Item 8.01. Other Events.
The Company is supplementing the risk factors set forth under “Item 1A. Risk Factors” in its Annual Report on Form 10-K for the year ended December 31, 2021, filed on February 25, 2022 (the “Form 10-K”), with the additional risk factors set forth below. The risk factors below should be read in conjunction with the other risk factors set forth in the Form 10-K.
Our existing and future indebtedness could limit our flexibility in operating our business or adversely affect our business and our liquidity position.
As of August 31, 2022, following our acquisition of CFI, we have a significant amount of indebtedness outstanding, including $450 million under the Term Facility of the 2022 Credit Agreement and approximately $44.1 million of debt and financing lease obligations associated with revenue equipment. Our indebtedness may fluctuate from time to time in the future for various reasons, including fluctuations in results of operations, capital expenditures, and potential acquisitions. Our current indebtedness, as well as any future indebtedness, could, among other things:
•require us to dedicate a substantial portion of our cash flow to payments on our debt, reducing our ability to use our cash flow to fund capital expenditures and working capital and other general operational requirements;
•expose us to the risk of increased interest rates relating to any of our indebtedness at variable rates;
•limit our flexibility to plan for and react to changes in our business and/or changing market conditions;
•place us at a competitive disadvantage relative to some of our competitors that have less, or less restrictive, debt than us;
•limit our ability to pursue acquisitions or cause us to make non-strategic divestitures; and
•increase our vulnerability to general adverse economic and industry conditions, including changes in interest rates or a downturn in our business or the economy.
The occurrence of any one of these events could have a material adverse effect on our business, financial condition and results of operations or cause a significant decrease in our liquidity and impair our ability to pay amounts due on our indebtedness. The 2022 Credit Agreement contains usual and customary events of default and negative covenants for a facility of this nature including, among other things, restrictions on our ability to incur certain additional indebtedness or issue guarantees, to create liens on our assets, to make distributions on or redeem equity interests (subject to certain exceptions, including that (a) we may pay regularly scheduled dividends on our common stock not to exceed $10,000,000 during any fiscal year and (b) we may make any other distributions so long as we maintain a net leverage ratio not greater than 2.50 to 1.00), to make investments and to engage in mergers, consolidations, or acquisitions. In addition, the 2022 Credit Agreement contains usual and customary financial covenants, including (i) a maximum net leverage ratio of 2.75 to 1.00, measured quarterly on a trailing twelve-month basis, and (ii) a minimum interest coverage ratio of 3.00 to 1.00, measured quarterly on a trailing twelve-month basis.
Our acquisition of CFI presents certain additional risks to our business and operations.
The acquisition of CFI is the largest acquisition we have made in our history. Given the nature and size of CFI, as well as the structure of the acquisition as a carveout from TFI, the acquisition of CFI presents the following risks, in addition to those risks under “Item 1A. Risk Factors” in our Form 10-K.
Although we anticipate achieving synergies in connection with the acquisition of CFI, we also expect to incur costs to implement such cost savings measures. Additionally, these synergies could be delayed and may not be achieved. The integration could result in significant unexpected costs. Transaction costs and integration costs related to the acquisition of CFI could adversely affect our results of operations in the period in which such charges are recorded. The acquisition of CFI involves numerous risks, including:
•management’s attention may be diverted from other areas of the Company, especially given the size of CFI and the complexity of integrating CFI into the Company;
•many services, including certain aspects of benefits, payroll, human resources, and information technology, were shared among CFI and other divisions of TFI. Following the acquisition, CFI will continue to provide certain services to TFI and TFI will continue to provide certain services to CFI until such services can be transferred to the applicable party and our inability to provide or receive such transition services could cause disruptions to our employees, drivers, business, and integration;
•prior to the acquisition, our management team had limited experience with temperature-controlled freight and no experience with Mexican operations and therefore may be challenged in managing the temperature-controlled and Mexican operations, particularly if there were a loss of the CFI management team;
•potential adverse reactions or changes to business relationships, including with customers, employees, drivers, and vendors, resulting from the completion of the acquisition;
•increased risk of material deficiencies or material weaknesses in internal controls over financial reporting related to CFI’s internal controls;
•the potential loss of professional drivers of CFI or our historical operations due to differences in pay, policies or culture, or other factors, or an increase in costs of recruiting and retaining professional drivers;
•the challenges and unanticipated costs associated with integrating complex organizations, systems, operating procedures, information technology, compliance programs, technology, networks, and other assets;
•the inability to successfully combine our respective businesses in a manner and on a timeline that permits us to achieve the cost savings and other anticipated benefits from the acquisition;
•the challenges associated with known and unknown legal or financial liabilities associated with the acquisition, for which there is no escrow or representation and warranty insurance under the purchase agreement;
•the difficulties in retaining key management and other key employees; and
•the challenge of managing the expanded operations of a larger and more complex company.
These disruptions and difficulties, if they occur, may cause us to fail to realize the cost savings, synergies, revenue enhancements, and other benefits that we expect to result from integrating CFI and may cause material adverse short- and long-term effects on our operating results, financial condition, and liquidity.
Even if we are able to integrate CFI’s operations into our operations, we may not realize the full benefits of the cost savings, synergies, revenue enhancements, or other benefits that we may have expected at the time of acquisition. Also, the cost savings and other benefits from this acquisition may be offset by unexpected costs incurred in integrating CFI, increases in other expenses, or problems in the business unrelated to this acquisition.
In addition, CFI’s Mexican operations subject us to general international business risks, including:
•foreign currency fluctuation;
•changes in Mexico's economic strength;
•difficulties in enforcing contractual obligations and intellectual property rights;
•burdens of complying with a wide variety of international and US export, import, business procurement, transparency, and corruption laws, including the US Foreign Corrupt Practices Act;
•changes in trade agreements and US-Mexico relations;
•theft or vandalism of our revenue equipment; and
•social, political, and economic instability.