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Table of Contents

 

 

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 September 30, 2012

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 001-34586

 

 

Westway Group, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   20-4755936

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

365 Canal Street, Suite 2900,

New Orleans, LA

  70130
(Address of principal executive offices)   (Zip Code)

(504) 525-9741

(Registrant’s telephone number, including area code)

 

 

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.    x  Yes    ¨  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).    x  Yes    ¨  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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

As of November 2, 2012, 14,571,663 shares of our Class A common stock, par value $0.0001 per share, and 13,652,763 shares of our Class B common stock, par value $0.0001 per share, were outstanding. The number of shares of our Class A common stock outstanding stated above includes 41,667 shares issued to Shermen WSC Holding LLC and held in escrow.

 

 

 


Table of Contents

Westway Group, Inc. Index to Form 10-Q

TABLE OF CONTENTS

 

PART I. – FINANCIAL INFORMATION

  

Item 1. – Consolidated Financial Statements (unaudited)

     4   

Consolidated Balance Sheets

     4   

Consolidated Statements of Operations

     5   

Consolidated Statements of Comprehensive Income

     6   

Consolidated Statements of Stockholders’ Equity

     7   

Consolidated Statements of Cash Flows

     9   

Notes to Consolidated Financial Statements

     10   

Item  2. – Management’s Discussion and Analysis of Financial Condition and Results of Operations

     15   

Item 3. – Quantitative and Qualitative Disclosures About Market Risk

     29   

Item 4. – Controls and Procedures

     30   
PART II. – OTHER INFORMATION   

Item 1. – Legal Proceedings

     30   

Item 1A. – Risk Factors

     30   

Item 2. – Unregistered Sales of Equity Securities and Use of Proceeds

     34   

Item 3. – Defaults Upon Senior Securities

     35   

Item 5. – Other Information

     35   

Item 6. – Exhibits

     36   

SIGNATURES

     36   

EXHIBIT INDEX

     37   

 

2


Table of Contents

Certain Defined Terms

Unless the context otherwise requires, when used in this quarterly report on Form 10-Q:

 

   

the “Company” or “we” or “us” means the public company now named Westway Group, Inc. together with its wholly-owned subsidiaries;

 

   

“ED&F Man” means ED&F Man Holdings Limited, on an unconsolidated basis;

 

   

“ED&F Man group” means ED&F Man and its direct and indirect subsidiaries;

 

   

“Agman” means Agman Louisiana, Inc, a subsidiary of ED&F Man and member of the ED&F Man group which was named Westway Holdings Corporation before June 17, 2010;

 

   

“Class A common stock” means our Class A Common Stock, par value $0.0001 per share (this class is listed on NASDAQ; generally, shares of this class automatically convert into shares of Class B common stock at any time they become owned by a member of the ED&F Man group);

 

   

“Class B common stock” means our Class B Common Stock, par value $0.0001 per share (this class is not listed on NASDAQ; generally, shares of this class automatically convert into shares of Class A common stock at any time they cease to be owned by a member of the ED&F Man group); and

 

   

“Series A Convertible Preferred Stock” means our Series A Perpetual Convertible Preferred Stock, par value $0.0001 per share (this class is not listed on NASDAQ).

 

3


Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED).

WESTWAY GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except for share data)

 

     As of  
     September 30,     December 31,  
   2012     2011  
     (unaudited)        

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 7,130      $ 13,479   

Trade accounts receivable from third parties, net

     40,533        45,579   

Trade accounts receivable from related parties

     1,742        1,752   

Inventories

     20,582        19,789   

Other current assets

     7,563        6,495   
  

 

 

   

 

 

 

Total current assets

     77,550        87,094   

Investment in unconsolidated subsidiary

     3,056        3,449   

Property, plant and equipment, net

     328,771        323,458   

Goodwill

     86,244        85,883   

Other intangibles, net

     7,836        7,912   

Other non-current assets

     3,696        4,235   
  

 

 

   

 

 

 

Total assets

   $ 507,153      $ 512,031   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Trade accounts payable to third parties

   $ 8,536      $ 14,134   

Trade accounts payable to related parties

     4,574        7,568   

Accrued expenses and other current liabilities

     21,971        28,395   
  

 

 

   

 

 

 

Total current liabilities

     35,081        50,097   

Borrowings under credit facilities

     90,534        93,534   

Deferred income taxes

     74,640        71,565   

Other long-term liabilities

     2,132        702   
  

 

 

   

 

 

 

Total liabilities

     202,387        215,898   
  

 

 

   

 

 

 

Stockholders’ equity:

    

Series A Convertible Preferred stock: $0.0001 par value; 40,000,000 authorized; 33,321,892 outstanding at September 30, 2012. (December 31, 2011: $0.0001 par value; 40,000,000 authorized; 32,724,874 outstanding)

     190,786        187,387   

Common Stock: $0.0001 par value; 235,000,000 shares authorized; 27,974,426 outstanding at September 30, 2012 represented by 14,321,663 Class A and 13,652,763 Class B shares. (December 31, 2011: $0.0001 par value; 235,000,000 shares authorized; 26,892,179 shares outstanding represented by 13,993,369 Class A and 12,898,810 Class B shares)

     3        3   

Additional paid-in capital

     126,656        127,026   

Accumulated other comprehensive income (loss)

     (536     (2,538

Retained earnings (accumulated deficit)

     1,870        (2,600

Treasury stock at cost – 2,335,569 shares at September 30, 2012. (December 31, 2011: 2,335,569 shares)

     (14,013     (14,013
  

 

 

   

 

 

 

Total Westway Group, Inc. stockholders’ equity

     304,766        295,265   

Non-controlling interest

     —          868   
  

 

 

   

 

 

 

Total stockholders’ equity

     304,766        296,133   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 507,153      $ 512,031   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

4


Table of Contents

WESTWAY GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except for share data)

(unaudited)

 

     Three months ended     Nine months ended  
   September 30,     September 30,  
     2012     2011     2012     2011  

Net revenue

        

Bulk liquid storage

   $ 19,310      $ 17,821      $ 57,630      $ 55,286   

Liquid feed supplements

     83,607        81,062        247,115        223,228   

Related parties

     3,235        4,159        9,953        11,672   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenue

     106,152        103,042        314,698        290,186   

Costs of sales – liquid feed supplements

        

Third parties

     46,552        44,760        137,726        125,711   

Related parties

     23,013        23,633        69,060        61,882   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs of sales – liquid feed supplements

     69,565        68,393        206,786        187,593   

Other operating costs and expenses

     14,524        14,182        44,800        43,502   

Depreciation and amortization

     6,955        6,490        20,560        19,134   

Selling, general and administrative expenses

     9,069        8,105        27,601        24,804   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     100,113        97,170        299,747        275,033   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     6,039        5,872        14,951        15,153   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other expense

        

Interest, net

     (898     (942     (2,650     (3,509

Loss on disposal of property, plant & equipment

     (46     (42     (109     (771
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

     (944     (984     (2,759     (4,280

Income before income tax provision and equity in loss of unconsolidated subsidiary

     5,095        4,888        12,192        10,873   

Income tax provision

     (1,323     (1,713     (4,007     (3,521

Equity in loss of unconsolidated subsidiary, net

     (96     (128     (312     (453
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     3,676        3,047        7,873        6,899   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (income) loss attributable to non-controlling interest

     —          (17     16        (53
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Westway Group, Inc.

     3,676        3,030        7,889        6,846   

Preferred dividends accrued

     (1,146     (1,114     (3,419     (3,332

Net (income) applicable to participating stockholders

     (1,389     (1,301     (2,661     (1,301
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income applicable to common stockholders

   $ 1,141      $ 615      $ 1,809      $ 2,213   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share of common stock:

        

Basic

   $ 0.04      $ 0.02      $ 0.07      $ 0.06   

Diluted

   $ 0.04      $ 0.02      $ 0.07      $ 0.06   

Dividends declared per share

   $ —        $ 0.04      $ 0.08      $ 0.04   

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

5


Table of Contents

WESTWAY GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

 

     Three months ended September 30,     Nine months ended September 30,  
     2012      2011     2012      2011  

Net income

   $  3,676       $ 3,047      $  7,873       $ 6,899   

Other comprehensive income (loss) net of tax effect:

          

Foreign currency translation

     2,468         (8,984     2,002         (1,383
  

 

 

    

 

 

   

 

 

    

 

 

 

Comprehensive income (loss)

     6,144         (5,937     9,875         5,516   

Comprehensive (income) loss attributable to non-controlling interest

     —           (17     16         (53
  

 

 

    

 

 

   

 

 

    

 

 

 

Comprehensive income (loss) attributable to Westway Group Inc.

   $ 6,144       $ (5,954   $ 9,891       $ 5,463   
  

 

 

    

 

 

   

 

 

    

 

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

6


Table of Contents

WESTWAY GROUP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)

(in thousands, except per share data)

 

      Westway Group, Inc. Stockholders’ Equity                     

(in thousands,

except per

share data)

   Series A
Convertible
Preferred
Stock
     Common Stock
Class A
     Common Stock
Class B
     Additional
Paid-In
Capital
    Retained
Earnings
(Accumulated
Deficit)
    Accumulated
Other
Comprehensive
Income (Loss)
    Common Stock
Held  in
Treasury
    Total
Westway
Group, Inc.
stockholders’
equity
    Non-
controlling
Interest
     Total
Stockholders’
Equity
 
   Number
of Shares
     Value      Number
of Shares
    At Par
Value
     Number
of Shares
     At Par
Value
           Number
of Shares
     At Cost         

Balance, December 31, 2010

     30,887       $ 177,291         14,218      $ 2         12,624       $ 1       $ 131,039      $ (3,082   $ 231        2,335       $ (14,013   $ 291,469      $ 740       $ 292,209   

Convertible preferred shares
issued

     1,500         8,239                               8,239           8,239   

Convertible preferred dividend
accrued

                        (3,332            (3,332        (3,332

Dividends on common and convertible preferred shares

                      (2,360              (2,360        (2,360

Restricted stock activity, net of
shares forfeited

           80                 654                 654           654   

Purchase and retirement of common stock

           (317              (1,424              (1,424        (1,424

Comprehensive income:

                                   

Net income

                        6,846               6,846        53         6,899   

Foreign currency translation

                          (1,383          (1,383        (1,383
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Balance, September 30, 2011

     32,387       $ 185,530         13,981      $ 2         12,624       $ 1       $ 127,909      $ 432      $ (1,152     2,335       $ (14,013   $ 298,709      $ 793       $ 299,502   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

7


Table of Contents
    Westway Group, Inc. Stockholders’ Equity              
(in thousands,   Series A
Convertible
Preferred
Stock
    Common Stock
Class A
    Common Stock
Class B
    Additional    

Retained

Earnings

   

Accumulated

Other

    Common Stock Held  in
Treasury
   

Total Westway

Group, Inc.

    Non-     Total  
except per share
data)
  Number
of Shares
    Value     Number
of Shares
    At Par
Value
    Number
of Shares
    At Par
Value
    Paid-In
Capital
    (Accumulated
Deficit)
    Comprehensive
Income (Loss)
    Number
of Shares
    At Cost     stockholders’
equity
    controlling
Interest
    Stockholders’
Equity
 

Balance, December 31, 2011

    32,725      $ 187,387        13,993      $ 2        12,899      $ 1      $ 127,026      $ (2,600   $ (2,538     2,335      $ (14,013   $ 295,265      $ 868      $ 296,133   

Convertible preferred shares issued

    597        3,399                          3,399          3,399   

Convertible preferred dividend accrued

                  (3,419           (3,419       (3,419

Dividends on common and convertible preferred shares

        79          754          (71             (71       (71

Founder warrants cashless exercise

        60                        —            —     

Founder warrants purchase

                (1,193             (1,193       (1,193

Restricted stock activity, net of shares forfeited

        190              714                714          714   

Issuance of stock options

                180                180          180   

Sale of investment

                            (852     (852

Comprehensive income:

                           

Net income

                  7,889              7,889        (16     7,873   

Foreign currency translation

                    2,002            2,002        —          2,002   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2012

    33,322      $ 190,786        14,322      $ 2        13,653      $ 1      $ 126,656      $ 1,870      $ (536     2,335      $ (14,013   $ 304,766      $ —        $ 304,766   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

8


Table of Contents

WESTWAY GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     Nine months ended  
     September 30,  
     2012     2011  

Cash flows from operating activities:

    

Net income

   $ 7,873      $ 6,899   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Deferred income taxes

     2,935        3,952   

Provision for doubtful accounts receivable

     995        448   

Depreciation and amortization

     20,560        19,134   

Amortization of deferred financing costs

     672        928   

Equity in loss of unconsolidated investments

     447        676   

Loss on sale of investment

     36        —     

Loss on disposal of property, plant & equipment

     109        771   

Stock compensation

     1,037        848   

Changes in operating assets and liabilities, net of effects of acquisitions:

    

Accounts receivable

     3,533        (1,888

Inventory

     (1,199     (2,806

Other current assets

     (1,464     (2,182

Accounts payable

     (8,411     (4,388

Accrued expenses and other current liabilities

     (3,389     187   
  

 

 

   

 

 

 

Net cash provided by operating activities

     23,734        22,579   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Capital expenditures for property, plant and equipment, net of sales proceeds

     (25,653     (26,572

Sale of investment

     850        —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (24,803     (26,572
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from credit facility

     35,844        67,158   

Payments on credit facility

     (38,844     (63,073

Purchase and cancellation of Class A common stock

     —          (1,424

Payment of cash dividends

     (1,620     —     

Purchase of founder warrants

     (1,193     —     

Payment of deferred financing costs

     —          (1,572
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (5,813     1,089   
  

 

 

   

 

 

 

Effects of exchange rate changes on cash and cash equivalents

     533        (235
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (6,349     (3,139
  

 

 

   

 

 

 

Cash and cash equivalents, beginning of period

     13,479        12,652   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 7,130      $ 9,513   
  

 

 

   

 

 

 

Non-cash financing and investing activities:

    

Preferred dividends accrued

   $ 3,419      $ 3,332   

Series A Convertible Preferred stock issued to ED&F Man group

     3,399        8,239   

Common stock issued or accrued as dividend

     5,492        —     

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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WESTWAY GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. DESCRIPTION OF BUSINESS

Westway Group, Inc., together with its wholly-owned subsidiaries (the “Company” or “we” or “us”), is a leading provider of bulk liquid storage and related value-added services, and a leading manufacturer and distributor of liquid animal feed supplements. The Company owns and/or operates an extensive global network of operating facilities providing bulk liquid storage and producing liquid feed supplements. The bulk liquid storage business is a global business with terminal locations at key port and terminal sites throughout North America and in Western Europe and Asia, offering storage to manufacturers and consumers of agricultural and industrial liquids. The liquid feed supplements business produces liquid animal feed supplements through blending liquid by-products and essential nutrients to form feed rations that help to maximize the genetic potential of livestock, and are sold directly to end users, primarily supplying the beef and dairy livestock industries.

2. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and the requirements of the Securities and Exchange Commission (“SEC”) for interim financial information. As permitted under those rules, certain footnotes and other financial information required by U.S. GAAP for complete financial statements have been condensed or omitted. These interim financial statements should be read in conjunction with the audited financial statements and note disclosures for the Company previously filed with the SEC in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

The Consolidated Financial Statements include all normal and recurring adjustments that are necessary for a fair presentation of our financial position and operating results including the elimination of all significant intercompany accounts and transactions among our wholly owned subsidiaries. The preparation of the consolidated financial statements involves the use of estimates and accruals. Actual results may vary from those estimates. Quarterly results are not necessarily indicative of results that may be expected for the full year. The Company adheres to the same accounting policies in preparing interim financial statements as it does for the preparation of annual statements.

The Company has evaluated subsequent events for potential disclosure through the date the financial statements were issued.

3. EARNINGS PER SHARE

The Company calculated earnings per common share in accordance with U.S. GAAP under the two-class method. The two-class method is an earnings allocation formula that treats a participating security as having rights to earnings that otherwise would have been available to common stockholders. This method determines basic earnings per share for common stock and participating securities by adjusting for dividends declared (or accumulated) and participation rights in undistributed earnings. The Company’s participating securities are the Series A Convertible Preferred Stock and unvested restricted shares. Unvested restricted shares are considered participating securities because they receive non-forfeitable rights to dividends before vesting at the same rate as common stock.

The numerator was adjusted for dividends declared on participating securities, as well as for the undistributed earnings (loss) allocated to participating securities, for the three and nine months ended September 30, 2012 and 2011, in order to calculate net income applicable to common stockholders.

In calculating the basic weighted average number of common shares outstanding, the Series A Convertible Preferred Stock and unvested restricted shares were excluded, as they are participating securities and not included in calculating the earnings per common share under the two-class method. In calculating the diluted weighted average number of common shares outstanding for the three and nine months ended September 30, 2012 and 2011, the Company did not include these additional securities in the denominator as this would result in an anti-dilutive impact because of the greater income attributable to the Series A Convertible Preferred Stock.

The Company’s 3,476,189 founder warrants with an exercise price of $5.00 and a non-qualified stock option, granted in April 2012, to purchase 250,000 shares of Class A common stock with an exercise price of $5.55 could potentially dilute earnings per common share. Both of these securities were included as dilutive for the three and nine months ended September 30, 2012 because the average stock price of each period was in excess of the exercise prices. However, the founder warrants were excluded for the three and nine months ended September 30, 2011 since the average market price of our common stock during the period was below the exercise prices. Additionally, the founder warrants and stock option could have a potentially less dilutive effect because they have a cashless exercise provision.

 

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Also included in dilutive shares are Class B common stock that are accrued to be issued, as a result of the Company’s common dividends on Series A Preferred shares held in escrow, for the three and nine months ended September 30, 2012. Under the articles of incorporation, the Company is unable to pay a common dividend on shares held in escrow and such dividends have therefore been accrued for the issuance of these shares. Since no common dividend had been paid on escrowed shares prior to September 30, 2011, additional dilutive shares have not been included in the three and nine months ended September 30, 2011 for purposes of this calculation.

The calculation of basic and diluted earnings per common share is as follows (in thousands except share amounts):

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2012     2011     2012     2011  

Numerator

        

Net income attributable to Westway Group, Inc.

   $ 3,676      $ 3,030      $ 7,889      $ 6,846   

Preferred dividends accrued

     (1,146     (1,114     (3,419     (3,332

Dividends to participating securities (1)

     —          (1,306     (2,664     (1,306

Undistributed (earnings) loss allocated to participating securities (2)

     (1,389     5        3        (637
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income applicable to common stockholders—Basic & Diluted

     1,141        615        1,809        1,571   
  

 

 

   

 

 

   

 

 

   

 

 

 

Denominator

        

Weighted average number of common shares outstanding—Basic

     27,595,537        26,370,278        27,307,238        26,481,455   

Dilutive shares (3)

     935,800        —          678,434        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of common shares outstanding—Diluted

     28,531,337        26,370,278        27,985,672        26,481,455   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and Diluted Earnings Per Common Share

        

Earnings per common share—Basic

   $ 0.04      $ 0.02      $ 0.07      $ 0.06   

Earnings per common share—Diluted

   $ 0.04      $ 0.02      $ 0.07      $ 0.06   

Dividends declared per share

   $ —        $ 0.04      $ 0.08      $ 0.04   

 

(1) For the three month period ending September 31, 2012 there was no participating dividend declared. For the nine month period ending September 30, 2012, participating dividends related to the Series A Convertible Preferred Stock and the unvested restricted shares amounted to $2,642,000 and $22,000 respectively, totaling $2,664,000. Participating dividends related to the Series A Convertible Preferred Stock and the unvested restricted shares were $1,295,000 and $11,000 respectively for the three and nine month periods ending September 30, 2011, which amounts to $1,306,000.
(2) Undistributed earnings allocated to the unvested restricted shares were $11,000 and undistributed earnings allocated to preferred shares net income was $1,378,000 for the three months ended September 30, 2012, totaling $1,389,000. Undistributed losses allocated to the unvested restricted shares for the three months ended September 30, 2011 were $5,000. Undistributed losses allocated to the unvested restricted shares for the nine months ended September 30, 2012 were $3,000. Undistributed earnings allocated to the unvested restricted shares and the Series A Convertible Preferred Stock for the nine months ended September 30, 2011 were $6,000 and $631,000, respectively, totaling $637,000.
(3) The dilutive shares for the three months ended September 30, 2012 amounted to 935,800 which are comprised of 32,896 incremental shares related to the non-qualified stock options, 756,572 incremental shares related to the founder warrants, and 146,332 shares of accrued stock dividends. The dilutive shares for the nine months ended September 30, 2012 amounted to 678,434 which are comprised of 19,390 incremental shares related to the non-qualified stock options, 587,381 incremental shares related to the founder warrants, and 71,663 shares of accrued stock dividends.

4. EQUITY

Waivers Relating to Dividends

On November 9, 2011, the Company entered into a Waiver by and between the Company and Agman, pursuant to which the Company agreed to issue 204,679 additional shares of Series A Convertible Preferred Stock to Agman on or shortly following January 1, 2012, in satisfaction in full of the accrued preferred stock dividends through December 31, 2011, based on a valuation of $5.50 per share of the Series A Convertible Preferred Stock, and in exchange for a waiver by Agman of the Company’s compliance with the negative covenants set forth in the Company’s Amended and Restated Certificate of Incorporation and the Stockholder’s Agreement dated as of May 28, 2009, between the Company and Agman, in connection with, and Agman’s consent to and approval of, the declaration of the dividends in November 2011. These shares of Series A Convertible Preferred Stock were issued on January 1, 2012.

 

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On February 13, 2012, the Company entered into a Waiver by and between the Company and Agman, pursuant to which the Company agreed to issue 205,959 additional shares of Series A Preferred Stock to Agman on or shortly following April 1, 2012, in satisfaction in full of the accrued preferred stock dividends through March 31, 2012, based on a valuation of $5.50 per share of the Series A Preferred Stock, and in exchange for a waiver by Agman of the Company’s compliance with the negative covenants set forth in the Company’s Amended and Restated Certificate of Incorporation and the Stockholder’s Agreement dated as of May 28, 2009, between the Company and Agman, in connection with, and Agman’s consent to and approval of, the declaration and payment of the dividend. These shares of Series A Convertible Preferred Stock were issued on April 1, 2012.

On May 9, 2012, the Company entered into a Waiver by and between the Company and Agman, pursuant to which the Company agreed to issue 186,380 additional shares of Series A Preferred Stock to Agman on or shortly following July 1, 2012, in satisfaction in full of the accrued preferred stock dividends through June 30, 2012, based on a volume weighted average price of $6.1158 of the Company’s Class A common stock traded on NASDAQ during the period from June 21, 2012 through July 5, 2012, and in exchange for a waiver by Agman of the Company’s compliance with the negative covenants set forth in the Company’s Amended and Restated Certificate of Incorporation and the Stockholder’s Agreement dated as of May 28, 2009, between the Company and Agman, in connection with, and Agman’s consent to and approval of, the declaration and payment of the dividend. These shares of Series A Convertible Preferred Stock were issued on July 1, 2012.

Common Stock Dividends

On February 13, 2012 the Board of Directors declared a quarterly dividend of $0.04 per share of common stock payable on April 23, 2012 to holders of record of the Company’s Class A and Class B common stock and participating preferred stock on February 27, 2012. The dividend was payable in cash or shares of the Company’s common stock, or a combination thereof, at the election of each shareholder. Each shareholder entitled to receive the dividend had until March 23, 2012 to make a distribution election. Any shareholder that did not make a distribution election by March 23, 2012 was deemed to have elected to receive the dividend in shares of the Company’s common stock. The dollar value of the Company’s common stock that was used to calculate the number of common shares to be issued with respect to that portion of the dividend payable in shares of common stock was $5.7371, the volume weighted average price of the Company’s Class A common stock on NASDAQ from March 26, 2012 through April 5, 2012.

On May 9, 2012 the Board of Directors declared a quarterly dividend of $0.04 per share of common stock payable on July 23, 2012 to holders of record of the Company’s Class A and Class B common stock and participating preferred stock on May 23, 2012. The dividend was payable in cash or shares of the Company’s common stock, or a combination thereof, at the election of each shareholder. Each shareholder entitled to receive the dividend had until June 20, 2012 to make a distribution election. Any shareholder that did not make a distribution election by June 20, 2012 was deemed to have elected to receive the dividend in shares of the Company’s common stock. The dollar value of the Company’s common stock that was used to calculate the number of common shares to be issued with respect to that portion of the dividend payable in shares of common stock was $6.1158, the volume weighted average price of the Company’s Class A common stock on NASDAQ from June 21, 2012 through July 5, 2012.

Conversion Rights

Agman, a subsidiary of ED&F Man, is the sole holder of the Company’s Series A Convertible Preferred Stock. As such, Agman has the right, at any time and from time to time, to convert any or all of its shares of Series A Convertible Preferred Stock into an equal number of shares of our Class B common stock (subject to adjustment for accrued base dividends, stock splits, subdivisions, reclassifications, and combinations). However, Agman is unable to exercise such conversion rights to the extent it would result in the ED&F Man group (including Agman) and certain individual affiliates thereof owning more than 49.5% of the Company’s total outstanding common stock.

Approval Rights; Dividends on Escrowed Shares

As the sole holder of our Series A Convertible Preferred Stock, Agman has no right to vote in such capacity as a Preferred shareholder for the election of any directors or on many matters that could be presented for stockholder action. However, its approval in such capacity is required for the Company to take a number of specific actions, including any action to amend, alter or repeal any provision of its certificate of incorporation or by-laws in a manner inconsistent with the stockholder’s agreement between the Company and Agman. With respect to any shares of Series A Convertible Preferred Stock held in escrow pursuant to the stock escrow agreement, all dividends or distributions on those shares are to accrue on the Company’s books and records, but are not to be paid unless and until those shares are released from escrow.

 

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Transactions Involving Founder Warrants

On May 23, 2012, the Company entered into a warrant repurchase agreement with Mr. Francis Jenkins, a director of the Company, and certain of his affiliates (the “warrant repurchase agreement”) pursuant to which the Company repurchased from him and them, at a purchase price of $0.87 per warrant, 1,371,429 warrants to purchase our Class A common stock, for an aggregate purchase price of $1,193,143.

Also on May 23, 2012, Mr. Toffolon, a director of the Company, and certain of his affiliates exercised on a cashless basis 366,668 warrants to purchase the Company’s Class A common stock at an exercise price of $5.00 per warrant. In accordance with the terms of the warrants, the value of the warrants for purposes of the cashless exercise was determined by the five day volume weighted average price preceding the date of exercise, $5.97, resulting in a net issuance of 59,576 shares of Class A common stock to Mr. Toffolon and his affiliates.

Stock Escrow Agreement

During August 2012, the Company’s stock price closed in excess of $6.50 for five of seven consecutive trading days. This occurrence marked the achievement of the first target under the stock escrow agreement. As a result, 4,380,691 shares of Series A Preferred Stock were released from escrow to Agman in September 2012. Additionally, the dividends related to those shares were released to Agman, consisting of $342,403 in cash and the issuance of 58,674 shares of Class B Common Stock. The achievement of this target also triggered the release of 958,333 shares of Class A Common Stock from escrow to Shermen WSC Holding, LLC, as well as the release of dividends related to those shares, which consisted of $153,333 in cash.

5. BUSINESS SEGMENTS

The Company has two reportable operating segments: bulk liquid storage and liquid feed supplements. These businesses represent distinct operations that are managed separately because of differing products and services. Each of these businesses has distinct operating, marketing and sales strategies, and our chief operating decision maker reviews the performance of these businesses based on these segments. The Company also has one non-operating segment: corporate.

These segments follow the accounting principles described in Note 3 of the Company’s audited financial statements for the year ended December 31, 2011 in the Company’s 2011 Annual Report on Form 10-K. Intersegment revenue is recorded at prices which approximate market.

Bulk Liquid Storage

The Company’s bulk liquid storage segment generates revenue through contracts by providing three primary types of services: fixed income, volume or throughput income, and income from ancillary services. Each of these sources of income is recorded net of any sales taxes. These sources of income reflect the Company’s relationships with its global, regional or local customer bases, which typically comprise contracts spanning one or more years. Contracts vary according to the provision of services, ranging from the simple transloading of products to delivery into storage, but more typically, extend into more complex product management and storage services.

Fixed income services generate revenue from storage services at each of our terminals and are based on a fixed fee per month for tank rental, input/output from storage tanks or combination of both. The Company recognizes revenue from fixed income services in the period the service is rendered.

Volume services generate revenue based on the volume of liquid entering or exiting at each terminal location and are based on tonnage. The Company recognizes revenue for volume services as the volumes are entered into or withdrawn from its storage facilities.

Ancillary income services generate revenue from customer-specific storage requirements including energy, overtime, and other infrastructure costs. Revenue relating to ancillary income services is recognized based on terms stipulated in the customer service contract and is recorded at the time the service is provided. However, a small percentage of ancillary services are included as fixed income in the service contracts.

Liquid Feed Supplements

The liquid feed supplements segment generates income from making and selling liquid animal feed products, with a small proportion of income arising from making and selling dried or block animal feeds. The business is focused on the processing of animal feeds from their raw liquid constituents into a blended product that varies according to customer and livestock requirements. Revenue is recorded net of any discounts and sales taxes. Shipping and handling costs are included within cost of sales in the consolidated statements of income.

 

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Our liquid feed supplements segment incorporates a research and development program focused on developing products that are distinct, based on customer, livestock and geographical requirements, and are capable of being varied to reflect commodity prices and/or other factors.

Corporate

Corporate operating expenses are not allocated to the Company’s reportable segments. The corporate segment includes interest expenses related to corporate debt and unallocated general and administrative expenses including primarily executive, legal, finance, information technology, human resource, and health, safety, environmental, and quality expenses.

Results of Operations by Business Segment

The Company’s operations by business segment are as follows (in thousands):

Three Months Ended September 30, 2012

 

      Bulk Liquid
Storage
     Liquid Feed
Supplements
     Corporate     Total  

Net revenue (1)

   $ 22,434       $ 83,718       $ —        $ 106,152   

Income (loss) before income tax provision and equity in loss of unconsolidated subsidiary

   $ 6,109       $ 4,373       $ (5,387   $ 5,095   

Total assets

   $ 358,911       $ 137,906       $ 10,336      $ 507,153   

Three Months Ended September 30, 2011

 

      Bulk Liquid
Storage
     Liquid Feed
Supplements
     Corporate     Total  

Net revenue (1)

   $ 21,909       $ 81,133       $ —        $ 103,042   

Income (loss) before income tax provision and equity in loss of unconsolidated subsidiary

   $ 6,139       $ 3,707       $ (4,958   $ 4,888   

Total assets

   $ 359,040       $ 131,723       $ 12,700      $ 503,463   

Nine Months Ended September 30, 2012

 

      Bulk Liquid
Storage
     Liquid Feed
Supplements
     Corporate     Total  

Net revenue (1)

   $ 67,153       $ 247,545       $ —        $ 314,698   

Income (loss) before income tax provision and equity in loss of unconsolidated subsidiary

   $ 17,118       $ 11,475       $ (16,401   $ 12,192   

Total assets

   $ 358,911       $ 137,906       $ 10,336      $ 507,153   

Nine Months Ended September 30, 2011

 

      Bulk Liquid
Storage
     Liquid Feed
Supplements
     Corporate     Total  

Net revenue (1)

   $ 66,719       $ 223,467       $ —        $ 290,186   

Income (loss) before income tax provision and equity in loss of unconsolidated subsidiary

   $ 18,082       $ 8,388       $ (15,597   $ 10,873   

Total assets

   $ 359,040       $ 131,723       $ 12,700      $ 503,463   

 

(1) After intersegment eliminations

 

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6. INCOME TAXES

The Company’s effective tax rate was lower for the three months ended September 30, 2012 as compared to the three months ended September 30, 2011. This change was primarily due to a reduction in foreign earnings subject to U.S. tax for the three months ending September 30, 2012 as compared to the three months ending September 30, 2011.

For the nine months ended September 30, 2012, the Company recorded a tax provision at an effective rate that is slightly higher than the rate used for the nine months ended September 30, 2011. This change for the first nine months of 2012 compared to the same period in 2011 was the result of increased U.S. earnings taxed at the U.S. rates, which are the highest tax rates of all the countries in which we are subject to tax.

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The purpose of this discussion and analysis is to focus on significant changes in the financial condition and results of operations of the Company during the three and nine months ended September 30, 2012. This discussion and analysis highlights and supplements information contained elsewhere in this Quarterly Report on Form 10-Q, particularly the preceding consolidated financial statements and notes. This discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2011 (“2011 Form 10-K”).

Forward-Looking Statements

This discussion and analysis includes statements regarding our future performance, liquidity, and capital resources, our plans and objectives for future operations, and assumptions relating to the foregoing. Such statements, along with any other non-historical statements in the discussion, are forward-looking. Our use of words such as “believe,” “expect,” “anticipate,” “intend,” “aim,” “will,” “shall,” “may,” “should,” “could,” “would,” “plan,” “estimate,” “continue,” “foresee,” or the negative of such terms, or other similar expressions often further identify a statement as a forward-looking statement (although not all forward-looking statements necessarily include one of these words). Forward-looking statements involve risks and uncertainties. Our actual results may differ materially from those contained in or implied by any of the forward-looking statements in this Form 10-Q. Important factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in “Part II, Item 1A. Risk Factors” of this Form 10-Q and in “Item 1A. Risk Factors” of our 2011 Form 10-K. We do not assume an obligation to update any forward-looking statement.

Company Overview

Westway Group, Inc., together with its wholly-owned subsidiaries (the “Company” or “we” or “us”) is a global provider of bulk liquid storage and related value-added services and the largest manufacturer and distributor of liquid feed supplements for the livestock industry in North America. We currently operate a global network of 25 operating storage facilities providing approximately 369 million gallons of total bulk liquid storage capacity and 34 operating liquid feed supplement facilities selling approximately 1.9 million tons of liquid feed supplements annually. Our Class A common stock is traded on the NASDAQ stock market under the symbol (WWAY). As of November 2, 2012, we had 492 employees.

Highlights of the Third Quarter of 2012

 

   

Consolidated net income increased 21% to $3.7 million during the third quarter of 2012 as compared to $3.0 million in the third quarter of 2011.

 

   

Consolidated net revenue increased $3.1 million, or 3%, to $106.2 million for the third quarter of 2012, as compared to $103.0 million in the third quarter of 2011, primarily attributable to increases in our liquid feed supplement net revenue. We achieved this increase by providing our liquid feed customers with products that met their price points and business needs in a variety of market conditions.

 

   

Our liquid feed supplements business recognized improvements in all three of its key performance indicators in the third quarter of 2012 compared to the same period in 2011.

 

   

Dollar gross profit increased $1.4 million, or 11%.

 

   

Gross profit margin percentage increased to 16.9% compared to 15.7%.

 

   

Tonnage sold totaled 469,000 tons, an increase of 1%. This and other improvements mentioned were partially due to our success in securing favorable supply contracts for several of our key ingredients. This combined with our modest volume increase and strong demand for our products enabled us to improve the gross profit margin.

 

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The liquid feed supplements business also made the following achievements in the third quarter of 2012:

 

   

Signed a licensing agreement with a commercial dry feed manufacturer, which will further our research into developing a new profitable process in the manufacturing of pellet feed.

 

   

Expanded the Sweet Lac product capacity by securing an additional source of the main ingredient, condensed whey. Currently, we are achieving profits from the sale of unprocessed condensed whey, and we are working on implementing our patented whey treatment process in order to begin producing Sweet Lac on a large commercial scale.

 

   

Our total global bulk liquid storage capacity increased to 369 million gallons at September 30, 2012, which is up from 354 million gallons at the end of the third quarter of 2011.

 

   

In our bulk liquid storage business, the following construction projects were either completed or under way during the third quarter of 2012:

 

   

Capacity expansion continued at our Houston 1, TX terminal, which will add 6.0 million gallons of storage capacity and three new dock lines, as well as associated inbound and outbound marine and land traffic infrastructure. Half of this capacity is already under a long term agreement for a lease beginning early in the fourth quarter of 2012. The remaining capacity from this expansion is on budget and scheduled for completion at the end of the fourth quarter of 2012.

 

   

At our Houston 2, TX terminal, we completed a project that added 2.5 million gallons of storage capacity. The project was completed on time and all of the additional capacity is currently under contract.

 

   

Construction has been completed subsequent to the end of the third quarter of 2012 of a new 3.0 million gallon tank at our Port Allen, LA terminal. The tank is already under a ten year lease agreement, which began in October 2012.

 

   

In late August 2012, the New Orleans area experienced Hurricane Isaac. Westway’s facilities did not suffer any damage, and commercial operations continued uninterrupted.

 

   

In late October 2012, our facilities in Baltimore, MD, Philadelphia, PA, and Albany, NY experienced Hurricane Sandy. These facilities did not suffer any damage, and continued operations with only minor interruptions.

Strategic Review

On December 15, 2011, we announced the receipt of an unsolicited preliminary offer from ED&F Man, our largest stockholder, to acquire our animal feed supplements business (“Westway Feed Products”) and certain non-core bulk liquid storage terminals. As a result, our Board of Directors initiated a process to explore strategic alternatives for the Company as a whole, including possible alternatives for the bulk liquid storage business. Our Board of Directors formed a Special Committee of independent directors to direct the strategic review process. The Special Committee retained Evercore Partners as its financial advisor to provide assistance in this process.

On December 21, 2011, we announced the receipt of an unsolicited proposal from an infrastructure investment fund to acquire Westway Group, Inc. for $6.00 per common share, $6.00 for each outstanding Series A Convertible Preferred share and $1.00 for each outstanding founder warrant. The proposal was contingent upon the consummation of the proposed transaction to sell Westway Feed Products and certain non-core bulk liquid storage terminals to ED&F Man. The Special Committee reviewed the unsolicited proposal with the assistance of Evercore Partners and determined that the proposal substantially undervalued our bulk liquid storage business (“Westway Terminals”) and did not provide any basis to begin discussions or negotiations.

 

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On June 13, 2012, we announced that the Company entered into final negotiations to sell Westway Feed Products and certain bulk liquid storage terminals located in Dublin, Ireland; Esbjerg, Denmark; and Liverpool, Hull and Grangemouth, United Kingdom (the “European Terminals”) to an affiliate of ED&F Man. The proposed transaction remains subject to, among other things, execution of a binding purchase agreement, a shared services agreement, regulatory clearances and the sale to a third party of Westway Terminals.

On August 2, 2012, we announced that the Company entered into final negotiations with a selected group of bidders to possibly acquire our Westway Terminals business. On August 2, 2012, we also announced the postponement of our annual meeting of stockholders, originally scheduled for August 6, 2012, to allow the Special Committee and our Board of Directors additional time to complete the evaluation of strategic alternatives available to the Company. The Board has not yet set a new date for the annual meeting. The Board has further decided that, until the conclusion of the Special Committee’s strategic evaluation process, consideration of matters otherwise affecting the capitalization of the Company, including the declaration of any dividends, will be deferred. See the Company’s Form 8-K filed with the SEC on August 3, 2012 for additional information.

In addition, we are currently negotiating with a selected group of bidders to possibly acquire our Westway Terminals business, which would occur through the acquisition of Westway Group, Inc.’s public equity securities following, or concurrent with, the sale of Westway Feed Products and the European Terminals.

Our Board has not set a definitive timetable for the completion of any of the proposed transactions and there can be no guarantee that either possible arrangement will result in a transaction or series of transactions or, if a transaction or series of transactions will be undertaken, the terms or timing of such transaction or series of transactions. We do not intend to disclose further developments regarding either process unless and until our Board of Directors has approved a specific course of action, or it otherwise deems further disclosure is appropriate or required.

There can be no assurance that we will enter into a definitive agreement for any transaction with ED&F Man or any other party for the sale of Westway Feed Products or Westway Terminals. In the event that any agreement is reached, such agreement will be subject to various conditions, and, accordingly, there can be no assurance that any transaction will be completed. See the “Risk Factors” section, item 1A of our 2011 Form 10-K filed on March 30, 2012 for more details.

Critical Accounting Policies and Estimates

We prepare our consolidated financial statements in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), which requires management to make estimates, judgments, and assumptions based upon available information that affect reported amounts and related disclosures. We base our estimates and judgments on historical experience and various other factors that we believe to be reasonable under the circumstances.

For a description of our critical accounting policies and critical accounting estimates that require us to make the most difficult, subjective or complex judgments, please see the “Critical Accounting Estimates” section of Item 7 of our 2011 Form 10-K. We have not changed these policies and method of estimating from those previously disclosed in our 2011 Form 10-K.

Results of Operations

Third Quarter of 2012 Compared to Third Quarter of 2011

The following is a discussion of operating results for the third quarter of 2012, compared to operating results for the third quarter of 2011.

NET REVENUE

 

     Three Months Ended
September 30,
        

(in thousands)

   2012      2011      Change  

Net revenue

   $ 106,152       $ 103,042       $ 3,110   

Total net revenue increased by $3.1 million or 3%, to $106.2 million for the third quarter of 2012, compared to $103.0 million for the third quarter of 2011. The increase was primarily due to providing our liquid feed customers with products that met their price points and business needs in a variety of market conditions. The increase was also attributable to increased U.S. bulk liquid storage revenue driven by our recent capital expansion projects.

Net revenue from third parties increased $4 million or 4%, to $102.9 million for the third quarter of 2012, compared to $98.9 million for the third quarter of 2011.

 

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Net revenue from related parties, which accounted for 3% of total net revenue in the third quarter of 2012 and 4% in the third quarter of 2011, decreased $924,000, to $3.2 million for the third quarter of 2012, when compared to $4.2 million for the third quarter of 2011.

The bulk liquid storage segment represented 21% of total net revenue for the third quarter of 2012 and 2011, while the liquid feed supplement segment represented the remaining 79% of total net revenue for these periods.

Bulk Liquid Storage

Net revenue for the bulk liquid storage business increased $525,000 for the third quarter of 2012 to $22.4 million from $21.9 million during the same period of 2011.

Within the U.S., bulk liquid storage net revenue increased 6% during the third quarter of 2012 compared to the same period in 2011, primarily reflecting the expansion of 10.5 million gallons of capacity at our Houston 1, TX and Houston 2, TX facilities, CPI adjustments, and increased rates on new and renewed contracts at several of our U.S. terminals since the third quarter of 2011. Market conditions remained healthy, and we are near full capacity at most of our locations with the exception of the Midwest terminals which are dependent on agricultural products. Our Cincinnati terminal continues to see improvements in utilization and rate increases due to the marketing and capital improvements that we have made at this location.

Bulk liquid storage net revenue outside the U.S. accounted for 28% of total global bulk liquid storage net revenue for the third quarter of 2012. During the third quarter of 2012, net revenue from outside of the U.S. decreased 5% compared to the same period in 2011. This decrease was primarily attributable to the fluctuation of exchange rates in the Euro, Pound Sterling, and Canadian dollar. Fluctuation of these three exchange rates had a combined negative impact on bulk liquid storage net revenue outside of the U.S. of approximately 6% during the third quarter of 2012, compared to rates experienced during the third quarter of 2011. The decrease in net revenue was also due to the continued softness in Poland as the result of various local issues. However, our Poland facility has secured several new contracts and has applied to obtain new permits to handle additional products in this region. Negative influences on outside U.S. bulk liquid storage revenue were partially offset by improving results at our Amsterdam facility due to the successful short term leasing of our newly constructed capacity. Our European activities are focused on developing new customer relationships, including opportunities in markets such as the United Kingdom, and reconfiguring our Polish terminal to participate in new product transportation modes. We believe that the overall state of our European storage market is stable, and we are seeing signs of increased commercial activity in previously soft market sectors.

On a global basis our storage capacity (net of disposals and not including construction in progress) increased to approximately 369 million gallons, as of September 30, 2012. The percentage capacity utilization of our bulk liquid storage facilities was approximately 91% at the end of the third quarter of 2012, compared to 92% at the end of the third quarter of 2011. While our third quarter 2012 percentage utilization has fallen slightly, we have been able to absorb our new-build capacity whereby storage that was earning revenue at September 30, 2012 totaled 334 million gallons as compared to 327 million gallons earning revenue at the same time last year.

We believe that both capacity and capacity utilization are key variables affecting the profitability of our bulk liquid storage business. We are continuing to seek opportunities to increase our bulk liquid storage capacity, including possible future projects for greenfield expansions and targeted infill development and handling of new products.

Liquid Feed Supplements

Net revenue for our liquid feed supplements business totaled $83.7 million for the third quarter of 2012, an increase of $2.6 million or 3%, compared to net revenue of $81.1 million for the third quarter of 2011. This increase is primarily attributable to continued strong volumes and pricing. Volume for the third quarter of 2012 increased slightly to 469,000 tons, compared to 465,000 tons sold in the same period of 2011. While results in most areas of our feed business have been strong, the performance of our locations in the Texas Panhandle, Midwest and Northeast regions of the United States have been exemplary.

We view volume, dollar gross profit and gross profit margin percentage as key performance indicators of our liquid feed supplements business. Generally, revenues are a partial indicator of performance because large fluctuations can occur from period to period due to general seasonal trends, as well as the volatility in the prices of underlying commodity ingredients which affect both competitive pricing strategies and the cost of sales. Gross profit margin percentage is a better indicator of performance because it reflects revenue as well as the cost of input associated with that revenue. Our business model is based on the concept that once fixed costs of an operating facility are covered, any revenue which exceeds variable costs contributes to the profitability of our business.

 

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COST OF SALES

 

     Three Months Ended         
     September 30,         

(in thousands)

   2012      2011      Change  

Costs of sales – liquid feed supplements

   $ 69,565       $ 68,393       $ 1,172   

Liquid feed supplement volume (tons)

     469         465         4   

Dollar gross profit

   $ 14,153       $ 12,740       $ 1,413   

The cost of sales for our liquid feed supplements business for the third quarter of 2012, including related party purchases, totaled $69.6 million, an increase of $1.2 million or 2%, compared to cost of sales of $68.4 million for the third quarter of 2011. The increase in costs of sales was primarily due to the increasing cost of ingredients and an increase in sales volumes in the third quarter of 2012.

Dollar gross profit (net revenue less cost of sales) for the liquid feed supplement business increased by $1.4 million or 11%, to $14.2 million for the third quarter of 2012, compared to $12.7 million for the third quarter of 2011, as a result of increased sales and demand in markets that benefited from securing favorable key input supply contracts.

Gross profit margin percentage (net revenue less cost of sales, divided by net revenue) for the liquid feed supplement business increased to 16.9% for the third quarter of 2012, compared to 15.7% for the third quarter of 2011. This increase was due to higher demand for our products in light of the higher cost of competitive dry feed products.

OTHER OPERATING COSTS AND EXPENSES

 

     Three Months Ended         
     September 30,         

(in thousands)

   2012      2011      Change  

Other operating costs and expenses

   $  14,524       $  14,182       $  342   

Other operating costs and expenses for the third quarter of 2012 were $14.5 million, an increase of $342,000 or 2%, from $14.2 million for the third quarter of 2011. The increase in the third quarter of 2012 was primarily due to higher liquid feed supplements other operating expenses, particularly increased personnel and maintenance costs to accommodate higher sales volumes in the Texas Panhandle and Western US. The increase in costs is also attributable to the new cooked tub business at Catoosa, which came online in late 2011.

Additionally, these negative influences were partially offset by a combined beneficial impact on bulk liquid storage other operating costs and expenses outside of the U.S. of approximately 4% from fluctuations of exchange rates in the Euro, Pound Sterling, and Canadian dollar during the third quarter of 2012, compared to rates experienced during the same period of 2011.

Of the total other operating costs and expenses, the bulk liquid storage segment accounted for 64% and 66% for the third quarter of 2012 and 2011, respectively, and the liquid feed supplement segment accounted for 36% and 34%, respectively. Major components of other operating costs and expenses included payroll, repairs, utilities, and insurance.

DEPRECIATION AND AMORTIZATION

 

     Three Months Ended         
     September 30,         

(in thousands)

   2012      2011      Change  

Depreciation and amortization

   $ 6,955       $ 6,490       $ 465   

Depreciation and amortization costs increased $465,000 or 7%, to $7.0 million for the third quarter of 2012, from $6.5 million for the third quarter of 2011. The increase was due to new capital investments since the third quarter of 2011 at our Houston 1, TX, Houston 2, TX, and Amsterdam facilities.

Of the total depreciation, the bulk liquid storage segment accounted for 80% for the third quarter of 2012 and 78% in the third quarter of 2011, and the liquid feed supplement segment accounted for 18% in both periods. The corporate non-operating segment represented the remaining 2% and 4% for the third quarter of 2012 and 2011, respectively.

 

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SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES

 

     Three Months Ended         
     September 30,         

(in thousands)

   2012      2011      Change  

Selling, general and administrative expenses

   $ 9,069       $ 8,105       $ 964   

Selling, general and administrative expenses for the third quarter of 2012 increased $964,000 or 12%, to $9.1 million, compared to $8.1 million for the third quarter of 2011. The increase was primarily due to approximately $750,000 of corporate legal and advisory fees incurred in our strategic review process that is currently under way. We have managed to maintain our other corporate selling, general, and administrative expenses at a consistent level as compared to the same period in 2011. The remainder of the increase was due to higher liquid feed supplement personnel costs as well as additional consulting and research costs as part of ongoing strategies to promote new feed product development and business growth.

Of the total selling, general and administrative expenses, the bulk liquid storage segment represented 16% and 19% for the third quarter of 2012 and 2011, respectively the liquid feed supplement segment represented 35% and 36% for the third quarter of 2012 and 2011, respectively, and the corporate segment, including health, safety and environmental quality expenses, represented the remaining 49% and 45%, respectively. Selling, general, and administrative expenses included costs associated with payroll, office, and other administrative expenses of our bulk liquid storage and liquid feed supplement operations, as well as corporate general and administrative costs.

OPERATING INCOME

 

     Three Months Ended         
     September 30,         

(in thousands)

   2012      2011      Change  

Operating income

   $ 6,039       $ 5,872       $ 167   

Operating income increased by $167,000 to $6.0 million for the third quarter of 2012 compared to $5.9 million for the third quarter of 2011. This increase was due in part to higher liquid feed supplement dollar gross profit and was offset by increased depreciation and amortization, other operating cost and expense, and selling general and administrative expenses in the third quarter of 2012 compared to the third quarter of 2011.

Operating income for the third quarter of 2012 was comprised of operating income of $6.2 million from the bulk liquid storage segment and $4.4 million from the liquid feed supplements segment, less corporate segment costs of $4.5 million. Operating income for the third quarter of 2011 was comprised of operating income of $6.0 million from the bulk liquid storage segment and $3.7 million from the liquid feed supplements segment, less corporate segment costs of $3.8 million.

INTEREST, NET

 

     Three Months Ended        
     September 30,        

(in thousands)

   2012     2011     Change  

Interest, net

   $ (898   $ (942   $ 44   

Interest expense decreased by $44,000 or 5%, to $898,000 for the third quarter of 2012, compared to $942,000 for the third quarter of 2011. The decrease was primarily due to the reduction of interest rates over the past year.

LOSS ON DISPOSAL OF PROPERTY, PLANT & EQUIPMENT

 

     Three Months Ended        
     September 30,        

(in thousands)

   2012     2011     Change  

Loss on disposal of property, plant & equipment

   $ (46   $ (42   $ (4

 

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Loss on disposal of property, plant & equipment increased $4,000 or 10% to $46,000 for the third quarter of 2012, compared to $42,000 for the third quarter of 2011. These losses resulted from the disposal of obsolete equipment during the period which we believe no longer had a useful life.

INCOME TAXES

 

     Three Months Ended        
     September 30,        

(in thousands)

   2012     2011     Change  

Income tax provision

   $ (1,323   $ (1,713   $ 390   

We had a consolidated income tax provision of $1.3 million for the third quarter of 2012 as compared to $1.7 million for the third quarter of 2011. The change was primarily due to a reduction in foreign earnings subject to U.S. tax in the third quarter of 2012 as compared to the third quarter of 2011.

NET INCOME ATTRIBUTABLE TO WESTWAY GROUP, INC.

 

     Three Months Ended         
     September 30,         

(in thousands)

   2012      2011      Change  

Net income attributable to Westway Group, Inc.

   $ 3,676       $ 3,030       $ 646   

Net income attributable to Westway Group, Inc. increased $646,000 from $3.0 million during the third quarter of 2011 to $3.7 million for the third quarter of 2012. This increase primarily resulted from a $390,000 decrease in the income tax provision, a $167,000 increase in operating income, and a $44,000 reduction in interest expense.

PREFERRED DIVIDENDS ACCRUED

 

     Three Months Ended        
     September 30,        

(in thousands)

   2012     2011     Change  

Preferred dividends accrued

   $ (1,146   $ (1,114   $ (32

Accruals for preferred dividends remained relatively consistent at $1.1 million for the third quarter of 2012 and 2011. The slight increase of $32,000 was the result of dividends accruing on an additional 934,631 shares of Series A Convertible Preferred Stock issued throughout the trailing twelve months in satisfaction of outstanding unpaid accrued dividends.

NET INCOME APPLICABLE TO COMMON AND PARTICIPATING STOCKHOLDERS

 

     Three Months Ended        
     September 30,        

(in thousands)

   2012     2011     Change  

Net (income) applicable to participating stockholders

   $ (1,389   $ (1,301   $ (88

Net income applicable to common stockholders

   $ 1,141      $ 615      $ 526   

Net income applicable to participating stockholders was $1.4 million for the third quarter of 2012 compared to $1.3 million for the third quarter of 2011. In the third quarter of 2012, $1.4 million of undistributed earnings was allocated to the participating stockholders and no common dividends were declared. In the third quarter of 2011, $1.3 million of common dividends were declared to participating stockholders.

Net income applicable to common stockholders increased $526,000, to $1.1 million for the third quarter of 2012 as compared to net income of $615,000 for the third quarter of 2011. This increase was primarily due to an increase in net income attributable to Westway Group, Inc. of $646,000, partially offset by an increase in net income attributable to participating stockholders.

First Nine Months of 2012 Compared to First Nine Months of 2011

The following is a discussion of operating results for the first nine months of 2012, compared to operating results for the first nine months of 2011.

 

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NET REVENUE

 

     Nine Months Ended
September 30,
        

(in thousands)

   2012      2011      Change  

Net revenue

   $ 314,698       $ 290,186       $ 24,512   

Total net revenue increased by $24.5 million or 8% to $314.7 million for the first nine months of 2012, when compared to $290.2 million for the first nine months of 2011. The increase was primarily due to providing our liquid feed customers with products that met their price points and business needs in a variety of market conditions. The increase was also attributable to increased U.S. bulk liquid storage driven by our recent capital expansion projects.

Net revenue from third parties increased $26.2 million or 9% to $304.7 million for the first nine months of 2012, compared to $278.5 million for the first nine months of 2011.

Net revenue from related parties, which accounted for 3% of total net revenue in the first nine months of 2012 and 4% for the first nine months of 2011, decreased $1.7 million, to $10 million for the first nine months of 2012, when compared to $11.7 million for the first nine months of 2011.

The bulk liquid storage segment represented 21% and 23% of total net revenue for the first nine months of 2012 and 2011, respectively, while the liquid feed supplement segment represented the remaining 79% and 77% of total net revenue for these periods.

Bulk Liquid Storage

In the bulk liquid storage business, net revenue increased by $434,000, to $67.2 million for the first nine months of 2012, from $66.7 million for the first nine months of 2011.

Within the U.S., bulk liquid storage net revenue increased 5% during the first nine months of 2012 compared to the same period in 2011, primarily reflecting the expansion of 10.5 million gallons of capacity at our Houston 1, TX and Houston 2, TX facilities, CPI adjustments, and increased rates on new and renewed contracts at several of our U.S. terminals since the third quarter of 2011. Market conditions remained healthy and we are near full capacity at most of our locations, with the exception of the Midwest terminals which are dependent on agricultural products. Our Cincinnati terminal continues to see improvements in utilization and rate increases due to the marketing and capital improvements that we have made at this location.

Bulk liquid storage net revenue outside the U.S. accounted for 28% of our total global bulk liquid storage net revenue for the first nine months of 2012. During the first nine months of 2012, net revenue from outside the U.S. decreased 9% compared to the first nine months of 2011. The decrease in net revenue was due to the continued softness in Poland as the result of various local issues, as well as a contract buy-out in the United Kingdom that increased revenues in the third quarter of 2011 but was not repeated in 2012. However, our Poland facility has secured several new contracts and has applied to obtain new permits to handle additional products in this region. Also affecting bulk liquid storage revenue outside the U.S. was the fluctuation of exchange rates in the Euro, Pound Sterling, and Canadian dollar. Fluctuation of these three exchange rates had a combined negative impact on bulk liquid storage net revenue outside of the U.S. of approximately 5% during the first nine months of 2012, compared to rates experienced during the first nine months of 2011. Negative influences on outside U.S. bulk liquid storage revenue were partially offset by improving results in the Denmark and Ireland markets due to increased ancillary revenue and through-put, respectively. Our European activities are focused on developing new customers, including opportunities in markets such as the United Kingdom, and reconfiguring our Polish terminal to participate in new product transportation modes. We believe that the overall state of our European storage market is stable, and we are seeing signs of increased commercial activity in previously soft market sectors.

On a global basis our storage capacity (net of disposals and not including construction in progress) increased to approximately 369 million gallons, as of September 30, 2012. The percentage capacity utilization of our bulk liquid storage facilities was approximately 91% at the end of the third quarter of 2012, compared to 92% at the end of the third quarter of 2011. While our third quarter 2012 percentage utilization has fallen slightly, we have been able to absorb our new-build capacity whereby storage that was earning revenue at September 30, 2012 totaled 334 million gallons as compared to 327 million gallons earning revenue at the same time last year.

Liquid Feed Supplements

Net revenue for our liquid feed supplements business totaled $247.5 million for the first nine months of 2012, an increase of $24.0 million or 11%, compared to net revenue of $223.5 million for the first nine months of 2011. This increase is attributable to both continued strong volumes and pricing for our products. Volume for the first nine months of 2012 increased by 7% to 1.4 million tons, compared to 1.3 million tons for the same period in 2011. While results in most areas of our feed business have been strong, the performance of our locations in the Texas Panhandle, Midwest and Northeast regions of the United States have been exemplary.

 

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COST OF SALES

 

     Nine Months Ended
September 30,
        

(in thousands)

   2012      2011      Change  

Costs of sales – liquid feed supplements

   $ 206,786       $ 187,593       $ 19,193   

Liquid feed supplement volume (tons)

     1,396         1,309         87   

Dollar gross profit

   $ 40,759       $ 35,874       $ 4,885   

For the first nine months of 2012, cost of sales for our liquid feed supplements business, including related party purchases, totaled $206.8 million, an increase of $19.2 million or 10%, compared to cost of sales of $187.6 million for the first nine months of 2011. The increase in costs of sales was primarily due to the higher sales volume and an increase in the prices we pay for inputs.

Dollar gross profit (net revenue less cost of sales) for the liquid feed supplements business increased $4.9 million or 14%, to $40.8 million for the first nine months of 2012, compared to $35.9 million for the first nine months of 2011, as a result of higher sales volume and prices in the first nine months of 2012.

Gross profit margin percentage (net revenue less cost of sales, divided by net revenue) for the liquid feed business increased slightly to 16.5% for the first nine months of 2012, compared to 16.1% for the first nine months of 2011. This increase was due to higher demand for our products in light of the higher cost of competitive dry feed products.

OTHER OPERATING COSTS AND EXPENSES

 

           Nine Months Ended
September 30,
        

(in thousands)

        2012           2011           Change  

Other operating costs and expenses

      $ 44,800          $ 43,502          $ 1,298   

Other operating costs and expenses for the first nine months of 2012 were $44.8 million, an increase of $1.3 million or 3%, from $43.5 million for the first nine months of 2011. The increase in the first nine months of 2012 was primarily due to higher other operating expenses from the liquid feed supplements business, particularly increased personnel and maintenance costs to accommodate higher sales volumes in the Texas Panhandle and Western US. The increase in liquid feed other operating costs is also attributable to the new cooked tub business at Catoosa which came online in late 2011.

Additionally in the bulk liquid storage business, other operating expenses in the U.S. increased particularly as a result of a bad debt provision related to a single customer in which we are pursuing legal remedies. These detrimental influences were partially offset by a combined beneficial impact on bulk liquid storage other operating costs and expenses outside of the U.S. of approximately 4% from fluctuations of exchange rates in the Euro, Pound Sterling, and Canadian dollar during the first nine months of 2012 compared to rates experienced during the same period of 2011.

Of the total other operating costs and expenses, the bulk liquid storage segment accounted for 65% and 66% for the first nine months of 2012 and 2011, respectively, and the liquid feed supplement segment accounted for 35% and 34%, respectively.

DEPRECIATION AND AMORTIZATION

 

           Nine Months Ended
September 30,
        

(in thousands)

        2012           2011           Change  

Depreciation and amortization

      $ 20,560          $ 19,134          $ 1,426   

Depreciation and amortization costs increased $1.4 million to $20.6 million for the first nine months of 2012 from $19.1 million for the first nine months of 2011. The increase was due to new capital investments since the third quarter of 2011 at our Houston 1, TX, Houston 2, TX, and Amsterdam facilities.

Of the total depreciation, the bulk liquid storage segment accounted for 80% and 78% for the first nine months of 2012 and 2011, respectively, and the liquid feed supplement segment accounted for 18% and 19% for the same periods. The corporate non-operating segment accounted for the remaining 2% and 3% for 2012 and 2011, respectively, relating mainly to information technology software.

 

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SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES

 

           Nine Months Ended
September 30,
        

(in thousands)

        2012           2011           Change  

Selling, general, and administrative expenses

      $ 27,601          $ 24,804          $ 2,797   

Selling, general, and administrative expenses for the first nine months of 2012 increased $2.8 million or 11%, to $27.6 million, compared to $24.8 million for the first nine months of 2011. The increase was primarily due to approximately $2.5 million of corporate legal and advisory fees incurred in our strategic review process that is currently under way. We have managed to maintain our other corporate selling, general, and administrative expenses at approximately the same level as compared to the same period in 2011. The increase was also partially due to higher liquid feed personnel costs and additional consulting and research costs as part of ongoing strategies to promote new product development and business growth in the liquid feed supplements business. These increased costs were partially offset by a decline in personnel costs in the bulk liquid storage business.

Of the total selling, general, and administrative expenses, the bulk liquid storage segment represented 16% and 20% for the first nine months of 2012 and 2011, respectively the liquid feed supplement segment represented 35% and 35%, respectively, and the corporate segment, including health, safety and environmental quality expenses, represented the remaining 49% and 45%, respectively.

OPERATING INCOME

 

      Nine Months Ended
September 30,
        

(in thousands)

   2012      2011      Change  

Operating income

   $ 14,951       $ 15,153       $ (202

Operating income decreased by $202,000 or 1%, to $15.0 million for the first nine months of 2012 from $15.2 million for the first nine months of 2011. This decrease was due in part to higher selling, general, and administrative expenses, depreciation and amortization, and other operating cost and expense in the first nine months of 2012 compared to the first nine months of 2011. These factors were partially offset by an increase in liquid feed supplements dollar gross profit in the first nine months of 2012 compared to the same period in 2011.

Operating income for the first nine months of 2012 was comprised of operating income of $17.2 million from the bulk liquid storage segment and $11.5 million from the liquid feed supplements segment, less corporate segment costs of $13.7 million. Operating income for the first nine months of 2011 was comprised of operating income of $18.0 million from the bulk liquid storage segment and $8.7 million from the liquid feed supplements segment, less corporate segment costs of $11.5 million.

INTEREST, NET

 

      Nine Months Ended
September 30,
       

(in thousands)

   2012     2011     Change  

Interest, net

   $ (2,650   $ (3,509   $ 859   

Interest expense decreased by $859,000 or 24% to $2.7 million for the first nine months of 2012 compared to $3.5 million for the first nine months of 2011. The decrease was primarily due to the reduction of interest rates and commitment fees payable as a result of the July 2011 amendment to our credit facility. This amendment also extended the maturity date of the overall facility and resulted in a longer amortization period for debt financing costs.

LOSS ON DISPOSAL OF PROPERTY, PLANT & EQUIPMENT

 

      Nine Months Ended
September 30,
       

(in thousands)

   2012     2011     Change  

Loss on disposal of property, plant & equipment

   $ (109   $ (771   $ 662   

 

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Table of Contents

Loss on disposal of property, plant & equipment decreased $662,000 to $109,000 for the first nine months of 2012 compared to $771,000 for the first nine months of 2011. These losses resulted from the disposal of obsolete equipment during the period which we believe no longer had a useful life.

INCOME TAXES

 

      Nine Months Ended
September 30,
       

(in thousands)

   2012     2011     Change  

Income tax provision

   $ (4,007   $ (3,521   $ (486

We had a consolidated income tax provision of $4.0 million for the first nine months of 2012 as compared to $3.5 million for the first nine months of 2011. The change for the first nine months of 2012 compared to the same period in 2011 was primarily due to our increase in income (before income tax provision and equity in loss of unconsolidated subsidiary).

NET INCOME ATTRIBUTABLE TO WESTWAY GROUP, INC.

 

      Nine Months Ended
September 30,
        

(in thousands)

   2012      2011      Change  

Net income attributable to Westway Group, Inc.

   $ 7,889       $ 6,846       $ 1,043   

Net income attributable to Westway Group, Inc. increased by $1.0 million to $7.9 million for the first nine months of 2012 as compared to $6.8 million for the first nine months of 2011. This increase was primarily due to an $859,000 decrease in interest expense and a $662,000 decrease in loss on disposal of property, plant, and equipment. These factors were partially offset by a $486,000 increase in income tax provision and a $202,000 decrease in operating income.

PREFERRED DIVIDENDS ACCRUED

 

      Nine Months Ended
September 30,
       

(in thousands)

   2012     2011     Change  

Preferred dividends accrued

   $ (3,419   $ (3,332   $ (87

Accruals for preferred dividends increased slightly to $3.4 million for the first nine months of 2012 compared to $3.3 million for the first nine months of 2011. The slight increase of $87,000 was the result of dividends accruing on an additional 934,631 shares of Series A Convertible Preferred Stock issued throughout the trailing twelve months in satisfaction of outstanding unpaid accrued dividends.

NET INCOME APPLICABLE TO COMMON AND PARTICIPATING STOCKHOLDERS

 

      Nine Months Ended
September 30,
       

(in thousands)

   2012     2011     Change  

Net (income) applicable to participating stockholders

   $ (2,661   $ (1,301   $ (1,360

Net income applicable to common stockholders

   $ 1,809      $ 2,213      $ (404

Net income applicable to participating stockholders was $2.7 million for the first nine months of 2012 compared to $1.3 million for the first nine months of 2011. In the first nine months of 2012, $2.7 million of common dividends were declared to participating stockholders. In the first nine months of 2011, $1.3 million of common dividends were declared to participating stockholders.

Net income applicable to common stockholders decreased $404,000, to $1.8 million for the first nine months of 2012 as compared to net income applicable to common stockholders of $2.2 million for the first nine months of 2011. This decrease was primarily due to an increase in net income applicable to participating stockholders of $1.4 million, partially offset by an increase in net income attributable to Westway Group, Inc. of $1.0 million.

 

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Trends in Results of Operations

In our liquid feed supplements business, we have achieved higher gross profit margins while maintaining our growth in volumes for the first nine months of 2012, as compared to the first nine months of 2011, by meeting the requirements of our customers with products that met their price points and business needs in a variety of market conditions. Although our gross profit margin percentage increased only slightly for the first nine months of 2012 compared to the first nine months of 2011, we have increased volume and dollar gross profit by offering our liquid feed alternatives in a market experiencing high priced dry feed commodities.

Liquid feed supplement sales typically follow a seasonal pattern with demand influenced by the availability of pasture grass for grazing livestock. Normally, demand is lower during the spring and summer and stronger in the fall and winter. During the summer of 2011, our demand for liquid feed supplement products and tonnage sold was atypically high due to unusual drought conditions affecting the growth of pasture grass in the Southwest U.S. While the Southwest U.S. has returned to more typical rainfall conditions, in 2012 the U.S. suffered one of the most widespread droughts in decades. The drought led to a decline in the availability of pasture grass and significantly increased the demand for our liquid feed supplement products versus higher priced dry ingredient based commodities in 2012. Additionally, in 2012 we have been successful in broadening our base of business to provide more products to our existing customers, while also expanding our customer base. We believe that this broadening of our business will continue in the future, as well as strategies to continue our expansion into making and selling liquid animal feed for other species of livestock besides cattle and horses.

However, the negative impact of the drought and high priced commodities is causing economic stress to our liquid feed supplement customer base. If the resultant high price of commodities does not moderate in the near future, it could have a negative impact on our profits as well.

In our bulk liquid storage business, global demand has generally remained strong, notably in the U.S. and the United Kingdom. Contracts continue to renew at a high percentage and at higher lease rates due to contractual escalations and targeted efforts to raise rates where tight market conditions permit.

There has been continued softness in certain European markets attributable to various local issues, including volatility in oil industry pricing, disappearance of renewable energy subsidies, and migration of logistic supply chains in favor of inland rather than marine transport in Poland. While we are experiencing some improvement in Poland, we remain concerned about the general softness in the Polish market. These conditions have led to some continued localized excesses in the supply of storage. However, our Poland facility has secured several new contracts and has applied to obtain new permits to handle additional products in this region. We believe that the overall state of the European storage market is stable, and we are seeing signs of increased commercial activity in previously soft market sectors.

The storage market in North America remains healthy, and overall capacity utilization exceeds our global average. We have not recognized any broad impact from the general economic slowdown. However, we have noted isolated incidents of softness in market demand due to the drought in certain Midwest locations, which has in general negatively impacted agricultural activity, particularly in edible oils. Therefore, some of our inland terminals are experiencing lower seasonal demand. We are taking steps to diversify the products we store away from highly volatile or seasonal agricultural products, while improving rates by storing higher margin products.

This discussion regarding trends contains numerous forward-looking statements. Important factors that could cause our results to differ materially include the intensity of demand for our products and services, the cost of raw materials, the actions of our competitors in our various markets, and other risk factors described in Part II, Item 1A of this Form 10-Q.

Liquidity and Capital Resources

Cash and Working Capital

During the first nine months of 2012, our cash and cash equivalents decreased by $6.3 million from December 31, 2011 to a total of $7.1 million at September 30, 2012. This decrease was the result of cash provided by operating activities of $23.7 million, cash used in investing activities of $24.8 million, cash used in financing activities of $5.8 million, and a positive exchange rate effect of $533,000.

Our working capital (by which we mean total current assets less total current liabilities) increased by $5.5 million from $37.0 million at December 31, 2011, to $42.5 million at September 30, 2012.

Total net trade accounts receivable, including amounts due from related parties, decreased 11% to $42.3 million at September 30, 2012 from $47.3 million at December 31, 2011, due primarily to the seasonality of the liquid feed supplement business, which is predominately driven by cattle feeding and typically stronger in the fall and winter months (feed season) because cattle are fed grasses during the spring and summer months.

 

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Total trade accounts payable, including amounts due to related parties, decreased 40% to $13.1 million at September 30, 2012 from $21.7 million at December 31, 2011, due primarily to the seasonality of the liquid feed supplement business.

Total accrued expenses and other current liabilities decreased 23% to $22.0 million at September 30, 2012 from $28.4 million at December 31, 2011, due to payments made during the first quarter of 2012 relating to employee bonuses, a reduction in the common dividends accrued due to payment, and a decrease in goods received and not yet invoiced as a result of the seasonality of the liquid feed business.

Sources

Our capital expenditures have been financed primarily with cash flows from operations, periodically supplemented by borrowings from our credit facility.

At September 30, 2012, we had $109.5 million of borrowing capacity available under our $200 million bank revolving credit facility. We have the option, subject to certain conditions, to increase the credit facility by up to $50 million (the “accordion” feature).

Our internal sources of liquidity generally include our cash balances, our cash equivalents (which are readily convertible to cash), and our current cash flows from operations. Our external sources of liquidity include our bank revolving credit facility. Our available sources of liquidity include the balance still available to be drawn down under the credit facility.

Uses

We used cash to fund ongoing operations, including paying for purchases of raw materials, leases of land and equipment, and payroll, to fund capital expenditures for expansions and maintenance, and to pay debt service, taxes, professional fees relating to our strategic review, cash dividends, and for other purchases.

Trends in Liquidity

The cash flows from operations of the bulk liquid storage and liquid feed supplements businesses have been positive for each 12 month fiscal year for the last 3 years. We expect that cash flows from operations will continue to be positive for the next twelve months. We also note that the capital expenditures of our two businesses for expansion are likely to increase, consistent with our growth strategy.

Cash Flows

Operating Activities

Our net cash provided by operating activities for the first nine months of 2012 was $23.7 million, whereas in the first nine months of 2011, operating activities provided net cash of $22.6 million. This increase in operating cash flow compared to the first nine months of 2011 is largely due to the aggregate net change in working capital items, specifically accounts receivable, as well as an increase in depreciation and amortization and an increase in net income.

Cash provided by operating activities was generated primarily from bulk liquid storage rentals, throughput fees, and ancillary service fees and sales of liquid feed supplements. Cash was used in operating activities mainly for costs of raw materials, maintenance expenses, payroll costs, utilities, professional services, interest, and taxes.

Investing Activities

Our investing activities resulted in net cash used of $24.8 million for the first nine months of 2012, compared to net cash used of $26.6 million for the comparable period in 2011. This decrease was partially due to slightly lower capital expenditures, primarily in our bulk liquid storage segment for the first nine months of 2012 compared to the same period in 2011. The decrease was also due to $850,000 of cash received as a result of our sale of our 51% interest in Sunnyside Feed, LLC in the first quarter of 2012. Historically, cash used in our investing activities has primarily been spent on acquisitions of businesses and on expansion of our existing facilities.

Financing Activities

Our financing activities resulted in net cash used of $5.8 million for the first nine months of 2012, compared to net cash provided of $1.1 million for the comparable period in 2011. The difference between the periods is primarily due to the repayment of $3.0 million on our credit facility during the second quarter of 2012 compared to the receipt of $4.1 million of proceeds from our credit facility during the second quarter of 2011. The difference also relates to the payment of cash dividends of $1.6 million and the purchase of 1.4 million founder warrants for $1.2 million during the first nine months of 2012, as well as the payment of $1.6 million of deferred finance costs in the third quarter of 2011.

 

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Effect of Exchange Rate Changes on Cash and Cash Equivalents

During the first nine months of 2012, exchange rate changes increased our cash and cash equivalents by $533,000, primarily due to the weakening of the U.S. dollar against other foreign currencies, including the Euro, Pound Sterling, Canadian dollar and Polish Zloty, during this period. During the first nine months of 2011, exchange rate changes decreased our cash and cash equivalents by $235,000, primarily due to the strengthening of the U.S. dollar against other foreign currencies, including the Euro, Pound Sterling, and Canadian dollar, during that period.

Future Cash Flows

This section consists almost entirely of forward-looking statements. Important factors that could cause our actual results to differ materially from the statements in this section include any changes resulting from the strategic review process described above under “Strategic Review,” changes in the expected profitability and cash flow of one or both of our businesses, changes in the amount or timing of our expected investments, or changes in the amount or timing of our expected draws under our credit facilities, as well as other risk factors described in Item 1A of our 2011 Form 10-K, as revised and updated in Part II, Item 1A of this Form 10-Q.

Sources

We expect our principal sources of liquidity in 2012 to be our cash flow from operations supplemented by our credit facility, on which the available borrowing capacity as of September 30, 2012 was $109.5 million, not including the $50 million accordion feature. We expect our cash flow from operating activities to be positive for the remainder of the year and for the next twelve months. As cash flow from operations is a key source of liquidity for us, decreases in demand for our products or services would reduce the availability of funds.

Uses

We expect to use our available cash flow to pay operating expenses, maintenance capital expenses, interest payments, tax payments, expansion capital expenditures, and discretionary debt principal payments.

As part of our operating expenses, we expect to continue to make significant purchases of raw materials for our liquid feed supplements business. We have a long-term molasses supply agreement with the ED&F Man group, pursuant to which the ED&F Man group is expected to continue to be our primary supplier of cane molasses. The initial term of the agreement runs until May 28, 2019, after which the agreement provides for automatic renewals for successive one-year periods unless either party gives notice of non-renewal. Effective October 2012, the addendum to this molasses supply agreement was renewed for an additional one-year term.

Also as part of operating expenses, we expect to continue to make lease payments. We have long-term operating leases on 21 bulk liquid storage facilities and 14 liquid feed supplements processing and distribution facilities. Typically these leases extend beyond five years.

In the normal course of business, we make investments in the properties and facilities utilized by our bulk liquid storage and liquid feed supplements businesses. As a result, at any given time, we have outstanding contracts with third parties reflecting long-term commitments for capital expenditures not yet incurred. At September 30, 2012, these commitments totaled $2.8 million.

We currently have ongoing expansion projects for the construction of approximately 3.0 million gallons of new storage capacity and associated infrastructure at our Houston 1, TX terminal. The completion of these projects is expected in fourth quarter of 2012.

Any liquidity in excess of our operating expenses, working capital needs, and planned capital expenditures, is expected to repay part of our credit facility or to finance the implementation of our growth strategy.

Short-term Adequacy

We believe that our current cash and cash equivalents, credit facility, and the cash flow we anticipate to generate from operating activities will provide us with sufficient liquidity to pay our operating expenses, to satisfy our working capital needs, to make our planned capital expenditures, and to meet our commitments for the next 12 months. We expect that we will be in compliance with covenants relating to our outstanding debt during this period.

We expect that our operating expenses, maintenance capital expenditures, interest payments, and tax payments, will generally be funded by cash from operating activities during the remainder of 2012, and for the next twelve months.

 

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We believe cash generated from operations, combined with our availability to draw on our current credit facility, will be sufficient to fund our capital expenditure requirement in 2012 and for the next twelve months. Our capital expenditures can generally be accelerated or scaled back depending on our liquidity.

Cash generated from operating activities can fluctuate depending on global economic conditions. If the availability of credit is tightened due to economic conditions, this could affect the demand of some of our customers for our products and services. Nonetheless, we expect to have sufficient access to cash to complete our committed projects in 2012.

Long-term Adequacy

Beyond the next twelve months, we expect to have the ability to generate sufficient liquidity and capital resources to meet our future cash requirements, including our debt obligations for the reasonably foreseeable future. We believe that our liquidity and capital resources will be sufficient beyond the next twelve months based on the following assumptions:

 

   

our businesses should continue to generate significant operating cash flow on an annual basis;

 

   

the ongoing maintenance capital expenditures associated with our businesses should be readily funded from their annual operating cash flow or available financing; and

 

   

we expect to be able to refinance or extend maturing debt on terms that can be supported by the performance of our businesses.

General

We expect that our financing arrangements will provide us with sufficient financial flexibility to fund our operations, debt service requirements, capital expenditure plans, and any cash dividends. Our ability to access additional debt or equity capital in the long-term depends on the availability of capital markets, our operating and financial performance, and pricing on commercially reasonable terms. From time-to-time, we review our long-term financing and capital structure. As a result of this review, we may periodically explore alternatives to our current capital structure and financing, including the issuance of additional equity or long-term debt, refinancing our credit facility, and other restructurings or financings. In addition, we may from time to time seek to repurchase a portion of our outstanding equity, including common stock and/or warrants, in open market purchases, privately negotiated transactions, or otherwise; and our board of directors may also review our corporate dividend policy. These matters, if any, will depend on prevailing market conditions, contractual restrictions, government regulations, and other factors. The amount of these matters may be material and may involve significant amounts of cash and/or financing availability.

Impact of New Accounting Standards

For a discussion of accounting standards, see Note 3 of Notes to Consolidated Financial Statements included in our 2011 Form 10-K. Management does not believe that any recently issued, but not yet effective, accounting pronouncements, if currently adopted, would have a material effect on the Company’s financial statements.

Other Factors Affecting Our Business and Financial Results

In addition to the matters discussed above, our business, financial condition and results of operations are affected by a number of other factors. This quarterly report on Form 10-Q should be read in conjunction with the discussion in our 2011 Form 10-K regarding risk factors, including the factors described in the “Factors that Affect Financial Performance” section of Item 7 and the “Risk Factors” section, Item 1A, in our 2011 Form 10-K, as revised and updated in the “Risk Factors” section, Part II, Item 1A in this Form  10-Q.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Our accumulated other comprehensive income as presented in our consolidated statements of stockholders’ equity includes unrealized gains and losses from foreign currency translation. The assets, liabilities and results of operations of certain of our foreign subsidiaries are measured using their functional currency, which is the currency of the foreign economic environment in which they operate. Upon consolidating these subsidiaries, their assets and liabilities are translated to U.S. dollars at currency exchange rates as of the balance sheet date, their revenue and expenses are translated at the weighted average currency exchange rate for the applicable reporting period, and their stockholder’s equity accounts are translated at historical exchange rates during the applicable reporting periods. Gains or losses from translation of foreign subsidiaries are included in accumulated other comprehensive income.

Translation adjustments included in accumulated other comprehensive income as of September 30, 2012 amounted to $2.0 million of unrealized gains, primarily due to the weakening of the U.S. dollar against other foreign currencies including the Euro, Pound Sterling, Canadian dollar and Polish Zloty. This exchange rate change positively impacted the net assets used in our foreign operations and held in local currencies, resulting in a change in cumulative translation adjustments to a $536,000 unrealized loss as of September 30, 2012, compared to a $2.5 million unrealized loss as of December 31, 2011. We do not presently hedge against the risks of foreign currency fluctuations but are continuing to evaluate the possible future use of foreign currency hedging strategies where we deem appropriate.

 

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For more information regarding our exposure to certain market risks, see “Quantitative and Qualitative Disclosures about Market Risk,” Item 7A of our 2011 Form 10-K.

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Based on management’s evaluation (with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO)), as of the end of the period covered by this report, our CEO and CFO have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) are effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

During the third quarter of 2012, no change in our internal control over financial reporting occurred that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Because of inherent limitations, disclosure controls and procedures provide only reasonable, and not absolute, assurance that their objectives are met.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

There are no pending legal proceedings to which we are a party, or of which any of our property is the subject, or known by us to be contemplated by governmental authorities, that are material to us, our business, or our financial condition. Moreover, we are not a party to any administrative or judicial proceeding arising under environmental laws or regulations to which a governmental entity is a party that involves potential monetary sanctions that we reasonably believe will exceed $100,000.

ITEM 1A. RISK FACTORS.

You should carefully consider the risk factors set forth in the “Risk Factors” section, Item 1A, of our 2011 Form 10-K, which are hereby incorporated by reference, as well as the additional risk factor information appearing below in this section and elsewhere in this report. These important factors may cause our actual results to differ materially from those indicated by our forward-looking statements, including those contained in this report. Please also see the section entitled “Forward-Looking Statements” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this quarterly report on Form 10-Q.

There have been no material changes with respect to the risk factors set forth in our 2011 Form 10-K, except the following risk factors have been revised to read as follows:

The proposals received by our Board of Directors, and the related Special Committee process, could materially and adversely affect our business and financial results. In addition, there can be no assurance that any definitive offers will be made, or, if made, that any transactions will be consummated.

As described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our Board of Directors has received (1) an unsolicited preliminary offer from ED&F Man, our largest stockholder, to acquire our animal feed supplements business and certain non-core bulk liquid storage terminals and (2) an unsolicited proposal from an infrastructure investment fund to acquire us for $6.00 per common share, $6.00 for each outstanding Series A Convertible Preferred share and $1.00 for each outstanding Founder Warrant, contingent upon the consummation of the proposed transaction to sell our animal feed supplements business and certain non-core bulk liquid storage terminals to ED&F Man. Our Board of Directors has initiated a process to explore strategic alternatives for the company as a whole and formed a Special Committee of independent directors to direct the strategic review process. The Special Committee has retained Evercore Partners as financial advisor to assist it during this process.

No definitive timetable has been set for evaluation of ED&F Man’s proposal. The Special Committee reviewed the infrastructure investment fund proposal with Evercore Partners and determined that it substantially undervalued the bulk liquid storage business and did not provide any basis to begin discussions or negotiations.

 

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The process undertaken by the Special Committee could cause distractions and disruptions in our business. We may encounter difficulty retaining officers and other key employees who may be concerned about their future roles with us if a transaction were completed. Further, the costs associated with the evaluation of proposals and any related process are expected to be considerable, regardless of whether any transaction is consummated. From January 1, 2012 through September 30, 2012, we have incurred approximately $2.5 million in such costs. All of the foregoing could materially and adversely affect our business and financial results. In addition, there is no assurance that any definitive offer for a change of control transaction will be made, or, if made, that any change of control transaction will be consummated. If a change of control transaction does not occur, the share price of our Class A common stock may decline to the extent that the current market price of our Class A common stock reflects an expectation that a transaction will be completed.

Divestitures of any of our businesses could have a material adverse effect on our business, results of operations and financial condition.

We continually evaluate the performance of our businesses and may determine to sell a business. Divestitures may result in significant write-offs or impairment of assets, including goodwill or other intangible assets. Divestitures may involve additional risks, including separation of operations and personnel, diversion of management attention, disruption of our businesses, loss of key employees, and retention of primary or secondary liability for environmental or other exposures. We may not successfully manage or avoid these or other risks we may confront in divesting a business, which could have a material adverse effect on our business, results of operations and financial condition.

Cost overruns and delays in our expansion activities could adversely affect our business.

We routinely have expansion projects underway or planned. A variety of factors outside of our control, including weather or natural disasters, shortages of materials, construction equipment, or skilled labor; unforeseen engineering, geological, or environmental problems; poor performance by or disputes with contractors; opposition by environmental groups; or difficulties in obtaining permits or other regulatory approvals, at times may result in delays in construction or increased construction costs that may have an adverse effect on our return on investment, results of operations, or cash flows.

We may enter into agreements for or consummate acquisitions with little or no notice to our stockholders.

We consider and enter into discussions regarding potential acquisitions in the normal course of business. Any such transaction would be subject to negotiation of mutually agreeable terms and conditions and approval of the parties’ respective boards of directors. The acquisition of a business or assets can be effected quickly, may occur at any time, and may be significant in size relative to our existing assets or operations. Our capitalization and results of operations may change significantly as a result of these activities, and you generally will not have the opportunity to evaluate the economic, financial, and other relevant information that we will consider in connection with any future acquisitions or development opportunities, even though you may have the opportunity to evaluate material information in certain circumstances, such as when the approval of our common stockholders is required.

The impact of environmental regulation on our liquid storage facilities may adversely affect our level of cash flow and net income.

Compliance with environmental regulations incurs operating and capital costs. Our business operations are subject to federal, state, local, and some foreign laws and regulations relating to environmental protection. For example, whenever an accidental leak, release, or spill of chemicals or other products occurs at one of our liquid storage facilities, we may experience significant operational disruptions and may have to pay a significant amount to clean up the leak, release or spill or pay for government penalties, address natural resource damage, compensate for human exposure or property damage, or a combination of these measures. Potential liability for cleaning up a site may remain with us for many years, even after we have divested our interest in the site and even though we have obtained indemnification agreements from others. For example, when we divested our San Pedro, California terminal operation in 2007, the Port of Los Angeles undertook primary responsibility for environmental clean up of the facility and the land under it; nevertheless, in 2012 we received notification from a California state agency that we are a potentially responsible party for cleaning up the land. Thus we face the risk that the Port may be unable or unwilling to honor its obligations. All of the foregoing costs and liabilities may negatively affect our level of cash flow and net income. The impact of U.S. Environmental Protection Agency current standards or increased future environmental measures may increase our costs significantly whenever new environmental laws and regulations become effective.

The profitability of our bulk liquid storage business can be significantly affected by changes in the exchange rates between the United States dollar and the currencies used in foreign countries in which we operate.

Almost one-third of our bulk liquid storage operations are outside of the United States. As a result, we hold assets, incur liabilities, earn revenues, and pay expenses in a variety of foreign currencies, including most notably the Euro and the Pound Sterling. The financial statements of our foreign subsidiaries are translated into United States dollars in preparing our consolidated financial statements. Thus, our profitability is impacted by changes in foreign currency exchange rates. For example, in 2011, higher foreign exchange rates for the Euro, Pound Sterling, and Canadian dollar resulted in a combined positive impact on our bulk liquid storage

 

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earnings outside of the U.S. of approximately 4%. As another example, in the first three quarters of 2012, lower foreign exchange rates for the Euro, Pound Sterling, and Canadian dollar resulted in a combined negative impact on our bulk liquid storage earnings outside of the U.S. of approximately 4%.

Foreign exchange rates may vary quite significantly from period to period. We do not presently hedge against the risks of foreign currency fluctuations, but we are continuing to evaluate the possible future use of foreign currency hedging strategies. For more information regarding our exposure to foreign currency exchange rate risk, please see “Quantitative and Qualitative Disclosures about Market Risk” in Part II, Item 7A of our 2011 Form 10-K.

The supply of, demand for, and price of agricultural products and raw materials are often affected by the weather.

Weather conditions have historically caused volatility in the agricultural commodity industry and consequently in that segment of our operating results related to liquid feed supplements. Weather conditions can affect the demand for our products, such as by affecting the primary natural source of animal nutrition, grass. For example, in 2009 adverse weather effects, including a drought in central and southern Texas, led to reduced cattle herds, which affected the demand for our products. As another example, in the first half of 2012, the U.S. experienced one of the hottest half-years on record and one of the widest droughts in decades, resulting in less available pasture grass and higher feed prices. Also a significant risk is the reduction in feeder cattle herd since July 2011, which has been steadily declining since 2007, thus reducing demand for animal feed. The ultimate impact of the 2012 drought and decline in feeder cattle herd remain unknown.

Weather conditions have also at times caused crop failures or significantly reduced harvests, which can adversely affect the supply and pricing of the agricultural raw materials that we use as inputs for our business.

We may not resume paying quarterly dividends at the same rate or form or in any amount in the future.

We declared our first quarterly dividend on August 30, 2011, and continued to pay quarterly dividends the following three quarters. In August 2012, the board of directors decided that, until the conclusion of the Special Committee’s strategic evaluation process, consideration of matters affecting the capitalization of the Company, including the declaration of any dividends, would be deferred. Consequently we have not declared any dividends since May 9, 2012. The Company’s declaration of a quarterly dividend or the adoption of a dividend policy does not commit the board of directors to declare future dividends, and plans for future dividends may be revised by the board of directors. Dividend declarations and the rate and form of any future dividends are limited by the discretion of the Company’s board of directors, and may be affected by a number of factors, including the Company’s then current and prospective financial condition, results of operations, cash flows, and liquidity, and its capital spending programs, including the level and timing of its acquisition activity. The amount of future dividends payable in cash is also subject to the constraints of our credit facility and the ability of the Company to pay or otherwise satisfy the accrued preferred cash dividends of our Series A Convertible Preferred Stock, which is currently held by the ED&F Man group.

A substantial number of shares of our Series A preferred stock were issued to an ED&F Man subsidiary in connection with the 2009 business combination. Any shares of Series A preferred stock that are sold to persons who are not affiliated with ED&F Man will become convertible into shares of Class A common stock. Such sales and conversions may adversely affect the price of our Class A common stock.

At the closing of the 2009 business combination, we issued approximately 30.9 million shares, and since then, approximately an additional 2.4 million shares, of our Series A Convertible Preferred Stock to Agman, a subsidiary of ED&F Man. Although approximately 13.1 million of these shares were delivered to an escrow agent for deposit into an escrow account (discussed in the next subsection), the remaining approximate 20.2 million shares of our Series A Convertible Preferred Stock were issued without ever being subject to the escrow agreement. These shares remained outstanding as of November 2, 2012.

Subject to conditions set forth in our certificate of incorporation, shares of our Series A Convertible Preferred Stock are convertible into shares of our common stock. In particular, shares of our Series A Convertible Preferred Stock held by ED&F Man or its affiliates are convertible by them only into Class B common stock, and then only up to an amount that would result in their holding, collectively, 49.5% of our common stock. On the other hand, shares of our Series A Convertible Preferred Stock, if sold by Agman to a person not affiliated with ED&F Man, will be convertible into shares of our Class A common stock. Any such sales by Agman may adversely affect the price of our Class A common stock.

Agman will not be able to transfer any of its shares of Series A Convertible Preferred Stock held in escrow unless and until such shares are released to Agman (discussed in the next subsection).

 

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A substantial number of shares of our Series A Convertible Preferred Stock and Class A common stock are held in escrow and may be released upon our achievement of certain earnings or share price targets or the occurrence of certain events resulting in a change of control of the Company. The release of shares from escrow may adversely affect the market price of our Class A common stock.

Approximately 8.8 million shares of our Series A Convertible Preferred Stock issued to Agman, a subsidiary of ED&F Man, and 41,667 shares of our Class A common stock issued to our sponsor Shermen WSC Holdings LLC are currently being held in escrow, and may be released to their respective owners upon our achievement of certain earnings or share price performance targets or the occurrence of certain events resulting in a change of control of the Company. Placement in escrow does not affect the voting rights or conversion rights of the escrowed shares, but does place restrictions on access to dividends and salability. The release of shares from escrow may adversely affect the market price of our Class A common stock.

In September 2012, because the closing share price of our common stock on five trading days within a seven trading day consecutive period exceeded $6.50 per share, approximately 4.4 million shares of the Series A Convertible Preferred Stock in escrow and the accrued dividends thereon (in the form of 58,674 newly issued Class B common shares and $342,403 in cash) were released to Agman, and 958,333 shares of the common stock in escrow and the dividends thereon (in the form of $153,333 in cash) were released to Shermen WSC Holding LLC.

Generally, the remaining earnings and share price performance targets and the amounts of shares to be released upon their achievement are as follows:

—if the closing share price of our common stock on any five trading days within a seven trading day consecutive period has exceeded $7.00 per share, or our reported EBITDA (as defined) has exceeded $57 million for any 12 month period, then approximately 4.4 million shares of our Series A Convertible Preferred Stock and any accrued dividends thereon are to be released to Agman and 41,667 shares of our common stock and any dividends thereon are to be released to Shermen WSC Holding LLC.

—if the closing share price of our common stock on any five trading days within a seven trading day consecutive period has exceeded $7.50 per share, or our reported EBITDA (as defined) has exceeded $62 million for any 12 month period, then the final approximately 4.4 million shares of our Series A Convertible Preferred Stock and any accrued dividends thereon are to be released to Agman.

For purposes of the earnings targets, “EBITDA” is defined in the stock escrow agreement to mean income (loss) before net interest (defined as the aggregate of interest expense and interest income), income tax, and depreciation and amortization (as further defined by certain accounting principles). For a more detailed description of the earnings and share price performance targets, please see “Certain Relationships and Related Transactions—Related Transactions—Stock Escrow Agreement” in the Prospectus filed by us with the SEC on August 7, 2009.

Our stock ownership is highly concentrated, with ED&F Man and its affiliates owning 48.4% of our outstanding common stock (total of Class A and Class B) as of November 2, 2012. This level of ownership, combined with other rights that were granted to the ED&F Man group at the closing of the 2009 business combination, allow it to exert influence over our affairs.

ED&F Man and its affiliates own 48.4% of our common stock as of November 2, 2012. Subject to the provisions of our certificate of incorporation, for so long as ED&F Man and its affiliates own at least 35% of the outstanding shares of our common stock, the holders of our Class B common stock (currently Agman, a subsidiary of ED&F Man) have the right to elect three of the seven members of our board of directors. This right allows the ED&F Man group to have a significant impact on the determination of our corporate and management policies, including any potential acquisitions, asset sales, and other significant corporate transactions. We entered into a Stockholder’s Agreement, dated May 28, 2009, with Agman, which provides that Agman, so long as it and its affiliated entities collectively own more than a specified percentage of our outstanding common stock (assuming conversion of the Series A Convertible Preferred Stock held by ED&F Man and its affiliates into shares of our common stock), has certain informational rights (if at least 15%) and certain veto rights (if at least 20%) regarding our operations and activities. See “Certain Relationships and Related Transactions—Related Transactions—Stockholder’s Agreement” in the Prospectus filed by the Company with the SEC on August 7, 2009.

Agman has the voting power significantly to influence our policies, business, and affairs and to influence the outcome of any corporate transaction or other matter, including mergers, consolidations, and the sale of all or substantially all of our assets. This voting power may decrease the ability of our other stockholders to influence our affairs, and may have the effect of delaying, deterring, or preventing a change of control that otherwise could result in a premium in the price of our common stock, or may have the effect of expediting or facilitating a change of control on terms less advantageous to us than we otherwise might have obtained.

The interests of the ED&F Man group may not coincide with the interests of other holders of our common stock. The ED&F Man group is the largest supplier to our liquid feed supplements business and the largest customer of our bulk liquid storage business. While our certificate of incorporation contains provisions on interested transactions designed to minimize conflicts, the ED&F Man group may have a view on our strategies and policies that is different from that of our other stockholders.

 

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We also note the following changes in certain of the historical information included in the risk factors set forth in our 2011 Form 10-K:

 

   

As of November 2, 2012, our total indebtedness under our bank credit facility was $90.5 million, leaving $109.5 million available for additional borrowing, along with a $50 million accordion feature.

 

   

At November 2, 2012, there were outstanding founder warrants (i.e., warrants that were sold to two of our current directors through our sponsor, Sherman WSC Holdings, LLC) to purchase approximately 3.5 million shares of our Class A common stock at $5.00 per share, with a cashless exercise provision. One half of these warrants are scheduled to expire on each of May 24, 2013 and May 24, 2014.

 

   

As of the close of business on November 2, 2012, there were approximately 14.6 million shares of our Class A common stock outstanding, at a market price of $5.90 per share.

 

   

At the closing of the 2009 business combination, we issued approximately 12.6 million shares of Class B Common stock, and since then, approximately an additional 1,028,760 shares, of our Class B common stock to Agman, a subsidiary of ED&F Man. These shares remained outstanding as of November 2, 2012.

 

   

As of November 2, 2012, ED&F Man and its affiliates owned approximately 48.4% of our outstanding common stock (Class A and Class B common stock combined).

 

   

As of November 2, 2012, all 40 million shares of our preferred stock were designated Series A Perpetual Convertible Preferred Stock, par value $.0001 per share, of which 33.3 million were issued and outstanding, leaving another 6.7 million available to be issued.

 

   

At the closing of the 2009 business combination, we issued approximately 30.9 million shares of Series A Convertible Preferred Stock, and since then, approximately an additional 2.4 million shares, of our Series A Convertible Preferred Stock to Agman, a subsidiary of ED&F Man.

 

   

Approximately 8.8 million shares of our Series A Convertible Preferred Stock issued to Agman, and 41,667 shares of our Class A common stock issued to our sponsor Shermen WSC Holdings LLC, are currently being held in escrow, and may be released to their respective owners upon our achievement of certain earnings or share price performance targets or the occurrence of certain events resulting in a change of control of the Company.

 

   

Approximately 20.2 million shares of our Series A Convertible Preferred Stock issued to Agman were issued without ever being subject to the escrow agreement. These shares remained outstanding as of November 2, 2012.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

Unregistered Sales of Equity Securities

In July 2012, we issued 186,380 shares of Series A Convertible Preferred Stock in the name of Agman, a subsidiary of ED&F Man, constituting satisfaction in full for the $1.1 million outstanding accrued but unpaid preferred stock dividends on Agman’s shares of Series A Convertible Preferred Stock through June 30, 2012. Of these 186,380 shares, 112,872 were delivered to Agman and 73,508 were delivered to the escrow agent for deposit in the escrow account under the Stock Escrow Agreement dated May 28, 2009 among the Company, Agman, Shermen WSC Holding LLC, and the escrow agent. The foregoing 186,380 shares were issued in a private placement, not involving a public offering under the Securities Act of 1933, in accordance with a Waiver agreement between the Company and Agman dated May 9, 2012. We did not engage in general solicitation or advertising with regard to the foregoing issuance of shares of Series A Convertible Preferred Stock and did not offer securities to the public in connection with the issuance.

The shares of Series A Convertible Preferred Stock issued to Agman pursuant to each of the foregoing three Waiver agreements have the same rights and privileges as the previously issued shares of Series A Convertible Preferred Stock, including the following terms of conversion. A holder of Series A Convertible Preferred Stock has the right, at any time and from time to time, to convert any or all of that holder’s shares of Series A Convertible Preferred Stock into shares of our common stock. Shares of Series A Convertible Preferred Stock owned by persons unrelated to ED&F Man are convertible into shares of Class A common stock, whereas shares of Series A Convertible Preferred Stock owned by ED&F Man or any of its affiliates are convertible into shares of Class B common stock. However, ED&F Man and its affiliates are unable to exercise such conversion rights to the extent it would result in ED&F Man and its affiliates owning more than 49.5% of our outstanding common stock. The number of shares of common stock into which one share of the Series A Convertible Preferred Stock is convertible is determined by dividing (a) $5.50 plus the amount of any dividends and distributions which have accrued before the applicable conversion date on such share, by (b) $5.50 (subject to adjustments for stock splits, subdivisions, reclassifications, combinations, other distributions, certain repurchases of common stock, and business combinations).

 

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Repurchases of Equity Securities

The table below provides information on purchases made by the Company or any affiliated purchaser thereof during the indicated months of shares of the Company’s equity securities that were registered pursuant to section 12 of the Exchange Act.

 

Period

   (a) Total number
of shares or
other units
purchased
    (b) Average price
paid per share or
unit ($)
     (c) Total number of
shares or
units purchased as
part of publicly
announced plans or
programs
     (d) Maximum number (or
approximate dollar value)
of shares or units that
may yet be
purchased under the plans
or programs
 

7-1-12 to 7-31-12 (1)

     917  (1)      6.12         —           —     

8-1-12 to 8-31-12

     —          —           —           —     

9-1-12 to 9-30-12

     —          —           —           —     

 

(1) For the dividend declared on May 9, 2012 and paid July 23, 2012, the Company has withheld 917 shares on stock dividends to satisfy the tax withholding on shares issued to uncertified and foreign accounts.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

We had no defaults with respect to indebtedness.

With respect to dividend accruals, our certificate of incorporation provides that our Series A Convertible Preferred Stock ranks senior and prior to our common stock with respect to the payment of cash dividends, and that cash dividends in the amount of $0.0344 per share of Series A Convertible Preferred Stock shall accrue on such stock on a quarterly basis, cumulatively, until May 28, 2016, whether or not earned or declared, and whether or not there are any profits, surplus, or other funds legally available for the payment of dividends. On several occasions, and most recently on May 9, 2012, we entered into a Waiver agreement with Agman pursuant to which we have already issued additional shares of Series A Convertible Preferred Stock in satisfaction of all cash preferred dividends accrued through a specified date prior to such issuance, most recently June 30, 2012, thus eliminating the preferred dividends accrued as of such date. The total accrual of such cash preferred dividends on our Series A Convertible Preferred Stock on the date of filing this report, November 9, 2012, is $1,642,991.

ITEM 5. OTHER INFORMATION.

On November 7, 2012, the Company entered into a letter agreement (the “Amendment”) with its Chief Executive Officer, James B. Jenkins, which amended the retention agreement entered into between the Company and Mr. Jenkins on April 6, 2012 (the “Retention Agreement”). The Retention Agreement provides, among other things, for the payment by the Company to Mr. Jenkins of a $1,149,000 retention bonus (i) if he remains continuously employed by the Company from the date of the Retention Agreement through and including the date that is six months following the date of a change in control of the Company, or (ii) if, following the occurrence of a change in control but prior to the six month anniversary thereof, his employment with the Company is terminated by the Company without cause or due to his disability or death or by Mr. Jenkins for good reason. The Amendment provides that Mr. Jenkins’ right to receive the retention bonus shall terminate if a change of control has not occurred by December 31, 2012, rather than within 6 months after the date of the Retention Agreement, as previously provided. The Amendment further provides that Mr. Jenkins waives his right to receive any other severance benefits from the Company in connection with his termination of employment if a change in control occurs by December 31, 2012, rather than within 6 months after the date of the Retention Agreement, as previously provided. The Retention Agreement, see Exhibit 10.1 to the Form 8-K filed on April 9, 2012, and the Amendment, see Exhibit 10.1 to this Form 10-Q, are incorporated herein by reference.

 

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ITEM 6. EXHIBITS.

See the Exhibit Index following the Signature page, which index is hereby incorporated by reference.

SIGNATURES

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.

 

WESTWAY GROUP, INC.
/s/ James B. Jenkins
Name: James B. Jenkins
Title: Chief Executive Officer
/s/ Thomas A. Masilla, Jr.
Name: Thomas A. Masilla, Jr.
Title: Chief Financial Officer

Dated: November 9, 2012

 

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EXHIBIT INDEX

The agreements and other documents that have been filed as exhibits to this Form 10-Q have been filed to provide investors with information regarding their terms, but not to provide any other factual information about the Company. The representations and warranties and other provisions of the agreements allocate risks and establish rights and obligations among the parties thereto, and should not be relied on by investors as statements of fact. Moreover, information concerning the subject matter of the representations, warranties, and other provisions may change after the date of the agreements, which subsequent information may or may not be fully reflected in the Company’s public disclosures.

 

Exhibit
Number

  

Exhibit Title

3.1    Amended and Restated Certificate of Incorporation, filed with the Secretary of State of the State of Delaware on May 28, 2009, as amended by that certain Certificate of Amendment of Amended and Restated Certificate of Incorporation of Westway Group, Inc., filed with the Secretary of State of the State of Delaware on July 12, 2010 (incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 9, 2010)
3.2    Certificate of Designation, filed with the Secretary of State of the State of Delaware on November 14, 2011 (incorporated by reference to Exhibit 3.2 of the Company’s Quarterly Report on Form 10-Q filed with the SEC on November 14, 2011)
3.3    Amended and Restated By-laws, dated as of November 4, 2010 (incorporated by reference to Exhibit 3.2 of the Company’s Quarterly Report on Form 10-Q filed with the SEC on November 9, 2010)
10.1   

Letter agreement, dated November 7, 2012, between the Company and James B. Jenkins, amending the retention letter agreement, dated April 6, 2012, between the Company and James B. Jenkins.

31.1    Certification of Principal Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2    Certification of Principal Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1    Certification of Principal Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2    Certification of Principal Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101    Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets at September 30, 2012 and December 31, 2011, (ii) the Consolidated Statements of Operations for the three and nine month periods ended September 30, 2012 and 2011, (iii) the Consolidated Statements of Comprehensive Income for the three and nine month periods ended September 30, 2012 and 2011; (iv) the Consolidated Statements of Stockholders’ Equity for the nine month periods ended September 30, 2012 and 2011, (v) the Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2012 and 2011 and (vi) the notes to the Consolidated Financial Statements, tagged in detail.

 

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