Depreciation and amortization decreased to $5.0 million in 2006 from $6.7 million in 2005. This expense as a percentage of revenue decreased to 0.4% in 2006 from 0.6% in 2005. The decrease in depreciation and amortization is due primarily to lower software depreciation due to certain assets being fully depreciated.
Interest expense remained consistent at $0.1 million in 2006 and 2005. Interest income increased to $1.7 million in 2006 from $0.6 million in 2005. The increase in interest income is due to a higher average investment balance in 2006 and higher interest rates.
The provision for income taxes increased to $22.8 million in 2006 compared to $14.0 million in 2005. The increase in the provision is the result of higher taxable income.
Income from continuing operations increased to $34.2 million in 2006 compared to $20.4 million in 2005 due primarily to higher gross margin, lower depreciation and amortization expense and higher interest income.
Income from discontinued operations includes income from the operations of HGDS. This income was $1.0 million in 2006 and $2.5 million in 2005. Certain assets of HGDS were disposed of on May 1, 2006 at a pre-tax loss of $0.1 million.
Basic earnings per share from continuing operations were $0.85 in 2006 and $0.51 in 2005. Basic earnings per share from discontinued operations were $0.02 in 2006 and $0.06 in 2005. Basic earnings per share were $0.87 in 2006 and $0.57 in 2005.
Diluted earnings per share from continuing operations increased to $0.83 in 2006 from $0.49 in 2005. Diluted earnings per share from discontinued operations were $0.02 in 2006 and $0.06 in 2005. Diluted earnings per share increased to $0.85 in 2006 from $0.55 in 2005. All shares, per-share amounts and options have been retroactively restated to give effect to the two-for-one stock split in June 2006.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions. In certain circumstances, those estimates and assumptions can affect amounts reported in the accompanying consolidated financial statements. We have made our best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. We do not believe there is a great likelihood that materially different amounts would be reported related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. Note 1 of the “Notes to Consolidated Financial Statements” in our Annual Report on Form 10-K for the year ended December 31, 2005, includes a summary of the significant accounting policies and methods used in the preparation of our consolidated financial statements. The following is a brief discussion of the more significant accounting policies and estimates.
Allowance for Uncollectible Trade Accounts Receivable
In the normal course of business, we extend credit to customers after a review of each customer’s credit history. An allowance for uncollectible trade accounts has been established through an analysis of the accounts receivable aging, an assessment of collectibility based on historical trends and an evaluation of the current economic conditions. To be more specific, we reserve every account balance that has aged over one year, certain customers in bankruptcy and account balances specifically identified as uncollectible. In addition, we provide a reserve for accounts not specifically identified as uncollectible based upon historical trends that are updated routinely. The allowance is reported on the balance sheet in net accounts receivable. Actual collections of accounts receivable could differ from management’s estimates due to changes in future economic, industry or customer financial conditions. Recoveries of receivables previously charged off are recorded when received.
Revenue Recognition
Revenue is recognized at the time 1) persuasive evidence of an arrangement exists, 2) services have been rendered, 3) the sales price is fixed and determinable and 4) collectibility is reasonably assured. In accordance with EITF 91-9, revenue and related transportation costs are recognized based on relative transit time. Further, we report revenue on a gross basis in accordance with the criteria in EITF 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent.” We are the primary obligor and are responsible for providing the service desired by the customer. The customer views us as responsible for fulfillment including the acceptability of the service. Service requirements may include, for example, on-time delivery, handling freight loss and damage claims, setting up appointments for pick up and delivery and tracing shipments in transit. We have discretion in setting sales prices and as a result, our earnings vary. In addition, we have the discretion to select our vendors from multiple suppliers for the services ordered by our customers. Finally, we have credit risk for our receivables. These three factors, discretion in setting prices, discretion in selecting vendors and credit risk, further support reporting revenue on the gross basis.
Deferred Income Taxes
Deferred income taxes are recognized for the future tax effects of temporary differences between financial and income tax reporting using tax rates in effect for the years in which the differences are expected to reverse. We believe that it is more likely than not that our deferred tax assets will be realized with the exception of $0.2 million related to state tax net operating losses and other state credits for which valuation allowances have been established. In the event the probability of realizing the remaining deferred tax assets do not meet the more likely than not threshold in the future, a valuation allowance would be established for the deferred tax assets deemed unrecoverable.
Valuation of Goodwill and Other Indefinite-Lived Intangibles
We review goodwill and other indefinite-lived intangibles for impairment on an annual basis or whenever events or changes in circumstances indicate the carrying amount of goodwill or other intangibles may not be recoverable. We utilize a third-party independent valuation firm to assist in performing the necessary valuations to be used in the impairment testing. These valuations are based on market capitalization, discounted cash flow analysis or a combination of both methodologies. The assumptions used in the valuations include expectations regarding future operating performance, discount rates, control premiums and other factors which are subjective in nature. Actual cash flows from operations could differ from management’s estimates due to changes in business conditions, operating performance and economic conditions. Should estimates differ materially from actual results, we may be required to record impairment charges in the future.
Share-Based Compensation
In December 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 (R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in SFAS No. 123 (R) is similar to the approach described in Statement 123. However, SFAS No. 123 (R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.
22
As permitted by Statement 123, prior to January 1, 2006 we accounted for share-based payments to employees using Opinion 25’s intrinsic value method and, as such, recognized no compensation cost for employee stock options. Had we adopted SFAS No. 123 (R) in prior periods, the impact of that standard would have approximated the impact of Statement 123 as described in Note 2 of the consolidated financial statements.
We have adopted SFAS No. 123 (R) effective January 1, 2006 using the modified prospective method. We also elected to calculate our initial pool of excess tax benefits under FSP (R)-3 (“FSP”). The FSP requires benefits of tax deductions in excess of compensation cost recognized (excess tax benefits) to be classified as a financing cash in-flow and an operating cash out-flow, rather than as an operating cash flow as required prior to the adoption of SFAS No. 123 (R).
New Pronouncement
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 (“FIN48”), Accounting for Uncertainty in Income Taxes, which is an interpretation of SFAS No. 109, Accounting for Income Taxes. FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. In addition, FIN 48 clearly scopes out income taxes from Financial Accounting Standards Board Statement No. 5, Accounting for Contingencies. FIN 48 is effective for fiscal years beginning after December 15, 2006. We will implement this interpretation in the fiscal year starting January 1, 2007. We cannot reasonably estimate the impact of this interpretation at this time.
LIQUIDITY AND CAPITAL RESOURCES
During the year, we have funded operations and capital expenditures through cash flows from operations.
Cash provided by operating activities for the nine months ended September 30, 2006, was approximately $63.1 million, which resulted primarily from net income from operations of $34.2 million, non-cash charges of $9.3 million and an increase in working capital of $19.6 million.
Net cash used in investing activities for the nine months ended September 30, 2006, was $32.8 million and related primarily to our acquisition of Comtrak for $39.9 million partially offset by the $12.2 million of proceeds from the disposition of our discontinued operations. We expect capital expenditures to be approximately $9.0 million for the year ended December 31, 2006.
The net cash used in financing activities for the nine months ended September 30, 2006, was $35.4 million. We generated $1.9 million of cash from stock options exercised and used $45.2 million of cash to purchase treasury stock. We also reported $7.9 million of excess tax benefits as a financing cash in-flow. This was previously reported as operating cash flows prior to the adoption of SFAS 123 (R).
Cash provided by discontinued operations was $1.8 million for the nine months ended September 30, 2006 and $7.5 million for the nine months ended September 30, 2005.
On March 23, 2005 we entered into a revolving credit agreement that provides for unsecured borrowings of up to $40.0 million. The interest rate ranges from LIBOR plus 0.75% to 1.25% or Prime plus 0.5%. The revolving line of credit expires on March 23, 2010. The financial covenants require a minimum net worth of $175.0 million and a cash flow leverage ratio of not more than 2.0 to 1.0. The commitment fees charged on the unused line of credit are between 0.15% and 0.25%. On February 21, 2006, we amended the revolving credit agreement to provide for unsecured borrowing up to $50.0 million. No other terms of the agreement were amended.
Our unused and available borrowings under our bank revolving line of credit at September 30, 2006 are $48.3 million. We were in compliance with our debt covenants at September 30, 2006.
We have standby letters of credit that expire from 2006 to 2012. As of September 30, 2006, our outstanding letters of credit were $1.7 million.
23
Contractual Obligations
Our contractual cash obligations as of September 30, 2006 are minimum rental commitments under noncancellable operating leases, principally for real estate, containers and equipment which are payable as follows (in thousands):
Remainder 2006 | | $ 6,724 |
2007 | | 22,305 |
2008 | | 15,450 |
2009 | | 12,077 |
2010 | | 10,052 |
2011 | | 9,389 |
2012 and thereafter | | 11,466 |
Total | | $ 87,463 |
In March 2006, we entered into an equipment purchase contract with Singamas North America, Inc. We agreed to purchase 2,000 fifty-three foot dry freight steel domestic containers for approximately $18.0 million. We have received 1,493 units as of September 30, 2006 and we expect delivery of the remaining units over the next few months. We financed these containers with 7 year operating leases.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk related to changes in interest rates on our bank line of credit which may adversely affect our results of operations and financial condition.
CONTROLS AND PROCEDURES
As of September 30, 2006, an evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective as of September 30, 2006. There have been no changes in our internal control over financial reporting identified in connection with such evaluation that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
24
PART II. | Other Information |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On August 22, 2005, our Board of Directors authorized the purchase of up to $45.0 million of our Class A Common Stock. This authorization expires on December 31, 2006. We intend to hold the repurchased shares in treasury for future use. During the third quarter, we completed the authorized purchase of $45.0 million of our Class A Common Stock.
The following table displays the number of shares purchased and the maximum value of shares that may yet be purchased under the plan:
| Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plan | | Maximum Value of Shares that May Yet Be Purchased Under the Plan (in 000’s) |
January 1 to March 31 | - | | $ - | | - | | $ 45,000 |
April 1 to June 30 | - | | $ - | | - | | $ 45,000 |
July 1 to July 31 | 393,300 | | $ 22.23 | | 393,300 | | $ 36,258 |
August 1 to August 31 | 1,563,845 | | $ 23.19 | | 1,563,845 | | $ - |
September 1 to September 30 | - | | $ - | | - | | $ - |
Total | 1,957,145 | | $ 22.99 | | 1,957,145 | | $ - |
On October 26, 2006, our Board of Directors authorized the purchase of up to $75.0 million of our Class A Common Stock. This authorization expires June 30, 2008. We intend to make purchases from time to time as market conditions warrant. We intend to hold the repurchased shares in treasury for future use.
Item 6. Exhibits
The exhibits included as part of the Form 10-Q are set forth in the Exhibit Index immediately preceding such Exhibits and are incorporated herein by reference.
25
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 hereunto duly authorized.
DATE: October 26, 2006 | /s/ Thomas M. White |
| Senior Vice President, Chief Financial |
| (Principal Financial Officer) |
EXHIBIT INDEX
31.1 | Certification of David P. Yeager, Vice Chairman and Chief Executive Officer, Pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934. |
31.2 | Certification of Thomas M. White, Senior Vice President, Chief Financial Officer and Treasurer, Pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934. |
32.1 | Certification of David P. Yeager and Thomas M. White, Chief Executive Officer and Chief Financial Officer, respectively, Pursuant to 18 U.S.C. Section 1350. |
