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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 June 30, 2004
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: 0-24946
KNIGHT TRANSPORTATION, INC.
(Exact name of registrant as specified in its charter)
Arizona 86-0649974
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5601 West Buckeye Road
Phoenix, Arizona
85043
(Address of Principal Executive Offices)
(Zip Code)
Registrant's telephone number, including area code: 602-269-2000
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 is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). [X] Yes [ ] No
The number of shares outstanding of registrant's Common Stock, par value $0.01
per share, as of July 30, 2004 was 56,380,470 shares.
KNIGHT TRANSPORTATION, INC.
INDEX
PART I - FINANCIAL INFORMATION Page Number
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2004 1
and December 31, 2003 (Unaudited)
Condensed Consolidated Statements of Income for the three months 3
and six months ended June 30, 2004 and 2003 (Unaudited)
Condensed Consolidated Statements of Cash Flows for the 4
six months ended June 30, 2004 and 2003 (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition 10
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. Controls and Procedures 21
Part II - OTHER INFORMATION
22
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 25
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (unaudited)
As of June 30, 2004 and December 31, 2003
(In thousands)
June 30, 2004 December 31, 2003
------------------------ -----------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 36,480 $ 40,550
Accounts receivable, net 47,460 38,751
Notes receivable, net 295 515
Inventories and supplies 1,732 1,336
Prepaid expenses 4,060 7,490
Income tax receivable - 1,761
Deferred tax asset 6,077 5,667
------------------------ -----------------------
Total current assets 96,104 96,070
------------------------ -----------------------
PROPERTY AND EQUIPMENT:
Land and improvements 14,976 13,911
Buildings and improvements 21,191 17,166
Furniture and fixtures 5,267 4,916
Shop and service equipment 2,600 2,409
Revenue equipment 292,416 256,803
Leasehold improvements 783 968
------------------------ -----------------------
337,233 296,173
Less: Accumulated depreciation
and amortization (89,082) (83,238)
------------------------ -----------------------
PROPERTY AND EQUIPMENT, net 248,151 212,935
------------------------ -----------------------
NOTES RECEIVABLE - long-term 144 362
GOODWILL 7,504 7,504
OTHER ASSETS 5,307 4,355
$ 357,210 $ 321,226
======================== =======================
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (unaudited) (continued)
As of June 30, 2004 and December 31, 2003
(In thousands, except par values)
June 30, 2004 December 31, 2003
------------------------ ---------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,251 $ 3,408
Accrued payroll 4,912 3,448
Accrued liabilities 11,600 4,493
Claims accrual 18,065 14,805
------------------------ ---------------------------
Total current liabilities 39,828 26,154
DEFERRED INCOME TAXES 55,540 55,149
------------------------ ---------------------------
Total liabilities 95,368 81,303
------------------------ ---------------------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value;
authorized 50,000 shares;
none issued and outstanding - -
Common stock, $0.01 par value; authorized
100,000 shares; 56,375 and 56,234
issued and outstanding at June 30, 2004
and December 31, 2003, respectively 564 563
Additional paid-in capital 78,946 77,754
Retained earnings 182,332 161,606
------------------------ ---------------------------
Total shareholders' equity 261,842 239,923
------------------------ ---------------------------
$ 357,210 $ 321,226
======================== ===========================
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income (unaudited)
(In thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
---- ---- ---- ----
REVENUE
Revenue, before fuel surcharge $100,168 $81,790 $190,411 $155,341
Fuel surcharge 6,980 3,319 11,049 6,977
------------ ------------ ------------ ------------
Total revenue 107,148 85,109 201,460 162,318
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Salaries, wages and benefits 32,333 26,398 62,463 50,189
Fuel 20,418 13,638 37,132 27,866
Operations and maintenance 6,128 5,033 11,789 9,721
Insurance and claims 5,714 4,274 10,603 8,101
Operating taxes and licenses 2,366 2,289 4,590 4,415
Communications 872 747 1,741 1,467
Depreciation and amortization 9,573 7,266 18,471 14,052
Lease expense - revenue
equipment 1,035 1,948 2,268 3,923
Purchased transportation 7,549 6,542 14,137 12,054
Miscellaneous operating
expenses 2,228 2,016 3,947 3,719
------------ ------------ ------------ ------------
88,216 70,151 167,141 135,507
------------ ------------ ------------ ------------
Income from operations 18,932 14,958 34,319 26,811
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income 83 173 207 309
Interest expense - (181) - (383)
------------ ------------ ------------ ------------
83 (8) 207 (74)
------------ ------------ ------------ ------------
Income before taxes 19,015 14,950 34,526 26,737
INCOME TAXES (7,600) (6,000) (13,800) (10,710)
------------ ------------ ------------ ------------
Net income $11,415 $8,950 $20,726 $16,027
============ ============ ============ ============
Net income per common share and
common share equivalent:
Basic $0.20 $0.16 $0.37 $0.29
============ ============ ============ ============
Diluted $0.20 $0.16 $0.36 $0.28
============ ============ ============ ============
Weighted average number of common
shares and common share equivalents
outstanding:
Basic 56,340 56,001 56,298 55,895
============ ============ ============ ============
Diluted 57,479 57,342 57,435 57,248
============ ============ ============ ============
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (unaudited)
(In thousands)
Six Months Ended
June 30,
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 20,726 $ 16,027
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization 18,471 14,052
Non-cash compensation expense for issuance of
stock to certain members of board of directors 13 18
Allowance for doubtful accounts 224 314
Interest rate swap agreement - fair value change - 167
Tax benefit from exercise of stock options 550 1,400
Deferred income taxes (20) 1,806
Changes in assets and liabilities:
Increase in trade receivables (8,932) (1,636)
Increase in inventories and supplies (396) (15)
Decrease (increase) in prepaid expenses 3,430 (352)
Decrease in income tax receivable 1,761 -
Increase in other assets (952) (925)
(Decrease) increase in accounts payable (604) 1,970
Increase in accrued liabilities and claims accrual 11,831 4,326
------------------ ------------------
Net cash provided by operating activities 46,102 37,152
------------------ ------------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (51,240) (37,925)
Investment in/advances to other companies - (213)
Cash received from advance to other company - 1,600
Decrease in notes receivable, net 438 885
------------------ ------------------
Net cash used in investing activities (50,802) (35,653)
------------------ ------------------
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (unaudited) (continued)
(In thousands)
Six Months Ended
June 30,
2004 2003
---- ----
CASH FLOW FROM FINANCING ACTIVITIES:
Payments on long-term debt - (1,954)
Proceeds from exercise of stock options 630 1,447
---------------------- ---------------------
Net cash used in financing activities 630 (507)
---------------------- ---------------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (4,070) 992
CASH AND CASH EQUIVALENTS,
Beginning of period 40,550 36,198
---------------------- ---------------------
CASH AND CASH EQUIVALENTS, end of period $ 36,480 $ 37,190
====================== =====================
SUPPLEMENTAL DISCLOSURES:
Noncash investing and financing transactions:
Equipment acquired in accounts payable $ 2,522 $ 1,133
Net book value of equipment traded 16,974 15,810
Cash Flow Information:
Income taxes paid $ 5,746 $ 6,593
Interest paid - 214
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1. Financial Information
The accompanying condensed consolidated financial statements include the
accounts of Knight Transportation, Inc., and its wholly owned subsidiaries (the
Company). All material inter-company balances and transactions have been
eliminated in consolidation.
The condensed consolidated financial statements included herein have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP"), pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). Certain information and footnote
disclosures have been omitted or condensed pursuant to such rules and
regulations. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. Results of operations in interim periods are not necessarily
indicative of results for a full year. For additional information, please refer
to other filings with the SEC, including our Form 10Q for the quarter ended
March 31, 2004, and our consolidated financial statements and notes thereto
included in our Annual Report on Form 10-K for the year ended December 31, 2003.
Note 2. Stock-Based Compensation
Stock-Based Compensation - At June 30, 2004, the Company had one stock-based
employee compensation plan. The Company applies the intrinsic-value-based method
of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations
including Financial Accounting Standards Board (FASB) Interpretation No. 44,
"Accounting for Certain Transactions involving Stock Compensation, an
interpretation of APB Opinion No. 25," issued in March 2000, to account for its
fixed-plan stock options. Under this method, compensation expense is recorded on
the date of grant only if the current market price of the underlying stock
exceeded the exercise price. No stock-based employee compensation cost is
reflected in net income, as all options granted under the plan had an exercise
price equal to the market value of the underlying common stock on the date of
the grant. Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation," as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure,"
established accounting and disclosure requirements using a fair-value-based
method of accounting for stock-based employee compensation plans. As allowed by
SFAS No. 123, the Company has elected to continue to apply the
intrinsic-value-based method of accounting described above, and has adopted only
the disclosure requirements of SFAS No. 123. The following table illustrates the
effect on net income if the fair-value-based method had been applied to all
outstanding and unvested awards for the three-month and six-month periods ended
June 30, 2004 and 2003, respectively (in thousands, except per share data):
6
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
---- ---- ---- ----
Net income, as reported $ 11,415 $ 8,950 $ 20,726 $ 16,027
Deduct total stock-based
compensation expense determined
under fair-value based method for
all awards, net of tax (326) (151) (586) (302)
---------------- ---------------- --------------- ----------------
Pro forma net income $ 11,089 $ 8,799 $ 20,140 $ 15,725
================ ================ =============== ================
Diluted earnings per share:
As reported $0.20 $0.16 $0.36 $0.28
================ ================ =============== ================
Pro forma $0.19 $0.15 $0.35 $0.27
================ ================ =============== ================
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 2004: risk free interest rate of 4.0%; expected
life of 6.5 years; expected volatility of 49%; expected dividend yield rate of
zero; and expected forfeitures of 3.68%. The following weighted average
assumptions were used for grants in 2003: risk free interest rate 3.36%;
expected life of 6.0 years; expected volatility of 52%; expected dividend yield
rate of zero; and expected forfeitures of 3.04%.
Note 3. Net Income Per Share
A reconciliation of the basic and diluted net income per share computations for
the three months and six months ended June 30, 2004 and 2003, respectively, is
as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
---- ---- ---- ----
Weighted average common
shares outstanding - Basic 56,340 56,001 56,298 55,895
Effect of stock options 1,139 1,341 1,137 1,353
---------------- ---------------- --------------- ----------------
Weighted average common
share and common share
equivalents outstanding -
Diluted 57,479 57,342 57,435 57,248
================ ================ =============== ================
Net income $ 11,415 $ 8,950 $ 20,726 $ 16,027
================ ================ =============== ================
Net income per common share
and common share equivalent
Basic $0.20 $0.16 $0.37 $0.29
================ ================ =============== ================
Diluted $0.20 $0.16 $0.36 $0.28
================ ================ =============== ================
7
Note 4. Comprehensive Income
Comprehensive income for the three and six-month periods ended June 30, 2004 and
2003 was as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
---- ---- ---- ----
Net Income $11,415 $8,950 $20,726 $16,027
Other comprehensive income:
Interest rate swap agreement - fair
market value adjustment - 83 - 167
---------------- ---------------- --------------- ----------------
Comprehensive income $11,415 $9,033 $20,726 $16,194
================ ================ =============== ================
Note 5. Segment Information
Although we have seventeen operating divisions, we have determined that we have
one reportable segment. Sixteen of the divisions are managed based on regions in
the United States in which we operate. Each of these divisions has similar
economic characteristics as they all provide short to medium-haul truckload
carrier services of general commodities to a similar class of customers. In
addition, each division exhibits similar financial performance, including
average revenue per mile and operating ratio. The remaining division is not
reported because it does not meet the materiality thresholds in SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". As a
result, we have determined that it is appropriate to aggregate our operating
divisions into one reportable segment consistent with the guidance in SFAS No.
131. Accordingly, we have not presented separate financial information for each
of our operating divisions as our consolidated financial statements present our
one reportable segment.
Note 6. Derivative Instruments
All derivatives are recognized on the balance sheet at their fair value. In
August and September 2000, and in July 2001, we entered into three agreements,
respectively, which are derivative instruments. These three contracts relate to
the price of heating oil on the New York Merchantile Exchange ("NYMX") and were
entered into in connection with volume diesel fuel purchases between October
2000 and February 2002. The three agreements described above are stated at their
fair market value in the accompanying condensed consolidated financial
statements.
During 2001, we entered into an interest rate swap agreement on the $12.2
million outstanding on our line of credit for purposes of better managing cash
flow. On November 7, 2001, we paid $762,500 to settle this swap agreement. The
amount was included in other comprehensive income and had been fully amortized
to interest expense at December 31, 2003.
Note 7. Recently Adopted and to be Adopted Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51", which was revised
in December 2003. This interpretation addresses the consolidation by business
enterprises of variable interest entities as defined in this interpretation.
This interpretation applies immediately to variable interests in variable
interest entities created after January 31, 2003, and to variable interests in
variable interest entities obtained after January 31, 2003. For public
enterprises with a variable interest in a variable interest entity created
before February l, 2003,
8
this interpretation applies to that enterprise no later than the beginning of
the first interim or annual reporting period beginning after December 15, 2003.
The application of this interpretation did not have a material effect on our
consolidated financial statements.
In December 2003, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 104 ("SAB No. 104"), "Revenue Recognition", which
codifies, revises and rescinds certain sections of SAB No. 101, "Revenue
Recognition", in order to make this interpretive guidance consistent with
current authoritative accounting guidance and SEC rules and regulations. The
changes noted in SAB No. 104 did not have a material effect on our consolidated
financial statements.
Note 8. Commitments and Contingencies
We are involved in certain legal proceedings arising in the normal course of
business. In the opinion of management, our potential exposure under pending
legal proceedings is adequately provided for in the accompanying condensed
consolidated financial statements.
Note 9. Stock Split
On July 20, 2004, we effected a 3-for-2 stock split. The stock split increased
the weighted average number of diluted shares outstanding for the quarter ended
June 30, 2004 to 57.5 million. Earnings per share for all periods presented have
been adjusted to reflect the stock split.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Cautionary Note Regarding Forward-Looking Statements
Except for certain historical information contained herein, the following
discussion contains forward-looking statements that involve risks, assumptions
and uncertainties which are difficult to predict. All statements, other than
statements of historical fact, are statements that could be deemed
forward-looking statements, including without limitation: any projections of
earnings, revenues, or other financial items; any statement of plans,
strategies, and objectives of management for future operations; any statements
concerning proposed new services or developments; any statements regarding
future economic conditions or performance; and any statements of belief and any
statement of assumptions underlying any of the foregoing. Words such as
"believe," "may," "could," "expects," "hopes," "anticipates," and "likely," and
variations of these words, or similar expressions, are intended to identify such
forward-looking statements. Actual events or results could differ materially
from those discussed in forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in the section entitled "Factors That May Affect Future Results," set forth
below. We do not assume, and specifically disclaim, any obligation to update any
forward-looking statement contained in this Report.
Introduction
Business Overview
We are primarily a dry van truckload carrier based in Phoenix, Arizona. We
transport general commodities for shippers throughout the United States,
generally focusing our operations on short-to-medium lengths of haul. We provide
regional truckload carrier services from our 16 operations centers located
throughout the United States. Over the past five years we have achieved
substantial revenue and income growth as a result of our continuing expansion
into new regional markets, emphasis on maintaining and improving efficiencies
and cost control discipline, and success at obtaining rate increases as a result
of providing a high level of customer service. During this period, our revenue,
before fuel surcharge, grew at a 21% compounded annual rate from $125.0 million
in 1998 to $326.9 million in 2003, and our net income grew at a 22% compounded
annual rate from $13.3 million in 1998 to $35.5 million in 2003.
Operating and Growth Strategy
Our operating strategy is focused on the following core elements:
o Focusing on Regional Operations. We seek to operate primarily in
high-density, predictable traffic lanes in selected geographic
regions. We believe our regional operations allow us to obtain greater
freight volumes and higher revenue per mile, and also enhance safety
and driver recruitment and retention.
o Maintaining Operating Efficiencies and Controlling Costs. We focus
almost exclusively on operating dry-vans in distinct geographic and
shipping markets in order to achieve increased penetration of targeted
service areas and higher equipment utilization in dense traffic lanes.
We actively seek to control costs by, among other things, operating a
modern equipment fleet, maintaining a high tractor to non-driver
employee ratio, and regulating vehicle speed.
o Providing a High Level of Customer Service. We seek to compete on the
basis of service in addition to price, and offer our customers a broad
range of services to meet their specific needs, including multiple
pick ups and deliveries, on-time pick ups and deliveries within narrow
time frames, dedicated fleet and personnel, and specialized driver
training.
10
o Using Technology to Enhance Our Business. Our tractors are equipped
with a satellite-based tracking and communications systems to permit
us to stay in contact with our drivers, obtain load position updates,
and provide our customers with freight visibility. A significant
number of our trailers are equipped with tracking technology to allow
us to manage our trailers more effectively, maintain a low trailer to
tractor ratio, efficiently assess detention fees, and minimize cargo
loss.
The primary source of our revenue growth has been our ability to open new
regional facilities in certain geographic areas and operate these facilities at
a profit. We opened our most recent regional facilities in Carlisle,
Pennsylvania in June 2004 and Lakeland, Florida in August 2004. Based on our
current expectations concerning the economy, we anticipate increasing our total
tractors by 350 to 400 system-wide for the entire year of 2004. We have
increased our total tractors by 171 through June 30, 2004. As part of our growth
strategy, we also periodically evaluate acquisition opportunities and we will
continue to consider acquisitions that meet our financial and operating
criteria. In addition, in July 2004, we began operating a refrigerated division
based out of a separate facility located in Phoenix. This new refrigerated
division began with approximately 20 tractors.
Revenue and Expenses
We primarily generate revenue by transporting freight for our customers.
Generally we are paid a rate per mile for our services. We enhance our revenue
by charging for tractor and trailer detention, loading and unloading activities,
and other specialized services, as well as through the collection of fuel
surcharges to mitigate the impact of increases in the cost of fuel. The main
factors that affect our revenue are the revenue per mile we receive from our
customers, the percentage of miles for which we are compensated, and the number
of miles we generate with our equipment. These factors relate, among other
things, to the general level of economic activity in the United States,
inventory levels, specific customer demand, the level of capacity in the
trucking industry, and driver availability.
For much of 2001, 2002, and 2003, economic activity in the United States
was somewhat sluggish, which limited to some extent our ability to obtain rate
increases. During the first half of 2004, however, the United States economy
experienced strong growth. Business inventory levels also improved during this
period. As a result of these positive developments, we have experienced stronger
and more stable freight demand among current and prospective customers thus far
in 2004 than we experienced in the preceding three years. Historically, the
excess capacity in the transportation industry has limited our ability to
improve rates. Over the past two years, however, the transportation industry has
seen some reduction in capacity. We hope that, over the remainder of 2004, lower
capacity coupled with stronger freight demand will continue to provide us with
better pricing power.
The main factors that impact our profitability on the expense side are the
variable costs of transporting freight for our customers. These costs include
fuel expense, driver-related expenses, such as wages, benefits, training, and
recruitment, and owner-operator costs, which are recorded under purchased
transportation. Expenses that have both fixed and variable components include
maintenance and tire expense and our total cost of insurance and claims. These
expenses generally vary with the miles we travel, but also have a controllable
component based on safety, fleet age, efficiency, and other factors. Our main
fixed costs are the acquisition and financing of long-term assets, such as
revenue equipment and operating terminals, and the compensation of non-driver
personnel. Effectively controlling our expenses is an important element of
assuring our profitability. The primary measure we use to evaluate our
profitability is operating ratio, excluding the impact of fuel surcharge revenue
(operating expenses, net of fuel surcharge, as a percentage of revenue, before
fuel surcharge). We view any operating ratio, whether for the Company or any
operations center, in excess of 85% as unacceptable performance.
11
Recent Results of Operations and Quarter-End Financial Condition
For the quarter ended June 30, 2004, our results of operations improved as
follows versus the same period in 2003:
o Revenue, before fuel surcharge, increased 22.5%, to $100.2 million
from $81.8 million;
o Net income increased 27.5%, to $11.4 million from $9.0 million; and
o Net income per diluted share increased 25.0% to $0.20 from $0.16.
We believe the improvements in our profitability are attributable primarily
to higher average revenue per tractor per week (excluding fuel surcharge), our
main measure of asset productivity, which increased 7.8% to $3,052 in the second
quarter of 2004 from $2,831 in the second quarter of 2003. This improvement was
driven by a 5.9% increase in average revenue per loaded mile (excluding fuel
surcharge) to $1.516 from $1.431 and a 1.3% increase in average miles per
tractor to 29,125 from 28,763. We believe these increases were attributable to
stronger freight demand and a better rate environment in the 2004 quarter
primarily due to the improving U.S. economy and a favorable relationship between
demand and trucking capacity. Rate and mile improvements were partially offset
by a 0.9% increase in our percentage of non-revenue miles to 10.9% for the
second quarter of 2004 from 10.8% for the same period in the prior year, which
was principally due to positioning of our revenue equipment in areas which
allowed us to capitalize on the most favorable freight in terms of the highest
rates.
At June 30, 2004, our balance sheet reflected $36.5 million in cash and
cash equivalents, no long-term debt, and shareholders' equity of $261.8 million.
For the quarter, we generated $25.9 million in cash flow from operations and
used $30.8 million for net capital expenditures (net of net book value of
equipment traded of $17.0 million).
12
Results of Operations
The following table sets forth the percentage relationships of our expense
items to total revenue and revenue, before fuel surcharge, for the three-month
and six-month periods ended June 30, 2004, and 2003, respectively. Fuel expense
as a percentage of revenue, before fuel surcharge, is calculated using fuel
expense, net of surcharge. Management believes that eliminating the impact of
this sometimes volatile source of revenue affords a more consistent basis for
comparing our results of operations from period to period.
(Revenue, before) (Revenue, before)
(Total revenue) (fuel surcharge) (Total revenue) (fuel surcharge)
Three-Month Three-Month Six-Month Six-Month
Period Ended Period Ended Period Ended Period Ended
------------------ ------------------ ------------------ ------------------
June 30, June 30, June 30, June 30,
2004 2003 2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ---- ---- ----
Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Salaries, wages and
benefits 30.2 31.0 32.3 32.3 31.0 30.9 32.8 32.3
Fuel 19.1 16.0 13.4(1) 12.6(1) 18.4 17.2 13.7(1) 13.4(1)
Operations and maintenance 5.7 5.9 6.1 6.2 5.9 6.0 6.2 6.3
Insurance and claims 5.3 5.0 5.7 5.2 5.3 5.0 5.6 5.2
Operating taxes and licenses 2.2 2.7 2.4 2.8 2.3 2.7 2.4 2.8
Communications 0.8 0.9 0.9 0.9 0.9 0.9 0.9 0.9
Depreciation and amortization 8.9 8.5 9.6 8.9 9.2 8.7 9.7 9.0
Lease expense - revenue
equipment 1.0 2.3 1.0 2.4 1.1 2.4 1.2 2.5
Purchased transportation 7.0 7.7 7.5 8.0 7.0 7.4 7.4 7.8
Miscellaneous
operating expenses 2.1 2.4 2.2 2.5 2.0 2.3 2.1 2.4
------ ------ ------ ------ ------ ------ ------ ------
Total Operating
Expenses 82.3 82.4 81.1 81.7 83.0 83.5 82.0 82.7
------ ------ ------ ------ ------ ------ ------ ------
Income from operations 17.7 17.6 18.9 18.3 17.0 16.5 18.0 17.3
Net interest expense 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
------ ------ ------ ------ ------ ------ ------ ------
Income before income taxes 17.7 17.6 18.9 18.3 17.7 16.5 18.0 17.3
Income taxes 7.1 7.0 7.5 7.4 6.8 6.6 7.1 7.0
------ ------ ------ ------ ------ ------ ------ ------
Net income 10.7 10.6 11.4 10.9 10.3 9.9 10.9 10.3
====== ====== ====== ====== ====== ====== ====== ======
_______________________________________
(1) Net of fuel surcharge.
There are minor rounding differences in the above table.
A discussion of our results of operations for the six and three month
periods ended June 30, 2004 and 2003 is set forth below.
Comparison of Six Months and Three Months Ended June 30, 2004 to Six Months and
Three Months Ended June 30, 2003
Our total revenue for the six months ended June 30, 2004 increased 24.2% to
$201.5 million from $162.3 million for the same period in 2003. Total revenue
included $11.0 million of fuel surcharge revenue in the 2004 period compared to
$7.0 million in the 2003 period. Our total revenue for the quarter ended June
30, 2004 increased 25.9% to $107.1 million from $85.1 million for the same
quarter in 2003. Total revenue included $7.0 million of fuel surcharge revenue
in the 2004 quarter compared to $3.3 million in the 2003 quarter. In discussing
our results of operations we use revenue, before fuel surcharge, and fuel
expense, net of surcharge, because management believes that eliminating the
impact of this sometimes volatile source of revenue affords a more consistent
basis for comparing our results of operations from period to period. We also
discuss the changes in our expenses as a percentage of revenue, before fuel
surcharge, rather than absolute dollar changes. We do this because we believe
the
13
high variable cost nature of our business makes a comparison of changes in
expenses as a percentage of revenue more meaningful than absolute dollar
changes.
Revenue, before fuel surcharge, increased by 22.6% to $190.4 million in the
six months ended June 30, 2004 from $155.3 million for the same period in 2003.
Revenue, before fuel surcharge, increased by 22.5% to $100.2 million in the
quarter ended June 30, 2004 from $81.8 million in the same quarter in 2003.
These increases primarily resulted from the expansion of our customer base as we
continue to open additional regional facilities, as well as improved rates and
utilization in the 2004 period. As a result of our expansion into new regions
and improving freight demand, our tractor fleet grew to 2,589 tractors
(including 251 owned by independent contractors) as of June 30, 2004, from 2,267
tractors (including 234 owned by independent contractors) as of June 30, 2003, a
14.6% increase. This growth in our fleet, coupled with higher average revenue
per tractor per week in the 2004 periods, resulted in the significant
period-over-period improvement in revenue.
Salaries, wages and benefits expense increased as a percentage of revenue,
before fuel surcharge, to 32.8% for the six months ended June 30, 2004 from
32.3% for the same period in 2003. This increase was primarily due to the
increases in driver pay rates implemented during the previous nine months.
Salaries, wages and benefits expense remained constant as a percentage of
revenue, before fuel surcharge, at 32.3% for the quarter ended June 30, 2004 and
2003. This expense remained constant for the quarter as the increases in driver
pay rates that we implemented were offset by increases in average revenue per
tractor per week. As of June 30, 2004, 90.3% of our fleet was operated by
Company drivers, compared to 89.7% as of June 30, 2003. For our employees, we
record accruals for workers' compensation benefits as a component of our claims
accrual, and the related expense is reflected in salaries, wages and benefits in
our consolidated statements of income.
Fuel expense, net of fuel surcharge, increased, as a percentage of revenue
before fuel surcharge, to 13.7% for the six months ended June 30, 2004 from
13.4% for the same period in 2003. For the quarter ended June 30, 2004, fuel
expense, net of fuel surcharge, increased, as a percentage of revenue before
fuel surcharge, to 13.4% from 12.6% for the same quarter in 2003. The Company
maintains a fuel surcharge program to assist us in recovering a portion of
increased fuel costs. The increases noted above were due mainly to higher than
average fuel prices in the 2004 periods, partially offset by increased fuel
surcharge collections and improved revenue per mile. As a percentage of total
revenue, including fuel surcharge, fuel expense increased to 18.4% for the six
months ended June 30, 2004 from 17.2% for the same period in 2003. For the
quarter ended June 30, 2004, fuel expense, as a percentage of total revenue,
including fuel surcharge, increased to 19.1% from 16.0% for the corresponding
quarter in the prior year. These increases were due primarily to higher fuel
prices. See "Quantitative and Qualitative Disclosure About Market Risk -
Commodity Price Risk," below.
Operations and maintenance expense remained relatively constant as a
percentage of revenue, before fuel surcharge, at 6.2% for the six months ended
June 30, 2004, compared to 6.3% for the same period in 2003. For the quarter
ended June 30, 2004, operations and maintenance expense also remained relatively
constant as a percentage of revenue, before fuel surcharge, at 6.1% compared to
6.2% for the same quarter in 2003.
Insurance and claims expense increased as a percentage of revenue, before
fuel surcharge, to 5.6% for the six months ended June 30, 2004, compared to 5.2%
for the same period in 2003. Insurance and claims expense increased as a
percentage of revenue, before fuel surcharge, to 5.7% for the quarter ended June
30, 2004, compared to 5.2% for the same quarter in 2003. These increases were
primarily a result of higher insurance premiums and an increase in claims
incurred by the Company.
Operating taxes and licenses expense as a percentage of revenue, before
fuel surcharge, decreased to 2.4% for both the quarter and six months ended June
30, 2004 from 2.8% for the same periods in 2003. These decreases resulted
primarily from the improvements in average revenue per tractor per week in the
2004 periods described above, which more efficiently covered this largely fixed
cost.
14
Communications expenses as a percentage of revenue, before fuel surcharge,
remained constant at 0.9% for each of the 2004 and 2003 periods.
Depreciation and amortization expense, as a percentage of revenue before
fuel surcharge, increased to 9.7% for the six months ended June 30, 2004 from
9.0% for the same period in 2003. Depreciation and amortization expense, as a
percentage of revenue before fuel surcharge, increased to 9.6% for the quarter
ended June 30, 2004 from 8.9% for the same quarter in 2003. These increases were
primarily related to an increase in the percentage of our Company fleet
comprised of purchased vehicles. At June 30, 2004, 91% of our Company fleet was
comprised of purchased vehicles, compared to 76% at June 30, 2003. Our Company
fleet includes purchased vehicles and vehicles held under operating leases,
while our total fleet includes vehicles in our Company fleet as well as vehicles
provided by independent contractors.
Lease expense for revenue equipment as a percentage of revenue, before fuel
surcharge, decreased to 1.2% for the six months ended June 30, 2004, compared to
2.5% for the same period in 2003. Lease expense for revenue equipment as a
percentage of revenue, before fuel surcharge, decreased to 1.0% for the quarter
ended June 30, 2004, compared to 2.4% for the same quarter in 2003. These
decreases primarily resulted from the reduction in the percentage of the Company
fleet comprised of vehicles held under operating leases discussed above.
Purchased transportation expense as a percentage of revenue, before fuel
surcharge, decreased to 7.4% for the six months ended June 30, 2004 compared to
7.8% for the same period in 2003. Purchased transportation expense as a
percentage of revenue, before fuel surcharge, decreased to 7.5% for the quarter
ended June 30, 2004 compared to 8.0% for the same quarter in 2003. These
decreases were primarily the result of the improvements in revenue per mile
during the 2004 periods described above, along with the slight decrease in the
percentage of our total fleet comprised of independent contractors. As of June
30, 2004, 9.7% of our fleet was operated by independent contractors, compared to
10.3% at June 30, 2003.
Miscellaneous operating expenses as a percentage of revenue, before fuel
surcharge, decreased to 2.1% for the six months ended June 30, 2004 from 2.4%
for the same period in 2003. Miscellaneous operating expenses as a percentage of
revenue, before fuel surcharge, decreased to 2.2% for the quarter ended June 30,
2004 from 2.5% for the same quarter in 2003. These decreases were primarily due
to the improvements in average revenue per tractor per week in the 2004 periods
described above.
As a result of the above factors, our operating ratio (operating expenses,
net of fuel surcharge, expressed as a percentage of revenue, before fuel
surcharge) was 82.0% for the six months ended June 30, 2004, compared to 82.7%
for same period in 2003. For the quarter ended June 30, 2004, our operating
ratio was 81.1% compared to 81.7% for same quarter in 2003.
Income taxes have been provided at the statutory federal and state rates,
adjusted for certain permanent differences between financial statement income
and income for tax reporting. Our effective tax rate was 40.0% for 2004 and
2003. As a percentage of revenue, before fuel surcharge, income tax expense
increased to 7.1% for the six months ended June 30, 2004, from 7.0% for the same
period in 2003. For the quarter ended June 30, 2004, income tax expense, as a
percentage of revenue, before fuel surcharge, increased to 7.5% from 7.4% for
the same quarter in 2003. These increases were primarily due to the increases in
our income before income taxes.
As a result of the preceding changes, our net income, as a percentage of
revenue before fuel surcharge, was 10.9% for the six months ended June 30, 2004,
compared to 10.3% for the same period in 2003. For the quarter ended June 30,
2004, our net income, as a percentage of revenue before fuel surcharge, was
11.4% compared to 10.9% in the same quarter in 2003.
15
Liquidity and Capital Resources
The growth of our business has required, and will continue to require, a
significant investment in new revenue equipment. Our primary sources of
liquidity have been funds provided by operations, and to a lesser extent lease
financing arrangements, issuances of equity securities, and borrowings under our
line of credit.
Net cash provided by operating activities was approximately $46.1 million
for the six months ended June 30, 2004, compared to $37.2 million for the same
period in 2003. The increase for the 2004 period was primarily the result of an
increase in revenue and the improvement in our operating ratio.
Capital expenditures for the purchase of revenue equipment (net of
trade-ins), office equipment, land and leasehold improvements, totaled $51.2
million for the six months ended June 30, 2004 compared to $37.9 million for the
same period in 2003. During the 2004 period, we acquired a significant number of
tractors and trailers for cash, including some that previously had been held
under operating leases.
Net cash provided by financing activities was approximately $0.6 million
for the six months ended June 30, 2004, compared to net cash used for financing
activities of approximately $0.5 million for same period in 2003. Net cash
provided by financing during the 2004 period was the result of stock option
exercises. The net cash used for financing during the 2003 period was primarily
for the payments on our line of credit and long-term debt, which was retired in
full during the fourth quarter of 2003.
At June 30, 2004, we did not have any borrowings outstanding. We currently
maintain a line of credit, which permits revolving borrowings and letters of
credit totaling $11.0 million. At June 30, 2004, the line of credit consisted
solely of issued but unused letters of credit totaling $9.6 million.
Historically this line of credit had been maintained at $50.0 million. However,
due to our continued strong positive cash position, and in an effort to minimize
bank fees, we do not believe a revolving credit facility or term loans are
necessary to meet our current and anticipated near-term cash needs. We believe
any necessary increase in our line of credit to provide for a revolving line or
credit or term loans could be accomplished quickly as needed. We are obligated
to comply with certain financial covenants under our line of credit and were in
compliance with these covenants at June 30, 2004.
As of June 30, 2004, we held $36.5 million in cash and cash equivalents.
Management believes we will be able to finance our near term needs for working
capital over the next twelve months, as well as capital expenditures during such
period, with cash balances, cash flows from operations, and borrowings and
operating lease financing believed to be available from financing sources. We
will continue to have significant capital requirements over the long-term, which
may require us to incur debt or seek additional equity capital. The availability
of additional capital will depend upon prevailing market conditions, the market
price of our common stock and other factors over which we have limited control,
as well as our financial condition and results of operations. Nevertheless,
based on our recent operating results, current cash position, anticipated future
cash flows, and sources of financing that we expect will be available to us, we
do not expect that we will experience any significant liquidity constraints in
the foreseeable future.
Off-Balance Sheet Transactions
Our liquidity is not materially affected by off-balance sheet transactions.
Like many other trucking companies, from time-to-time we have utilized
non-cancelable operating leases to finance a portion of our revenue equipment
acquisitions. At June 30, 2004, we leased 217 tractors under operating leases
with varying termination dates ranging from August 2004 to April 2006. Vehicles
held under operating leases are not carried on our balance sheet, and lease
payments in respect of such vehicles are reflected in our income statements in
the line item "lease expense - revenue equipment." Our rental expense related to
operating leases was $2.3 million for the six months ended June 30, 2004,
compared to $3.9 million for the same period of 2003. The total amount
outstanding under operating leases as of
16
June 30, 2004, was $3.8 million, with $1.7 million due in the next 12 months.
The effective annual interest rates under these operating leases range from 5.2%
to 5.9%.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires that
management make a number of assumptions and estimates that affect the reported
amounts of assets, liabilities, revenue and expenses in our consolidated
financial statements and accompanying notes. Management bases its estimates on
historical experience and various other assumptions believed to be reasonable.
Although these estimates are based on management's best knowledge of current
events and actions that may impact the Company in the future, actual results may
differ from these estimates and assumptions. Our critical accounting policies
are those that affect our financial statements materially and involve a
significant level of judgment by management.
Revenue Recognition. We recognize revenue, including fuel surcharges, upon
delivery of a shipment.
Revenue Equipment. Property and equipment are stated at cost. Depreciation
on property and equipment is calculated by the straight-line method over the
estimated useful life down to an estimated salvage value of the property and
equipment. We periodically evaluate the useful lives and salvage values of our
property and equipment based upon, among other things, our experience with
similar assets, including gains or losses upon dispositions of such assets. Our
determinations with respect to salvage values are based upon the expected market
values of equipment at the end of the expected life. We presently do not expect
any decrease in the salvage values of our revenue equipment as a result of
conditions in the used equipment market or otherwise. We do not conduct "fair
value" assessments of our capital assets in the ordinary course of business and,
unless a triggering event under SFAS 144 occurs, we do not expect to do so in
the future.
Tires on revenue equipment purchased are capitalized as a part of the
equipment cost and depreciated over the life of the vehicle. Replacement tires
and recapping costs are expensed when placed in service.
Claims Reserves and Estimates. Reserves and estimates for claims is another
of our critical accounting policies. The primary claims arising for us consist
of cargo liability, personal injury, property damage, collision and
comprehensive, workers' compensation, and employee medical expenses. We maintain
self-insurance levels for these various areas of risk and have established
reserves to cover these self-insured liabilities. We also maintain insurance to
cover liabilities in excess of the self-insurance amounts. The claims reserves
represent accruals for the estimated uninsured portion of pending claims,
including adverse development of known claims, as well as incurred but not
reported claims. These estimates are based on historical information, primarily
our own claims experience and the experience of our third party administrator,
along with certain assumptions about future events. Changes in assumptions as
well as changes in actual experience could cause these estimates to change in
the near term. The significant recent increases in our self-insured retention
for personal injury and property damage claims amplify the importance and
potential impact of these estimates.
Estimates also are involved in other aspects of our business. For instance,
we make similar types of estimates concerning the collectibility of our accounts
receivable and the concentration of our credit exposure based on our historical
experience and certain assumptions about future events.
Accounting for Income Taxes. Significant management judgment is required in
determining our provision for income taxes and in determining whether deferred
tax assets will be realized in full or in part. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. When it is more likely than not that all or some portion
of specific deferred tax assets will not be realized, a
17
valuation allowance must be established for the amount of the deferred tax
assets that are determined not to be realizable. A valuation allowance for
deferred tax assets has not been deemed necessary due to the Company's
profitable operations. We continually evaluate strategies that would allow for
the future utilization of our deferred tax assets and currently believe we have
the ability to enact strategies to fully realize our deferred tax assets should
our earnings in future periods not support the full realization of the deferred
tax assets.
Factors That May Affect Future Results
The following issues and uncertainties, among others, should be considered
in evaluating our business outlook:
Business Uncertainties. Our future results may be affected by a number of
factors over which we have little or no control. Fuel prices, insurance and
claims costs, interest rates, the availability of qualified drivers,
fluctuations in the resale value of revenue equipment, economic and customer
business cycles and shipping demands are factors over which we have little or no
control. Significant increases or rapid fluctuations in fuel prices, interest
rates or insurance costs or claims, to the extent not offset by fuel surcharges
and increases in freight rates, and the resale value of revenue equipment, could
reduce our profitability. Weakness in the general economy, including a weakness
in consumer demand for goods and services, could adversely affect our customers
and our growth and revenues, if customers reduce their demand for transportation
services. Weakness in customer demand for our services or in the general rate
environment may also restrain our ability to increase rates or obtain fuel
surcharges. It is also not possible to predict the effects of terrorist attacks
and subsequent events on the economy or on customer confidence in the United
States, or the impact, if any, on our future results of operations.
Managing Growth We have experienced significant and rapid growth in revenue
and profits since the inception of our business in 1990. There can be no
assurance that our business will continue to grow in a similar fashion in the
future or that we can effectively adapt our management, administrative, and
operational systems to respond to any future growth. Further, there can be no
assurance that our operating margins will not be adversely affected by future
changes in and expansion of our business or by changes in economic conditions.
In addition, we have recently commenced operation of a refrigerated division as
part of our growth strategy and are subject to the risks inherent in entering a
new market, including but not limited to: unfamiliarity with pricing, service,
and operational issues; the risk that customer relationships may be difficult to
obtain or that we may have to reduce rates to gain customer relationships; the
risk that the specialized refrigerated equipment may not be adequately utilized;
and the risk that cargo claims may exceed our past experience.
Insurance. Our future insurance and claims expenses might exceed historical
levels, which could reduce our earnings. Insurance premiums have increased
significantly over the past several years, which we have managed, in part, by
increasing the levels of our self-insured retention. We are self-insured for
personal injury and property damage liability, cargo liability, collision and
comprehensive up to a maximum limit of $2.0 million per occurrence. Our maximum
self-retention for workers' compensation where a traffic accident is not
involved is $500,000 per occurrence. We maintain insurance with licensed
insurance companies above the amounts for which we self-insure. Our insurance
policies provide for excess personal injury and property damage liability up to
a total of $40.0 million per occurrence and cargo liability, collision,
comprehensive and workers' compensation coverage up to a total of $10.0 million
per occurrence. Our personal injury and property damage policies also include
coverage for punitive damages where such coverage is allowed.
If these costs were to increase further, or if the severity or number of
claims were to increase our earnings could be materially and adversely affected.
Revenue Equipment. Our growth has been made possible through the addition
of new revenue equipment. Difficulty in financing or obtaining new revenue
equipment (for example, delivery delays
18
from manufacturers, a significant decline in used revenue equipment values, or
the unavailability of independent contractors) could restrict future growth.
EPA emissions control regulations require that diesel engines manufactured
in October 2002 and thereafter must satisfy considerably more restrictive
emissions standards. Furthermore, even more restrictive engine design
requirements will take effect in 2007. In part to offset the costs of compliance
with the EPA engine design requirements, some manufacturers have significantly
increased new equipment prices and further increases may result in connection
with the implementation of the 2007 standards. If new equipment prices increase
more than anticipated, we may be required to increase our depreciation and
financing costs and/or retain some of our equipment longer, with a resulting
increase in maintenance expenses. To the extent we are unable to offset any such
increases in expenses with rate increases or cost savings, our results of
operations would be adversely affected.
In addition to increases in equipment costs, the EPA-compliant engines are
generally less fuel efficient than those in later model tractors manufactured
before October 2002, and compliance with the 2007 EPA standards is expected to
result in further declines in fuel economy. To the extent we are unable to
offset resulting increases in fuel expenses with higher rates or surcharge
revenue, our results of operations would be adversely affected.
Inflation. Many of our operating expenses, including fuel costs and fuel
taxes, are sensitive to the effects of inflation, which could result in higher
operating costs. During the first six months of 2004, we experienced
fluctuations in fuel costs, as a result of conditions in the petroleum industry.
We maintain an aggressive program to obtain rate and fuel surcharge increases.
Competitive conditions in the transportation industry, including lower demand
for transportation services, could limit our ability to continue to obtain rate
increases or fuel surcharges. Due to our significant operations in the West
Coast region, we are particularly affected by the substantially higher fuel
prices currently prevailing in that portion of the country. Generally, West
Coast fuel prices are on average approximately $0.10 per gallon higher than the
national average. For much of the first six months of 2004, however, this
regional difference has been considerably more pronounced. As fuel surcharges
generally are based on national fuel price averages, this fuel price disparity
disproportionately affects carriers, like us, with substantial operations on the
West Coast. We continue to address this situation by implementing a higher West
Coast surcharge on our tariff customers and negotiating with our contract
customers to obtain higher fuel surcharge rates. To the extent we are not
successful in these negotiations, our results of operations may be adversely
affected. See "Quantitative and Qualitative Disclosure About Market Risk -
Commodity Price Risk," below.
We also have periodically experienced some wage increases for drivers.
Increases in driver compensation could continue during 2004 and may affect our
operating income, unless we are able to pass those increased costs to customers
through rate increases.
Driver Retention. Difficulty in attracting or retaining qualified drivers,
including independent contractors, or a downturn in customer business cycles or
shipping demands also could have a materially adverse effect on our growth and
profitability. If a shortage of drivers should occur in the future, or if we
were unable to continue to attract and contract with independent contractors, we
could be required to make further adjustments to our driver compensation
package, which could adversely affect our profitability if not offset by a
corresponding increase in rates.
For other risks and uncertainties that might affect our future operations,
please review Part II of our Annual Report on Form 10-K - "Management's
Discussion and Analysis of Financial Conditions and Results of Operations -
Factors That May Affect Future Results."
19
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk changes in interest rate on debt and from
changes in commodity prices.
Under Financial Accounting Reporting Release Number 48 and Securities and
Exchange Commission rules and regulations, we are required to disclose
information concerning market risk with respect to foreign exchange rates,
interest rates, and commodity prices. We have elected to make such disclosures,
to the extent applicable, using a sensitivity analysis approach, based on
hypothetical changes in interest rates and commodity prices.
We generally have not had occasion to use derivative financial instruments
for risk management purposes and do not use them for either speculation or
trading. Because our operations are confined to the United States, we are not
subject to foreign currency risk.
Interest Rate Risk
We are subject to interest rate risk to the extent the Company borrows
against its line of credit or incurs debt in the acquisition of revenue
equipment. We attempt to manage our interest rate risk by managing the amount of
debt we carry. At June 30, 2004, we did not have any outstanding borrowings. In
the opinion of management, an increase in short-term interest rates could have a
materially adverse effect on our financial condition if our debt levels
increase. Management does not foresee or expect in the near future any
significant changes in our exposure to interest rate fluctuations or in how that
exposure is managed by us.
Commodity Price Risk
We are also subject to commodity price risk with respect to purchases of
fuel. Prices and availability of petroleum products are subject to political,
economic and market factors that are generally outside our control. Because our
operations are dependent upon diesel fuel, significant increases in diesel fuel
costs could materially and adversely affect our results of operations and
financial condition if we are unable to pass increased costs on to customers
through rate increases or fuel surcharges. Historically, we have sought to
recover a portion of our short-term fuel price increases from customers through
fuel surcharges. Fuel surcharges that can be collected do not always fully
offset an increase in the cost of diesel fuel. Based on our recent historical
experience, we believe that we generally pass through to our customers
approximately 80% to 90% of increases in fuel prices. For the six months ended
June 30, 2004, fuel expense, net of fuel surcharge, represented 16.7% of our
total operating expenses, net of fuel surcharge, compared to 16.3% for the same
period in 2003.
We are party to three fuel contracts relating to the price of heating oil
on the New York Mercantile Exchange ("NYMX") that we entered into between
October 2000 and February 2002 in connection with volume diesel fuel purchases.
If the price of heating oil on the NYMX falls below $0.58 per gallon we may be
required to pay the difference between $0.58 and the index price (1) for 1.0
million gallons per month for any selected twelve months through March 31, 2005,
and (2) for 750,000 gallons per month for the twelve months of 2005. At July 9,
2004, the price of heating oil on the NYMX was $1.09 for October 2004 contracts.
For each $0.05 per gallon the price of heating oil would fall below $0.58 per
gallon during the relevant periods, our potential loss on the contracts would be
approximately $900,000. However, our net savings on fuel costs resulting from
lower fuel prices under our volume diesel fuel purchase contracts would be
approximately $1.4 million, after taking the loss on the contracts into
consideration. We have valued these items at fair value in the accompanying June
30, 2004 consolidated financial statements.
20
Item 4. Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, the Company has carried
out an evaluation of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of the end of the period covered
by this report. This evaluation was carried out under the supervision and with
the participation of the Company's management, including our Chief Executive
Officer and our Chief Financial Officer. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective as of the end of the period covered by
this report. During the Company's second fiscal quarter, there were no changes
in the Company's internal control over financial reporting that have materially
affected, or that are reasonably likely to materially affect, the Company's
internal control over financial reporting.
Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in the
Company's reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure controls and
procedures include controls and procedures designed to ensure that information
required to be disclosed in Company reports filed under the Exchange Act is
accumulated and communicated to management, including the Company's Chief
Executive Officer and Chief Financial Officer as appropriate, to allow timely
decisions regarding disclosures.
The Company has confidence in its internal controls and procedures.
Nevertheless, the Company's management, including the Chief Executive Officer
and Chief Financial Officer, does not expect that our disclosure controls and
procedures or our internal controls will prevent all errors or intentional
fraud. An internal control system, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of such
internal controls are met. Further, the design of an internal control system
must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent
limitations in all internal control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected.
21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We are a party to ordinary, routine litigation and administrative
proceedings incidental to our business. These proceedings primarily involve
claims for personal injury or property damage incurred in the transportation of
freight and for personnel matters.
Item 2. Changes in Securities and use of Proceeds
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders was held on May 21, 2004. At
the Annual Meeting, the shareholders elected Kevin Knight, Randy Knight, and
Michael Garnreiter to serve as Class III directors for three-year terms. Gary
Knight, G.D. Madden, Matt Salmon, Timothy Kohl, Donald Bliss, and Mark Scudder
also continued as directors of the Company after the Annual Meeting.
Shareholders representing 34,715,597 shares, or approximately 92.5%, of the
Company's outstanding Common Stock as of the record date were present in person
or by proxy at the Annual Meeting. A tabulation of the vote with respect to each
nominee follows:
Votes
Votes Cast Votes For Withheld
----------- ------------- ------------
Kevin Knight 34,715,597 28,729,658 5,985,939
Randy Knight 34,715,597 28,870,205 5,845,392
Michael Garnreiter 34,715,597 33,756,145 959,452
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K
Exhibit No. Description
----------- -----------
Exhibit 3 Articles of Incorporation and Bylaws
(3.1) Restated Articles of Incorporation of the Company
(Incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-1. No
33-83534.)
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(3.1.1) First Amendment to Restated Articles of
Incorporation of the Company (Incorporated by
reference to Exhibit 3.1.1 to the Company's
report on Form 10-K for the period ended December
31, 2000.)
(3.1.2) Second Amendment to Restated Articles of
Incorporation of the Company (Incorporated by
reference to Exhibit 3.1.2 to the Company's
Registration Statement on Form S-3 No.333-72130.)
(3.1.3) Third Amendment to Restated Articles of
Incorporation of the Company. (Incorporated by
reference to Exhibit 3.1.3 to the Company's Report
on Form 10-K for the period ended December 31,
2002.)
(3.2) Restated Bylaws of the Company Incorporated by
reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-3 No. 333-72130.)
(3.2.1) First Amendment to Restated Bylaws of the Company
(Incorporated by reference to Exhibit 3.2.1 to the
Company's Report on Form 10-K for the period ended
December 31, 2002.)
Exhibit 4 Instruments defining the rights of security
holders, including indentures
(4.1) Articles 4, 10 and 11 of the Restated Articles of
Incorporation of the Company. (Incorporated by
reference to Exhibit 3.1 to this Report on Form
10-Q.)
(4.2) Sections 2 and 5 of the Restated Bylaws of the
Company. (Incorporated by reference to Exhibit 3.2
to this Report on Form 10-Q.)
Exhibit 11 Schedule of Computation of Net Income Per Share
(Incorporated by reference from Note 3, Net Income
Per Share, in the Notes To Consolidated Financial
Statements contained in this Report on Form 10-Q.)
Exhibit 31 Section 302 Certifications
(31.1) Certification pursuant to Item 601(b)(31) of
Regulation S-K, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002, by Kevin P.
Knight, the Company's Chief Executive Officer
(31.2) Certification pursuant to Item 601(b)(31) of
Regulation S-K, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002, by David A.
Jackson, the Company's Chief Financial Officer
Exhibit 32 Section 906 Certifications
(32.1) Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, by Kevin P. Knight,
the Company's Chief Executive Officer
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(32.2) Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, by David A. Jackson,
the Company's Chief Financial Officer
(b) Reports on Form 8-K
During the quarter ended June 30, 2004, the Company filed with,
or furnished to, the Securities and Exchange Commission (the
"Commission") the following Current Reports on Form 8-K:
Current Report on Form 8-K dated April 12, 2004 (filed with the
Commission on the same date) reporting the appointment of Deloitte &
Touche LLP as the Company's principal independent accountants for
fiscal 2004; and
Current Report on Form 8-K dated April 21, 2004 (furnished to the
Commission on April 22, 2004) reporting the issuance of a press
releasing announcing the Company's financial results for the quarter
ended March 31, 2004.
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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.
KNIGHT TRANSPORTATION, INC.
Date: August 6, 2004 By: /s/ Kevin P. Knight
---------------------------------
Kevin P. Knight
Chief Executive Officer, in his capacity as
such and on behalf of the registrant
Date: August 6, 2004 By: /s/ David A. Jackson
---------------------------------
David A. Jackson
Chief Financial Officer, in his capacity as
such and on behalf of the registrant
Date: August 6, 2004 By: /s/ Robert Johnson
---------------------------------
Robert Johnson
Chief Accounting Officer, in his capacity as
such and on behalf of the registrant
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