SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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 JUNE 30, 2001
COMMISSION FILE NO. 0-24946
KNIGHT TRANSPORTATION, INC.
(Exact name of registrant as specified in its charter)
ARIZONA 86-0649974
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5601 WEST BUCKEYE ROAD
PHOENIX, ARIZONA 85043
(Address of Principal Executive Offices) (Zip Code)
(602) 269-2000
(Registrant's telephone number, including area code)
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 [ ]
The number of shares outstanding of registrant's Common Stock, par value $0.01
per share, as of August 10, 2001 was 23,112,824 shares.
KNIGHT TRANSPORTATION, INC.
INDEX
PAGE NUMBER
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30, 2001
And December 31, 2000 1
Consolidated Statements of Income for the Three Months
And Six Months Ended June 30, 2001 and June 30, 2000 3
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2001 and June 30, 2000 4
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ON MARKET RISK 15
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 16
ITEM 2. CHANGES IN SECURITIES 16
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 AND REPORTS ON FORM 8-K 17
SIGNATURES 18
INDEX TO EXHIBITS 20
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2001 AND DECEMBER 31, 2000
June 30, 2001 December 31, 2000
------------- -----------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,987,949 $ 6,151,383
Accounts receivable, net 31,773,320 33,923,878
Notes receivable, net 718,830 143,576
Inventories and supplies 897,023 792,683
Prepaid expenses 7,951,406 5,018,559
Deferred tax asset 3,401,125 3,046,756
------------- -------------
Total current assets 46,729,653 49,076,835
------------- -------------
PROPERTY AND EQUIPMENT:
Land and improvements 12,848,460 11,309,547
Buildings and improvements 11,230,356 9,684,086
Furniture and fixtures 5,824,383 5,620,344
Shop and service equipment 1,743,088 1,435,818
Revenue equipment 157,779,938 156,429,863
Leasehold improvements 636,500 611,475
------------- -------------
190,062,725 185,091,133
Less: Accumulated depreciation (48,194,035) (42,113,992)
------------- -------------
PROPERTY AND EQUIPMENT, net 141,868,690 142,977,141
------------- -------------
NOTES RECEIVABLE - long-term 3,222,591 1,398,475
------------- -------------
OTHER ASSETS 16,879,886 13,531,568
------------- -------------
$ 208,700,820 $ 206,984,019
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
1
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
AS OF JUNE 30, 2001 AND DECEMBER 31, 2000
June 30, 2001 December 31, 2000
------------- -----------------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,854,116 $ 6,125,474
Accrued liabilities 6,687,080 4,406,341
Current portion of long-term debt 4,864,429 5,477,868
Claims accrual 5,212,525 5,554,127
------------- -------------
Total current liabilities 22,618,150 21,563,810
------------- -------------
LINE OF CREDIT 30,200,000 34,000,000
LONG - TERM DEBT, less current portion 7,504,809 14,885,268
DEFERRED INCOME TAXES 31,956,043 31,414,320
------------- -------------
Total liabilities 92,279,002 101,863,398
------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value; authorized
50,000,000 shares, none issued and outstanding -- --
Common stock, $0.01 par value; authorized 100,000,000
shares; issued 23,111,160 and 22,890,300 shares at
June 30, 2001 and December 31, 2000; outstanding
22,709,142 and 22,488,282 shares at June 30, 2001
and December 31, 2000, respectively 231,112 228,903
Additional paid-in capital 30,987,423 28,831,892
Retained earnings
Accumulated other comprehensive income 88,492,985 79,196,334
Less treasury stock, at cost (402,018 shares (153,194) --
at June 30, 2001 and December 31, 2000) (3,136,508) (3,136,508)
------------- -------------
Total shareholders' equity 116,421,818 105,120,621
------------- -------------
$ 208,700,820 $ 206,984,019
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
2
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Six Months Ended
June 30 June 30
------------------------------ ------------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
REVENUE
Revenue, before fuel surcharge $ 58,697,743 $ 51,675,992 $ 112,745,349 $ 95,244,826
Fuel surcharge 2,490,201 1,947,149 5,105,616 3,459,058
------------- ------------- ------------- -------------
Total revenue 61,187,944 53,623,141 117,850,965 98,703,884
------------- ------------- ------------- -------------
OPERATING EXPENSES:
Salaries, wages and benefits 19,540,189 17,493,054 37,874,993 31,569,049
Fuel 9,959,204 8,451,524 19,141,316 15,398,230
Operations and maintenance 3,172,348 2,767,002 6,294,236 5,162,152
Insurance and claims 2,194,052 1,239,795 4,250,575 1,963,109
Operating taxes and licenses 1,721,676 1,931,820 3,377,225 3,590,426
Communications 450,283 402,657 849,204 712,364
Depreciation and amortization 4,826,744 4,802,468 9,693,913 8,955,449
Lease expense - revenue equipment 2,140,948 811,719 3,992,684 895,616
Purchased transportation 6,167,230 6,279,514 12,019,256 13,092,985
Miscellaneous operating expenses 1,929,259 1,371,673 3,463,216 2,418,861
------------- ------------- ------------- -------------
52,101,933 45,551,226 100,956,618 83,758,241
------------- ------------- ------------- -------------
Income from operations 9,086,011 8,071,915 16,894,347 14,945,643
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest income 153,954 323,873 310,719 611,296
Interest expense (639,872) (1,120,038) (1,508,415) (1,908,424)
------------- ------------- ------------- -------------
(485,918) (796,165) (1,197,696) (1,297,128)
------------- ------------- ------------- -------------
Income before taxes 8,600,093 7,275,750 15,696,651 13,648,515
INCOME TAXES (3,540,000) (2,680,000) (6,400,000) (5,180,000)
------------- ------------- ------------- -------------
Net income $ 5,060,093 $ 4,595,750 $ 9,296,651 $ 8,468,515
============= ============= ============= =============
Net income per common share and common
share equivalent:
Basic $ 0.22 $ 0.21 $ 0.41 $ 0.39
============= ============= ============= =============
Diluted $ 0.22 $ 0.20 $ 0.40 $ 0.38
============= ============= ============= =============
Weighted average number of common
shares and common share equivalents
outstanding:
Basic 22,694,320 21,988,217 22,645,303 21,966,425
============= ============= ============= =============
Diluted 23,202,283 22,518,579 23,123,647 22,374,168
============= ============= ============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
3
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
June 30
----------------------------
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 9,296,651 $ 8,468,515
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization 9,693,913 8,955,449
Allowance for doubtful accounts 164,813 161,134
Valuation allowance - notes receivable 0 635,902
Deferred income taxes 187,354 2,169,846
Changes in assets and liabilities, net of businesses acquired:
Decrease (increase) in trade receivables 1,985,745 (4,774,105)
Increase in inventories and supplies (104,340) (103,116)
Increase in prepaid expenses (2,932,847) (3,927,918)
Decrease in accounts payable (271,358) (156,174)
Increase in accrued liabilities and claims accrual 1,785,943 2,238,725
------------ ------------
Net cash provided by operating activities 19,805,874 13,668,258
------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net (10,360,609) (20,457,798)
Increase in other assets (1,573,171) (4,766,525)
Cash received from business acquired 0 2,528,420
Proceeds from sale of notes receivable 0 10,091,165
Increase in notes receivable, net (2,399,370) (2,054,874)
------------ ------------
Net cash used in investing activities (14,333,150) (14,659,612)
------------ ------------
The accompanying notes are an integral part of these
consolidated financial statements.
4
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Six Months Ended
June 30
--------------------------
2001 2000
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
(Payments) borrowing on line of credit, net (3,800,000) 9,587,421
Payments of long-term debt (7,993,898) (6,671,531)
Decrease in accounts payable - equipment 0 (4,261,659)
Proceeds from exercise of stock options 2,157,740 955,380
----------- -----------
Net cash used in financing activities (9,636,158) (390,389)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,163,434) (1,381,743)
CASH AND CASH EQUIVALENTS,
Beginning of period 6,151,383 3,294,827
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,987,949 $ 1,913,084
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Cash Flow Information:
Income taxes paid $ 2,518,731 $ 3,345,825
Interest paid 1,521,261 1,881,949
The accompanying notes are an integral part of these
consolidated financial statements.
5
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. FINANCIAL INFORMATION
The accompanying consolidated financial statements include the parent company
Knight Transportation, Inc., and its wholly owned subsidiaries, Knight
Administrative Services, Inc.; Quad-K Leasing, Inc.; KTTE Holdings, Inc.; QKTE
Holdings, Inc.; Knight Management Services, Inc.; Knight Transportation Midwest,
Inc.; Knight Transportation South Central Ltd.; KTeCom, L.L.C.; and John Fayard
Fast Freight, Inc. (hereinafter collectively called the "Company"). All material
inter-company items and transactions have been eliminated in consolidation.
The consolidated financial statements included herein have been prepared in
accordance with generally accepted accounting principles ("GAAP"), pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures have been omitted or condensed pursuant to
such rules and regulations. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. Results of operations in interim periods are
not necessarily indicative of results for a full year. These consolidated
financial statements and notes thereto should be read in conjunction with the
Company's consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2000. The
preparation of financial statements in accordance with GAAP requires management
to make estimates and assumptions. Such estimates and assumptions affect the
reported amounts of assets and liabilities as well as disclosure of contingent
assets and liabilities, at the date of the accompanying consolidated financial
statements, and the reported amounts of the revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
6
NOTE 2. NET INCOME PER SHARE
A reconciliation of the basic and diluted earnings per share computations for
the three months and six months ended June 30, 2001 and 2000 is as follows:
Three Months Ended Six Months Ended
June 30 June 30
------------------------- -------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Weighted average common
shares outstanding - Basic 22,694,320 21,988,217 22,645,303 21,966,425
Effect of stock options 507,963 530,362 478,344 407,743
----------- ----------- ----------- -----------
Weighted average common
share and common share
equivalents outstanding -
Diluted 23,202,283 22,518,579 23,123,647 22,374,168
=========== =========== =========== ===========
Net income $ 5,060,093 $ 4,595,750 $ 9,296,651 $ 8,468,515
=========== =========== =========== ===========
Net income per common share and
common share equivalent
Basic $ 0.22 $ 0.21 $ 0.41 $ 0.39
=========== =========== =========== ===========
Diluted $ 0.22 $ 0.20 $ 0.40 $ 0.38
=========== =========== =========== ===========
NOTE 3. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) for the period was as follows:
Three Months Ended Six Months Ended
June 30 June 30,
------------------------- --------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net Income $ 5,060,093 $ 4,595,750 $ 9,296,651 $ 8,468,515
Other comprehensive income (loss):
Interest rate swap agreement - fair
market value adjustment 29,188 -0- (153,194) -0-
----------- ----------- ----------- -----------
Comprehensive income $ 5,089,281 $ 4,595,750 $ 9,143,457 $ 8,468,515
=========== =========== =========== ===========
7
NOTE 4. ACQUISITION
The Company acquired the assets of a Mississippi-based truckload carrier during
the quarter ended June 30, 2000. The Company's consolidated financial statements
include the operations of this subsidiary from the date of acquisition. The
acquired assets and assumed liabilities were recorded at their estimated fair
values at the acquisition date in accordance with Accounting Principles Board
("APB") Opinion No. 16. In conjunction with the acquisition, the Company issued
343,182 shares of common stock from its treasury shares. These shares were
valued at fair market value less a discount due to the restricted nature of
these shares. Adjustments to the purchase price allocations, if any, are not
expected to have a material impact on the accompanying consolidated financial
statements. Terms of the purchase agreement set forth conditions upon which an
earn-out adjustment to the purchase price based upon earnings may be necessary.
This earn-out adjustment may be in the form of additional shares of the
Company's common stock and/or cash.
The aggregate purchase price of the acquisition consisted of the following, in
thousands:
Cash $ 4,000
Common stock 2,949
Assumption of liabilities 20,830
-------
Total $27,779
=======
The fair value of the assets purchased has been allocated as follows, in
thousands:
Cash $ 2,528
Accounts receivable 4,360
Property and equipment 12,253
Intangible assets 7,745
Other assets 893
-------
Total $27,779
=======
NOTE 5. SEGMENT INFORMATION
The Company has seven operating segments; however, it has determined that it has
one reportable segment. Six of the segments are managed based on similar
economic characteristics. Each of the six regional operating divisions provides
short to medium-haul truckload carrier services of general commodities to a
similar class of customers. In addition, each division exhibits similar
financial performance, including average revenue per mile and operating ratio.
The remaining segment is not reported because it does not meet the materiality
thresholds in SFAS No. 131. As a result of the foregoing, the Company has
determined that it is appropriate to aggregate its operating divisions into one
reportable segment consistent with the guidance in SFAS No. 131. Accordingly,
the Company has not presented separate financial information for each of its
operating divisions as the Company's consolidated financial statements present
its one reportable segment.
8
NOTE 6. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June, 1998 the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. This
statement establishes accounting and reporting standards for derivative
instruments, including derivative instruments embedded in other contracts, and
for hedging activities. In June 1999, the FASB issued SFAS No. 137, Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of SFAS No. 133. This statement was adopted by the Company effective
January 1, 2001. The adoption of this statement did not have a material impact
on the Company's results of operations or financial position.
In July 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No.
142, Goodwill and Other Intangible Assets. SFAS No. 141 requires the use of the
purchase method of accounting and prohibits the use of the pooling-of-interests
method of accounting for business combinations initiated after June 30, 2001.
This statement also requires that the Company recognize acquired intangible
assets apart from goodwill if the acquired intangible assets meet certain
criteria. SFAS No. 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill for impairment at least annually.
In addition, SFAS No. 142 requires that the Company identify reporting units for
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS No. 142. This statement is required to be
applied in fiscal years beginning after December 15, 2001 to all goodwill and
other intangible assets recognized at that date, regardless of when those assets
were initially recognized. SFAS No. 142 requires the Company to complete a
transitional goodwill impairment test within six months from the date of
adoption and reassess the useful lives of other intangible assets within the
first interim quarter after adoption. At present, the Company is currently
assessing but has not yet determined the complete impact the adoption of SFAS
No. 141 and SFAS No. 142 will have on its financial position and results of
operations.
NOTE 7. COMMITMENTS AND CONTINGENCIES
The Company is involved in certain legal proceedings arising in the normal
course of business. In the opinion of management, the Company's potential
exposure under pending legal proceedings is adequately provided for in the
accompanying consolidated financial statements.
NOTE 8. RECAPITALIZATION AND STOCK SPLIT
On May 9, 2001, the Board of Directors approved a three for two stock split,
effected in the form of a 50 percent stock dividend. The stock split occurred on
June 1, 2001, to stockholders of record as of the close of business on May 18,
2001. The number of common shares authorized, issued and outstanding, and all
per share amounts, have been adjusted to reflect the stock split for all periods
presented.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FORWARD LOOKING STATEMENTS
Except for certain historical information contained herein, this Quarterly
Report on Form 10-Q contains forward-looking statements that involve risks,
assumptions and uncertainties which are difficult to predict. All statements,
other than statements of historical fact, are statements that could be deemed
forward-looking statements, including any projections of earnings, revenues, or
other financial items; any statements of plans, strategies, and objectives of
management for future operations; any statements concerning proposed new
strategies or developments; any statements regarding future economic conditions
or performance; any statements of belief and any statement of assumptions
underlying any of the foregoing. Words such as "believe," "may", "could",
"expects," "anticipates", and "likely", and variations of these words or similar
expressions, are intended to identify such forward-looking statements. The
Company's actual results could differ materially from those discussed here.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in the section entitled "Factors That may Affect
Future Results," included in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" set forth in the Company's Annual report on
Form 10-K, which is by this reference incorporated herein. The Company does not
assume, and specifically disclaims, any obligation to update any forward-looking
statement contained in this Quarterly report.
RESULTS OF OPERATIONS
The Company's revenue, before fuel surcharge, for the six months ended June 30,
2001, increased by 18.4% to $112.7 million from $95.2 million over the same
period in 2000. For the three months ended June 30, 2001, revenue, before fuel
surcharge, increased by 13.6% to $58.7 million from $51.7 million over the same
period in 2000.
The increase in revenue, before fuel surcharge, resulted from expansion of the
Company's customer base and increased volume from existing customers. This was
facilitated by the continued expansion of the Company's fleet, including the
addition of approximately 225 tractors in the April 19, 2000 acquisition of John
Fayard Fast Freight, Inc. The Company's fleet increased by 15.4% to 1,797
tractors (including 209 owned by independent contractors) as of June 30, 2001,
from 1,557 tractors (including 243 owned by independent contractors) as of June
30, 2000.
Salaries, wages and benefits increased as a percentage of revenue, before fuel
surcharge, to 33.6% for the six months ended June 30, 2001, from 33.1% for the
same period in 2000. This increase was primarily the result of the increase in
the ratio of Company drivers to independent contractors. At June 30, 2001, 88%
of the Company's fleet was operated by Company drivers, compared to 84% at June
30, 2000. For the three months ended June 30, 2001, salaries, wages and benefits
decreased as a percentage of revenue, before fuel surcharge, to 33.3% from 33.9%
for the same period in 2000. This decrease was the result of the Company's
efforts to improve the ratio of non-driving employees to tractors by utilizing
technology to increase efficiencies. The Company's insurance program for medical
claims which involves self- insurance with risk retention levels, was higher for
the 2001 period compared to the 2000 period. Claims in excess of these retention
levels are covered by insurance, which management considers adequate. The
Company records the cost of medical insurance coverage, along with the uninsured
portion, to salaries, wages and benefits expense. For Company drivers, the
Company records accruals for worker's compensation as a component of its claims
accrual, and the related expense is reflected in salaries, wages and benefits
expense in its consolidated statements of income.
10
Fuel expense, net of fuel surcharge, remained consistent as a percentage of
revenue, before fuel surcharge, at 12.5% for the six months ended June 30, 2001
and for the same period in 2000. For the three months ended June 30, 2001, fuel
expense as a percentage of revenue, before fuel surcharge, increased to 12.7%
from 12.6% for the same period in 2000. This increase was primarily the result
of recent higher fuel costs per gallon, as well as the increase in the ratio of
Company vehicles to independent contractors. Independent contractors pay their
own fuel costs.
Operations and maintenance expense increased as a percentage of revenue, before
fuel surcharge, to 5.6% for the six months ended June 30, 2001 from 5.4% for the
same period in 2000. This increase was primarily due to the increase in the
ratio of Company vehicles to independent contractors. For the three months ended
June 30, 2001 and for the same period in 2000, operations and maintenance
expense as a percentage of revenue, before fuel surcharge, remained consistent
at 5.4%.
Insurance and claims expense increased as a percentage of revenue, before fuel
surcharge, to 3.8% for the six months ended June 30, 2001, from 2.1% for the
same period in 2000. For the three months ended June 30, 2001, insurance and
claims expense increased as a percentage of revenue, before fuel surcharge, to
3.7% from 2.4% for the same period in 2000. These variations reflect the effect
of the increases in insurance rates and self-insurance retention levels incurred
during the 2001 periods compared to the same periods in 2000.
Operating taxes and licenses decreased as a percentage of revenue, before fuel
surcharge, to 3.0% for the six months ended June 30, 2001, from 3.8% for the
same period in 2000. For the three months ended June 30, 2001, operating taxes
and licenses as a percentage of revenue, before fuel surcharge, decreased to
2.9% compared to 3.7% for the same period in 2000. These decreases were due to
overall improved management of the tractor and trailer licensing in the various
states the Company operates in.
Communications expense as a percentage of revenue, before fuel surcharge, for
both the six months and three months ended June 30, 2001 remained relatively
consistent with the same periods in 2000, at less than 1.0% of revenue.
Depreciation and amortization expense as a percentage of revenue, before fuel
surcharge, decreased to 8.6% for the six month period ended June 30, 2001, from
9.4% for the same period in 2000. For the three months ended June 30, 2001,
depreciation and amortization decreased as a percentage of revenue, before fuel
surcharge, to 8.2% from 9.3% for the same period in 2000. These decreases were
due to the initiation of a leasing program as described below.
Lease Expense - Revenue Equipment as percentage of revenue, before fuel
surcharge, was 3.5% for the six months ended June 30, 2001, compared to 0.9% for
the same period in 2000. For the three months ended June 30, 2001 Lease Expense
- - Revenue Equipment as a percentage of revenue, before fuel surcharge, was 3.6%
compared to 1.6% for the same period in 2000. These increases were due to the
initiation of a leasing program to obtain additional revenue equipment, as well
as the increase in the ratio of the company vehicles to independent contractors.
Purchased transportation decreased as a percentage of revenue, before fuel
surcharge, to 10.7% for the six months ended June 30, 2001, from 13.7% for the
same period in 2000. For the three months ended June 30, 2001, purchased
transportation as a percentage of revenue, before fuel surcharge, decreased to
10.5% from 12.2% for the same period in 2000. These decreases were due to the
decrease in the ratio of independent contractors to Company drivers to 12% as of
June 30, 2001, from 16% as of June 30, 2000. Independent contractors pay their
own expenses, including fuel, and are compensated at a fixed rate per mile.
11
Miscellaneous operating expenses, as a percentage of revenue, before fuel
surcharge, were slightly higher for the three and six months ending June 30,
2001, compared to the same periods in 2000. These increases were primarily due
to decreased utilization of the Company's fleet and increased travel expenses
during the 2001 periods.
As a result of the above factors, the Company's operating ratio (operating
expenses, net of fuel surcharge, as a percentage of revenue, before fuel
surcharge) for the six months ended June 30, 2001, increased to 85.0% from 84.4%
for the same period in 2000. The Company's operating ratio remained consistent
at 84.5% for the three months ended June 30, 2001, and for the same period in
2000.
For both the six months and three months ended June 30, 2001, net interest
expense decreased as a percentage of revenue, before fuel surcharge, compared to
the same periods in 2000. This decrease was primarily the result of the
Company's ability to reduce its average outstanding debt by approximately $19.6
million at June 30, 2001 compared to June 30, 2000. Recent trends of lower
interest rates on the Company's line of credit borrowings and the equipment
leasing program discussed above, have also contributed to this decrease.
Income taxes have been provided at the statutory federal and state rates,
adjusted for certain permanent differences between financial statement and
income tax reporting.
As a result of the preceding changes, the Company's net income as a percentage
of revenue, before fuel surcharge, was 8.2% for the six months ended June 30,
2001, compared to 8.9% for the same period in 2000. For the three months ended
June 30, 2001, net income as a percentage of revenue, before fuel surcharge, was
8.6%, compared to 8.9% for the same period in 2000.
LIQUIDITY AND CAPITAL RESOURCES
The growth of the Company's business has required a significant investment in
new revenue equipment. The Company's primary source of liquidity has been funds
provided by operations and the Company's lines of credit with its primary
lender. Net cash provided by operating activities was approximately $19.8
million for the first six months of 2001, compared to $13.7 million for the
corresponding period in 2000.
Capital expenditures for the purchase of revenue equipment, net of trade-ins,
office equipment and leasehold improvements totaled $10.4 million for the first
six months of 2001 compared to $20.5 million for the same period in 2000.
Net cash used in financing activities was approximately $9.6 million for the
first six months of 2001, compared to net cash used in financing activities of
$0.4 million for the same period in 2000. Net cash used in financing activities
during the first six months of 2001 was primarily used for pay downs of
long-term debt and the Company's line of credit.
The Company maintains a line of credit totaling $50 million with its lender and
uses this line to finance the acquisition of revenue equipment and other
corporate uses to the extent the Company's need for capital is not provided by
funds from operations. The Company is obligated to comply with certain financial
covenants under its line of credit. The rate of interest on borrowings against
the line of credit will vary depending upon the interest rate election made by
the Company, based upon either the London Interbank Offered Rate ("Libor") plus
an adjustment factor, or the prime rate. The average interest rate
12
for the three months ended June 30, 2001, was 5.7%. Borrowings under the line
amounted to $30.2 million at June 30, 2001. The line expires in July 2003.
The Company, through its subsidiaries, has entered into lease agreements under
which it leased revenue equipment. The Company has guaranteed all revenue
equipment leases. The total amount financed under these agreements as of June
30, 2001, was $45,556,409, with effective interest rates ranging from 5.2% to
8.2%, with $8,921,122 due in the next 12 months.
Management believes the Company has adequate liquidity to meet its current
needs. The Company will continue to have significant capital requirements over
the long term, which may require the Company to incur debt or seek additional
equity capital. The availability of this capital will depend upon prevailing
market conditions, the market price of the common stock and other factors over
which the Company has no control, as well as the Company's financial condition
and results of operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's future results may be affected by a number of factors over which
the Company has little or no control. Fuel prices, insurance and claims costs,
liability claims, interest rates, the availability of qualified drivers,
fluctuations in the resale value of revenue equipment, economic and customer
business cycles and shipping demands are economic factors over which the Company
has little or no control. Significant increases or rapid fluctuations in fuel
prices, interest rates or insurance costs or liability claims, to the extent not
offset by increases in freight rates, and the resale value of revenue equipment
could reduce the Company's profitability. Weakness in the general economy,
including a weakness in consumer demand for goods and services, could adversely
affect the Company's customers and the Company's growth and revenues, if
customers reduce their demand for transportation services. Weakness in customer
demand for the Company's services or in the general rate environment may also
restrain the Company's ability to increase rates or obtain fuel surcharges.
Although the Company's independent contractors are responsible for paying for
their own equipment, fuel and other operating costs, significant increases in
these costs could cause them to seek higher compensation from the Company or
other contractual opportunities. Difficulty in attracting or retaining qualified
drivers, including independent contractors, or a downturn in customer business
cycles or shipping demands also could have a material adverse effect on the
growth and profitability of the Company. If a shortage of drivers should occur
in the future, or if the Company were unable to continue to attract and contract
with independent contractors, the Company could be required to adjust its driver
compensation package, which could adversely affect the Company's profitability
if not offset by a corresponding increase in rates. The Company has experienced
the effects of fuel and driver wage increases and is seeking to recover such
charges through rate increases and a fuel surcharge. By increasing rates and
imposing a fuel surcharge, the Company could lose customers who are unwilling to
pay the increases.
The Company's growth has been made possible through the addition of new revenue
equipment. Difficulty in financing or obtaining new revenue equipment (for
example, delivery delays from manufacturers or the unavailability of independent
contractors) could restrict future growth. There is currently an excess supply
of used revenue equipment on the market. Although the Company has made
arrangements to fix the repurchase or trade price of most of its used revenue
equipment it periodically sells or exchanges with its vendors, if the surplus of
used revenue equipment continues and the resale price of revenue equipment
continues to decline, the
13
Company may be forced to retain its revenue equipment longer, with a resulting
increase in operating expenses for maintenance and repairs. The current supply
of used tractors and trailers on the market may adversely affect the Company's
ability to obtain favorable terms on the tractors and trailers the Company sells
or exchanges for new revenue equipment.
The Company periodically makes investments in companies that may provide
strategic support for its transportation business. The Company has invested
approximately $6 million in such companies as of June 30, 2001. Current economic
conditions in the transportation industry have adversely affected demand for the
products and services such companies provide. The Company understands that these
businesses have modified their business plans to address adverse conditions in
the transportation industry. Although the Company believes its investments in
these companies are sound and may ultimately work to the advantage of the
Company and may fulfill their respective purposes, economic conditions in the
transportation industry, and the conditions of economy in general, have made it
more difficult for each of these companies to sell their goods and services and
to execute and achieve their original business objectives. There are no
assurances that the Company's investment in each of these entities will not be
adversely affected if adverse economic conditions in the transportation industry
continue, including the deterioration of the financial condition of many
carriers within the transportation industry, who purchase the goods and services
offered by these companies.
Current economic conditions in the transportation industry have adversely
affected demand for Terion's products, particularly its two-way digital wireless
communications product. These same economic conditions also have adversely
affected Concentrek's ability to market its logistics services. The Company
understands that both Terion and Concentrek have modified their business plans
to address adverse conditions in the transportation industry. Although the
Company believes its investments in both Terion and Concentrek are sound and
will ultimately work to the advantage of the Company and will fulfill their
respective purposes, economic conditions in the transportation industry, and the
conditions of economy in general, have made it more difficult for each of these
companies to execute and achieve their original business objectives, and there
are no assurances that the Company's investment in each of these entities will
not be adversely affected if adverse economic conditions in the transportation
industry continue, including the deterioration of the financial condition of
many carriers within the transportation industry, who purchase the products and
services offered by Terion and Concentrek.
The Company has experienced significant and rapid growth in revenue and profits
since the inception of its business in 1990. There can be no assurance that the
Company's business will continue to grow in a similar fashion in the future or
that the Company can effectively adapt its management, administrative, and
operational systems to respond to any future growth. Further, there can be no
assurance that the Company's operating margins will not be adversely affected by
future changes in and expansion of the Company's business or by changes in
economic conditions.
Currently, a significant portion of the Company's business is concentrated in
the Arizona and California markets and a general economic decline or a natural
disaster in either of these markets could have a material adverse effect on the
growth and profitability of the Company. If the Company is successful in
deriving a more significant portion of its revenues from markets in the Midwest,
South Central, Southeastern and Southern regions and on the East Coast, its
growth and profitability could be materially adversely affected by general
economic declines or natural disasters in those markets.
The Company has established regional operations in Katy, Texas; Indianapolis,
Indiana; Charlotte, North Carolina; Gulfport, Mississippi; Salt Lake City, Utah;
and Kansas City, Missouri in order to serve markets in these regions. These
regional operations require the commitment of additional revenue equipment and
personnel, as well as management resources, for future development. Should the
growth in the Company's regional operations throughout the United States slow or
stagnate, the results of Company operations could be adversely affected. The
Company may encounter operating conditions in these new markets that differ
substantially from those previously experienced in its western United States
14
markets. There can be no assurance that the Company's regional operating
strategy, as employed in the western United States, can be duplicated
successfully in the other areas of the United States or that it will not take
longer than expected or require a more substantial financial commitment than
anticipated.
SEASONALITY
In the transportation industry, results of operations frequently show a seasonal
pattern. Seasonal variations may result from weather or from customer's reduced
shipments after the busy winter holiday season.
To date, the Company's revenues have not shown any significant seasonal pattern.
Because the Company has operated primarily in Arizona, California and the
western United States, winter weather conditions have not adversely affected the
Company's business. The expansion of the Company's operations into the Midwest,
on the East Coast, the Southeast and Gulf Coast regions, could expose the
Company to greater operating variances due to seasonal weather in these regions.
Recent shortage of energy issues in California and elsewhere in the Western
United States, could result in an adverse effect on the operations of the
Company and demand for the Company's services should these shortages continue or
increase. This risk may exist in the other regions in which the Company
operates, depending upon changes in the energy industry.
INFLATION
Many of the Company's operating expenses, including fuel costs and fuel taxes,
are sensitive to the effects of inflation, which could result in higher
operating costs. In late 1999, the Company began to experience increases in fuel
costs, as a result of conditions in the petroleum industry. The Company has also
recently experienced some wage increases for drivers. Increases in fuel costs
and driver compensation are expected to continue during 2001 and may affect the
Company's operating income, unless the Company is able to pass those increased
costs to customers through rate increases or fuel surcharges. The Company has an
aggressive program to obtain rate increases and fuel surcharges from customers
in order to cover increased costs due to these increases in fuel prices, driver
compensation and other expenses and has been successful in implementing some
fuel surcharges. Competitive conditions in the transportation industry,
including lower demand for transportation services, could limit the Company's
ability to continue to obtain rate increases or fuel surcharges.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risk changes in interest rate on debt and from
changes in commodity prices.
INTEREST RATE RISK
The Company is subject to interest rate risk to the extent it borrows against
its line of credit or incurs debt in the acquisition of revenue equipment. The
Company attempts to manage its interest rate risk by managing the amount of debt
the Company carries. The Company has entered into an interest rate swap
agreement with its primary lender to protect it against interest rate risk. In
the opinion of management, an increase in short-term interest rates could have a
material adverse effect on the Company's financial
15
condition if the Company's debt levels increase and if the interest rate
increases are not offset by freight rate increases or other items. Management
does not foresee or expect in the near future any significant changes in the
Company's exposure to interest rate fluctuation or in how that exposure is
managed by the Company. The Company has not issued corporate debt instruments.
COMMODITY PRICE RISK
The Company is also subject to commodity price risk with respect to purchases of
fuel. Prices and availability of petroleum products are subject to political,
economic and market factors that are generally outside the Company's control.
Because the Company's operations are dependent upon diesel fuel, significant
increases in diesel fuel costs could materially and adversely affect the
Company's results of operations and financial condition if the Company is unable
to pass increased costs on to customers through rate increases or fuel
surcharges. Historically, the Company has sought to recover a portion of its
short-term fuel price increases from customers through fuel surcharges. Fuel
surcharges that can be collected do not always offset the increase in the cost
of diesel fuel.
For the three-month period ended June 30, 2001, fuel expense, net of fuel
surcharge, represented 15.1% of the Company's operating expenses, net of fuel
surcharge, compared to 14.9% for the same period ending in 2000. In August,
2000, the Company entered into an agreement to obtain price protection to reduce
a portion of the Company's exposure to fuel price fluctuations. Under that
arrangement, the Company was obligated to purchase certain minimum volumes of
diesel fuel for the period beginning October 1, 2000, through March 31, 2001, at
a guaranteed price per gallon. If during the 48 month period following March 31,
2001, the price of the heating oil on the New York Mercantile Exchange ("NY MX
HO") falls below $.58 per gallon, the Company is obligated to pay, for a maximum
of twelve different months selected by the contract holder during the 48-month
period, the difference between $.58 per gallon and the NY MX HO average price
for the minimum volume commitment
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to ordinary, routine litigation and administrative
proceedings incidental to its business. These proceedings primarily involve
personnel matters, including Equal Employment Opportunity Commission ("EEOC")
claims and claims for personal injury or property damage incurred in the
transportation of freight. The Company maintains insurance to cover liabilities
arising from the transportation of freight for amounts in excess of self-insured
retentions. It is the Company's policy to comply with applicable equal
employment opportunity laws and the Company periodically reviews its policies
and practices for equal employment opportunity compliance.
ITEM 2. CHANGES IN SECURITIES
Not Applicable
16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K
EXHIBIT NO. DESCRIPTION
----------- -----------
Exhibit 3 Instruments defining the rights of security
holders, including indentures
(3.1) Restated Articles of Incorporation of the Company
(Incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-1. No
33-83534.)
(3.2) Amended and Restated Bylaws of the Company
(Incorporated by reference to Exhibit 3.2 to the
Company's report on Form 10-K for the period
ending December 31, 1996.)
Exhibit 4 Instruments defining the rights of security
holders, including indentures
(4.1) Articles 4, 10 and 11 of the Restated Articles of
Incorporation of the Company. (Incorporated by
reference to Exhibit 3.1 to the Company's Report
on Form 10-K for the fiscal year ended December
31, 1994.)
(4.2) Sections 2 and 5 of the Amended and Restated
Bylaws of the Company. (Incorporated by reference
to Exhibit 3.2 to the Company's Report on Form
10-K for the fiscal year ended December 31, 1995.)
Exhibit 10 (a) Credit agreement by and among Knight Trans-
portation, Inc., Wells Fargo Bank and Northern
Trust Bank, dated April 6, 2001.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KNIGHT TRANSPORTATION, INC.
Date: August 10, 2001 By: /s/ Kevin P. Knight
-----------------------------------
Kevin P. Knight
Chief Executive Officer
Date: August 10, 2001 By: /s/ Timothy Kohl
-----------------------------------
Timothy Kohl
Chief Financial Officer and
Principal Financial Officer
18
KNIGHT TRANSPORTATION, INC.
INDEX TO EXHIBITS TO FORM 10-Q
SEQUENTIALLY
EXHIBIT NO. DESCRIPTION NUMBERED PAGES(1)
- ----------- ----------- -----------------
Exhibit 4 Instruments defining the rights of security holders,
including indentures
(a) Articles 4, 10 and 11 of the Restated Articles of
Incorporation of the Company. (Incorporated by
reference to Exhibit 3.1 to the Company's Report on
Form 10-K for the fiscal year ended December 31,
1994.)
(b) Sections 2 and 5 of the Amended and Restated By-laws
of the Company. (Incorporated by reference to Exhibit
3.2 to the Company's Report on Form 10-K for the
fiscal year ended December 31, 1995.)
Exhibit 10 (a) Credit agreement by and among Knight Transportation,
Inc., Wells Fargo Bank and Northern Trust Bank, dated
April 6, 2001.
- ----------
(1) The page numbers where exhibits (other than those incorporated by
reference) may be found are indicated only on the manually signed report.