Growing pains
Because of a nine-month delay in absorbing a New Jersey trucking company it acquired, Velocity Express Corp. has had to restructure loan covenants to stay out of default as it looks to raise cash through the sale of its Canadian operations.
Based in Westport, Velocity Express runs a parcel delivery service, competing with FedEx Corp., United Parcel Service and DHL among others. It is an intensely competitive industry, with low barriers to entry and significant pricing pressures.
In August 2006, Velocity Express spent $61 million to acquire CD&L, a South Hackensack, N.J., delivery company. The deal roughly doubled the size of Velocity Express and reversed a four-year decline in revenue. For its fiscal year ending June 30, Velocity Express reported a $40 million loss on $410 million in sales.
The CD&L deal gave Velocity Express more than 4,000 drivers as of mid-2007 ”“ including independent contractors ”“ and some 2,100 employees, nearly double its work force of 2006. Velocity Express has cut 520 jobs during the past three years, including 200 following the CD&L deal.
The cuts come against the backdrop of several adverse developments in recent years for Velocity Express, whose Chief Financial Officer Edward Stone declined to make an executive available for an interview.
In a prepared statement issued in mid-October, Chief Executive Officer Vincent Wasik said the company has made considerable progress with its acquisition of CD&L.
“We have realized all of the $22 million in acquisition synergies we had anticipated and, with a significant effort ”¦ we have been able to migrate all of our customer and route management information to a single database and operating system,” Wasik said. “The company can now apply our unique route management systems to capture the full $16 million of routing efficiencies we had anticipated when we merged with CD&L. During the quarter, we saw the first benefits of the integrated databases as our route management and route engineering systems allowed us to improve driver pay ”¦ while increasing the average settlement paid to our independent contractor drivers.”
Following a 2004 law requiring financial institutions to migrate to electronic processing, Velocity Express has been attempting to offset declines in its business transporting checks.
After Office Depot Inc., one of Velocity Express”™ largest customers, prematurely ended a contract last year, Velocity Express sued in Delaware court, claiming Office Depot improperly terminated the deal which would have lasted at least another year. Typical Velocity Express contracts range from one to three years. The case is still in the process of discovery.
This past summer, the Nasdaq informed Velocity Express that its shares do not meet minimum listing requirements, potentially affecting its ability to raise cash via the sale of equity.
Perhaps most ominously, since obtaining a revolving credit facility last December from Wells Fargo Foothill Inc., Velocity Express was unable to maintain earnings levels specified in the loan agreement, as it amassed $7 million in unexpected costs from the CD&L acquisition.
In a condition of default, lenders are allowed to declare all debts due immediately, threatening a borrower with insolvency.
Â
Velocity Express has since negotiated lower earnings targets that put it back in compliance for the time being. Just as importantly, it has substantially completed integrating its computer systems and truck routes with those of CD&L, which it says will allow it to reduce operating expenses going forward.
Even as it complains of being dumped by Office Depot, Velocity Express indicated it is reviewing service contracts it inherited from CD&L with an eye to renegotiating more favorable terms or not renewing them.
Separately, under a new expansion strategy Velocity has begun awarding franchises, effectively shifting the cost of opening new markets onto independent entrepreneurs.
As of late October, the company had inked a half-dozen franchise agreements, and said it expects to add franchisees in at least three locales each quarter.
The company also is negotiating the sale of its Canadian subsidiary, without specifying how much it expects the unit will fetch.
Â