There is a major change coming to the North American trucking industry. This change will have an impact on every motor carrier that moves freight in the United States, including Canadian and Mexican truckers that move goods in and out of the United States. The United States Federal Motor Carrier Safety Administration (FMCSA) plans to fully implement a new safety initiative known as Comprehensive Safety Analysis 2010 or CSA2010.

The goal of the program is to achieve a greater reduction in large truck and bus crashes, injuries and fatalities, while maximizing the resources of FMCSA and its State partners and it is expected to be fully operational by the end of 2010. According to Jeff Davis, Vice President, Safety and Human Resources, Jet Express Inc., Dayton, Ohio., this represents the biggest change in safety procedures in the trucking industry since the 1930’s.

The implementation of CSA2010 will result in three major changes.

1. The motor vehicle record or driver abstract will be changed.
2. Individual drivers are going to be audited and each will be given a personal safety rating.
3. An updated safety rating for each driver and trucking company will be issued every 30 days.

The personal safety rating will determine whether or not the driver is considered eligible to continue driving, requires some sort of “intervention,” or is deemed “unfit” to continue operating a commercial vehicle. Similarly motor carriers will face increased scrutiny under CSA2010 and will face harsh fines, corrective action plans and even risk having their entire fleets placed out of service due to violations.

The FMCSA has estimated that under their old system, fewer than 2% of carriers were audited annually, with no driver audits. Under CSA2010, all carriers, and eventually all drivers, with sufficient safety data available, will receive a safety rating that is periodically updated.

In a recent presentation at the Driving for Profit Seminar in Mississauga, Ontario, Jeff Davis outlined the four “duties of compliance” for all truckers. They include:

• Duty to comply with safety regulations
• Duty to detect violations
• Duty to prevent violations
• Duty to not aid and abet in violation of regulations

There are four major elements to CSA2010. They are Measurement, Intervention, Safety Evaluation and COMPASS (the safety information data base). The Measurement system will group the safety performance data of motor carriers and drivers into seven categories, called Basics – Behavioural Analysis Safety Improvement Categories. The seven BASICS are:

- Unsafe Driving
- Fatigued Driving
- Driver Fitness
- Controlled Substances/Alcohol
- Vehicle Maintenance
- Improper Loading/Cargo
- Crash Indicator

The data will be scored and weighted based on its relationship to crash causation. Based on a carrier’s score with each BASIC, the measurement system will trigger when the Agency should begin to “intervene” with a motor carrier and when its performance has reached the proposed “unfit” threshold. The measurement system will activate a set of progressive interventions that move the carrier from a warning letter through to a Comprehensive Notice of Claim/Settlement Agreement.

The safety data will also be used to categorize carriers into “continue to operate,” “marginal” (with ongoing intervention) and “unfit.” Carriers will also be ranked against their peers in their category (e. g. 5 power units or less). The ratings will be updated every 30 days. The CSA2010 data will be aligned with COMPASS, an FMCSA-wide initiative that is leveraging new technology to transform the way that FMCSA does business. The data by carrier and by driver will be available via the internet.

The CSA2010 will have some profound effects on the industry. Carriers will be able to see where they rank against their peer group on safety. Shippers will be able to determine the quality of the safety operations of their trucking company partners. In addition to FMCSA pressure, there will be pressure from shippers to take corrective action or lose out on business.

There will likely be heightened competition for drivers with good safety records. Safe drivers result in fewer accidents and reduced insurance costs. They also improve company safety scores. As a result, there will likely more emphasis placed on hiring and training safe drivers. CSA2010 could likely have the effect of either increasing the compensation for safe drivers or creating an incentive pay scheme to reward safe driving performance. Drivers with consistently poor safety records could face challenges in finding employment in the industry.

A trial of the CSA2010 is scheduled for a designated number of states in mid year 2010. The FMCSA has reviewed audits conducted in a recent five-year period and estimates that 47.9% of companies would have failed audits under the new rules! Under CSA2010, all carriers and all drivers will be audited annually. Over 70% of the roadside inspections will be the result of either speeding or obvious mechanical defects (worn tires, malfunctioning lights, etc.). Once an inspection has been initiated, the inspector is required to cover an extensive checklist of items as mandated by FMCSA. CSA2010 will cause companies to place more emphasis on the maintenance of their fleets. All motor carriers that do business in the United States should proactively create plans to upgrade their fleet safety procedures and safe driving practices to make sure they receive a good score in their first audit and on every subsequent audit.

Anyone with even a remote connection to the trucking industry is aware of the challenges that this industry is currently facing. Declining volumes, rate decreases, excess capacity and significant year/year profit declines are all compelling reasons to look at other industries as investment opportunities.

However, recently there have seen some signs that demand has hit bottom and utilization rates have begun to climb again. Freight volume in trucking’s spot market rose 10 percent in October, said TransCore, which reported the first year-over-year increase this year in the TransCore Freight Index. In addition, there is an expectation that there will be consolidation in the industry in the coming year. Lenders, who have been extending payment terms to distressed truckers, are likely to “call in their chips” as the market for used trucking equipment and freight terminals begins to improve.

While the LTL sector has always been an attractive candidate for acquisition, due to the opportunity to consolidate terminals and reduce overheads, the truckload sector presents some interesting possibilities at this time. In a recent white paper co-authored by John Moses and James C. Westphal of the Merge Global Value Creation Institute , these two gentlemen make the case that now is a great time to make an acquisition in this sector.

“Modest continued demand growth coupled with the removal of some of the weaker players, may serve to reduce excess capacity and lead to rate increases in 2010. If capacity remains tight into 2012, truckers may be less likely to invest in new capacity anytime soon while trucks purchased in the 2005-2006 binge years are retired from the OTR fleet. In fact, when new orders for tractors do return in a meaningful way, recent OEM consolidation and rationalization of manufacturing capacity will limit how quickly new tractors enter the market.”

The authors make the case that “in the past, strategically motivated mergers and acquisitions (M&A) in the truckload sector has been relatively limited – particularly when compared to other freight sectors such as forwarding, logistics or less-than-truckload (LTL). There are a number of reasons for this:

• Organic growth options – . . . . growth in the truckload sector lends itself to organic growth, which also avoids the added cost of acquisition premiums.

• The lack of a clear strategic impetus – Traditional rationales for acquisitions – such as rationalization of overhead or horizontal integration of related services – have been viewed as having limited applicability in truckload or at least as being insufficient to inspire potential acquirers to incur the costs and undertake the risks associ¬ated with acquisitions.

• Concerns over integration – In many cases, the founder of a company is a key element of the company’s identity and there are concerns about integration of cultures.

• Unclear value-creation opportunities – Both private and public equity investors have generally not appreciated the nuances of truckload operations and the ability of well-positioned and well-managed companies have to create shareholder value.”

The authors argue that some of the concerns about M&A listed above need to be reconsidered. “Though it is impossible to know precisely how the nascent economic recovery will play out, some believe that there is substantial risk that the industry will be caught short of capacity and experience a strong upcycle in pricing and profitability over the next three to four years. Though trucking management has been focused on cost-cutting and often their very survival, some argue that we have reached an inflection point where the attention needs to shift back to growth and how to best take advantage of the emerging recovery.”

The conversion of private fleets to asset based transportation providers is likely to continue as more manufacturers look for ways to reduce costs. The pressure to restrain capital expenditures and expenses should provide further impetus to the movement to outsource freight transportation.

“Distressed trucking companies have become available for little or no acquisition premiums. While careful consideration must be given to how a target’s portfolio of business fits with the existing business, distressed acquisitions offer prudent buyers the opportunity to rapidly accelerate growth in a single transaction. These valuations are even more compelling when considering what is likely to be an extremely supply-constrained industry over the next several years, as demand recovers.”

Moreover, as more truckload carriers leave the industry, this will further reduce capacity and make the opportunities for financial success in this sector much more viable. Increasing demand coupled with constrained capacity could be a formula for attractive profits for those with the vision and resources to make well planned and executed acquisitions. This could be a classic case of being in the right place at the right time.

The authors also argue that there are opportunities for synergies through effective use of technology. Advances in information technology can enable “more efficient analysis of customer profitability and linking tactical dispatching decisions to advanced yield management systems. While the fixed costs associated with these IT systems aren’t large enough to offer significant operating leverage, they are often out of reach for small and medium-sized trucking companies. And in a business where enhancing a company’s margin per mile by a couple pennies can increase profitability (and value) by 20 percent or more, the benefit of such sharing is significant.”

Cultural integration issues have long been a concern in mergers across all industries and have played a key role in the high failure rates that have been experienced. The owners of trucking companies founded in the 60”s, 70”s and 80”s are now in their 60s and 70s. Many are seeking to reduce “their involvement in day-to-day operations (and looking for options to monetize their life’s work), and relying increasingly on professional managers in more corporatized environments. Integration of asset-light (or human resource-heavy) brokerage or intermodal operations can also be successfully accomplished, as long as buyers understand the incentive structure and ensure that employees are motivated following an acquisition.”

The authors conclude by stating that “we believe that the truckload sector remains misunderstood. Superior management teams can create value through well developed growth strategies with strong execution. While growth requires capital (considerably less for brokerage), incremental improvements go a long way in creating value. Given the likely magnitude of a supply-demand imbalance in an upswing, acquisitions can be a particularly potent strategic tool for growth in the current environment for those who are bold and capable.”

Warren Buffett has made an offer to buy the Burlington Northern Santa Fe Railway for 34 billion dollars in cash and stock. The esteemed investor has stated on several occasions that good investment ideas are hard to come by. Fifteen years ago he stated that between him and his close colleague Charlie Munger, combined they were quite happy if they could come up with one good investment idea each year. Undoubtedly, BNSF is one of those ideas.

It is worth noting that there are several companies in which Buffet’s company, Berkshire Hathaway, has held close to 20% positions for many years. Breaching the 20% line is a big deal for Warren Buffett.

"Our country's future prosperity depends on its having an efficient and well-maintained rail system," Buffett said in a statement. "Conversely, America must grow and prosper for railroads to do well." He also added that "It's an all-in wager on the economic future of the United States. . . . I love these bets."

Speaking alongside fellow multi-billionaire, Bill Gates, at Columbia Business School in New York City last Thursday in a CNBC telecast, Buffett said: “I’m willing to bet a lot of money - $34 billion to be specific – on the fact that 10 years from now, 20 years from now, 50 years from now, there will be more and more goods being moved by rail and it will be better for the country and it will better for the shareholders of Burlington Northern.”

What is behind Buffet’s Strategy?

1. Railroads are consistent Profit Machines

This old-fashioned form of transportation has been modernized in recent years, with more-efficient trains, fewer employees and higher profit margins. BNSF has invested in its own infrastructure. They have made capital improvements (extending 2 lane tracks to 4 lane tracks) and are ready for growth.

2. Huge Barriers to Entry

The industry has consolidated with 2 Canadian railways, two west coast railways and two east coast class 1 rails. There are limited competitors in the rail sector of the market. The business is very capital intensive and expensive to run. Only a select few companies can compete in this arena.

3. Leadership

In Matt Rose as Chairman, CEO and President and John Lanigan as Chief Marketing Officer, BNSF has (along with Hunter Harrison at CN), two of the best leadership talents in the industry.

4. Rising Fuel Costs Favour Rail Transport over Truck Transport

Fuel costs are likely to spike again. Mr Buffet stated that “The Burlington Northern last year moved on average a ton of freight 470 miles on one gallon of diesel – that is far, far more efficient than what takes place over the highways. . . . You have a situation where overall they use a third less fuel, they put far fewer pollutants into the atmosphere than trucks will – one train will supplant 280 trucks or so on the road,” he said. In addition, BNSF has opportunities to make major reductions in its carbon footprint. Buffett likes the environmentally friendly aspects of rail.

5. BNSF primarily operates on the West Coast & Mid-West

The West coast is growth. Burlington Northern carries coal and timber from the West, grain from the Midwest and imports arriving directly from Mexico and Canada, as well as through California ports.

6. The Asia Connection

The West Coast has the key L.A. and Long Beach terminals that bring in goods from China/Asia. In the future the US will be doing more business with China/Asia (West Coast) and less business with Europe (East Coast).

7. Intermodal has great Growth Prospects

We are coming out of a recession. Railroads are a cyclical business. Intermodal has been hit but at some point it will bounce back. As fuel costs increase, the intermodal option becomes more rate competitive than truck. BNSF draws a third of its revenues from intermodal transportation, with half of it being Asia business. With its recently signed contract with JB Hunt, it has aligned itself with an industry leader and is well positioned to dominate in this sector.

8. Heavy involvement in the PRB

The PRB sells cheap coal... cheap energy that people need to heat and air condition their homes. Americans might be buying less flat screen TV's during the resetting economy, but they will need to heat their homes as winter arrives.

9. Potential to create a Privately Held National Railway

Buffet already has a large stake in Norfolk Southern, one of the two large eastern USA class 1 railway players. His long term plan may be to create a large truly national player that could dominate the U.S. transportation industry.

There is no doubt that the BNSF faces a few challenges. With the L.A. ports facing congestion issues in the past, some freight has been diverted to Mexican, Canadian (Prince Rupert) or east coast ports. As the U.S. dollar declines in value, this makes it more costly to import Asian goods. As fuel costs increase, we may see more goods produced in North America and less in Asia. However, the offset to these issues is that the L.A. ports are positioned to handle significant volume. A low U.S. dollar may spur more exports through these ports. The overall value proposition of rail transportation still remains strong. This looks like a winning move for the “Sage of Omaha.”

Factoring has been called the world’s second oldest profession. According to Wikipedia, it is a financial transaction whereby a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount in exchange for immediate money with which to finance continued business. The sale of the receivables essentially transfers ownership of the receivables to the factor, indicating the factor obtains all of the rights and risks associated with the receivables.

Factoring is a method used by a firm to obtain cash when the available Cash Balance held by the firm is insufficient to meet current obligations and accommodate its other cash needs, such as new orders or contracts. The use of Factoring to obtain the cash allows the firm to maintain a smaller ongoing Cash Balance. By reducing the size of its Cash Balances, more money is made available for investment in the firm’s growth or survival.

A company sells its invoices at a discount to their face value when it calculates that it will be better off using the proceeds to bolster its own growth than it would be by effectively functioning as its "customer's bank." Accordingly, Factoring occurs when the rate of return on the proceeds invested in production exceed the costs associated with Factoring the Receivables. Therefore, the trade-off between the return the firm earns on investment in production and the cost of utilizing a Factor is crucial in determining both the extent Factoring is used and the quantity of cash the firm holds on hand.

During these trying times, trucking firms have been challenged to maintain cash flow, the lifeline of any business. Shippers have been taking advantage of the reduced freight volumes as leverage to not only reduce rates but extend payment terms from 30 to 60 or even 90 days. For this reason, Factoring can become an attractive vehicle for some trucking companies.

To gain some further insight on the status of Factoring as it pertain to trucking firms in the current economic environment, I contacted Tina Capobianco who is Vice President of J D Factors, a Toronto-based factoring company. I began our discussion by suggesting that there is a perception by some that factoring receivables is mostly for trucking companies in distress. I asked Tina if the majority of her company’s clients are in some sort of financial difficulty and how she would describe the different categories of companies that require the services of JD Factors. She responded as follows.

“Unfortunately, many people still look down on factoring as a financing vehicle for companies who are in distress. Nothing could be further from the truth. Although factoring has become increasingly popular in the transport industry over the past 15 or 20 years, many industries such as the rag trade have thrived on factoring for many, many years. While it is certainly true that factoring can be a last resort for companies that are in distress, we have many success stories as well. The reason that many companies that are in distress turn to factors is because it is much easier for them to qualify with us than a bank. This is due to the fact that factoring credit is based on the credit of the company paying the freight bill, not the trucking company that hauled it. As long as we can make acceptable arrangements with their bank and other secured creditors, we can often help them. Factoring also appeals to many companies that are in a high growth mode. Factors can react quickly to increased demands so long as their customer has good credit. Banks will take months to approve an increase in financing for any client.

This led to a question about how the economy has affected her business.

“This past year has proven a challenging one. The economic downturn has translated into a much higher demand for our products. However the lower debtor quality, higher risks of customer bankruptcy and decreases in debtor credit has made it very difficult to provide the financing required. Many companies that would have been approved 1 year ago no longer qualify because our criteria are much more stringent.”

What are the business decisions that lead a trucking company to factor their receivables?

“Improving cash flow has always been a priority for most of our transport clients and the main reason for a trucking company to factor their receivables. This past year businesses have seen that even their better customers are now paying much slower. So the demand on cash flow is even greater. Trucking companies still must pay fuel, payroll and other expenses on a daily or weekly basis while waiting 30 or 60 days for payments from their customers. Factoring is the means for getting the cash flow back into a company and protecting a company from bad debt.”

I asked Tina if she could share some insights on when a company should or should not factor their receivables.

“If a company is being paid COD or they qualify for a line of credit with the bank, that will provide them with the cash flow that they need. That company should have no need for factoring. However, a company may have a need for factoring if they find turning their receivables into immediate cash allows them to be able to pay their bills, offer credit terms to their customers or even be protected from bad debt. Another reason to factor would be if a company is facing a period of growth in their business, and they have good solid receivables. A bank will not be able to adjust its funding base to a company very quickly. Factoring on the other hand can provide the capital a company needs so long as it has good receivables to sell.”

What is the “Value Proposition” of J D Factors and why should a trucking company come to her company rather than perform the collection of receivables in-house.

“Factoring provides a company with the cash flow necessary for them to be able to pay their bills on time or even early. A factor will also conduct thorough credit checks on all the main customers and follow up until invoices are paid. This is a valuable service that prevents collection problems and bad debt for trucking companies. Just as importantly, the owner can focus on more important business issues like sales and profitability, instead of collecting accounts receivable.

J D Factors also has an exclusive relationship with Load Surfer, the new Canadian load board. This is a very important relationship on many levels. First of all, it is a value-add for clients that are factoring with us. When they use Load Surfer, any load that we are willing to purchase on a non-recourse basis is denoted with a green money bag symbol (we call it the J D Guarantee). This saves them the step of having to call our office every time they are considering hauling a load that they want us to buy. The J D Guarantee symbol can also be used by non-factoring clients as a business tool that they can use when deciding whether or not to take a load off of Load Surfer (if we are not interested in buying the bill, it is probably wise to think twice before hauling for that party).”

This prompted me to ask Tina about the training her people receive and about how they measure their performance.

“All of our employees go through intensive hands on training. We have a number of seasoned employees that are great role models for new employees. We have goals and objectives for each employee that they strive to meet each month.”

Since the economic downturn has placed considerable pressure on most trucking firms, are there some telltale signs that you watch for before agreeing to take on the factoring work for a prospective client?

“It is important that a trucking company has a steady consistent flow of business that keeps their trucks working. Once a company has difficulty finding loads to take or relies only on loads boards to move their trucks, that is usually the first sign of the end.”

Clearly Factoring is not for every trucking company. However, for companies that meet Tina’s stated criteria and for whom the rate of return on the proceeds invested in production exceed the costs associated with factoring the Receivables, this may be an avenue to pursue to maintain financial viability.