Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Results of Operations
Operating revenue for the first quarter of 2001 increased 16 percent over the first quarter of 2000. This increase was primarily the result of transporting additional freight associated with our larger fleet, along with an increase in fuel surcharges to our customers associated with a higher average price of diesel fuel. Our equipment utilization improved in 2001 due to our ability to recruit and retain drivers. Our contracts with customers provide for fuel surcharges and rebates based upon significant fluctuations in the price of diesel fuel. Diesel fuel prices were higher in the first quarter of 2001 than in the same period of 2000. As a result, fuel surcharges increased operating revenue for the first quarter of 2001 by $3.4 million, compared with an increase of $2.0 million for the first quarter of 2000. We expect operating revenue for the remainder of 2001 to exceed 2000 levels due to continued customer demand and planned additions to our fleet.
Operating expenses for the first quarter of 2001 were 94.1 percent of operating revenue, compared with 93.7 percent for the same period of 2000. The transportation of additional freight and expansion of our fleet, in addition to the items discussed below, caused our expense categories to increase during the first quarter of 2001. Purchased transportation expense during the first quarter of 2001 increased slightly from the first quarter of 2000. The average number of independent contractors decreased from the first quarter of 2000 to 2001, which was offset by an increase in the rate per mile paid to independent contractors. Independent contractors are responsible for their own salaries, wages and benefits expense, fuel and fuel taxes expense, and supplies and maintenance expense. Therefore, our expenses in these categories increased relative to revenue from the first quarter of 2000 to the first quarter of 2001 because of the decrease in independent contractors. The average price of diesel fuel in the first quarter of 2001 remained above the price in the first quarter of 2000, causing fuel and fuel taxes expense to increase. Insurance and claims expense in the first quarter of 2001 increased from 2000 levels due to a higher frequency of accident and cargo claims. We expect our operating expenses as a percentage of revenue to remain at current levels for the remainder of 2001.
Interest expense for the first quarter ended March 31, 2001, increased over the same period of 2000. The primary cause of this increase was an increase in our average long-term debt outstanding, which was required to finance our planned revenue equipment additions. We expect interest expense to remain at current levels for the remainder of 2001.
Our effective income tax rate was 38 percent for the first quarter of 2001 and the prior year. We expect our effective income tax rate to remain at 38 percent for the remainder of 2001.
We adopted Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, on January 1, 2001 (see Note 3 to the financial statements). The effect of this change as of January 1, 2001, was a pretax accumulated other comprehensive loss of $279,000 ($173,000 net of income tax benefit). During the first quarter of 2001, other comprehensive loss increased by $21,000 ($13,000 net of income tax benefit) to reflect an unrealized loss on our swap agreements from January 1, 2001 to March 31, 2001.
Capital Resources and Liquidity
Our operating activities in the first quarter of 2001 provided net cash of $12,102,000. We used $3,742,000 of the net cash to invest in revenue equipment and other assets, along with $8,360,000 of the net cash to repay long-term borrowings during the quarter. We have continued to update and expand our fleet with new, more efficient revenue equipment in 2001 and 2000. Our cash management practice minimizes both cash and debt balances by utilizing our unsecured committed credit facility. Our operating profits, short turnover in accounts receivable and cash management practices allow us to effectively meet our working capital requirements. We have not used and do not expect to use short-term borrowings to satisfy working capital needs. We believe our liquidity is adequate to meet expected near-term operating requirements.
Forward-Looking Information
This Quarterly Report on Form 10-Q contains certain forward-looking statements. Any statements not of historical fact may be considered forward-looking statements. Written words such as “may, ” “expect, ” “believe, ” “anticipate” or “estimate,” or other variations of these or similar words, identify such statements. These statements by their nature involve substantial risks and uncertainties, and actual results may differ materially, depending on a variety of factors, such as the industry driver shortage, the market for revenue equipment, fuel prices and general weather and economic conditions.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Effective January 1, 2001, unrealized gains and losses on commodity swap agreements used to hedge our exposure to diesel fuel price fluctuations are recognized currently for financial reporting. The swap agreements are marked to market. The effect of this change as of January 1, 2001, was a pretax accumulated other comprehensive loss of $279,000 ($173,000 net of income tax benefit). During the first quarter of 2001, other comprehensive loss increased by $21,000 ($13,000 net of income tax benefit) to reflect an unrealized loss on our swap agreements from January 1, 2001 to March 31, 2001.
There have been no other significant changes in market risk or market risk factors since December 31, 2000, as discussed in the 2000 Annual Report to Shareholders.
