UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the period ended
March 31, 2002
--------------
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 1-10006
Frozen Food Express Industries, Inc.
- -------------------------------------------------------------------------
(Exact name of registrant as specified on its charter)
Texas 75-1301831
- -------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer incorporation or
organization) Identification No.)
1145 Empire Central Place Dallas, Texas 75247-4309
- -------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(2l4) 630-8090
- -------------------------------------------------------------------------
(Registrant's telephone number, including area code)
None
- -------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (l) 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
filing requirements for the past 90 days.
[X] Yes [ ] No
As of May 6, 2002, 16,664,000 shares of the Registrant's Common Stock, $1.50
par value, were outstanding.
INDEX
PART I - FINANCIAL INFORMATION
==============================
Page No.
--------
Item l. Financial Statements
--------------------
Consolidated Condensed Balance Sheets -
March 31, 2002 and December 31, 2001 2
Consolidated Statements of Income -
Three months ended March 31, 2002 and 2001 3
Consolidated Condensed Statements of Cash Flows -
Three months ended March 31, 2002 and 2001 4
Notes to Consolidated Condensed Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
FROZEN FOOD EXPRESS INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(In thousands)
(Unaudited)
Mar. 31, Dec. 31,
2002 2001
Assets ---- ----
Current assets
Cash $ 3,782 $ 3,236
Accounts receivable, net 42,735 39,600
Inventories 7,550 7,409
Tires 4,596 4,558
Other current assets 5,735 5,246
------- -------
Total current assets 64,398 60,049
Property and equipment, net 57,686 55,154
Other assets 11,159 11,334
------- -------
$133,243 $126,537
======= =======
Liabilities and Shareholders' Equity
Current liabilities
Trade accounts payable $ 21,467 $ 19,056
Accrued claims liabilities 7,663 7,960
Accrued payroll 5,522 5,471
Other 3,286 2,438
------- -------
Total current liabilities 37,938 34,925
Long-term debt 6,500 1,750
Deferred federal income tax 1,865 2,186
Other and deferred credits 13,005 13,100
------- -------
Total liabilities and deferred credits 59,308 51,961
------- -------
Shareholders' equity
Common stock 25,921 25,921
Paid-in capital 3,475 3,753
Retained earnings 49,544 50,403
------- -------
78,940 80,077
Less - Treasury stock 5,005 5,501
------- -------
Total shareholders' equity 73,935 74,576
------- -------
$133,243 $126,537
======= =======
See accompanying notes.
FROZEN FOOD EXPRESS INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands, except per-share amounts)
(Unaudited)
For the Three Months
Ended March 31,
--------------
2002 2001
---- ----
Revenue
Freight revenue $77,468 $78,309
Non-freight revenue 1,589 11,179
------ ------
79,057 89,488
------ ------
Costs and expenses
Freight operating expenses
Salaries, wages and related expenses 22,203 21,744
Purchased transportation 17,344 17,826
Supplies and expenses 22,400 24,079
Revenue equipment rent 7,312 6,122
Depreciation 2,770 2,744
Communications and utilities 942 963
Claims and insurance 3,590 3,038
Operating taxes and licenses 998 1,017
Miscellaneous expense 199 931
------ ------
77,758 78,464
Non-freight costs and operating expenses 1,982 11,855
------ ------
79,740 90,319
------ ------
Loss from operations (683) (831)
Interest and other expense, net 571 482
------ ------
Loss before income tax (1,254) (1,313)
Income tax benefit (395) (429)
------ ------
Net loss $ (859) $ (884)
====== ======
Net loss per share of common stock
Basic $ (.05) $ (.05)
====== ======
Diluted $ (.05) $ (.05)
====== ======
Weighted average shares outstanding
Basic 16,474 16,343
====== ======
Diluted 16,474 16,343
====== ======
See accompanying notes.
FROZEN FOOD EXPRESS INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
(In thousands)
(Unaudited)
For the Three Months
Ended March 31,
--------------
2002 2001
---- ----
Net cash (used in) provided by operating
activities $(1,909) $ 2,031
------ ------
Cash flows from investing activities
Expenditures for property and equipment (5,235) (1,678)
Proceeds from sale of property and equipment 1,549 698
Life insurance and other 141 (180)
------ ------
Net cash (used in) provided by investing
activities (3,545) (1,160)
------ ------
Cash flows from financing activities
Borrowings under revolving credit agreement 14,000 5,000
Payments against revolving credit agreement (8,000) (4,000)
Net treasury stock activity - 96
------ ------
Net cash provided by financing activities 6,000 1,096
------ ------
Net increase in cash and cash equivalents 546 1,967
Cash and cash equivalents at January 1 3,236 1,222
------ ------
Cash and cash equivalents at March 31 $ 3,782 $ 3,189
====== ======
See accompanying notes.
FROZEN FOOD EXPRESS INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
March 31, 2002 and 2001
(Unaudited)
1. BASIS OF PRESENTATION
These consolidated financial statements include Frozen Food Express
Industries, Inc. (FFEX) and its subsidiary companies, all of which are
wholly owned. All significant intercompany accounts and transactions have
been eliminated in consolidation. The financial statements included herein
have been prepared pursuant to the rules and regulations of the Securities
and Exchange Commission (SEC) and have not been audited or reviewed by
independent public accountants. In the opinion of management, all
adjustments (which consisted only of normal recurring accruals) necessary to
present fairly the financial position and results of operations have been
made. Pursuant to SEC rules and regulations, certain information and
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
from these statements unless significant changes have taken place since the
end of the most recent fiscal year. FFEX believes that the disclosures
contained herein, when read in conjunction with the financial statements and
notes included, or incorporated by reference, in FFEX's Form 10-K filed with
the SEC on April 9, 2002, are adequate to make the information presented not
misleading. It is suggested, therefore, that these statements be read in
conjunction with the statements and notes (included, or incorporated by
reference), in the aforementioned report on Form 10-K.
2. SHAREHOLDERS' EQUITY
As of March 31, 2002 and December 31, 2001, respectively, there were
16,631,000 and 16,573,000 shares of stock outstanding.
3. COMMITMENTS AND CONTINGENCIES
We have accrued for costs related to public liability and work-related
injury claims, some of which involve litigation. The aggregate amount of
these claims is significant. In the opinion of management, these actions
can be successfully defended or resolved, and any additional costs incurred
over amounts accrued will not have a material adverse effect on the
company's financial position, cash flows or results of operations.
4. EARNINGS PER SHARE
There were no common stock equivalents included in diluted weighted average
shares for either of the periods presented because their inclusion would
have been anti-dilutive.
5. OPERATING SEGMENTS
The company's operations consist of two reportable segments. The freight
segment is engaged primarily in the motor carrier freight transportation
business. During 2001, the smaller segment was primarily engaged in non-
freight business relating to the sale and service of refrigeration equipment
and of trailers used in freight transportation. Although we sold the
transportation equipment dealership in December 2001, we retained a 19.9%
ownership interest in the buyer.
Following is information for each reportable segment for the three month
periods ended March 31, 2002 and 2001 (in millions):
March 31,
---------
2002 2001
---- ----
Freight Operations
Total revenue $ 77.5 $ 78.3
Operating loss (0.3) (0.2)
Total assets 130.5 136.6
Non-Freight Operations
Total revenue $ 1.6 $ 12.2
Operating loss (0.4) (0.7)
Total assets 18.3 30.1
Intercompany Eliminations
Revenue $ - $ (1.0)
Operating income - 0.1
Total assets (15.6) (25.1)
Consolidated
Revenue $ 79.1 $ 89.5
Operating loss (0.7) (0.8)
Total assets 133.2 141.6
Intercompany elimination of revenue relates to transfers at cost of
inventory such as trailers and refrigeration units from the non-freight
segment for use by the freight segment.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
The following table sets forth, as a percentage of freight revenue, certain
major operating expenses for the three month periods ended March 31, 2002
and 2001.
Three Months
Ended March 31,
--------------
2002 2001
---- ----
Salaries, wages and related expenses 28.7% 27.8%
Purchased transportation 22.4 22.8
Supplies and expenses 28.9 30.7
Revenue equipment rent and depreciation 13.0 11.3
Claims and insurance 4.6 3.9
Other 2.8 3.7
----- -----
Total freight operating expenses 100.4% 100.2%
===== =====
First Quarter of 2002 vs. 2001
- ------------------------------
During the first quarter of 2002, our freight revenue fell by 1.1% to $77.5
million. Fuel adjustment charges aggregated $2.9 million during the first
quarter of 2001. These charges totaled about $0.5 million during the same
period of 2002. The decline in fuel adjustments aggregated about 5 times
the $500,000 decrease in freight revenue.
Excluding the impact of fuel adjustment charges, our full-truckload revenue
increased by 3.8%, to $56.8 million during the first quarter of 2002. This
resulted from a 5% increase in the number of shipments, which was offset by
a 1.2% decrease in average shipment weight.
Exclusive of fuel adjustment charges, less-than-truckload (LTL) revenue
declined by $0.5 million between the first quarters of 2001 and 2002.
Slackening demand for the refrigerated LTL service we offer, reflected by a
2.3% drop in the number of LTL shipments we hauled, was the primary
contributor to this variance. During the first quarter of 2002, we reduced
the size of our LTL tractor fleet by 13 trucks, of which 11 were company-
operated.
Non-freight revenue aggregated 2.0% and 12.5% of total revenue during the
first three months of 2002 and 2001, respectively. The 2002 decrease in
non-freight revenue was due to our divestiture of the most significant
portion of our non-freight business.
The number of tractors in our company-operated, full-truckload fleet has not
changed appreciably since the beginning of 2002. The number of full-
truckload tractors provided to us by owner-operators fell by about 40 to
470. This decline in the number of owner-operator-provided tractors resulted
primarily from an industry-wide trend of independent contractors to cease
operations in response to the soft economy, hardening insurance and credit
environments and rising fuel costs.
Full-truckload activities, which contributed about 75% of freight revenue
during the first quarter of 2002 and 2001, are conducted primarily with
company-operated equipment, while LTL activities are conducted primarily
with equipment provided by owner-operators. Changes in the mix of LTL
versus full-truckload revenue as well as fluctuations in the amount of total
freight handled on company-operated versus owner-operator provided
equipment, impact the percent of freight revenue absorbed by the various
categories of operating expenses between the two quarters.
During the first quarter of 2002, the percent of freight revenue absorbed by
salaries, wages and related expense was 28.7%, as compared to 27.8% during
the year-ago quarter. Total salaries and wages rose by $459,000. Payroll
expenses related to drivers increased by $339,000 between the quarters.
Purchased transportation, as a percent of freight revenue, fell from 22.8%
during the first quarter of 2001 to 22.4% during the comparable 2002 period.
The portion of freight revenue we paid to independent contractors for
purchased transportation, as a percent of revenue, has not changed
appreciably since last year. The reduction in purchased transportation
expenses during 2002 is principally related to the lower volume of LTL
activity, which is more reliant on equipment provided by independent
contractors than are our full-truckload activities.
Supplies and expenses fell by $1.7 million between the first quarters of
2001 and 2002. More than 80% of this decrease was related to fuel consumed
by our company-operated fleet. Per-gallon costs we paid for fuel fell by
20% during the first quarter of 2002 as compared to 2001. During April of
2002, however, fuel prices once again rose very quickly.
Sudden and dramatic fuel price volatility impacts our profitability. We
have in place a number of strategies designed to address such volatility.
Owner-operators are responsible for all costs associated with their
equipment, including fuel. Therefore, the cost of such fuel is not a direct
expense of ours. With regard to fuel expenses for company-operated
equipment, we attempt to mitigate the impact of fluctuating fuel costs by
purchasing more fuel-efficient tractors and aggressively managing fuel
purchasing. Also, pursuant to the contracts and tariffs by which our
freight rates are determined, those rates automatically fluctuate as diesel
fuel prices rise and fall.
The total of depreciation and revenue equipment rent expense rose from 11.3%
of freight revenue for the first quarter of 2001 to 13.0% for the comparable
2002 quarter. There were 1,371 tractors in our company-operated fleets as of
March 31, 2002, an increase of almost 50 as compared to one year before.
The number of tractors we own and lease to independent contractors increased
by about 65. Therefore, we owned or were the lessee of about 115 more
tractors as of March 31, 2002 than was the case as of March 31, 2001. This
was the primary factor relative to our higher depreciation and equipment
rental expense.
Claims and insurance expense rose from 3.9% of freight revenue during the
first quarter of 2001, to 4.6% for 2002. These expenses tend to vary with
the severity and frequency of personal injury and property damage claims.
In December 2001, we sold the largest component of our non-freight
operations. The business we sold is a dealership engaged in the sale and
service of refrigeration equipment and of trailers used in freight
transportation. Products offered included trailers manufactured by Wabashr
and mobile trailer refrigeration machinery manufactured by Carrier
Transicoldr. We retained a 19.9% interest in the company that bought the
dealership. Because revenue and expenses from the dealership were present
in our financial statements during 2001, but not in 2002, our non-freight
revenue declined this year, as did our non-freight operating expenses. For
the first quarter of 2002, the operating loss from our non-freight
activities fell by 42% as compared to the first quarter of 2001, but 58% of
our consolidated operating loss was from our remaining non-freight
operations.
The buyer group was led by our former employee who until the date of the
sale managed the dealership on our behalf. We sold the majority of the
operating assets of the dealership including accounts receivable, inventory,
machinery, equipment and one real estate asset. The buyer also assumed all
liabilities associated with the dealership including, but not limited to
accounts payable and accrued payroll. The assets we sold had a book value of
$14.7 million. The assumed liabilities totaled approximately $2.8 million.
When the sale closed, we received as consideration $6.8 million in cash, a
note receivable from the buyer for $4.1 million and a limited partnership
interest in the buyer group to which we assigned a value of $1 million. Our
note receivable from the buyer is subordinated to senior debt which the
buyer borrowed to obtain the cash we received at closing. The note must be
repaid in 3 equal installments in December 2007, 2008 and 2009, until which
time monthly interest payments are due.
Our loss from operations was $831,000 during the first quarter of 2001 as
compared to $683,000 during the first quarter of 2002.
Primarily as a result of increased expenses related to one of our life
insurance policies, interest and other expense, net, rose from $482,000 to
$571,000 between the two quarters.
We incurred a pre-tax loss of $1,254,000 during the first quarter of 2002 as
compared to a pre-tax loss of $1,313,000 during the comparable 2001 period.
The provision for income tax was 32.7% of pre-tax income for the first
quarter of 2001 and 31.4% for the comparable portion of 2002. Our effective
tax rate is generally lower than statutory rates due to the presence of
expenses in our income statement which are not deductible for federal income
tax purposes.
In March of 2002, we retroactively changed the manner in which we account
for a life insurance policy that we acquired in 1993. The life insurance
policy, with a death benefit of at least $17.25 million, was purchased to
provide us funds with which we could purchase a large block of our common
stock owned by a non-employee shareholder. If we determined that the sale
of such shares in the open market by the estate would have an adverse effect
on the market price of our stock, we could use the life insurance proceeds
to purchase the shares directly from the estate.
Beginning in 1993, we and our independent public accountants believed that
capitalizing the premium payments as an investment to purchase the shares in
the future was an acceptable accounting policy. We have changed the manner
by which we account for the insurance policy. We will expense the excess of
the premiums over the amount that we could actually realize under the
insurance contract as of the date of the related financial statements.
Although this change resulted in a slight improvement to 2001's net loss,
this change increased our first quarter 2002 net loss by approximately
$250,000, as compared to the first quarter of 2001 as restated.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Our primary needs for capital resources are to finance working capital,
capital expenditures and, from time to time, acquisitions. Working capital
investment typically increases during periods of sales expansion when higher
levels of receivables and, with regard to non-freight operations, inventory
are present. We had long-term debt of $8 million as of March 31, 2002. The
unused portion of the company's $33 1/3 million revolving credit facility
was approximately $20 million.
Our current credit agreement expires on June 1, 2002. We are currently
negotiating with lenders who have indicated their willingness and ability to
provide us borrowing capacity with terms that we can operate under for the
next three years.
During the three months ended March 31, 2002, net cash used in operating
activities was $1.9 million as compared to net cash provided by operations
of $2.0 million a year ago. Changes in the components of working capital
were the primary cause of this variance.
We believe that our current cash position, funds from operations, and the
availability of funds under our credit agreement will be sufficient to meet
anticipated liquidity requirements for the next twelve months. At March 31,
2002, working capital was $26.5 million as compared to $25.1 million at
December 31, 2001.
OUTLOOK
- -------
This report contains information and forward-looking statements that are
based on management's current beliefs and expectations and assumptions we
made based upon information currently available. Forward-looking statements
include statements relating to our plans, strategies, objectives,
expectations, intentions, and adequacy of resources, may be identified by
words such as "will", "could", "should", "believe", "expect", "intend",
"plan", "schedule", "estimate", "project" and similar expressions. These
statements are based on our current expectations and are subject to
uncertainty and change.
Although we believe that the expectations reflected in such forward-looking
statements are reasonable, we can give no assurance that such expectations
will be realized. Should one or more of the risks or uncertainties
underlying such expectations not materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
we expect.
Among the key factors that are not within our control and that may have a
bearing on operating results are demand for our services and products, and
our ability to meet that demand, which may be affected by, among other
things, competition, weather conditions and the general economy, the
availability and cost of labor, our ability to negotiate favorably with
lenders and lessors, the effects of terrorism and war, the availability and
cost of equipment, fuel and supplies, the market for previously-owned
equipment, the impact of changes in the tax and regulatory environment in
which we operate, operational risks and insurance, risks associated with the
technologies and systems we use and the other risks and uncertainties
described elsewhere in our filings with the Securities and Exchange
Commission.
FAIR VALUE OF FINANCIAL INSTRUMENTS
- -----------------------------------
As of March 31, 2002, debt stood at $8 million, which approximated fair
market value. We sponsor a Rabbi Trust for benefit of participants in a
supplemental executive retirement plan. As of March 31, 2002, the trust had
about 100,000 shares of our stock. To the extent that trust assets are
invested in our stock, our future pre-tax income will reflect changes in the
market value of our stock.
We own life insurance policies that have cash surrender value. The
investment returns earned by the insurance company serve to pay insurance
costs and increase cash surrender value, which is a key determinant of the
amount that we could receive pursuant to the policy as of the date of our
financial statements. Accordingly, changes in the market value of and
returns from those investments could impact the value of our life insurance
assets.
We held no other material market risk sensitive instruments (for trading or
non-trading purposes) that would involve significant relevant market risks,
such as equity price risk. Accordingly, the potential loss in our future
earnings resulting from changes in such market rates or prices is not
significant.
PART II - OTHER INFORMATION
- ---------------------------
Items 1 through 6 of Part II are omitted due to a lack of updated
information to disclose pursuant to said items.
On April 1, 2002 we filed a current report on Form 8-K announcing that we
had retroactively changed our manner of accounting for a life insurance
investment.
SIGNATURES
- ----------
Pursuant to the requirements of the Securities and Exchange Act of l934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
Frozen Food Express Industries, Inc.
------------------------------------
(Registrant)
May 14, 2002 By: /s/Stoney M. Stubbs, Jr.
------------------------
Stoney M. Stubbs, Jr.
Chairman of the Board
May 14, 2002 By: /s/F. Dixon McElwee, Jr.
------------------------
F. Dixon McElwee, Jr.
Senior Vice President
Principal Financial and
Accounting Officer