UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934: FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
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 of (I.R.S. Employer
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 October 2, 2006, the registrant had 3,989,124 shares of Class A Common
Stock and 1,000,000 shares of Class B Common Stock outstanding.
PAGE
NUMBER
------
PART I
FINANCIAL INFORMATION
Item 1 Financial Statements........................................ 3
Condensed Consolidated Balance Sheets as of December 31,
2005 and September 30, 2006 (unaudited).................. 3
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 2005 and
2006 (unaudited)......................................... 5
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 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................................ 10
Item 3 Quantitative and Qualitative Disclosures About Market Risk.. 19
Item 4 Controls and Procedures..................................... 20
PART II
OTHER INFORMATION
Item 1 Legal Proceedings........................................... 21
Item 1A Risk Factors................................................ 21
Item 2 Unregistered Sales of Equity Securities and Use of
Proceeds................................................. 21
Item 3 Defaults Upon Senior Securities............................. 21
Item 4 Submission of Matters to a Vote of Security Holders......... 21
Item 5 Other Information........................................... 21
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, SEPTEMBER 30,
2005 2006
------------ -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents ............. $ 168 $ 1,907
Receivables, net:
Trade .............................. 19,209 20,495
Other .............................. 611 907
Inventories ........................... 938 1,083
Deposits, primarily with insurers ..... 976 976
Prepaid expenses ...................... 1,597 2,633
Deferred income taxes ................. 3,133 3,377
-------- --------
Total current assets ............ 26,632 31,378
-------- --------
Property and equipment:
Land .................................. 1,137 1,137
Buildings and improvements ............ 7,052 7,134
Tractors .............................. 72,354 74,341
Trailers .............................. 36,260 38,046
Other equipment ....................... 4,323 4,652
-------- --------
121,126 125,310
Less accumulated depreciation ......... 59,704 54,798
-------- --------
Net property and equipment ...... 61,422 70,512
-------- --------
Goodwill ................................. 1,745 1,745
Other assets ............................. 312 315
-------- --------
$ 90,111 $103,950
======== ========
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, SEPTEMBER 30,
2005 2006
------------ -------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt .. $ 8,363 $ 10,116
Accounts payable ...................... 7,401 8,029
Accrued loss reserves ................. 6,681 7,437
Accrued compensation .................. 2,463 3,245
Other accrued expenses ................ 493 532
Income tax payable .................... 313 199
------- --------
Total current liabilities ....... 25,714 29,558
Long-term debt, less current maturities .. 24,425 29,066
Line of credit ........................... 760 --
Deferred income taxes .................... 11,734 13,389
------- --------
Total liabilities ............... 62,633 72,013
------- --------
Stockholders' equity:
Preferred stock ....................... -- --
Common stock:
Class A ............................ 40 40
Class B ............................ 10 10
Additional paid-in capital ............ 11,511 11,608
Retained earnings ..................... 16,058 20,382
Reacquired shares, at cost ............ (141) (103)
------- --------
Total stockholders' equity ...... 27,478 31,937
Commitments
------- --------
$90,111 $103,950
======= ========
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2005 2006 2005 2006
---------- ---------- ---------- ----------
Operating revenue:
Freight ............................... $ 56,867 $ 58,458 $ 161,272 $ 176,106
Other ................................. 440 541 1,115 1,463
---------- ---------- ---------- ----------
Operating revenue ............... 57,307 58,999 162,387 177,569
---------- ---------- ---------- ----------
Operating expenses:
Purchased transportation .............. 20,423 20,546 55,938 62,780
Compensation and employee benefits .... 13,866 13,629 42,107 43,441
Fuel, supplies, and maintenance ....... 13,106 14,276 36,121 41,217
Insurance and claims .................. 1,309 1,402 4,975 4,320
Taxes and licenses .................... 880 942 2,785 2,908
General and administrative ............ 1,826 2,054 5,592 5,946
Communications and utilities .......... 266 276 862 893
Gain on disposal of assets ............ (476) (839) (1,496) (2,151)
Depreciation and amortization ......... 2,810 3,142 8,154 9,017
---------- ---------- ---------- ----------
Total operating expenses ........ 54,010 55,428 155,038 168,371
---------- ---------- ---------- ----------
Earnings from operations ........... 3,297 3,571 7,349 9,198
Financial (expense) income
Interest expense ...................... (500) (629) (1,268) (1,669)
Interest income ....................... 47 67 98 126
---------- ---------- ---------- ----------
Earnings before income taxes ....... 2,844 3,009 6,179 7,655
Income tax expense ....................... 1,216 1,287 2,693 3,331
---------- ---------- ---------- ----------
Net earnings ....................... $ 1,628 $ 1,722 $ 3,486 $ 4,324
========== ========== ========== ==========
Basic earnings per share ................. $ 0.33 $ 0.35 $ 0.71 $ 0.87
========== ========== ========== ==========
Diluted earnings per share ............... $ 0.32 $ 0.34 $ 0.69 $ 0.85
========== ========== ========== ==========
Basic weighted average shares outstanding 4,936,624 4,988,124 4,925,818 4,979,501
Effect of dilutive stock options ... 123,570 95,178 117,960 101,022
Diluted weighted average ---------- ---------- ---------- ----------
shares outstanding .................... 5,060,194 5,083,302 5,043,778 5,080,523
========== ========== ========== ==========
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)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
2005 2006
-------- -------
Cash flows from operating activities:
Net earnings .......................... $ 3,486 $ 4,324
-------- -------
Adjustments to reconcile net earnings
to cash provided by operating
activities:
Depreciation and amortization ...... 8,154 9,017
Gain on disposal of assets ......... (1,496) (2,151)
Deferred income tax (benefit)
expense ............................ (530) 1,411
Change in:
Receivables ..................... (5,314) (1,582)
Inventories ..................... (45) (145)
Deposits, primarily with
insurers ..................... (63) --
Prepaid expenses ................ (481) (238)
Accounts payable and other
accrued liabilities .......... 4,288 2,091
-------- -------
Total adjustments ............ 4,513 8,403
-------- -------
Net cash provided by operating
activities ................ 7,999 12,727
-------- -------
Cash flows from investing activities:
Purchase of property and equipment .... (3,881) (5,262)
Proceeds from sale of property and
equipment .......................... 5,716 2,600
Other ................................. 36 (3)
-------- -------
Net cash provided by (used in)
investing activities ......... 1,871 (2,665)
-------- -------
Cash flows from financing activities:
Principal payments on long-term debt .. (13,600) (8,458)
Treasury stock reissued ............... 84 91
Other ................................. 15 44
-------- -------
Net cash used in financing
activities ................... (13,501) (8,323)
-------- -------
Net (decrease) increase in cash
and cash equivalents ......... (3,631) 1,739
Cash and cash equivalents at beginning
of period ............................. 5,054 168
-------- -------
Cash and cash equivalents at end
of period ............................. $ 1,423 $ 1,907
======== =======
Supplemental disclosure of cash flow
information:
Cash paid during period for:
Interest ........................ $ 1,253 $ 1,648
Income taxes .................... 2,489 1,987
======== =======
Supplemental schedules of noncash
investing and financing activities:
Fair market value of revenue equipment
traded ............................. $ -- $ 3,428
Notes payable issued for tractors and
trailers ........................... 17,751 13,294
Notes payable issued for excess
insurance premiums ................. 1,071 798
======== =======
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. NEW ACCOUNTING STANDARDS
In July 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"),
"Accounting for Uncertainty in Income Taxes-an Interpretation of FASB
Statement No. 109." This interpretation prescribes a recognition threshold
and measurement process for recording in the financial statements uncertain
tax positions taken or expected to be taken in a tax return. Additionally,
this interpretation provides guidance on the derecognition, classification,
accounting in interim periods, and disclosure requirements for uncertain
tax positions. The provisions of FIN 48 will be effective at the beginning
of the first fiscal year that begins after December 15, 2006. We are
evaluating the effect, if any, the adoption of FIN 48 will have on our
financial statements
In September 2006, the Securities and Exchange Commission published Staff
Accounting Bulletin ("SAB") No. 108 (Topic 1N), "Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements." SAB No. 108 requires registrants to quantify
misstatements using both the balance-sheet and income-statement approaches,
with adjustment required if either method results in a material error. The
provisions of SAB No. 108 are effective as of the beginning of the first
fiscal year that ends after November 15, 2006. As of September 30, 2006, we
are evaluating the effect, if any, the adoption of SAB No. 108 will have on
our financial statements.
NOTE 3. 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 55,000 and 42,000 shares for the three months and nine months
ending on September 30, 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 September 30, 2005 and 2006,
totaled 240,350 and 199,850, respectively.
NOTE 4. 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.
7
(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 vest in installments from 12 to 60 months
after the date of grant. The options are exercisable over a period not to
exceed ten years from the date of grant. At September 30, 2006, 822,500
shares were available for granting additional awards under these plans.
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 for either recognition or pro
forma disclosures. Stock-based employee compensation expense for the nine
months ended September 30, 2006 was $44 and is included as an expense
within the consolidated statements of operations, giving rise to a related
tax benefit of $12. As of September 30, 2006, the total compensation cost
related to non-vested awards not yet recognized was $84 and the
weighted-average period over which it is expected to be recognized was one
year. There was no cumulative effect of initially adopting No. 123R.
The following table summarizes stock option activity for the nine months
ended September 30, 2006:
WEIGHTED
WEIGHTED AVERAGE
AVERAGE REMAINING AGGREGATE
NUMBER OF EXERCISE CONTRACTUAL INTRINSIC
OPTIONS PRICE TERM (YEARS) VALUE
--------- -------- ------------ ---------
Outstanding at beginning of period 205,350 $ 4.38
Options granted 12,000 11.42
Options exercised (17,500) 2.29
Options forfeited --
Options expired --
-------- ------ ---- ----
Outstanding at end of period 199,850 $ 4.99 4.29 $659
======== ====== ==== ====
Options exercisable at end of period 148,350 $ 5.16 3.61 $465
The total intrinsic value of options that vested during the nine months
ended September 30, 2005 and 2006 was $5 and $77, respectively.
We granted 25,500 and 12,000 stock options during the nine months ended
September 30, 2005 and 2006, respectively. The weighted-average grant-date
fair value of these options was $2.85 per share in the 2005 period and
$5.45 per share in the 2006 period. The fair value of stock options granted
was estimated using a Black-Scholes valuation model with the following
assumptions:
Nine months ended
September 30,
-----------------
2005 2006
---- ----
Risk-free interest rate 3.71% 5.05%
Expected dividend yield 0% 0%
Expected volatility 69% 66%
Expected term (in years) 3.7 3.0
The risk-free interest rate assumptions were based upon the yield of a US
Treasury interest only strip with a maturity date corresponding to the
estimated term of the option. The expected volatility was based on
historical bi-monthly price changes of our stock since July 1996. The
estimated term was the average number of years that we estimate the options
will be outstanding.
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.
8
The following table illustrates the effect on net earnings and earnings per
share if we had applied the fair value recognition provisions of FAS No.
123 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 NINE MONTHS ENDED
SEPTEMBER 30, 2005 SEPTEMBER 30, 2005
------------------ ------------------
Net earnings, as reported $1,628 $3,486
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects (7) (12)
------ ------
Pro forma net earnings $1,621 $3,474
====== ======
Basic earnings per share - as reported $ 0.33 $ 0.71
- pro forma $ 0.33 $ 0.71
Diluted earnings per share - as reported $ 0.32 $ 0.69
- pro forma $ 0.32 $ 0.69
The following table summarizes options that were exercised during the nine
months ended September 30, 2005 and 2006.
2005 2006
------- -------
Number of options exercised 35,000 17,500
Cash received from exercise of stock options $ 85 $ 40
Total intrinsic value of options exercised 148 131
Tax benefits realized from exercised options -- 50
Although we do not have a formal policy for issuing shares upon exercise of
stock options, these 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.
9
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 third quarter and first nine months 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
(Dollars in thousands) 2005 2006 2005 2006
------- ------- -------- --------
Trucking revenue $46,271 $46,187 $135,058 $140,721
Brokerage revenue 2,377 1,918 6,497 6,674
Fuel surcharge revenue 8,219 10,353 19,717 28,711
------- ------- -------- --------
Total freight revenue 56,867 58,458 161,272 176,106
Other revenue 440 541 1,115 1,463
------- ------- -------- --------
Operating revenue $57,307 $58,999 $162,387 $177,569
======= ======= ======== ========
During the third quarter of 2006, our average revenue per tractor per week
(excluding fuel surcharge, brokerage, and other revenues) decreased to $2,795
from $2,884 in the third quarter of 2005, reflecting a decrease in miles per
tractor per week, partially offset by a 5.0% 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 1,271 in the 2006 quarter from
1,234 in the 2005 quarter. Our ending fleet size grew by 29 units (2.3%) to
1,276 units at September 30, 2006 compared to 1,247 units at September 30, 2005.
10
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 September 30, 2006, operating revenue increased
3.0% to $59.0 million from $57.3 million during the same quarter in 2005. Net
earnings were $1.7 million, or $0.35 per basic share and $0.34 per diluted
share, compared with net earnings of $1.6 million, or $0.33 per basic share and
$0.32 per diluted share, during the 2005 quarter.
For the nine months ended September 30, 2006, operating revenue increased
9.3% to $177.6 million from $162.4 million during the same period in 2005. Net
earnings were $4.3 million, or $0.87 per basic share and $0.85 per diluted
share, compared with net earnings of $3.5 million, or $0.71 per basic share and
$0.69 per diluted share, during the first nine months of 2005.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of certain items
to revenue for the three and nine months ended September 30, 2005 and 2006:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2005 2006 2005 2006
----- ----- ----- -----
Operating revenue 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Purchased transportation 35.6 34.8 34.4 35.4
Compensation and employee benefits 24.2 23.1 25.9 24.5
Fuel, supplies, and maintenance 22.9 24.2 22.2 23.2
Insurance and claims 2.3 2.4 3.1 2.4
Taxes and licenses 1.5 1.6 1.7 1.6
General and administrative 3.2 3.5 3.4 3.3
Communication and utilities 0.5 0.5 0.5 0.5
Gain from disposal of assets (0.8) (1.4) (0.9) (1.2)
Depreciation and amortization 4.9 5.3 5.0 5.1
----- ----- ----- -----
Total operating expenses 94.2 93.9 95.5 94.8
----- ----- ----- -----
Earnings from operations 5.8 6.1 4.5 5.2
Interest expense, net (0.8) (1.0) (0.7) (0.9)
----- ----- ----- -----
Earnings before income taxes 5.0 5.1 3.8 4.3
Income tax expense 2.1 2.2 1.7 1.9
----- ----- ----- -----
Net earnings 2.8% 2.9% 2.1% 2.4%
===== ===== ===== =====
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2006 WITH THREE MONTHS ENDED
SEPTEMBER 30, 2005.
Operating revenue increased $1.7 million (3.0%) to $59.0 million in the
2006 quarter from $57.3 million in the 2005 quarter. The increase in operating
revenue resulted from an increase in our weighted average tractors to 1,271 in
the 2006 quarter from 1,234 in the 2005 quarter.
Average operating revenue per tractor per week remained relatively constant
at $3,571 in the 2006 quarter and $3,572 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
11
other revenue) decreased to $2,795 in the 2006 quarter from $2,884 in the 2005
quarter, primarily due to decreased freight demand which was partially offset by
improvements in our freight rates. Revenue per loaded mile (excluding fuel
surcharge, brokerage, and other revenue) increased $0.08 to $1.63 in the 2006
quarter from $1.55 in the 2005 quarter. Fuel surcharge revenue increased $2.1
million to $10.4 million in the 2006 quarter from $8.2 million in the 2005
quarter. During the third quarter of 2006 and 2005, approximately $6.0 million
and $4.7 million, respectively, of the fuel surcharge revenue collected helped
to offset our fuel costs. The remainder was passed through to independent
contractors.
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 $123,000 (0.6%) to $20.5 million in the 2006 quarter
from $20.4 million in the 2005 quarter. As a percentage of revenue, purchased
transportation decreased to 34.8% in the 2006 quarter from 35.6% 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,
partially offset by lower payments to broker carriers and a decrease in the
percentage of our fleet supplied by independent contractors. The percentage of
total operating revenue provided by independent contractors decreased slightly
to 36.9% in the 2006 quarter from 37.3% in the 2005 quarter.
Compensation and employee benefits decreased $237,000 (1.7%) to $13.6
million in the 2006 quarter from $13.9 million in the 2005 quarter reflecting
lower health claims and worker's compensation expense which was partially offset
by increases in the number of company drivers and in their rate of pay, as well
as increases in non-driver employee wages. As a percentage of revenue,
compensation and employee benefits decreased to 23.1% in the 2006 quarter from
24.2% 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 5.08 during the 2006 quarter compared to 4.98 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 $1.2 million (8.9%) to $14.3
million in the 2006 quarter from $13.1 million in the 2005 quarter. As a
percentage of revenue, fuel, supplies, and maintenance increased to 24.2% of
revenue in the 2006 quarter compared with 22.9% 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 14% to an average of $2.81 per gallon in the 2006 quarter from
$2.46 per gallon in the 2005 quarter. The $0.35 per gallon increase in fuel
prices was partially offset by a $0.32 per gallon ($1.3 million) increase in
fuel surcharge revenue attributable to company-owned tractors that is included
in operating revenue, mitigating 90% of the increase in fuel prices.
Insurance and claims increased $93,000 (7.1%) to $1.4 million in the 2006
quarter from $1.3 million in the 2005 quarter. As a percentage of revenue,
insurance and claims increased to 2.4% of revenue in the 2006 quarter compared
with 2.3% in the 2005 quarter. This reflects an increase in auto liability
claims, partially offset by a reduction in both primary and excess insurance
premiums, lower 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 were renewed on
July 1, 2006 with no material change in coverage.
Taxes and licenses increased $62,000 (7.0%) to $942,000 in the 2006 quarter
from $880,000 in the 2005 quarter, reflecting an increase in permit costs. As a
percentage of revenue, taxes and licenses increased to 1.6% of revenue in the
2006 quarter compared with 1.5% of revenue in the 2005 quarter.
General and administrative expenses increased $228,000 (12.5%) to $2.1
million in the 2006 quarter from $1.8 million in the 2005 quarter, reflecting
increased advertising expense related to driver recruiting and the addition of
new agency relationships that has caused agent commissions to increase. As a
percentage of revenue, general and administrative expenses increased to 3.5% of
revenue in the 2006 quarter compared with 3.2% of revenue in the 2005 quarter,
reflecting the items noted above offset by 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 $10,000 (3.8%) to $276,000 in the
2006 quarter from $266,000 in the 2005 quarter. As a percentage of revenue,
communications and utilities remained constant at 0.5% of revenue in the 2006
and 2005 quarters.
12
Gains on the disposal of assets increased $363,000 (76.3%) to $839,000 in
the 2006 quarter from $476,000 in the 2005 quarter reflecting a stronger used
equipment market. As a percentage of revenue, gains on the disposal of assets
increased to 1.4% of revenue in the 2006 quarter compared to 0.8% of revenue in
the 2005 quarter.
Depreciation and amortization increased $332,000 (11.8%) to $3.1 million in
the 2006 quarter from $2.8 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 increased to 5.3% of revenue in the 2006 quarter compared with 4.9%
in the 2005 quarter, reflecting the items noted above, the effect of which was
partially offset by 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 $109,000 (24.1%) to $562,000 in the 2006
quarter from $453,000 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 1.0% of revenue in the 2006 quarter
from 0.8% of revenue in the 2005 quarter.
As a result of the foregoing, our pre-tax margin increased to 5.1% in the
2006 quarter from 5.0% in the 2005 quarter.
Our income tax expense in the 2006 quarter was $1.3 million, or 42.8% of
earnings before income taxes. Our income tax expense in the 2005 quarter was
$1.2 million, or 42.8% 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 $1.7 million
in the 2006 quarter (2.9% of revenue), compared with $1.6 million in the 2005
quarter (2.8% of revenue). In addition, our operating ratio (operating expenses
as a percentage of operating revenue) was 93.9% during the 2006 quarter as
compared with 94.2% 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 92.7% during the 2006 quarter as
compared with 93.3% during the 2005 quarter.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2006 WITH NINE MONTHS ENDED
SEPTEMBER 30, 2005.
Operating revenue increased $15.2 million (9.3%) to $177.6 million in the
first nine months of 2006 from $162.4 million in first nine months of 2005. The
increase in operating revenue resulted from increased average operating revenue
per tractor per week and an increase in our weighted average tractors to 1,265
in the 2006 period from 1,234 in the 2005 period.
Average operating revenue per tractor per week increased to $3,599 in the
2006 period from $3,374 in the 2005 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
$2,852 in the 2006 period from $2,806 in the 2005 period, primarily due to
improvements in our freight rates. Revenue per loaded mile (excluding fuel
surcharge, brokerage, and other revenue) increased $0.08 to $1.62 in the 2006
period from $1.54 in the 2005 period. Fuel surcharge revenue increased $9.0
million to $28.7 million in the 2006 period from $19.7 million in the 2005
period. During the first nine months of 2006 and 2005, approximately $16.5
million and $11.5 million, respectively, of the fuel surcharge revenue collected
helped to offset our fuel costs. The remainder was passed through to independent
contractors.
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 $6.8 million (12.2%) to $62.8 million in the 2006
period from $55.9 million in the 2005 period. As a percentage of revenue,
purchased transportation increased to 35.4% in the 2006 period from 34.4% in the
2005 period. 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
13
fleet supplied by independent contractors. The percentage of total operating
revenue provided by independent contractors increased to 37.4% in the 2006
period from 36.4% in the 2005 period.
Compensation and employee benefits increased $1.3 million (3.2%) to $43.4
million in the 2006 period from $42.1 million in the 2005 period reflecting
increases in the number of company drivers and in their rate of pay, increases
in non-driver employee wages, and higher worker's compensation expense,
partially offset by lower health claims. As a percentage of revenue,
compensation and employee benefits decreased to 24.5% in the 2006 period from
25.9% in the 2005 period, 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
5.07 during the 2006 period compared to 4.95 in the 2005 period.
Fuel, supplies, and maintenance increased $5.1 million (14.1%) to $41.2
million in the 2006 period from $36.1 million in the 2005 period. As a
percentage of revenue, fuel, supplies, and maintenance increased to 23.2% of
revenue in the 2006 period compared with 22.2% in the 2005 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 decreased as we continue
to update our fleet with new equipment. Fuel prices increased approximately 21%
to an average of $2.65 per gallon in the 2006 period from $2.19 per gallon in
the 2005 period. The $0.46 per gallon increase in fuel prices was partially
offset by a $0.39 per gallon ($5.0 million) increase in fuel surcharge revenue
attributable to company-owned tractors that is included in operating revenue,
mitigating 84% of the increase in fuel prices.
Insurance and claims decreased $655,000 (13.2%) to $4.3 million in the 2006
period from $5.0 million in the 2005 period. As a percentage of revenue,
insurance and claims decreased to 2.4% of revenue in the 2006 period compared
with 3.1% in the 2005 period. This reflects lower auto liability and cargo
claims, a reduction in both primary and excess insurance premiums, 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
were renewed on July 1, 2006 with no material change in coverage.
Taxes and licenses increased $123,000 (4.4%) to $2.9 million in the 2006
period from $2.8 million in the 2005 period, reflecting an increase in permit
costs. As a percentage of revenue, taxes and licenses decreased to 1.6% of
revenue in the 2006 period compared with 1.7% of revenue in the 2005 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 $354,000 (6.3%) to $5.9
million in the 2006 period from $5.6 million in the 2005 period, reflecting
increased advertising expense related to driver recruiting and the addition of
new agency relationships that has caused agent commissions to increase. As a
percentage of revenue, general and administrative expenses decreased to 3.3% of
revenue in the 2006 period from 3.4% of revenue in the 2005 period, reflecting
the items noted above offset by 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 $31,000 (3.6%) to $893,000 in the
2006 period from $862,000 in the 2005 period. As a percentage of revenue,
communications and utilities remained constant at 0.5% of revenue in the 2006
and 2005 periods.
Gains on the disposal of assets increased $655,000 (43.8%) to $2.2 million
in the 2006 period from $1.5 million in the 2005 period reflecting a stronger
used equipment market. As a percentage of revenue, gains on the disposal of
assets increased to 1.2% of revenue in the 2006 period compared to 0.9% of
revenue in the 2005 period.
Depreciation and amortization increased $863,000 (10.6%) to $9.0 million in
the 2006 period from $8.2 million in the 2005 period 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 increased to 5.1% of revenue in the 2006 period compared with 5.0%
in the 2005 period, reflecting the items noted above, the effect of which was
partially offset by 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.
14
Interest expense, net, increased $373,000 (31.9%) to $1.5 million in the
2006 period from $1.2 million in the 2005 period. 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 period
from 0.7% of revenue in the 2005 period.
As a result of the foregoing, our pre-tax margin increased to 4.3% in the
2006 period from 3.8% in the 2005 period.
Our income tax expense in the 2006 period was $3.3 million, or 43.5% of
earnings before income taxes. Our income tax expense in the 2005 period was $2.7
million, or 43.6% of earnings before income taxes. In both periods, 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 $4.3 million
in the 2006 period (2.4% of revenue), compared with $3.5 million in the 2005
period (2.1% of revenue). In addition, our operating ratio (operating expenses
as a percentage of operating revenue) was 94.8% during the 2006 period as
compared with 95.5% during the 2005 period. Our adjusted operating ratio
(operating expenses minus fuel surcharge revenue as a percentage of operating
revenue excluding fuel surcharge revenue) was 93.8% during the 2006 period as
compared with 94.8% during the 2005 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. At September 30, 2006, we had $1.9 million in cash and
adequate borrowing availability on our line of credit to finance any near-term
needs for working capital. During the first nine months of 2006 we purchased 165
new tractors and 301 new trailers for $20.8 million, which was financed, in
part, with $13.3 million of new long term debt. We plan to purchase
approximately 55 new tractors and 89 new trailers throughout the remainder of
2006, allowing for the replacement of older, high mileage tractors and trailers.
At September 30, 2006, we had positive working capital of $1.8 million
compared to positive working capital of $2.6 million at September 30, 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 32 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, general shipping demand by our
customers, fuel prices, the availability of drivers and independent contractors,
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 September 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;
15
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 $12.7 million for the nine
months ended September 30, 2006, compared to $8.0 million for the nine months
ended September 30, 2005. Historically, our principal use of cash generated from
operations is to service debt and to internally finance acquisitions of revenue
equipment. Total receivables increased $1.6 million for the nine months ended
September 30, 2006. The average age of our trade accounts receivable improved to
31.5 days in the 2006 period compared to 31.8 days in the 2005 period.
Net cash used in investing activities was $2.7 million for the nine months
ended September 30, 2006. This related primarily to the use of cash to purchase
property and equipment offset by proceeds from the sale of revenue equipment.
Net cash used in financing activities was $8.3 million for the nine months
ended September 30, 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 September 30, 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 September 30, 2006, we had outstanding letters of credit totaling
$8.5 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 September 30, 2006 was $15.0 million, leaving
$6.5 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 September 30, 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 September 30, 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 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 September 30, 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.
16
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following tables set forth our contractual obligations and other
commercial commitments as of September 30, 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 $39,182 $10,116 $19,885 $9,181 $--
Operating lease obligations 4,180 1,971 2,151 58 --
Purchase obligations 5,561 5,561 -- -- --
------- ------- ------- ------ ---
Total $48,923 $17,648 $22,036 $9,239 $--
======= ======= ======= ====== ===
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 September 30, 2006, we had commercial
commitments of approximately $5.6 million, related to tractor and trailer orders
that cannot be cancelled. Financing for these commitments has been prearranged.
Approximately 16% 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 6.50% as of September 30, 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 $5,143 $2,219 $2,468 $456 $--
====== ====== ====== ==== ===
We had no other commercial commitments at September 30, 2006.
OFF-BALANCE SHEET ARRANGEMENTS
Our liquidity is not materially affected by off-balance sheet transactions.
As of September 30, 2006, our fleet included 126 tractors and 11 trailers
obtained under operating leases. The lease payments for these tractors and
trailers 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 116
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.
17
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."
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.
18
RECENT ACCOUNTING STANDARDS
In February 2006, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments-An Amendment
of FASB Statements No. 133 and 140." This statement amends FASB Statements No.
133, "Accounting for Derivative Instruments and Hedging Activities," and No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" and eliminates the exemption from applying
Statement No. 133 to interests in securitized financial assets so that similar
items are accounted for in the same way. The provisions of SFAS No. 155 are
effective for all financial instruments acquired or issued after the beginning
of the first fiscal year that begins after September 15, 2006. As of September
30, 2006, we believe that SFAS No. 155 will have no effect on our financial
position, results of operations, and cash flows.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets-An Amendment of FASB Statement No. 140." This Statement amends
FASB Statement No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" and requires that all separately
recognized servicing assets and servicing liabilities be initially measured at
fair value, if practicable. The provisions of SFAS No. 156 are effective as of
the beginning of the first fiscal year that begins after September 15, 2006. As
of September 30, 2006, we believe that SFAS No. 156 will have no effect on our
financial position, results of operations, and cash flows.
In July 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"),
"Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement
No. 109." This interpretation prescribes a recognition threshold and measurement
process for recording in the financial statements uncertain tax positions taken
or expected to be taken in a tax return. Additionally, this interpretation
provides guidance on the derecognition, classification, accounting in interim
periods, and disclosure requirements for uncertain tax positions. The provisions
of FIN 48 will be effective at the beginning of the first fiscal year that
begins after December 15, 2006. We are evaluating the effect, if any, the
adoption of FIN 48 will have on our financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements."
This Statement defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles (GAAP), and expands
disclosures about fair value measurements. The provisions of SFAS No. 157 are
effective as of the beginning of the first fiscal year that begins after
November 15, 2007. As of September 30, 2006, we believe that SFAS No. 157 will
have no effect on our financial position, results of operations, and cash flows.
In September 2006, the Securities and Exchange Commission published Staff
Accounting Bulletin ("SAB") No. 108 (Topic 1N), "Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements." SAB No. 108 requires registrants to quantify
misstatements using both the balance-sheet and income-statement approaches, with
adjustment required if either method results in a material error. The provisions
of SAB No. 108 are effective as of the beginning of the first fiscal year that
ends after November 15, 2006. As of September 30, 2006, we are evaluating the
effect, if any, the adoption of SAB No. 108 will have on our financial
statements.
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 these surcharges.
19
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 these 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 $6.3 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 September 30, 2006, a
one-point increase in the prime rate would increase interest expense by
approximately $63,000. The remainder of our other debt carries fixed interest
rates. At September 30, 2006, approximately 16% of our debt carried a variable
interest rate and the remainder was fixed.
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 September 30, 2006. During our third 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 disclosure controls and procedures and 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. A disclosure control system and an internal control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of these controls are met. Further,
the design of these control systems 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 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.
20
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.
ITEM 6. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Articles of Incorporation (1)
3.2 Bylaws of Smithway Motor Xpress Corp. (as amended and restated
November 3, 2006) (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 effective June 27, 1996 (SEC Registration No.
33-90356).
(2) Incorporated by reference to Exhibit 3 to our Current Report on Form 8-K
dated and filed November 3, 2006 (SEC File No. 000-20793).
* 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: November 9, 2006 By: /s/ Douglas C. Sandvig
-----------------------------------
Douglas C. Sandvig
Senior Vice President, Treasurer
and Chief Financial Officer
(On behalf of the registrant and as
the registrant's principal
financial and accounting officer)
22
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION METHOD OF FILING
- ------- ----------- ----------------
3.1 Articles of Incorporation Incorporated by
reference
3.2 Bylaws of Smithway Motor Xpress Corp. (as amended Incorporated by
and restated November 3, 2006) 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, Filed herewith
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, Filed herewith
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, by Douglas C. Sandvig,
the Registrant's principal financial officer