UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Commission file number: 000-26256

VITRAN CORPORATION INC.

185 The West Mall, Suite 701, Toronto, Ontario, Canada, M9C 5L5
(Address of principal executive offices)(Zip Code)

416-596-7664
(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. Yes x No o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

The number of shares of common stock outstanding at October 21, 2004 was 12,412,578.

TABLE OF CONTENTS

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Part I. Financial Information

Item 1: Financial Statements

VITRAN CORPORATION INC.

CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Unaudited)

(In thousands of United States dollars except for per share amounts)

See accompanying notes to consolidated financial statements.

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VITRAN CORPORATION INC.

CONSOLIDATED BALANCE SHEETS
(Unaudited)

(In thousands of United States dollars)

See accompanying notes to consolidated financial statements.

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VITRAN CORPORATION INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

(In thousands of United States dollars)

See accompanying notes to consolidated financial statements.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of United States dollars except for per share amounts)

1.

Accounting Policies

		The interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles with reconciliation to United States generally accepted accounting principles in note 8 and follow the same accounting principles and methods of application as the most recent annual consolidated financial statements. The interim consolidated financial statements do not contain all the disclosures required by Canadian and United States generally accepted accounting principles. The interim consolidated financial statements have been prepared in accordance with instruction to Quarterly Report on Form 10-Q. The interim consolidated financial statements should be read in conjunction with the Company’s Annual Report and the Annual Report on Form 10-K.
		These unaudited consolidated interim financial statements reflect all adjustments which are, in the opinion of management, necessary to a fair presentation of the results of the interim period presented. Operating results for the quarter ended September 30, 2004 are not necessarily indicative of the results of operations that may be expected for the year ended December 31, 2004.
		All amounts in these consolidated interim financial statements are expressed in United States dollars, unless otherwise stated.
		Accounting Estimates
		On January 01, 2004 the Company changed the estimated useful life of its equipment to accurately reflect its actual useful life. The useful life of the Company’s tractors and trailers was changed to 8 years from 7 years and to 12 years from 10 years, respectively. The following table outlines the effect of the change in estimate on net income and earnings per share:

2.		Foreign Currency Translation
		On December 31, 2003 the Company elected to change its reporting currency to U.S. dollars and restated prior year comparative balances to reflect the change in accounting policy.
		The United States dollar is the functional currency of the Company’s operations in the U.S. The Canadian dollar is the functional currency of the Company’s Canadian operations.
		Each operation translates foreign currency denominated transactions into its functional currency using the rate of exchange in effect at the date of the transaction.
		Monetary assets and liabilities denominated in foreign currency are translated into the functional currency of the operation using the period-end rate of exchange giving rise to a gain or loss that is recognized in income during the current period.
		For reporting purposes, the Canadian operations are translated into United States dollars using the current rate method. Under this method, all assets and liabilities are translated at the period-end rate of exchange and all revenue and expense items are translated at the average rate of exchange for the period. The resulting translation adjustment is recorded as a separate component of shareholders equity. United States dollar debt of $20.0 million is designated as a hedge of the investment in the United States self-sustaining operations.

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3.		Goodwill
		The Company annually compares the implied fair value of its reporting units to the carrying value to determine if an impairment loss has occurred. The fair value based test involves assumptions regarding long-term future performance of the reporting units, fair value of the assets and liabilities, cost of capital rates, capital re-investment and other assumptions. Actual recovery of goodwill could differ from these assumptions based on the market conditions and other factors. In the event goodwill is determined to be impaired a charge to earnings would be required.
		As at September 30, 2004 the Company completed its annual goodwill impairment test and concluded that there was no impairment. The change in goodwill is attributable to translating the Canadian dollar denominated goodwill to the United States dollar reporting currency.
4.		Common Stock

(a)		Authorized
		The Company’s common stock consists of an unlimited number of Common Shares. On April 21, 2004 the shareholders of the Company voted to redesignate the Company’s Class A Voting shares as Common Shares and cancelled the previously unissued Class B non-voting shares and first preference shares.
(b)		Issued

(c)		Weighted average number of shares
		The Company uses the treasury-stock method to calculate diluted earnings per share. Under the treasury-stock method, the weighted average number of shares outstanding for basic earnings per share is adjusted to reflect the assumed exercise of the Company’s outstanding stock options less the shares that could otherwise be acquired from the assumed proceeds on exercise.

*		Diluted weighted average number of shares excludes “out of the money” options
5.		Stock Option Plan
		Under the Company’s stock option plan, options to purchase Common Shares of the Company may be granted to key employees, officers and directors of the Company and its affiliates by the Board of Directors or by the Company’s Compensation Committee. There are 1,367,900 options authorized under the plan. The term of each option is ten years and the vesting period is generally five years. The exercise price for options is the trading price of the Common Shares of the Company on the Toronto Stock Exchange on the day of the grant.
		The Company has applied the fair value method for stock options granted on or after January 1, 2003. The Company has applied the pro forma disclosure provisions of the standard to awards granted during 2002, and consistent with the standard, the pro forma effect of stock options granted prior to January 1, 2002 have not been included. The following table outlines the impact:

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		On March 9, 2004 the Board of Directors of the Company approved an amendment to the Company stock option plan to increase the aggregate number of Common Shares issuable under the Plan by an additional 750,000 Common Shares and granted 205,000 stock options to executive officers and certain non-executive employees of the Company. The stock options granted on March 9, 2004 were not expensed in the first quarter financial statements as the shareholders of the Company had yet to approve the increase to the aggregate number of Common Shares reserved under the stock plan. On April 21, 2004 the shareholders of the Company approved the amendment to the stock option plan. In addition, the Board of Directors granted an additional 105,000 options on July 20, 2004 to non-executive employees of the Company. Accordingly, for the stock options granted in 2004 the associated stock option expense of $0.2 million pursuant to the fair value method has been recognized in the financial statements for the nine months ended September 30, 2004.
		The fair value of each stock option granted was estimated using the Black-Scholes fair value option-pricing model with the following assumptions:

6.		Contingent Liabilities
		The Company is subject to legal proceedings that arise in the ordinary course of business. In the opinion of management, the aggregate liability, if any, with respect to these actions will not have a material adverse effect on the consolidated financial position, results of operations or cash flows. Legal costs are expensed as incurred.

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7.

Segmented Information

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8.

Canadian and United States accounting policy differences:

(a)		Consolidated reconciliation of shareholders’ equity
		United States GAAP requires the inclusion of a reconciliation of shareholders’ equity between Canadian and United States GAAP. Shareholders’ equity reconciled to United States GAAP is as follows:

(b)		Consolidated statements of cash flows:
		Canadian GAAP permits the disclosure of a subtotal of the amount of cash provided by operations before changes in non-cash working capital items in the consolidated statements of cash flows. United States GAAP does not permit this subtotal to be included.
(c)		Statement of net income (loss) and comprehensive income (loss)
		The following table reconciles net income for the three-month and nine-month periods as reported in the consolidated statement of operations to what would have been reported had the statements been prepared in accordance with United States GAAP.
		United States GAAP requires the disclosure of a Statement of Comprehensive Income. Comprehensive income generally encompasses all changes in shareholders’ equity, except those arising from transactions with shareholders.

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(i)

The change in the fair value of the Company’s obligation for its interest rate swap, which was designated as a cash flow hedge, has been included net of the income tax effect of nil (2003 — $78,000).

(d)

Earnings per share

(e) Income from operations before depreciation

United States GAAP requires that depreciation be included in the determination of income from operations. Further, United States GAAP does not permit the disclosure of a subtotal of the amount of income from operations before this item. Canadian GAAP permits the disclosure of a subtotal of the amount of income from operations before this item. Income from operations based on United States GAAP is as follows:

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(f)		Stock-based compensation:
		Pro forma stock option disclosure:
		For all stock option grants prior to January 01, 2003, stock-based compensation to employees was accounted for based on the intrinsic value method under APB No. 25 and related interpretations.
		Canadian GAAP requires pro forma net income and earnings per share disclosure for stock option grants during 2002. United States GAAP requires pro forma net income and earnings per share disclosure for stock options granted on or after January 01, 1995. For stock option grants on or after January 01, 2003 there is no policy difference between Canadian and United States GAAP.
		The following table outlines the pro forma impact if the compensation cost for the Company’s stock options is determined under the fair value method for awards granted on or after January 1, 1995.

(g)		Marketable Securities
		The Marketable securities are classified as “available for sale” under United States GAAP. The cost approximates the fair value and all maturities are within one year.
9.		Comparative figures
		Certain comparative figures have been reclassified to conform with the financial statement presentation adopted in the current year.

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Item 2. Management’s Discussion and Analysis of Results of Operation

Forward-Looking Statements: This Quarterly Report contains forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 concerning Vitran Corporation Inc.’s business, operations, and financial performance and condition. When used in this Quarterly Report, the words “believe”, “anticipate”, “intend”, “estimate”, “expect”, “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such words. These forward-looking statements are based on current expectations and are naturally subject to uncertainty and changes in circumstances that may cause actual results to differ materially from those expressed or implied by such forward-looking statements. Factors that may cause such differences include but are not limited to technological change, regulatory change, the general health of the economy and competitive factors. More detailed information about these and other factors are included in the 2003 Annual Report and the Company’s Form 10-K in respect of 2003. Many of these factors are beyond the Company’s control; therefore, future events may vary substantially from what the Company currently foresees. You should not place undue reliance on such forward-looking statements. Vitran Corporation Inc. is under no obligation to update or alter such forward-looking statements whether as a result of new information, future events or otherwise. Unless otherwise indicated all dollar references herein are in U.S. dollars. Definitions of non-GAAP measures are listed subsequent to the management discussion and analysis of results of operations.

Overview

The third quarter of 2004 marked the second successive record quarter for Vitran. Net income increased 49.2% over the prior year third quarter and marked the twelfth consecutive quarter of improved earnings. All segments within the Company once again improved, posting both revenue and profitability increases. The LTL segment in general and most notably the US LTL business unit benefited from economic expansion that led to improved results in the quarter. For the nine-month period ended September 30, 2004 results exceeded the prior year nine-month period despite the adverse impact of the five-week strike at CN Railway Co. (“CN”). Strike related issues disrupted linehaul operations at the Canadian LTL business unit, reducing revenue and considerably increasing operating costs during February and March 2004. However, the Company efficiently diverted many shipments over-the-road during the strike, and quickly resumed normal operations once the strike ended. Strong results at both the Truckload and the Logistics segments also contributed to the improvement.

Consolidated Results

The following table summarizes the Consolidated Statements of Income for the periods ended:

Revenue increased 14.3% to $97.0 million for the third quarter of 2004 compared to $84.9 million in the third quarter of 2003. Revenue in the LTL segment increased 13.7% while revenue at the Logistics and Truckload segments grew 21.6% and 12.2% respectively. For the nine months ended September 30, 2004 revenue increased 12.8% to $278.1 million compared to $246.5 million for the same period in 2003. Explanations for the quarterly improvements in revenue are discussed within the “Segmented Results”.

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Income from operations for the third quarter of 2004 improved 37.0% to $6.2 million compared to $4.5 million in the third quarter of 2003. All three segments, LTL, Logistics, and Truckload posted quarter over prior-year quarter improvements of 28.6%, 6.4%, and 174.1%, respectively. Economic growth and a strong operating environment primarily in the Midwestern United States buoyed the results of the LTL and Truckload segments. For the nine months ended September 30, 2004 income from operations increased 32.3% to $14.1 million compared to $10.7 million for the same period in 2003. Improvements at the Logistics and Truckload segments as well as improving fundamentals in the LTL segment contributed to the increase. In addition, the Company changed the estimated useful life for its tractors from 7 years to 8 years and its trailers from 10 years to 12 years to more accurately reflect the actual useful life of its equipment and to bring the Company’s policy in line with its peer group. This change in estimate was recorded prospectively and resulted in a reduction in depreciation expense of $0.2 million for the 2004 third quarter and $0.5 million for the nine month ended September 30, 2004. The net impact of the items discussed above was that the consolidated operating ratio for the third quarter of 2004 improved to 93.6% compared to 94.7% in the third quarter of 2003. The operating ratio for the nine months ended September 30, 2004 improved to 94.9% compared to 95.7% for the same period in 2003.

Interest expense net of interest income was $0.1 million for the nine months ended September 30, 2004 compared to $1.1 million in the nine months ended September 30, 2003. This reduction was primarily due to the Company’s $28.2 million in short-term investments generating interest income of $0.4 million. As well, the Company repaid $6.1 million of its outstanding debt obligations and had a 50 basis point reduction in interest rate spreads starting in February 2004.

Income tax expense for the third quarter of 2004 was $1.6 million compared to $1.1 million in the third quarter of 2003. The effective tax rate was 26.6% for the third quarter of 2004 in line with the third quarter of 2003. For the nine months ended September 30, 2004 the effective tax rate was 25.3% compared to 23.6% for the same period a year ago. The increase in the effective tax rate can be attributed to an increase in statutory rates as well as a higher proportion of income being earned in higher tax jurisdictions.

Net income improved by 49.2% to $4.5 million for the third quarter of 2004, another successive quarter posting an all time record for the Company, compared to $3.0 million in the third quarter of 2003. This resulted in $0.37 per share basic and $0.36 diluted for the quarter, compared to $0.32 per share basic and $0.30 per share diluted in 2003. The weighted average number of shares for the third quarter of 2004 was 12.3 million basic and 12.8 million diluted compared to 9.6 million basic and 10.2 million diluted shares in the third quarter of 2003. For the nine months ended September 30, 2004 net income improved by 47.2% to $10.6 million compared to $7.2 million in the same period a year ago. This resulted in $0.86 per share basic and $0.83 diluted for the 2004 nine month period, compared to $0.75 per share basic and $0.72 per share diluted in 2003. The weighted average number of shares for the nine-month period of 2004 was 12.2 million basic and 12.7 million diluted compared to 9.5 million basic and 10.0 million diluted shares in the nine month period of 2003. The weighted average number of shares for 2004 reflects the Company’s 2.3 million share equity offering in the fourth quarter of 2003, and more dilution due to the fact that the majority of outstanding stock options were in the money in the three month and nine month period ended September 30, 2004.

Segmented Results

Less-Than-Truckload (LTL)

The table below provides summary information for the LTL segment for the periods ended September 30:

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The LTL segment posted another quarterly improvement in revenue, increasing 13.7%. Income from operations for the third quarter of 2004 improved 28.6% to $5.9 million, compared $4.6 million in 2003. Increased density throughout Canadian and U.S. infrastructure including a 24.7% increase in transborder revenue contributed to the improvement. The LTL segment’s operating ratio for the third quarter improved to 92.5% compared to 93.4% in the third quarter of 2003. Income from operations for the nine-month period ended September 30, 2004 increased 16.8% to $13.3 million compared to $11.4 million in the same period a year ago. Income from operations for the nine-month period includes the adverse impact of approximately $1.0 million related to the CN strike. However, the operating ratio for the 2004 nine-month period improved to 94.1% compared to 94.3% in the 2003 nine-month period.

The Canadian LTL business unit for the third quarter of 2004 increased revenue in all of its lines of business: national, regional, expedited, and transborder. A firm pricing environment in the Canadian LTL unit helped grow revenue 15.4% (Cdn 8.8%) in the third quarter of 2004 compared to the same period in 2003. Slightly offsetting the revenue improvement were railway capacity challenges and linehaul cost increases in the national line of business. This resulted in an increase in linehaul expenses and dock wages as a percentage of revenue compared to same period last year. Notwithstanding, for the 2004 third quarter compared to the third quarter of 2003, shipments, tonnage and revenue per hundredweight increased 3.0%, 2.3% and 11.4% (Cdn 6.3%) respectively contributing to an increase in the LTL segment’s period-over-period income from operations.

The U.S. LTL business unit increased revenue by 12.5% to $44.9 million, as a result of a firm pricing environment and market share gains in the third quarter of 2004 compared to 2003. The improvement in revenue was validated by increases in shipments, tonnage and revenue per hundredweight of 7.2%, 9.1% and 3.1% in the 2004 third quarter as compared to the same period a year ago. Efficiency gains in the pick-up and delivery system were realized as driver wages as a percentage of revenue decreased, although offset by a slight deterioration of linehaul expenses as a percentage of revenue.

Logistics

The table below provides summary information for the Logistics segment for the periods ended September 30:

Revenue and income from operations for the Logistics segment were up 21.6% and 6.4% for the third quarter of 2004. Revenue increases were attributable to improvements across all the logistics business units with strong growth coming from the Supply Chain unit. Revenue growth outpaced income from operations increases, as the Supply Chain unit worked to fill the capacity of its new distribution facility that was opened at the end of the 2004 second quarter.

Truckload (TL)

The table below provides summary information for the TL segment for the periods ended September 30:

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Revenue for the Truckload segment increased from 12.2% to $9.3 million in the third quarter of 2004 compared to $8.3 million in the third quarter of 2003. With a strong pricing environment in the Midwestern U.S. attributable to a shortage of qualified drivers in the truckload market place, the Company’s Truckload segment has focused on better yielding freight in 2004. Consequently, revenue per total mile has increased by 16.5% while empty miles has decreased by 22.1%, augmented by an increase shipments of 1.7% for the third quarter of 2004 compared to the same period in 2003. The revenue increase and yield progress improved the 2004 third quarter operating ratio to 94.0% from 97.5% in the third quarter of 2003.

LIQUIDITY AND CAPITAL RESOURCES

Cash flow from operations for the 2004 nine-month period, before working capital changes, generated $16.0 million compared to $11.7 million in 2003. Non-cash working capital changes consumed $7.2 million in the 2004 nine-month period compared to $5.7 million in 2003. The increase in accounts receivable at September 30, 2004 compared to December 31, 2003 was due to higher revenue. The increase was however mitigated by improved collections that resulted in 39.4 days sales outstanding at the end of September 2004 compared to 40.5 days at the end of December 2003.

Interest-bearing debt decreased to $20.1 million at September 30, 2004 from $26.2 million at the end of 2003. The interest-bearing debt is comprised of $20.0 million drawn under the term bank credit facility and a capital lease of $0.1 million. During the first nine months the Company repaid $6.1 million of interest-bearing debt. At September 30, 2004, the Company had $17.2 million of unused credit facilities.

In December 2003, the Company issued and sold, in an underwritten public offering, 2,300,000 shares of Common stock in consideration for net proceeds of $29.4 million. The proceeds of the offering are to be used to fund possible future acquisitions and capital expenditures and may be used to repay amounts outstanding under the Company’s credit facilities. At September 30, 2004, the Company had $12.5 million of cash on hand as well as $28.2 million (Cdn $35.6 million) in investment grade short-term securities.

Capital expenditures amounted to $0.9 million for the third quarter and $4.0 million for nine-month period of 2004 and were funded out of operating cash flows of the Company. The majority of the Company’s capital expenditures in the 2004 nine-month period was for the acquisition of tractors and trailing fleet. The table below sets forth the Company’s capital expenditures for the periods ended September 30.

Management estimates that cash capital expenditures for the remainder of 2004 will be between $5.0 million and $7.0 million, the majority of which will be for tractors and trailers. The Company also anticipates entering into operating leases to fund the acquisition of equipment with a capital cost of between $3.0 and $4.0 million.

The Company has contractual obligations that include long-term debt consisting of a term debt facility, capital leases for operating equipment in the Logistics segment and off-balance sheet operating leases primarily consisting of tractor, trailing fleet and real estate leases. Operating leases form an integral part of the Company’s financial structure and operating methodology as it provides an alternative cost effective and flexible form of financing. The following table summarizes our significant contractual obligations and commercial commitments as of September 30, 2004:

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In addition to the above noted contractual obligations, the Company, as at September 30, 2004, utilized the revolving credit facility for a standby letter of credit of $2.6 million expiring in November 2004. The letter of credit is used as collateral for self-insured retention of insurance claims.

A significant decrease in demand for our services could limit the Company’s ability to generate cash flow and affect its profitability. The Company’s credit agreement contains covenants that require the company to achieve stated levels of financial performance, which, if not achieved, could cause an acceleration of the payment schedules. Management does not anticipate a significant decline in business levels or financial performance and expects that existing working capital, together with available revolving facilities, is sufficient to fund operating and capital requirements in 2004 as well as service the contractual obligations.

OUTLOOK

The third quarter of 2004 was another record quarter for Vitran, marking the second successive quarter of posting all time best results. All operating segments performed very well and are ahead of the prior year nine-month results. Positive economic indicators and a stable pricing environment, particularly in the Midwestern U.S., should continue into the fourth quarter and permit the LTL and Truckload segments to sustain their momentum. Continued railway capacity issues within the Canadian LTL business unit could partially offset the realization of expanded operating margins. The Logistics segment, as it fills the capacity of its new distribution facility, should realize operating ratio improvements. Lastly, it is still the Company’s objective to use the proceeds from the December 2003 public offering to acquire an LTL operation in a new regional market contiguous to the existing network.

QUARTERLY RESULTS

Canadian GAAP

United States GAAP