Samantha L. Albert

It’s been hard to miss the news footage and video of the cargo ship Dali colliding with the Francis Scott Key Bridge across the Chesapeake Bay. The bridge collapse – as sudden as it is surprising – is another landmark in what has been a series of tumultuous years in the logistics industry. We recently wrote about global impacts on the supply chain, particularly East Coast ports, and this is another reminder about how unpredictable events can have a wide reach.The Port of BaltimoreThe Port of Baltimore is in the top twenty ports by volume in the United States and is the 5th largest port for foreign trade on the East Coast. TheWashington Postestimates that the port handled over 50 million tons of foreign cargo with value in excess of $80 billion during 2023. The port is the 2nd largest exporter of coal from the U.S. (though still a relatively small player on a global scale) and is the largest port for imports of automobiles, sugar, and gypsum. Baltimore is also equipped to handle Neo Panamax ships passing through the Panama Canal.Sharing the fortunes of several other East Coast ports of the last several years, the Port of Baltimore posted several records in 2023, including for the largest number of TEUs handled (1.1 million) and general cargo tons (11.7 million). Baltimore posts these growth records despite the overall decline in imports to the U.S. during 2022.Potential Short-Term and Long-Term ImpactShort term impacts will include delays of cargo already in transit for East Coast ports, whether originally bound for Baltimore or not. Just as we saw chokepoints on the West Coast lead to a redistribution of cargo among ports, the loss of the Baltimore port for the foreseeable future will cause ripple effects throughout the industry.Source: The Washington Post Other East Coast ports will likely take up the bulk of cargo previously destined for Baltimore. In particular, soybean shipments are expected to transfer to Norfolk, Savannah, and Charleston, while containers are expected to be processed in either Philadelphia or Norfolk. In any case, the truck routes and rail cars that previously serviced Baltimore will need to be recentered on other ports. However, this will be somewhat mitigated by global events that were already impacting East Coast ports—namely, the ongoing drought limiting capacity through the Panama Canal and the Houthi rocket attacks in the Red Sea, both of which had diverted some cargo away from East Coast ports prior to the bridge collapse. An additional concern is the International Longshoreman’s Association contract, which covers port workers from Texas through the Northeast. The contract is set to expire in September 2024. Talks stalled in early 2023 before resuming again in February 2024. The West Coast freight bottleneck that dominated transportation headlines in 2022 was brought on by labor disputes combined with a drastic increase in demand for shipping services due to COVID-fueled shopping. Conversely, the national freight market has been soft through 2023 and demand is not expected to rapidly escalate as it did a few years ago. This should limit long-term bottlenecks and chokepoints from forming on the East Coast.ConclusionMercer Capital’s Transportation & Logistics team constantly watches the transportation industry and global events and economic factors that can impact the overall industry, the supply chain, or various aspects of transportation.Mercer Capital provides business valuation and financial advisory services, and our transportation and logistics team helps trucking companies, brokerages, freight forwarders, and other supply chain operators to understand the value of their business. Contact a member of the Mercer Capital transportation and logistics team today to learn more about the value of your logistics company.

We discussed reshoring and nearshoring trends a bit in the last Value Focus Transportation and Logistics newsletter.There’s been some developments on that front, especially as it relates to the ongoing battle between East Coast and West Coast ports.As we mentioned last time, a variety of pandemic-related and regulatory issues resulted in long delays at California ports, the traditional import location for the majority of goods from East Asia.Many carriers shifted their import handling to East Coast ports – with the port of Savannah being one of the biggest winners.Georgia has posted three straight record–setting years for exports. A study by Cushman Wakefield that ran through October 2023 shows that volumes at East Gulf Ports exceeded West Coast volumes for the majority of 2022 and 2023.However, early results indicate the West Coast ports grew faster than East Coast ports in November and December 2023, and there are a couple of reasons behind that.(click here to expand the image above)The El Niño weather event has hit the Panama Canal hard.Under normal conditions, between 36 and 38 ships per day will make the transit.Due to the worst droughtPanama has experienced in over 70 years, the Canal Authority began reducing the number of ships passing through on a daily basis in July 2023.In February 2024, the Canal Authority reduced the total number of ships to 18 per day.Meanwhile, approaching from the other direction has been made harder by attacks on vessels in the Red Sea.About one-fifth of freight reaching East Cost ports travels through the Red Sea and the Suez Canal.Shippers continuing to use the Suez canal route will face higher insurance charges, while shippers opting to go around the Cape of Good Hope can expect to add at least a week to transit times.More recently, the first fully sunk ship from the conflict also disrupted underwater data cables.So far, analysts have had mixed opinions on the overall impact that will arise from the Houthi attacks.Between Red Sea disruptions and climate issues in Latin America the impact of worldwide current events on marine logistics cannot be ignored.

Executive SummaryPreliminary results for 2023 show that the number of goodwill impairments is increasing for both large and middle-market public companies. Based on data through November, the number of impairments recorded by firms on the S&P 500 and Russell 2000 indices had already eclipsed 2021 and 2022 full-year figures. Interestingly, these trends materialized even as the indices themselves posted favorable total returns for the year of 25% and 14%, respectively. Public and private companies currently in the process of performing their annual/interim impairment tests should be on the alert if their peer group turns out to be the one recording impairment charges.Back in 2020, the stock market downturn stemming from pandemic shutdowns resulted in triggering events and impairment charges for many companies.This was especially evident among smaller publicly-traded companies (as tracked by the Russell 2000 versus the S&P 500).The number of charges dropped drastically in 2021 (even compared to 2019 results), suggesting that some of the 2020 impairment charges may have reflected a pull-forward of later charges.Since that time, the number and percentage of companies recording charges has steadily increased, with preliminary figures for 2023 already exceeding the numbers recorded in 2022.Total Goodwill Impairment Charges and % of companies with GW that recorded chargesThis trend held across sectors as well.In the Russell 2000, eight of eleven sectors reported an increase in number of charges to goodwill between 2019 and 2020.Charges in the consumer staples sector declined among S&P 500 companies, while increasing for Russell 2000 companies.Charges in the utilities sector declined for S&P 500 companies but remained stable for Russell 2000 companies.For both groups of companies, charges taken by the materials sector declined.Following 2020, impairment charges dropped below 2019 levels – sharply, in the case of many sectors over 2021 through 2022.More recently, the number of charges and the magnitude of total goodwill charges for the first eleven months of 2023 had already exceeded the full year of 2022.Additional impairments may be on the way as companies complete and file their year-end financials. Based on the preliminary figures for the Russell 2000, the sectors recording the most charges appear to be healthcare and industrials.Despite the increase in impairment charges taken in 2020, the number of small-cap companies reporting year-end goodwill balances increased in 2020 and continued to increase through 2022 and 2023.Approximately 60% of Russell 2000 companies carried goodwill in 2019, while over 63% did so in 2023.The percentage of S&P 500 companies reporting goodwill declined from 89% in 2019 to 86% in 2023.Percent of Companies Reporting GoodwillIt is impossible to attribute the rise in impairment charges to a single specific factor. However, it is likely that rising interest rates and higher inflation played a significant role in 2023 results. Impairment charges also tend to have a larger impact on smaller companies.Generally speaking, smaller companies tend to be less diversified in terms of product or service offerings, and their client bases may be more sensitive to external economic factors.Ultimately, the preliminary data for 2023 shows that impairments do not necessarily taper off when overall equity markets are rising. Company-specific factors, including financial performance relative to history, expectations, and peer performance, are critical when evaluating goodwill for potential impairment. Will the impairment trends seen in the large and middle-market public markets extend to private companies? Perhaps.The valuation specialists at Mercer Capital have experience in implementing both the qualitative and quantitative aspects of goodwill impairment testing under ASC 350. If you have questions, please contact a member of Mercer Capital’s Financial Statement Reporting Group.

There are many reasons why a logistics company can be worth more or less than a standard rule of thumb might imply, and many reasons why a particular interest in a logistics company can be worth more or less than the pro rata value implied by that rule of thumb.This whitepaper provides useful information as to how logistics companies are valued and what impact that might have on their owners.The whitepaper breaks down basic concepts that must be defined in every valuation and goes into depth about three commonly accepted approaches to value. Financial and market considerations are discussed as are the differences between public and private companies as well as public and private logistics companies.

COVID-19 has had a lasting impression on many industries throughout the world, but the U.S. trucking and transportation industry was among the first industries to feel the impact of the pandemic.Lockdowns in China (initiated in December 2019) began affecting the U.S. trucking industry in very early 2020 as Chinese imports account for nearly 40% of all shipments entering the U.S. By the beginning of March, the U.S. had already begun to see massive declines in incoming freight with an escalation of shipping cancellations. The ports of Seattle and Long Beach experienced 50-60 container shipment cancellations reflecting declines of 9% relative to the prior year.When discussing the decline of imports in the port of Seattle, Sheri Call of the Washington Trucking Association said, “That’s the kind of decline we’d normally see over the course of an entire year.” Disruption of international trade led to transportation companies reducing capacity as early as the beginning of March. Outbound rail and trucking shipments from LA dropped 25% and 20% respectively, in March 2020.Due to social distancing requirements throughout the United States, many roadside eateries and rest areas were closed in the first several months of the pandemic, which reduced truck drivers’ access to food and other necessities for long days on the road.  Trucking companies were forced to alter their transportation network, frequently carrying empty loads as a result of uneven and declining demand.  According to Reuters, “trucks hauling food and consumer products north to the United State are returning empty to Mexico where mass job losses have hit demand, leaving cash-strapped truckers to log hundreds of costly, empty miles.” Empty loads increased nearly 40% worldwide in the immediate aftermath of the lockdown.An indication of the health of U.S. trucking industry can be seen through the ratio of full north bound trips to full southbound trips at the Mexico-US border. The ratio is typically one full southbound trip to every three full northbound trips, but the ratio began to lean closer to a one to seven ratio during the pandemic with the remainder being empty or partially full. Additionally, new freight contracts have fallen 60% to 90% since the rise of COVID-19 in 2020.Increased online shopping from consumers has led to a spike in demand for last-mile delivery services. Amazon reported $75.5 billion in 2020 first-quarter sales which was a 26% increase from the first quarter of 2019. Many last-mile delivery companies like FedEx and Amazon continued to hire workers with Amazon seeing an increase in company employment of nearly 175,000 workers from March to April of 2020. Last-mile delivery carriers also eliminated signature requirements so that they can now achieve a “contactless” delivery process.The level of domestic industrial production is correlated to the demand for services within the transportation industry. The Industrial Production Index is an economic measure of all real output from manufacturing, mining, electric, and gas utilities.Lockdowns that began in March of 2020, as a result of the pandemic, led to a sharp decline in the Industrial Production Index. The index began a rapid recovery during the summer months of 2020. At the end of the first quarter of 2020, the Industrial Production Index saw a quarter-over-quarter decrease of 16.7% while also being down 17.7% on a year-over-year basis. The index rebounded in the second quarter of 2020 with a quarter-over-quarter increase of 12.7%. The index continually increased over the last three quarters of 2020, but it had not reached pre-pandemic levels as of April 2021. The outlook for the trucking industry at the beginning of 2020 was promising with economists predicting that freight rates would grow 2% over the course of the year. Strong economic growth in the first two months of 2020 was halted by the outbreak of the unforeseen pandemic. The impact was dramatic – though not entirely negative for all carriers. Carriers of essential goods like groceries, cleaning supplies, and medical supplies experienced skyrocketing demand for their services while industrial, manufacturing, and other non-essential carriers are still undergoing lasting effects from the pandemic. One non-essential industry that experienced a downward turn at the onset of the pandemic was the vehicle shipping services industry. A strong economy with high disposable income and consumer confidence ramped up consumer spending for the American automobile industry in the periods leading up to the pandemic. The industry’s growth prospects were halted during 2020 due to a high unemployment rate and a drop-off in disposable income. The success of the vehicle shipping services industry is closely intertwined with new car sales and consumer confidence. The graph below shows the relationship between revenue of the vehicle shipping services industry and new car sales and consumer confidence. Overall, decreased consumer confidence in 2020 led to many Americans electing to defer vehicle upgrades, which created a major economic downturn for the vehicle shipping services industry.With many businesses closed, overall Cass Freight trucking shipments plummeted, seeing a decrease of 15.1%  and 22.7% from April 2019 to April 2020. Truck tonnage also dropped 9.3% on a from March 2020 to April 2020 while declining 8.90% from April 2019 through April 2020.The fall of the number of shipments along with overall truck tonnage caused transportation companies to lower contract and spot rates. Flatbed and reefer rates hit a five-year low in April of 2020, though they rapidly recovered and had surpassed pre-pandemic rates by the fourth quarter of 2020.  Truck tonnage has not recovered at the same rate as spot and contract pricing and had not reached pre-pandemic levels by March 2021.  These trends are reflected in the Cass Freight and Shipment Indices.  While the Shipments index has increased relative to its April 2020 level and has surpassed pre-pandemic levels, the Expenditures index increased over 27% from March 2020 through April 2020.Even though contract rates did not have as sharp of a decline in March of 2020 as spot rates, both experienced a drop-off at the onset of the pandemic. Spot rates dropped below numbers that had been seen in recent years. After the sharp decline of spot rates in March, rates for all categories began to steadily increase. Rates hit a seasonal decline at the end of December due to decreased consumer spending after the holiday season.  Rates resumed their climb during the first months of 2021.  Overall, the rising price of contract and spot rates spins a positive image for overall outlook of the trucking industry, while also encouraging new competition to enter the market.At the beginning of 2020, there were strong predictions for revenue in both the long distance and local trucking industries. Once the COVID-19 pandemic hit, revenues for both parts of the trucking industry dropped along with future revenue predictions. After a few months of lockdowns, the trucking industry began a rapid rebound as a result of businesses reopening and increased online retail. Future revenue predictions from March and April of 2021 from both the long distance and local sectors exceed predictions made in October 2020.Industrial production and consumer spending, spurred on by the substantial stimulus programs enacted by federal government, have recovered more rapidly than initially expected. This rapid recovery has seemingly reduced the expected long-term impacts of COVID-19 on the long-distance and local trucking industries.The effects of rising trucking rates and revenues coupled with optimistic outlooks for both categories can be seen in the number of long-distance and local trucking establishments. Lured in by appealing spot and contract rates, March 2021 predictions for the number of establishments in the trucking industry look to be on the rise. Naturally, there was a drop-off in the number of establishments in 2020, but the industry seems to have recovered with numerous new entries into the market in 2021. The long-distance trucking industry is projected to have more than one hundred thousand more establishments than originally forecasted in January of 2020.

On December 22, 2017, President Trump signed The Tax Cuts and Jobs Act, which resulted in sweeping changes to the U.S. tax code.The Act decreased the corporate tax rate to 21% from 35%, in addition to modifying specific provisions around interest, depreciation, carrybacks, and repatriation taxes.The change in tax rate will have the biggest impact on purchase accounting. In the energy industry, this will manifest itself in several ways. This blog post explores some of the impacts to valuations performed under fair value accounting in ASC 805 and ASC 820.Cash Flows and ReturnsWhen we evaluate prospective financial information, a lower tax rate will result in higher after-tax earnings.The value of the tax shield created by depreciation and deductions will be influenced by both the lower corporate tax rate (which reduces the tax shield’s value) and accelerated depreciation of qualifying capital equipment purchases (which increases the tax shield’s value). This could mean incentives for energy-oriented companies to (i) create a more modernized drilling rig fleet sooner that are best suited for today’s multi-frac lateral wells and (ii) accelerated plans to create more infrastructure and pipelines in active basins such as the Permian, Bakken and Eagle Ford. In addition, it also could drive more refinery and LNG liquefaction plant development. In most cases, a lower tax rate will increase cash flows, increasing the internal rate of return on acquisitions for a given purchase price.On the other hand, if lower tax rates drive higher purchase prices, internal rates of return may be unchanged.In terms of the weighted average cost of capital (WACC), the lower tax rate actually increases the after-tax cost of debt.Keeping other inputs constant, this modestly increases WACCs.Relief from RoyaltyUnder the relief from royalty method, after-tax royalties avoided increase as the tax rate falls.However, the tax amortization benefit (TAB) component of the intangible value also declines as a result of the lower tax rate, which serves to partially offset the increase in after-tax cash flows.Scenario AnalysisIn a scenario analysis used to value a noncompete agreement, a lower tax rate will again decrease the tax amortization benefit.Since both scenarios under the with and without approach will reflect the same tax rate, the impact of the new lower rate will be muted.As a result, the fair value of noncompete agreements may well be somewhat lower under the new tax rate.Cost ApproachThe cost approach, which is often used to value assets such as the assembled workforce or some technologies, the impact depends on whether a pre-tax or after-tax measurement basis is used.If fair value is measured on a pre-tax basis, the fair value of such assets is unaffected.If measured on an after-tax basis, costs avoided net of tax will be higher under lower tax rates, although this gain will be offset somewhat by the decrease in the TAB. Multi-Period Excess Earnings Method The impact of the tax rate on assets valued under the Multi-Period Excess Earnings Method (MPEEM) is more ambiguous since two key elements will be affected – the contributory asset charges and the tax rate used to derive after-tax cash flows.On the cash flow side of things, the lower tax rate will result in higher cash flow but a lower TAB.As far as contributory assets are concerned:Relief from royalty asset charges will increase under a lower tax rateWith and without scenario analysis with level payments charges will potentially decrease due to the lower base valueCost approach asset charges may increase or decrease depending on the net effect of taxes and TAB calculationsReserves & Goodwill The net impact of a lower tax rate on goodwill will vary by transaction. Since reserves are typically viewed through a pre-tax lens, the value of reserves could be muted (all else held constant). However, we note that if tax incentives increase CapEx and drilling plans, then more reserves could move up the category chain (P2 to P1 for example) and thus increase the fair value of reserves. If the lower tax rate results in a higher transaction price, the aggregate increase in fair value will likely result in a larger allocation to goodwill. This would apply more to intangible based energy companies. Upstream companies typically do not book goodwill. If, instead, the lower tax rate increases the projected IRR on a transaction, the impact on residual goodwill is harder to predict and will depend on the composition of the assets acquired.The changes to corporate taxes under the new bill are wide-ranging.In addition to the effect of lower rates discussed in this post, fair value specialists need to be alert to how other specific provisions of the bill may influence individual energy companies.Impact of Tax Rate Decrease on Valuation MethodCash Flows/Returns Higher after-tax cash flows/impact on returns depends on transaction priceTax Amortization Benefits DecreaseRelief from Royalty Method Increase (potential offset by decrease in TAB)Cost Approach (pre-tax) No ChangeCost Approach (post-tax) Increase (potential offset by decrease in TAB)With and Without Scenario Potentially lower (potential offset by decrease in TAB)MPEEM May Increase or Decrease (depends on magnitude of other changes)

On December 22, 2017, President Trump signed The Tax Cuts and Jobs Act, which resulted in sweeping changes to the U.S. tax code.The Act decreased the corporate tax rate to 21% from 35%, in addition to modifying specific provisions around interest, depreciation, carrybacks, and repatriation taxes.The change in tax rate will have the biggest impact on purchase accounting.Cash Flows and ReturnsWhen we evaluate prospective financial information, a lower tax rate will result in higher after-tax earnings.The value of the tax shield created by depreciation and deductions will be influenced by both the lower corporate tax rate (which reduces the tax shield’s value) and accelerated depreciation of qualifying capital equipment purchases (which increases the tax shield’s value).In most cases, a lower tax rate will increase cash flows, increasing the internal rate of return on acquisitions for a given purchase price.On the other hand, if lower tax rates drive higher purchase prices, internal rates of return may be unchanged.In terms of the weighted average cost of capital (WACC), the lower tax rate actually increases the after-tax cost of debt.Keeping other inputs constant, this modestly increases WACCs.Relief from RoyaltyUnder the relief from royalty method, after-tax royalties avoided increase as the tax rate falls.However, the tax amortization benefit (TAB) component of the intangible value also declines as a result of the lower tax rate, which serves to partially offset the increase in after-tax cash flows.Scenario AnalysisIn a scenario analysis used to value a noncompete agreement, a lower tax rate will again decrease the tax amortization benefit.Since both scenarios under the with and without approach will reflect the same tax rate, the impact of the new lower rate will be muted.As a result, the fair value of noncompete agreements may well be somewhat lower under the new tax rate.Cost ApproachThe cost approach, which is often used to value assets such as the assembled workforce or some technologies, the impact depends on whether a pre-tax or after-tax measurement basis is used.If fair value is measured on a pre-tax basis, the fair value of such assets is unaffected.If measured on an after-tax basis, costs avoided net of tax will be higher under lower tax rates, although this gain will be offset somewhat by the decrease in the TAB. Multi-Period Excess Earnings Method The impact of the tax rate on assets valued under the Multi-Period Excess Earnings Method (MPEEM) is more ambiguous since two key elements will be affected – the contributory asset charges and the tax rate used to derive after-tax cash flows.On the cash flow side of things, the lower tax rate will result in higher cash flow but a lower TAB.As far as contributory assets are concerned:Relief from royalty asset charges will increase under a lower tax rateWith and without scenario analysis with level payments charges will potentially decrease due to the lower base valueCost approach asset charges may increase or decrease depending on the net effect of taxes and TAB calculationsGoodwill The net impact of a lower tax rate on goodwill will vary by transaction.If the lower tax rate results in a higher transaction price, the aggregate increase in fair value will likely result in a larger allocation to goodwill.If, instead, the lower tax rate increases the projected IRR on a transaction, the impact on residual goodwill is harder to predict and will depend on the composition of the assets acquired.The changes to corporate taxes under the new bill are wide-ranging.In addition to the effect of lower rates discussed in this article, fair value specialists need to be alert to how other specific provisions of the bill may influence individual companies.Impact of Tax Rate Decrease on Valuation MethodCash Flows/Returns Higher after-tax cash flows/impact on returns depends on transaction priceTax Amortization Benefits DecreaseRelief from Royalty Method Increase (potential offset by decrease in TAB)Cost Approach (pre-tax) No ChangeCost Approach (post-tax) Increase (potential offset by decrease in TAB)With and Without Scenario Potentially lower (potential offset by decrease in TAB)MPEEM May Increase or Decrease (depends on magnitude of other changes)

It is inevitable; all successful businesses eventually undergo some form of ownership transition. People do not live forever, so businesses must be passed on in one way or another. There are numerous scenarios under which such transitions occur; however, all transitions must invariably address the question of value. The purpose of this whitepaper is to provide an informative overview regarding the valuation of a veterinary practice.A lack of knowledge regarding the value of your practice could be very costly. Opportunities for successful liquidity events may be missed or estate planning could be incorrectly implemented based on misunderstandings about value. In addition, understanding how veterinary practices are valued may help you understand how to grow the value of your practice and maximize your return when it comes time to sell.

There are many reasons why a trucking company can be worth more or less than a standard rule of thumb might imply, and many reasons why a particular interest in a trucking company can be worth more or less than the pro rata value implied by that rule of thumb.This whitepaper provides useful information as to how trucking companies are valued and what impact that might have on their owners.The whitepaper breaks down basic concepts that must be defined in every valuation and goes into depth about three commonly accepted approaches to value. Financial and market considerations are discussed as are the differences between public and private companies as well as public and private trucking companies.