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 March 31, 2004
[ _ ] 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 April 23, 2004
----- -----------------------------
Common Stock, $.01 Par Value 11,296,207
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)
March 31, December 31,
2004 2003
---- ----
(unaudited) (note)
ASSETS
Current assets:
Cash and cash equivalents $ 1,831 $ 3,064
Receivables:
Trade, net of allowance 55,052 46,120
Other 1,112 1,150
Inventories 853 653
Prepaid expenses and deposits 10,003 6,771
Marketable equity securities,
available for sale, at fair value 5,618 5,492
Income taxes refundable 653 1,256
--------- ---------
Total current assets 75,122 64,506
Property and equipment, at cost 256,199 269,419
Less: accumulated depreciation (84,314) (86,689)
--------- ---------
Net property and equipment 171,885 182,730
Other assets:
Goodwill 15,413 15,413
Non compete agreement 917 1,004
Other 1,329 1,196
--------- ---------
Total other assets 17,659 17,613
--------- ---------
Total assets $ 264,666 $ 264,849
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 2,324 $ 2,039
Trade accounts payable 17,759 22,295
Other current liabilities 12,405 11,167
Deferred income taxes 1,564 1,330
--------- ---------
Total current liabilities 34,052 36,831
Long-term debt, less current portion 26,490 26,740
Non compete agreement 609 695
Deferred income taxes 44,598 43,708
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- 11,296,207 at March 31, 2004,
11,294,207 at December 31, 2003 113 113
Additional paid-in capital 75,974 75,957
Accumulated other comprehensive income 158 164
Retained earnings 82,672 80,641
--------- ---------
Total shareholders' equity 158,917 156,875
--------- ---------
Total liabilities and shareholders' equity $ 264,666 $ 264,849
========= =========
Note: The balance sheet at December 31, 2003 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
March 31,
2004 2003
---- ----
Operating revenues $ 77,673 $ 70,139
Operating expenses:
Salaries, wages and benefits 30,398 29,282
Operating supplies 15,930 14,159
Rent/purchased transportation 9,762 7,027
Depreciation and amortization 7,469 6,055
Operating taxes and licenses 4,011 3,535
Insurance and claims 3,989 3,489
Communications and utilities 708 601
Other 1,349 1,013
Loss on sale of equipment 259 24
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73,875 65,185
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Operating income 3,798 4,954
Other income (expense)
Interest expense (350) (258)
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Income before income taxes 3,448 4,696
Income taxes --current 317 184
--deferred 1,100 1,694
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1,417 1,878
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Net income $ 2,031 $ 2,818
========= =========
Net income per common share:
Basic $ 0.18 $ 0.25
========= =========
Diluted $ 0.18 $ 0.25
========= =========
Average common shares outstanding-Basic 11,294,954 11,286,751
========== ==========
Average common shares outstanding-Diluted 11,321,279 11,338,463
========== ==========
See notes to condensed consolidated financial statements.
P.A.M. TRANSPORTATION SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Three Months Ended
March 31,
2004 2003
---- ----
OPERATING ACTIVITIES
Net income $ 2,031 $ 2,818
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,469 6,055
Non compete agreement amortization - 33
Provision for deferred income taxes 1,100 1,694
Loss on retirement of property and equipment 259 24
Changes in operating assets and liabilities:
Accounts receivable (8,915) (12,745)
Prepaid expenses and other current assets (2,962) (6,009)
Accounts payable (4,557) 4,855
Other current liabilities 1,238 1,971
--------- ---------
Net cash used in operating activities (4,337) (1,304)
INVESTING ACTIVITIES
Purchases of property and equipment (7,675) (5,142)
Acquisition of businesses, net of cash acquired - (1,658)
Purchases of marketable securities (86) (3,613)
Proceeds from disposal of assets 10,792 2,929
Lease payments received on direct financing leases 21 15
--------- ---------
Net cash provided by (used in) investing activities 3,052 (7,469)
FINANCING ACTIVITIES
Borrowings under lines of credit 85,583 77,990
Repayments under lines of credit (85,673) (75,944)
Borrowings of long-term debt 1,142 -
Repayments of long-term debt (1,017) (308)
Proceeds from exercise of stock options 17 59
--------- ---------
Net cash provided by financing activities 52 1,797
--------- ---------
Net decrease in cash and cash equivalents (1,233) (6,976)
Cash and cash equivalents at beginning of period 3,064 30,766
--------- ---------
Cash and cash equivalents at end of period $ 1,831 $ 23,790
========= =========
See notes to condensed consolidated financial statements.
P.A.M. TRANSPORTATION SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited)
(in thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other Other
Common Stock Paid-In Comprehensive Comprehensive Retained
Shares Amount Capital Income Income/(Loss) Earnings Total
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2003 11,294 113 75,957 164 80,641 156,875
Components of comprehensive income:
Net earnings $ 2,031 2,031 2,031
Other comprehensive loss -
Unrealized loss on hedge,
net of tax of $9 (14) (14) (14)
Unrealized gain on marketable
securities, net of tax of $5 8 8 8
--------
Total comprehensive income $ 2,025
========
Exercise of stock options-
shares issued including tax
benefits 2 17 17
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 2004 11,296 $ 113 $ 75,974 $ 158 $ 82,672 $158,917
==================================================================================================================================
See notes to consolidated financial statements.
P.A.M. TRANSPORTATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2004
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 three-month period ended March 31, 2004 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2004. 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, 2003.
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 income 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 March 31, 2004, the net after tax deferred
hedging loss in accumulated other comprehensive income was approximately
$796,000.
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. 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: RECENT ACCOUNTING PRONOUNCEMENTS
- -----------------------------------------
In December 2003, the FASB issued Interpretation No. 46 (revised December 2003),
Consolidation of Variable Interest Entities, an interpretation of Accounting
Research Bulletin No. 51, Consolidated Financial Statements ("FIN 46R"), which
replaced FIN 46. FIN 46 clarifies the application of Accounting Research
Bulletin No. 51 to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support. The Company is required to adopt the provisions
of FIN 46R by the beginning of the first annual period beginning after December
15, 2004. The adoption of FIN 46R is not expected to have a material effect on
the Company's consolidated financial statements.
In March 2004, the FASB issued an exposure draft entitled Share-Based Payment -
an amendment of Statements No.123 and 95 (Proposed Statement of Financial
Accounting Standards). The proposed Statement would eliminate the ability to
account for share-based compensation transactions using APB Opinion No. 25 and
generally require instead that such transactions be accounted for using a
fair-value-based method. This accounting, if approved, could result in
significant compensation expense charges to our future results of operations.
The exposure draft, if adopted as presently drafted, would be applied to public
entities prospectively for fiscal years beginning after December 15, 2004, as if
all share-based compensation awards granted, modified, or settled after December
15, 1994, had been accounted for using the fair-value method of accounting.
Retrospective application of the proposed Statement is not permitted.
NOTE D: MARKETABLE SECURITIES
- ------------------------------
The Company's investments in marketable securities, which are classified as
available for sale, currently consist entirely of equity securities. These
equity securities have a combined original cost of approximately $4,105,000 and
a combined fair market value of approximately $5,618,000 as of March 31, 2004.
Unrealized gains and losses from marketable securities classified as available
for sale are recorded as a component of accumulated other comprehensive income
in shareholders' equity. For the three month period ended March 31, 2004 the
Company had a net unrealized gain in market value of $8,000, net of deferred
income taxes. At March 31, 2004 the total unrealized gain, net of deferred
income taxes, in accumulated other comprehensive income was approximately
$954,000. During the first quarter of 2004 there were no sales or
reclassifications of investment securities.
NOTE E: 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
March 31,
2004 2003
------ ------
(in thousands,
except per share data)
Net income $ 2,031 $ 2,818
Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (74) (82)
------- -------
Pro forma net income $ 1,957 $ 2,736
======= =======
Earnings per share:
Basic - as reported $ .18 $ .25
Basic - pro forma $ .17 $ .24
Diluted - as reported $ .18 $ .25
Diluted - pro forma $ .17 $ .24
NOTE F: 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 $6.9 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 $1.9 million. A non-compete agreement
in the amount of $1.0 million and covering a 5 year period was also entered
into. Approximately $6.9 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 $8.9 million was paid in the form
of cash in the amount of approximately $8.8 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 which, in many cases include
guaranteed residual values by the manufacturers.
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 either provided by
outside claims administrators or developed internally. 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 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.
Business Segment and Concentrations of Credit Risk. The Company operates in one
business segment, motor carrier operations. The Company provides transportation
services to customers throughout the United States and portions of Canada and
Mexico. The Company performs ongoing credit evaluations and generally does not
require collateral from its customers. The Company maintains reserves for
potential credit losses. In view of the concentration of the Company's revenues
and accounts receivable among a limited number of customers within the
automobile industry, the financial health of this industry is a factor in the
Company's overall evaluation of accounts receivable.
Business Combinations and Goodwill. Upon acquisition of an entity, the cost of
the acquired entity must be allocated to assets and liabilities acquired.
Identification of intangible assets, if any, that meet certain recognition
criteria is necessary. This identification and subsequent valuation requires
significant judgments. The carrying value of goodwill was tested for impairment
on March 31, 2004. 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.
BUSINESS OVERVIEW
- -----------------
The Company's administrative headquarters are in Tontitown, AR. From this
location we manage operations conducted through nine wholly owned subsidiaries
based in various locations around the United States and Canada. The operations
of these subsidiaries can generally be classified into either truckload services
or brokerage and logistics services. All of the Company's operations are in the
trucking and transportation segment.
For both operations substantially all of our revenue is generated by
transporting freight for customers. For the period ended March 31, 2004 eighty
seven percent of our revenue came from our truckload services and thirteen
percent from brokerage and logistics services. For the period ended March 31,
2003 eighty nine percent of our revenue came from our truckload services and
eleven percent from brokerage and logistics services. Our revenue is
predominantly affected by the rates per mile received from our customers,
equipment utilization, and our percentage of non-compensated miles. These
aspects of our business are carefully managed and efforts are continuously
underway to achieve favorable results.
The main factors that impact our profitability on the expense side are costs
incurred in transporting freight for our customers. Currently our most
challenging costs include fuel, driver recruitment, training, wage and benefit
costs, independent broker costs (which we record as purchased transportation),
insurance, and maintenance and capital equipment costs. Competitive rate
pressures, coupled with the elevations in the above mentioned expenses over the
last few years, have created a difficult operating environment for most of the
industry.
RESULTS OF OPERATIONS - TRUCKLOAD SERVICES DIVISION
- ---------------------------------------------------
The following table sets forth, for the truckload services division, the
percentage relationship of revenue and expense items to operating revenues for
the periods indicated.
Three Months Ended
March 31,
2004 2003
---- ----
Operating revenues 100.0% 100.0%
------ ------
Operating expenses:
Salaries, wages and benefits 44.5 46.4
Operating supplies 23.9 22.7
Rent and purchased transportation 0.6 0.2
Depreciation and amortization 11.1 9.7
Operating taxes and licenses 6.0 5.7
Insurance and claims 6.0 5.6
Communications and utilities 1.0 0.9
Other 1.7 1.4
Loss on sale or disposal of property 0.4 0.0
------ ------
Total operating expenses 95.2 92.6
------ ------
Operating income 4.8 7.4
Interest expense (0.4) (0.4)
------ ------
Income before income taxes 4.4 7.0
------ ------
THREE MONTHS ENDED MARCH 31, 2004 VS. THREE MONTHS ENDED MARCH 31, 2003
For the quarter ended March 31, 2004, truckload services revenues increased 7.6%
to $67.1 million as compared to $62.4 million for the quarter ended March 31,
2003. Approximately $3.6 million of the $4.7 million increase was attributable
to the McNeill Trucking, Inc. asset acquisition which closed on April 3, 2003
and therefore had no comparable revenue for the three months ended March 31,
2003. The remaining increase of $1.1 million was generated by an increase of
approximately $.02 in the average rate per loaded mile.
Salaries, wages and benefits decreased from 46.4% of revenues in the first
quarter of 2003 to 44.5% of revenues in the first quarter of 2004. The decrease
relates to a decrease in the amount paid to owner operators due to a decrease
in the average number of owner operators under contract from 129 in the first
quarter of 2003 to 99 in the first quarter of 2004. This decrease was partially
offset by an increase in amounts paid to the corresponding company driver
replacement, and in other costs normally absorbed by the owner operator such as
repairs and fuel.
Operating supplies and expenses increased from 22.7% of revenues in the first
quarter of 2003 to 23.9% of revenues in the first quarter of 2004. The increase
relates to an increase in both equipment repair costs and fuel costs. Equipment
repair costs increased as a result of preparing a higher volume of tractors to
meet trade-in terms and specifications. Fuel costs, while down on a per gallon
basis, increased as the result of a 3.3% decrease in the average miles per
gallon traveled during the first quarter of 2004 as compared to the first
quarter of 2003. Fuel costs were also affected by the replacement of owner
operators with company drivers as discussed above.
Rent and purchased transportation increased from 0.2% of revenues in the first
quarter of 2003 to 0.6% of revenues in the first quarter of 2004. The increase
relates primarily to rental and mileage fees incurred on equipment used past
scheduled trade-in dates due to manufacturers delays in providing replacement
equipment.
Depreciation and amortization increased from 9.7% of revenues in the first
quarter of 2003 to 11.1% of revenues in the first quarter of 2004. The increase
was primarily due to the combined effect of higher tractor purchase prices and
lower tractor guaranteed residual values offered by the manufacturers.
Insurance and claims expense increased from 5.6% of revenues in the first
quarter of 2003 to 6.0% of revenues in the first quarter of 2004. The increase
in expense relates to an increase in the auto liability policy coverage acquired
during the third quarter of 2003.
The truckload services division operating ratio, which measures the ratio of
operating expenses to operating revenues, increased to 95.2% for the first
quarter of 2004 from 92.6% for the first quarter of 2003.
RESULTS OF OPERATIONS - LOGISTICS AND BROKERAGE SERVICES DIVISION
- -----------------------------------------------------------------
The following table sets forth, for the logistics and brokerage services
division, the percentage relationship of revenue and expense items to operating
revenues for the periods indicated.
Three Months Ended
March 31,
2004 2003
---- ----
Operating revenues 100.0% 100.0%
------ ------
Operating expenses:
Salaries, wages and benefits 5.1 4.5
Operating supplies 0.0 0.0
Rent and purchased transportation 87.4 88.6
Depreciation and amortization 0.3 0.0
Operating taxes and licenses 0.0 0.0
Insurance and claims 0.1 0.1
Communications and utilities 0.4 0.5
Other 1.6 1.8
Loss on sale or disposal of property 0.0 0.0
------ ------
Total operating expenses 94.9 95.5
------ ------
Operating income 5.1 4.5
Interest expense (0.6) (0.3)
------ ------
Income before income taxes 4.5 4.2
------ ------
THREE MONTHS ENDED MARCH 31, 2004 VS. THREE MONTHS ENDED MARCH 31, 2003
For the quarter ended March 31, 2004, logistics and brokerage services revenues
increased 35.9% to $10.5 million as compared to $7.8 million for the quarter
ended March 31, 2003. The increase of approximately $2.8 million was
attributable to the additional one month revenues generated by East Coast
Transport, Inc. which wasn't acquired until January 31, 2003.
Salaries, wages and benefits increased from 4.5% of revenues in the first
quarter of 2003 to 5.1% of revenues in the first quarter of 2004. The increase
relates to the hiring of an administrative staff at East Coast Transport, Inc.
for functions which had previously been outsourced to a third party.
Rent and purchased transportation decreased from 88.6% of revenues in the first
quarter of 2003 to 87.4% of revenues in the first quarter of 2004. The decrease
relates to a decrease in the average amount paid to third parties for logistics
and brokerage services.
The logistics and brokerage services division operating ratio, which measures
the ratio of operating expenses to operating revenues, decreased to 94.9% for
the first quarter of 2004 from 95.5% for the first quarter of 2003.
RESULTS OF OPERATIONS - COMBINED DIVISIONS
- ------------------------------------------
The decrease in the combined income before income taxes to $3.4 million from
$4.7 million, respectively, for the three month period ended March 31, 2004 and
2003 resulted in a decrease in the provision for income taxes from $1.9 million
for the first quarter of 2003 to $1.4 million for the first quarter of 2004.
Net income for all divisions decreased to $2.0 million, or 2.6% of revenues, in
the first quarter of 2004 from $2.8 million, or 4.0% of revenues in the first
quarter of 2003. The decrease in net income resulted in a decrease in diluted
net income per share to $.18 in the first quarter of 2004 from $.25 in the first
quarter of 2003.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During the first three months of 2004, the Company used $4.3 million of cash
from operating activities. Investing activities provided $3.1 million in cash in
the first three months of 2004. Financing activities provided $.1 million in the
first three months of 2004.
Our primary use of funds is for the purchase of revenue equipment. We typically
use our existing lines of credit, proceeds from the sale or trade of equipment,
and cash flows from operations to finance capital expenditures and repay
long-term debt. During the first quarter of 2004 we utilized cash on hand and
our lines of credit to finance revenue equipment purchases of approximately $7.4
million.
Occasionally we finance the acquisition of revenue equipment through installment
notes with fixed interest rates and terms ranging from 36 to 48 months, however
as of March 31, 2004, we had no outstanding indebtedness under such installment
notes.
In order to maintain our tractor fleet count it is often necessary to purchase
replacement tractors and place them in service before trade units are removed
from service. The timing difference created during this process often requires
the Company to pay for new units without any reduction in price for trade units.
In this situation, the Company later receives payment for the trade units as
they are delivered to the equipment vendor and have passed vendor inspection.
During the three months ended March 31, 2004, the Company received approximately
$10.1 million for 276 tractors delivered for trade.
During the remainder of 2004 we expect to purchase approximately 280 new
tractors and approximately 400 new trailers while continuing to sell or trade
older equipment, which we expect to result in net capital expenditures of
approximately $18.1 million.
We maintain a $20.0 million revolving line of credit and a $30.0 million
revolving line of credit (Line A and Line B, respectively) with separate
financial institutions. Amounts outstanding under Line A bear interest at LIBOR
(determined as of the first day of each month) plus 1.40%, are secured by our
accounts receivable and mature on May 31, 2005. At March 31, 2004, $4.1 million,
including $1.3 million in letters of credit were outstanding under Line A, with
availability to borrow $14.6 million. Amounts outstanding under Line B bear
interest at LIBOR (on the last day of the previous month) plus 1.15%, are
secured by revenue equipment and mature on June 30, 2005. At March 31, 2004,
$27.0 million, including $7.0 million in letters of credit were outstanding with
availability to borrow $3.0 million. In an effort to reduce interest rate risk
associated with these floating rate facilities, we have entered into interest
rate swap agreements in an aggregate notional amount of $20.0 million. For
additional information regarding the interest rate swap agreements, see Note B
to the condensed consolidated financial statements.
Trade accounts receivable at March 31, 2004 increased approximately $8.9 million
from December 31, 2003. 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 March 31, 2004 increased approximately $3.2
million as compared to December 31, 2003. The increase relates to the Company's
annual registration fees for tractors and trailers which occurs each January,
and to the prepayment of certain insurance policies. These prepaid expenses will
be amortized to expense through the remainder of the year.
Trade accounts payable at March 31, 2004 decreased approximately $4.5 million as
compared to December 31, 2003. Approximately $3.7 million of the $4.5 million
decrease relates to a decrease in bank drafts payable from $6.8 million at
December 31, 2003 to $3.1 million at March 31, 2004.
NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------
See Note C 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 2003 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. 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 March 31, 2004 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 March 31, 2004.
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 so 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 remains 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 an unfavorable outcome 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:
3.1 - Amended and Restated Certificate of Incorporation
of the Registrant (Incorporated by reference to Exhibit 3.1
to the Company's report on Form 10-Q for the period ending
March 31, 2002.)
3.2 - Amended and Restated By-Laws of the Registrant
(Incorporated by reference to Exhibit 3.2 to the Company's
report on Form 10-Q for the period ending March 31, 2002.)
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 filed on February 25, 2004 regarding a press
release issued to announce the Company's fourth quarter 2003 results. No other
reports on Form 8-K were filed during the first quarter ending March 31, 2004.
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: May 6, 2004 By: /s/ Robert W. Weaver
---------------------------------
Robert W. Weaver
President and Chief Executive Officer
(principal executive officer)
Dated: May 6, 2004 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
- -------- ---------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation
of the Registrant (Incorporated by reference to Exhibit 3.1
to the Company's report on Form 10-Q for the period ending
March 31, 2002.)
3.2 Amended and Restated By-Laws of the Registrant
(Incorporated by reference to Exhibit 3.2 to the Company's
report on Form 10-Q for the period ending March 31, 2002.)
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