UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
(Mark
One)
| x |
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934. |
| |
|
For the
Quarterly Period Ended March 31, 2005
or
| o |
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
incorporation
or organization) |
(I.R.S.
Employer
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 o No
Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). x Yes o No
The
number of shares outstanding of the registrant’s Common Stock, par value $0.01
per share, as of April 26, 2005 was 56,798,260 shares.
KNIGHT
TRANSPORTATION, INC.
|
PART
I - Financial
Information |
Page
Number |
| |
|
|
Item
1. |
Financial
Statements |
|
| |
|
|
| |
Condensed
Consolidated Balance Sheets as of March 31, 2005
and
December 31, 2004 (Unaudited) |
|
| |
|
|
| |
Condensed
Consolidated Statements of Income for the three
months
ended March 31, 2005 and 2004 (Unaudited) |
|
| |
|
|
| |
Condensed
Consolidated Statements of Cash Flows for the three
months
ended March 31, 2005 and 2004 (Unaudited) |
|
| |
|
|
| |
Notes
to Condensed Consolidated Financial Statements (Unaudited) |
|
| |
|
|
|
Item
2. |
Management’s
Discussion and Analysis of Financial Condition
and Results of Operations |
|
| |
|
|
|
Item
3. |
Quantitative
and Qualitative Disclosures About Market Risk |
|
| |
|
|
|
Item
4. |
Controls
and Procedures |
|
| |
|
|
|
Part
II - Other
Information |
| |
|
|
|
Item
1. |
Legal
Proceedings |
|
| |
|
|
|
Item
2. |
Unregistered
Sales of Equity Securities and Use of Proceeds |
|
| |
|
|
|
Item
3. |
Defaults
Upon Senior Securities |
|
| |
|
|
|
Item
4. |
Submission
of Matters to a Vote of Security Holders |
|
| |
|
|
|
Item
5. |
Other
Information |
|
| |
|
|
|
Item
6. |
Exhibits |
|
| |
|
|
|
Signatures |
|
|
|
|
|
|
Item
1.
Financial Statements
|
|
|
KNIGHT
TRANSPORTATION, INC. AND SUBSIDIARIES |
|
|
Condensed
Consolidated Balance Sheets (unaudited)
As
of March 31, 2005 and December 31, 2004
(In
thousands) |
|
| |
|
| |
|
March
31, 2005 |
|
December
31, 2004 |
|
| |
|
|
|
|
|
ASSETS |
|
|
|
|
|
| |
|
|
|
|
|
CURRENT
ASSETS: |
|
|
|
|
|
| |
|
|
|
|
|
|
Cash
and cash equivalents |
|
$ |
38,692 |
|
$ |
25,357 |
|
|
Accounts
receivable, net
Notes receivable, net |
|
|
60,473
189 |
|
|
58,733
171 |
|
|
Inventories
and supplies |
|
|
2,914 |
|
|
2,332 |
|
|
Prepaid
expenses
Income tax receivable |
|
|
9,925
- |
|
|
5,215
3,216 |
|
|
Deferred
tax asset |
|
|
7,989 |
|
|
7,493 |
|
| |
|
|
|
|
|
|
|
|
Total
current assets |
|
|
120,182 |
|
|
102,517 |
|
| |
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT: |
|
|
|
|
|
|
|
|
Land
and improvements |
|
|
16,538 |
|
|
16,516 |
|
|
Buildings
and improvements |
|
|
27,771 |
|
|
26,944 |
|
|
Furniture
and fixtures |
|
|
6,898 |
|
|
6,610 |
|
|
Shop
and service equipment |
|
|
2,709 |
|
|
2,739 |
|
|
Revenue
equipment |
|
|
350,512 |
|
|
338,413 |
|
|
Leasehold
improvements |
|
|
845 |
|
|
833 |
|
| |
|
|
405,272 |
|
|
392,055 |
|
|
Less:
Accumulated depreciation
and amortization |
|
|
(112,411 |
) |
|
(104,125 |
) |
| |
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT, net |
|
|
292,861 |
|
|
287,930 |
|
| |
|
|
|
|
|
|
|
|
NOTES
RECEIVABLE - long-term |
|
|
32 |
|
|
77 |
|
|
GOODWILL |
|
|
7,504 |
|
|
7,504 |
|
|
OTHER
ASSETS |
|
|
5,377 |
|
|
4,839
|
|
| |
|
|
|
|
|
|
|
| |
|
$ |
425,956 |
|
$ |
402,867 |
|
| |
| |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements. |
|
KNIGHT
TRANSPORTATION, INC. AND SUBSIDIARIES
Condensed
Consolidated Balance Sheets (unaudited)
(continued)
As
of March 31, 2005 and December 31, 2004
(In
thousands, except par values)
|
| |
|
March
31, 2005 |
|
December
31, 2004 |
|
| |
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
| |
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
Accounts
payable |
|
$ |
7,484 |
|
$ |
5,044 |
|
|
Accrued
payroll |
|
|
5,181 |
|
|
4,558 |
|
|
Accrued
liabilities |
|
|
9,284 |
|
|
5,684 |
|
|
Dividends
payable |
|
|
1,136 |
|
|
- |
|
|
Claims
accrual |
|
|
26,408 |
|
|
23,904 |
|
| |
|
|
|
|
|
|
|
|
Total
current liabilities |
|
|
49,493 |
|
|
39,190 |
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
DEFERRED
INCOME TAXES |
|
|
72,556 |
|
|
72,660 |
|
| |
|
|
|
|
|
|
|
|
Total
liabilities |
|
|
122,049 |
|
|
111,850 |
|
| |
|
|
|
|
|
|
|
|
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; 56,794 and 56,665
issued
and outstanding at March 31, 2005
and
December 31, 2004, respectively |
|
|
568 |
|
|
567 |
|
|
Additional paid-in
capital |
|
|
83,385 |
|
|
82,117 |
|
|
Retained earnings
|
|
|
219,954 |
|
|
208,333 |
|
| |
|
|
|
|
|
|
|
|
Total shareholders’
equity |
|
|
303,907 |
|
|
291,017 |
|
| |
|
|
|
|
|
|
|
| |
|
$ |
425,956 |
|
$ |
402,867 |
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements. |
|
Condensed
Consolidated Statements of Income (unaudited)
(In
thousands, except per share data) |
|
| |
|
|
|
| |
|
Three
Months Ended |
|
| |
|
March
31, |
|
| |
|
|
|
|
|
| |
|
2005 |
|
2004 |
|
| |
|
|
|
|
|
REVENUE: |
|
|
|
|
|
|
Revenue, before
fuel surcharge |
|
$ |
111,074 |
|
$ |
90,243 |
|
|
Fuel
surcharge |
|
|
11,107 |
|
|
4,069 |
|
| |
|
|
|
|
|
|
|
|
Total
revenue |
|
|
122,181 |
|
|
94,312 |
|
| |
|
|
|
|
|
|
|
|
OPERATING
EXPENSES: |
|
|
|
|
|
|
|
|
Salaries,
wages and benefits |
|
|
36,918 |
|
|
30,130 |
|
|
Fuel |
|
|
25,841 |
|
|
16,714 |
|
|
Operations
and maintenance |
|
|
7,632 |
|
|
5,661 |
|
|
Insurance
and claims |
|
|
6,365 |
|
|
4,889 |
|
|
Operating
taxes and licenses |
|
|
2,929 |
|
|
2,224 |
|
|
Communications |
|
|
976 |
|
|
869 |
|
|
Depreciation
and amortization |
|
|
12,309 |
|
|
8,898 |
|
|
Lease
expense - revenue
equipment |
|
|
-
|
|
|
1,233 |
|
|
Purchased
transportation |
|
|
6,484 |
|
|
6,588 |
|
|
Gain
on sales of equipment |
|
|
(629 |
) |
|
-
|
|
|
Miscellaneous
operating
expenses |
|
|
2,209 |
|
|
1,719 |
|
| |
|
|
101,034 |
|
|
78,925 |
|
| |
|
|
|
|
|
|
|
|
Income
from operations |
|
|
21,147 |
|
|
15,387 |
|
| |
|
|
|
|
|
|
|
|
INTEREST
INCOME |
|
|
110 |
|
|
124 |
|
| |
|
|
|
|
|
|
|
|
Income
before taxes |
|
|
21,257 |
|
|
15,511 |
|
| |
|
|
|
|
|
|
|
|
INCOME
TAXES |
|
|
(8,500 |
) |
|
(6,200 |
) |
| |
|
|
|
|
|
|
|
|
Net
income |
|
$ |
12,757 |
|
$ |
9,311 |
|
| |
|
|
|
|
|
|
|
|
Earnings
per common share
and
common share
equivalent: Basic |
|
$ |
0.22 |
|
$ |
0.17 |
|
|
Diluted |
|
$ |
0.22 |
|
$ |
0.16 |
|
| |
|
|
|
|
|
|
|
|
Weighted
average number of common
shares
and common share equivalents
outstanding: Basic |
|
|
56,747 |
|
|
56,261 |
|
|
Diluted |
|
|
58,031 |
|
|
57,410 |
|
| |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements. |
|
Condensed
Consolidated Statements of Cash Flows (unaudited)
(In
thousands) |
|
| |
|
|
|
|
|
| |
|
Three
Months Ended
March
31, |
|
| |
|
|
|
| |
|
2005 |
|
2004 |
|
CASH
FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
| |
|
|
|
|
|
|
Net
income |
|
$ |
12,757 |
|
$ |
9,311 |
|
|
Adjustments
to reconcile net income to net cash
provided by
operating activities: |
|
|
|
|
|
|
|
|
Depreciation
and amortization |
|
|
12,309 |
|
|
8,898 |
|
|
Gain
on sales of equipment |
|
|
(629 |
) |
|
-
|
|
|
Non-cash
compensation expense for issuance of common
stock
to certain members of board of directors |
|
|
15 |
|
|
13 |
|
|
Provision
for allowance for doubtful accounts and notes receivable |
|
|
(97 |
) |
|
(53 |
) |
|
Tax
benefit on stock option exercises |
|
|
545 |
|
|
298 |
|
|
Deferred
income taxes |
|
|
(600 |
) |
|
140 |
|
|
Changes
in assets and liabilities: |
|
|
|
|
|
|
|
|
Increase
in trade receivables |
|
|
(1,660 |
) |
|
(5,733 |
) |
|
Increase
in inventories and supplies |
|
|
(582 |
) |
|
(279 |
) |
|
(Increase)
decrease in prepaid expenses |
|
|
(4,709 |
) |
|
791 |
|
|
Decrease
in income tax receivable |
|
|
3,216 |
|
|
1,762
|
|
|
Increase
in other assets |
|
|
(538 |
) |
|
(62 |
) |
|
Decrease
in accounts payable |
|
|
(906 |
) |
|
(731 |
) |
|
Increase
in accrued liabilities and claims accrual |
|
|
6,728 |
|
|
5,830 |
|
| |
|
|
|
|
|
|
|
|
Net
cash provided by operating activities |
|
|
25,849 |
|
|
20,185 |
|
| |
|
|
|
|
|
|
|
|
CASH
FLOW FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Purchase
of property and equipment |
|
|
(15,977 |
) |
|
(20,390 |
) |
|
Proceeds
from sales of equipment |
|
|
2,711 |
|
|
-
|
|
|
Decrease
in notes receivable |
|
|
43 |
|
|
332 |
|
| |
|
|
|
|
|
|
|
|
Net
cash used in investing activities |
|
|
(13,223 |
) |
|
(20,058 |
) |
| |
|
|
|
|
|
|
|
|
(continued) |
|
KNIGHT
TRANSPORTATION, INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Cash Flows (unaudited)
(continued)
(In
thousands) |
|
| |
|
Three
Months Ended
March
31, |
|
| |
|
|
|
|
|
| |
|
2005 |
|
2004 |
|
CASH
FLOW FROM FINANCING ACTIVITIES: |
|
|
|
|
|
| |
|
|
|
|
|
|
Proceeds
from exercise of stock options |
|
|
709 |
|
|
256 |
|
| |
|
|
|
|
|
|
|
|
Net
cash provided by financing activities |
|
|
709 |
|
|
256 |
|
| |
|
|
|
|
|
|
|
|
NET
INCREASE IN CASH AND CASH
EQUIVALENTS |
|
|
13,335 |
|
|
383 |
|
|
CASH
AND CASH EQUIVALENTS,
beginning
of period |
|
|
25,357 |
|
|
40,550 |
|
| |
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, end of period |
|
$ |
38,692 |
|
$ |
40,933 |
|
| |
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES: |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Noncash
investing and financing transactions: |
|
|
|
|
|
|
|
|
Equipment acquired
in accounts payable |
|
$ |
3,497 |
|
$ |
3,849 |
|
|
Net book value of
revenue equipment traded |
|
|
- |
|
|
2,338 |
|
| |
|
|
|
|
|
|
|
|
Cash
flow information: |
|
|
|
|
|
|
|
|
Income taxes
paid |
|
$ |
1,114 |
|
$ |
145 |
|
|
Interest
paid |
|
|
- |
|
|
- |
|
| |
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Three
Months Ended March 31, 2005 and 2004
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. These condensed consolidated financial statements and notes thereto
should be read in conjunction with the Company’s consolidated financial
statements and notes thereto included in the Company’s Annual Report on Form
10-K for the year ended December 31, 2004.
Note
2. Stock-Based
Compensation
Stock-Based
Compensation - At March 31, 2005, 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 periods ended March 31, 2005
and 2004 (in thousands, except per share data):
| |
|
2005 |
|
2004 |
|
| |
|
|
|
|
|
|
Net
income, as reported |
|
$ |
12,757 |
|
$ |
9,311 |
|
|
Deduct
total stock-based employee
compensation
expense determined under
fair-value-based
method for all rewards, net
of
tax |
|
|
(284 |
) |
|
(289 |
) |
| |
|
|
|
|
|
|
|
|
Pro
forma net income |
|
$ |
12,473 |
|
$ |
9,022 |
|
| |
|
|
|
|
|
|
|
|
Basic
earnings per share - as reported |
|
$ |
0.22 |
|
$ |
0.17 |
|
|
Basic
earnings per share - pro forma |
|
$ |
0.22 |
|
$ |
0.16 |
|
|
Diluted
earnings per share - as reported |
|
$ |
0.22 |
|
$ |
0.16 |
|
|
Diluted
earnings per share - pro forma |
|
$ |
0.21 |
|
$ |
0.16 |
|
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 2005: risk free interest rate of 4.00%; expected
life of six years; expected volatility of 48%; expected dividend yield rate of
0.3%; and expected forfeitures of 4.40%. The following weighted average
assumptions were used for grants in 2004: risk free interest rate 4.30%;
expected life of six years; expected volatility of 49%; expected dividend yield
rate of 0.3%; and expected forfeitures of 4.17%.
Note
3. Earnings
Per Share
A
reconciliation of the basic and diluted earnings per share computations for the
three months ended March 31, 2005 and 2004, is as follows:
| |
|
Three
Months Ended
March
31, |
|
| |
|
|
|
|
|
| |
|
2005 |
|
2004 |
|
| |
|
|
|
|
|
|
Weighted
average common
shares outstanding
- basic |
|
|
56,747 |
|
|
56,261 |
|
| |
|
|
|
|
|
|
|
|
Effect
of stock options |
|
|
1,284 |
|
|
1,149 |
|
| |
|
|
|
|
|
|
|
|
Weighted
average common
share and common
share
equivalents
outstanding -
diluted |
|
|
58,031 |
|
|
57,410 |
|
| |
|
|
|
|
|
|
|
|
Net
income |
|
$ |
12,757 |
|
$ |
9,311 |
|
| |
|
|
|
|
|
|
|
|
Earnings per common
share and
common share
equivalent
Basic |
|
$ |
0.22 |
|
$ |
0.17 |
|
|
Diluted |
|
$ |
0.22 |
|
$ |
0.16 |
|
Note
4. Segment
Information
Although
the Company has many operations centers, it has determined that it has one
reportable segment. Nineteen of the divisions are managed based on regions in
the United States in which the Company operates. Each of these operations
centers 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 operations center is measured by similar
financial performance, including average revenue per mile and operating ratio.
As a result, the Company has determined that it is appropriate to aggregate its
operations centers into one reportable segment consistent with the guidance in
SFAS No. 131,
“Disclosures
about Segments of an Enterprise and Related Information”. Accordingly, the
Company has not presented separate financial information for each of its
operations centers as the Company’s consolidated financial statements present
its one reportable segment.
Note
5. Derivative
Instruments and Hedging Activities
All
derivatives are recognized on the balance sheet at their fair value. On the date
the derivative contract is entered into, the Company designates the derivative
as either a hedge of the fair value of a recognized asset or liability or of a
firm commitment (“fair value” hedge), a hedge of a forecasted transaction or the
variability of cash flows to be received or paid related to a recognized asset
or liability (“cash flow” hedge), a foreign-currency fair-value or cash-flow
hedge (“foreign currency” hedge), or a hedge of a net investment in a foreign
operation. The Company formally assesses, both at the hedge’s inception and on
an ongoing basis, whether the derivatives that are used in hedging transactions
are effective in offsetting changes in fair values or cash flows of hedged
items. When it is determined that a derivative is not effective as a hedge or
that it has ceased to be an effective hedge, the Company discontinues hedge
accounting prospectively.
The
Company is party to a hedging contract relating to the price of heating oil on
the New York Mercantile Exchange (“NYMX”) that was entered into in February 2002
in connection with volume diesel fuel purchases. If the price of heating oil on
the NYMX were to fall below $0.58 per gallon, the Company may be required to pay
the difference between $0.58 and the index price for 750,000 gallons per month
for the remaining nine months of 2005. This
agreement is stated at fair value in the accompanying condensed consolidated
financial statements.
Note
6. New
Accounting Pronouncements
In
November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of
ARB No. 43, Chapter 4”. SFAS No. 151 clarifies the accounting for amounts of
idle facility expenses, freight, handling costs, and wasted material (spoilage).
This statement is effective for the Company on January 1, 2006. The adoption of
SFAS No. 151 is not expected to have a material effect on the Company’s
consolidated financial statements.
In
December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets,
an amendment of APB No. 29”. SFAS No. 153 amends ABP 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets and replaces it
with a general exception for exchanges of nonmonetary assets that do not have
commercial substance. A monetary exchange has commercial substance if the future
cash flows of the entity are expected to change significantly as a result of the
exchange. This statement is effective for the Company on January 1, 2006. The
adoption of SFAS No. 153 is not expected to have a material effect on the
Company’s consolidated financial statements.
In
December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based
Payment”. SFAS No. 123 is a revision of FASB Statement No. 123, “Accounting for
Stock-Based Compensation”. This statement supersedes APB Opinion No. 25,
“Accounting for Stock Issued to Employees”, and its related implementation
guidance. SFAS No. 123 (revised 2004) requires a public entity to measure the
cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award. That cost will be
recognized over the period during which an employee is required to provide
services in exchange for the award. This statement is effective for the Company
on January 1, 2006. The Company is still evaluating the complete
impact of this statement.
Note
7. Commitments
and Contingencies
The
Company is involved in certain legal proceedings arising in the normal course of
business. In the opinion of management, the Company’s potential exposure under
any currently pending or threatened legal proceedings will not have a material
adverse effect upon the Company’s financial position or results of
operations.
Note
8. Stock
Split
On
July 20, 2004, the Company effected a 3-for-2 stock split. Earnings per share
for all periods presented have been adjusted to reflect the stock
split.
Note
9. Dividend
In March
2005, the Company declared a cash dividend of $.02 per share on its common
stock. The dividend was payable to shareholders of record on March 31, 2005, and
was paid on April 18, 2005. The Company currently expects to
continue to pay quarterly cash
dividends in the
future. Future payment of cash dividends, and the amount of any such dividends,
will depend upon financial condition, results of operations, cash requirements,
tax treatment, and certain corporate law requirements, as well as other factors
deemed relevant by the Company’s Board of Directors.
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” within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section
27A of the Securities Act of 1933, as amended, 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,” “will,” “could,” “should,” “likely,” “expects,” “estimates,”
“anticipates,” “projects,” “plans,” “intends,” “hopes,” “potential,” “continue,”
and “future” 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 a
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 18 regional dry van operations centers located throughout the United
States and one temperature controlled subsidiary located in Phoenix. 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 19%
compounded annual rate from $207.4 million in 2000 to $411.7 million in 2004,
and our net income grew at a 28% compounded annual rate from $17.7 million in
2000 to $47.9 million in 2004.
Operating
and Growth Strategy
Our
operating strategy is focused on the following core elements:
| · |
Focusing
on Regional Operations.
We seek to operate predominantly 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. |
| · |
Maintaining
Operating Efficiencies and Controlling Costs.
We primarily focus on operating 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 driver to non-driver employee ratio, and
regulating vehicle speed.
|
|
· |
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.
|
| · |
Using
Technology to Enhance Our Business.
Our tractors are equipped with a satellite-based tracking and
communications system 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 and develop
new regional operations centers in certain geographic areas and operate them at
or near our targeted margins within a relatively short period of time. We opened
a dry van operations center in Carlisle, Pennsylvania in June 2004; a
temperature controlled subsidiary in Phoenix, Arizona in July 2004; and a dry
van operations center in Lakeland, Florida in August 2004. Our most recent
opening was a dry van operations center in Chicago, Illinois that commenced
operations in March 2005. During the first quarter of 2005, we grew our tractor
fleet by 87 tractors and upgraded an additional 86 existing tractors. Based on
our current expectations concerning the economy, we anticipate adding a total of
approximately 300 to 350 new tractors system-wide over the remainder of the
year. 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.
Revenue
and Expenses
We
primarily generate revenue by transporting freight for our customers. Generally,
we are paid a predetermined rate per mile or per
load 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.
Historically,
excess capacity in the transportation industry has limited our ability to
improve rates. From 1999 into 2003, economic activity in the United States was
somewhat sluggish, which limited to some extent our ability to obtain rate
increases during that period, but
also resulted in decreased truck capacity in relation to demand as many trucking
companies failed, contracted, or limited their growth. Beginning in 2003 and
throughout 2004, however, the United States economy experienced strong growth,
which,
together with tighter capacity, contributed to higher freight rates throughout
much of the industry, including our 7.6% improvement in average
revenue per loaded mile (excluding fuel surcharge) from 2003 to 2004. If the
economy continues at the 2004 pace, we expect continued tight capacity,
coupled
with stronger freight demand, to
continue
to provide us with better than
historical pricing
power. In the first quarter of 2005, our average revenue per loaded mile
(excluding fuel surcharge) increased by 9.8% over the same quarter in
2004.
The main
factors that impact our profitability in terms of expenses 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 independent contractor 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 terminal
facilities, 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 in the current environment.
Recent
Results of Operations and Quarter-End Financial
Condition
For the
quarter ended March 31, 2005, our results of operations improved as follows
versus the same quarter in 2004:
| · |
Revenue,
before fuel surcharge, increased 23.1%, to $111.1 million from
$90.2 million; |
| · |
Net
income increased 37.0%, to $12.8 million from $9.3 million;
and |
| · |
Net
income per diluted share increased to $0.22 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 5.6% to $3,003 in the first
quarter of 2005 from $2,843 in the first quarter of 2004. This improvement was
driven by a 9.8% increase in average revenue per loaded mile (excluding fuel
surcharge) to $1.635 from $1.489. This rate improvement was partially offset by
a 3.2% decrease in average miles per tractor to 27,245 from 28,142 and a 5.1%
increase in our percentage of non-revenue miles to 12.4% for the first quarter
of 2005 from 11.8% for the same quarter in the prior year. We believe the
decline in miles per tractor primarily was a function of somewhat softer freight
demand at pricing acceptable to us during the 2005 quarter versus the 2004
quarter, as well as the fact that in 2005 the Easter holiday fell in March. The
increase in non-revenue miles principally was 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 March
31, 2005 our balance sheet reflected $38.7 million in cash and cash equivalents,
no long-term debt, and shareholders’ equity of $303.9 million. For the quarter,
we generated $25.8 million in cash flow from operations and used $13.3 million
for capital expenditures, net of $2.7 million in proceeds from sales of
equipment.
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 quarters ended March
31, 2005, and 2004. 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.
| |
|
Quarter
Ended
March
31, |
|
|
|
Quarter
Ended
March
31, |
|
| |
|
2005 |
|
2004 |
|
|
|
2005 |
|
2004 |
|
|
Total
revenue |
|
|
100.0 |
% |
|
100.0 |
% |
|
Revenue,
before fuel
surcharge |
|
|
100.0 |
% |
|
100.0 |
% |
|
Operating
expenses: |
|
|
|
|
|
|
|
|
Operating
expenses: |
|
|
|
|
|
|
|
|
Salaries,
wages and benefits |
|
|
30.2 |
|
|
32.0 |
|
|
Salaries,
wages and benefits |
|
|
33.2 |
|
|
33.4 |
|
|
Fuel |
|
|
21.1 |
|
|
17.7 |
|
|
Fuel(1) |
|
|
13.3 |
|
|
14.0 |
|
|
Operations
and maintenance |
|
|
6.3 |
|
|
6.0 |
|
|
Operations
and maintenance |
|
|
6.9 |
|
|
6.3 |
|
|
Insurance
and claims |
|
|
5.2 |
|
|
5.2 |
|
|
Insurance
and claims |
|
|
5.7 |
|
|
5.4 |
|
|
Operating
taxes and
licenses |
|
|
2.4 |
|
|
2.4 |
|
|
Operating
taxes and
licenses |
|
|
2.7 |
|
|
2.5 |
|
|
Communications |
|
|
0.8 |
|
|
0.9 |
|
|
Communications |
|
|
0.9 |
|
|
1.0 |
|
|
Depreciation
and
amortization |
|
|
10.1 |
|
|
9.4 |
|
|
Depreciation
and
amortization |
|
|
11.1 |
|
|
9.9 |
|
|
Lease
expense - revenue
equipment |
|
|
- |
|
|
1.3 |
|
|
Lease
expense - revenue
equipment |
|
|
- |
|
|
1.4 |
|
|
Purchased
transportation |
|
|
5.3 |
|
|
7.0 |
|
|
Purchased
transportation |
|
|
5.8 |
|
|
7.3 |
|
|
Gain
on sales of
equipment |
|
|
(0.5 |
) |
|
- |
|
|
Gain
on sales of
equipment |
|
|
(0.6 |
) |
|
- |
|
|
Miscellaneous
operating
expenses |
|
|
1.8 |
|
|
1.8 |
|
|
Miscellaneous
operating
expenses |
|
|
2.0 |
|
|
1.9 |
|
|
Total
operating expenses |
|
|
82.7 |
|
|
83.7 |
|
|
Total
operating expenses |
|
|
81.0 |
|
|
82.9 |
|
|
Income
from operations |
|
|
17.3 |
|
|
16.3 |
|
|
Income
from operations |
|
|
19.0 |
|
|
17.1 |
|
|
Net
interest and other
expense |
|
|
0.1 |
|
|
0.1 |
|
|
Net
interest and other
expense
|
|
|
0.1 |
|
|
0.1 |
|
|
Income
before income
taxes |
|
|
17.4 |
|
|
16.4 |
|
|
Income
before income
taxes
|
|
|
19.1 |
|
|
17.2 |
|
|
Income
taxes |
|
|
7.0 |
|
|
6.5 |
|
|
Income
taxes |
|
|
7.6 |
|
|
6.9 |
|
|
Net
Income |
|
|
10.4 |
% |
|
9.9 |
% |
|
Net
Income |
|
|
11.5 |
% |
|
10.3 |
% |
___________________________
(1) Net of
fuel surcharge.
A
discussion of our results of operations for the quarters ended March 31, 2005
and 2004 is set forth below.
Comparison
of Three Months Ended March 31, 2005 to Three Months Ended March 31,
2004
Our total
revenue for the quarter ended March 31, 2005 increased to $122.2 million from
$94.3 million for the same quarter in 2004. Total revenue included $11.1 million
of fuel surcharge revenue in the 2005 quarter compared to $4.1 million in the
2004 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 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 23.1% to $111.1 million in the quarter ended
March 31, 2005, from $90.2 million in the same quarter in 2004. This increase
primarily resulted from the expansion of our fleet and customer base and
increased volume from existing customers, as well as improved rates. Our tractor
fleet grew to 2,891 tractors (including 230 owned by independent contractors) as
of March 31, 2005, from 2,477 tractors (including 249 owned by independent
contractors) as of March 31, 2004, a 16.7% increase. This growth in our fleet
was made possible by continued market development from existing operations
centers and the opening of three additional regional dry van operations centers
and the establishment of a temperature controlled subsidiary subsequent to
March 31, 2004. The growth in our fleet, coupled with a 5.6% increase
in average revenue per tractor per week over the 2004 quarter, resulted in the
significant period-over-period improvement in revenue.
Salaries,
wages and benefits expense decreased slightly as a percentage of revenue, before
fuel surcharge, to 33.2% for the quarter ended March 31, 2005 from 33.4% for the
same quarter in 2004. The improvement in revenue per tractor per week more than
offset the impact of two one cent per mile increases in driver pay rates
implemented in February and March 2005, which will continue to affect this
expense item going forward. As of March 31, 2005, 92.0% of our fleet was
operated by company drivers, compared to 90.0% as of March 31, 2004. For our
drivers, 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, decreased, as a percentage of revenue before
fuel surcharge, to 13.3% for the quarter ended March 31, 2005 from 14.0% for the
same quarter in 2004, due primarily to a 9.1% increase in average revenue per
total mile (excluding fuel surcharge) to $1.433 from $1.314 and improved
collection of fuel surcharge revenue in the 2005 quarter, which more than offset
significantly higher fuel prices. The Company maintains a fuel surcharge program
to assist us in recovering a portion of increased fuel costs. For the quarter
ended March 31, 2005, fuel surcharge revenue was $11.1 million, compared to $4.1
million for the same quarter in 2004. As a percentage of total revenue,
including fuel surcharge, fuel expense increased to 21.1% for the quarter ended
March 31, 2005 from 17.7% for the same quarter in 2004 as a result of
a significant increase in average cost per gallon for fuel from $1.52 to $1.99.
We believe that high fuel prices may continue to affect our operating expenses
throughout the remainder of 2005, and that continued unrest in the Middle East
and other areas could have a significant adverse effect on fuel
prices.
Operations
and maintenance expense increased as a percentage of revenue, before fuel
surcharge, to 6.9% for the quarter ended March 31, 2005, compared to 6.3% for
the same quarter in 2004. This increase was primarily due to increased equipment
maintenance and driver recruiting expenses, along with the increase in the
company owned percentage of our tractor fleet to 92.0% from 90.0%. Independent
contractors pay for the maintenance of their own vehicles.
Insurance
and claims expense increased as a percentage of revenue, before fuel surcharge,
to 5.7% for the quarter ended March 31, 2005, compared to 5.4% for the same
quarter in 2004, primarily as a result of higher premiums and self-insurance
claims costs incurred by the Company.
Operating
taxes and licenses expense as a percentage of revenue, before fuel surcharge,
remained essentially constant at 2.7% for the quarter ended March 31, 2005,
compared to 2.5% for the same quarter in 2004.
Communications
expenses as a percentage of revenue, before fuel surcharge, remained essentially
constant at or less than 1.0% for both the 2005 and 2004 quarters.
Depreciation
and amortization expense, as a percentage of revenue before fuel surcharge,
increased to 11.1% for the quarter ended March 31, 2005 from 9.9% for the same
quarter in 2004. This increase was primarily related to an increase in the
percentage of our company fleet comprised of purchased vehicles. Our company
fleet includes purchased vehicles and vehicles held under operating leases, if
any, while our total fleet includes vehicles in our company fleet as well as
vehicles provided by independent contractors. At March 31, 2005, 100% of our
company fleet was comprised of purchased vehicles, compared to 87% at March 31,
2004.
Lease
expense for revenue equipment as a percentage of revenue, before fuel surcharge,
decreased to zero for the quarter ended March 31, 2005, compared to 1.4% for the
same quarter in 2004. During 2004, we exercised early buy-out options on all of
our 393 tractors that were held under operating leases as of January 1, 2004. As
a result, we held no vehicles under operating leases during the 2005
quarter.
Purchased
transportation expense as a percentage of revenue, before fuel surcharge,
decreased to 5.8% for the quarter ended March 31, 2005, compared to 7.3% for the
same period in 2004. This decrease was primarily the result of the improvements
in revenue per tractor per week during the 2005 quarter described above and the
decrease in the percentage of our fleet operated by independent contractors. As
of March 31, 2005, 8.0% of our total fleet was operated by independent
contractors, compared to 10.0% at March 31, 2004. Purchased transportation
represents the amount independent contractors are paid to haul freight for us on
a mutually agreed upon per-mile basis.
Gain on
sales of equipment as a percentage of revenue, before fuel surcharge, increased
to 0.6% for the quarter ended March 31, 2005, compared to zero for the same
period in 2004. This increase was due to the revenue equipment primarily being
sold to independent parties during the 2005 period, as opposed to primarily
being traded back to the equipment manufacturers as had been done in the prior
period.
Miscellaneous
operating expenses as a percentage of revenue, before fuel surcharge, remained
essentially constant at 2.0% for the quarter ended March 31, 2005, compared to
1.9% for the same quarter in 2004.
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
81.0% for the quarter ended March 31, 2005, compared to 82.9% for same
quarter in 2004.
We
generated net interest income of less than 1.0% of revenue, before fuel
surcharge, for the quarters ended March 31, 2005 and 2004. We had no outstanding
debt at March 31, 2005 or 2004.
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 both the 2005 and the 2004
quarter. As a percentage of revenue, before fuel surcharge, income tax expense
increased to 7.6% for the quarter ended March 31, 2005, from 6.9% for the same
quarter in 2004, primarily due to the increase in taxable income for reporting
purposes.
As a
result of the preceding changes, our net income, as a percentage of revenue
before fuel surcharge, was 11.5% for the quarter ended March 31, 2005, compared
to 10.3% for the same quarter in 2004.
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 $25.8 million for the quarter
ended March 31, 2005, compared to $20.2 million for the same quarter in 2004.
The increase for the 2005 quarter was primarily the result of an increase in
revenue and the improvement in our operating ratio.
Capital
expenditures for the purchase of revenue equipment, office equipment, land and
leasehold improvements, net of equipment sales, totaled $13.3 million for the
quarter ended March 31, 2005, compared to $20.4 million for the same
quarter in 2004. We currently anticipate capital expenditures, net of equipment
sales, of approximately $65.0 million for the remainder of 2005. We expect these
capital expenditures will be applied primarily to acquire new revenue
equipment.
Net cash
provided by financing activities was approximately $0.7 million for the quarter
ended March 31, 2005, compared to approximately $0.3 million for same quarter in
2004, primarily as a result of the net proceeds of stock option exercises.
During the first quarter of 2005, we declared our second quarterly dividend of
$.02 per share on our common stock.
At March
31, 2005, we did not have any borrowing outstanding. We currently maintain a
line of credit, which permits revolving borrowings and letters of credit
totaling $25.0 million. At March 31, 2005, the line of credit
consisted solely of issued but unused letters of credit totaling
$9.8 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 March 31,
2005.
As of
March 31, 2005, we held $38.7 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 acquisitions of revenue equipment during such
period, with cash balances and cash flows from operations. 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 several 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, historically we have utilized operating leases to
finance a portion of our revenue equipment acquisitions. At March 31, 2005, we
had no tractors held under operating leases, compared to 285 tractors held under
operating leases at March 31, 2004. Vehicles held under operating leases were
not carried on our balance sheet, and lease payments in respect of such vehicles
were reflected in our income statements in the line item “lease expense -
revenue equipment.” Our rental expense related to
operating
leases was zero for the quarter ended March 31, 2005, compared to
$1.2 million for the same quarter of 2004.
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, or could 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.
Depreciation. Property
and equipment are stated at cost. Depreciation on property and equipment is
calculated by the straight-line method over the estimated useful life, which
ranges from five to thirty years, down to an estimated salvage value of the
property and equipment, which ranges from 10% to 30% of the capitalized cost. 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 “Accounting for the Impairment or
Disposal of Long-Lived Assets” 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
Accrual. 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 level of our self-insured retention for personal injury and property
damage claims, currently at $1.5 million, amplifies the importance and potential
impact of these estimates.
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. If it were ever
estimated that it is more likely than not that all or some portion of specific
deferred tax assets will not be realized, a 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.
Accordingly, if the facts or financial results were to change, thereby impacting
the likelihood of realizing the deferred tax assets, judgment would have to be
applied to determine the amount of valuation allowance required in any given
period. 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 and growth outlook:
General
Economic and Industry Conditions.
Our
business is dependent on a number of factors that may have a materially adverse
effect on our results of operations, many of which are beyond our control. The
most significant of these factors are recessionary economic cycles, changes in
customers’ inventory levels, excess tractor or trailer capacity, and downturns
in customers’ business cycles, particularly in market segments and industries
where we have a significant concentration of customers and in regions of the
country where we have a significant amount of business. Economic conditions may
adversely affect our customers and their ability to pay for our services.
Customers encountering adverse economic conditions represent a greater potential
for loss, and we may be required to increase our allowance for doubtful
accounts. We also are affected by increases in interest rates, fuel prices,
taxes, tolls, license and registration fees, insurance costs, and the rising
costs of healthcare for our employees. We could be affected by strikes or other
work stoppages at our facilities or at customer, port, border, or other shipping
locations.
In
addition, we cannot predict the effects on the economy or consumer confidence of
actual or threatened armed conflicts or terrorist attacks, efforts to combat
terrorism, military action against a foreign state or group located in a foreign
state, or heightened security requirements. Enhanced security measures could
impair our operating efficiency and productivity and result in higher operating
costs.
Risks
Associated with Our 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 to our regional facilities in Phoenix, Arizona, we have established dry
van regional operations
centers
throughout the United States in order to serve markets in these regions. These
regional operations require the commitment of additional revenue equipment and
personnel, as well as management resources, for future development. Should the
growth in our regional operations throughout the United States slow or stagnate,
the results of our operations could be adversely affected. We may encounter
operating conditions in these new markets that differ substantially from those
previously experienced in our western United States markets. There can be no
assurance that our regional operating strategy can be duplicated successfully in
the other areas of the United States or that it will not take longer than
expected or require a more substantial financial commitment than anticipated. In
addition, we have recently commenced operation of a refrigerated subsidiary as part
of our growth strategy and are subject to the risks inherent in entering a new
line of business, 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
and Claims. Our
future insurance and claims expenses might exceed historical levels, which could
reduce our earnings. Effective February 1, our maximum self-insured retention
for auto liability is $1.5 million per occurrence, which is a decrease from the
previous level of $2.0 million. Our maximum self-insured retention for workers’
compensation remains constant at $500,000 per occurrence. We maintain insurance
with licensed insurance companies above the amounts for which we self-insure.
Our insurance policies for 2005 provide for excess liability coverage up to a
total of $50.0 million per occurrence.
If
insurance
premiums increase, the
severity or number of claims to which we are exposed increase, or one or
more claims exceed our coverage limits, our
earnings could be materially and adversely affected.
We
currently reserve for anticipated losses and expenses associated with claims and
regularly evaluate and adjust our claims reserves to reflect actual experience.
However, ultimate results may differ from our estimates, which could result in
losses above reserved amounts.
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 from manufacturers) 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 could 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.
We are
subject to 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. Political events in the Middle East,
Venezuela and elsewhere also may cause the price of fuel to increase. 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 short-term increases in fuel prices from customers through
fuel surcharges. Fuel surcharges that can be collected do not always fully
offset the increase in the cost of diesel fuel. To the extent we are not
successful in these negotiations, our results of operations may be adversely
affected.
Driver
Recruiting and Retention. Difficulty
in attracting or retaining qualified drivers, including independent contractors,
could have a materially adverse effect on our growth and profitability. Our
independent contractors are responsible for paying for their own equipment,
fuel, and other operating costs, and significant increases in these costs could
cause them to seek higher compensation from us or seek other opportunities
within or outside the trucking industry. In addition, competition for drivers,
which is always intense, increased in 2004 and remained very strong during the
first quarter of 2005. If a shortage of drivers should continue, or if we were
unable to continue to attract and contract with independent contractors, we
could be
forced to limit our growth,
experience an increase in the number of our tractors without drivers, which
would lower our profitability, or be required to further
adjust
our driver compensation package, which could adversely affect our profitability
if not offset by a corresponding increase in rates.
Seasonality.
In the
transportation industry, results of operations frequently show a seasonal
pattern, with
lower revenue and higher operating expenses being common in the winter
months.
Seasonal variations may result from weather or from customer’s reduced shipments
after the busy winter holiday season. Because
we operate significantly in western and southern United States, winter weather
generally has not adversely affected our overall business. Continued expansion
of our operations throughout the United States could expose us to greater
operating variances due to periodic seasonal weather in other regions. Shortages
of energy and related issues in California, and elsewhere in the western United
States, could result in an adverse effect on our operations and demand for our
services if these shortages continue or increase. This risk also may exist in
other regions in which we operate, depending upon availability of
energy.
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.”
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 Reporting Release Number 48 and SEC 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.
Except as
described below, we 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 we borrow against our line of credit
or incur debt in the acquisition of revenue equipment. We attempt to manage our
interest rate risk by managing the amount of debt we carry. At March 31, 2005,
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 only if we incur substantial indebtedness and the
interest rate increases are not offset by freight rate increases or other items.
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 also
are 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 upon our experience, we believe that we generally
pass through to customers approximately 80% to 90% of fuel price increases. For
the quarter ended March 31, 2005, fuel expense, net of fuel surcharge,
represented 16.4% of our total operating expenses, net of fuel surcharge,
compared to 16.9% for the same quarter in 2004.
We are
party to a hedging contract relating to the price of heating oil on the New York
Mercantile Exchange (“NYMX”) that we entered into in February 2002 in connection
with volume diesel fuel purchases. If the price of heating oil on the NYMX were
to fall below $0.58 per gallon we may be required to pay the difference between
$0.58 and the index price for 750,000 gallons per month for the remaining nine
months of 2005. At April 15, 2005, the price of heating oil on the NYMX was
$1.46 for May 2005 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 hedging contracts would be approximately $0.3 million. 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 potential loss on the hedging contracts into consideration. We have valued
this item at fair value in the accompanying March 31, 2005 consolidated
financial statements.
We have
established disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Exchange Act) to ensure that material information
relating to the Company, including its consolidated subsidiaries, is made known
to the officers who certify the Company’s financial reports and to other members
of senior management and the Board of Directors.
Based on
their evaluation as of March 31, 2005, our principal executive officer and
principal financial officer have concluded that our disclosure controls and
procedures are effective to ensure that the information required to be disclosed
by the Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in SEC rules and forms.
There was
no change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March
31, 2005, that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
We have
confidence in our disclosure controls and procedures and internal control over
financial reporting. Nevertheless, our management, including our principal
executive officer and principal financial officer, does not expect that our
disclosure controls and procedures and internal control
over financial reporting will
prevent all error,
misstatements or
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a 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
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.
PART
II - OTHER INFORMATION
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. Unregistered
Sales of Equity Securities and Use of Proceeds
Not Applicable