UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
[ _ ] 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 0-15057
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P.A.M. TRANSPORTATION SERVICES, INC.
------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 71-0633135
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
297 West Henri De Tonti, Tontitown, Arkansas 72770
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(Address of principal executive offices)(Zip Code)
Registrants telephone number, including area code: (479) 361-9111
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.
Yes [ X ] No [ _ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ X ] No [ _ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at October 30, 2003
----- -------------------------------
Common Stock, $.01 Par Value 11,293,707
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
P.A.M. TRANSPORTATION SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 30, December 31,
2003 2002
---- ----
(unaudited) (note)
ASSETS
Current assets:
Cash and cash equivalents $ 5,534 $ 30,766
Marketable investments, at fair value 4,746 -
Receivables:
Trade, net of allowance 52,176 34,231
Other 1,455 1,221
Operating supplies and inventories 651 411
Deferred income taxes - 127
Prepaid expenses and deposits 4,996 3,647
Income taxes refundable 1,155 281
--------- ---------
Total current assets 70,713 70,684
Property and equipment, at cost 255,959 233,159
Less: accumulated depreciation (91,387) (85,787)
--------- ---------
Net property and equipment 164,572 147,372
Other assets:
Excess of cost over net assets acquired 15,413 8,102
Non compete agreement 1,092 -
Other 2,285 2,162
--------- ---------
Total other assets 18,790 10,264
--------- ---------
Total assets $ 254,075 $ 228,320
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 924 $ 1,017
Trade accounts payable 17,989 15,725
Other current liabilities 12,064 9,601
Deferred income taxes 420 -
--------- ---------
Total current liabilities 31,397 26,343
Long-term debt, less current portion 24,045 20,175
Non compete agreement 784 -
Deferred income taxes 42,914 37,350
Shareholders' equity:
Preferred Stock, $.01 par value:
10,000,000 shares authorized; none issued
Common stock, $.01 par value:
40,000,000 shares authorized; issued and
outstanding- 11,293,707 at September 30,
2003, 11,282,207 at December 31, 2002 113 113
Additional paid-in capital 76,308 76,193
Accumulated other comprehensive loss (465) (1,005)
Retained earnings 78,979 69,151
--------- ---------
Total shareholders' equity 154,935 144,452
--------- ---------
Total liabilities and shareholders' equity $ 254,075 $ 228,320
========= =========
Note: The balance sheet at December 31, 2002 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. See notes to condensed consolidated financial statements.
P.A.M. TRANSPORTATION SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Operating revenues $ 74,216 $ 65,034 $ 219,311 $ 199,188
Operating expenses:
Salaries, wages and benefits 30,161 27,679 89,368 87,666
Operating supplies 14,287 13,438 41,158 38,517
Rent/purchased transportation 9,276 1,911 25,867 7,584
Depreciation and amortization 6,590 6,701 19,194 17,676
Operating taxes and licenses 3,686 3,356 10,890 10,200
Insurance and claims 3,089 2,559 10,220 9,505
Communications and utilities 624 444 1,861 1,704
Other 1,172 1,926 3,381 3,527
Loss on sale of equipment 14 48 42 96
--------- --------- --------- ---------
68,899 58,062 201,981 176,475
--------- --------- --------- ---------
Operating income 5,317 6,972 17,330 22,713
Other income (expense)
Interest expense (375) (377) (1,060) (1,718)
--------- --------- --------- ---------
Income before income taxes 4,942 6,595 16,270 20,995
Income taxes --current 60 536 270 1,310
--deferred 1,917 2,102 6,172 7,088
--------- --------- --------- ---------
1,977 2,638 6,442 8,398
--------- --------- --------- ---------
Net income $ 2,965 $ 3,957 $ 9,828 $ 12,597
========= ========= ========= =========
Net income per common share:
Basic $ 0.26 $ 0.35 $ 0.87 $ 1.20
========= ========= ========= =========
Diluted $ 0.26 $ 0.35 $ 0.87 $ 1.20
========= ========= ========= =========
Average common shares outstanding-Basic 11,293,147 11,263,392 11,289,927 10,466,381
========== ========== ========== ==========
Average common shares outstanding-Diluted 11,326,610 11,306,778 11,330,528 10,514,705
========== ========== ========== ==========
See notes to condensed consolidated financial statements.
P.A.M. TRANSPORTATION SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Nine Months Ended
September 30,
2003 2002
---- ----
OPERATING ACTIVITIES
Net income $ 9,828 $ 12,597
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 19,194 17,676
Non compete agreement amortization 42 -
Provision for deferred income taxes 6,172 7,088
Loss on retirement of property and equipment 42 93
Changes in operating assets and liabilities:
Accounts receivable (18,209) (12,554)
Prepaid expenses and other current assets (3,387) (1,926)
Accounts payable 2,752 9,817
Other current liabilities 2,113 2,815
--------- ---------
Net cash provided by operating activities 18,547 35,606
INVESTING ACTIVITIES
Purchases of property and equipment (42,065) (31,185)
Acquisition of businesses, net of cash acquired (10,752) -
Purchases of marketable securities (3,946) -
Proceeds from sales of assets 14,036 7,892
Lease payments received on direct financing leases 31 74
--------- ---------
Net cash used in investing activities (42,696) (23,219)
FINANCING ACTIVITIES
Borrowings under lines of credit 257,783 270,733
Repayments under lines of credit (257,783) (279,809)
Borrowings of long-term debt - 1,459
Repayments of long-term debt (1,198) (35,886)
Proceeds from issuance of common stock - 54,784
Proceeds from exercise of stock options 115 305
--------- ---------
Net cash provided by (used in) financing activities (1,083) 11,586
--------- ---------
Net increase (decrease) in cash and cash equivalents (25,232) 23,973
Cash and cash equivalents at beginning of period 30,766 896
--------- ---------
Cash and cash equivalents at end of period $ 5,534 $ 24,869
========= =========
See notes to condensed consolidated financial statements.
NONCASH INVESTING AND FINANCING ACTIVITIES:
A promissory note in the amount of $4,974,612 was incurred in connection with
the acquisition of a business.
A non-compete agreement in the amount of $1,000,020, payable in equal monthly
installments of $16,667 over a five year period, was entered into in connection
with the acquisition of a business.
A non-compete agreement in the amount of $300,000, payable in equal monthly
installments of $12,500 over a two year period, was entered into in connection
with the acquisition of a business.
P.A.M. TRANSPORTATION SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited)
(in thousands)
- ----------------------------------------------------------------------------------------------------------------
ADDITIONAL OTHER ACCUMULATED
COMMON PAID-IN COMPREHENSIVE COMPREHENSIVE RETAINED
STOCK CAPITAL INCOME INCOME/(LOSS) EARNINGS TOTAL
- ----------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2002 $ 113 $ 76,193 $ (1,005) $ 69,151 $144,452
Components of comprehensive income:
Net earnings $ 9,828 9,828 9,828
Other comprehensive loss -
Unrealized gain on hedge,
net of tax of $73 109 109 109
Unrealized gain on securities,
net of tax of $288 431 431 431
--------
Total comprehensive income $ 10,368
========
Exercise of stock options-
shares issued including tax
benefits - 115 115
- ----------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2003 $ 113 $ 76,308 $ (465) $ 78,979 $154,935
================================================================================================================
See notes to consolidated financial statements.
P.A.M. TRANSPORTATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2003
NOTE A: BASIS OF PRESENTATION
- --------------------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In management's opinion, all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation have been included.
Operating results for the nine-month period ended September 30, 2003 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2003. For further information, refer to the consolidated financial
statements and the footnotes thereto included in the Company's annual report on
Form 10-K for the year ended December 31, 2002.
NOTE B: DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
- ----------------------------------------------------------------
Effective February 28, 2001 the Company entered into an interest rate swap
agreement on a notional amount of $15,000,000. The pay fixed rate under the swap
is 5.08%, while the receive floating rate is "1-month" LIBOR. This interest rate
swap agreement terminates on March 2, 2006. Effective May 31, 2001 the Company
entered into an interest rate swap agreement on a notional amount of $5,000,000.
The pay fixed rate under the swap is 4.83%, while the receive floating rate is
"1-month" LIBOR. This interest rate swap agreement terminates on June 2, 2006.
The Company designates both of these interest rate swaps as cash flow hedges of
its exposure to variability in future cash flows resulting from interest
payments indexed to "1-month" LIBOR. Changes in future cash flows from the
interest rate swaps will offset changes in interest rate payments on the first
$20,000,000 of the Company's current revolving credit facility or future
"1-month" LIBOR based borrowings that reset on the last London Business Day
prior to the start of the next interest period. The hedge locks the interest
rate at 5.08% or 4.83% plus the pricing spread (currently 1.15%) for the
notional amounts of $15,000,000 and $5,000,000, respectively.
These interest rate swap agreements meet the specific hedge accounting criteria.
The effective portion of the cumulative gain or loss has been reported as a
component of accumulated other comprehensive loss in shareholders' equity and
will be reclassified into current earnings by June 2, 2006, the latest
termination date for all current swap agreements. The Company records all
derivatives at fair value as assets or liabilities in the condensed consolidated
balance sheet, with classification as current or long-term depending on the
duration of the instrument. At September 30, 2003, the net after tax deferred
hedging loss in accumulated other comprehensive loss was approximately $896,000.
The measurement of hedge effectiveness is based upon a comparison of the
floating-rate leg of the swap and the hedged floating-rate cash flows on the
underlying liability. This method is based upon the premise that only the
floating-rate component of the swap provides the cash flow hedge, and any
changes in the swap's fair value attributable to the fixed-rate leg is not
relevant to the variability of the hedged interest payments on the floating-rate
liability. The calculation of ineffectiveness involves a comparison of the
present value of the cumulative change in the expected future cash flows on the
variable leg of the swap and the present value of the cumulative change in the
expected future interest cash flows on the floating-rate liability.
Ineffectiveness related to these hedges was not significant.
In August 2000 and July 2001, we entered into agreements to obtain price
protection and reduce a portion of our exposure to fuel price fluctuations.
Under these agreements, we were obligated to purchase minimum amounts of diesel
fuel per month, with a price protection component, for the six month periods
ended March 31, 2001 and February 28, 2002. The agreements also provide that if
during the 48 months commencing April 2001, the average monthly price of heating
oil on the New York Mercantile Exchange ("NY MX HO") falls below $.58 per
gallon, we are obligated to pay, for a maximum of twelve different months
selected by the contract holder during such 48-month period, the difference
between $.58 per gallon and NY MX HO average price, multiplied by 900,000
gallons. Accordingly, in any month in which the holder exercises such right, we
would be obligated to pay the holder $9,000 for each cent by which $.58 exceeds
the average NY MX HO price for that month. For example, the NY MX HO average
price during February 2002 was approximately $.54, and if the holder were to
exercise its payment right, we would be obligated to pay the holder
approximately $36,000. In addition, if during any month in the twelve-month
period commencing January 2005, the average NY MX HO is below $.58 per gallon,
we will be obligated to pay the contract holder the difference between $.58 and
the average NY MX HO price for such month, multiplied by 1,000,000 gallons. The
agreements are stated at their fair value of $750,000 which is included in
accrued liabilities in the accompanying consolidated financial statements.
NOTE C: COMMON STOCK OFFERING
- ------------------------------
During March 2002, the Company received net proceeds of approximately $43.9
million from a public offering of 2,100,000 shares of its common stock. The
Company has repaid certain long-term debt obligations and intends to use the
remaining proceeds to fund its capital expenditures and to finance general
working capital needs.
During April 2002, the Company received net proceeds of approximately $10.9
million from the sale of an additional 521,250 shares of its common stock in
order to cover broker over-allotments. The Company intends to use the proceeds
to fund its capital expenditures and to finance general working capital needs.
NOTE D: RECENT ACCOUNTING PRONOUNCEMENTS
- -----------------------------------------
SFAS No. 143 provides accounting requirements for retirement obligations
associated with tangible long-lived assets, including: (i) the timing of
liability recognition; (ii) initial measurement of the liability; (iii)
allocation of asset retirement cost to expense; (iv) subsequent measurement of
the liability; and (v) financial statement disclosures. SFAS No. 143 requires
that an asset retirement cost should be capitalized as part of the cost of the
related long-lived asset and subsequently allocated to expense using a
systematic and rational method. The adoption of SFAS No. 143 on January 1, 2003
did not have a material impact on the Company's financial position or results of
operations.
In May 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos. 4, 44 and
64, Amendment of SFAS No. 13, and Technical Corrections" as of April 2002. SFAS
No. 145, rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of
Debt", and SFAS No. 64, "Extinguishments of Debt made to Satisfy Sinking-Fund
Requirements". Under the provisions of SFAS No. 145, gains and losses from
extinguishment of debt can only be classified as extraordinary items if they
meet the criteria in APB Opinion No. 30. This statement also amends SFAS No. 13,
"Accounting for Leases", to eliminate an inconsistency between the accounting
for sale-leaseback transactions and certain lease modifications that have
economic effects that are similar and was effective for transactions occurring
after May 15, 2002. This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. The adoption of SFAS No.
145 on January 1, 2003 did not have a material impact on the Company's financial
position or results of operations.
In July of 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 replaces EITF No. 94-3
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)". SFAS
No. 146 requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan as was required by EITF No. 94-3. Examples of costs
covered by SFAS No. 146 include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. SFAS No. 146 was
effective for exit or disposal activities initiated after December 31, 2002. The
adoption of SFAS No. 146 on January 1, 2003 did not have a material impact on
the Company's financial position or results of operations.
In November 2002, The Financial Accounting Standards Board issued Interpretation
No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others ("FIN 45"). FIN 45
elaborates on the disclosures to be made by a guarantor in its financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and initial measurement
provisions of FIN 45 are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002, irrespective of the guarantor's fiscal
year-end. Management has determined that since December 31, 2002, no guarantees
have been issued or modified, and therefore, the initial recognition and initial
measurement provisions of FIN 45 did not have any material impact on the
financial position or results of operations.
In March of 2003, the Financial Accounting Standards Board issued Interpretation
No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB
No. 51. ("FIN 46"). FIN 46 of Accounting Research Bulletin No. 51, Consolidated
Financial Statements, addresses consolidation by business enterprises of
variable interest entities. This Interpretation applies to variable interest
entities created after January 31, 2003, and to variable interest entities in
which an enterprise obtains an interest after that date. The effective date of
FIN 46 had been July 1, 2003. The Financial Accounting Standards Board postponed
the effective date to December 31, 2003. The Company is evaluating the effects
of FIN 46 but currently expects it will not have a material impact on the
Company's financial position or results of operations.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities ("SFAS 149"), which amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
133. The new guidance amends SFAS 133 for decisions made: (a) as part of the
Derivatives Implementation Group process that effectively required amendments to
SFAS 133, (b) in connection with other Board projects dealing with financial
instruments, and (c) regarding implementation issues raised in relation to the
application of the definition of a derivative. The amendments set forth in SFAS
149 improve financial reporting by requiring that contracts with comparable
characteristics be accounted for similarly. SFAS 149 is generally effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. Adopting the provisions of SFAS
149 did not have a material impact on the Company's financial position or
results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity ("SFAS 150"),
which requires certain financial instruments that embody obligations of the
issuer and have characteristics of both liabilities and equity to be classified
as liabilities. The provisions of SFAS 150 are effective for financial
instruments entered into or modified after May 31, 2003 and to all other
instruments that exist as of the beginning of the first interim financial
reporting period beginning after June 15, 2003. The Company does not have any
financial instruments that meet the provisions of SFAS 150; therefore, adopting
the provisions of SFAS 150 did not have a material impact on the Company's
financial position or results of operations.
NOTE E: MARKETABLE SECURITIES
- ------------------------------
The Company's investments in marketable securities, which are classified as
available for sale, had a net unrealized gain in market value of $431,000, net
of deferred income taxes, for the nine month period ended September 30, 2003.
The investments consist entirely of equity securities with a combined original
cost of approximately $3,950,000 and a combined fair market value of
approximately $4,750,000 as of September 30, 2003. There were no sales or
reclassifications of investment securities during the nine month period ended
September 30, 2003.
NOTE F: STOCK BASED COMPENSATION
- ---------------------------------
The Company adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS No.
123). The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123 to stock-based employee compensation:
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
------- ------- ------- -------
(in thousands, except per share data)
Net income $ 2,965 $ 3,957 $ 9,828 $12,597
Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (82) (106) (245) (318)
------- ------- ------- -------
Pro forma net income $ 2,883 $ 3,851 $ 9,583 $12,279
======= ======= ======= =======
Earnings per share:
Basic - as reported $ .26 $ .35 $ .87 $ 1.20
Basic - pro forma $ .26 $ .34 $ .85 $ 1.17
Diluted - as reported $ .26 $ .35 $ .87 $ 1.20
Diluted - pro forma $ .25 $ .34 $ .85 $ 1.17
NOTE G: BUSINESS ACQUISITIONS
- ------------------------------
On January 31, 2003, P.A.M. Transportation Services, Inc. acquired substantially
all of the assets of East Coast Transport, Inc. The results of East Coast
Transport, Inc. have been included in the consolidated financial statements
since that date. In accordance with SFAS No. 141, "Business Combinations", the
acquisition was accounted for under the purchase method of accounting.
The aggregate purchase price of $6.6 million was paid in the form of a 7 year
installment note in the amount of approximately $5.0 million at an interest rate
of 6% and a cash payment of approximately $1.6 million. A non-compete agreement
in the amount of $1.0 million and covering a 5 year period was also entered
into. Approximately $6.6 million of additional goodwill was recognized as a
result of the acquisition.
On April 3, 2003, P.A.M. Transportation Services, Inc. acquired substantially
all of the assets of McNeill Trucking, Inc. The results of McNeill Trucking,
Inc. have been included in the consolidated financial statements since that
date. In accordance with SFAS No. 141, "Business Combinations", the acquisition
was accounted for under the purchase method of accounting.
The aggregate purchase price of approximately $8.7 million was paid in the form
of cash in the amount of approximately $8.6 and the assumption of liabilities
aggregating approximately $70,000. A non-compete agreement in the amount of
$300,000 and covering a 2 year period was also entered into. Approximately
$370,000 of additional goodwill was recognized as a result of the acquisition.
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
- ----------------------------
Certain information included in this Quarterly Report on Form 10-Q constitutes
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements may relate to
expected future financial and operating results or events, and are thus
prospective. Such forward-looking statements are subject to risks, uncertainties
and other factors which could cause actual results to differ materially from
future results expressed or implied by such forward-looking statements.
Potential risks and uncertainties include, but are not limited to, excess
capacity in the trucking industry; surplus inventories; recessionary economic
cycles and downturns in customers' business cycles; increases or rapid
fluctuations in fuel prices, interest rates, fuel taxes, tolls, license and
registration fees; the resale value of the Company's used equipment and the
price of new equipment; increases in compensation for and difficulty in
attracting and retaining qualified drivers and owner-operators; increases in
insurance premiums and deductible amounts relating to accident, cargo, workers'
compensation, health, and other claims; unanticipated increases in the number or
amount of claims for which the Company is self insured; inability of the Company
to continue to secure acceptable financing arrangements; seasonal factors such
as harsh weather conditions that increase operating costs; competition from
trucking, rail, and intermodal competitors including reductions in rates
resulting from competitive bidding; the ability to identify acceptable
acquisition candidates, consummate acquisitions, and integrate acquired
operations; a significant reduction in or termination of the Company's trucking
service by a key customer; and other factors, including risk factors, referred
to from time to time in filings made by the Company with the Securities and
Exchange Commission. The Company undertakes no obligation to update or clarify
forward-looking statements, whether as a result of new information, future
events or otherwise.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
The Company's management makes estimates and assumptions in preparing the
consolidated financial statements that affect reported amounts and disclosures
therein. In the opinion of management, the accounting policies that generally
have the most significant impact on the financial position and results of
operations of the Company include:
Accounts Receivable. We continuously monitor collections from our customers,
third parties and vendors and maintain a provision for estimated credit losses
based upon our historical experience and any specific collection issues that we
have identified. While such credit losses have historically been within our
expectations and the provisions established, we cannot guarantee that we will
continue to experience the same credit loss rates that we have in the past.
Property, plant and equipment. Management must use its judgment in the
selection of estimated useful lives and salvage values for purposes of
depreciating tractors and trailers which do not have guaranteed residual values.
Estimates of salvage value at the expected date of trade-in or sale are based on
the expected market values of equipment at the time of disposal.
Other current liabilities - Self Insurance. The Company is self-insured for
health and workers' compensation benefits up to certain stop-loss limits. Such
costs are accrued based on known claims and an estimate of incurred, but not
reported (IBNR) claims. IBNR claims are estimated using historical lag
information and other data provided by claims administrators. This estimation
process is subjective, and to the extent that future actual results differ from
original estimates, adjustments to recorded accruals may be necessary.
Revenue Recognition. Revenue is recognized in full upon completion of delivery
to the receivers location. For freight in transit at the end of a reporting
period, the Company recognizes revenue prorata based on relative transit miles
completed as a portion of the estimated total transit miles with estimated
expenses recognized upon recognition of the related revenue.
Prepaid expenses - Tires. Tires purchased with revenue equipment are capitalized
as a cost of the related equipment. Replacement tires are included in prepaid
expenses and deposits and are amortized over a 24-month period. Costs related to
tire recapping are expensed when incurred.
Goodwill. The carrying value of goodwill is tested for impairment at least
annually. The impairment testing requires an estimate of the value of the
Company as a whole, as the Company has determined it only has one reporting
unit as defined in SFAS No. 142.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED SEPTEMBER 30, 2003 VS. THREE MONTHS ENDED SEPTEMBER 30, 2002
For the quarter ended September 30, 2003, revenues increased 14.1% to $74.2
million as compared to $65.0 million for the quarter ended September 30, 2002.
The increase was due to an increase in revenues generated by the Company as a
result of the East Coast Transport, Inc. and McNeill Trucking, Inc. business
acquisitions which closed on January 31, 2003 and April 3, 2003, respectively.
Salaries, wages and benefits decreased from 42.6% of revenues in the third
quarter of 2002 to 40.6% of revenues in the third quarter of 2003. The decrease
relates to a decrease in company driver wages as a percentage of revenues due to
the reliance on third party drivers for our logistics operations which is
reflected as purchased transportation costs.
Operating supplies and expenses decreased from 20.7% of revenues in the third
quarter of 2002 to 19.3% of revenues in the third quarter of 2003. The decrease
as a percentage of revenues was caused by an increase in logistics revenues
which have relatively few operating costs in relation to the revenues generated.
Rent and purchased transportation increased from 2.9% of revenues in the third
quarter of 2002 to 12.5% of revenues in the third quarter of 2003. The increase
relates primarily to the East Coast Transport acquisition which purchases
transportation services from other transportation companies in order to support
our logistics operations and is reflected as purchased transportation costs.
Depreciation and amortization decreased from 10.3% of revenues in the third
quarter of 2002 to 8.9% of revenues in the third quarter of 2003. The decrease
as a percentage of revenues was caused by an increase in logistics revenues
which have no associated tractor or trailer depreciation expense.
Other expenses decreased from 3.0% of revenues in the third quarter of 2002 to
1.6% of revenues in the third quarter of 2003. The decrease relates to a
decrease in amounts charged to bad debt expense.
The Company's operating ratio increased to 92.8% for the third quarter of 2003
from 89.3% for the third quarter of 2002.
The decrease in income before income taxes to $4.9 million from $6.6 million,
respectively, for the three month period ended September 30, 2003 and 2002
resulted in a decrease in the provision for income taxes from $2.6 million for
the third quarter of 2002 to $2.0 million for the third quarter of 2003.
Net income decreased to $2.9 million, or 4.0% of revenues, in the third quarter
of 2003 from $4.0 million, or 6.1% of revenues in the third quarter of 2002. The
decrease in net income resulted in a decrease in diluted net income per share to
$.26 in the third quarter of 2003 from $.35 in the third quarter of 2002.
NINE MONTHS ENDED SEPTEMBER 30, 2003 VS. NINE MONTHS ENDED SEPTEMBER 30, 2002
For the nine months ended September 30, 2003, revenues increased 10.1% to $219.3
million as compared to $199.2 million for the nine months ended September 30,
2002. The increase was due to an increase in revenues generated by the Company
as a result of the East Coast Transport, Inc. and McNeill Trucking, Inc.
business acquisitions which closed on January 31, 2003 and April 3, 2003,
respectively.
Salaries, wages and benefits decreased from 44.0% of revenues in the first nine
months of 2002 to 40.8% of revenues in the first nine months of 2003. The
decrease relates to a decrease in company driver wages as a percentage of
revenues due to the reliance on third party drivers for our logistics operations
which is reflected as purchased transportation costs. The decrease in company
driver wages was partially offset by increases in workers compensation and
health insurance costs.
Operating supplies and expenses decreased from 19.4% of revenues in the first
nine months of 2002 to 18.8% of revenues in the first nine months of 2003. The
decrease as a percentage of revenues was caused by an increase in logistics
revenues which have relatively few operating costs in relation to the revenues
generated.
Rent and purchased transportation increased from 3.8% of revenues in the first
nine months of 2002 to 11.8% of revenues in the first nine months of 2003. The
increase relates primarily to the East Coast Transport acquisition which
purchases transportation services from other transportation companies in order
to support our logistics operations which is reflected as purchased
transportation costs.
The Company's operating ratio increased to 92.1% for the first nine months of
2003 from 88.6% for the first nine months of 2002.
The decrease in income before income taxes to $16.3 million from $21.0 million,
respectively, for the nine month periods ended September 30, 2003 and 2002
resulted in a decrease in the provision for income taxes from $8.4 million for
the first nine months of 2002 to $6.4 million for the first nine months of 2003.
Net income decreased to $9.8 million, or 4.5% of revenues, in the first nine
months of 2003 from $12.6 million, or 6.3% of revenues in the first nine months
of 2002. The decrease in net income, combined with a 7.8% increase in the
average number of shares outstanding, resulted in a decrease in diluted net
income per share to $.87 in the first nine months of 2003 from $1.20 in the
first nine months of 2002.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During the first nine months of 2003, the Company generated $18.5 million of
cash from operating activities. Investing activities used $42.7 million in cash
in the first nine months of 2003. Financing activities used $1.1 million in the
first nine months of 2003.
Marketable investments at September 30, 2003 increased approximately $4.7
million from December 31, 2002. The increase was due to a combination of
purchases of equity securities during periods of excess cash and appreciation in
investment value during the first nine months of 2003. The Company has developed
a strategy to invest in securities from which it expects to receive dividends
that qualify for favorable tax treatment, as well as, appreciate in value. The
Company anticipates that increases in the market value of the investments
combined with dividend payments will exceed interest rates paid on borrowings
for the same period. The holding term of the investments depends largely on the
general economic environment, the equity markets and borrowing rates.
Accounts receivable at September 30, 2003 increased approximately $18.2 million
from December 31, 2002. Approximately $5.9 million of the increase is related to
the revenues generated by East Coast Transport, Inc. and McNeill Transport, Inc.
which were acquired in January 2003 and April 2003, respectively. Also, certain
of the Company's largest customers regularly schedule plant shutdowns for
various periods during December and the volume of freight we ship is reduced
during such scheduled shutdowns. This reduction in freight volume results in a
reduction in accounts receivable at the end of each year.
Prepaid expenses and deposits at September 30, 2003 increased approximately $1.3
million as compared to December 31, 2002. The increase relates to the Company's
annual registration fees for tractors and trailers which occurs each January,
and to the prepayment of certain annual insurance policies during the first
quarter of 2003 which had been paid on a monthly basis during the previous year.
Trade accounts payable at September 30, 2003 increased approximately $2.3
million as compared to December 31, 2002. This is a normal fluctuation that
occurs as a result of the timing of regularly scheduled check runs and how they
fall in relation to the end of a period.
The Company's principal subsidiary, P.A.M. Transport, Inc., maintains two lines
of credit with separate financial institutions. "Line A" is a $20.0 million line
maturing May 31, 2005 bearing interest at LIBOR (on the first day of the month)
plus 1.40%, and is secured by accounts receivable. At September 30, 2003,
outstanding advances on Line A were approximately $1.5 million, consisting
entirely of letters of credit, with availability to borrow $18.5 million. "Line
B" is a $30.0 million line maturing on June 30, 2005 bearing interest at LIBOR
(on the last London Business Day of the previous month) plus 1.15%, and is
secured by equipment. At September 30, 2003, outstanding advances on Line B were
approximately $27.0 million, including $7.0 million in letters of credit, with
availability to borrow $3.0 million.
In addition to cash flows from operations, the Company uses its existing lines
of credit on an interim basis to finance capital expenditures and repay
long-term debt. Longer-term transactions, such as installment notes (generally
three to five year terms at fixed rates), are typically entered into for the
purchase of revenue equipment; however, the Company purchased additional revenue
equipment during the first nine months of 2003 at a cost of approximately $39.4
million using its existing lines of credit and available cash balances. During
the remainder of 2003, the Company plans to replace 419 tractors and 150
trailers, which would result in net capital expenditures of approximately $22.2
million. Management expects that the Company's existing working capital and its
available lines of credit will be sufficient to meet the Company's present
capital commitments, to repay indebtedness coming due in the current year, and
to fund its operating needs during the remainder of 2003.
During January 2003 a seven year promissory note in the amount of $4,974,612
million and payable in equal monthly installments at a fixed interest rate of
6.0% was incurred in connection with the acquisition of East Coast Transport,
Inc.
During February 2001 and May 2001 the Company entered into separate interest
rate swap agreements on notional amounts of $15,000,000 and $5,000,000,
respectively. The pay fixed rate under the swaps are 5.08% and 4.83%,
respectively, while the receive floating rate is "1-month" LIBOR. The
$15,000,000 swap agreement terminates on March 2, 2006 while the $5,000,000 swap
agreement terminates on June 2, 2006. For additional information with respect to
the interest rate swap agreements, see Note B to the condensed consolidated
financial statements.
NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------
See Note D to the condensed consolidated financial statements for a description
of the most recent accounting pronouncements and their impact, if any, on the
Company.
Item 3. Quantitative and Qualitative Disclosure about Market Risk.
- -------------------------------------------------------------------
The Company's primary market risk exposures include commodity price risk (the
price paid to obtain diesel fuel for our tractors) and interest rate risk. The
potential adverse impact of these risks and the general strategies the Company
employs to manage such risks are discussed below.
The following sensitivity analyses do not consider the effects that an adverse
change may have on the overall economy nor do they consider additional actions
the Company may take to mitigate our exposure to such changes. Actual results of
changes in prices or rates may differ materially from the hypothetical results
described below.
COMMODITY PRICE RISK
Prices and availability of all petroleum products are subject to political,
economic and market factors that are generally outside of our control.
Accordingly, the price and availability of diesel fuel, as well as other
petroleum products, can be unpredictable. 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. Based
upon our 2002 fuel consumption, a 10% increase in the average annual price per
gallon of diesel fuel would increase our annual fuel expenses by $3.5 million.
In August 2000 and July 2001, we entered into agreements to obtain price
protection and reduce a portion of our exposure to fuel price fluctuations.
Under these agreements, we were obligated to purchase minimum amounts of diesel
fuel per month, with a price protection component, for the six month periods
ended March 31, 2001 and February 28, 2002. The agreements also provide that if
during the 48 months commencing April 2001, the average monthly price of heating
oil on the New York Mercantile Exchange ("NY MX HO") falls below $.58 per
gallon, we are obligated to pay, for a maximum of twelve different months
selected by the contract holder during such 48-month period, the difference
between $.58 per gallon and NY MX HO average price, multiplied by 900,000
gallons. Accordingly, in any month in which the holder exercises such right, we
would be obligated to pay the holder $9,000 for each cent by which $.58 exceeds
the average NY MX HO price for that month. For example, the NY MX HO average
price during February 2002 was approximately $.54, and if the holder were to
exercise its payment right, we would be obligated to pay the holder
approximately $36,000. In addition, if during any month in the twelve-month
period commencing January 2005, the average NY MX HO is below $.58 per gallon,
we will be obligated to pay the contract holder the difference between $.58 and
the average NY MX HO price for such month, multiplied by 1,000,000 gallons. The
agreements are stated at their fair value of $750,000 which is included in
accrued liabilities in the accompanying consolidated financial statements.
INTEREST RATE RISK
Our lines of credit each bear interest at a floating rate equal to LIBOR plus a
fixed percentage. Accordingly, changes in LIBOR, which are effected by changes
in interest rates generally, will affect the interest rate on, and therefore our
costs under, the lines of credit. In an effort to manage the risks associated
with changing interest rates, we entered into interest rate swap agreements
effective February 28, 2001 and May 31, 2001, on notional amounts of $15,000,000
and $5,000,000, respectively. The "pay fixed rates" under the $15,000,000 and
$5,000,000 swap agreements are 5.08% and 4.83%, respectively. The "receive
floating rate" for both swap agreements is "1-month" LIBOR. These interest rate
swap agreements terminate on March 2, 2006 and June 2, 2006, respectively.
Assuming $20.0 million of variable rate debt was outstanding under each of Line
A and Line B for a full fiscal year, a hypothetical 100 basis point increase in
LIBOR would result in approximately $200,000 of additional interest expense, net
of the effect of the swap agreements. For additional information see Note B to
the condensed consolidated financial statements.
Item 4. Controls and Procedures.
- ---------------------------------
We maintain a set of disclosure controls and procedures designed to ensure that
information required to be disclosed by P.A.M. Transportation Services, Inc. in
reports that it files under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. An evaluation was carried
out as of September 30, 2003 under the supervision and with the participation of
our management, including the Chief Executive Officer ("CEO") and Chief
Financial Officer ("CFO"), of the effectiveness of our disclosure controls and
procedures. Based on that evaluation, the CEO and CFO have concluded that our
disclosure controls and procedures were effective as of September 30, 2003.
CEO AND CFO CERTIFICATES
Exhibit 31.1 and Exhibit 31.2 to this report on Form 10-Q includes
certifications by the CEO and the CFO, respectively. They are required under
Section 302 of the Sarbanes-Oxley Act of 2002 (the "Section 302
Certifications"). This Item 4, Controls and Procedures, is referred to in the
Section 302 Certifications and should be read in conjunction with the Section
302 Certifications.
DISCLOSURE CONTROLS
"Disclosure Controls" are procedures that are designed to ensure that
information required to be disclosed in our reports filed under the Securities
Exchange Act of 1934, such as this report on Form 10-Q, is recorded, processed,
summarized and reported within the time periods specified in the SEC rules and
forms. Disclosure Controls are also designed to ensure that information required
to be disclosed is accumulated and communicated to our management, including our
CEO and CFO, as appropriate to allow timely decisions regarding disclosure.
INTERNAL CONTROLS
"Internal Controls" are procedures that are designed to provide reasonable
assurance that (1) our transactions are properly authorized, recorded and
reported and (2) our assets are safeguarded against unauthorized or improper
use, so that our financial statements may be prepared in accordance with
generally accepted accounting principles.
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS
Our management, including the CEO and CFO, do not expect that our Disclosure
Controls and/or our Internal Controls will prevent or detect all error or fraud.
A system of controls is able to provide only reasonable, not complete, assurance
that the control objectives are being met, no matter how extensive those control
systems may be. Also, control systems must be established within the opposing
forces of risk and resources, (i.e., the benefits of a control system must be
considered relative to its costs). Because of these inherent limitations that
exist in all control systems, no evaluation of Disclosure Controls and/or
Internal Controls can provide absolute assurance that all errors or fraud, if
any, have been detected. The inherent limitations in control systems include
various human and system factors that may include errors in judgment or
interpretation regarding events or circumstances or inadvertent error.
Additionally, controls can be circumvented by the acts of a single person, by
collusion on the part of two or more people or by management override of the
control. Over time, controls can also become ineffective as conditions,
circumstances, policies, technologies, level of compliance and people change.
Because of such inherent limitations, in any cost-effective control system over
financial information, misstatements may occur due to error or fraud and may not
be detected.
SCOPE OF EVALUATION OF DISCLOSURE CONTROLS
The evaluation of our Disclosure Controls performed by our CEO and CFO included
obtaining an understanding of the design and objective of the controls, the
implementation of those controls and the results of the controls on this report
on Form 10-Q. We have established a Disclosure Committee whose duty is to
perform procedures to evaluate the Disclosure Controls and provide the CEO and
CFO with the results of their evaluation as part of the information considered
by the CEO and CFO in their evaluation of Disclosure Controls. In the course of
the evaluation of Disclosure Controls, we reviewed the controls that are in
place to record, process, summarize and report, on a timely basis, matters that
require disclosure in our reports filed under the Securities Exchange Act of
1934. We also considered the adequacy of the items disclosed in this report on
Form 10-Q.
CONCLUSIONS
Based upon the evaluation of Disclosure Controls described above, our CEO and
CFO have concluded that, subject to the limitations described above, our
Disclosure Controls are effective to ensure that material information relating
to P.A.M. Transportation Services, Inc. and its consolidated subsidiaries is
made known to management, including the CEO and CFO, so that required
disclosures have been included in this report on Form 10-Q.
PART II. OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
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On October 10, 2002, a suit was filed against one of the Company's subsidiaries
and is entitled "The Official Committee of Unsecured Creditors of Bill's Dollar
Stores, Inc. v. Allen Freight Services Co." The suit, which has been filed in
the United States Bankruptcy Court for the District of Delaware, alleges
preferential transfers of $660,055 were made to the defendant, Allen Freight
Services Co., within the 90 day period preceding the bankruptcy petition date of
Bill's Dollar Stores, Inc. The suit is currently in pretrial proceedings.
In addition to the specific legal action mentioned above, the nature of our
business routinely results in litigation, primarily involving claims for
personal injuries and property damage incurred in the transportation of freight.
We believe that all such routine litigation is adequately covered by insurance
and that adverse results in one or more of those cases would not have a material
adverse effect on our financial condition.
Item 6. Exhibits and Reports on Form 8-K.
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(a) Exhibits required by Item 601 of Regulations S-K:
11.1 - Statement Re: Computation of Diluted Earnings Per Share
31.1 - Rule 13a-14(a) Certification of Principal Executive Officer
31.2 - Rule 13a-14(a) Certification of Principal Financial Officer
32.1 - Section 1350 Certification of Chief Executive Officer
32.2 - Section 1350 Certification of Chief Financial Officer
(b) Reports on Form 8-K:
A Current Report on Form 8-K was furnished on July 25, 2003 regarding a press
release issued to announce the Company's second quarter 2003 results. No other
reports on Form 8-K were filed or furnished during the third quarter ending
September 30, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
P.A.M. TRANSPORTATION SERVICES, INC.
Dated: October 30, 2003 By: /s/ Robert W. Weaver
---------------------------------
Robert W. Weaver
President and Chief Executive Officer
(principal executive officer)
Dated: October 30, 2003 By: /s/ Larry J. Goddard
---------------------------------
Larry J. Goddard
Vice President-Finance, Chief Financial
Officer, Secretary and Treasurer
(principal accounting and financial officer)
P.A.M. TRANSPORTATION SERVICES, INC.
INDEX TO EXHIBITS TO FORM 10-Q
Exhibit
Number Exhibit Description
- -------- ---------------------------------------------------------
11.1 Statement Re: Computation of Diluted Earnings Per Share
31.1 Rule 13a-14(a) Certification of Principal Executive Officer
31.2 Rule 13a-14(a) Certification of Principal Financial Officer
32.1 Section 1350 Certification of Chief Executive Officer
32.2 Section 1350 Certification of Chief Financial Officer