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 MARCH 31, 2006
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
As of April 28, 2006, the registrant had 3,971,624 shares of Class A Common
Stock and 1,000,000 shares of Class B Common Stock outstanding.
1
PAGE
NUMBER
------
PART I
FINANCIAL INFORMATION
Item 1 Financial Statements........................................... 3
Condensed Consolidated Balance Sheets as of December 31, 2005
and March 31, 2006 (unaudited).............................. 3
Condensed Consolidated Statements of Operations for the three
months ended March 31, 2005 and 2006 (unaudited)............ 5
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2005 and 2006 (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..... 16
Item 4 Controls and Procedures........................................ 17
PART II
OTHER INFORMATION
Item 1 Legal Proceedings.............................................. 17
Item 1A Risk Factors................................................... 17
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds.... 17
Item 3 Defaults Upon Senior Securities................................ 17
Item 4 Submission of Matters to a Vote of Security Holders............ 17
Item 5 Other Information.............................................. 17
Item 6 Exhibits....................................................... 18
Signatures............................................................. 19
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, MARCH 31,
2005 2006
------------ -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents............ $ 168 $ 346
Receivables, net:
Trade............................. 19,209 20,180
Other............................. 611 1,048
Inventories.......................... 938 993
Deposits, primarily with insurers.... 976 1,076
Prepaid expenses..................... 1,597 2,148
Deferred income taxes................ 3,133 3,141
-------- --------
Total current assets........... 26,632 28,932
-------- --------
Property and equipment:
Land................................. 1,137 1,137
Buildings and improvements........... 7,052 7,052
Tractors............................. 72,354 70,862
Trailers............................. 36,260 36,568
Other equipment...................... 4,323 4,377
-------- --------
121,126 119,996
Less accumulated depreciation........ 59,704 58,669
-------- --------
Net property and equipment..... 61,422 61,327
-------- --------
Goodwill................................ 1,745 1,745
Other assets............................ 312 313
-------- --------
$ 90,111 $ 92,317
======== ========
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, MARCH 31,
2005 2006
------------ -----------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt... $ 8,363 $ 8,344
Accounts payable....................... 7,401 8,304
Accrued loss reserves.................. 6,681 6,697
Accrued compensation................... 2,463 2,898
Other accrued expenses................. 493 463
Income tax payable..................... 313 862
------- --------
Total current liabilities........ 25,714 27,568
Long-term debt, less current maturities... 24,425 24,487
Line of credit............................ 760 --
Deferred income taxes..................... 11,734 11,729
------- --------
Total liabilities................ 62,633 63,784
------- --------
Stockholders' equity:
Preferred stock........................ -- --
Common stock:
Class A............................. 40 40
Class B............................. 10 10
Additional paid-in capital............. 11,511 11,523
Retained earnings...................... 16,058 17,101
Reacquired shares, at cost............. (141) (141)
------- --------
Total stockholders' equity....... 27,478 28,533
Commitments
------- --------
$90,111 $ 92,317
======= ========
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
MARCH 31,
-----------------------
2005 2006
---------- ----------
Operating revenue:
Freight.................................... $ 49,447 $ 57,277
Other...................................... 277 412
---------- ----------
Operating revenue.................... 49,724 57,689
---------- ----------
Operating expenses:
Purchased transportation................... 16,368 20,553
Compensation and employee benefits......... 13,660 15,129
Fuel, supplies, and maintenance............ 11,078 12,758
Insurance and claims....................... 2,008 1,433
Taxes and licenses......................... 873 954
General and administrative................. 1,942 1,866
Communications and utilities............... 331 344
Gain on disposal of assets................. (540) (562)
Depreciation and amortization.............. 2,678 2,864
---------- ----------
Total operating expenses............. 48,398 55,339
---------- ----------
Earnings from operations................ 1,326 2,350
Financial (expense) income
Interest expense........................... (369) (501)
Interest income............................ 33 18
---------- ----------
Earnings before income taxes............ 990 1,867
Income tax expense............................ 487 824
---------- ----------
Net earnings............................ $ 503 $ 1,043
========== ==========
Basic earnings per share...................... $ 0.10 $ 0.21
========== ==========
Diluted earnings per share.................... $ 0.10 $ 0.21
========== ==========
Basic weighted average shares outstanding..... 4,903,845 4,971,624
Effect of dilutive stock options........ 118,534 104,269
---------- ----------
Diluted weighted average shares outstanding... 5,022,379 5,075,893
========== ==========
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)
THREE MONTHS ENDED
MARCH 31,
------------------
2005 2006
------- -------
Cash flows from operating activities:
Net earnings......................................................... $ 503 $ 1,043
------- -------
Adjustments to reconcile net earnings to cash provided by
operating activities:
Depreciation and amortization..................................... 2,678 2,864
Gain on disposal of assets........................................ (540) (562)
Deferred income tax expense....................................... 52 (12)
Change in:
Receivables.................................................... (2,092) (1,408)
Inventories.................................................... (20) (55)
Deposits, primarily with insurers.............................. (116) (100)
Prepaid expenses............................................... (1,505) (551)
Accounts payable and other accrued liabilities................. 2,288 1,873
------- -------
Total adjustments........................................... 745 2,049
------- -------
Net cash provided by operating activities................ 1,248 3,092
------- -------
Cash flows from investing activities:
Purchase of property and equipment................................... (216) (1,598)
Proceeds from sale of property and equipment......................... 979 1,577
Other................................................................ 8 (1)
------- -------
Net cash provided by (used in) investing activities............ 771 (22)
------- -------
Cash flows from financing activities:
Net repayment on line of credit...................................... -- (760)
Principal payments on long-term debt................................. (3,062) (2,144)
Treasury stock reissued.............................................. 84 --
Other................................................................ 6 12
------- -------
Net cash used in financing activities............................. (2,972) (2,892)
------- -------
Net (decrease) increase in cash and cash equivalents.............. (953) 178
Cash and cash equivalents at beginning of period........................ 5,054 168
------- -------
Cash and cash equivalents at end of period.............................. $ 4,101 $ 346
======= =======
Supplemental disclosure of cash flow information:
Cash paid during period for:
Interest.......................................................... $ 373 $ 504
Income taxes...................................................... 76 288
======= =======
Supplemental schedules of noncash investing and financing activities:
Notes payable issued for tractors and trailers....................... $ 3,312 $ 2,186
======= =======
See accompanying notes to condensed consolidated financial statements.
6
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(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 U.S. generally accepted accounting principles,
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, 2005, 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 annual
report on Form 10-K for the year ended December 31, 2005. Results of
operations in interim periods are not necessarily indicative of results to
be expected for a full year.
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 57,000 and 30,000 shares for the first quarter of 2005 and 2006,
respectively, as the exercise prices of the underlying options were out of
the money and the effect was anti-dilutive. Stock options outstanding at
March 31, 2005 and 2006, totaled 216,850 and 205,350, respectively.
NOTE 3. STOCK OPTION PLANS
We have two active stock-based compensation plans:
(1) We have reserved 400,000 shares of Class A common stock for
issuance pursuant to an employee incentive stock plan adopted during
2001. Any shares subject to awards which expire unexercised or are
forfeited become available again for issuance under this 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 this plan. This plan expires
on May 13, 2015.
Options granted under these plans become exercisable in installments from
twelve to sixty months after the date of grant. The options are exercisable
over a period not to exceed ten years from the date of grant. At March 31,
2006, 834,500 shares were available for granting additional options.
Effective January 1, 2006, we adopted Statement of Financial Accounting
Standards ("SFAS") No. 123 (revised 2004), Share-Based Payment ("No. 123R")
using a modified version of the prospective transition method. Under this
transition method, compensation cost is recognized on or after the required
effective date for the portion of outstanding awards for which the
requisite service has not yet been rendered, based on the grant-date fair
value of those awards calculated under SFAS No. 123R for either recognition
or pro forma disclosures. Stock-based employee compensation expense for the
three months ended March 31, 2006 was $12 and included as an expense within
the consolidated statements of operations. As of March 31, 2006, the total
compensation cost related to non-vested awards not yet recognized was $50
and the weighted-average period over which it is expected to be recognized
was one year. There was no cumulative effect of initially adopting SFAS No.
123R.
7
We granted no stock options during the three month periods ended March 31,
2005 and 2006.
The following table summarizes Stock Option Plan activity for the three
months ended March 31, 2006:
WEIGHTED WEIGHTED AVERAGE
AVERAGE REMAINING
NUMBER OF EXERCISE CONTRACTUAL TERM AGGREGATE
OPTIONS PRICE (YEARS) INTRINSIC VALUE
--------- -------- ---------------- ---------------
Outstanding at beginning of period 205,350 $4.38
Options granted -- --
Options exercised -- --
Options forfeited -- --
Options expired -- --
------- ----- ---- ------
Outstanding at end of period 205,350 $4.38 4.48 $1,120
======= ===== ==== ======
Options exercisable at end of period 151,850 $4.79 3.72 $ 784
In periods prior to January 1, 2006, we accounted 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 was reflected in
our statements 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.
The following table illustrates the effect on net earnings and earnings per
share if we had applied the fair value recognition provisions of SFAS No.
123R 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
MARCH 31, 2005
------------------
Net earnings, as reported $ 503
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all
awards, net of related tax effects (2)
-----
Pro forma net earnings $ 501
=====
Basic earnings per share - as reported $0.10
- pro forma $0.10
Diluted earnings per share - as reported $0.10
- pro forma $0.10
We use the Black-Scholes option pricing model to determine the fair value
of stock options issued.
Although we do not have a formal policy for issuing shares upon exercise of
stock options, such shares are generally issued from treasury stock. Based
on current treasury stock levels, we do not expect to repurchase additional
shares specifically for stock option exercises during 2006.
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," "may," "could," "likely," 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: 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; failure to sustain 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;
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 under "Risk Factors" and elsewhere in our annual
report on Form 10-K.
Our fiscal year ends on December 31 of each year. Thus, this report
discusses the first quarter of our 2005 and 2006 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 (excluding fuel surcharge, brokerage, and other revenues). We exclude
fuel surcharge, brokerage and other more volatile revenues in this measurement
because we believe the analysis of tractor productivity is more meaningful if
these revenues are excluded from the computation, providing useful information
to investors regarding business trends relating to our financial condition and
results of ongoing operations. The components of operating revenue are as
follows:
THREE MONTHS
ENDED MARCH 31,
(dollars in
thousands)
-----------------
2005 2006
------- -------
Trucking revenue $42,766 $46,419
Brokerage revenue 1,801 2,661
Fuel surcharge revenue 4,880 8,197
------- -------
Total freight revenue 49,447 57,277
Other revenue 277 412
------- -------
Operating revenue $49,724 $57,689
======= =======
During the first quarter of 2006, our average revenue per tractor per week
(excluding fuel surcharge, brokerage, and other revenues) increased to $2,816
from $2,672 in the first quarter of 2005, reflecting a 5.4% increase in our
average revenue per loaded mile (excluding fuel surcharge, brokerage, and other
revenues) and a 3.0% increase in our weighted average tractors to 1,268 in the
2006 quarter from 1,231 in the 2005 quarter. Our ending fleet size grew by 36
units (2.9%) to 1,269 units at March 31, 2006 compared to 1,233 units at March
31, 2005.
9
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.
For the three months ended March 31, 2006, operating revenue increased
16.0% to $57.7 million from $49.7 million during the same quarter in 2005. Net
earnings were $1.0 million, or $0.21 per basic and diluted share, compared with
net earnings of $503,000, or $0.10 per basic share and diluted share, during the
2005 quarter.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of certain items
to revenue for the three months ended March 31, 2005 and 2006:
THREE MONTHS
ENDED MARCH 31,
---------------
2005 2006
----- -----
Operating revenue ...................... 100.0% 100.0%
Operating expenses:
Purchased transportation ............ 32.9 35.6
Compensation and employee benefits .. 27.5 26.2
Fuel, supplies, and maintenance ..... 22.3 22.1
Insurance and claims ................ 4.0 2.5
Taxes and licenses .................. 1.8 1.7
General and administrative .......... 3.9 3.2
Communication and utilities ......... 0.7 0.6
Gain from disposal of assets ........ (1.1) (1.0)
Depreciation and amortization ....... 5.4 5.0
----- -----
Total operating expenses ............ 97.3 95.9
----- -----
Earnings from operations ............... 2.7 4.1
Interest expense, net .................. (0.7) (0.9)
----- -----
Earnings before income taxes ........... 2.0 3.2
Income tax expense ..................... 1.0 1.4
----- -----
Net earnings ........................... 1.0% 1.8%
===== =====
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2006, WITH THREE MONTHS ENDED MARCH
31, 2005.
Operating revenue increased $8.0 million (16.0%) to $57.7 million in the
2006 quarter from $49.7 million in the 2005 quarter. The increase in operating
revenue resulted from increased average operating revenue per tractor per week
and a 3.0% increase in our weighted average tractors to 1,268 in the 2006
quarter from 1,231 in the 2005 quarter.
Average operating revenue per tractor per week increased to $3,500 in the
2006 quarter from $3,107 in the 2005 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
$2,816 in the 2006 quarter from $2,672 in the 2005 quarter, primarily due to
improvements in our freight rates. Revenue per loaded mile (excluding fuel
surcharge, brokerage, and other revenue) increased $0.09 to $1.61 in the 2006
quarter from $1.52 in the 2005 quarter, reflecting improved lane and customer
selection, increased trucking demand, and improved general economic conditions.
Fuel surcharge revenue increased $3.3 million to $8.2 million in the 2006
quarter from $4.9 million in the 2005 quarter. During the first quarter of 2006
and 2005, approximately $4.7 million and $2.9 million, respectively, of the fuel
surcharge revenue collected helped to offset our fuel costs. The remainder was
passed through to independent contractors.
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 $4.2 million (25.6%) to $20.6 million in the 2006
quarter from $16.4 million in the 2005 quarter. As a percentage of revenue,
purchased transportation increased to 35.6% in the 2006 quarter from 32.9% in
the 2005 quarter. The changes reflect higher pay to independent contractors
resulting from increases in fuel surcharge revenue and average revenue per
billed mile, higher payments to broker carriers and an increase in the
percentage of our fleet supplied by independent contractors. The percentage of
total operating revenue provided by independent contractors increased to 37.1%
in the 2006 quarter from 35.1% in the 2005 quarter.
Compensation and employee benefits increased $1.4 million (10.8%) to $15.1
million in the 2006 quarter from $13.7 million in the 2005 quarter reflecting
increases in the number of company drivers and in their rate of pay, increases
in non-driver employee wages, and increased worker's compensation expense. As a
percentage of revenue, compensation and employee benefits decreased to 26.2% in
the 2006 quarter from 27.5% in the 2005 quarter, reflecting the changes
described above and 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, improved to 5.13 during the 2006 quarter compared to
4.97 in the 2005 quarter. The market for recruiting drivers continues to be
challenging. We increased driver pay in April 2006 and expect that further
increases will be necessary. Future increases in driver pay will negatively
impact our results of operations to the extent that corresponding freight rate
increases are not obtained.
Fuel, supplies, and maintenance increased $1.7 million (15.2%) to $12.8
million in the 2006 quarter from $11.1 million in the 2005 quarter. As a
percentage of revenue, fuel, supplies, and maintenance decreased to 22.1% of
revenue in the 2006 quarter compared with 22.3% in the 2005 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 decreased as
we continue to update our fleet with new equipment. Fuel prices increased
approximately 22% to an average of $2.39 per gallon in the 2006 quarter from
$1.96 per gallon in the 2005 quarter. The $0.43 per gallon increase in fuel
prices was partially offset by a $0.39 per gallon ($1.7 million) increase in
fuel surcharge revenue attributable to company-owned tractors that is included
in operating revenue, mitigating 89% of the increase in fuel prices.
Insurance and claims decreased $575,000 (28.6%) to $1.4 million in the 2006
quarter from $2.0 million in the 2005 quarter. As a percentage of revenue,
insurance and claims decreased to 2.5% of revenue in the 2006 quarter compared
with 4.0% in the 2005 quarter. This reflects a reduction in the cost of auto
liability, physical damage, and cargo claims and an increase in our average
revenue per loaded mile, which increases revenue without a corresponding
increase in insurance and claims costs. The insurance policies are scheduled for
renewal on July 1, 2006.
Taxes and licenses increased $81,000 (9.3%) to $954,000 in the 2006 quarter
from $873,000 in the 2005 quarter reflecting a slight increase in the number of
company-owned tractors subject to annual license and increased over-dimensional
permit costs. As a percentage of revenue, taxes and licenses decreased to 1.7%
of revenue in the 2006 quarter compared with 1.8% of revenue in the 2005
quarter, reflecting the items noted above and 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 were $1.9 million in both the 2006
quarter and 2005 quarter, but reflected a $76,000 (3.9%) decrease in the 2006
quarter due to decreased professional fees related to Sarbanes-Oxley compliance
efforts. As a percentage of revenue, general and administrative expenses
decreased to 3.2% of revenue in the 2006 quarter compared to 3.9% in the 2005
quarter, reflecting the items noted above and 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 increased $13,000 (3.9%) to $344,000 in the
2006 quarter from $331,000 in the 2005 quarter. As a percentage of revenue,
communications and utilities decreased to 0.6% of revenue in the 2006 quarter
from 0.7% of revenue in the 2005 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.
11
Gains on the disposal of assets increased $22,000 (4.1%) to $562,000 in the
2006 quarter from $540,000 in the 2005 quarter. As a percentage of revenue,
gains on the disposal of assets remained relatively constant at 1.0% of revenue
in the 2006 quarter compared to 1.1% of revenue in the 2005 quarter.
Depreciation and amortization increased $186,000 (6.9%) to $2.9 million in
the 2006 quarter from $2.7 million in the 2005 quarter reflecting an increase in
company owned tractors and trailers and an increase in the value of equipment
subject to depreciation. As a percentage of revenue, depreciation and
amortization decreased to 5.0% of revenue in the 2006 quarter compared with 5.4%
in the 2005 quarter, reflecting an increase in our average revenue per loaded
mile and fuel surcharge revenue which increases revenue without a proportionate
increase in depreciation and amortization. As we continue to upgrade our
equipment fleet, we expect depreciation expense to increase.
Interest expense, net, increased $147,000 (43.8%) to $483,000 in the 2006
quarter from $336,000 in the 2005 quarter. This increase was attributable to
higher average debt outstanding and higher interest rates. As a percentage of
revenue, interest expense, net, increased to 0.9% of revenue in the 2006 quarter
from 0.7% of revenue in the 2005 quarter.
As a result of the foregoing, our pre-tax margin increased to 3.2% in the
2006 quarter from 2.0% in the 2005 quarter.
Our income tax expense in the 2006 quarter was $824,000, or 44.1% of
earnings before income taxes. Our income tax expense in the 2005 quarter was
$487,000, or 49.2% of earnings before income taxes. In both quarters, the
effective tax rate was different from the expected combined tax rate for a
company headquartered in Iowa because a portion of 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 $1.0 million
in the 2006 quarter (1.8% of revenue), compared with $503,000 in the 2005
quarter (1.0% of revenue). In addition, our operating ratio (operating expenses
as a percentage of operating revenue) was 95.9% during the 2006 quarter as
compared with 97.3% during the 2005 quarter. Our adjusted operating ratio
(operating expenses minus fuel surcharge revenue as a percentage of operating
revenue excluding fuel surcharge revenue) was 95.3% during the 2006 quarter as
compared with 97.0% during the 2005 quarter.
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. At March 31, 2006, we had $346,000 in cash and adequate
borrowing availability on our line of credit to finance any near-term needs for
working capital. During the three months of 2006 we purchased 33 new tractors
and 42 new trailers for $3.5 million, which was financed, in part, with $2.2
million of new long term debt. We plan to purchase approximately 180 new
tractors throughout the remainder of 2006, allowing for the replacement of
older, high mileage tractors.
At March 31, 2006, we had positive working capital of $1.4 million compared
to positive working capital of $3.5 million at March 31, 2005. 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 31 days. Alternatively, current maturities of
long term debt, a large portion of our current liabilities, are paid over one
year.
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,
12
general shipping demand by our customers, fuel prices, the availability of
drivers and independent contractors, the continued success of 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 March 2007. 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 impact of stricter emissions standards;
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 profitability, 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 $3.1 million for the three
months ended March 31, 2006, compared to $1.2 million for the three months ended
March 31, 2005. Historically, our principal use of cash from operations is to
service debt and to internally finance acquisitions of revenue equipment. Total
receivables increased $1.4 million for the three months ended March 31, 2006.
The average age of our trade accounts receivable was approximately 31.9 days in
the 2005 period and 30.9 days in the 2006 period.
Net cash used by investing activities was $22,000 for the three months
ended March 31, 2006. Cash used to purchase property and equipment was nearly
offset by proceeds from the sale of equipment.
Net cash used in financing activities was $2.9 million for the three months
ended March 31, 2006, consisting primarily of net payments of principal under
our long-term debt agreements.
We have a financing arrangement with LaSalle Bank, which expires on October
31, 2010, and provides for automatic month-to-month renewals under certain
conditions after that date. LaSalle Bank may terminate the arrangement prior to
October 31, 2010, in the event of default, and may terminate at the end of any
renewal term. The agreement provides for a revolving line of credit which allows
for borrowings at up to 85% of eligible receivables. At March 31, 2006, there
was no balance owed under our revolving line of credit.
The LaSalle Bank financing arrangement also includes financing for letters
of credit. At March 31, 2006, we had outstanding letters of credit totaling $7.6
million for self-insured amounts under our insurance programs. We are required
to pay an annual fee of 1.25% of the outstanding letters of credit. These
letters of credit directly reduce the amount of potential borrowings available
under the financing arrangement discussed above. 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.
The combination of borrowings under the line of credit and outstanding
letters of credit with LaSalle Bank cannot exceed the lower of $15 million or a
specified borrowing base, which at March 31, 2006 was $15.0 million, leaving
$7.4 million in remaining availability at such date. We are required to pay a
facility fee on the LaSalle Bank financing arrangement of .25% of the unused
loan limit. Borrowings under the arrangement are secured by accounts receivable.
The interest rate on outstanding borrowings under the arrangement is equal to a
spread on LaSalle Bank's prime rate or LIBOR, at our option. The spread is
determined by our ratio of funded debt to earnings before interest, taxes,
depreciation, amortization and rent, or EBITDAR, as defined under the agreement.
At March 31, 2006 the applicable interest rate under the arrangement was equal
to the prime rate minus 50 basis points.
The LaSalle Bank financing arrangement requires compliance with certain
financial covenants, including compliance with a minimum tangible net worth,
debt to EBITDAR, and a fixed charge coverage ratio. We were in compliance with
these requirements at March 31, 2006. We believe we will maintain compliance
with all covenants throughout 2006, although there can be no assurance that the
required financial performance will be achieved. In
13
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 March 31, 2006 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 March 31, 2006:
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 $32,831 $ 8,344 $15,807 $8,680 $--
Operating lease obligations 5,166 1,971 3,117 78 --
Purchase obligations 5,669 5,669 -- -- --
------- ------- ------- ------ ---
Total $43,666 $15,984 $18,924 $8,758 $--
======= ======= ======= ====== ===
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 March 31, 2006, we had commercial
commitments of approximately $5.7 million, related to tractor and trailer orders
that cannot be cancelled. Financing for these commitments has been prearranged.
Approximately 26% 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 6.20% as of March 31, 2006, 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 $4,218 $1,777 $2,005 $436 $--
====== ====== ====== ==== ===
We had no other commercial commitments at March 31, 2006.
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.
14
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles 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, 2005. 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 recognized in accordance with Statement of Financial
Accounting Standards No. 153, "Exchange of Nonmonetary Assets" (SFAS 153).
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.
15
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 EBITDAR, as defined
under the agreement. In addition, approximately $8.5 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 March 31, 2006, a
one-point increase in the prime rate would increase interest expense by
approximately $85,000. The remainder of our other debt carries fixed interest
rates. At March 31, 2006, approximately 26% of our debt carried a variable
interest rate and the remainder was fixed.
16
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 March 31, 2006. During our first 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 1A. RISK FACTORS
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
17
ITEM 6. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Articles of Incorporation (1)
3.2 Amended and Restated Bylaws (2)
10.1 Description of 2006 Bonus Program (3)
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.
(3) Incorporated by reference to item 1.01 of our Current Report on Form 8-K
filed on February 21, 2006.
* Filed herewith.
18
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: May 12, 2006 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
19
Exhibit Index
EXHIBIT METHOD
NUMBER DESCRIPTION OF FILING
- ------- ----------- ---------
3.1 Articles of Incorporation Incorporated by
reference
3.2 Amended and Restated Bylaws (as in effect on March Incorporated by
5, 2004) reference
10.1 Description of 2006 Bonus Plan Incorporated by
reference
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Filed herewith
Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Filed herewith
Financial Officer
32.1 Certification pursuant to 18 U.S.C. Section 1350, as Filed herewith
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 Filed herewith
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, by Douglas C. Sandvig,
the Registrant's principal financial officer