, LLC, a Delaware limited liability company, and its consolidated subsidiaries and their predecessors, (iii) the term QD Capital refers to our wholly-owned subsidiary, QD Capital Corporation, a Delaware corporation, (iv) the term QCI refers to our wholly-owned subsidiary, Quality Carriers, Inc., an Illinois corporation, (v) the term Boasso refers collectively to our wholly-owned subsidiary, Boasso America Corporation, a Louisiana corporation and Boassos wholly-owned subsidiary, Greensville Transport Company (Greensville), a Virginia corporation, (vi) the term QCER refers collectively to our wholly-owned subsidiary, QC Energy Resources, Inc., a Delaware corporation and its wholly-owned subsidiaries, QC Energy Logistics, LLC, a Delaware limited liability company, QC Energy Resources, LLC, a Delaware limited liability company, QC Energy Resources Northwest, LLC, a Delaware limited liability company, and QC Energy Resources Texas, LLC, a Delaware limited liability company, as well as our wholly-owned subsidiary QC Environmental Services, Inc., a North Dakota corporation and (vii) the term CLC refers to our wholly-owned subsidiary, Chemical Leaman Corporation, a Pennsylvania corporation.
We are engaged primarily in transportation of bulk chemicals in North America through QCI. We are the largest provider of intermodal ISO tank container and depot services in North America through Boasso. In 2011, we entered the unconventional gas and oil frac shale energy markets, providing logistics services to these markets through QCER. We conduct a significant portion of our business through a network of independent affiliates and independent owner-operators. Independent affiliates are companies which enter into various term contracts with the Company. Independent affiliates are responsible for paying for their own power equipment (including debt service), fuel and other operating costs. Most of the independent affiliates lease trailers from us. Independent owner-operators are independent contractors who, through a contract with us, supply one or more tractors and drivers for our use. Contracts with independent owner-operators may be terminated by either party on short notice. We charge independent affiliates and third parties for the use of tractors and trailers as necessary. In exchange for the services rendered, independent affiliates and independent owner-operators are normally paid a percentage of the revenues collected on each load hauled.
Our accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X and do not include all of the information and notes required by accounting principles generally accepted in the United States (GAAP) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments and accruals) considered necessary for a fair statement of consolidated financial position, results of operations and cash flows have been included. The year ended December 31, 2012 consolidated balance sheet data was derived from our audited financial statements, but does not include all the disclosures required by GAAP. For further information, refer to our Annual Report on Form 10-K for the year ended December 31, 2012, including the consolidated financial statements and accompanying notes.
Operating results for the three months ended March 31, 2013 are not necessarily indicative of the results that may be expected for any future period.
6
New Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board (FASB) issued an accounting pronouncement related to accumulated other comprehensive income (AOCI). Under this standard, entities are required to disclose additional information with respect to changes in AOCI balances by component and significant items reclassified out of AOCI. Expanded disclosures for presentation of changes in AOCI involve disaggregating the total change of each component of other comprehensive income as well as presenting separately for each such component the portion of the change in AOCI related to (1) amounts reclassified into income and (2) current-period other comprehensive income. The disclosures required with respect to income statement line item impacts would be made in either the notes to the consolidated financial statements or parenthetically on the face of the financial statements. This standard is effective beginning January 1, 2013. The adoption of this standard did not have a material impact on our consolidated financial statements.
In July 2012, the FASB issued an accounting pronouncement related to intangiblesgoodwill and other, which permits companies to first consider qualitative factors as a basis for assessing impairment and determining the necessity of a detailed impairment test of indefinite-lived intangible assets. The provisions for this pronouncement are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. We do not expect the adoption of this pronouncement to have a material effect on our consolidated financial statements.
Acquisition and Dispositions
During the first three months of 2013, we did not complete any acquisitions or dispositions of businesses or independent affiliates.
Acquisition of an Independent Affiliate
During the third quarter of 2012, we terminated our business relationship with an independent affiliate due to financial and operational difficulties. On October 17, 2012, we acquired the business, certain operating assets and certain liabilities of this independent affiliate for a purchase price of $17.1 million, paid in cash at closing. Of the total $17.1 million, we allocated $15.5 million to property and equipment and $1.6 million to goodwill. This entire amount of goodwill is deductible for tax purposes. This independent affiliate operated eight terminals within the chemical logistics segment and one terminal within the energy logistics segment. Four chemical logistics terminals were immediately transitioned to other independent affiliates, with the remaining terminals transitioned to company operations. During this transition, operating results for the third and fourth quarters of 2012 were adversely impacted in aggregate by $4.4 million of greater than expected operating costs and reduced profitability. During the first quarter of 2013, we recognized $0.3 million of additional costs.
Dunns Tank Service and Nassau Disposal, Inc.
On August 1, 2012, we acquired certain operating assets of Dunns Tank Service, Inc. and the operating assets and rights of Nassau Disposal, Inc., (collectively Dunns), for an aggregate purchase price of $34.3 million paid in cash to expand our energy logistics business. An additional $3.6 million in cash consideration may be payable in cash one year after the closing date if certain future operating and financial performance criteria are satisfied, although we do not currently expect those criteria to be met or to pay any additional consideration. Of the total $34.3 million, we allocated $12.2 million to property and equipment, $17.3 million to goodwill and $4.8 million to intangibles. The entire amount of goodwill is deductible for tax purposes. Dunns is headquartered in Velma, Oklahoma and provides transportation services to the unconventional oil and gas industry within the Marcellus, Woodford and Utica shale regions, primarily hauling flowback and production water for various energy customers. The results of Dunns have been included in our results since the date of acquisition, and are included in our energy logistics segment.
Wylie Bice Trucking, LLC and RM Resources, LLC
On June 1, 2012, we acquired certain operating assets of Wylie Bice Trucking, LLC and the operating assets and rights of RM Resources, LLC, (collectively Bice), for $81.4 million aggregate consideration to expand our energy logistics business. Headquartered in Killdeer, ND, Bice provides transportation services to the unconventional oil and gas frac shale industry within the Bakken shale region, primarily hauling fresh water, flowback and production water, and oil for numerous energy and other customers, which expands our energy logistics business. The flowback and production water Bice hauls is primarily disposed of utilizing six salt water injection wells we purchased from Bice. The results of the Bice acquisitions are included in our results since the date of acquisition, and are included in our energy logistics segment.
The Bice transaction was structured as asset acquisitions with aggregate consideration paid to the sellers as follows: (i) $52.2 million in cash; (ii) $21.3 million in 5-year subordinated seller notes bearing interest annually at a 5.0% fixed rate; and (iii) $7.9 million of approximately 0.7 million in unregistered restricted shares of Quality common stock. Up to an additional $19.0 million may be payable in cash one year after the closing date, contingent upon the collective businesses meeting certain future operating and financial performance criteria, although we do not currently expect those criteria to be met or to pay any additional consideration. We have performed an allocation of the purchase price. The allocation of the purchase price is based on information existing at the
7
acquisition date and is subject to change. Measurement period adjustments will be evaluated to determine whether they relate to facts and circumstances that existed at the acquisition date. Any measurement period adjustments recorded will be an adjustment to goodwill and are not expected to be material to the Companys financial position. Estimates of useful lives and estimated fair values of tangible and amortizable intangible assets will be finalized after we review all available data including, but not limited to, appraisals and internal assessments. The purchase price of the combined acquisitions has initially been allocated to the assets acquired according to their estimated fair values at the time of the acquisitions as follows:
(In thousands) | Bice & RM Combined |
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Equipment |
$ | 26,557 | ||
Non-compete agreements |
400 | |||
Tradename |
700 | |||
Customer-related intangibles |
12,320 | |||
Goodwill |
48,218 | |||
Contingent consideration (a) |
(6,800 | ) | ||
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$ | 81,395 | |||
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(a) | In the first quarter of 2013, we determined that we do not expect the contingent consideration to be paid. Therefore, we wrote-off $6.8 million of contingent consideration which is recognized in our energy logistics results as a gain in Other income in our Consolidated Statements of Operations. |
The non-compete agreements are amortized over an estimated six-year useful life on a straight-line basis. The customer-related intangible assets relate to acquired customer relationships and are amortized over an estimated ten-year useful life on a straight-line basis. The tradename is amortized over an estimated two-year useful life on a straight-line basis. Goodwill has been recorded because the consideration paid exceeds the fair value of the assets acquired. The goodwill acquired in these acquisitions is tax deductible.
Trojan Vacuum Services
On April 1, 2012, we acquired certain operating assets of Trojan Vacuum Services (Trojan) to expand our energy logistics business. The purchase price was $8.7 million paid in cash at closing, plus $1.0 million payable in cash upon the satisfaction of certain operating and financial performance criteria. These criteria were satisfied and the full $1.0 million was paid in January 2013. Of the total $8.7 million, we allocated $4.1 million to property and equipment, $4.3 million to intangibles and $0.3 million to goodwill. The entire amount of goodwill is deductible for tax purposes. Trojan is headquartered in Pleasanton, TX and provides transportation service to the unconventional oil and gas frac shale industry within the Eagle Ford shale region, primarily hauling flowback and production water for various energy customers. The results of the Trojan acquisition are included in our energy logistics segment.
2. Variable Interest Entities
At March 31, 2013, we have a variable interest in one variable interest entity (VIE), for which we are not the primary beneficiary. We have concluded, based on our qualitative consideration of our contracts with the VIE, the operating structure of the VIE and our role with the VIE, that we do not have the power to direct the activities that most significantly impact their economic performance. Therefore, we are not required to consolidate the operations of this VIE.
This VIE is an independent affiliate that is directly engaged in the dry bulk and chemical business through the management of three trucking terminals in the North East region of the U.S. As such, this business is highly seasonal. We are involved with this VIE as a non-controlling interest. Our maximum exposure to loss as a result of our involvement with this unconsolidated VIE is limited to our recorded loans receivable which aggregated approximately $3.0 million at March 31, 2013. These loans are secured by a second- priority lien on certain assets of the VIE.
8
3. Fair Value of Financial Instruments
The three-level valuation hierarchy for fair value measurements is based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. These two types of inputs create the following fair value hierarchy:
| Level 1Quoted prices for identical instruments in active markets; |
| Level 2Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations whose significant inputs are observable; and |
| Level 3Instruments whose significant inputs are unobservable. |
Following is a description of the valuation methodologies we used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.
Fair Value Measurements on a Nonrecurring Basis
The fair value of our long-term indebtedness is based on level 2 quoted market prices. As of March 31, 2013, the carrying value and fair value are as follows (in thousands):
Carrying Value |
Fair Value | |||||||
9.875% Second-Priority Senior Secured Notes due 2018 (2018 Notes) |
$ | 225,000 | $ | 245,250 | ||||
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Our asset-based loan facility (the ABL Facility) is variable rate debt which is believed to be a reasonable approximation of its fair value that is determined using a coupon rate on borrowings with similar maturities, current remaining average life to maturity borrower credit quality, and current market conditions and approximates fair value. The fair value of the 2018 Notes is estimated using various techniques including recently executed transactions in securities of the issuer or comparable issuers, market price quotations (where observable), bond spreads, fundamental data relating to the issuer, and credit default swap spreads adjusted for any basis difference between cash and derivative instruments.
The carrying amounts reported in the accompanying Consolidated Balance Sheets for cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the immediate or short-term maturities of these financial instruments.
4. Goodwill and Intangible Assets
Goodwill
Under the FASB guidance, goodwill and intangible assets are subject to an annual impairment test as well as impairment assessments of certain triggering events. We evaluate goodwill for impairment by determining the fair value based on criteria in the FASB guidance for each reporting unit. These reporting units contain goodwill and other identifiable intangible assets as a result of previous business acquisitions. Our annual impairment test is performed during the second quarter with a measurement date of June 30th. There were no indications that a triggering event had occurred as of March 31, 2013.
9
Goodwill within our intermodal, energy logistics and chemical logistics segments are as follows (in thousands):
March 31, 2013 |
December 31, 2012 |
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Energy Logistics |
$ | 71,339 | $ | 71,339 | ||||
Intermodal |
31,410 | 31,410 | ||||||
Chemical Logistics |
1,545 | 1,545 | ||||||
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Total |
$ | 104,294 | $ | 104,294 | ||||
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There were no changes in the current period.
Intangible Assets
Intangible assets at March 31, 2013 are as follows (in thousands):
Gross Book Value |
Accumulated Amortization |
Net Book Value |
Average Lives (in years) |
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TradenameIntermodal |
$ | 7,400 | $ | | $ | 7,400 | Indefinite | |||||||||
TradenameEnergy Logistics |
1,100 | (442 | ) | 658 | 2 | |||||||||||
Customer relationships |
33,410 | (7,067 | ) | 26,343 | 10-12 | |||||||||||
Non-compete agreements |
4,311 | (3,138 | ) | 1,173 | 3-6 | |||||||||||
Service agreement |
1,120 | (102 | ) | 1,018 | 11 | |||||||||||
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$ | 47,341 | $ | (10,749 | ) | $ | 36,592 | ||||||||||
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Of the total intangibles of $36.6 million at March 31, 2013, $20.2 million was allocated to our energy logistics segment, $16.3 million was allocated to our intermodal segment and $0.1 million was allocated to our chemical logistics segment.
10
Intangible assets at December 31, 2012 are as follows (in thousands):
Gross Book Value |
2012 Additions |
Accumulated Amortization |
Net Book Value |
Average Lives (in years) |
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TradenameIntermodal |
$ | 7,400 | $ | | $ | | $ | 7,400 | Indefinite | |||||||||||
TradenameEnergy Logistics |
| 1,100 | (304 | ) | 796 | 2 | ||||||||||||||
Customer relationships |
14,260 | 19,150 | (6,292 | ) | 27,118 | 10-12 | ||||||||||||||
Non-compete agreements |
3,221 | 1,090 | (3,015 | ) | 1,296 | 3-6 | ||||||||||||||
Service agreement |
| 1,120 | (76 | ) | 1,044 | 11 | ||||||||||||||
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$ | 24,881 | $ | 22,460 | $ | (9,687 | ) | $ | 37,654 | ||||||||||||
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Of the total intangibles of $37.7 million at December 31, 2012, $20.9 million was allocated to our energy logistics segment, $16.6 million was allocated to our intermodal segment and $0.2 million was allocated to our chemical logistics segment.
Amortization expense for the three months ended March 31, 2013 and 2012 was $1.1 million and $0.5 million, respectively. Estimated amortization expense for intangible assets is as follows (in thousands):
2013 remaining |
$ | 3,124 | ||
2014 |
3,680 | |||
2015 |
3,434 | |||
2016 |
3,430 | |||
2017 |
3,354 | |||
2018 and after |
12,170 | |||
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Total |
$ | 29,192 | ||
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5. Income Per Share
A reconciliation of the numerators and denominators of the basic and diluted income per share computations is as follows (in thousands, except per share amounts):
Three months ended | ||||||||||||||||||||||||
March 31, 2013 | March 31, 2012 | |||||||||||||||||||||||
Net income (numerator) |
Shares (denominator) |
Per-share amount |
Net income (numerator) |
Shares (denominator) |
Per-share amount |
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Basic income available to common shareholders: |
$ | 9,144 | 26,625 | $ | 0.34 | $ | 6,700 | 24,546 | $ | 0.27 | ||||||||||||||
Effect of dilutive securities: |
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Stock options |
| 409 | | | 675 | (0.01 | ) | |||||||||||||||||
Unvested restricted stock |
| 91 | | | 166 | | ||||||||||||||||||
Stock warrants |
| 9 | | | 26 | | ||||||||||||||||||
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Diluted income available to common shareholders: |
$ | 9,144 | 27,134 | $ | 0.34 | $ | 6,700 | 25,413 | $ | 0.26 | ||||||||||||||
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11
The following securities were not included in the calculation of diluted earnings per share because such inclusion would be anti-dilutive (in thousands):
Three months ended March 31, |
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2013 | 2012 | |||||||
Stock options |
2,106 | 1,654 | ||||||
Unvested restricted stock |
394 | 232 |
6. Stock-Based Compensation
Under the FASB guidance, we apply the Black-Scholes valuation model in determining the fair value of share-based payments to employees. The resulting compensation expense is recognized over the requisite service period, which is generally the vesting term of two to four years.
Compensation expense is recognized only for those awards expected to vest, with forfeitures estimated based on our historical experience and future expectations. All stock-based compensation expense is classified within compensation in the consolidated statements of operations.
The following table summarizes unrecognized stock-based compensation and the weighted average period over which such stock-based compensation is expected to be recognized as of March 31, 2013 (in thousands):
Remaining years |
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Stock options |
$ | 3,109 | 2.8 | |||||
Restricted stock |
2,792 | 2.6 | ||||||
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$ | 5,901 | |||||||
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These amounts do not include the cost of any additional awards that may be granted in future periods nor any changes in our forfeiture rate.
7. Employee Benefit Plans
We maintain two noncontributory defined benefit plans resulting from a prior acquisition that cover certain vested salaried participants and retirees (CLC Plan) and certain other vested participants and retirees under an expired collective bargaining agreement (TTWU Plan). Retirement benefits for employees covered by the CLC Plan are based on years of service and compensation levels. The monthly benefit for employees under the TTWU Plan is based on years of service multiplied by a monthly benefit factor. Pension costs are funded in accordance with the provisions of the applicable law. Both pension plans have been frozen since prior to January 1, 1998. There have been no new participants and no future accruals of benefits from the time the plans were frozen.
We use a December 31st measurement date for both of our plans.
The components of net periodic pension cost are estimated as follows (in thousands):
Three months ended March 31, |
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2013 | 2012 | |||||||
Service cost |
$ | 41 | $ | 44 | ||||
Interest cost |
463 | 542 | ||||||
Amortization of prior service cost |
24 | 24 | ||||||
Amortization of loss |
362 | 364 | ||||||
Expected return on plan assets |
(583 | ) | (566 | ) | ||||
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Net periodic pension cost |
$ | 307 | $ | 408 | ||||
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We contributed $0.6 million to our pension plans during the three months ended March 31, 2013. We expect to contribute an additional $2.3 million during the remainder of 2013.
12
Multi-employer pension plans
At March 31, 2013, we contributed to three separate multi-employer pension plans for employees under collective bargaining agreements. These agreements cover approximately 2.5% of our total workforce, including our independent affiliates employees and independent owner-operators providing service to us. These multi-employer pension plans provide defined benefits to retired participants. We do not directly or indirectly manage any of these multi-employer pension plans. Trustees, half of whom are appointed by the International Brotherhood of Teamsters (the Teamsters) and half of whom various contributing employers appoint, manage the trusts covering these plans. Our collective bargaining agreements with the Teamsters determine the amounts of our ongoing contributions to these plans.
We do not currently intend to withdraw from the three multi-employer pension plans or take any actions that would subject us to payment of contingent obligations upon withdrawal from such plans. Based on information provided to us from the trustees of these plans, we estimate our portion of the contingent liability in the case of a full withdrawal or termination from these plans to be approximately $73.8 million, of which $68.8 million relates to the Central States Southeast and Southwest Areas Pension Plan.
These defined benefit plans cover substantially all of our union employees not covered under the TTWU Plan. The actuarial present value of accumulated plan benefits and net assets available for benefits to employees under these multi-employer plans is not readily available.
8. Accumulated Other Comprehensive Loss
The components and changes to accumulated other comprehensive loss for the three months ended March 31 (in thousands):
2013 | 2012 | |||||||
Foreign currency translation |
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Beginning balance |
$ | (1,180 | ) | $ | (1,137 | ) | ||
Net gain (loss) on foreign currency translation, net of tax |
35 | (39 | ) | |||||
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Ending balance |
$ | (1,145 | ) | $ | (1,176 | ) | ||
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Pension benefits |
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Beginning balance |
$ | (30,572 | ) | $ | (30,244 | ) | ||
Amortization of prior service cost |
24 | 24 | ||||||
Amortization of gain |
362 | 364 | ||||||
Ending balance |
$ | (30,186 | ) | $ | (29,856 | ) | ||
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Total AOCI ending balance at March 31 |
$ | (31,331 | ) | $ | (31,032 | ) | ||
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9. Restructuring
We account for restructuring costs associated with one-time termination benefits, costs associated with lease and contract terminations and other related exit activities in accordance with FASBs guidance. We previously made estimates of the costs to be incurred as part of a restructuring plan developed during 2008 and concluded at the end of 2010. The restructuring plan consisted of various actions including termination of approximately 380 non-driver positions and the consolidation, closure or affiliation of underperforming company-operated terminals, our withdrawal from three multi-employer pension plans and costs associated with the consolidation of our corporate headquarters, and resulted in charges during 2008, 2009 and 2010, primarily related to our chemical logistics segment. As of March 31, 2013, we have $2.0 million of restructuring charges included in accrued expenses on the Consolidated Balance Sheet which are expected to be paid through 2017.
In the three months ended March 31, 2013, we had the following activity in our restructuring accrual (in thousands):
Balance at December 31, 2012 |
Additions | Payments | Reductions | Balance at March 31, 2013 |
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Restructuring costs |
$ | 2,149 | $ | 155 | $ | (142 | ) | $ | (115 | ) | $ | 2,047 | ||||||||
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13
10. Segment Reporting
Reportable Segments
Our chief operating decision maker manages the Company in three reportable business segments for financial reporting purposes that are distinguished primarily on the basis of services offered:
| Chemical Logistics, which consists of the transportation of bulk chemicals primarily through our network of 25 independent affiliates and company-operated terminals, and equipment rental income; |
| Energy Logistics, which consists primarily of the transportation of fresh water, disposal water, and crude oil for the unconventional oil and gas frac shale energy markets, primarily through company-operated terminals and 2 independent affiliates; and |
| Intermodal, which consists of Boassos intermodal ISO tank container transportation and depot services business primarily supporting the international movement of bulk liquids. |
Segment operating income reported in our segment tables excludes amounts such as depreciation and amortization, gains and losses on disposal of property and equipment and restructuring costs. Although these amounts are excluded from the reportable business segment results, they are included in our reported Consolidated Statements of Operations. Most corporate and shared services overhead costs, including acquisitions costs, are included in our chemical logistics segment. We have not provided specific asset information by segment, as it is not regularly provided to our chief operating decision maker for review.
14
Summarized segment data and a reconciliation to income before income taxes as follows (in thousands):
Three Months Ended March 31, 2013 | ||||||||||||||||
Chemical Logistics |
Energy Logistics |
Intermodal | Total | |||||||||||||
Operating Revenues: |
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Transportation |
$ | 109,068 | $ | 36,930 | $ | 17,996 | $ | 163,994 | ||||||||
Service revenue |
16,393 | 3,921 | 13,140 | 33,454 | ||||||||||||
Fuel surcharge |
27,262 | 233 | 4,479 | 31,974 | ||||||||||||
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Total operating revenues |
152,723 | 41,084 | 35,615 | 229,422 | ||||||||||||
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Segment operating income |
9,414 | 2,714 | 6,920 | 19,048 | ||||||||||||
Depreciation and amortization |
2,884 | 3,001 | 808 | 6,693 | ||||||||||||
Other (income) expense, net |
(3,309 | ) | 220 | | (3,089 | ) | ||||||||||
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Operating income (loss) |
9,839 | (507 | ) | 6,112 | 15,444 | |||||||||||
Interest expense |
2,304 | 3,912 | 1,507 | 7,723 | ||||||||||||
Interest income |
(211 | ) | | | (211 | ) | ||||||||||
Other (income) expense, net |
(423 | ) | (6,800 | ) | 251 | (6,972 | ) | |||||||||
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Income before income taxes |
$ | 8,169 | $ | 2,381 | $ | 4,354 | $ | 14,904 | ||||||||
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Three Months Ended March 31, 2012 | ||||||||||||||||
Chemical Logistics |
Energy Logistics |
Intermodal | Total | |||||||||||||
Operating Revenues: |
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Transportation |
$ | 105,647 | $ | 10,049 | $ | 17,510 | $ | 133,206 | ||||||||
Service revenue |
15,916 | 884 | 11,185 | 27,985 | ||||||||||||
Fuel surcharge |
26,314 | 1 | 4,409 | 30,724 | ||||||||||||
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Total operating revenues |
147,877 | 10,934 | 33,104 | 191,915 | ||||||||||||
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Segment operating income |
11,432 | 1,082 | 5,113 | 17,627 | ||||||||||||
Depreciation and amortization |
2,688 | 247 | 856 | 3,791 | ||||||||||||
Other expense (income), net |
18 | 22 | (42 | ) | (2 | ) | ||||||||||
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Operating income |
8,726 | 813 | 4,299 | 13,838 | ||||||||||||
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Interest expense |
5,682 | | 1,507 | 7,189 | ||||||||||||
Interest income |
(179 | ) | | | (179 | ) | ||||||||||
Other (income) expense, net |
(496 | ) | | 260 | (236 | ) | ||||||||||
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Income before income taxes |
$ | 3,719 | $ | 813 | $ | 2,532 | $ | 7,064 | ||||||||
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15
11. Income Taxes
At December 31, 2012, we had approximately $1.7 million of total gross unrecognized tax benefits. Of this total, $1.0 million (net of federal benefit on state tax issues) represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in any future periods.
Included in the balance of total gross unrecognized tax benefits at December 31, 2012 was $0.1 million related to tax positions for which it was reasonably possible that the total amounts could significantly change during the next twelve months due to expiration of the applicable statute of limitations.
For the three months ended March 31, 2013, the net change to our total gross unrecognized tax benefit was less than $0.1 million. Our total gross unrecognized tax benefit at March 31, 2013 was $1.7 million. This represents the total of our unrecognized tax benefits (not including interest and penalties).
Our continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. We had $0.4 million (net of federal tax benefit) accrued for interest and $0.2 million accrued for penalties at December 31, 2012. The total amount accrued for interest and penalties at March 31, 2013 was $0.6 million.
We are subject to income tax in the U.S., Canada, and Mexico, as well as in multiple state jurisdictions. We believe we are no longer subject to U.S. federal income tax examinations for the years before 2007, to international examinations for years before 2007 and, with few exceptions, to state examinations before 2008.
The effective tax rates for the three months ended March 31, 2013 and 2012 were a tax provision of 38.6% and 5.2% respectively. The effective tax rate for the three months ended March 31, 2013 was different from our statutory rate primarily due to the impact of a favorable audit settlement. The effective tax rate for the three months ended March 31, 2012 was different than the statutory rate due to a 100% valuation allowance recorded against our net deferred tax assets.
16
12. Common Stock Offering
On March 13, 2012, we sold 2.5 million shares of our common stock in an underwritten public offering, at a gross price of $13.00 per share, and received net proceeds, after underwriting fees and expenses, of approximately $30.5 million. Certain affiliates of Apollo Management, L.P. also sold 3.2 million shares in the offering.
13. Share Repurchase Program
On November 20, 2012, we announced a share repurchase program pursuant to which our Board of Directors authorized the repurchase of up to $15.0 million of our common stock in an open-ended repurchase program (the Repurchase Program). The Repurchase Program does not have an expiration date. Stock has been, and may in the future be, purchased pursuant to the Repurchase Program, from time to time, in the open market or through private transactions, subject to market conditions. Subject to applicable laws, repurchases under the Repurchase Program may be made at such times and in such amounts as we deem appropriate and may be made pursuant to Rule 10b5-1. We are not obligated to purchase any shares under the Repurchase Program and it can be discontinued at any time that we feel additional purchases are not warranted. As of March 31, 2013, we have repurchased approximately 1.1 million shares valued at $7.1 million under the Repurchase Program.
14. Commitments and Contingencies
Environmental Matters
It is our policy to comply with all applicable environmental, safety, and health laws. We also are committed to the principles of Responsible Care®, an international chemical industry initiative to enhance the industrys responsible management of chemicals. We have obtained independent certification that our chemical logistics management system is in place and functions according to professional standards and we continue to evaluate and continuously improve our Responsible Care® Management System performance. Our current activities involve the handling, transportation and storage of bulk chemicals, both liquid and dry, wastewater from oil and gas wells and crude oil, which in many cases are classified as hazardous materials or hazardous substances. The energy logistics business operates disposal wells for non-conventional oil drilling wastewater. In addition, our former tank wash business (which was sold in 2009) and the remaining limited tank wash activities involve the generation, storage, discharge and disposal of wastes that may contain hazardous substances. As such, we and others who operate in our industry are subject to environmental, health and safety laws and regulation by U.S. federal, state and local agencies as well as foreign governmental authorities. Environmental laws and regulations are complex, and address emissions to the air, discharge onto land or water, and the generation, handling, storage, transportation, treatment and disposal of waste materials. These laws change frequently and generally require us to obtain and maintain various licenses and permits. Environmental laws have tended to become more stringent over time, and most provide for substantial fines and potential criminal sanctions for violations. Some of these laws and regulations are subject to varying and conflicting interpretations. Under certain of these laws, we could also be subject to allegations of liability for the activities of our independent affiliates or independent owner-operators.
17
We are potentially subject to strict, joint and several liability for investigating and rectifying the consequences of spills and other releases of such substances. From time to time, we have incurred remedial costs and regulatory penalties with respect to chemical or wastewater spills and releases at our facilities and on the road, and, notwithstanding the existence of our environmental management program, we cannot: (1) assure that such obligations will not be incurred in the future, (2) predict with certainty the extent of future liabilities and costs under environmental, health, and safety laws, or (3) assure that such liabilities will not result in a material adverse effect on our business, financial condition, operating results or cash flow. We have established reserves for remediation expenses at known contamination sites when it is probable that such efforts will be required of us and the related expenses can be reasonably estimated. We have also incurred in the past, and expect to incur in the future, expenditures related to environmental compliance; however, we do not anticipate that compliance with existing environmental laws will have a material adverse effect on our earnings or competitive position.
Reserves
Our policy is to accrue remediation expenses when it is probable that such efforts will be required and the related expenses can be reasonably estimated. Estimates of costs for future environmental compliance and remediation may be impacted by such factors as changes in environmental laws and regulatory requirements, the availability and application of technology, the identification of currently unknown potential remediation sites and the allocation of costs among the potentially responsible parties under the applicable statutes. Our reserves for environmental compliance and remediation are adjusted periodically as remediation efforts progress or as additional technical or legal information becomes available. It is difficult to quantify with certainty the potential financial impact of actions regarding expenditures for environmental matters, particularly remediation, and future capital expenditures for environmental control equipment. Nevertheless, based upon the information currently available, we believe that our ultimate liability arising from such environmental matters, taking into account the reserves described below, should not be material to our business or financial condition. As of March 31, 2013 and December 31, 2012, we had reserves in the amount of $8.5 million and $9.0 million, respectively, for all environmental matters, of which the most significant are presented and discussed below.
Number of Sites | Reserves (in millions) | |||||||||||||||
March 31, 2013 |
December 31, 2012 |
March 31, 2013 |
December 31, 2012 |
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Multi-party sites |
15 | 15 | $ | 1.9 | $ | 1.7 | ||||||||||
Sole party sites: |
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Bridgeport, New Jersey |
1 | 1 | 4.1 | 4.8 | ||||||||||||
William Dick, Pennsylvania |
1 | 1 | 0.7 | 0.7 | ||||||||||||
Other Properties |
6 | 6 | 1.8 | 1.8 | ||||||||||||
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Total |
23 | 23 | $ | 8.5 | $ | 9.0 | ||||||||||
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The foregoing amounts include estimates for future expenditures over the next five years that we believe are probable and are reasonably estimable. The estimate of the range of reasonably possible costs is less certain than the estimates upon which the reserves are based, and the estimated high ends of the ranges do not represent our maximum theoretical liability.
Changes to the environmental reserves are reflected in our Consolidated Statements of Operations within the Selling and administrative category.
Property Contamination Liabilities
We have been named as (or are alleged to be) a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (CERCLA) and similar state laws at approximately 23 sites.
Multi-Party Sites
At 15 of the 23 sites, we are one of many parties with alleged liability and are negotiating with Federal, State or private parties on the scope of our obligations, if any. At 1 of the 15 sites, we are participating in the initial study to determine site remediation objectives. Since our overall liability cannot be estimated at this time, we have set reserves for only the initial remedial investigation phase. At 2 of the 15 sites, we have explicitly denied any liability and since there has been no subsequent demand for payment we have not established a reserve for these matters. We have estimated all future expenditures for these 15 multi-party environmental matters to be paid over the next five years to be in the range of $1.9 million to $3.8 million. As of March 31, 2013, we have reserved $1.9 million.
18
Sole Party Sites
At 8 of the 23 sites, we are alleged to be the only responsible party and are in the process of conducting investigations and/or remediation projects. Five of these projects relate to operations conducted by CLC and its subsidiaries prior to our acquisition of CLC in 1998. These five sites are: (1) Bridgeport, New Jersey; (2) William Dick, Pennsylvania; (3) Tonawanda, New York; (4) Scary Creek, West Virginia; and (5) Charleston, West Virginia. The remaining three sites relate to investigations and potential remediation that were triggered by the New Jersey Industrial Site Recovery Act (ISRA), which requires such investigations and remediation following the sale of industrial facilities. Each of these five CLC sites is discussed in more detail below. We have estimated future expenditures over the next five years for these eight properties to be in the range of $6.6 million to $16.7 million. As of March 31, 2013, we have reserved $6.6 million.
19
Bridgeport, New Jersey
QDI is required under the terms of three federal consent decrees to perform remediation work at this operating truck terminal and tank wash site. CLC entered into consent orders with the U.S. Environmental Protection Agency (USEPA) in 1991 to treat groundwater, in 1998 to remove contamination in the wetlands, and in 2010 to assess and remediate contaminated soils at the site.
The groundwater treatment remedy negotiated with USEPA required us to construct a treatment facility for in-place treatment of groundwater contamination and a local discharge which was completed in early 2007. After various start-up issues, the treatment facility began long-term operations in July 2011 and is in the operations and maintenance phase. The plant appears to be performing in accordance with its design criteria and meeting permit requirements. Wetlands contamination has been remediated with localized restoration completed. Monitoring of the restored wetlands is required by USEPA and is on-going. USEPA has requested additional monitoring through 2017. In regard to contaminated soils, USEPA finalized the feasibility study and issued a record of decision in 2009 for the limited areas that show contamination and warrant additional investigation or work. We entered into a consent order with USEPA in 2010 to perform the remediation work, which will consist of in-place thermal treatment. In late 2012, USEPA concluded that our additional required site investigation work for delineation purposes is now complete. The preliminary engineering design for the thermal treatment of contaminated soils was prepared and submitted to USEPA in the first quarter 2013. We have estimated aggregate expenditures for the Bridgeport location over the next five years to be in the range of $4.1 million to $8.5 million. As of March 31, 2013, we have reserved $4.1 million.
William Dick, Pennsylvania
CLC entered into a consent order with the Pennsylvania Department of Environmental Protection and USEPA in 1995 to provide a replacement water supply to area residents, treat contaminated groundwater, and perform remediation of contaminated soils at this former wastewater disposal site. The replacement water supply is complete. We completed construction of a groundwater treatment facility with local discharge in 2007 and the treatment facility began operations in 2010. Although initial soil treatment was completed in 2007, test results indicated that soil clean-up objectives were not fully achieved. Soil piles from isolated discrete removal actions were subsequently treated on-site; we are awaiting approval from USEPA that this work is complete. Negotiations are on-going with USEPA over further limited soil remediation consisting of targeted in-situ chemical treatment that will be implemented at the site. We have estimated aggregate expenditures for the William Dick location over the next five years to be in the range of $0.7 million to $3.4 million. As of March 31, 2013, we have reserved $0.7 million.
Other Properties
Tonawanda, New York: CLC entered into a consent order with the New York Department of Environmental Conservation (NYSDEC) in 1999 obligating it to perform soil and groundwater remediation at this former truck terminal and tank wash site. The state issued a record of decision in 2006. The remedial design work plan has been approved by the NYSDEC, and the remedial action phase is expected to begin in 2013.
Scary Creek, West Virginia: CLC received a cleanup notice from the state environmental authority in 1994. The state and we have agreed that remediation can be conducted under the states voluntary clean-up program (instead of the state superfund enforcement program). We are currently completing the originally planned remedial investigation and the additional site investigation work.
Charleston, West Virginia: CLC completed its remediation plan for a former drum disposal area in 1995 at this truck terminal and tank wash site under the terms of a state hazardous waste permit. Supplemental groundwater monitoring was also required and completed. In 2012, we entered into the states voluntary clean-up program which requires us to perform additional sampling to close the site. Initial sampling work has commenced at the site.
ISRA New Jersey Facilities: We are obliged to conduct investigations and remediation at three current or former New Jersey tank wash and terminal sites pursuant to the states ISRA, which requires such remediation following the sale of facilities after 1983. Two of the sites are in the process of remedial investigation with projections set in contemplation of limited soil remediation expense for contaminated areas.
One site has completed the investigation phase and a final report was submitted to New Jersey Department of Environmental Protection. In accordance with the report findings and with the concurrence of the NJDEP, remedial efforts included limited soil excavation at the site, deed recordation, placement of clean fill and the designation of a Classification Exception Area for the groundwater. No further field remediation work is expected and this site has entered a long term monitoring phase.
We have estimated aggregate future expenditures over the next five years for Tonawanda, Scary Creek, Charleston and ISRA New Jersey to be in the range of $1.8 million to $4.8 million. As of March 31, 2013, we have reserved $1.8 million.
20
Other Legal Matters
We are from time to time involved in routine litigation incidental to the conduct of our business. We believe that no such routine litigation currently pending against us, if adversely determined, would have a material adverse effect on our consolidated financial position, results of operations or cash flows.
15. Guarantor Subsidiaries
At and during the three months ended March 31, 2013, there were outstanding 2018 Notes that were issued by our subsidiaries, QD LLC and QD Capital. The payment obligations of QD LLC and QD Capital under the 2018 Notes are guaranteed by QDI and by all of its domestic subsidiaries other than immaterial subsidiaries as further described below.
The 2018 Notes are the senior obligations of our subsidiaries, QD LLC and QD Capital, and are secured by a subordinated, second-priority lien on assets that secure our ABL Facility through a collateral agreement that is separate from the indenture under which these notes were issued. Pursuant to an intercreditor agreement, the liens on the collateral securing the 2018 Notes rank junior in right of payment to the ABL Facility and obligations under certain hedging agreements and cash management obligations and certain other first-lien obligations. Decisions regarding the maintenance and release of the collateral secured by the collateral agreement are made by the lenders under our ABL Facility and neither the indenture trustee nor the holders of the 2018 Notes have control of decisions regarding the release of the collateral.
The 2018 Notes are also guaranteed on a second-priority senior secured basis, jointly and severally, by QDI, subsidiary guarantors, and certain of our future U.S. restricted subsidiaries. The guarantees of the subsidiary guarantors are full and unconditional subject to customary release provisions for sales of a subsidiary in compliance with other provisions of the indenture for the 2018 Notes (the Notes Indenture), foreclosures of a pledge of the equity interests of the subsidiary, the right to designate a subsidiary as unrestricted under the terms of the Notes Indenture, the discharge of the 2018 Notes or the defeasance of the Notes Indenture. The guarantee of QDI is full and unconditional.
The subsidiary guarantors of all of the 2018 Notes are all of our direct and indirect domestic subsidiaries other than immaterial subsidiaries. No non-domestic subsidiaries are guarantor subsidiaries. QD Capital has no material assets or operations. QD LLC, all of the subsidiary guarantors and QD Capital are 100% owned by QDI. The subsidiary guarantors are 100% owned subsidiaries of QD LLC. QD LLC conducts substantially all of its business through and derives virtually all of its income from its subsidiaries. Therefore, its ability to make required principal and interest payments with respect to its indebtedness depends on the earnings of subsidiaries and its ability to receive funds from its subsidiaries through dividend and other payments.
QDI has no significant restrictions on its ability to receive funds from its subsidiaries. The ABL Facility and the indenture governing our 2018 Notes contain certain limitations on QD LLCs ability to make distributions to QDI. We do not consider these restrictions to be significant, because QDI is a holding company with no significant operations or assets, other than ownership of 100% of QD LLCs membership units. QD LLCs direct and indirect wholly owned subsidiaries are generally permitted to make distributions to QD LLC, which is the principal obligor under the ABL Facility and the 2018 Notes. We do not believe that additional financial or narrative information about QDI, QD LLC, QD Capital or the subsidiary guarantors would be material to evaluating the guarantees.
The following condensed consolidating financial information for QDI, QD LLC, and QD Capital, which has no assets or operations, non-guarantor subsidiaries and combined guarantor subsidiaries presents:
| Condensed consolidating balance sheets at March 31, 2013 and December 31, 2012 and condensed consolidating statements of operations for the three-month periods ended March 31, 2013 and 2012, and the condensed consolidating statements of cash flows for each of the three-month periods ended March 31, 2013 and 2012. |
| Elimination entries necessary to consolidate the parent company and all its subsidiaries. |
21
QUALITY DISTRIBUTION, INC. AND SUBSIDIARIES
Condensed Consolidating Statements of Operations
Three Months Ended March 31, 2013
Unaudited(In 000s)
QDI | QD LLC & QD Capital |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||||||||
Operating revenues: |
||||||||||||||||||||||||
Transportation |
$ | | $ | | $ | 163,994 | $ | | $ | | $ | 163,994 | ||||||||||||
Service revenue |
| | 33,361 | 93 | | 33,454 | ||||||||||||||||||
Fuel surcharge |
| | 31,974 | | | 31,974 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total operating revenues |
| | 229,329 | 93 | | 229,422 | ||||||||||||||||||
Operating expenses: |
||||||||||||||||||||||||
Purchased transportation |
| | 142,872 | | | 142,872 | ||||||||||||||||||
Compensation |
| | 26,470 | | | 26,470 | ||||||||||||||||||
Fuel, supplies and maintenance |
| | 27,011 | 7 | | 27,018 | ||||||||||||||||||
Depreciation and amortization |
| | 6,693 | | | 6,693 | ||||||||||||||||||
Selling and administrative |
| 51 | 7,410 | 18 | | 7,479 | ||||||||||||||||||
Insurance costs |
| | 4,489 | 8 | | 4,497 | ||||||||||||||||||
Taxes and licenses |
| | 943 | | | 943 | ||||||||||||||||||
Communication and utilities |
| | 1,095 | | | 1,095 | ||||||||||||||||||
Gain on disposal of property and equipment |
| | (3,089 | ) | | | (3,089 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Operating (loss) income |
| (51 | ) | 15,435 | 60 | | 15,444 | |||||||||||||||||
Interest expense, non-related party, net |
| 7,404 | 108 | | | 7,512 | ||||||||||||||||||
Interest (income) expense, related party, net |
| (7,404 | ) | 7,506 | (102 | ) | | | ||||||||||||||||
Other (income) expense, net |
| | (7,018 | ) | 46 | | (6,972 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
(Loss) income before income taxes |
| (51 | ) | 14,839 | 116 | | 14,904 | |||||||||||||||||
(Benefit from) provision for income taxes |
(14 | ) | | 5,748 | 26 | | 5,760 | |||||||||||||||||
Equity in earnings of subsidiaries |
9,130 | 9,181 | | | (18,311 | ) | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income |
$ | 9,144 | $ | 9,130 | $ | 9,091 | $ | 90 | $ | (18,311 | ) | $ | 9,144 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total other comprehensive income, net of tax |
421 | 421 | 386 | 35 | (842 | ) | 421 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Comprehensive income |
$ | 9,565 | $ | 9,551 | $ | 9,477 | $ | 125 | $ | (19,153 | ) | $ | 9,565 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
22
QUALITY DISTRIBUTION, INC. AND SUBSIDIARIES
Condensed Consolidating Statements of Operations
Three Months Ended March 31, 2012
Unaudited(In 000s)
QDI | QD LLC & QD Capital |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||||||||
Operating revenues: |
||||||||||||||||||||||||
Transportation |
$ | | $ | | $ | 133,206 | $ | | $ | | $ | 133,206 | ||||||||||||
Service revenue |
| | 27,881 | 104 | | 27,985 | ||||||||||||||||||
Fuel surcharge |
| | 30,724 | | | 30,724 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total operating revenues |
| | 191,811 | 104 | | 191,915 | ||||||||||||||||||
Operating expenses: |
||||||||||||||||||||||||
Purchased transportation |
| | 131,877 | | | 131,877 | ||||||||||||||||||
Compensation |
| | 16,631 | | | 16,631 | ||||||||||||||||||
Fuel, supplies and maintenance |
| | 14,466 | | | 14,466 | ||||||||||||||||||
Depreciation and amortization |
| | 3,791 | | | 3,791 | ||||||||||||||||||
Selling and administrative |
| 6 | 6,488 | 16 | | 6,510 | ||||||||||||||||||
Insurance costs |
| | 3,219 | | | 3,219 | ||||||||||||||||||
Taxes and licenses |
| | 748 | | | 748 | ||||||||||||||||||
Communication and utilities |
| | 837 | | | 837 | ||||||||||||||||||
Gain on disposal of property and equipment |
| | (2 | ) | | | (2 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Operating (loss) income |
| (6 | ) | 13,756 | 88 | | 13,838 | |||||||||||||||||
Interest expense (income), non-related party, net |
| 6,851 | 162 | (3 | ) | | 7,010 | |||||||||||||||||
Interest (income) expense, related party, net |
| (6,851 | ) | 6,955 | (104 | ) | | | ||||||||||||||||
Other (income) expense, net |
| | (229 | ) | (7 | ) | | (236 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
(Loss) income before income taxes |
| (6 | ) | 6,868 | 202 | | 7,064 | |||||||||||||||||
Provision for income taxes |
| | 330 | 34 | | 364 | ||||||||||||||||||
Equity in earnings of subsidiaries |
6,700 | 6,706 | | | (13,406 | ) | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income |
$ | 6,700 | $ | 6,700 | $ | 6,538 | $ | 168 | $ | (13,406 | ) | $ | 6,700 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total other comprehensive income (loss), net of tax |
349 | 349 | 388 | (39 | ) | (698 | ) | 349 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Comprehensive income |
$ | 7,049 | $ | 7,049 | $ | 6,926 | $ | 129 | $ | (14,104 | ) | $ | 7,049 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
23
QUALITY DISTRIBUTION, INC. AND SUBSIDIARIES
Condensed Consolidating Balance Sheet
March 31, 2013
Unaudited(In 000s)
QDI | QD LLC and QD Capital |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||||||||
ASSETS |
||||||||||||||||||||||||
Current assets: |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | | $ | 1,113 | $ | 88 | $ | | $ | 1,201 | ||||||||||||
Accounts receivable, net |
| | 124,466 | 36 | | 124,502 | ||||||||||||||||||
Prepaid expenses |
| 8 | 15,650 | 14 | | 15,672 | ||||||||||||||||||
Deferred tax asset, net |
| | 19,017 | | | 19,017 | ||||||||||||||||||
Intercompany |
| | 375,340 | 57 | (375,397 | ) | | |||||||||||||||||
Other |
49 | | 8,453 | (6 | ) | | 8,496 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total current assets |
49 | 8 | 544,039 | 189 | (375,397 | ) | 168,888 | |||||||||||||||||
Property and equipment, net |
| | 184,238 | | | 184,238 | ||||||||||||||||||
Goodwill |
| | 104,294 | | | 104,294 | ||||||||||||||||||
Intangibles, net |
| | 36,592 | | | 36,592 | ||||||||||||||||||
Non-current deferred tax asset, net |
(2,289 | ) | | 6,264 | | | 3,975 | |||||||||||||||||
Investment in subsidiaries |
(76,788 | ) | 435,204 | | | (358,416 | ) | | ||||||||||||||||
Intercompany |
140,243 | 242,996 | 381,544 | 11,847 | (776,630 | ) | | |||||||||||||||||
Other assets |
| 8,973 | 3,560 | | | 12,533 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total assets |
$ | 61,215 | $ | 687,181 | $ | 1,260,531 | $ | 12,036 | $ | (1,510,443 | ) | $ | 510,520 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
LIABILITIES AND SHAREHOLDERS (DEFICIT) EQUITY |
||||||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||||||
Current maturities of indebtedness |
$ | | $ | | $ | 3,035 | $ | | $ | | $ | 3,035 | ||||||||||||
Current maturities of capital lease obligations |
| | 2,125 | | | 2,125 | ||||||||||||||||||
Accounts payable |
| | 13,912 | (1 | ) | | 13,911 | |||||||||||||||||
Intercompany |
72,334 | | 303,063 | | (375,397 | ) | | |||||||||||||||||
Affiliates and independent owner-operators payable |
| | 16,545 | | | 16,545 | ||||||||||||||||||
Accrued expenses |
| 9,791 | 24,969 | 5 | | 34,765 | ||||||||||||||||||
Environmental liabilities |
| | 2,829 | | | 2,829 | ||||||||||||||||||
Accrued loss and damage claims |
| | 7,179 | | | 7,179 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total current liabilities |
72,334 | 9,791 | 373,657 | 4 | (375,397 | ) | 80,389 | |||||||||||||||||
Long-term indebtedness, less current maturities |
| 377,089 | 23,592 | | | 400,681 | ||||||||||||||||||
Capital lease obligations, less current maturities |
| | 1,080 | | | 1,080 | ||||||||||||||||||
Environmental liabilities |
| | 5,672 | | | 5,672 | ||||||||||||||||||
Accrued loss and damage claims |
| | 9,459 | | | 9,459 | ||||||||||||||||||
Intercompany |
| 377,089 | 395,086 | 4,455 | (776,630 | ) | | |||||||||||||||||
Other non-current liabilities |
| | 24,321 | 37 | | 24,358 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total liabilities |
72,334 | 763,969 | 832,867 | 4,496 | (1,152,027 | ) | 521,639 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Shareholders (deficit) equity: |
||||||||||||||||||||||||
Common stock |
438,380 | 354,963 | 390,760 | 4,191 | (749,914 | ) | 438,380 | |||||||||||||||||
Treasury stock |
(9,281 | ) | | | | | (9,281 | ) | ||||||||||||||||
Accumulated (deficit) retained earnings |
(219,323 | ) | (211,328 | ) | 66,721 | 4,446 | 140,161 | (219,323 | ) | |||||||||||||||
Stock recapitalization |
(189,589 | ) | (189,589 | ) | | (55 | ) | 189,644 | (189,589 | ) | ||||||||||||||
Accumulated other comprehensive loss |
(31,331 | ) | (30,859 | ) | (29,817 | ) | (1,042 | ) | 61,718 | (31,331 | ) | |||||||||||||
Stock purchase warrants |
25 | 25 | | | (25 | ) | 25 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total shareholders (deficit) equity |
(11,119 | ) | (76,788 | ) | 427,664 | 7,540 | (358,416 | ) | (11,119 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total liabilities and shareholders (deficit) equity |
$ | 61,215 | $ | 687,181 | $ | 1,260,531 | $ | 12,036 | $ | (1,510,443 | ) | $ | 510,520 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
24
QUALITY DISTRIBUTION, INC. AND SUBSIDIARIES
Condensed Consolidating Balance Sheet
December 31, 2012
Unaudited(In 000s)
QDI | QD LLC and QD Capital |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||||||||
ASSETS |
||||||||||||||||||||||||
Current assets: |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | | $ | 2,580 | $ | 124 | $ | | $ | 2,704 | ||||||||||||
Accounts receivable, net |
| | 113,863 | 43 | | 113,906 | ||||||||||||||||||
Prepaid expenses |
| (19 | ) | 14,648 | 22 | | 14,651 | |||||||||||||||||
Deferred tax asset, net |
| | 16,609 | | | 16,609 | ||||||||||||||||||
Intercompany |
| | 369,458 | 88 | (369,546 | ) | | |||||||||||||||||
Other |
44 | | 9,679 | (29 | ) | | 9,694 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total current assets |
44 | (19 | ) | 526,837 | 248 | (369,546 | ) | 157,564 | ||||||||||||||||
Property and equipment, net |
| | 190,342 | | | 190,342 | ||||||||||||||||||
Goodwill |
| | 104,294 | | | 104,294 | ||||||||||||||||||
Intangibles, net |
| | 37,654 | | | 37,654 | ||||||||||||||||||
Non-current deferred tax asset, net |
(2,300 | ) | | 14,013 | | | 11,713 | |||||||||||||||||
Investment in subsidiaries |
(86,339 | ) | 425,602 | | | (339,263 | ) | | ||||||||||||||||
Intercompany |
144,738 | 252,732 | 389,289 | 11,582 | (798,341 | ) | | |||||||||||||||||
Other assets |
| 9,510 | 2,526 | | | 12,036 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total assets |
$ | 56,143 | $ | 687,825 | $ | 1,264,955 | $ | 11,830 | $ | (1,507,150 | ) | $ | 513,603 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
LIABILITIES AND SHAREHOLDERS (DEFICIT) EQUITY |
||||||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||||||
Current maturities of indebtedness |
$ | | $ | | $ | 3,918 | $ | | $ | | $ | 3,918 | ||||||||||||
Current maturities of capital lease obligations |
| | 3,913 | | | 3,913 | ||||||||||||||||||
Accounts payable |
| | 9,977 | (11 | ) | | 9,966 | |||||||||||||||||
Intercompany |
74,583 | | 294,963 | | (369,546 | ) | | |||||||||||||||||
Independent affiliates and independent owner-operators payable |
| | 14,243 | | | 14,243 | ||||||||||||||||||
Accrued expenses |
| 4,294 | 33,567 | 28 | | 37,889 | ||||||||||||||||||
Environmental liabilities |
| | 2,739 | | | 2,739 | ||||||||||||||||||
Accrued loss and damage claims |
| | 7,326 | | | 7,326 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total current liabilities |
74,583 | 4,294 | 370,646 | 17 | (369,546 | ) | 79,994 | |||||||||||||||||
Long-term indebtedness, less current maturities |
| 384,935 | 23,915 | | | 408,850 | ||||||||||||||||||
Capital lease obligations, less current maturities |
| | 2,125 | | | 2,125 | ||||||||||||||||||
Environmental liabilities |
| | 6,302 | | | 6,302 | ||||||||||||||||||
Accrued loss and damage claims |
| | 9,494 | | | 9,494 | ||||||||||||||||||
Intercompany |
| 384,935 | 409,053 | 4,353 | (798,341 | ) | | |||||||||||||||||
Other non-current liabilities |
| | 25,233 | 45 | | 25,278 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total liabilities |
74,583 | 774,164 | 846,768 | 4,415 | (1,167,887 | ) | 532,043 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Shareholders (deficit) equity: |
||||||||||||||||||||||||
Common stock |
437,192 | 354,963 | 390,760 | 4,191 | (749,914 | ) | 437,192 | |||||||||||||||||
Treasury stock |
(5,849 | ) | | | | | (5,849 | ) | ||||||||||||||||
Accumulated (deficit) retained earnings |
(228,467 | ) | (220,458 | ) | 57,630 | 4,356 | 158,472 | (228,467 | ) | |||||||||||||||
Stock recapitalization |
(189,589 | ) | (189,589 | ) | | (55 | ) | 189,644 | (189,589 | ) | ||||||||||||||
Accumulated other comprehensive loss |
(31,752 | ) | (31,280 | ) | (30,203 | ) | (1,077 | ) | 62,560 | (31,752 | ) | |||||||||||||
Stock purchase warrants |
25 | 25 | | | (25 | ) | 25 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total shareholders (deficit) equity |
(18,440 | ) | (86,339 | ) | 418,187 | 7,415 | (339,263 | ) | (18,440 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total liabilities and shareholders equity (deficit) |
$ | 56,143 | $ | 687,825 | $ | 1,264,955 | $ | 11,830 | $ | (1,507,150 | ) | $ | 513,603 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
25
QUALITY DISTRIBUTION, INC. AND SUBSIDIARIES
Condensed Consolidating Statements of Cash Flows
Three Months Ended March 31, 2013
Unaudited(In 000s)
QDI | QD LLC and QD Capital |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||||||
Net income |
$ | 9,144 | $ | 9,130 | $ | 9,091 | $ | 90 | $ | (18,311 | ) | $ | 9,144 | |||||||||||
Adjustments for non-cash charges |
(8,133 | ) | (15,973 | ) | 9,294 | (102 | ) | 18,311 | 3,397 | |||||||||||||||
Net changes in assets and liabilities |
6 | 6,007 | (9,906 | ) | (29 | ) | | (3,922 | ) | |||||||||||||||
Intercompany activity |
(1,017 | ) | 836 | 176 | 5 | | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net cash provided by (used in) operating activities |
| | 8,655 | (36 | ) | | 8,619 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||||||
Capital expenditures |
| | (7,413 | ) | | | (7,413 | ) | ||||||||||||||||
Trojan purchase price adjustment |
| | (857 | ) | | | (857 | ) | ||||||||||||||||
Proceeds from sales of property and equipment |
| | 8,789 | | | 8,789 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net cash provided by investing activities |
| | 519 | | | 519 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||||||
Principal payments on long-term debt and capital lease obligations |
| | (1,854 | ) | | | (1,854 | ) | ||||||||||||||||
Proceeds from revolver |
| 46,700 | | | | 46,700 | ||||||||||||||||||
Payments on revolver |
| (54,600 | ) | | | | (54,600 | ) | ||||||||||||||||
Deferred financing costs |
| (21 | ) | | | | (21 | ) | ||||||||||||||||
Proceeds from exercise of stock options |
181 | | | | | 181 | ||||||||||||||||||
Purchases of treasury stock |
(3,428 | ) | (3,428 | ) | ||||||||||||||||||||
Other |
| 2,381 | | | 2,381 | |||||||||||||||||||
Intercompany activity |
3,247 | 7,921 | (11,168 | ) | | | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net cash used by financing activities |
| | (10,641 | ) | | | (10,641 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net decrease in cash and cash equivalents |
| | (1,467 | ) | (36 | ) | | (1,503 | ) | |||||||||||||||
Cash and cash equivalents, beginning of period |
| | 2,580 | 124 | | 2,704 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Cash and cash equivalents, end of period |
$ | | $ | | $ | 1,113 | $ | 88 | $ | | $ | 1,201 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
26
QUALITY DISTRIBUTION, INC. AND SUBSIDIARIES
Condensed Consolidating Statements of Cash Flows
Three Months Ended March 31, 2012
Unaudited(In 000s)
QDI | QD LLC and QD Capital |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||||||
Net income |
$ | 6,700 | $ | 6,700 | $ | 6,538 | $ | 168 | $ | (13,406 | ) | $ | 6,700 | |||||||||||
Adjustments for non-cash charges |
(6,027 | ) | (12,967 | ) | 10,814 | (104 | ) | 13,406 | 5,122 | |||||||||||||||
Net changes in assets and liabilities |
282 | 5,779 | (16,354 | ) | 203 | | (10,090 | ) | ||||||||||||||||
Intercompany activity |
(955 | ) | 488 | 765 | (298 | ) | | | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net cash provided by (used in) operating activities |
| | 1,763 | (31 | ) | | 1,732 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||||||
Capital expenditures |
| | (13,498 | ) | | | (13,498 | ) | ||||||||||||||||
Greensville purchase price adjustment |
| | (66 | ) | | | (66 | ) | ||||||||||||||||
Proceeds from sales of property and equipment |
| | 2,650 | | | 2,650 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net cash used in investing activities |
| | (10,914 | ) | | | (10,914 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||||||
Principal payments on long-term debt and capital lease obligations |
| | (2,303 | ) | | | (2,303 | ) | ||||||||||||||||
Proceeds from revolver |
| 25,800 | | | | 25,800 | ||||||||||||||||||
Payments on revolver |
| (46,100 | ) | | | | (46,100 | ) | ||||||||||||||||
Deferred financing costs |
| (246 | ) | | | | (246 | ) | ||||||||||||||||
Proceeds from equity offering, net of transaction costs |
30,710 | | | | | 30,710 | ||||||||||||||||||
Proceeds from exercise of stock options |
235 | | | | | 235 | ||||||||||||||||||
Other |
| | 900 | | | 900 | ||||||||||||||||||
Intercompany activity |
(30,945 | ) | 20,546 | 10,399 | | | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net cash provided by financing activities |
| | 8,996 | | | 8,996 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net decrease in cash and cash equivalents |
| | (155 | ) | (31 | ) | | (186 | ) | |||||||||||||||
Cash and cash equivalents, beginning of period |
| | 3,540 | 513 | | 4,053 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Cash and cash equivalents, end of period |
$ | | $ | | $ | 3,385 | $ | 482 | $ | | $ | 3,867 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
27
16. Subsequent Event
On May 1, 2013, we announced a plan to affiliate our Energy Logistics trucking operations in the Marcellus and Utica shale regions whereby three current company-operated terminals will be converted to affiliated operations over the next 60 to 90 days. The affiliation is a new relationship with an independent operator who is based in the Williamsport, Pennsylvania area and operates an existing oilfield services company. We will continue to manage our brokerage command center. In conjunction with this effort, the new independent affiliate purchased and leased certain transportation equipment to ensure sufficient capacity for the combined customer base and execute a smooth transition of the business. We expect to incur certain cash and non-cash costs associated with this affiliation in the second quarter of 2013.
28
ITEM 2Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our results of operations and financial condition should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this report. The following discussion includes forward-looking statements. For a discussion of important factors that could cause actual results to differ from results discussed in the forward-looking statements, see Forward-Looking Statements and Certain Considerations contained elsewhere in this report.
OVERVIEW
We operate the largest chemical bulk tank truck network in North America and are also the largest provider of intermodal ISO tank container and depot services in North America. In 2011, we began providing logistics services to the unconventional oil and gas frac shale energy markets. We operate an asset-light business model and service customers across North America through our network of 89 terminals servicing the chemical markets, 9 ISO tank depot services terminals (intermodal) servicing the chemical and other bulk liquid markets and 10 terminals servicing the energy markets.
Financial Reporting Segments
We have three reportable business segments for financial reporting purposes that are distinguished primarily on the basis of services offered:
| Chemical Logistics, which consists of the transportation of bulk chemicals primarily through our network of 25 independent affiliates and company-operated terminals, and equipment rental income; |
| Energy Logistics, which consists primarily of the transportation of fresh water, disposal water, and crude oil for the unconventional oil and gas frac shale energy markets, primarily through company-operated terminals and 2 independent affiliates; and |
| Intermodal, which consists of Boassos intermodal ISO tank container transportation and depot services business primarily supporting the international movement of bulk liquids. |
Chemical Logistics
Through our subsidiary, QCI, we coordinate the transport of a broad range of chemical products and provide our customers with logistics and other value-added services. Through our North American network, we are a core carrier for many of the major companies engaged in chemical processing. We believe the diversity of our customer base, geography and end-markets provide a competitive advantage.
The bulk tank truck market in North America includes all products shipped by bulk tank truck carriers and consists mainly of liquid and dry bulk chemicals (including plastics) and bulk dry and liquid food-grade products. We estimate, based on industry sources, that the highly fragmented North American for-hire segment of the bulk tank transport market generated revenues of approximately $6.4 billion in 2011. We specifically operate in the for-hire chemical and food grade bulk transport market (which we estimated at $4.4 billion in 2011). We believe we have the leading market share (estimated at 15% in 2011) in this sector based on revenues. We believe managing a larger carrier network facilitates customer service and lane density, and provides a more favorable operating cost structure for us and our independent affiliates. As such, we believe we are well-positioned to expand our business.
Chemical bulk tank truck industry growth is generally dependent on volume growth in the industrial chemical industry, the rate at which chemical companies outsource their transportation needs, the overall capacity of the rail system, and, in particular, the extent to which chemical companies make use of the rail system for their bulk chemical transportation needs. We also believe that North American chemical producers will gain a global competitive advantage and grow domestic production (thus shipments which we can service) through the use of low cost energy sources, primarily natural gas and natural gas liquids.
The chemical bulk tank truck industry is characterized by high barriers to entry such as the time and cost required to develop the operational infrastructure necessary to handle sensitive chemical cargo, the financial and managerial resources required to recruit and train drivers, substantial and increasingly more stringent industry regulatory requirements, strong customer relationships and the significant capital investments required to build a fleet of equipment and establish a network of terminals and independent affiliates.
Our transportation revenue in the chemical logistics segment is principally a function of the volume of shipments by the bulk chemical industry, prices, the average number of miles driven per load, our market share and the allocation of shipments between tank truck transportation and other modes of transportation such as rail. Additionally, it is common practice in the bulk tank truck industry for customers to pay fuel surcharges.
29
Energy Logistics
Our energy logistics business began operations in the second quarter of 2011 primarily as a third party logistics (3PL) provider. We operate the business through our subsidiary, QCER. Our energy logistics business services the unconventional oil and gas frac shale energy market through the transportation of crude oil, fresh water, flowback and produced brine water, and the disposal of flowback and produced brine water, as well as providing services ancillary to these activities. During 2012, we expanded our energy logistics business through the following acquisitions:
| On April 1, 2012, we acquired certain operating assets of Trojan Vacuum Services, which operates in the Eagle Ford shale. We paid $8.7 million in cash at closing, plus $1.0 million in cash in January 2013 upon the satisfaction of certain operating and financial performance criteria. |
| On June 1, 2012, we acquired certain operating assets of Wiley Bice Trucking, LLC and certain operating assets and rights of RM Resources, LLC, (collectively Bice), which operates in the Bakken shale region, for $81.4 million in aggregate consideration, with up to an additional $19.0 million in cash consideration, payable one year after the closing date if certain future operating and financial performance criteria are satisfied, although we do not currently expect those criteria to be met or to pay any additional consideration. |
| On August 1, 2012, we acquired certain operating assets of Dunns Tank Services, Inc. and its related company Nassau Disposal, Inc., (collectively Dunns), which operates in the Marcellus, Woodford and Utica shale regions for an aggregate purchase price of $34.3 million, with up to an additional $3.6 million in cash consideration, payable one year after the closing date if certain future operating and financial performance criteria are satisfied, although we do not currently expect those criteria to be met or to pay any additional consideration. |
As of March 31, 2013, we operate in the Bakken, Eagle Ford, Permian, Marcellus, Woodford, Utica and Mississippian Limestone shale regions in North America, all of which drill for both oil and natural gas with the exception of Marcellus, which is solely natural gas. We continue to evaluate the potential for expansion into additional shales, which would provide additional diversification to our business. Our strategy to target multiple resource rich shales helps to diversify our customer offerings, lessen the impact of swings in any one commodity and optimize equipment utilization. We currently operate approximately 1,400 units (tractors, trailers and combination equipment) of energy equipment in this market across a diverse customer base.
Our energy logistics business is primarily involved in fluid management and logistics in the upstream segment of the energy industry, through its services in connection with the establishment of production wells, and the midstream segment of the energy industry, in connection with the transportation of crude oil. We believe the market for services such as those provided by our energy logistics business was approximately $5.0 to $7.0 billion in 2011. The industry is made up of providers that include independent national or regional trucking and logistics companies such as QCER, trucking and logistics companies owned by or dedicated to large oil and gas companies, and local providers focused on one or more particular shales. Energy logistics providers are impacted by the level of new drilling activity, which impacts the transportation of fresh water and flowback water used and the provision of related services used in those activities, and the number of active wells, which impacts the transportation of crude oil and produced water and the provision of related services used in those activities. The energy logistics market is also impacted by market prices for oil and gas, which influence the production activities of our customers, the prices they are willing to pay for our services, and the shales in which they operate. We expect regulation of this industry to increase over time but believe that the scope of our operations and our experience with regulation in our chemical logistics business will facilitate our adaptation to new regulations and may provide us with an advantage over some of our competitors.
Intermodal
Our subsidiary, Boasso, provides intermodal ISO tank container transportation and depot services, through terminals located in the eastern half of the United States. In the fourth quarter of 2011, Boasso expanded its operations through the acquisition of Greensville Transport Company, which operates at a port located in Norfolk, Virginia. Boassos revenues are impacted by United States chemical import/export volume, in particular the number and volume of shipments through ports at which Boasso has terminals, as well as their market share at those ports.
In addition to intermodal tank transportation services, Boasso provides tank cleaning, heating, testing, maintenance and storage services to customers. Boasso provides local and over-the-road trucking primarily within the proximity of the port cities where its depots are located. Chemical manufacturers have sought to efficiently transport their products on a global basis by utilizing ISO tank containers, and we believe the resulting demand for distributors that can offer a broad range of services within the supply chain will drive future growth in this sector. We believe that our intermodal business will benefit from these trends because of its market leadership, experience and track record.
The intermodal ISO tank container business generally provides services that facilitate the global movement of liquid and dry bulk chemicals, pharmaceuticals and food grade products. The proliferation of global import/export of bulk liquid chemicals has
30
driven the movement of basic manufacturing out of the United States and has resulted in an increase in chemical plant infrastructure to service these off-shore industries. Driven by this globalization, the intermodal ISO tank container market is a growing sector of the overall liquid bulk chemical transportation sector. Demand for intermodal ISO tank containers is impacted by the aggregate volume of imports and exports of chemicals through United States ports. Demand is also impacted by the shift in modes of transportation, from drums to ISO tank containers. Economic conditions and differences among the laws and currencies of foreign nations may also impact the volume of shipments. We operate in the global intermodal ISO tank container transportation and depot services market, which we believe was approximately a $1.0 to $2.0 billion market in 2011.
Our Networks
Our businesses have networks that consist of terminals owned or operated by independent affiliates and terminals owned or operated by us and a driver pool consisting of independent owner-operator drivers, affiliate-employed drivers and company-employed drivers. Independent affiliates are independent companies with which we contract to operate trucking terminals and provide transportation services exclusively on our behalf in defined markets. The independent affiliates generally provide the capital necessary to service their contracted business and are also responsible for most of the operating costs associated with servicing the contracted business. Due to several factors, including our ownership of the customer contracts and relationships, our provision of back-office support in areas such as claims, our direct relationship with independent owner-operators,, the presence of non-compete agreements with the independent affiliates, and, in some cases, our ownership of the trailers utilized in the contracted business, our relationships with the independent affiliates tend to be long-term in nature, with minimal voluntary turnover. Independent owner-operators are generally individual drivers who own or lease their tractors and agree to provide transportation services to us under contract.
We believe our use of independent affiliates and independent owner-operators provides us with the following benefits:
| Locally owned and operated independent affiliate terminals can provide superior, tailored customer service. |
| Independent affiliates and independent owner-operators generally are paid a fixed, contractual percentage of revenue collected on each load they transport creating a variable cost structure that mitigates against cyclical downturns. |
| Reliance on independent affiliates and independent owner-operators creates an asset-light business model that generally reduces our capital investment. |
At present, our businesses rely upon independent affiliates and independent owner-operators to varying degrees. Our chemical logistics business operates primarily through independent affiliate terminals located throughout the continental United States and independent owner-operator drivers. Our intermodal business relies primarily on company terminals located near ports in the eastern half of the United States and independent owner-operator drivers. Our energy logistics business currently relies primarily upon company terminals, which will affect the overall mix of our asset-light business, located near shale regions that have historically experienced frac shale drilling for natural gas and oil and independent owner-operator drivers; however, it also operates through independent affiliate terminals in certain shale regions. We expect to continue to add independent affiliates and owner-operators with the goal to reduce the capital burden of this business while improving return on invested capital.
Recent Significant Transactions
May 2013 New Independent Affiliate
On May 1, 2013, we announced a plan to affiliate our Energy Logistics trucking operations in the Marcellus and Utica shale regions whereby three current company-operated terminals will be converted to affiliated operations over the next 60 to 90 days. The affiliation is a new relationship with an independent operator who is based in the Williamsport, Pennsylvania area and operates an existing oilfield services company. We will continue to manage our brokerage command center. In conjunction with this effort, the new independent affiliate purchased and leased certain transportation equipment to ensure sufficient capacity for the combined customer base and execute a smooth transition of the business. We expect to incur certain cash and non-cash costs associated with this affiliation in the second quarter of 2013.
31
November 2012 Share Repurchase Program
On November 20, 2012, we announced a share repurchase program pursuant to which our Board of Directors authorized the repurchase of up to $15.0 million of our common stock in an open-ended repurchase program (the Repurchase Program). Stock has been, and may in the future be, purchased pursuant to the Repurchase Program, from time to time, in the open market or through private transactions, subject to market conditions. We are not obligated to purchase any shares under the Repurchase Program, and it can be discontinued at any time that we feel additional purchases are not warranted. As of March 31, 2013, we have repurchased approximately 1.1 million shares valued at $7.1 million under the Repurchase Program.
October 2012 Acquisition of an Independent Affiliate
During the third quarter of 2012, we terminated our business relationship with an independent affiliate due to financial and operational difficulties. On October 17, 2012, we acquired the business, certain operating assets and certain liabilities of this independent affiliate for a purchase price of $17.1 million, paid in cash at closing. Of the total $17.1 million, we allocated $15.5 million to property and equipment and $1.6 million to goodwill. This entire amount of goodwill is deductible for tax purposes. This independent affiliate operated eight terminals within the chemical logistics segment and one terminal within the energy logistics segment. Four chemical logistics terminals were immediately transitioned to other independent affiliates, with the remaining terminals transitioned to company operations. During this transition, operating results for the third and fourth quarters of 2012 were adversely impacted in aggregate by $4.4 million of greater than expected operating costs and reduced profitability. During the first quarter of 2013, we recognized $0.3 million of additional costs.
September 2012 ABL Facility Amendment
On September 27, 2012, we entered into an amendment to our ABL Facility. The amendment increased our maximum borrowing capacity under the facility from $250.0 million to $350.0 million. The maturity, interest rate and other material terms and conditions under the ABL Facility remained the same.
August 2012 Asset AcquisitionDunns Tank Service and Nassau Disposal, Inc.
On August 1, 2012, we acquired certain operating assets of Dunns Tank Service, Inc. and the operating assets and rights of Nassau Disposal, Inc., (collectively Dunns), for an aggregate purchase price of $34.3 million paid in cash to expand our energy logistics business. An additional $3.6 million in cash consideration may be payable in cash one year after the closing date if certain future operating and financial performance criteria are satisfied, although we do not currently expect those criteria to be met or to pay any additional consideration. Of the total $34.3 million, we allocated $12.2 million to property and equipment, $17.3 million to goodwill and $4.8 million to intangibles. The entire amount of goodwill is deductible for tax purposes. Dunns is headquartered in Velma, Oklahoma and provides transportation services to the unconventional oil and gas industry within the Marcellus, Woodford and Utica shale regions, primarily hauling flowback and production water for various energy customers. The results of Dunns have been included in our results since the date of acquisition, and are included in our energy logistics segment.
June 2012 Asset AcquisitionsWylie Bice Trucking, LLC and RM Resources, LLC
On June 1, 2012, we acquired certain operating assets of Wylie Bice Trucking, LLC and the operating assets and rights of RM Resources, LLC, (collectively Bice), for $81.4 million aggregate consideration to expand our energy logistics business. Of the total $81.4 million, we allocated $48.2 million to goodwill, $26.6 million to property and equipment, $13.4 million to intangibles and $6.8 million to contingent consideration. Of the $48.2 million allocated to goodwill, $41.4 million is deductible for tax purposes. Headquartered in Killdeer, ND, Bice provides transportation services to the unconventional oil and gas frac shale industry within the Bakken shale region, primarily hauling fresh water, flowback and production water, and oil for numerous energy and other customers, which expands our energy logistics business. The flowback and production water Bice hauls is primarily disposed of utilizing six salt water injection wells we purchased from Bice. The results of the Bice acquisitions are included in our results since the date of acquisition, and are included in our energy logistics segment.
April 2012 Asset AcquisitionTrojan Vacuum Services
On April 1, 2012, we acquired certain operating assets of Trojan Vacuum Services (Trojan) to expand our energy logistics business. The purchase price was $8.7 million paid in cash at closing, plus $1.0 million payable in cash upon the satisfaction of certain operating and financial performance criteria. These criteria were satisfied and the full $1.0 million was paid in January 2013. Of the total $8.7 million, we allocated $4.1 million to property and equipment, $4.3 million to intangibles and $0.3 million to goodwill. The entire amount of goodwill is deductible for tax purposes. Trojan is headquartered in Pleasanton, TX and provides transportation service to the unconventional oil and gas frac shale industry within the Eagle Ford shale region, primarily hauling flowback and production water for various energy customers. The results of the Trojan acquisition are included in our energy logistics segment.
March 2012 Common Stock Offering
On March 13, 2012, we sold 2.5 million shares of our common stock in an underwritten public offering, at a gross price of $13.00 per share, and received net proceeds, after underwriting fees and expenses, of approximately $30.5 million. Certain affiliates of Apollo Management, L.P. also sold 3.2 million shares in the offering. We used our net cash proceeds to repay outstanding borrowings under our ABL Facility.
32
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We identified what we believe to be the more critical accounting policies that impact the financial statements, some of which are based on managements best estimates available at the time of preparation, in our Annual Report on Form 10-K for the year ended December 31, 2012. We have not made any material changes to those policies during the period covered by this Quarterly Report on Form 10-Q.
NEW ACCOUNTING PRONOUNCEMENTS
Refer to Note 1, Summary of Significant Accounting PoliciesNew Accounting Pronouncements for discussion of recent accounting pronouncements and for additional discussion surrounding the adoption of accounting standards.
RESULTS OF OPERATIONS
The following table presents certain condensed consolidated financial information, as a percentage of revenue, for the three months ended March 31, 2013 and 2012:
Three months ended March 31, |
||||||||
2013 | 2012 | |||||||
OPERATING REVENUES: |
||||||||
Transportation |
71.5 | % | 69.4 | % | ||||
Service revenue |
14.6 | % | 14.6 | % | ||||
Fuel surcharge |
13.9 | % | 16.0 | % | ||||
|
|
|
|
|||||
Total operating revenues |
100.0 | % | 100.0 | % | ||||
|
|
|
|
|||||
OPERATING EXPENSES: |
||||||||
Purchased transportation |
62.3 | % | 68.7 | % | ||||
Compensation |
11.5 | % | 8.7 | % | ||||
Fuel, supplies and maintenance |
11.8 | % | 7.5 | % | ||||
Depreciation and amortization |
2.9 | % | 2.0 | % | ||||
Selling and administrative |
3.3 | % | 3.4 | % | ||||
Insurance costs |
2.0 | % | 1.7 | % | ||||
Taxes and licenses |
0.4 | % | 0.4 | % | ||||
Communication and utilities |
0.4 | % | 0.4 | % | ||||
Gain on disposal of property and equipment |
(1.3 | %) | (0.0 | %) | ||||
|
|
|
|
|||||
Total operating expenses |
93.3 | % | 92.8 | % | ||||
|
|
|
|
|||||
Operating income |
6.7 | % | 7.2 | % | ||||
|
|
|
|
|||||
Interest expense |
3.4 | % | 3.7 | % | ||||
Interest income |
(0.1 | %) | (0.1 | %) | ||||
Other income |
(3.0 | %) | (0.1 | %) | ||||
|
|
|
|
|||||
Income before income taxes |
6.4 | % | 3.7 | % | ||||
Provision for income taxes |
2.5 | % | 0.2 | % | ||||
|
|
|
|
|||||
Net income |
3.9 | % | 3.5 | % | ||||
|
|
|
|
The following table shows the approximate number of terminals, drivers, tractors, trailers and energy logistics equipment that we manage (including independent affiliates and independent owner-operators) as of March 31:
2013 | 2012 | |||||||
Terminals(1) |
108 | 105 | ||||||
Drivers(2) |
3,299 | 2,745 | ||||||
Tractors |
2,821 | 2,976 | ||||||
Trailers(3) |
5,150 | 5,496 | ||||||
Energy logistics equipment(4) |
1,411 | 414 |
33
(1) | See the following table for terminals by segment. |
(2) | Includes approximately 670 and 190 drivers for the energy logistics reportable business segment as of March 31, 2013 and 2012, respectively. |
(3) | Excludes approximately 1,500 and 1,300 chassis used in our intermodal reportable business segment as of March 31, 2013 and 2012, respectively. |
(4) | Includes tractors, trailers and combination equipment. |
34
Our network terminals and facilities consisted of the following as of March 31:
2013 Terminals |
2012 Terminals |
|||||||
Chemical logistics independent affiliate trucking terminals |
80 | 89 | ||||||
Chemical logistics company-operated trucking terminals |
9 | 5 | ||||||
Energy logistics independent affiliate energy terminals |
2 | 2 | ||||||
Energy logistics company-operated energy terminals |
8 | | ||||||
Intermodal container services terminals/depots |
9 | 9 | ||||||
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|
|
|
|||||
Total |
108 | 105 | ||||||
|
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|
|
Three Months Ended March 31, 2013 Compared to Three Months Ended March, 31, 2012
Comparability for the three months ended March 31, 2013 to the three months ended March 31, 2012 is affected by acquisitions consummated in 2012. In April 2012, we acquired certain operating assets of Trojan, in June 2012, we acquired certain operating assets and rights of Bice, and in August 2012, we acquired certain operating assets of Dunns. Trojan, Bice and Dunns are collectively referred to as the 2012 Energy Acquisitions and are included in our energy logistics segment.
For the quarter ended March 31, 2013, total revenues were $229.4 million, an increase of $37.5 million, or 19.5%, from revenues of $191.9 million for the same period in 2012. Transportation revenue increased by $30.8 million, or 23.1%, primarily due to an increase in energy logistics revenue of $26.9 million, of which $25.0 million related to the 2012 Energy Acquisitions. In addition, we had an increase of $3.4 million in our chemical logistics business due to higher pricing and consistent volumes and we had an increase of $0.5 million in our intermodal business due to stronger demand for ISO container shipments.
Service revenue increased $5.5 million, or 19.5%. This increase was primarily due to an increase in our energy logistics business of $3.0 million, of which $2.9 million was due to the 2012 Energy Acquisitions. In addition, we had higher intermodal depot services revenue of $2.0 million and higher chemical logistics revenue of $0.5 million.
Fuel surcharge revenue increased $1.3 million, or 4.1%, primarily due to an increase in fuel prices. We have fuel surcharge programs in place with the majority of our chemical logistics and intermodal customers. Most of these programs typically involve a specified computation based on the changes in fuel prices. As a result, some of these programs have a short time lag between when fuel prices change and when this change is reflected in revenues. It is not meaningful to compare the amount of fuel surcharge revenue or the change in fuel surcharge revenue between reporting periods to fuel expense, or the change in fuel expense between periods, as a significant portion of fuel costs are included in purchased transportation.
Purchased transportation increased $11.0 million, or 8.3%, due to an increase of $11.3 million in costs related to servicing the energy logistics market, of which $11.1 million was due to the 2012 Energy Acquisitions offset by a slight decrease of $0.3 million in costs related to servicing our chemical logistics and intermodal businesses. Total purchased transportation as a percentage of transportation revenue and fuel surcharge revenue decreased to 72.9% for the current quarter versus 80.4% for the prior-year quarter. Our independent affiliates generated 87.5% of our chemical logistics revenue and fuel surcharge revenue for the three months ended March 31, 2013 compared to 91.7% for the comparable prior-year period. This decrease resulted primarily from the conversion of independent affiliate trucking terminals to company-operated terminals. During the 2013 and 2012 periods, we paid our independent affiliates approximately 85% of chemical logistics transportation revenue and paid independent owner-operators approximately 65% of chemical logistics transportation revenue.
During the three months ended March 31, 2013, hauling for the energy market was performed by company-operated terminals, independent affiliates and independent third-party carriers. During this period, company-operated terminals generated approximately 80% of the energy revenue and independent affiliates and third-party carriers generated approximately 20%. We typically pay these independent contractors between 70% and 95% of transportation revenue depending on their type of association with the Company. We expect the percentage of revenues generated by independent affiliates to increase over time if we successfully affiliate more of our company-operated terminals.
Compensation expense increased by $9.8 million, or 59.2%, due primarily to an increase of $7.0 million in our energy logistics business, of which $5.7 million was due to the 2012 Energy Acquisitions and an increase in our chemical logistics business of $2.7 million due to an increase in company-operated terminals. Compensation expense in our intermodal business remained relatively flat.
35
Fuel, supplies and maintenance increased $12.6 million, or 86.8%, due primarily to an increase of $8.5 million related to our energy logistics business of which $7.4 million was due to the 2012 Energy Acquisitions. We had an increase of $3.6 million related to our chemical logistics business resulting from an increase in fuel costs of $1.5 million, an increase in equipment rent expense of $1.3 million and an increase in other terminal costs of $0.8 million, primarily at our company-operated terminals. In addition, we had an increase of $0.5 million related to our intermodal business due to an increase in repairs and maintenance expense of $0.3 million, an increase in fuel costs of $0.1 million and an increase in equipment rent of $0.1 million.
Depreciation and amortization expense increased $2.9 million, or 76.5%, primarily due to an increase in depreciation for new energy logistics equipment and an increase in amortization expense for acquired intangible assets. We expect our depreciation and amortization expense to continue to be higher in 2013 than 2012 as energy logistics equipment and intangible assets acquired during 2012 are depreciated and amortized, respectively, for a full twelve months.
Selling and administrative expenses increased $1.0 million, or 14.9%, primarily due to an increase in our energy logistics business of $1.0 million, of which $0.9 million is due to the 2012 Energy Acquisitions. In addition, our intermodal business had increased costs of $0.4 million offset by a decrease in our chemical logistics business of $0.4 million primarily due to reduced professional fees.
Insurance costs increased by $1.3 million, or 39.7%, due to an increase in volume of claims in our energy logistics business and additional premiums related to the 2012 Energy Acquisitions. As a percentage of revenue, insurance expense was within the Companys target range of 2% to 3% of total revenue.
For the quarter ended March 31, 2013, we recognized a net gain on the disposition of property of $2.6 million and a net gain on disposal of revenue equipment of $0.5 million. For the quarter ended March 31, 2012, we recognized a net gain on disposal of revenue equipment of less than $0.1 million.
For the quarter ended March 31, 2013, operating income was $15.4 million, an increase of $1.6 million, or 11.6%, compared to operating income of $13.8 million for the same period in 2012. The operating margin for the quarter ended March 31, 2013 was 6.7% compared to 7.2% for the same period in 2012 as a result of the above-mentioned items.
Interest expense increased by $0.5 million, or 7.4% in the quarter ended March 31, 2013, primarily due to an increase in our weighted average ABL Facility borrowings which were primarily used to fund the 2012 Energy Acquisitions. We expect our interest expense for 2013 to continue to be higher than the comparable period of 2012 due to higher average debt balances.
36
Other income of $7.0 million in 2013 consists primarily of adjustments to our liability for contingent consideration payments related to the acquisition of Bice. Other expense in 2012 consists primarily of foreign currency expense of $0.2 million.
The provision for income taxes was $5.8 million for the quarter ended March 31, 2013, compared to $0.4 million for the same period in 2012. The effective tax rates for the three months ended March 31, 2013 and 2012 were a tax provision of 38.6% and 5.2% respectively. The effective tax rate for the three months ended March 31, 2013 was different from our statutory rate primarily due to the impact of a favorable audit settlement. The effective tax rate for the three months ended March 31, 2012 was different than the statutory rate due to a 100% valuation allowance recorded against our net deferred tax assets.
For the quarter ended March 31, 2013, net income was $9.1 million compared to net income of $6.7 million for the same period in 2012 as a result of the above-mentioned items.
37
Segment Operating Results
We have three reportable business segments for financial reporting purposes that are distinguished primarily on the basis of services offered:
| Chemical Logistics, which consists of the transportation of bulk chemicals primarily through our network of 25 independent affiliates and company-operated terminals, and equipment rental income; |
| Energy Logistics, which consists primarily of the transportation of fresh water, disposal water, and crude oil for the unconventional oil and gas frac shale energy markets, primarily through company-operated terminals and 2 independent affiliates; and |
| Intermodal, which consists of Boassos intermodal ISO tank container transportation and depot services business primarily supporting the international movement of bulk liquids. |
Segment operating income reported in our segment tables excludes amounts such as depreciation and amortization, gains and losses on disposal of property and equipment, restructuring costs, corporate and other unallocated amounts. Although these amounts are excluded from the business segment results, they are included in our reported consolidated statements of operations. Most corporate and shared services overhead costs, including acquisition costs, are included in our chemical logistics segment. We have not provided specific asset information by segment, as it is not regularly provided to our chief operating decision maker for review.
Summarized segment operating results are as follows (in thousands):
Three Months Ended March 31, 2013 | ||||||||||||||||
Chemical Logistics |
Energy Logistics |
Intermodal | Total | |||||||||||||
Operating Revenues: |
||||||||||||||||
Transportation |
$ | 109,068 | $ | 36,930 | $ | 17,996 | $ | 163,994 | ||||||||
Service revenue |
16,393 | 3,921 | 13,140 | 33,454 | ||||||||||||
Fuel surcharge |
27,262 | 233 | 4,479 | 31,974 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total operating revenue |
152,723 | 41,084 | 35,615 | 229,422 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Segment revenue % of total revenue |
66.6 | % | 17.9 | % | 15.5 | % | 100.0 | % | ||||||||
Segment operating income |
9,414 | 2,714 | 6,920 | 19,048 | ||||||||||||
Depreciation and amortization |
2,884 | 3,001 | 808 | 6,693 | ||||||||||||
Other (income) expense, net |
(3,309 | ) | 220 | | (3,089 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating income (loss) |
$ | 9,839 | $ | (507 | ) | $ | 6,112 | $ | 15,444 | |||||||
|
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|
|
|
|
|
|
Three Months Ended March 31, 2012 | ||||||||||||||||
Chemical Logistics |
Energy Logistics |
Intermodal | Total | |||||||||||||
Operating Revenues: |
||||||||||||||||
Transportation |
$ | 105,647 | $ | 10,049 | $ | 17,510 | $ | 133,206 | ||||||||
Service revenue |
15,916 | 884 | 11,185 | 27,985 | ||||||||||||
Fuel surcharge |
26,314 | 1 | 4,409 | 30,724 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total operating revenue |
147,877 | 10,934 | 33,104 | 191,915 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Segment revenue % of total revenue |
77.1 | % | 5.7 | % | 17.2 | % | 100.0 | % | ||||||||
Segment operating income |
11,432 | 1,082 | 5,113 | 17,627 | ||||||||||||
Depreciation and amortization |
2,688 | 247 | 856 | 3,791 | ||||||||||||
Other expense (income), net |
18 | 22 | (42 | ) | (2 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating income |
$ | 8,726 | $ | 813 | $ | 4,299 | $ | 13,838 | ||||||||
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|
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|
|
2013 vs 2012 |
Chemical Logistics |
Energy Logistics |
Intermodal | Total | ||||||||||||||
Segment revenues |
$ change | $ | 4,846 | $ | 30,150 | $ | 2,511 | $ | 37,507 | |||||||||
% change | 3.3 | % | 275.7 | % | 7.6 | % | 19.5 | % |
38
2013 vs 2012 |
Chemical Logistics |
Energy Logistics |
Intermodal | Total | ||||||||||||||
Segment revenues (excluding fuel surcharge) |
$ change | $ | 3,898 | $ | 29,918 | $ | 2,441 | $ | 36,257 | |||||||||
% change | 3.2 | % | 273.6 | % | 8.5 | % | 22.5 | % | ||||||||||
Segment operating income |
$ change | $ | (2,018 | ) | $ | 1,632 | $ | 1,807 | $ | 1,421 | ||||||||
% change | (17.7 | %) | 150.8 | % | 35.3 | % | 8.1 | % |
Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012
Operating revenue:
Chemical Logisticsrevenues increased $4.8 million, or 3.3%, for the quarter ended March 31, 2013 compared to the same period for 2012 primarily due to an increase in transportation revenue of $3.4 million which was driven by higher pricing and solid volumes. In addition, fuel surcharge revenue increased by $0.9 million due to increased fuel prices and service revenue increased by $0.5 million due primarily to increased trailer rental revenue. Driver counts were slightly higher in 2013 due to continued aggressive focus on recruiting and retention. However, industry-wide tightness in driver capacity could impact our chemical logistics business in 2013.
Energy Logisticsrevenues increased $30.2 million, or more than 100.0%, for the quarter ended March 31, 2013 due to our 2012 Energy Acquisitions and growth from our operations in the Eagle Ford and Woodford shales. These increases were partially offset by lower revenues in the Marcellus shale driven by reduced drilling activity due to continued lower natural gas prices.
Intermodalrevenues increased $2.5 million, or 7.6%, for the quarter ended March 31, 2013 compared to the same period in 2012, due to continued strong demand for ISO container shipments which has led to increases in trucking volumes and stable to upward pricing. Revenue increases were also the result of strong storage, rental and service revenue.
39
Segment operating income:
Chemical Logisticsoperating income decreased $2.0 million, or 17.7%, for the quarter ended March 31, 2013 compared to the same period in 2012 primarily due to $0.6 million of severance costs and $0.3 million of affiliate conversion costs. Better pricing and volumes were offset by higher equipment lease expense and increased insurance costs.
Energy Logisticsoperating income increased $1.6 million, or more than 100.0%, for the quarter ended March 31, 2013 primarily due to the 2012 Energy Acquisitions and growth in the Eagle Ford and Woodford shales. Growth in operating income over the prior-year period was limited by reduced profitability within the Marcellus region.
Intermodaloperating income increased $1.8 million, or 35.3%, for the quarter ended March 31, 2013 compared to the same period in 2012 due primarily to increased depot revenue, which typically has higher margins, enhanced cost controls, as well as increased profitability in Boassos Northeast region.
Liquidity and Capital Resources
Our primary cash needs consist of debt service, working capital, capital expenditures, acquisitions and share repurchases. Our working capital needs depend upon the timing of our collections from customers and payments to others, as well as our capital and operating lease payment obligations. Our capital expenditures primarily relate to acquiring trailers to maintain the chemical logistics fleet and supporting our energy logistics business with growth capital. We reduce our capital expenditure requirements for our chemical logistics business by utilizing independent affiliates and independent owner-operators.
Independent affiliates and independent owner-operators typically supply their own tractors, which reduces our capital investment requirements. For the three months ending March 31, 2013, capital expenditures were $7.4 million and proceeds from sales of property and equipment were $8.8 million. We generally expect our sustaining capital expenditures, net of proceeds from property and equipment sales, to be approximately 1% to 2% of operating segment revenues annually. We expect net capital expenditures to be approximately $10.0 to $15.0 million for the 2013 year. Notwithstanding our general expectation for sustaining capital expenditures, we expect net capital expenditures in 2013 to be lower than in 2012, regardless of operating revenue, as we focus on equipment rationalization. Some of our independent affiliates who are engaged with us in the chemical logistics or energy logistics markets may at times purchase some portion of this equipment from us. Actual amounts could differ materially because of operating needs, growth needs, regulatory changes, covenants in our debt arrangements, other expenses or other factors.
Debt service currently consists of required interest payments on the outstanding balance of our ABL Facility and our outstanding 2018 Notes, as well as acquisition-related indebtedness. We have no major debt maturities prior to August 2016, when our ABL Facility matures. We may from time to time repurchase or redeem additional amounts of our outstanding debt or may repurchase outstanding shares of our common stock. Our Board of Directors has approved a share repurchase program for up to $15.0 million in shares of our common stock, of which $7.9 million remained available at March 31, 2013. Separately, we have a long-term goal to reduce the outstanding amount of our indebtedness. Any repurchases or redemptions would depend upon prevailing market conditions, our liquidity requirements, contractual restrictions and other factors we consider important. Future repurchases or redemptions may materially impact our liquidity, future tax liability and results of operations.
Our primary sources of liquidity for operations during the 2013 and 2012 periods have been cash flow from operations and borrowing availability under the ABL Facility. At March 31, 2013, we had $64.6 million of borrowing availability under the ABL Facility. We periodically make business acquisitions with cash as part or all of the consideration. Some acquisitions provide us with new assets to pledge under our ABL Facility and increase our borrowing capacity. Further, we increased our maximum borrowing capacity under the ABL Facility by amendment on September 27, 2012.
If availability under the ABL Facility is insufficient to fund future acquisitions or pay contingent consideration on previous acquisitions, we would either need to raise additional capital or use other sources of liquidity to consummate the desired transactions or meet those requirements. We believe that, based on current operations and anticipated growth, our cash flow from operations, together with other available sources of liquidity, will be sufficient to fund anticipated capital expenditures, operating expenses and our other anticipated liquidity needs for the next 12 months. Anticipated debt maturities in 2016, the acquisition of other businesses or other events that we do not foresee may require us to seek alternative financing, such as restructuring or refinancing our long-term debt, selling assets or operations or selling additional debt or equity securities. If these alternatives were not available in a timely manner or on satisfactory terms or were not permitted under any of our debt agreements and we default on our obligations, our debt could be accelerated and our assets might not be sufficient to repay in full all of our obligations.
40
Cash Flows
The following summarizes our cash flows for the three months ended March 31, 2013 and 2012 as reported in our consolidated statements of cash flows in the accompanying consolidated financial statements (in thousands):
Three months ended March 31, |
||||||||
2013 | 2012 | |||||||
Net cash provided by operating activities |
$ | 8,619 | $ | 1,732 | ||||
Net cash provided by (used in) investing activities |
519 | (10,914 | ) | |||||
Net cash (used in) provided by financing activities |
(10,641 | ) | 8,996 | |||||
|
|
|
|
|||||
Net decrease in cash |
(1,503 | ) | (186 | ) | ||||
Cash at beginning of period |
2,704 | 4,053 | ||||||
|
|
|
|
|||||
Cash at end of period |
$ | 1,201 | $ | 3,867 | ||||
|
|
|
|
Net cash provided by operating activities was $8.6 million for the three-month period ended March 31, 2013, compared to $1.7 million provided by operating activities in the comparable 2012 period. The $6.9 million increase in cash provided by operating activities was primarily due to improved net income and higher net collections of receivables primarily from our energy logistics business, and a reduction in other assets as the prior-year period contained a note issued to an independent affiliate.
Net cash provided by investing activities totaled $0.5 million for the three-month period ended March 31, 2013, compared to $10.9 million used in the comparable 2012 period. The $11.4 million increase in cash was due primarily to $6.1 million of increased sales of property and equipment and $6.1 million of reduced capital expenditures.
Net cash used in financing activities was $10.6 million during the three-month period ended March 31, 2013, compared to $9.0 million provided by financing activities in the comparable 2012 period. In the 2013 period, cash flow from operations and property and equipment sales enabled us to pay down $7.9 million of our ABL Facility. Borrowings under our ABL Facility were utilized to fund share repurchases of $3.4 million and to pay down $2.3 million of other debt and capital lease obligations. In the 2012 period, net cash received from our equity offering of approximately $30.7 million was utilized to pay down $20.3 million of our ABL Facility and to pay down $2.7 million of other debt and capital lease obligations.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements as defined under Item 303(a)(4) of Regulation S-K.
Contractual Obligations
The following is a schedule of our long-term contractual commitments, including the current portion of our long-term indebtedness at March 31, 2013 over the periods we expect them to be paid (in thousands):
Total | Remainder of 2013 |
Years 2014 & 2015 |
Years 2016 & 2017 |
Thereafter 2018 |
||||||||||||||||
Operating leases (1) |
$ | 97,135 | $ | 17,005 | $ | 40,694 | $ | 36,399 | $ | 3,037 | ||||||||||
Total indebtedness (2) |
404,926 | 2,712 | 2,349 | 174,865 | 225,000 | |||||||||||||||
Capital leases |
3,205 | 1,367 | 1,656 | 182 | | |||||||||||||||
Interest on indebtedness (3) |
145,937 | 21,451 | 56,678 | 49,292 | 18,516 | |||||||||||||||
|
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|
|
|
|
|
|
|
|
|||||||||||
Total contractual cash obligations (4) (5) (6) (7) |
$ | 651,203 | $ | 42,535 | $ | 101,377 | $ | 260,738 | $ | 246,553 | ||||||||||
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|
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|
(1) | These obligations represent the minimum rental commitments under all non-cancelable operating leases including the guaranteed residual values at the end of the leases. Commitments also include the operating lease for our corporate headquarters. We expect that some of our operating lease obligations for tractors and trailers will be partially offset by rental revenue from subleasing the tractors to independent affiliates and independent owner-operators and subleasing trailers to independent affiliates. |
(2) | Includes aggregate unamortized discount of $1.2 million related to the 2018 Notes. |
(3) | Amounts presented for interest payments assume that all long-term debt obligations outstanding as of March 31, 2013 will remain outstanding until maturity and interest rates on variable-rate debt in effect as of March 31, 2013 will remain in effect until maturity. |
(4) | Excludes long-term pension obligations as we are unable to reasonably estimate the ultimate amount or timing of settlement of such obligations. As of March 31, 2013, obligations of $20.4 million were reflected in the Consolidated Balance Sheet. This amount represented our unfunded status of such plans, which is the difference between our projected benefit obligation and the fair value of plan assets, as of such date. See Note 7 of the Notes to Consolidated Financial Statements. |
41
(5) | Excludes liabilities associated with environmental matters as we are unable to reasonably estimate the ultimate amount or timing of settlement of such liabilities. Liabilities of $8.5 million, which represent our reserves for environmental compliance and remediation were reflected in the consolidated balance sheet as of March 31, 2013. See Note 14 of the Notes to Consolidated Financial Statements. |
(6) | Excludes accrued loss and damage claims as we are unable to reasonably estimate the ultimate amount or timing of settlement of such claims. As of March 31, 2013, accrued loss and damage claims of $16.6 million, which represented the balance of our reserves for such liabilities, were reflected in the Consolidated Balance Sheet. |
(7) | Excludes liabilities associated with uncertain tax positions as we are unable to reasonably estimate the ultimate amount or timing of settlement of such positions. See Note 11 of the Notes to Consolidated Financial Statements. |
42
Long-term Debt
Long-term debt consisted of the following (in thousands):
March 31, 2013 |
December 31, 2012 |
|||||||
Capital lease obligations |
$ | 3,205 | $ | 6,038 | ||||
ABL Facility |
153,300 | 161,200 | ||||||
9.875% Second-Priority Senior Secured Notes, due 2018 |
225,000 | 225,000 | ||||||
5% Subordinated Acquisition Notes |
21,300 | 21,300 | ||||||
Other Notes |
5,326 | 6,533 | ||||||
|
|
|
|
|||||
Long-term debt, including current maturities |
408,131 | 420,071 | ||||||
Discount on Notes |
(1,210 | ) | (1,265 | ) | ||||
|
|
|
|
|||||
406,921 | 418,806 | |||||||
Less current maturities of long-term debt (including capital lease obligations) |
(5,160 | ) | (7,831 | ) | ||||
|
|
|
|
|||||
Long-term debt, less current maturities (including capital lease obligations) |
$ | 401,761 | $ | 410,975 | ||||
|
|
|
|
Debt Retirement
The following is a schedule of our indebtedness at March 31, 2013 over the periods we are required to pay such indebtedness (in thousands):
Remainder of 2013 |
2014 | 2015 | 2016 | 2017 | Thereafter | Total | ||||||||||||||||||||||
Capital lease obligations |
$ | 1,367 | $ | 1,323 | $ | 333 | $ | 106 | $ | 76 | $ | | $ | 3,205 | ||||||||||||||
ABL Facility |
| | | 153,300 | | | 153,300 | |||||||||||||||||||||
9.875% Second-Priority Senior Secured Notes, due 2018 (1) |
| | | | | 225,000 | 225,000 | |||||||||||||||||||||
5% Subordinated Acquisition Notes |
| | | | 21,300 | | 21,300 | |||||||||||||||||||||
Other Notes |
2,712 | 1,265 | 1,084 | 265 | | | 5,326 | |||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 4,079 | $ | 2,588 | $ | 1,417 | $ | 153,671 | $ | 21,376 | $ | 225,000 | $ | 408,131 | ||||||||||||||
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|
(1) | Amounts do not include the remaining unamortized original issue discount of $1.2 million related to the 2018 Notes. |
The following is a schedule of our debt issuance costs (in thousands) as of March 31, 2013:
December 31, 2012 Balance |
Additional Debt Issuance Costs |
2013 amortization expense |
March 31, 2013 |
|||||||||||||
ABL Facility |
$ | 4,845 | $ | 21 | $ | (339 | ) | $ | 4,527 | |||||||
9.875% Second-Priority Senior Secured Notes, due 2018 |
4,665 | | (219 | ) | 4,446 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 9,510 | $ | 21 | $ | (558 | ) | $ | 8,973 | |||||||
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|
|
|
|
Amortization expense of deferred issuance costs was $0.6 million and $0.5 million for each of the three months ending March 31, 2013 and 2012, respectively, and is included in interest expense. We are amortizing these costs over the term of the debt instruments.
The ABL Facility
Our ABL Facility provides for a revolving credit facility with a maturity of August 19, 2016. On September 27, 2012, our maximum borrowing capacity under the facility was increased from $250.0 million to $350.0 million. Borrowing availability under our ABL Facility did not change as a result of this amendment. Changes in borrowing availability result from increases or decreases in assets securing the ABL Facility. The ABL Facility includes borrowing capacity of up to $150.0 million for letters of credit and up to
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$30.0 million for swingline borrowings on same-day notice. The ABL Facility is available for working capital needs and general corporate purposes, including permitted acquisitions. At March 31, 2013, we had $64.6 million of borrowing availability under the ABL Facility.
Borrowings under the ABL Facility bear interest at a rate equal to an applicable margin plus, at our option, either a base rate or LIBOR. The applicable margin at March 31, 2013 was 1.25% for base rate borrowings and 2.25% for LIBOR borrowings. The applicable margin for borrowings will be reduced or increased based on aggregate borrowing base availability under the ABL Facility and may be further reduced in the event that our fixed charge coverage ratio as calculated under the ABL Facility exceeds a target level. The base rate is equal to the highest of the prime rate, the federal funds overnight rate plus 0.50% and 30-day LIBOR plus 1.00%. In addition to paying interest on outstanding principal under the ABL Facility, we are required to pay an unutilized commitment fee to the lenders quarterly at a rate ranging from 0.25% to 0.50%, depending on the average utilization of the ABL Facility. We also pay customary letter of credit fees quarterly. We may voluntarily repay outstanding loans under the ABL Facility at any time without premium or penalty, other than customary breakage costs with respect to LIBOR loans. The interest rate on the ABL Facility at March 31, 2013 was 2.5%.
The borrowing base for the ABL Facility consists of eligible accounts receivable, inventory, tractor and trailer equipment, real property and certain other equipment.
We recorded $6.5 million in debt issuance costs relating to the ABL Facility. We are amortizing the debt issuance costs over the remaining term of the ABL Facility. The September 2012 amendment to our ABL Facility was treated as a modification under FASB guidance.
9.875% Second-Priority Senior Secured Notes Due 2018
On November 3, 2010 we issued $225.0 million aggregate principal amount of the 2018 Notes. With the proceeds of the issuance of the 2018 Notes, we repaid and redeemed certain of our outstanding notes, redeemed $47.5 million of our 2013 PIK Notes, and paid down a portion of our outstanding borrowings under the previous ABL Facility.
Interest on the 2018 Notes is payable at a rate of 9.875% per annum, semiannually on May 1 and November 1 of each year. The payment obligations of QD LLC and QD Capital under the 2018 Notes are guaranteed by QDI and by all of its 100% owned domestic subsidiaries other than immaterial subsidiaries. The 2018 Notes are senior obligations of QD LLC and QD Capital and are secured by a second-priority lien on certain assets. Pursuant to an intercreditor agreement, the liens on the collateral securing the 2018 Notes rank junior in right of payment to the ABL Facility and obligations under certain hedging agreements and cash management obligations and certain other first-lien obligations.
The 2018 Notes mature on November 1, 2018. Prior to November 1, 2014, we may redeem the 2018 Notes, in whole or in part, at a price equal to 100% of the principal amount of the 2018 Notes redeemed, plus accrued and unpaid interest to the redemption date, plus an additional make-whole premium intended to capture the value of holding 2018 Notes through November 1, 2014, but not less than 1%. During any twelve-month period prior to November 1, 2014, we may also redeem up to 10% of the original aggregate principal amount of the 2018 Notes at a redemption price of 103%, plus accrued and unpaid interest to the redemption date. Additionally, at any time prior to November 1, 2013, we may redeem up to 35% of the principal amount of the 2018 Notes at a redemption price of 109.875%, plus accrued and unpaid interest to the redemption date, with the net proceeds of one or more equity offerings so long as at least 50% of the aggregate original principal amount of the 2018 Notes remains outstanding afterwards. On or after November 1, 2014, we may redeem the 2018 Notes, in whole or in part, at the following prices (expressed as a percentage of principal amount), plus accrued and unpaid interest to the redemption date, if redeemed during the 12-month period commencing on November 1 of the years set forth below:
Period |
Redemption Price |
|||
2014 |
104.938 | % | ||
2015 |
102.469 | % | ||
2016 and thereafter |
100.000 | % |
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We recorded $6.6 million in debt issuance costs relating to the 2018 Notes, of which $6.4 million was related to the new issuance and $0.2 million of unamortized debt issuance costs related to our 10% Senior Notes due 2013 which are no longer outstanding. We are amortizing these costs over the term of the 2018 Notes.
5% Subordinated Acquisition Notes
We issued promissory notes in an aggregate principal amount of $21.3 million as part of the consideration for the Bice acquisition. The promissory notes bear interest at a fixed rate of 5.0% per annum and mature June 1, 2017. Payments of interest only are scheduled for the end of each calendar quarter with principal payable in full at maturity. The promissory notes are unsecured and subordinated. The notes are non-negotiable and non-transferable and may be prepaid at any time without premium or penalty.
Collateral, Guarantees and Covenants
The ABL Facility contains a fixed charge coverage ratio which only needs to be met if borrowing availability is less than a designated amount ranging from $20.0 million to $35.0 million, depending upon the size of our borrowing base. The ABL Facility contains a number of covenants that, among other things, restrict, subject to certain exceptions: (i) our ability to sell assets; (ii) incur additional indebtedness; (iii) prepay other indebtedness, including the 2018 Notes; (iv) pay dividends and distributions or repurchase QDIs capital stock; (v) create liens on assets; (vi) make investments; (vii) make certain acquisitions; (viii) engage in mergers or consolidations; (ix) engage in certain transactions with affiliates; (x) amend certain charter documents and material agreements governing subordinated indebtedness, including the 2018 Notes; (xi) change our business; and (xii) enter into agreements that restrict dividends from QD LLCs subsidiaries. The ABL Facility also contains certain customary affirmative covenants and events of default. The indenture governing the 2018 Notes contains covenants that restrict, subject to certain exceptions, our ability to, among other things: (i) incur additional debt or issue certain preferred shares; (ii) pay dividends on or make other distributions in respect of QDIs common stock or make other restricted payments; (iii) make certain investments; (iv) sell certain assets; (v) create or permit to exist dividend and/or payment restrictions affecting their restricted subsidiaries; (vi) create liens on certain assets to secure debt; (vii) consolidate, merge, sell or otherwise dispose of all or substantially all assets; (viii) enter into certain transactions with affiliates; and (ix) designate subsidiaries as unrestricted subsidiaries. The indenture also provides certain customary events of default, which, if any of them occurs, may result in the principal, interest and any other monetary obligations on the then outstanding 2018 Notes becoming payable immediately.
The payment obligations under the ABL Facility are senior secured obligations of QD LLC and QD Capital and are secured by a first-priority lien on certain assets and guaranteed by QDI and by all of its domestic restricted subsidiaries other than immaterial subsidiaries. The payment obligations of QD LLC and QD Capital under the 2018 Notes are guaranteed by QDI and by all of its domestic subsidiaries other than immaterial subsidiaries. The 2018 Notes, and the guarantees thereof, are senior obligations of QD LLC and QD Capital and are secured by a second-priority lien on certain assets. Pursuant to an intercreditor agreement, the liens on the collateral securing the 2018 Notes rank junior in right of payment to the ABL Facility and obligations under certain hedging agreements and cash management obligations and certain other first lien obligations. We were in compliance with the covenants under the ABL Facility and the 2018 Notes at March 31, 2013.
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Other Liabilities and Obligations
As of March 31, 2013, we had $23.9 million in outstanding letters of credit issued under the ABL Facility that may be drawn by third parties to satisfy some of the obligations described above and certain other obligations. We are required to provide letters of credit to our insurance administrator to ensure that we pay required claims. The letter of credit issued to our insurance administrator had a maximum draw amount of $20.0 million as of March 31, 2013. If we fail to meet certain terms of our agreement, the insurance administrator may draw down the entire letter of credit. The remaining $3.9 million of outstanding letters of credit as of March 31, 2013 relates to various other obligations.
Our obligations for environmental matters, accrued loss and damage claims and long-term pension obligations are considered within Contractual Obligations.
Other Issues
While uncertainties relating to environmental, labor and other regulatory matters exist within the trucking industry, management is not aware of any trends or events likely to have a material adverse effect on liquidity or the accompanying consolidated financial statements. Our credit ratings are affected by many factors, including our financial results, operating cash flows and total indebtedness.
The ABL Facility and the indentures governing the 2018 Notes contain certain limitations on QD LLCs ability to make distributions to QDI. We do not consider these restrictions to be significant, because QDI is a holding company with no significant operations or assets, other than ownership of 100% of QD LLCs membership units. QD LLCs direct and indirect 100% owned subsidiaries are generally permitted to make distributions to QD LLC, which is the principal obligor under the ABL Facility and the 2018 Notes.
FORWARD-LOOKING STATEMENTS AND CERTAIN CONSIDERATIONS
This report, along with other documents that are publicly disseminated by us, contains or might contain forward-looking statements within the meaning of the Securities Exchange Act of 1934, as amended. All statements included in this report and in any subsequent filings made by us with the SEC other than statements of historical fact, that address activities, events or developments that we or our management expect, believe or anticipate will or may occur in the future are forward-looking statements. These statements represent our reasonable judgment on the future based on various factors and using numerous assumptions and are subject to known and unknown risks, uncertainties and other factors that could cause our actual results and financial position to differ materially. We claim the protection of the safe harbor for forward-looking statements provided in the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act and Section 21E of the Exchange Act. Examples of forward-looking statements include: (i) projections of revenue, earnings, capital structure and other financial items, (ii) statements of our plans and objectives, (iii) statements of expected future economic performance, and (iv) assumptions underlying statements regarding us or our business. Forward-looking statements can be identified by, among other things, the use of forward-looking language, such as targets, bodes, believes, expects, estimates, may, will, should, could, seeks, plans, intends, anticipates or scheduled to or the negatives of those terms, or other variations of those terms or comparable language, or by discussions of strategy or other intentions.
Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause our actual results to differ materially from those contemplated by the statements. The forward-looking information is based on various factors and was derived using numerous assumptions. Important factors that could cause our actual results to be materially different from the forward-looking statements include the following risks and other factors discussed under the Item 1A Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2012 and in our Quarterly Reports on Form 10-Q. These factors include:
| the effect of local, national and international economic, credit, capital and labor market conditions on the economy in general, and on the particular industries in which we operate, including excess capacity in the industry, the availability of qualified drivers, changes in fuel and insurance prices, interest rate fluctuations, and downturns in customers business cycles and shipping requirements; |
| our substantial leverage and our ability to make required payments and comply with restrictions contained in our debt arrangements or to otherwise generate sufficient cash from operations or borrowings under our ABL Facility to fund our liquidity needs; |
| competition and rate fluctuations, including fluctuations in prices and demand for transportation services as well as for commodities such as natural gas and oil; |
| our reliance on independent affiliates and independent owner-operators; |
| reclassification of our independent contractors, such as our independent owner-operators, as a result of legislative, judicial or regulatory changes or for any other reason; |
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| a shift away from or slowdown in production in the shale regions in which we have energy logistics operations; |
| our liability as a self-insurer to the extent of our deductibles as well as changing conditions and pricing in the insurance marketplace; |
| increased unionization, which could increase our operating costs or constrain operating flexibility; |
| changes in or our inability to comply with, governmental regulations and legislative changes affecting the transportation industry generally or in the particular segments in which we operate; |
| federal and state legislative and regulatory initiatives, which could result in increased costs and additional operating restrictions upon us or our oil and gas frac shale energy customers; |
| our ability to access and use our salt water disposal wells and other disposal sites and methods in our energy logistics business; |
| our ability to comply with current and future environmental regulations and the increasing costs relating to environmental compliance; |
| potential disruption at U.S. ports of entry; |
| diesel fuel prices and our ability to recover costs through fuel surcharges; |
| our ability to attract and retain qualified drivers; |
| terrorist attacks and the cost of complying with existing and future anti-terrorism security measures; |
| our dependence on senior management; |
| the potential loss of our ability to use net operating losses to offset future income; |
| potential future impairment charges; |
| the interests of our largest shareholder, which may conflict with your or our interests; |
| our ability to successfully identify acquisition opportunities, consummate such acquisitions and successfully integrate acquired businesses and converted and new affiliates and achieve the anticipated benefits and synergies of acquisitions and conversions, the effects of the acquisitions and conversions on the acquired businesses existing relationships with customers, governmental entities, affiliates, owner-operators and employees, and the impact that acquisitions and conversions could have on our future financial results and business performance and other future conditions in the market and industry from the acquired businesses; |
| our ability to execute plans to profitably operate in the transportation business and disposal well business within the energy logistics market; |
| our success in entering new markets; |
| adverse weather conditions; |
| changes in health insurance benefit regulations; |
| our liability for our proportionate share of unfunded vested benefit liabilities, particularly in the event of our withdrawal from any of our multi-employer pension plans; and |
| changes in planned or actual capital expenditures due to operating needs, changes in regulation, covenants in our debt arrangements and other expenses, including interest expenses. |
In addition, there may be other factors that could cause our actual results to be materially different from the results referenced in the forward-looking statements. All forward-looking statements contained in this Quarterly Report on Form 10-Q are qualified in their entirety by this cautionary statement. Forward-looking statements speak only as of the date they are made, and we do not intend to update or otherwise revise the forward-looking statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events.
ADDITIONAL INFORMATION AVAILABLE ON COMPANY WEBSITE
Our most recent Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports may be viewed or downloaded electronically or as paper copies from our website: www.qualitydistribution.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our recent press releases are also available to be viewed or downloaded electronically at www.qualitydistribution.com. We will also provide electronic or paper copies of our SEC filings free of charge on request. We regularly post or otherwise make available information on the Investor Relations section of our website that may be important to investors. Any information on or linked from our website is not incorporated by reference into this Quarterly Report on Form 10-Q.
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ITEM 3Quantitative and Qualitative Disclosures about Market Risk
We are subject to market risks from (i) interest rates due to our variable interest rate indebtedness, (ii) foreign currency fluctuations due to our international operations and (iii) increased commodity prices due to the diesel consumption necessary for our operations. During the three months ended March 31, 2013, we have not held derivative instruments or engaged in other hedging transactions to reduce our exposure to such risks.
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Interest Rate Risk
We are exposed to the impact of interest rate changes through our variable-rate borrowings under the ABL Facility. With regard to the ABL Facility, at QD LLCs option, the applicable margin for borrowings at March 31, 2013 was 1.25% with respect to base rate borrowings and 2.25% with respect to LIBOR borrowings. The applicable margin for such borrowings will be reduced or increased based on aggregate borrowing base availability under the ABL Facility and may be further reduced in the event that our fixed charge coverage ratio as calculated under the ABL Facility exceeds a target level. The base rate under the ABL Facility is equal to the highest of the prime rate, the federal funds overnight rate plus 0.50% and 30 day LIBOR plus 1.00%.
Balance at March 31, 2013 ($ in 000s) |
Interest Rate at March 31, 2013 |
Effect of 1% Increase ($ in 000s) |
||||||||||
ABL Facility |
$ | 153,300 | 2.54 | % | $ | 1,533 | ||||||
|
|
|
|
At March 31, 2013, a 1% point increase in the current per annum interest rate would result in $1.5 million of additional interest expense during the next 12 months. The foregoing calculation assumes an instantaneous 1% point increase in the rates under the ABL Facility and that the principal amount is the amount outstanding as of March 31, 2013. The calculation therefore does not account for the differences in the market rates upon which the interest rates of our indebtedness are based, our option to elect the lowest of three different interest rates under our borrowings or other possible actions, such as prepayment, that we might take in response to any rate increase.
Foreign Currency Exchange Rate Risk
Operating in international markets involves exposure to the possibility of volatile movements in foreign exchange rates. The currencies in each of the countries in which we operate affect:
| the results of our international operations reported in United States dollars; and |
| the value of the net assets of our international operations reported in United States dollars. |
These exposures may impact future earnings or cash flows. Revenue from foreign locations (Canada and Mexico) represented approximately 4.3% of our consolidated revenue for the three months ended March 31, 2013 and 5.4% of our consolidated revenue for the three months ended March 31, 2012. The economic impact of foreign exchange rate movements is complex because such changes are often linked to variability in real growth, inflation, interest rates, governmental actions and other factors. These changes, if material, could cause us to adjust our financing and operating strategies. Therefore, to isolate the effect of changes in currency does not accurately portray the effect of these other important economic factors. As foreign exchange rates change, translation of the income statements of our international subsidiaries into U.S. dollars affects year-over-year comparability of operating results. While we may hedge specific transaction risks, we generally do not hedge translation risks because we believe there is no long-term economic benefit in doing so.
Assets and liabilities for our Canadian operations are matched in the local currency, which reduces the need for dollar conversion. Our Mexican operations use the United States dollar as their functional currency. Any foreign currency impact on translating assets and liabilities into dollars is included as a component of shareholders deficit. Our revenue results for the three months ended March 31, 2013 were negatively impacted by less than a $0.1 million in foreign currency movement, primarily due to the weakening of the Canadian dollar against the United States dollar.
Changes in foreign exchange rates that had the largest impact on translating our international operating profits for the first three months of 2013 related to the Canadian dollar versus the United States dollar. We estimate that a 1% adverse change in the Canadian dollar foreign exchange rate would have decreased our revenues by approximately $0.1 million for the three months ended March 31, 2013, assuming no changes other than the exchange rate itself. Our intercompany loans are subject to fluctuations in exchange rates primarily between the United States dollar and the Canadian dollar. Based on the outstanding balance of our intercompany loans at March 31, 2013, a change of 1% in the exchange rate for the Canadian dollar would cause a change in our foreign exchange result of less than $0.1 million.
Commodity Price Risk
The price and availability of diesel fuel are subject to fluctuations due to changes in the level of global oil production, seasonality, weather, global politics and other market factors. Historically, we have been able to recover a majority of fuel price increases from our customers in the form of fuel surcharges. The price and availability of diesel fuel can be unpredictable as well as the extent to which fuel surcharges can be collected to offset such increases. In the three months ended March 31, 2013 and 2012, a majority of fuel costs were covered through fuel surcharges.
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ITEM 4Controls and Procedures
Evaluation of disclosure controls and procedures
As required by Exchange Act Rules 13a-15(b) and 15d-15(b), management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on their evaluation, management concluded our disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) were effective as of March 31, 2013 to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and were effective as of March 31, 2013 to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the quarter ended March 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Other than reported in Item 3Legal Proceedings of our Annual Report on Form 10-K for the year ended December 31, 2012, Note 20. Commitments and Contingencies to our audited consolidated financial statements contained in such Form 10-K and Note 14. Commitments and Contingencies to our unaudited consolidated financial statements included in this report, we are not currently a party to any material pending legal proceedings other than routine matters incidental to our business and no material developments have occurred in any proceedings described in such Form 10-K.
You should carefully consider the factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012 included under Item 1A Risk Factors in addition to the other information set forth in this report. The risks described in our Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q are not the only risks facing our Company.
We may be subject to the risks set forth below:
Reclassification of our independent contractors, such as our independent owner-operators, as employees could increase our costs and adversely impact our business.
We use a significant number of independent contractors, such as our independent owner-operators, in all three segments of our business, consistent with long-standing industry practices. Regulatory authorities and private parties have recently asserted within the trucking industry that some independent contractors should be classified as employees based upon their interpretations of existing rules and regulations. Legislative, judicial, or regulatory (including tax) authorities could also introduce proposals or assert interpretations of existing rules and regulations that would change to employee the classification of a significant number of independent contractors doing business with us. The costs associated with reclassification, including any related regulatory action or litigation, could have a material adverse effect on our results of operations and our financial position.
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ITEM 2Unregistered Sales of Equity Securities and Use of Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES
The following table lists QDIs share repurchases and deemed share repurchases during the three-months ended March 31, 2013. On November 20, 2012, we announced a share repurchase program pursuant to which our Board of Directors authorized the repurchase of up to $15.0 million of our common stock in an open-ended repurchase program (the Repurchase Program). Stock has been, and may in the future be, purchased pursuant to the Repurchase Program, from time to time, in the open market or through private transactions, subject to market conditions. Subject to applicable laws, repurchases under the Repurchase Program may be made at such times and in such amounts as we deem appropriate and may be made pursuant to Rule 10b5-1. We are not obligated to purchase any shares under the Repurchase Program, and it can be discontinued at any time that we feel additional purchases are not warranted. As of March 31, 2013, we have repurchased approximately 1.1 million shares valued at $7.1 million under the Repurchase Program. The remaining shares deemed repurchased were surrendered by employees in order to satisfy statutory tax withholding obligations in connection with the vesting of stock-based compensation awards.
Period |
Total Number of Shares Purchased (1) |
Average Price Paid Per Share |
Total Number of Shares Purchased as Part of Publicly Announced Program (1) |
Maximum Dollar Value of Shares That May Yet Be Purchased Under the Program (in thousands) (2) |
||||||||||||
January 2013 |
364,745 | $ | 6.83 | 364,745 | $ | 8,842 | ||||||||||
February 2013 |
110,900 | $ | 7.85 | 110,900 | $ | 7,969 | ||||||||||
March 2013 |
7,309 | $ | 7.94 | 6,900 | $ | 7,914 | ||||||||||
|
|
|
|
|||||||||||||
Total |
482,954 | $ | 7.09 | 482,545 | $ | 7,914 | ||||||||||
|
|
|
|
(1) | The difference between the Total Number of Shares Purchased and the Total Number of Shares Purchased as Part of Publicly Announced Program reflects shares deemed repurchased that were surrendered by employees in order to satisfy statutory tax withholding obligations in connection with the vesting of stock-based compensation awards. |
(2) | Represents the amount remaining in the Repurchase Program as of the end of the period noted. |
ITEM 3Defaults Upon Senior Securities
None.
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ITEM 4Mine Safety Disclosures
Not applicable.
None.
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Exhibit No. |
Description | |
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification of Chief Executive Officer and Chief Financial Officer pursuant To 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101 | Interactive Data File |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
QUALITY DISTRIBUTION, INC. | ||||
May 9, 2013 | /S/ GARY R. ENZOR | |||
GARY R. ENZOR, | ||||
CHIEF EXECUTIVE OFFICER | ||||
(PRINCIPAL EXECUTIVE OFFICER) | ||||
May 9, 2013 | /S/ JOSEPH J. TROY | |||
JOSEPH J. TROY, | ||||
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) |
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Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Gary R. Enzor, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of Quality Distribution, Inc.: |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c) evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: May 9, 2013 |
/s/ Gary R. Enzor |
GARY R. ENZOR |
CHIEF EXECUTIVE OFFICER |
Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Joseph J. Troy, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of Quality Distribution, Inc.: |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c) evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: May 9, 2013 |
/s/ Joseph J. Troy |
JOSEPH J. TROY |
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER |
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Each of the undersigned in connection with this Quarterly Report of Quality Distribution, Inc. (the Company) on Form 10-Q for the quarterly period ended March 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the Report), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the undersigneds knowledge:
(1) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: May 9, 2013 |
/s/ Gary R. Enzor |
GARY R. ENZOR |
CHIEF EXECUTIVE OFFICER |
Date: May 9, 2013 |
/s/ Joseph J. Troy |
JOSEPH J. TROY |
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER |
This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
A signed original of this written statement required by Section 906 has been provided to Quality Distribution, Inc. and will be retained by Quality Distribution, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
Variable Interest Entities - Additional Information (Detail) (USD $)
In Millions, unless otherwise specified |
3 Months Ended |
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Mar. 31, 2013
Location
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Variable Interest Entity [Line Items] | |
Holding variable interest in number of VIEs | 1 |
VIE dry bulk business
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Variable Interest Entity [Line Items] | |
Aggregated loans receivable | $ 3.0 |
Number of terminals | 3 |
Restructuring Accrual Activity (Detail) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended |
---|---|
Mar. 31, 2013
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Restructuring Cost and Reserve [Line Items] | |
Balance | $ 2,149 |
Additions | 155 |
Payments | (142) |
Reductions | (115) |
Balance | $ 2,047 |
Stock-Based Compensation - Additional Information (Detail)
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3 Months Ended |
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Mar. 31, 2013
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Minimum
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Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | |
Vesting term | 2 years |
Maximum
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Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | |
Vesting term | 4 years |
Segment Reporting - Additional Information (Detail)
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3 Months Ended |
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Mar. 31, 2013
Entity
Segment
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Chemical Logistics
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Segment Reporting Information [Line Items] | |
Number of reportable business segments | 3 |
Independent affiliates | 25 |
Energy Logistics
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Segment Reporting Information [Line Items] | |
Independent affiliates | 2 |
Reconciliation of Numerators and Denominators of Basic and Diluted Income Per Share Per Share (Detail) (USD $)
In Thousands, except Per Share data, unless otherwise specified |
3 Months Ended | |
---|---|---|
Mar. 31, 2013
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Mar. 31, 2012
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Net income (numerator) | $ 9,144 | $ 6,700 |
Net income (numerator), diluted | $ 9,144 | $ 6,700 |
Shares (denominator) | 26,625 | 24,546 |
Weighted Average Shares, Diluted | 27,134 | 25,413 |
Basic income available to common shareholders, Per-share amount | $ 0.34 | $ 0.27 |
Diluted income available to common shareholders, Per-share amount | $ 0.34 | $ 0.26 |
Stock Options
|
||
Shares (denominator) | 409 | 675 |
Diluted income available to common shareholders, Per-share amount | $ (0.01) | |
Unvested restricted stock
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Shares (denominator) | 91 | 166 |
Stock warrants
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Shares (denominator) | 9 | 26 |
Segment Reporting (Tables)
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3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2013
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Summarized Segment Data and Reconciliation to Income before Income Taxes | Summarized segment data and a reconciliation to income before income taxes as follows (in thousands):
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Income Taxes - Additional Information (Detail) (USD $)
In Millions, unless otherwise specified |
3 Months Ended | ||
---|---|---|---|
Mar. 31, 2013
|
Mar. 31, 2012
|
Dec. 31, 2012
|
|
Income Taxes [Line Items] | |||
Unrecognized tax benefit | $ 1.7 | $ 1.7 | |
Unrecognized tax benefit that, if recognized, would favorably affect the effective income tax rate in any future periods | 1.0 | ||
Unrecognized tax benefits related to tax positions for which it is reasonably possible that the total amounts could significantly change during the next twelve months due to expiration of the applicable statute of limitations | 0.1 | ||
Net of federal tax benefit accrued for interest | 0.4 | ||
Accrued for penalties | 0.6 | 0.2 | |
Effective tax rate for tax provision | 38.60% | 5.20% | |
Valuation allowance rate for deferred tax assets | 100.00% | ||
Maximum
|
|||
Income Taxes [Line Items] | |||
Net changes to gross unrecognized tax benefits | $ 0.1 |
Summary of Significant Accounting Policies (Tables)
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3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2013
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Estimated Fair Values of Assets Acquired | The purchase price of the combined acquisitions has initially been allocated to the assets acquired according to their estimated fair values at the time of the acquisitions as follows:
|
Employee Benefit Plans - Additional Information (Detail) (USD $)
In Millions, unless otherwise specified |
3 Months Ended |
---|---|
Mar. 31, 2013
CompensationPlan
|
|
Defined Benefit Plan Disclosure [Line Items] | |
Number of noncontributory defined benefit plans | 2 |
Pension plan contribution by Company | $ 0.6 |
Expected contribution during the remainder of the 2013 | 2.3 |
Number of employer pension plans | 3 |
Multi-employer pension employee percentage | 2.50% |
Contingent liability | 73.8 |
Central States Southeast And Southwest Areas Pension Plan
|
|
Defined Benefit Plan Disclosure [Line Items] | |
Contingent liability | $ 68.8 |
Goodwill within Segments (Detail) (USD $)
In Thousands, unless otherwise specified |
Mar. 31, 2013
|
Dec. 31, 2012
|
---|---|---|
Intangible Assets Goodwill And Other Assets [Line Items] | ||
Goodwill | $ 104,294 | $ 104,294 |
Energy Logistics
|
||
Intangible Assets Goodwill And Other Assets [Line Items] | ||
Goodwill | 71,339 | 71,339 |
Intermodal
|
||
Intangible Assets Goodwill And Other Assets [Line Items] | ||
Goodwill | 31,410 | 31,410 |
Chemical Logistics
|
||
Intangible Assets Goodwill And Other Assets [Line Items] | ||
Goodwill | $ 1,545 | $ 1,545 |
Estimated Fair Values of Assets Acquired (Detail) (USD $)
In Thousands, unless otherwise specified |
Mar. 31, 2013
|
|||
---|---|---|---|---|
Asset Acquisition [Line Items] | ||||
Equipment | $ 26,557 | |||
Non-compete agreements | 400 | |||
Tradename | 700 | |||
Customer-related intangibles | 12,320 | |||
Goodwill | 48,218 | |||
Contingent consideration | (6,800) | [1] | ||
Fair Value of Assets Acquired, Total | $ 81,395 | |||
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Components and Changes to Accumulated other Comprehensive Loss (Detail) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended | |
---|---|---|
Mar. 31, 2013
|
Mar. 31, 2012
|
|
Accumulated Other Comprehensive Income (Loss) [Line Items] | ||
Beginning balance | $ (31,752) | |
Net gain (loss) on foreign currency translation, net of tax | 35 | (39) |
Ending balance | (31,331) | (31,032) |
Foreign currency translation
|
||
Accumulated Other Comprehensive Income (Loss) [Line Items] | ||
Beginning balance | (1,180) | (1,137) |
Net gain (loss) on foreign currency translation, net of tax | 35 | (39) |
Ending balance | (1,145) | (1,176) |
Pension benefits
|
||
Accumulated Other Comprehensive Income (Loss) [Line Items] | ||
Beginning balance | (30,572) | (30,244) |
Amortization of prior service cost | 24 | 24 |
Amortization of gain | 362 | 364 |
Ending balance | $ (30,186) | $ (29,856) |
Commitment and contingencies (Detail) (USD $)
In Millions, unless otherwise specified |
Mar. 31, 2013
Site
|
Dec. 31, 2012
Location
|
---|---|---|
Commitment And Contingencies [Line Items] | ||
Number of Sites | 23 | 23 |
Reserves | $ 8.5 | $ 9.0 |
Multi-party sites
|
||
Commitment And Contingencies [Line Items] | ||
Number of Sites | 15 | 15 |
Reserves | 1.9 | 1.7 |
Sole party sites
|
||
Commitment And Contingencies [Line Items] | ||
Reserves | 6.6 | |
Sole party sites | Bridgeport, New Jersey
|
||
Commitment And Contingencies [Line Items] | ||
Number of Sites | 1 | 1 |
Reserves | 4.1 | 4.8 |
Sole party sites | William Dick, Pennsylvania
|
||
Commitment And Contingencies [Line Items] | ||
Number of Sites | 1 | 1 |
Reserves | 0.7 | 0.7 |
Sole party sites | Other Properties
|
||
Commitment And Contingencies [Line Items] | ||
Number of Sites | 6 | 6 |
Reserves | $ 1.8 | $ 1.8 |
Summary of Antidilutive Securities Not Included in Calculation of Diluted Earnings Per Share (Detail)
In Thousands, unless otherwise specified |
3 Months Ended | |
---|---|---|
Mar. 31, 2013
|
Mar. 31, 2012
|
|
Stock Options
|
||
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items] | ||
Antidilutive securities excluded from computation of earnings per share, amount | 2,106 | 1,654 |
Unvested restricted stock
|
||
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items] | ||
Antidilutive securities excluded from computation of earnings per share, amount | 394 | 232 |
Variable Interest Entities
|
3 Months Ended |
---|---|
Mar. 31, 2013
|
|
Variable Interest Entities | 2. Variable Interest Entities At March 31, 2013, we have a variable interest in one variable interest entity (“VIE”), for which we are not the primary beneficiary. We have concluded, based on our qualitative consideration of our contracts with the VIE, the operating structure of the VIE and our role with the VIE, that we do not have the power to direct the activities that most significantly impact their economic performance. Therefore, we are not required to consolidate the operations of this VIE. This VIE is an independent affiliate that is directly engaged in the dry bulk and chemical business through the management of three trucking terminals in the North East region of the U.S. As such, this business is highly seasonal. We are involved with this VIE as a non-controlling interest. Our maximum exposure to loss as a result of our involvement with this unconsolidated VIE is limited to our recorded loans receivable which aggregated approximately $3.0 million at March 31, 2013. These loans are secured by a second- priority lien on certain assets of the VIE. |
Guarantor Subsidiaries - Additional Information (Detail)
|
3 Months Ended |
---|---|
Mar. 31, 2013
|
|
Condensed Financial Statements, Captions [Line Items] | |
Second-Priority Senior Secured Notes, maturity date | 2018 |
Qd Llc
|
|
Condensed Financial Statements, Captions [Line Items] | |
Percentage of ownership by QDI | 100.00% |
QD LLC and QD Capital
|
|
Condensed Financial Statements, Captions [Line Items] | |
Percentage of ownership by QDI | 100.00% |
Guarantor Subsidiaries
|
|
Condensed Financial Statements, Captions [Line Items] | |
Equity investment method, ownership interest | 100.00% |
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