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 MARCH 31, 2002
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)
Registrant's telephone number, including area code: 602-269-2000
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 April 19, 2002 was 36,971,247 shares.
KNIGHT TRANSPORTATION, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE
NUMBER
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 2002
and December 31, 2001 1
Consolidated Statements of Income for the Three Months
ended March 31, 2002 and March 31, 2001 3
Consolidated Statements of Cash Flows for the Three Months
ended March 31, 2002 and March 31, 2001 4
Notes to 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 17
ITEM 2. CHANGES IN SECURITIES 17
ITEM 3 DEFAULTS UPON SENIOR SECURITIES 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
ITEM 5. OTHER INFORMATION 17
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 19
INDEX TO EXHIBITS 21
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2002 AND DECEMBER 31, 2001
March 31, 2002 December 31, 2001
-------------- -----------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 34,838,204 $ 24,135,601
Accounts receivable, net 31,821,474 31,693,074
Notes receivable, net 769,950 777,218
Inventories and supplies 1,785,222 1,905,934
Prepaid expenses 10,272,682 7,964,109
Deferred tax asset 5,852,672 6,081,462
------------- -------------
Total current assets 85,340,204 72,557,398
------------- -------------
PROPERTY AND EQUIPMENT:
Land and improvements 13,138,539 13,112,344
Buildings and improvements 12,584,413 12,456,546
Furniture and fixtures 6,520,544 6,297,862
Shop and service equipment 1,919,697 1,789,903
Revenue equipment 169,789,679 169,630,340
Leasehold improvements 734,247 666,860
------------- -------------
204,687,119 203,953,855
Less: Accumulated depreciation (54,102,840) (50,258,826)
------------- -------------
PROPERTY AND EQUIPMENT, net 150,584,279 153,695,029
------------- -------------
NOTES RECEIVABLE - long-term 2,818,918 3,108,263
------------- -------------
OTHER ASSETS 12,042,157 11,753,359
------------- -------------
$ 250,785,558 $ 241,114,049
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
1
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
AS OF MARCH 31, 2002 AND DECEMBER 31, 2001
March 31, 2002 December 31, 2001
-------------- -----------------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,445,668 $ 3,838,011
Accrued liabilities 9,752,836 6,321,829
Current portion of long-term debt 3,003,624 3,159,162
Claims accrual 7,709,936 7,509,397
------------- -------------
Total current liabilities 24,912,064 20,828,399
LINE OF CREDIT 12,200,000 12,200,000
LONG - TERM DEBT, less current portion 1,321,932 2,714,526
DEFERRED INCOME TAXES 38,107,874 37,675,395
------------- -------------
Total liabilities 76,541,870 73,418,320
------------- -------------
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; 36,940,300 and 36,834,106
issued and outstanding at March 31, 2002 and
December 31, 2001, respectively 369,403 368,341
Additional paid-in capital 70,751,300 69,846,990
Retained earnings 103,766,219 98,212,868
Accumulated other comprehensive loss (643,234) (732,470)
------------- -------------
Total shareholders' equity 174,243,688 167,695,729
------------- -------------
$ 250,785,558 $ 241,114,049
============= =============
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
March 31
-----------------------------
2002 2001
------------ ------------
REVENUE:
Revenue, before fuel surcharge $ 61,890,025 $ 54,047,606
Fuel surcharge 461,446 2,615,415
------------ ------------
Total revenue 62,351,471 56,663,021
------------ ------------
OPERATING EXPENSES:
Salaries, wages and benefits 21,262,704 18,334,804
Fuel 8,980,045 9,182,112
Operations and maintenance 3,402,278 3,121,887
Insurance and claims 2,657,536 2,056,524
Operating taxes and licenses 1,870,600 1,655,549
Communications 615,895 398,920
Depreciation and amortization 5,354,837 4,867,169
Lease expense - revenue
Equipment 2,296,002 1,851,736
Purchased transportation 4,879,107 5,852,026
Miscellaneous operating
Expenses 1,621,646 1,533,958
------------ ------------
52,940,650 48,854,685
------------ ------------
Income from operations 9,410,821 7,808,336
------------ ------------
OTHER INCOME (EXPENSE):
Interest income 218,866 156,765
Interest expense (266,336) (868,543)
------------ ------------
(47,470) (711,778)
------------ ------------
Income before taxes 9,363,351 7,096,558
INCOME TAXES (3,810,000) (2,860,000)
------------ ------------
Net income $ 5,553,351 $ 4,236,558
============ ============
Net income per common share and
common share equivalent:
Basic $ 0.15 $ 0.12
============ ============
Diluted $ 0.15 $ 0.12
============ ============
Weighted average number of common shares
and common share equivalents outstanding:
Basic 36,893,535 33,914,792
============ ============
Diluted 38,081,869 34,570,491
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
3
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended
March 31
----------------------------
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,553,351 $ 4,236,558
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization 5,354,837 4,867,169
Non-cash compensation expense for issuance of
common stock to certain members of board of directors 10,000 7,500
Allowance for doubtful accounts 77,145 82,284
Deferred income taxes 661,269 137,196
Changes in assets and liabilities, net of businesses acquired:
(Increase) decrease in trade receivables (205,545) 5,776,665
Decrease (increase) in inventories and supplies 120,712 (143,361)
Increase in prepaid expenses (2,308,573) (3,033,276)
Increase in other assets (288,798) (900,660)
Increase (decrease) in accounts payable 607,657 (733,689)
Increase in accrued liabilities and claims accrual 3,710,782 2,244,480
------------ ------------
Net cash provided by operating activities 13,292,837 12,540,866
------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net (2,244,087) (3,868,637)
Payments on notes receivable 296,613 63,082
------------ ------------
Net cash used in investing activities (1,947,474) (3,805,555)
------------ ------------
The accompanying notes are an integral part of these consolidated financial
statements.
4
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Three Months Ended
March 31
----------------------------
2002 2001
------------ ------------
CASH FLOW FROM FINANCING ACTIVITIES:
Payments on line of credit, net -0- (3,800,000)
Payments of long-term debt (1,548,132) (7,243,044)
Decrease in accounts payable - equipment -0- (1,051,078)
Proceeds from exercise of stock options 905,372 1,772,390
------------ ------------
Net cash used in financing activities (642,760) (10,321,732)
------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 10,702,603 (1,586,421)
CASH AND CASH EQUIVALENTS,
Beginning of period 24,135,601 6,151,383
------------ ------------
CASH AND CASH EQUIVALENTS, end of period 34,838,204 $ 4,564,962
============ ============
SUPPLEMENTAL DISCLOSURES:
Cash Flow Information:
Income taxes paid $ 132,236 $ 134,167
Interest paid 217,829 882,326
The accompanying notes are an integral part of these consolidated financial
statements.
5
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO 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 Gulf Coast, Inc., (formerly John Fayard Fast
Freight, Inc.); Knight Transportation South Central Ltd.; and KTeCom, L.L.C. 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 our
consolidated financial statements and notes thereto included in our Annual
Report on Form 10-K for the year ended December 31, 2001. 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 ended March 31, 2002 and 2001 is as follows:
Three Months Ended
March 31
-----------------------------
2002 2001
----------- -----------
Weighted average common
shares outstanding - Basic 36,893,535 33,914,792
Effect of stock options 1,188,334 655,699
----------- -----------
Weighted average common
share and common share
equivalents outstanding -
diluted 38,081,869 34,570,491
=========== ===========
Net income $ 5,553,351 $ 4,236,558
=========== ===========
Net income per common share and
common share equivalent
Basic $ 0.15 $ 0.12
=========== ===========
Diluted $ 0.15 $ 0.12
=========== ===========
NOTE 3. COMPREHENSIVE INCOME
Comprehensive income (loss) for the period was as follows:
Three Months Ended
March 31
----------------------------
2002 2001
----------- -----------
Net Income $ 5,553,351 $ 4,236,558
Other comprehensive income:
Interest rate swap agreement - fair
market value adjustment 89,236 (182,382)
----------- -----------
Comprehensive income $ 5,642,587 $ 4,054,176
=========== ===========
7
NOTE 4. SEGMENT INFORMATION
Although we have eight operating segments, we have determined that we have one
reportable segment. Seven of the segments are managed based on regions in the
United States in which we operate. Each of these segments have similar economic
characteristics as they all provide short to medium-haul truckload carrier
services of general commodities to a similar class of customers. In addition,
each segment 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, we have
determined that it is appropriate to aggregate our operating divisions into one
reportable segment consistent with the guidance in SFAS No. 131. Accordingly, we
have not presented separate financial information for each of our operating
divisions as our consolidated financial statements present our one reportable
segment.
NOTE 5. RECENTLY ADOPTED AND TO BE ADOPTED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, as amended by
SFAS No. 138 ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES. This statement, as amended, 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 deferred the
effective date of SFAS No. 133 for the Company until January 1, 2001.
In August and September 2000, we entered into two agreements to obtain price
protection to reduce a portion of our exposure to fuel price fluctuations. Under
these agreements, we purchased 1,000,000 gallons of diesel fuel, per month, for
a period of six months from October 1, 2000 through March 31, 2001. If during
the 48 months following March 31, 2001, the price of heating oil on the New York
Mercantile Exchange (NY MX HO) falls below $.58 per gallon, we may be obligated
to pay, for a maximum of 12 different months selected by the contract holder
during the 48-month period beginning after March 31, 2001, the difference
between $.58 per gallon and NY MX HO average price for the minimum volume
commitment. In July 2001, we entered into a similar agreement. Under this
agreement, we purchased 750,000 gallons of diesel fuel, per month, for a period
of six months beginning September 1, 2001 through February 28, 2002. If during
the 12-month period commencing January 2005 through December 2005, the price
index discussed above falls below $.58 per gallon, we may be obligated to pay
the difference between $.58 and the stated index.
We adopted SFAS No. 133 on January 1, 2001. There was not a material impact on
our results of operations or financial position as a result of the adoption of
SFAS No. 133. As of December 31, 2001, the three agreements described above are
stated at their fair market value, based on an option provided by the issuer of
the agreements to dissolve the agreements for $750,000, which expires on July
12, 2002.
In June 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 we 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.
8
In addition, SFAS No. 142 requires that we identify reporting units for purposes
of assessing potential future impairments of goodwill, reassess the useful lives
of other existing recognized finite-lived 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 us 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. We had $7,504,067 in net book value recorded for
goodwill at March 31, 2002. We adopted SFAS No. 141 and 142 on January 1, 2002.
At present, we are currently assessing, but have not yet determined the complete
impact the adoption of SFAS No. 141 and SFAS No. 142 will have on our financial
position and results of operations. We ceased amortization of our indefinite
life intangibles as of January 1, 2002.
In August 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS. SFAS No. 143 covers all legally enforceable obligations associated
with the retirement of tangible long-lived assets and provides the accounting
and reporting requirements for such obligations. SFAS No. 143 is effective for
us beginning January 1, 2003. We have not assessed the impact of this new
statement on our financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS. SFAS No. 144 addresses financial accounting and
reporting for impairment or disposal of long-lived assets. This statement
supersedes SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS TO
BE DISPOSED OF, and the accounting and reporting provisions of APB Opinion No.
30, REPORTING THE RESULTS OF OPERATIONS-REPORTING THE EFFECTS OF DISPOSAL OF A
SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING
EVENTS AND TRANSACTIONS, for the disposal of a segment of a business. This
statement also amends ARB No. 51, CONSOLIDATED FINANCIAL STATEMENTS to eliminate
the exception to consolidate a subsidiary for which control is likely to be
temporary. SFAS No. 144 is effective for fiscal years beginning after December
15, 2001. We adopted SFAS No. 144 on January 1, 2002 and there was not a
material impact on our results of operations or financial position.
NOTE 6. COMMITMENTS AND CONTINGENCIES
We are involved in certain legal proceedings arising in the normal course of
business. In the opinion of management, our potential exposure under pending
legal proceedings is adequately provided for in the accompanying consolidated
financial statements.
NOTE 7. 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 all shareholders of record as of the close of business on May
18, 2001. Also on December 7, 2001 our Board of Directors approved another
three-for-two stock split, effected in the form of a 50 percent stock dividend.
The stock split occurred on December 28, 2001, to all stockholders of record as
of the close of business on December 7, 2001. These stock splits have been given
retroactive recognition for all periods presented in the accompanying
consolidated financial statements. All share amounts and earnings per share
amounts have been retroactively adjusted to reflect the stock splits.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 statement 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.
Our 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 items discussed in the section entitled "Factors That May Affect
Future Results," and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" set forth in our Annual Report on Form
10-K, which is by this reference incorporated herein. We do not assume, and
specifically disclaim, any obligation to update any forward-looking statement
contained in this Quarterly Report.
RESULTS OF OPERATIONS
Our revenue, before fuel surcharge, for the three months ended March 31, 2002,
increased by 14.5% to $61.9 million from $54.0 million for the same period in
2001.
The increase in revenue, before fuel surcharge, resulted from expansion of our
customer base and increased volume from existing customers. Our fleet increased
by 10.7% to 1,897 tractors (including 196 owned by independent contractors) as
of March 31, 2002, from 1,714 tractors (including 221 owned by independent
contractors) as of March 31, 2001.
Salaries, wages and benefits increased as a percentage of revenue, before fuel
surcharge, to 34.4% for the three months ended March 31, 2002, from 33.9% for
the same period in 2001. This increase was primarily the result of the increase
in the ratio of Company drivers to independent contractors. At March 31, 2002,
90% of our fleet was operated by Company drivers, compared to 87% at March 31,
2001. Excluding the impact of the change of the ratio of Company drivers to
independent contractors, salaries, wages and benefits expense would have
reflected a decrease of approximately 1% as a percentage of revenue, before fuel
surcharge, compared to the same period of last year. Our insurance program for
medical claims which involves self insurance with risk retention levels, was
higher for the 2002 period compared to the 2001 period. Claims in excess of
these retention levels are covered by insurance which management considers
adequate. We record the cost of this medical insurance coverage, along with the
uninsured portion, to salaries, wages and benefits expense. For Company drivers
and non-driving employees, we record accruals for worker's compensation as a
component of our claims accrual, and the related expense is reflected in
salaries, wages and benefits expense in our consolidated statements of income.
Fuel expense, net of fuel surcharge, increased as a percentage of revenue,
before fuel surcharge, to 13.8% for the three months ended March 31, 2002, from
12.2% for the same period in 2001. This increase was primarily the result of
recent higher fuel costs per gallon and the increase in the ratio of Company
vehicles to 90% compared to 87% in the same period last year.
10
Operations and maintenance expense decreased as a percentage of revenue, before
fuel surcharge, to 5.5% for the three months ended March 31, 2002 from 5.8% for
the same period in 2001. This decrease was due primarily to the increase in the
utilization of our revenue equipment.
Insurance and claims expense increased as a percentage of revenue, before fuel
surcharge, to 4.3% for the three months ended March 31, 2002, from 3.8% for the
same period in 2001. The primary reason for this increase is due to increases in
insurance premiums and the higher self-insurance retention levels assumed by us.
Our insurance program for liability, physical damage and cargo damage involves
self-insurance with varying risk retention levels. Claims in excess of these
risk retention levels are covered by insurance which management considers
adequate. We accrue the estimated cost of the uninsured portion of pending
claims. These accruals are estimated based on management's evaluation of the
nature and severity of individual claims and estimates of future claims
development based on historical claims development trends.
Operating taxes and licenses as a percentage of revenue, before fuel surcharge,
for the three months ended March 31, 2002, decreased to 3.0% compared to 3.1%
for the same period in 2001. This decrease resulted from a relative increase in
miles run in lower tax rate states for the 2002 period compared to the 2001
period.
Communications expense increased as a percentage of revenue, before fuel
surcharge, to 1.0% for the three months ended March 31, 2002 compared to 0.7%
for the same period in 2001. This increase was primarily due to the purchase and
utilization of new tractor and trailer tracking communication technology.
Depreciation and amortization expense as a percentage of revenue, before fuel
surcharge, decreased to 8.7% for the three month period ended March 31, 2002,
from 9.0% for the same period in 2001. This decrease was primarily related to
the increase in lease expenses incurred for revenue equipment under operating
lease agreements, increased utilization of our revenue equipment, and
discontinuing the amortization of indefinite life intangible assets on January
1, 2002, in accordance with SFAS No. 142.
Lease Expense - revenue equipment as a percentage of revenue, before fuel
surcharge, was 3.7% for the three months ended March 31, 2002 compared to 3.4%
for the same period in 2001, due to our involvement in a leasing program to
obtain additional revenue equipment. Under this program, we leased 568 tractors
and 474 tractors at March 31, 2002 and March 31, 2001, respectively, under
operating leases with average terms of approximately 3.5 years.
Purchased transportation decreased as a percentage of revenue, before fuel
surcharge, to 7.9% for the three months ended March 31, 2002, from 10.8% for the
same period in 2001. This decrease was primarily due to the decrease in the
percentage of independent contractors to Company drivers to 10% as of March 31,
2002, from 13% as of March 31, 2001. Independent contractors are compensated at
a fixed rate per mile.
Miscellaneous operating expenses as a percentage of revenue, before fuel
surcharge, decreased to 2.6% for the three months ending March 31, 2002 compared
to 2.8% for the same period in 2001. This decrease was primarily the result of
increased utilization of our fleet.
As a result of the above factors, our operating ratio (operating expenses, net
of fuel surcharge, as a percentage of revenue, before fuel surcharge) for the
three months ended March 31, 2002, was 84.8% compared to 85.6% for the same
period in 2001.
11
For the three months ended March 31, 2002, net interest expense decreased to
0.1% as a percentage of revenue, before fuel surcharge, compared to 1.3% for the
same period in 2001. This decrease was primarily due to the reduction of
outstanding debt to approximately $16.5 million at March 31, 2002, compared to
$43.3 million at March 31, 2001. Debt reduction was facilitated, in part, by
proceeds received from the offering of our Common Stock that closed November 7,
2001.
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, our net income as a percentage of revenue,
before fuel surcharge, was 9.0% for the three months ended March 31, 2002,
compared to 7.8% for the same period in 2001.
LIQUIDITY AND CAPITAL RESOURCES
The growth of our business has required a significant investment in new revenue
equipment. Our primary source of liquidity has been funds provided by operations
and our line of credit with our primary lender. During the fourth quarter of
2001, we registered with the Securities and Exchange Commission and sold
2,678,907 shares of our common stock through a public offering, which resulted
in net proceeds to us of $41,249,460. SEE our Registration Statements on Form
S-3 filed with the SEC on October 24, 2001 (File No. 333-72130), and November 2,
2001 (File No. 333-72688). The proceeds we received from this offering were used
for the repayment of indebtedness and for general corporate purposes. Net cash
provided by operating activities was approximately $13.3 million for the first
three months of 2002, compared to $12.5 million for the corresponding period in
2001.
Capital expenditures for the purchase of revenue equipment, net of trade-ins,
office equipment and leasehold improvements, totaled $2.2 million for the first
three months of 2002 compared to $3.9 million for the same period in 2001.
Net cash used in financing activities and direct financing was approximately
$0.6 million for the first three months of 2002 compared to net cash used of
$10.3 million for the same period in 2001. Net cash used in financing activities
during the first three months of 2002 was primarily for the payment of long-term
debt.
We maintain a line of credit totaling $50 million with our lender and use this
line to finance the acquisition of revenue equipment and other corporate uses to
the extent our need for capital is not provided by funds from operations. We are
obligated to comply with certain financial covenants under our line of credit.
The rate of interest on borrowings against the line of credit will vary
depending upon the interest rate election made by us, based upon either the
London Interbank Offered Rate ("Libor") plus an adjustment factor, or the prime
rate. The average interest rate for the three months ended March 31, 2002 was
2.5%. Borrowings under the line of credit amounted to $12.2 million at March 31,
2002. The line of credit expires in July 2003.
Through our subsidiaries, we have entered into lease agreements under which we
lease revenue equipment. The total amount outstanding under these agreements as
of March 31, 2002, was $19.3 million, with interest rates from 5.2% to 8.2%,
with $8.4 million due in the next 12 months.
Management believes the Company has adequate liquidity to meet its current
needs. We will continue to have significant capital requirements over the long
term, which may require us 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 several other factors over which we have
limited control, as well as our financial condition and results of operations.
12
FACTORS THAT MAY AFFECT FUTURE RESULTS
Our future results may be affected by a number of factors over which we have
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 we have 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 our
profitability. Weakness in the general economy, including a weakness in consumer
demand for goods and services, could adversely affect our customers and our
growth and revenues, if customers reduce their demand for transportation
services. Weakness in customer demand for our services or in the general rate
environment may also restrain our ability to increase rates or obtain fuel
surcharges. It is also not possible to predict the medium or long term effects
of the September 11, 2001, terrorist attacks and subsequent events on the
economy or on customer confidence in the United States, or the impact, if any,
on our future results of operations.
THE FOLLOWING ISSUES AND UNCERTAINTIES, AMONG OTHERS, SHOULD BE CONSIDERED IN
EVALUATING OUR GROWTH OUTLOOK:
BUSINESS UNCERTAINTIES. We have experienced significant and rapid growth in
revenue and profits since the inception of our business in 1990. There can be no
assurance that our business will continue to grow in a similar fashion in the
future or that we can effectively adapt our management, administrative, and
operational systems to respond to any future growth. Further, there can be no
assurance that our operating margins will not be adversely affected by future
changes in and expansion of our business or by changes in economic conditions.
INSURANCE. Our future insurance and claims expenses might exceed historical
levels, which could reduce our earnings. We currently self-insure for a portion
of our claims exposure resulting from cargo loss, personal injury, and property
damage, combined up to $1,750,000 per occurrence. Our worker's compensation
self-insurance level remains at a maximum of $500,000, and our health insurance
self-insurance level is $100,000 per person per year. If the number of claims
for which we are self-insured increases, our operating results could be
adversely affected. Also, we maintain insurance with licensed insurance
companies above the amounts for which we self-insure. After several years of
aggressive pricing, insurance carriers have raised premiums which has increased
our insurance and claims expense. The terrorist attacks of September 11, 2001,
in the United States, and subsequent events, may result in additional increases
in our insurance expenses. If these expenses continue to increase, and we are
unable to offset the increase with higher freight rates, our earnings could be
materially affected.
REVENUE EQUIPMENT. Our 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.
In the past we have acquired new tractors and trailers at favorable prices, and
have entered into agreements with the manufacturers to repurchase the tractors
from us at agreed prices. Current developments in the secondary tractor and
trailer resale market have resulted in a large supply of used tractors and
trailers on the market. This has depressed the market value of used equipment to
levels significantly below the prices at which the manufacturers have agreed to
repurchase the equipment. Accordingly, some manufacturers may refuse or be
financially unable to keep their commitments to repurchase equipment according
to their repurchase agreement terms. We understand that some manufacturers have
communicated to customers their intention to significantly increase new
equipment prices and eliminate or sharply reduce the price of repurchase
commitments.
13
We are currently in litigation with one of our major tractor suppliers
concerning new equipment purchase prices and tractor repurchase commitments made
to us. We initiated this litigation to protect our contractual and other rights.
In the meantime, to mitigate any losses, we have ordered additional revenue
equipment from an alternative supplier and expect deliveries to commence in
early June. The delay in receiving new tractors may slow our growth plan
slightly. Our business plan and current contract take into account new equipment
price increases due to engine design requirements imposed effective October 1,
2002, by the Environmental Protection Agency. If new equipment prices were to
increase more than anticipated, or if the price of repurchase commitments were
to decrease or contractual commitments not be honored by current suppliers, we
may be required to increase our depreciation and financing costs, write down the
value of used equipment, or retain some of our equipment longer, with the
resulting increase in operating expense. If our resulting cost of revenue
equipment were to increase, or prices of used revenue equipment were to decline,
and if we were unable to offset these increases through rate increases or cost
savings, our operating costs could increase, which could materially and
adversely affect our earnings and cash flows. See Part II, Other Information,
Item I, Legal Proceedings, below.
REGIONAL OPERATIONS. Currently, a significant portion of our 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 our growth and profitability. If we are successful in deriving
a more significant portion of our revenues from markets in the Midwest, South
Central, Southeastern and Southern regions and on the East Coast, our growth and
profitability could be materially adversely affected by general economic
declines or natural disasters in those markets.
In addition to our headquarters in Phoenix, Arizona, we have established
regional operations in Katy, Texas; Indianapolis, Indiana; Charlotte, North
Carolina; Gulfport, Mississippi; Salt Lake City, Utah; Kansas City, Kansas; and
Portland, Oregon 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 of
our regional operations throughout the United States slow or stagnate, the
results of our operations could be adversely affected. We may encounter
operating conditions in these new markets that differ substantially from those
previously experienced in our western United States markets. There can be no
assurance that our 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.
For other risks and uncertainties that might affect our future operations,
please review Part II of our Annual Report on Form 10-K - "Management's
Discussion and analysis of Financial Conditions and Results of Operations -
Factors That May Affect Future Results."
TECHNOLOGY. We utilize Terion's trailer-tracking technology to assist with
monitoring the majority of our trailers. Terion has filed for bankruptcy
protection and is attempting a reorganization under Chapter 11 of the Federal
Bankruptcy Code. If Terion ceases operations or abandons that technology, we
would be required to incur the cost of replacing that technology or could be
forced to operate without this trailer-tracking technology, which could
adversely affect our trailer utilization and our ability to assess detention
charges.
INVESTMENTS. We have invested $200,000 and loaned approximately $1.9 million to
Concentrek, Inc., ("Concentrek") a transportation logistics company and are
committed to loan up to an additional $300,000 on a secured basis. We own
approximately 17% of Concentrek, and the remainder is owned by members of the
Knight family and Concentrek's management. If Concentrek's financial position
does not continue to improve, and if it is unable to raise additional capital,
we could be forced to write down all or part of that investment.
14
DRIVER RETENTION. 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 our growth and
profitability. If a shortage of drivers should occur in the future, or if we
were unable to continue to attract and contract with independent contractors, we
could be required to adjust our driver compensation package, which could
adversely affect our profitability if not offset by a corresponding increase in
rates.
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, our revenue has not shown any significant seasonal pattern. Because we
operate primarily in Arizona, California and the western United States, winter
weather conditions have generally not adversely affected our business. The
expansion of our operations in the Midwest, Rock Mountain region, the East
Coast, and the Southeast and Gulf Coast regions, could expose us to greater
operating variances due to seasonal weather in these regions. Shortage of energy
issues in California and elsewhere in the Western United States could result in
an adverse effect on our operations and demand for our services should these
shortages continue or increase. This risk may exist in the other regions in
which we operate, depending upon future changes in the energy industry.
INFLATION. Many of our operating expenses, including fuel costs and fuel taxes,
are sensitive to the effects of inflation, which could result in higher
operating costs. During 2000, 2001 and the first three months of 2002, we
experienced fluctuations in fuel costs, as a result of conditions in the
petroleum industry. We have also periodically experienced some wage increases
for drivers. Increases in fuel costs and driver compensation are expected to
continue during 2002 and may affect our operating income, unless we are able to
pass those increased costs to customers through rate increases or fuel
surcharges. We have initiated 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 have been
successful in implementing some fuel surcharges. Competitive conditions in the
transportation industry, including lower demand for transportation services,
could limit our ability to continue to obtain rate increases or fuel surcharge.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ON MARKET RISK
The Company is exposed to market risk from changes in interest rate on debt
and from changes in commodity prices. Under Financial Accounting Reporting
Release Number 48, we are required to disclose information concerning market
risk with respect to foreign exchange rates, interest rates, and commodity
prices. We have elected to make such disclosures, to the extent applicable,
using a sensitivity analysis approach, based on hypothetical changes in interest
rates and commodity prices.
Except as described below, we have not had occasion to use derivative
financial instruments for risk management purposes and do not use them for
either speculation or tracking. Because our operations are confined to the
United States, we are not subject to foreign currency risk.
INTEREST RATE RISK. We are subject to interest rate risk to the extent we borrow
against our line of credit or incur debt in the acquisition of revenue
equipment. We attempt to manage our interest rate risk by managing the amount of
debt we carry. We have not issued debt instruments. An increase in short-term
interest rates could have a material adverse effect on our financial condition
if our debt levels increase and if the interest rate increases are not offset by
freight rate increases or other items. We have entered into an interest rate
swap agreement with our primary lender to better manage cash flow.
15
Under this swap agreement a one- percent (1%) increase or decrease in
interest rates would result in a corresponding increase or decrease in annual
interest expense of approximately $122,000. Management does not foresee or
expect in the near future any significant changes in our exposure to interest
rate fluctuations or in how that exposure is managed by us. We have not issued
corporate debt instruments.
COMMODITY PRICE RISK. We are 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 our
control. Because our operations are dependent upon diesel fuel, significant
increases in diesel fuel costs could materially and adversely affect our results
of operations and financial condition if we are unable to pass increased costs
on to customers through rate increases or fuel surcharges. Historically, we have
sought to recover a portion of our 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 months
ended March 31, 2002, fuel expense, net of fuel surcharge, represented 16.2% of
our total operating expenses, net of fuel surcharge, compared to 14.2% for the
same period ending in 2001.
In August and September 2000, we entered into two agreements to obtain price
protection to reduce a portion of our exposure to fuel price fluctuations. Under
these agreements, we purchased 1,000,000 gallons of diesel fuel, per month, for
a period of six months from October 1, 2000 through March 31, 2001. If during
the 48 months following March 31, 2001, the price of heating oil on the New York
Mercantile Exchange (NY MX HO) falls below $.58 per gallon, we may be obligated
to pay, for a maximum of 12 different months as selected by the contract holder
during the 48-month period beginning after March 31, 2001, the difference
between $.58 per gallon and NY MX HO average price for the minimum volume
commitment. In July 2001, we entered into a similar agreement. Under this
agreement, we purchased 750,000 gallons of diesel fuel, per month, for a period
of six months beginning September 1, 2001 through February 28, 2002. If during
the 12-month period commencing January 2005 through December 2005, the price
index discussed above falls below $.58 per gallon, we may be obligated to pay
the difference between $.58 and the stated index. Management estimates that any
potential future payment under any of these agreements would be less than the
amount of our savings for reduced fuel costs. For example, management estimates
that a further reduction of $0.10 in the NY MX HO average price would result in
a net savings, after making a payment on this agreement, to our total fuel
expenses of approximately $1.0 million. Future increases in the NY MX HO average
price would result in us not having to make payments under these agreements.
Management's current valuation of the fuel purchase agreements indicates there
was no material impact upon adoption of SFAS No. 133 on our results of
operations and financial position and we have valued these items at fair value
in the accompanying March 31, 2002, consolidated financial statements
16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are a party to ordinary, routine litigation and administrative proceedings
incidental to our business. These proceedings primarily involve claims for
personal injury or property damage incurred in the transportation of freight and
for personnel matters. We maintain insurance to cover liabilities arising from
the transportation of freight for amounts in excess of self-insured retentions.
It is our policy to comply with applicable equal employment opportunity laws and
we periodically review our policies and practices for equal employment
opportunity compliance.
We have a four-year rolling contract with one of our major tractor suppliers for
the delivery of tractors. Under that contract, our supplier is delinquent in
delivering tractors and accepting equipment repurchases. Due to this and other
disputes, we have filed a complaint against our supplier in United States
District Court for the District of Arizona alleging breach of contract and other
legal wrongs. We initiated this lawsuit to protect our rights. It is too early
to evaluate what effect, if any, this litigation may have upon our business. See
"Factors That May Affect Future results - Revenue Equipment," above, for
additional information.
ITEM 2. CHANGES IN SECURITIES
Not Applicable
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
Not Applicable
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
17
(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.)
(3.1.1) First Amendment to restated Articles of Incorporation
of the Company (Incorporated by reference to Exhibit
3.1.1 to the Company's report on Form 10-K for the
period ending December 31, 2000.)
(3.1.2) Second Amendment to Restated Articles of
Incorporation of the Company (Incorporated by
reference to Exhibit 3.1.2 to the Company's
Registration Statement on Form S-3 No. 333-72130.)
(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 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 11 Schedule of Computation of Net Income Per Share
(Incorporated by reference from Note 3, Net Income
Per Share, in the Notes To Consolidated Financial
Statements on Form 10-Q, for the quarter ended March
31, 2001.)
Reports on Form 8-K
None
18
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: April 19, 2002 By: /s/ Kevin P. Knight
-------------------------------------
Kevin P. Knight
Chief Executive Officer
Date: April 19, 2002 By: /s/ Timothy Kohl
-------------------------------------
Timothy Kohl
Chief Financial Officer and
Principal Financial Officer
19
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS TO
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
Commission File No. 0-24946
20
KNIGHT TRANSPORTATION, INC.
INDEX TO EXHIBITS TO FORM 10-Q
Exhibit No. Description
- ----------- -----------
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.)
(1) The page numbers where exhibits (other than those incorporated by
reference) may be found are indicated only on the manually signed report.
21