UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ______________ to ____________________
COMMISSION FILE NUMBER 000-20793
SMITHWAY MOTOR XPRESS CORP.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEVADA 42-1433844
- --------------------------------- -------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
2031 QUAIL AVENUE
FORT DODGE, IOWA 50501
- ---------------------------------------- -------------------
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 515/576-7418
------------
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 [ ] NO [X]
As of July 29, 2005, the registrant had 3,936,624 shares of Class A Common Stock
and 1,000,000 shares of Class B Common Stock outstanding.
PART I
FINANCIAL INFORMATION
PAGE
NUMBER
Item 1 Financial Statements 3
Condensed Consolidated Balance Sheets as of December 31, 2004 and
June 30, 2005 (unaudited)............................................ 3
Condensed Consolidated Statements of Operations for the three and six
months ended June 30, 2004 and 2005 (unaudited)....................... 5
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2004 and 2005 (unaudited).............................. 6
Notes to Condensed Consolidated Financial Statements (unaudited)......... 7
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................. 9
Item 3 Quantitative and Qualitative Disclosures About Market Risk............... 18
Item 4 Controls and Procedures.................................................. 19
PART II
OTHER INFORMATION
Item 1 Legal Proceedings........................................................ 19
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds.............. 19
Item 3 Defaults Upon Senior Securities.......................................... 19
Item 4 Submission of Matters to a Vote of Security Holders...................... 20
Item 5 Other Information........................................................ 20
Item 6 Exhibits................................................................. 21
Signatures ......................................................................... 22
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands, except per share data)
------------------------
DECEMBER 31, JUNE 30,
2004 2005
----------- -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 5,054 $ 4,016
Receivables:
Trade 16,289 19,607
Other 487 902
Inventories 948 955
Deposits, primarily with insurers 936 1,047
Prepaid expenses 473 1,041
Deferred income taxes 2,733 2,782
-------- --------
Total current assets 26,920 30,350
-------- --------
Property and equipment:
Land 1,302 1,302
Buildings and improvements 7,502 7,627
Tractors 67,872 71,262
Trailers 36,107 35,724
Other equipment 4,265 4,476
-------- --------
117,048 120,391
Less accumulated depreciation 67,772 65,745
-------- --------
Net property and equipment 49,276 54,646
-------- --------
Goodwill 1,745 1,745
Other assets 335 320
-------- --------
$ 78,276 $ 87,061
======== ========
See accompanying notes to condensed consolidated financial statements.
3
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands, except per share data)
----------------------------
DECEMBER 31, JUNE 30,
2004 2005
------------- ----------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 9,301 $ 7,226
Accounts payable 6,390 9,558
Accrued loss reserves 5,928 6,138
Accrued compensation 2,398 3,343
Other accrued expenses 522 529
Income tax payable 18 880
-------- --------
Total current liabilities 24,557 27,674
Long-term debt, less current maturities 20,008 23,900
Deferred income taxes 10,702 10,530
-------- --------
Total liabilities 55,267 62,104
-------- --------
Stockholders' equity:
Preferred stock - -
Common stock:
Class A 40 40
Class B 10 10
Additional paid-in capital 11,438 11,450
Retained earnings 11,817 13,675
Reacquired shares, at cost (296) (218)
-------- --------
Total stockholders' equity 23,009 24,957
Commitments
-------- --------
$ 78,276 $ 87,061
======== ========
See accompanying notes to condensed consolidated financial statements.
4
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Dollars in thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
2004 2005 2004 2005
----------- ----------- ----------- -----------
Operating revenue:
Freight .................................. $ 46,461 $ 54,958 $ 89,869 $ 104,405
Other .................................... 218 398 410 675
----------- ----------- ----------- -----------
Operating revenue .................. 46,679 55,356 90,279 105,080
----------- ----------- ----------- -----------
Operating expenses:
Purchased transportation ................. 15,181 19,147 29,259 35,515
Compensation and employee benefits ....... 13,119 14,581 26,700 28,241
Fuel, supplies, and maintenance .......... 8,984 11,937 17,642 23,015
Insurance and claims ..................... 1,332 1,658 2,665 3,666
Taxes and licenses ....................... 991 1,032 1,872 1,905
General and administrative ............... 1,712 1,824 3,434 3,766
Communications and utilities ............. 314 265 680 596
Depreciation and amortization ............ 3,315 2,186 6,492 4,324
----------- ----------- ----------- -----------
Total operating expenses ........... 44,948 52,630 88,744 101,028
----------- ----------- ----------- -----------
Earnings from operations ............. 1,731 2,726 1,535 4,052
Financial (expense) income
Interest expense ......................... (390) (399) (763) (768)
Interest income .......................... 6 18 10 51
Other income ............................. - - 727 -
----------- ----------- ----------- -----------
Earnings before income taxes ......... 1,347 2,345 1,509 3,335
Income tax expense ............................ 682 990 509 1,477
----------- ----------- ----------- -----------
Net earnings ......................... $ 665 $ 1,355 $ 1,000 $ 1,858
----------- ----------- ----------- -----------
Basic earnings per share ...................... $ 0.14 $ 0.27 $ 0.21 $ 0.38
=========== =========== =========== ===========
Diluted earnings per share .................... $ 0.13 $ 0.27 $ 0.20 $ 0.37
=========== =========== =========== ===========
Basic weighted average shares outstanding ..... 4,847,173 4,936,624 4,846,997 4,920,325
Effect of dilutive stock options ..... 91,290 110,834 79,217 114,687
----------- ----------- ----------- -----------
Diluted weighted average shares outstanding ... 4,938,463 5,047,458 4,926,214 5,035,012
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
5
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(unaudited)
SIX MONTHS ENDED
JUNE 30,
----------------------
2004 2005
-------- --------
Cash flows from operating activities:
Net earnings ...................................................... $ 1,000 $ 1,858
-------- --------
Adjustments to reconcile net earnings to cash provided by operating
activities:
Depreciation and amortization ................................. 6,492 4,324
Deferred income tax (benefit) expense ......................... 440 (221)
Change in:
Receivables .............................................. (3,187) (3,733)
Inventories .............................................. (214) (7)
Deposits, primarily with insurers ........................ 21 (111)
Prepaid expenses ......................................... 291 (568)
Accounts payable and other accrued liabilities ........... 3,753 5,192
-------- --------
Total adjustments .................................... 7,596 4,876
-------- --------
Net cash provided by operating activities .......... 8,596 6,734
-------- --------
Cash flows from investing activities:
Purchase of property and equipment ................................ (440) (686)
Proceeds from sale of property and equipment ...................... 1,833 2,856
Other ............................................................. 28 15
-------- --------
Net cash provided by investing activities ............... 1,421 2,185
-------- --------
Cash flows from financing activities:
Net borrowings on line of credit ................................. (426) -
Principal payments on long-term debt ............................. (6,366) (10,047)
Treasury stock reissued .......................................... 5 84
Other ............................................................ - 6
Change in checks issued in excess of cash balances ............... (672) -
-------- --------
Net cash used in financing activities ................... (7,459) (9,957)
-------- --------
Net increase (decrease) in cash and cash equivalents .... 2,558 (1,038)
Cash and cash equivalents at beginning of period .................... 355 5,054
-------- --------
Cash and cash equivalents at end of period .......................... $ 2,913 $ 4,016
-------- --------
Supplemental disclosure of cash flow information:
Cash paid during period for:
Interest .................................................. $ 784 $ 775
Income taxes .............................................. 25 836
======== ========
Supplemental schedules of noncash investing and financing activities:
Notes payable issued for tractors and trailers ................... $ 9,075 $ 11,864
======== ========
See accompanying notes to condensed consolidated financial statements.
6
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
Smithway Motor Xpress Corp., a Nevada holding company, and its four wholly
owned subsidiaries ("we", "us", or "our"). All significant intercompany
balances and transactions have been eliminated in consolidation.
The condensed consolidated financial statements have been prepared, without
audit, in accordance with accounting principles generally accepted in the
United States of America, pursuant to the published rules and regulations of
the Securities and Exchange Commission. In our opinion, the accompanying
condensed consolidated financial statements include all adjustments that are
necessary for a fair presentation of the results for the interim periods
presented, such adjustments being of a normal recurring nature. Certain
information and footnote disclosures have been condensed or omitted pursuant
to such rules and regulations. The December 31, 2004, Condensed Consolidated
Balance Sheet was derived from our audited balance sheet for the year then
ended. It is suggested that these condensed consolidated financial statements
and notes thereto be read in conjunction with the consolidated financial
statements and notes thereto included in our Form 10-K for the year ended
December 31, 2004. Results of operations in interim periods are not
necessarily indicative of results to be expected for a full year.
Certain 2004 balances have been reclassified to conform to 2005 presentation.
NOTE 2. NET EARNINGS PER COMMON SHARE
Basic earnings per share have been computed by dividing net earnings by the
weighted-average outstanding Class A and Class B common shares during each of
the quarters. Diluted earnings per share have been calculated by also
including in the computation the effect of employee stock options, nonvested
stock, and similar equity instruments granted to employees and directors as
potential common shares. The dilutive effect of stock options excludes 84,000
and 55,000 shares for the second quarter of 2004 and 2005, respectively, as
the exercise prices of the underlying options were out of the money and the
effect was anti-dilutive. Stock options outstanding at June 30, 2004, and
2005, totaled 305,650 and 236,850, respectively.
NOTE 3. STOCK OPTION PLANS
On December 31, 2004, our ability to grant incentive stock options under our
incentive stock plan expired and on March 1, 2005 our ability to grant stock
options under our director stock option plan also expired. As a result, our
Board of Directors determined to cease use of these plans and we now have two
active stock-based compensation plans:
(1) We have reserved 400,000 shares of Class A common stock for
issuance pursuant to a new employee incentive stock plan adopted during
2001. Any shares subject to awards which expire unexercised or are
forfeited become available again for issuance under the plan. Under this
plan, no award of incentive stock options may be made after August 6,
2011.
(2) We have reserved 500,000 shares of Class A common stock for
issuance pursuant to an omnibus stock plan adopted on May 13, 2005. Any
shares subject to awards which expire unexercised or are forfeited become
available again for issuance under the plan. This plan expires on May 13,
2015.
We account for these plans under the recognition and measurement principles
of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. No stock-based employee
compensation cost is reflected in the statement of operations, as all options
granted under these plans had an exercise price equal to the market value of
the common stock on the date of the grant.
7
The following table illustrates the effect on net earnings and earnings per
share if we had applied the fair value recognition provisions of FASB
Statement No. 123, "Accounting for Stock-Based Compensation," to stock-based
employee compensation. For purposes of pro forma disclosures, the estimated
fair value of options is amortized to expense over the options' vesting
periods.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- -------------------------
2004 2005 2004 2005
------ -------- ------- --------
Net earnings, as reported $ 665 $ 1,355 $ 1,000 $ 1,858
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (4) (3) $ (7) $ (5)
------ ------- ------- --------
Pro forma net earnings $ 661 $ 1,352 $ 993 $ 1,853
====== ======= ======= ========
Basic earnings per share - as reported $ 0.14 $ 0.27 $ 0.21 $ 0.38
- pro forma $ 0.14 $ 0.27 $ 0.21 $ 0.38
Diluted earnings per share - as reported $ 0.13 $ 0.27 $ 0.20 $ 0.37
- pro forma $ 0.13 $ 0.27 $ 0.20 $ 0.37
We use the Black-Scholes option pricing model to determine the fair value of
stock options issued. The following table summarizes the assumptions used in
our Black-Scholes calculations.
Weighted
Weighted average Weighted average average
Number of risk-free interest Weighted average expected expected
Period options issued rate expected life volatility dividends
- --------------------------------------------------------------------------------------------------------------------
First quarter 2004 None N/A N/A N/A N/A
Second quarter 2004 2,000 3.23% 3 years 69% None
First quarter 2005 None N/A N/A N/A N/A
Second quarter 2005 22,000 3.69% 3.9 years 69% None
NOTE 4. LONG-TERM DEBT
During February 2005, we amended our financing arrangement with LaSalle Bank
to extend the maturity date from January 1, 2006 to January 1, 2010 and to
reduce the interest rate and facilities fee applied under the arrangement. We
incur debt on a regular basis for the purchase of new tractors and trailers.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
Except for the historical information contained herein, the discussion
in this quarterly report on Form 10-Q contains forward-looking statements that
involve risk, assumptions, and uncertainties that are difficult to predict.
Words such as "anticipates," "believes," "estimates," "projects," "plans,"
"expects," variations of these words, and similar expressions, are intended to
identify such forward-looking statements. These statements are made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. These statements are based upon the current beliefs and expectations of
our management and are subject to significant risks and uncertainties. Actual
results may differ from those set forth in forward-looking statements. The
following factors, among others, could cause actual results to differ materially
from those in forward-looking statements: failure to sustain recent
profitability, which could result in violation of bank covenants and
acceleration of indebtedness at several financial institutions; the ability to
obtain financing on acceptable terms, and obtain waivers and amendments to
current financing in the event of default; economic recessions or downturns in
customers' business cycles; excessive increases in capacity within truckload
markets; surplus inventories; decreased demand for transportation services
offered by us; increases or rapid fluctuations in inflation, interest rates,
fuel prices, and fuel hedging; the availability and costs of attracting and
retaining qualified drivers and owner-operators; increases in insurance premiums
and deductible amounts, or changes in excess coverage, relating to accident,
cargo, workers' compensation, health, and other claims; the resale value of used
equipment and prices of new equipment; seasonal factors such as harsh weather
conditions that increase operating costs; regulatory requirements that increase
costs and decrease efficiency, including new emissions standards and
hours-of-service regulations; changes in management; and the ability to
negotiate, consummate, and integrate acquisitions. Readers should review and
consider the various disclosures made by us in our press releases, stockholder
reports, and public filings, as well as the factors explained in greater detail
in our annual report on Form 10-K.
Our fiscal year ends on December 31 of each year. Thus, this report
discusses the second quarter and first six months of our 2004 and 2005 fiscal
years.
We generate substantially all of our revenue by transporting freight
for our customers. Generally, we are paid by the mile for our services. We also
derive revenue from fuel surcharges, loading and unloading activities, equipment
detention, and other accessorial services. The main factors that affect our
revenue are the revenue per mile we receive from our customers, the percentage
of miles for which we are compensated, and the number of miles we generate with
our equipment. These factors relate, among other things, to the United States
economy, inventory levels, the level of capacity in the trucking industry,
specific customer demand, and driver availability. We monitor our revenue
production primarily through average revenue per tractor per week.
During the second quarter of 2005, our average revenue per tractor per
week (excluding fuel surcharge, brokerage, and other revenues) increased to
$2,864 from $2,767 in the second quarter of 2005, reflecting a 6.8% increase in
our average revenue per loaded mile and a 5.6% increase in our weighted average
tractors to 1,236 in the 2005 quarter from 1,170 in the 2004 quarter.
The main factors that impact our profitability on the expense side are
the variable costs of transporting freight for our customers. These costs
include fuel expense, driver-related expenses, such as wages, benefits,
training, and recruitment, and independent contractor costs, which are recorded
under purchased transportation. Expenses that have both fixed and variable
components include maintenance and tire expense and our total cost of insurance
and claims. These expenses generally vary with the miles we travel, but also
have a controllable component based on safety, fleet age, efficiency, and other
factors. Our main fixed costs are the acquisition and financing of long-term
assets, such as revenue equipment and the compensation of non-driver personnel.
Effectively controlling our expenses has been a key component of our profit
improvement plan.
For the three months ended June 30, 2005, operating revenue increased
18.6% to $55.4 million from $46.7 million during the same quarter in 2004. Net
earnings was $1.4 million, or $0.27 per basic and diluted share, compared with
net earnings of $665,000, or $0.14 per basic share and $0.13 per diluted share,
during the 2004 quarter.
For the six months ended June 30, 2005, operating revenue increased
16.4% to $105.1 million from $90.3 million during the same period in 2004. Net
earnings was $1.9 million, or $0.38 per basic share and $0.37 per diluted share,
compared with net earnings of $1.0 million, or $0.21 per basic share and $0.20
per diluted share, during the first six months of 2004. However, during the
first
9
quarter of 2004 we recorded $727,000 of income from life insurance. This
non-operating income is tax exempt and added $0.15 to our earnings per share for
the first six months of 2004. This was a one time event that did not recur in
2005. Without these life insurance proceeds, our net earnings would have been
$273,000, or $0.06 per basic and diluted share, during the first six months of
2004, compared with net earnings of $1.9 million, or $0.38 per basic share and
$0.37 per diluted share, during the first six months of 2005. Our net earnings
and earnings per share as adjusted to exclude the life insurance proceeds are
not in accordance with, or an alternative for, generally accepted accounting
principles. We believe that the presentation of net earnings and the related per
share amount excluding the one-time effect of these life insurance proceeds
provides useful information to investors regarding business trends relating to
our financial condition and results of ongoing operations.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of certain
items to revenue for the three and six months ended June 30, 2004 and 2005:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2004 2005 2004 2005
------ ----- ------ ------
Operating revenue ......................... 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Purchased transportation ......... 32.5 34.6 32.4 33.8
Compensation and employee benefits 28.1 26.3 29.6 26.9
Fuel, supplies, and maintenance .. 19.2 21.6 19.5 21.9
Insurance and claims ............. 2.9 3.0 3.0 3.5
Taxes and licenses ............... 2.1 1.9 2.1 1.8
General and administrative ....... 3.7 3.3 3.8 3.6
Communication and utilities ...... 0.7 0.5 0.8 0.6
Depreciation and amortization .... 7.1 3.9 7.2 4.1
----- ----- ----- -----
Total operating expenses ......... 96.3 95.1 98.3 96.1
----- ----- ----- -----
Earnings from operations .................. 3.7 4.9 1.7 3.9
Interest expense, net ..................... (0.8) (0.7) (0.8) (0.7)
Life insurance proceeds ................... - - 0.8 -
----- ----- ----- -----
Earnings before income taxes .............. 2.9 4.2 1.7 3.2
Income tax expense ........................ 1.5 1.8 0.6 1.4
----- ----- ----- -----
Net earnings .............................. 1.4% 2.4% 1.1% 1.8%
===== ===== ===== =====
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2005, WITH THREE MONTHS ENDED JUNE 30,
2004.
Operating revenue increased $8.7 million (18.6%) to $55.4 million in
the 2005 quarter from $46.7 million in the 2004 quarter. The increase in
operating revenue resulted from increased average operating revenue per tractor
per week and a 5.6% increase in our weighted average tractors.
Average operating revenue per tractor per week, one measure of asset
productivity, increased significantly to $3,445 in the 2005 quarter from $3,069
in the 2004 quarter. Operating revenue includes revenue from operating our
trucks as well as other, more volatile revenue items, including fuel surcharge,
brokerage, and other revenue. We believe the analysis of tractor productivity is
more meaningful if fuel surcharge, brokerage, and other revenue are excluded
from the computation as this provides useful information to investors regarding
business trends relating to our financial condition and results of ongoing
operations. Average revenue per tractor per week (excluding fuel surcharge,
brokerage, and other revenue) increased to $2,864 in the 2005 quarter from
$2,767 in the 2004 quarter, primarily due to improvements in our freight rates.
Revenue per loaded mile (excluding fuel surcharge, brokerage, and other revenue)
increased $0.10 to $1.56 in the 2005 quarter from $1.46 in the 2004 quarter,
reflecting improved lane and customer selection, increased trucking demand, and
improved general economic conditions. Fuel surcharge revenue increased $4.0
million to $6.6 million in the 2005 quarter from $2.7 million in the 2004
quarter. During the second quarter of 2005 and 2004, approximately $3.9 million
and $1.8 million, respectively, of the fuel surcharge revenue collected helped
to offset our fuel costs. The remainder was passed through to independent
contractors.
Our weighted average tractors increased to 1,236 in the 2005 quarter
from 1,170 in the 2004 quarter.
10
Purchased transportation consists primarily of payments to independent
contractor providers of revenue equipment, expenses related to brokerage
activities, and payments under operating leases of revenue equipment. Purchased
transportation increased $4.0 million (26.1%) to $19.1 million in the 2005
quarter from $15.2 million in the 2004 quarter. As a percentage of revenue,
purchased transportation increased to 34.6% in the 2005 quarter from 32.5% in
the 2004 quarter. The changes reflect higher pay to independent contractors
resulting from increases in fuel surcharge revenue and average revenue per
billed mile and higher payments under operating leases of revenue equipment. The
percentage of total operating revenue provided by independent contractors
remained relatively constant at 36.6% in the 2005 quarter and 36.4% in the 2004
quarter. During the last half of 2004 we leased 117 new tractors under operating
leases. Payments under operating leases, a component of purchased
transportation, increased $443,000, to $498,000 in the 2005 quarter from $55,000
in the 2004 quarter. If the leased tractors would have been purchased, instead
of leased, a similar amount of depreciation and interest expense would have been
incurred in lieu of purchased transportation expense.
Compensation and employee benefits increased $1.5 million (11.1%) to
$14.6 million in the 2005 quarter from $13.1 million in the 2004 quarter
reflecting increases in the number of company drivers and in their rate of pay,
and increases in non-driver employee wages, health insurance costs and worker's
compensation expense. As a percentage of revenue, compensation and employee
benefits decreased to 26.3% in the 2005 quarter from 28.1% in the 2004 quarter,
reflecting an increase in our revenue per loaded mile and fuel surcharge
revenue, which increases revenue without a proportionate increase in wages. Our
ratio of tractors to non-driver employees, a key measure of administrative
efficiency, has improved to 4.91 during the 2005 quarter compared to 4.39 in the
2004 quarter. The market for recruiting drivers continues to be challenging. We
have increased driver pay three times since the third quarter of 2004 and expect
that further increases will be necessary. Future increases in driver pay would
negatively impact our results of operations to the extent that corresponding
freight rate increases are not obtained.
Fuel, supplies, and maintenance increased $3.0 million (32.9%) to $11.9
million in the 2005 quarter from $9.0 million in the 2004 quarter. As a
percentage of revenue, fuel, supplies, and maintenance increased to 21.6% of
revenue in the 2005 quarter compared with 19.2% in the 2004 quarter. This
reflects higher fuel prices, partially offset by an increase in our average
revenue per loaded mile, which increases revenue without a corresponding
increase in maintenance costs. As expected, maintenance costs have stabilized as
we continue to update our fleet with new equipment. Fuel prices increased
approximately 32% to an average of $2.15 per gallon in the 2005 quarter from
$1.63 per gallon in the 2004 quarter. The $0.52 per gallon increase in fuel
prices was partially offset by a $0.45 per gallon ($2.1 million) increase in
fuel surcharge revenue attributable to company-owned tractors that is included
in operating revenue, mitigating 87% of the increase in fuel prices.
Insurance and claims increased $326,000 (24.5%) to $1.7 million in the
2005 quarter from $1.3 million in the 2004 quarter. As a percentage of revenue,
insurance and claims remained relatively constant at 3.0% of revenue in the 2005
quarter compared with 2.9% in the 2004 quarter. On February 1, 2005 we
reinstated excess insurance coverage that we had discontinued in July 2003. The
additional insurance, which increases our per claim coverage from $2.0 million
to $5.0 million, added $321,000 to our insurance and claims expense during the
second quarter of 2005. Claims that exceed the limits of our insurance coverage,
or claims for which coverage is not provided, may cause our financial condition
and results of operations to suffer a materially adverse effect. The insurance
policies were renewed on July 1, 2005 with no change in our retention levels.
Taxes and licenses increased $41,000 (4.1%) to $1.0 million in the 2005
quarter from $991,000 in the 2004 quarter reflecting the increase in the number
of company-owned tractors subject to annual license and permit costs. As a
percentage of revenue, taxes and licenses decreased to 1.9% of revenue in the
2005 quarter compared with 2.1% of revenue in the 2004 quarter, reflecting an
increase in our average revenue per loaded mile and fuel surcharge revenue,
which increases revenue without a proportionate increase in taxes and licenses.
General and administrative expenses increased $112,000 (6.5%) to $1.8
million in the 2005 quarter from $1.7 million in the 2004 quarter, reflecting
increased professional fees related to Sarbanes-Oxley compliance efforts and
increased advertising expense necessary for driver recruitment. As a percentage
of revenue, general and administrative expenses decreased to 3.3% of revenue in
the 2005 quarter compared to 3.7% in the 2004 quarter, reflecting an increase in
our average revenue per loaded mile and fuel surcharge revenue, which increases
revenue without a proportionate increase in general and administrative expenses.
Communications and utilities decreased $49,000 (15.6%) to $265,000 in
the 2005 quarter from $314,000 in the 2004 quarter. As a percentage of revenue,
communications and utilities decreased to 0.5% of revenue in the 2005 quarter
11
from 0.7% of revenue in the 2004 quarter, reflecting an increase in our average
revenue per loaded mile and fuel surcharge revenue which increases revenue,
without a proportionate increase in communications and utilities expenses.
Depreciation and amortization decreased $1.1 million (34.1%) to $2.2
million in the 2005 quarter from $3.3 million in the 2004 quarter. In accordance
with industry practices, the gain or loss on retirement, sale, or write-down of
equipment is included in depreciation and amortization. In the 2005 and 2004
quarter, depreciation and amortization included net gains from the sale of
equipment of $480,000 and $33,000, respectively. Additionally, during the last
half of 2004 we leased 117 new tractors under operating leases. Payments under
operating leases are a component of purchased transportation. If the leased
tractors would have been purchased, instead of leased, approximately $377,000 of
depreciation expense would have been incurred in lieu of purchased
transportation expense. Finally, some of our older equipment still generates
revenue but is no longer being depreciated. As a percentage of revenue,
depreciation and amortization decreased to 3.9% of revenue in the 2005 quarter
compared with 7.1% in the 2004 quarter, reflecting the changes described above
and an increase in our average revenue per loaded mile and fuel surcharge
revenue which increases revenue without a proportionate increase in depreciation
expense. In the short-term, we expect that the presence of older equipment that
is not being depreciated will more than offset increases in depreciation
resulting from the addition of new equipment to our fleet. Over the long-term,
as we continue to upgrade our equipment fleet, we expect depreciation expense to
increase.
Interest expense, net, decreased $3,000 (0.8%) to $381,000 in the 2005
quarter from $384,000 in the 2004 quarter. This decrease was attributable to
lower average debt outstanding, partially offset by higher interest rates. As a
percentage of revenue, interest expense, net, decreased to 0.7% of revenue in
the 2005 quarter compared with 0.8% in the 2004 quarter.
As a result of the foregoing, our pre-tax margin increased to 4.2% in
the 2005 quarter from 2.9% in the 2004 quarter.
Our income tax expense in the 2005 quarter was $990,000, or 42.2% of
earnings before income taxes. Our income tax expense in the 2004 quarter was
$682,000, or 50.6% of earnings before income taxes. In both years, the effective
tax rate is different from the expected combined tax rate for a company
headquartered in Iowa because the cost of driver per diem expense is not
deductible. The impact of paying per diem travel expenses varies depending upon
the ratio of drivers to independent contractors and the level of our pre-tax
earnings.
As a result of the factors described above, net earnings were $1.4
million in the 2005 quarter (2.4% of revenue), compared with $665,000 in the
2004 quarter (1.4% of revenue).
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2005, WITH SIX MONTHS ENDED JUNE 30,
2004.
Operating revenue increased $14.8 million (16.4%) to $105.1 million in
the first six months of 2005 (the 2005 period) from $90.3 million in the first
six months of 2004 (the 2004 period). The increase in operating revenue resulted
from increased average operating revenue per tractor per week and a 5.7%
increase in our weighted average tractors.
Average operating revenue per tractor per week, one measure of asset
productivity, increased significantly to $3,275 in the 2005 period from $2,975
in the 2004 period. Operating revenue includes revenue from operating our trucks
as well as other, more volatile revenue items, including fuel surcharge,
brokerage, and other revenue. We believe the analysis of tractor productivity is
more meaningful if fuel surcharge, brokerage, and other revenue are excluded
from the computation as this provides useful information to investors regarding
business trends relating to our financial condition and results of ongoing
operations. Average revenue per tractor per week (excluding fuel surcharge,
brokerage, and other revenue) increased to $2,767 in the 2005 period from $2,700
in the 2004 period, primarily due to improvements in our freight rates. Revenue
per loaded mile (excluding fuel surcharge, brokerage, and other revenue)
increased $0.11 to $1.54 in the 2005 period from $1.43 in the 2004 period,
reflecting improved lane and customer selection, increased trucking demand, and
improved general economic conditions. Fuel surcharge revenue increased $7.0
million to $11.5 million in the 2005 period from $4.5 million in the 2004
period. During the first six months of 2005 and 2004, approximately $6.8 million
and $3.0 million, respectively, of the fuel surcharge revenue collected helped
to offset our fuel costs. The remainder was passed through to independent
contractors.
Our weighted average tractors increased to 1,234 in the 2005 period
from 1,167 in the 2004 period.
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Purchased transportation consists primarily of payments to independent
contractor providers of revenue equipment, expenses related to brokerage
activities, and payments under operating leases of revenue equipment. Purchased
transportation increased $6.3 million (21.4%) to $35.5 million in the 2005
period from $29.3 million in the 2004 period. As a percentage of revenue,
purchased transportation increased to 33.8% in the 2005 period from 32.4% in the
2004 period. The changes reflect higher pay to independent contractors resulting
from increases in fuel surcharge revenue and average revenue per billed mile and
higher payments under operating leases of revenue equipment. The percentage of
total operating revenue provided by independent contractors remained relatively
constant at 35.9% in the 2005 period and 35.8% in the 2004 period. During the
last half of 2004 we leased 117 new tractors under operating leases. Payments
under operating leases, a component of purchased transportation, increased
$848,000, to $1.0 million in the 2005 period from $153,000 in the 2004 period.
If the leased tractors would have been purchased, instead of leased, a similar
amount of depreciation and interest expense would have been incurred in lieu of
purchased transportation expense.
Compensation and employee benefits increased $1.5 million (5.8%) to
$28.2 million in the 2005 period from $26.7 million in the 2004 period
reflecting increases in the number of company drivers and in their rate of pay,
and increases in non-driver employee wages, health insurance costs and worker's
compensation expense. As a percentage of revenue, compensation and employee
benefits decreased to 26.9% in the 2005 period from 29.6% in the 2004 period,
reflecting an increase in our revenue per loaded mile and fuel surcharge
revenue, which increases revenue without a proportionate increase in wages. Our
ratio of tractors to non-driver employees, a key measure of administrative
efficiency, has improved to 4.94 during the 2005 period compared to 4.45 in the
2004 period. The market for recruiting drivers continues to be challenging. We
have increased driver pay three times since the third quarter of 2004 and expect
that further increases will be necessary. Future increases in driver pay would
negatively impact our results of operations to the extent that corresponding
freight rate increases are not obtained.
Fuel, supplies, and maintenance increased $5.4 million (30.5%) to $23.0
million in the 2005 period from $17.6 million in the 2004 period. As a
percentage of revenue, fuel, supplies, and maintenance increased to 21.9% of
revenue in the 2005 period compared with 19.5% in the 2004 period. This reflects
higher fuel prices, partially offset by an increase in our average revenue per
loaded mile, which increases revenue without a corresponding increase in
maintenance costs. As expected, maintenance costs have stabilized as we continue
to update our fleet with new equipment. Fuel prices increased approximately 31%
to an average of $2.05 per gallon in the 2005 period from $1.57 per gallon in
the 2004 period. The $0.48 per gallon increase in fuel prices was partially
offset by a $0.41 per gallon ($3.8 million) increase in fuel surcharge revenue
attributable to company-owned tractors that is included in operating revenue,
mitigating 83% of the increase in fuel prices.
Insurance and claims increased $1.0 million (37.6%) to $3.7 million in
the 2005 period from $2.7 million in the 2004 period. As a percentage of
revenue, insurance and claims increased to 3.5% of revenue in the 2005 period
compared with 3.0% in the 2004 period. On February 1, 2005 we reinstated excess
insurance coverage that we had discontinued in July 2003. The additional
insurance, which increases our per claim coverage from $2.0 million to $5.0
million, added $539,000 to our insurance and claims expense during the first six
months of 2005. Claims that exceed the limits of our insurance coverage, or
claims for which coverage is not provided, may cause our financial condition and
results of operations to suffer a materially adverse effect. The insurance
policies were renewed on July 1, 2005 with no change in our retention levels.
Taxes and licenses increased $33,000 (1.8%) to $1.9 million in the 2005
period from $1.9 million in the 2004 period. The increase in the number of
company-owned tractors subject to annual license and permit costs was partially
offset by a decrease in permits and other taxes. As a percentage of revenue,
taxes and licenses decreased to 1.8% of revenue in the 2005 period compared with
2.1% of revenue in the 2004 period, reflecting an increase in our average
revenue per loaded mile and fuel surcharge revenue, which increases revenue
without a proportionate increase in taxes and licenses.
General and administrative expenses increased $332,000 (9.7%) to $3.8
million in the 2005 period from $3.4 million in the 2004 period, reflecting
increased professional fees related to Sarbanes-Oxley compliance efforts and
increased advertising expense necessary for driver recruitment. As a percentage
of revenue, general and administrative expenses decreased to 3.6% of revenue in
the 2005 period compared to 3.8% in the 2004 period, reflecting an increase in
our average revenue per loaded mile and fuel surcharge revenue, which increases
revenue without a proportionate increase in general and administrative expenses.
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Communications and utilities decreased $84,000 (12.4%) to $596,000 in
the 2005 period from $680,000 in the 2004 period. As a percentage of revenue,
communications and utilities decreased to 0.6% of revenue in the 2005 period
from 0.8% of revenue in the 2004 period, reflecting an increase in our average
revenue per loaded mile and fuel surcharge revenue which increases revenue,
without a proportionate increase in communications and utilities expenses.
Depreciation and amortization decreased $2.2 million (33.4%) to $4.3
million in the 2005 period from $6.5 million in the 2004 period. In accordance
with industry practices, the gain or loss on retirement, sale, or write-down of
equipment is included in depreciation and amortization. In the 2005 and 2004
period, depreciation and amortization included net gains from the sale of
equipment of $1.0 million and $148,000, respectively. Additionally, during the
last half of 2004 we leased 117 new tractors under operating leases. Payments
under operating leases are a component of purchased transportation. If the
leased tractors would have been purchased, instead of leased, approximately
$754,000 of depreciation expense would have been incurred in lieu of purchased
transportation expense. Finally, some of our older equipment still generates
revenue but is no longer being depreciated. As a percentage of revenue,
depreciation and amortization decreased to 4.1% of revenue in the 2005 period
compared with 7.2% in the 2004 period, reflecting the changes described above
and an increase in our average revenue per loaded mile and fuel surcharge
revenue which increases revenue without a proportionate increase in depreciation
expense. In the short-term, we expect that the presence of older equipment that
is not being depreciated will more than offset increases in depreciation
resulting from the addition of new equipment to our fleet. Over the long-term,
as we continue to upgrade our equipment fleet, we expect depreciation expense to
increase.
Interest expense, net, decreased $36,000 (4.8%) to $717,000 in the 2005
period from $753,000 in the 2004 period. This decrease was attributable to lower
average debt outstanding, partially offset by higher interest rates. As a
percentage of revenue, interest expense, net, decreased to 0.7% of revenue in
the 2005 period compared with 0.8% in the 2004 period.
During the first six months of 2004 we recorded $727,000 of income from
life insurance proceeds. This non-operating income was tax exempt and added
$0.15 to our earnings per share for the first six months of 2004. This one time
event did not recur in 2005 and will not recur in the future.
As a result of the foregoing, our pre-tax margin increased to 3.2% in
the 2005 period from 1.7% in the 2004 period.
Our income tax expense in the 2005 period was $1.5 million, or 44.3% of
earnings before income taxes. Our income tax expense in the 2004 period was
$509,000, or 65.1% of earnings before life insurance proceeds and income taxes.
In both years, the effective tax rate is different from the expected combined
tax rate for a company headquartered in Iowa because of the cost of
nondeductible driver per diem expense absorbed by us. The impact of paying per
diem travel expenses varies depending upon the ratio of drivers to independent
contractors and the level of our pre-tax earnings.
As a result of the factors described above, net earnings were $1.9
million in the 2005 period (1.8% of revenue), compared with $1.0 million in the
2004 period (1.1% of revenue). Without the life insurance proceeds, our net
earnings would have been $273,000 (0.3% of revenue) in the 2004 period.
LIQUIDITY AND CAPITAL RESOURCES
USES AND SOURCES OF CASH
We require cash to fund working capital requirements and to service our
debt. We have historically financed acquisitions of new equipment with
borrowings under installment notes payable to commercial lending institutions
and equipment manufacturers, borrowings under lines of credit, cash flow from
operations, and equipment leases from third-party lessors. We also have obtained
a portion of our revenue equipment fleet from independent contractors who own
and operate the equipment, which reduces overall capital expenditure
requirements compared with providing a fleet of entirely company-owned
equipment.
Our primary sources of liquidity have been funds provided by operations
and borrowings under credit arrangements with commercial lending institutions
and equipment manufacturers. We are experiencing improved cash flow as we have
returned to profitability. At June 30, 2005, we had $4.0 million in cash and
adequate borrowing availability on our line of credit to finance any near-term
needs for working capital. We purchased 95 new tractors and
14
175 new trailers during the first six months of 2005 and plan to purchase 120
new tractors and 105 new trailers throughout the remainder of 2005, allowing for
the replacement of older, high mileage tractors and trailers.
At June 30, 2005, we had positive working capital of $2.7 million
compared to negative working capital of $1.5 million at June 30, 2004. Working
capital, defined as current assets minus current liabilities, is not always
fully representative of our liquidity position because cash and trade
receivables account for a large portion of our current assets. Our trade
accounts receivable are generally collected within 32 days. Alternatively,
current maturities of long term debt, a large portion of our current
liabilities, are paid over one year. For this reason, a negative working capital
position does not always represent liquidity problems for our company.
Our ability to fund cash requirements in future periods will depend on
our ability to comply with covenants contained in financing arrangements and the
availability of other financing options, as well as our financial condition and
results of operations. Our financial condition and results of operations will
depend on insurance and claims experience, general shipping demand by our
customers, fuel prices, the availability of drivers and independent contractors,
continued success in implementing our profit improvement plan, and other
factors.
Although there can be no assurance, we believe that cash generated by
operations and available sources of financing for acquisitions of revenue
equipment will be adequate to meet our currently anticipated working capital
requirements and other cash needs through June 2006. We will require additional
sources of financing over the long-term to upgrade our tractor and trailer
fleets. To the extent that actual results or events differ from our financial
projections or business plans, our liquidity may be adversely affected and we
may be unable to meet our financial covenants. Specifically, our short- and
long-term liquidity may be adversely affected by one or more of the following
factors: costs associated with insurance and claims; weak freight demand or a
loss in customer relationships or volume; the impact of new hours-of-service
regulations on asset productivity; the ability to attract and retain sufficient
numbers of qualified drivers and independent contractors; elevated fuel prices
and the ability to collect fuel surcharges; inability to maintain compliance
with, or negotiate amendments to, loan covenants; the ability to finance the
tractors and trailers delivered and scheduled for delivery; and the possibility
of shortened payment terms by our suppliers and vendors worried about our
ability to meet payment obligations. Based upon our improving results,
anticipated future cash flows, current availability under the financing
arrangement with LaSalle Bank, and sources of equipment financing that are
available, we do not expect to experience significant liquidity constraints in
the foreseeable future. To the extent that actual results or events differ from
our financial projections or business plans, our liquidity may be adversely
affected and we may be unable to meet our financial covenants. In such event, we
believe we could renegotiate the terms of our debt or that alternative financing
would be available, although this cannot be assured.
Net cash provided by operating activities was $6.7 million for the six
months ended June 30, 2005, compared to $8.6 million for the six months ended
June 30, 2004, reflecting improved operating results, offset by increased income
tax payments in the 2005 period and cash flow from life insurance proceeds in
the 2004 period that did not recur in the 2005 period. Historically, our
principal use of cash from operations is to service debt and to internally
finance acquisitions of revenue equipment. Total receivables increased $3.7
million for the six months ended June 30, 2005. The average age of our trade
accounts receivable was approximately 32.9 days in the 2004 period and 31.6 days
in the 2005 period.
Net cash provided by investing activities was $2.2 million for the six
months ended June 30, 2005. This related primarily to proceeds from the sale of
revenue equipment.
Net cash used in financing activities was $10.0 million for the six
months ended June 30, 2005, consisting primarily of net payments of principal
under our long-term debt agreements. During the second quarter of 2005 we used
excess cash to prepay $4.3 million of long term debt without penalty.
We have a financing arrangement with LaSalle Bank, which expires on
January 1, 2010, and provides for automatic month-to-month renewals under
certain conditions after that date. LaSalle may terminate the arrangement prior
to January 1, 2010, in the event of default, as discussed below, and may
terminate at the end of any renewal term.
Since the beginning of 2005, the financing arrangement has been amended
to reduce the rate of interest and facilities fee charged pursuant to the
agreement and to extend the term of the agreement. The arrangement provides for
a term loan, a revolving line of credit, a capital expenditure loan, and
financing for letters of credit. The combination of all loans with LaSalle Bank
cannot exceed the lesser of $20 million or a specified borrowing base.
15
At June 30, 2005, there was no balance owed under the term loan. During
the second quarter of 2005 we used excess cash of $4.3 million to prepay the
term loan without penalty. The revolving line of credit allows for borrowing up
to 85 percent of eligible receivables. At June 30, 2005, there were no
borrowings outstanding under the revolving line. The capital expenditure loan
allows for borrowing up to 80 percent of the purchase price of revenue equipment
purchased with these advances, provided borrowings under the capital expenditure
loan are limited to $2.0 million annually, and $4.0 million over the term of the
arrangement. At June 30, 2005, the amount owed under capital expenditure loans
was $624,000, payable in equal monthly installments of $18,000 in principal plus
interest. At June 30, 2005, we had outstanding letters of credit totaling $7.7
million for self-insured amounts under our insurance programs. These letters of
credit directly reduce the amount of potential borrowings available under the
financing arrangement. Any increase in self-insured retention, as well as
increases in claim reserves, may require additional letters of credit to be
posted, which would negatively affect our liquidity. At June 30, 2005, our
borrowing limit under the financing arrangement was $14.6 million, leaving
approximately $6.3 million in remaining availability at such date.
We are required to pay a facility fee on the LaSalle financing
arrangement of .20% of the maximum loan limit of $20 million. Borrowings under
the arrangement are secured by liens on revenue equipment, accounts receivable,
and certain other assets. The interest rate on outstanding borrowings under the
arrangement is equal to a spread on LaSalle's prime rate or LIBOR, at our
option. The spread is determined by our ratio of funded debt to EBITDA, as
defined under the agreement.
The LaSalle financing arrangement requires compliance with certain
financial covenants, including compliance with a minimum tangible net worth,
capital expenditure limits, and a fixed charge coverage ratio. We were in
compliance with these covenants at June 30, 2005. We believe we will maintain
compliance with all covenants for the foreseeable future, although there can be
no assurance that the required financial performance will be achieved. In
addition, equipment financing provided by a manufacturer contains a minimum
tangible net worth requirement. We were in compliance with the required minimum
tangible net worth requirement for June 30, 2005 and we expect to remain in
compliance for the foreseeable future. If we fail to maintain compliance with
these financial covenants, or to obtain a waiver of any noncompliance, the
lenders will have the right to declare all sums immediately due and pursue other
remedies. In this event, we believe we could renegotiate the terms of our debt
or that alternative financing would be available, although this cannot be
assured. As of the filing date, we were in compliance with all financial
covenants.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following tables set forth our contractual obligations and other
commercial commitments as of June 30, 2005:
PAYMENTS (IN THOUSANDS) DUE BY PERIOD
Less than After
Contractual Obligations Total One year 1-3 years 3-5 years 5 years
- ------------------------------------------------------------------------------------------
Long-term debt $31,126 $ 7,226 $14,523 $ 9,377 $ -
Operating lease obligations 6,645 1,972 3,903 741 29
Purchase obligations 3,300 3,300 - - -
---------------------------------------------------------
Total $41,071 $12,498 $18,426 $10,118 $ 29
=========================================================
In our normal course of business we place orders with equipment
manufacturers for future delivery of new tractors and trailers. The orders for
trailers can be cancelled at any time without penalty prior to taking delivery.
The orders for tractors can be cancelled without penalty at any time up to 60
days prior to production of the tractor. If the termination occurs less than 60
days, but more than 45 days prior to production, we retain the right to cancel
subject to a per truck penalty of $500. Orders generally cannot be cancelled
within 45 days prior to production. At June 30, 2005, we had commercial
commitments of approximately $3.3 million, related to tractor orders that cannot
be cancelled, financing for which has been prearranged.
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Approximately 40% of our long-term debt carries a variable interest
rate making reliable estimates of future interest payments difficult. Using our
weighted average interest rate of 5.6% as of June 30, 2005, the following
approximately represents our expected obligations for future interest payments:
PAYMENTS (IN THOUSANDS) DUE BY PERIOD
Less than After
Total One year 1-3 years 3-5 years 5 years
- ---------------------------------------------------------------------------------------------
Total interest payments $3,859 $1,541 $ 1,868 $ 450 $ -
===============================================================
We had no other commercial commitments at June 30, 2005.
OFF-BALANCE SHEET ARRANGEMENTS
Our liquidity is not materially affected by off-balance sheet
transactions. During the last six months of 2004 we leased 117 new tractors
under operating leases. These new leases increase equipment rent expense, a
component of purchased transportation expense, rather than depreciation and
interest expense. These obligations are included in our schedule of contractual
obligations, and exclude potential Terminal Remainder Adjustment Clause (TRAC)
payments or refunds on 117 tractors amounting to 40% of the original purchase
price due at the end of the original 48 month term of the lease. After 48
months, we expect the residual value of the tractors to be greater than 40% of
the original cost, allowing us to return the tractors without penalty.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make decisions based upon estimates, assumptions, and factors we consider as
relevant to the circumstances. Such decisions include the selection of
applicable accounting principles and the use of judgment in their application,
the results of which impact reported amounts and disclosures. Changes in future
economic conditions or other business circumstances may affect the outcomes of
our estimates and assumptions. Accordingly, actual results could differ from
those anticipated. A summary of the significant accounting policies followed in
preparation of the financial statements included in this Form 10-Q is contained
in Note 1 of the consolidated financial statements included in our Form 10-K for
the year ended December 31, 2004. Other footnotes in the Form 10-K describe
various elements of the financial statements included in this Form 10-Q and the
assumptions on which specific amounts were determined.
Our critical accounting policies include the following:
REVENUE RECOGNITION
We generally recognize operating revenue when the freight to be
transported has been loaded. We operate primarily in the short-to-medium length
haul category of the trucking industry; therefore, our typical customer delivery
is completed one day after pickup. Accordingly, this method of revenue
recognition is not materially different from recognizing revenue based on
completion of delivery. We recognize operating revenue when the freight is
delivered for longer haul loads where delivery is completed more than one day
after pickup. Amounts payable to independent contractors for purchased
transportation, to company drivers for wages, and other direct expenses are
accrued when the related revenue is recognized.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided
by use of the straight-line and declining-balance methods over lives of 5 to 39
years for buildings and improvements, 5 years for tractors, 7 years for
trailers, and 3 to 10 years for other equipment. Tires purchased as part of
revenue equipment are capitalized as a cost of the equipment. Replacement tires
are expensed when placed in service. Expenditures for maintenance and minor
repairs are charged to operations, and expenditures for major replacements and
betterments are capitalized. The cost and related accumulated depreciation on
property and equipment retired, traded, or sold are eliminated from the property
accounts at the time of retirement, trade, or sale. The gain or loss on
retirement or sale is included in depreciation and amortization in
17
the consolidated statements of operation. Gains on trade-ins are included in the
basis of the new asset. Judgments concerning salvage values and useful lives can
have a significant impact.
ESTIMATED LIABILITY FOR INSURANCE CLAIMS
Losses resulting from auto liability, physical damage, workers'
compensation, and cargo loss and damage are covered by insurance subject to
certain self-retention levels. Losses resulting from uninsured claims are
recognized when such losses are incurred. We estimate and accrue a liability for
our share of ultimate settlements using all available information. We accrue for
claims reported, as well as for claims incurred but not reported, based upon our
past experience. Expenses depend on actual loss experience and changes in
estimates of settlement amounts for open claims that have not been fully
resolved. However, final settlement of these claims could differ materially from
the amounts we have accrued at year-end. Our judgment concerning the ultimate
cost of claims and modification of initial reserved amounts is an important part
of establishing claims reserves, and is of increasing significance with higher
self-insured retention and lack of excess coverage.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net undiscounted cash
flows expected to be generated by the asset. Our judgment concerning future cash
flows is an important part of this determination. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less the costs to sell.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to a variety of market risks, most importantly the
effects of the price and availability of diesel fuel and changes in interest
rates.
Commodity Price Risk
Our operations are heavily dependent upon the use of diesel fuel. The
price and availability of diesel fuel can vary and are subject to political,
economic, and market factors that are beyond our control. Significant increases
in diesel fuel prices could materially and adversely affect our results of
operations and financial condition.
We presently use fuel surcharges to address the risk of increasing fuel
prices. We believe these fuel surcharges are an effective means of mitigating
the risk of increasing fuel prices, although the competitive nature of our
industry prevents us from recovering the full amount of fuel price increases
through the use of such surcharges.
In the past, we have used derivative instruments, including heating oil
price swap agreements, to reduce a portion of our exposure to fuel price
fluctuations. Since 2000 we have had no such agreements in place. We do not
trade in such derivatives with the objective of earning financial gains on price
fluctuations.
Interest Rate Risk
We also are exposed to market risks from changes in certain interest
rates on our debt. Our financing arrangement with LaSalle Bank carries a
variable interest rate equal to a spread on LaSalle's prime rate or LIBOR, at
our option. The spread is determined by our ratio of funded debt to EBITDA, as
defined under the agreement. In addition, approximately $12.0 million of our
other debt carries variable interest rates. This variable interest exposes us to
the risk that interest rates may rise. Assuming borrowing levels at June 30,
2005, a one-point increase in the prime rate would increase interest expense by
approximately $126,000. The remainder of our other debt carries fixed interest
rates. At June 30, 2005, approximately 40% of our debt carried a variable
interest rate and the remainder was fixed.
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ITEM 4. CONTROLS AND PROCEDURES
As required by Rule 13a-15 under the Securities Exchange Act of 1934
(the "Exchange Act"), we have carried out an evaluation of the effectiveness of
the design and operation of our disclosure controls and procedures (as defined
in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this
report. This evaluation was carried out under the supervision and with the
participation of our management, including our Chief Executive Officer and our
Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer
and our Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of June 30, 2005. During our second fiscal quarter,
there were no changes in our internal control over financial reporting that have
materially affected, or that are reasonably likely to materially affect, our
internal control over financial reporting. We intend to periodically evaluate
our disclosure controls and procedures as required by the Exchange Act rules.
Disclosure controls and procedures are controls and other procedures
that are designed to ensure that information required to be disclosed in our
reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include controls and procedures designed to ensure that information required to
be disclosed in our reports filed under the Exchange Act is accumulated and
communicated to management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding
disclosures.
We have confidence in our internal controls and procedures.
Nevertheless, our management, including our Chief Executive Officer and our
Chief Financial Officer, does not expect that our disclosure controls and
procedures or our internal controls will prevent all errors or intentional
fraud. An internal control system, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of the
internal controls are met. Further, the design of an internal control system
must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent
limitations in all internal control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within our company have been detected.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 13, 2005, the Company held its annual meeting of stockholders for the
purpose of (a) electing five directors for one-year terms, (b) approving the
Smithway Motor Xpress Corp. 2005 Omnibus Stock Plan and (c) ratifying the
selection of KPMG LLP as independent auditors for the Company for the fiscal
year ending December 31, 2005.
The voting tabulation on the election of directors was as follows:
For Withheld
--- --------
G. Larry Owens 5,377,258 11,448
Terry G. Christenberry 5,378,740 9,966
Labh S. Hira 5,378,740 9,966
Herbert D. Ihle 5,376,740 11,966
Marlys L. Smith 5,377,421 11,285
The voting tabulation to approve the Smithway Motor Xpress Corp. 2005 Omnibus
Stock Plan was as follows:
For Against Broker Non-Votes
--- ------- ----------------
3,669,243 151,427 1,558,232
The voting tabulation to ratify the selection of KPMG LLP as independent
auditors for the Company for the fiscal year ending December 31, 2005 was as
follows:
For Against Broker Non-Votes
--- ------- ----------------
5,377,903 3,388 0
ITEM 5. OTHER INFORMATION
None.
20
ITEM 6. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
3.1 Articles of Incorporation (1)
3.2 Amended and Restated Bylaws (2)
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer *
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer *
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, by G. Larry Owens,
the Registrant's principal executive officer *
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, by Douglas C.
Sandvig, the Registrant's principal financial officer *
- ---------------------
(1) Incorporated by reference to the same numbered exhibit to our Registration
Statement on Form S-1, Registration No. 33-90356, effective June 27, 1996.
(2) Incorporated by reference to the same numbered exhibit to our Annual Report
on Form 10-K for the year ended December 31, 2003.
* Filed herewith.
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SMITHWAY MOTOR XPRESS CORP.
Date: August 10, 2005 By: /s/ Douglas C. Sandvig
---------------------------------
Douglas C. Sandvig
Senior Vice President, Treasurer,
and Chief Financial Officer, in
his capacity as such and on
behalf of the issuer
22
Exhibit Index
Exhibit Method of
Number Description Filing
- ------- --------------------------------------------------------- ---------------
3.1 Articles of Incorporation Incorporated by reference
3.2 Amended and Restated Bylaws (as in effect on March 5, 2004) Incorporated by reference
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer Filed herewith
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer Filed Herewith
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Filed herewith
Section 906 of the Sarbanes-Oxley Act of 2002, by G. Larry Owens, the
Registrant's principal executive officer
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Filed herewith
Section 906 of the Sarbanes-Oxley Act of 2002, by Douglas C. Sandvig, the
Registrant's principal financial officer