UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the Quarterly Period Ended September 30, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
Commission File Number: 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. [X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). [X] Yes [ ] No
The number of shares outstanding of registrant's Common Stock, par value $0.01
per share, as of October 20, 2004 was 56,515,083 shares.
KNIGHT TRANSPORTATION, INC.
INDEX
PART I - FINANCIAL INFORMATION Page Number
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2004 1
and December 31, 2003 (Unaudited)
Condensed Consolidated Statements of Income for the three months 3
and nine months ended September 30, 2004 and 2003 (Unaudited)
Condensed Consolidated Statements of Cash Flows for the nine 4
months ended September 30, 2004 and 2003 (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition 10
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. Controls and Procedures 21
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits 22
Signatures 24
</table>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (unaudited)
As of September 30, 2004 and December 31, 2003
(In thousands)
September 30, 2004 December 31, 2003
------------------------ -----------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 24,382 $ 40,550
Accounts receivable, net 52,802 38,751
Notes receivable, net 226 515
Inventories and supplies 1,957 1,336
Prepaid expenses 2,325 7,490
Income tax receivable - 1,761
Deferred tax asset 6,863 5,667
------------------------ -----------------------
Total current assets 88,555 96,070
------------------------ -----------------------
PROPERTY AND EQUIPMENT:
Land and improvements 14,951 13,911
Buildings and improvements 24,531 17,166
Furniture and fixtures 5,896 4,916
Shop and service equipment 2,666 2,409
Revenue equipment 331,467 256,803
Leasehold improvements 796 968
------------------------ -----------------------
380,307 296,173
Less: Accumulated depreciation
and amortization (96,765) (83,238)
------------------------ -----------------------
PROPERTY AND EQUIPMENT, net 283,542 212,935
------------------------ -----------------------
NOTES RECEIVABLE - long-term 80 362
GOODWILL 7,504 7,504
OTHER ASSETS 5,285 4,355
------------------------ -----------------------
$ 384,966 $ 321,226
======================== =======================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (unaudited) (continued)
As of September 30, 2004 and December 31, 2003
(In thousands, except par values)
September 30, 2004 December 31, 2003
------------------------ ------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 13,658 $ 3,408
Accrued payroll 4,467 3,448
Accrued liabilities 7,043 4,493
Claims accrual 20,329 14,805
------------------------ ------------------------
Total current liabilities 45,497 26,154
DEFERRED INCOME TAXES 64,425 55,149
------------------------ ------------------------
Total liabilities 109,922 81,303
------------------------ ------------------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value;
authorized 50,000 shares;
none issued and outstanding - -
Common stock, $0.01 par value; authorized
100,000 shares; 56,467 and 56,234
issued and outstanding at September 30, 2004
and December 31, 2003, respectively 565 563
Additional paid-in capital 79,589 77,754
Retained earnings 194,890 161,606
------------------------ ------------------------
Total shareholders' equity 275,044 239,923
------------------------ ------------------------
$ 384,966 $ 321,226
======================== ========================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income (unaudited)
(In thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
---- ---- ---- ----
REVENUE
Revenue, before fuel surcharge $106,109 $84,445 $296,521 $239,786
Fuel surcharge 7,947 3,194 18,996 10,171
-------- -------- -------- --------
Total revenue 114,056 87,639 315,517 249,957
-------- -------- -------- --------
OPERATING EXPENSES:
Salaries, wages and benefits 34,441 26,908 96,904 77,097
Fuel 21,879 14,277 59,011 42,142
Operations and maintenance 7,234 5,444 19,022 15,165
Insurance and claims 5,376 4,136 15,978 12,237
Operating taxes and licenses 2,476 2,342 7,066 6,758
Communications 912 769 2,653 2,236
Depreciation and amortization 10,463 7,744 28,935 21,796
Lease expense - revenue
equipment 634 1,920 2,903 5,843
Purchased transportation 7,560 6,465 21,697 18,519
Miscellaneous operating
expenses 2,305 1,816 6,253 5,535
-------- -------- -------- --------
93,280 71,821 260,422 207,328
-------- -------- -------- --------
Income from operations 20,776 15,818 55,095 42,629
-------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest income 132 110 339 419
Interest expense - (165) - (548)
-------- -------- -------- --------
132 (55) 339 (129)
-------- -------- -------- --------
Income before taxes 20,908 15,763 55,434 42,500
-------- -------- -------- --------
INCOME TAXES (8,350) (6,300) (22,150) (17,010)
-------- -------- -------- --------
Net income $12,558 $9,463 $33,284 $25,490
======== ======== ======== ========
Income per common share and
common share equivalent:
Basic $0.22 $0.17 $0.59 $0.46
======== ======== ======== ========
Diluted $0.22 $0.16 $0.58 $0.44
======== ======== ======== ========
Weighted average number of common
shares and common share equivalents
outstanding:
Basic 56,402 56,082 56,332 55,958
======== ======== ======== ========
Diluted 57,747 57,503 57,534 57,345
======== ======== ======== ========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
3
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (unaudited)
(In thousands)
Nine Months Ended
September 30,
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 33,284 $ 25,490
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 28,935 21,796
Non-cash compensation expense for issuance of
stock to certain members of board of directors 13 23
Allowance for doubtful accounts (276) 401
Interest rate swap agreement - fair value change - 249
Tax benefit from exercise of stock options 686 1,638
Deferred income taxes 8,080 4,222
Changes in assets and liabilities:
Increase in trade receivables (13,828) (973)
Increase in inventories and supplies (621) (3)
Decrease in prepaid expenses 5,164 550
Decrease in income tax receivable 1,761 -
Increase in other assets (930) (441)
Increase in accounts payable 3,359 1,604
Increase in accrued liabilities and claims accrual 9,093 5,520
---------- ----------
Net cash provided by operating activities 74,720 60,076
---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (92,650) (53,064)
Investment in/advances to other companies - (213)
Cash received from advance to other company - 1,600
Decrease in notes receivable, net 624 1,305
---------- ----------
Net cash used in investing activities (92,026) (50,372)
---------- ----------
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
4
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (unaudited) (continued)
(In thousands)
Nine Months Ended
September 30,
2004 2003
---- ----
CASH FLOW FROM FINANCING ACTIVITIES:
Payments on long-term debt - (2,715)
Proceeds from exercise of stock options 1,138 1,627
---------------------- ---------------------
Net cash used in financing activities 1,138 (1,088)
---------------------- ---------------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (16,168) 8,616
CASH AND CASH EQUIVALENTS,
Beginning of period 40,550 36,198
---------------------- ---------------------
CASH AND CASH EQUIVALENTS, end of period $ 24,382 $ 44,814
====================== =====================
SUPPLEMENTAL DISCLOSURES:
Noncash investing and financing transactions:
Equipment acquired in accounts payable $ 6,966 $ 4,476
Net book value of equipment traded 8,854 12,869
Cash Flow Information:
Income taxes paid $ 10,308 $ 9,911
Interest paid - 297
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
5
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1. Financial Information
The accompanying condensed consolidated financial statements include the
accounts of Knight Transportation, Inc., and its wholly owned subsidiaries (the
Company). All material inter-company balances and transactions have been
eliminated in consolidation.
The condensed consolidated financial statements included herein have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP"), pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). 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. For additional information, please refer
to other filings with the SEC, including our Form 10Q for the quarters ended
March 31 and June 30, 2004, and our consolidated financial statements and notes
thereto included in our Annual Report on Form 10-K for the year ended December
31, 2003.
Note 2. Stock-Based Compensation
Stock-Based Compensation - At September 30, 2004, the Company had one
stock-based employee compensation plan. The Company applies the
intrinsic-value-based method of accounting prescribed by Accounting Principles
Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations including Financial Accounting Standards Board (FASB)
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No. 25," issued in March 2000, to
account for its fixed-plan stock options. Under this method, compensation
expense is recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. No stock-based employee
compensation cost is reflected in net income, as all options granted under the
plan had an exercise price equal to the market value of the underlying common
stock on the date of the grant. Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure,"
established accounting and disclosure requirements using a fair-value-based
method of accounting for stock-based employee compensation plans. As allowed by
SFAS No. 123, the Company has elected to continue to apply the
intrinsic-value-based method of accounting described above, and has adopted only
the disclosure requirements of SFAS No. 123. The following table illustrates the
effect on net income if the fair-value-based method had been applied to all
outstanding and unvested awards for the three-month and nine-month periods ended
September 30, 2004 and 2003, respectively (in thousands, except per share data):
6
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
---- ---- ---- ----
Net income, as reported $ 12,558 $ 9,463 $ 33,284 $ 25,490
Deduct total stock-based
compensation expense determined
under fair-value based method for
all awards, net of tax (254) (256) (761) (767)
---------------- ---------------- --------------- ----------------
Pro forma net income $ 12,304 $ 9,207 $ 32,523 $24,723
================ ================ =============== ================
Diluted earnings per share:
As reported $0.22 $0.16 $0.58 $0.44
================ ================ =============== ================
Pro forma $0.21 $0.16 $0.57 $0.43
================ ================ =============== ================
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 2004: risk free interest rate of 3.39%; expected
life of 6.0 years; expected volatility of 49%; expected dividend yield rate of
zero; and expected forfeitures of 3.48%. The following weighted average
assumptions were used for grants in 2003: risk free interest rate 3.36%;
expected life of 6.0 years; expected volatility of 51%; expected dividend yield
rate of zero; and expected forfeitures of 3.51%.
Note 3. Income Per Share
A reconciliation of the basic and diluted income per share computations for the
three months and nine months ended September 30, 2004 and 2003, respectively, is
as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
---- ---- ---- ----
Weighted average common
shares outstanding - Basic 56,402 56,082 56,332 55,958
Effect of stock options 1,345 1,421 1,202 1,387
---------------- ---------------- --------------- ----------------
Weighted average common
share and common share
equivalents outstanding -
Diluted 57,747 57,503 57,534 57,345
================ ================ =============== ================
Net income $12,558 $ 9,463 $ 33,284 $25,490
================ ================ =============== ================
Income per common share and
common share equivalent
Basic $0.22 $0.17 $0.59 $0.46
================ ================ =============== ================
Diluted $0.22 $0.16 $0.58 $0.44
================ ================ =============== ================
7
Note 4. Comprehensive Income
Comprehensive income for the three and nine-month periods ended September 30,
2004 and 2003 was as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
---- ---- ---- ----
Net Income $12,558 $9,463 $33,284 $25,490
Other comprehensive income:
Interest rate swap agreement - fair
market value adjustment - 82 - 249
---------------- ---------------- --------------- ----------------
Comprehensive income $12,558 $9,545 $33,284 $25,739
================ ================ =============== ================
Note 5. Segment Information
Although we have nineteen operating divisions, we have determined that we have
one reportable segment. Eighteen of the divisions are managed based on regions
in the United States in which we operate. Each of these divisions has 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 division exhibits similar financial performance, including
average revenue per mile and operating ratio. The remaining division is not
reported because it does not meet the materiality thresholds in SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". 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 6. Derivative Instruments
All derivatives are recognized on the balance sheet at their fair value. In
August and September 2000, and in July 2001, we entered into three agreements,
respectively, which are derivative instruments. These three contracts relate to
the price of heating oil on the New York Merchantile Exchange ("NYMX") and were
entered into in connection with volume diesel fuel purchases between October
2000 and February 2002. The three agreements described above are stated at their
fair market value in the accompanying condensed consolidated financial
statements.
During 2001, we entered into an interest rate swap agreement on the $12.2
million outstanding on our line of credit for purposes of better managing cash
flow. On November 7, 2001, we paid $762,500 to settle this swap agreement. The
amount was included in other comprehensive income and had been fully amortized
to interest expense at December 31, 2003.
Note 7. Recently Adopted and to be Adopted Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51", which was revised
in December 2003. This interpretation addresses the consolidation by business
enterprises of variable interest entities as defined in this interpretation.
This interpretation applies immediately to variable interests in variable
interest entities created after
8
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. For public enterprises with a variable interest
in a variable interest entity created before February l, 2003, this
interpretation applies to that enterprise no later than the beginning of the
first interim or annual reporting period beginning after December 15, 2003. The
application of this interpretation did not have a material effect on our
consolidated financial statements.
In December 2003, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 104 ("SAB No. 104"), "Revenue Recognition", which
codifies, revises and rescinds certain sections of SAB No. 101, "Revenue
Recognition", in order to make this interpretive guidance consistent with
current authoritative accounting guidance and SEC rules and regulations. The
changes noted in SAB No. 104 did not have a material effect on our consolidated
financial statements.
Note 8. 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 condensed
consolidated financial statements.
Note 9. Stock Split
On July 20, 2004, we effected a 3-for-2 stock split. Earnings per share for all
periods presented have been adjusted to reflect the stock split.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Cautionary Note Regarding Forward-Looking Statements
Except for certain historical information contained herein, the following
discussion 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 without limitation: 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 services or developments; any statements regarding
future economic conditions or performance; and any statements of belief and any
statement of assumptions underlying any of the foregoing. Words such as
"believe," "may," "could," "expects," "hopes," "anticipates," and "likely," and
variations of these words, or similar expressions, are intended to identify such
forward-looking statements. Actual events or results could differ materially
from those discussed in forward-looking statements. 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," set forth
below. We do not assume, and specifically disclaim, any obligation to update any
forward-looking statement contained in this Report.
Introduction
Business Overview
We are primarily a dry van truckload carrier based in Phoenix, Arizona, and
we also offer refrigerated services. We transport general commodities for
shippers throughout the United States, generally focusing our operations on
short-to-medium lengths of haul. We provide regional truckload carrier services
from our operations centers located throughout the United States. Over the past
five years we have achieved substantial revenue and income growth as a result of
our continuing expansion into new regional markets, emphasis on maintaining and
improving efficiencies and cost control discipline, and success at obtaining
rate increases as a result of providing a high level of customer service. During
this period, our revenue, before fuel surcharge, grew at a 21% compounded annual
rate from $125.0 million in 1998 to $326.9 million in 2003, and our net income
grew at a 22% compounded annual rate from $13.3 million in 1998 to $35.5 million
in 2003.
Operating and Growth Strategy
Our operating strategy is focused on the following core elements:
o Focusing on Regional Operations. We seek to operate primarily in
high-density, predictable traffic lanes in selected geographic
regions. We believe our regional operations allow us to obtain greater
freight volumes and higher revenue per mile, and also enhance safety
and driver recruitment and retention.
o Maintaining Operating Efficiencies and Controlling Costs. We focus
primarily on operating dry vans, along with a limited number of
refrigerated trailers, in distinct geographic and shipping markets in
order to achieve increased penetration of targeted service areas and
higher equipment utilization in dense traffic lanes. We actively seek
to control costs by, among other things, operating a modern equipment
fleet, maintaining a high tractor to non-driver employee ratio, and
regulating vehicle speed.
10
o Providing a High Level of Customer Service. We seek to compete on the
basis of service in addition to price, and offer our customers a broad
range of services to meet their specific needs, including multiple
pick ups and deliveries, on-time pick ups and deliveries within narrow
time frames, dedicated fleet and personnel, and specialized driver
training.
o Using Technology to Enhance Our Business. Our tractors are equipped
with satellite-based tracking and communications systems to permit us
to stay in contact with our drivers, obtain load position updates, and
provide our customers with freight visibility. A significant number of
our trailers are equipped with tracking technology to allow us to
manage our trailers more effectively, maintain a low trailer to
tractor ratio, efficiently assess detention fees, and minimize cargo
loss.
The primary source of our revenue growth has been our ability to open new
divisions in certain geographic areas and operate these facilities at a profit.
We opened our most recent divisions in Carlisle, Pennsylvania in June 2004 and
Lakeland, Florida in August 2004. Based on our current expectations concerning
the economy, we anticipate increasing our total tractors by 350 to 400
system-wide for the entire year of 2004. We have increased our total tractors by
335 through September 30, 2004. As part of our growth strategy, we also
periodically evaluate acquisition opportunities and we will continue to consider
acquisitions that meet our financial and operating criteria. In addition, in
July 2004, we began operating a refrigerated division based out of a separate
facility located in Phoenix. This new refrigerated division began with
approximately 20 tractors and was operating 33 tractors as of September 30,
2004.
Revenue and Expenses
We primarily generate revenue by transporting freight for our customers.
Generally we are paid a rate per mile for our services. We enhance our revenue
by charging for tractor and trailer detention, loading and unloading activities,
and other specialized services, as well as through the collection of fuel
surcharges to mitigate the impact of increases in the cost of fuel. The main
factors that affect our revenue are the revenue per mile we receive from our
customers, the percentage of miles for which we are compensated, and the number
of miles we generate with our equipment. These factors relate, among other
things, to the general level of economic activity in the United States,
inventory levels, specific customer demand, the level of capacity in the
trucking industry, and driver availability.
During the first nine months of 2004, the United States economy has
experienced strong growth and business inventory levels seemed to improve during
this period. As a result of these positive developments, we have experienced
stronger and more stable freight demand among current and prospective customers
thus far in 2004 than we experienced in the preceding three years. Historically,
the excess capacity in the transportation industry has limited our ability to
improve rates. Over the past two years, however, the transportation industry
seems to have seen some reduction in capacity. We hope that, over the remainder
of 2004, lower capacity coupled with stronger freight demand will continue to
provide us with better pricing power.
The main factors that impact our profitability on the expense side are the
variable costs of transporting freight for our customers. These costs include
fuel expense, driver-related expenses, such as wages, benefits, training, and
recruitment, and owner-operator costs, which are recorded under purchased
transportation. Expenses that have both fixed and variable components include
maintenance and tire expense and our total cost of insurance and claims. These
expenses generally vary with the miles we travel, but also have a controllable
component based on safety, fleet age, efficiency, and other factors. Our main
fixed costs are the acquisition and financing of long-term assets, such as
revenue equipment and operations centers, and the compensation of non-driver
personnel. Effectively controlling our expenses is an important element of
assuring our profitability. The primary measure we use to evaluate our
profitability is operating ratio, excluding the impact of fuel surcharge revenue
(operating expenses,
11
net of fuel surcharge, as a percentage of revenue, before fuel surcharge). We
view any operating ratio, whether for the Company or any operations center, in
excess of 85% as unacceptable performance.
Recent Results of Operations and Quarter-End Financial Condition
For the quarter ended September 30, 2004, our results of operations
improved as follows versus the same period in 2003:
o Revenue, before fuel surcharge, increased 25.7%, to $106.1 million
from $84.4 million;
o Net income increased 32.6%, to $12.6 million from $9.5 million; and
o Net income per diluted share increased 37.5% to $0.22 from $0.16.
We believe the improvements in our profitability are attributable primarily
to higher average revenue per tractor per week (excluding fuel surcharge), our
main measure of asset productivity, which increased 9.5% to $3,085 in the third
quarter of 2004 from $2,818 in the third quarter of 2003. This improvement was
driven by an 8.3% increase in average revenue per loaded mile (excluding fuel
surcharge) to $1.556 from $1.437 and a 1.6% increase in average miles per
tractor to 28,834 from 28,379. We believe these increases were attributable to
stronger freight demand and a better rate environment in the 2004 quarter
primarily due to the improving U.S. economy and a favorable relationship between
demand and trucking capacity. Rate and mile improvements were partially offset
by a 5.6% increase in our percentage of non-revenue miles to 11.4% for the third
quarter of 2004 from 10.8% for the same period in the prior year, which was
principally due to positioning of our revenue equipment in areas which allowed
us to capitalize on the most favorable freight in terms of the higher rates.
At September 30, 2004, our balance sheet reflected $24.4 million in cash
and cash equivalents, no long-term debt, and shareholders' equity of $275.0
million. For the quarter, we generated $28.7 million in cash flow from
operations and used $41.4 million for net capital expenditures (net of net book
value of equipment traded of $2.3 million).
12
Results of Operations
The following table sets forth the percentage relationships of our expense
items to total revenue and revenue, before fuel surcharge, for the three-month
and nine-month periods ended September 30, 2004, and 2003, respectively. Fuel
expense as a percentage of revenue, before fuel surcharge, is calculated using
fuel expense, net of surcharge. Management believes that eliminating the impact
of this sometimes volatile source of revenue affords a more consistent basis for
comparing our results of operations from period to period.
(Revenue, before) (Revenue, before)
(Total revenue) (fuel surcharge) (Total revenue) (fuel surcharge)
Three-Month Three-Month Nine-Month Nine-Month
Period Ended Period Ended Period Ended Period Ended
------------ ------------ ------------ ------------
September 30, September 30, September 30, September 30,
2004 2003 2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ---- ---- ----
Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Salaries, wages and
benefits 30.2 30.7 32.5 31.9 30.7 30.8 32.7 32.2
Fuel 19.2 16.3 13.1 (1) 13.1 (1) 18.7 16.9 13.5 (1) 13.3 (1)
Operations and maintenance 6.3 6.2 6.8 6.4 6.0 6.1 6.4 6.3
Insurance and claims 4.7 4.7 5.1 4.9 5.1 4.9 5.4 5.1
Operating taxes and licenses 2.2 2.7 2.3 2.8 2.2 2.7 2.4 2.8
Communications 0.8 0.9 0.9 0.9 0.8 0.9 0.9 0.9
Depreciation and amortization 9.2 8.8 9.9 9.2 9.2 8.7 9.8 9.1
Lease expense - revenue
equipment 0.6 2.2 0.6 2.3 0.9 2.3 1.0 2.4
Purchased transportation 6.6 7.4 7.1 7.7 6.9 7.4 7.3 7.8
Miscellaneous
operating expenses 2.0 2.1 2.1 2.1 2.0 2.3 2.0 2.3
---- ---- ---- ---- ---- ---- ---- ----
Total Operating
Expenses 81.8 82.0 80.4 81.3 82.5 83.0 81.4 82.2
---- ---- ---- ---- ---- ---- ---- ----
Income from operations 18.2 18.0 19.6 18.7 17.5 17.0 18.6 17.8
Net interest expense 0.1 0.0 0.1 0.0 0.0 0.0 0.1 (0.1)
---- ---- ---- ---- ---- ---- ---- ----
Income before income taxes 18.3 18.0 19.7 18.7 17.5 17.0 18.7 17.7
Income taxes 7.3 7.2 7.9 7.5 7.0 6.8 7.5 7.1
---- ---- ---- ---- ---- ---- ---- ----
Net income 11.0 10.8 11.8 11.2 10.5 10.2 11.2 10.6
==== ==== ==== ==== ==== ==== ==== ====
(1) Net of fuel surcharge.
There are minor rounding differences in the above table.
A discussion of our results of operations for the nine and three month
periods ended September 30, 2004 and 2003 is set forth below.
Comparison of Nine Months and Three Months Ended September 30, 2004 to Nine
Months and Three Months Ended September 30, 2003
Our total revenue for the nine months ended September 30, 2004 increased
26.2% to $315.5 million from $250.0 million for the same period in 2003. Total
revenue included $19.0 million of fuel surcharge revenue in the 2004 period
compared to $10.2 million in the 2003 period. Our total revenue for the quarter
ended September 30, 2004 increased 30.1% to $114.1 million from $87.6 million
for the same quarter in 2003. Total revenue included $7.9 million of fuel
surcharge revenue in the 2004 quarter compared to $3.2 million in the 2003
quarter. In discussing our results of operations we use revenue, before fuel
surcharge, and fuel expense, net of surcharge, because management believes that
eliminating the impact of this sometimes volatile source of revenue affords a
more consistent basis for comparing our results of operations from period to
period. We also discuss the changes in our expenses as a percentage of revenue,
before fuel surcharge, rather than absolute dollar changes. We do this because
we believe the
13
high variable cost nature of our business makes a comparison of changes in
expenses as a percentage of revenue more meaningful than absolute dollar
changes.
Revenue, before fuel surcharge, increased by 23.6% to $296.5 million in the
nine months ended September 30, 2004 from $239.8 million for the same period in
2003. Revenue, before fuel surcharge, increased by 25.7% to $106.1 million in
the quarter ended September 30, 2004 from $84.4 million in the same quarter in
2003. These increases primarily resulted from the expansion of our fleet and
customer base as we continue to open additional divisions, as well as improved
rates and utilization in the 2004 period. As a result of our expansion into new
regions and improving freight demand, our tractor fleet grew to 2,753 tractors
(including 256 owned by independent contractors) as of September 30, 2004, from
2,330 tractors (including 229 owned by independent contractors) as of September
30, 2003, an 18.2% increase. This growth in our fleet, coupled with higher
average revenue per tractor per week in the 2004 periods, resulted in the
significant period-over-period improvement in revenue.
Salaries, wages and benefits expense increased as a percentage of revenue,
before fuel surcharge, to 32.7% for the nine months ended September 30, 2004
from 32.2% for the same period in 2003. Salaries, wages and benefits expense
increased as a percentage of revenue, before fuel surcharge, to 32.5% for the
quarter ended September 30, 2004, compared to 31.9% for the same quarter of
2003. These increases were primarily due to the increases in driver pay rates
implemented during the previous nine months. As of September 30, 2004, 90.7% of
our fleet was operated by Company drivers, compared to 90.2% as of September 30,
2003. For our employees, we record accruals for workers' compensation benefits
as a component of our claims accrual, and the related expense is reflected in
salaries, wages and benefits in our consolidated statements of income.
Fuel expense, net of fuel surcharge, increased, as a percentage of revenue
before fuel surcharge, to 13.5% for the nine months ended September 30, 2004
from 13.3% for the same period in 2003. For the quarters ended September 30,
2004 and 2003, fuel expense, net of fuel surcharge, remained constant, as a
percentage of revenue before fuel surcharge, at 13.1%. We maintain a fuel
surcharge program to assist us in recovering a portion of increased fuel costs.
The increase for the nine month period noted above was due mainly to higher than
average fuel prices in the 2004 period, partially offset by increased fuel
surcharge collections and improved revenue per mile. As a percentage of total
revenue, including fuel surcharge, fuel expense increased to 18.7% for the nine
months ended September 30, 2004 from 16.9% for the same period in 2003. For the
quarter ended September 30, 2004, fuel expense, as a percentage of total
revenue, including fuel surcharge, increased to 19.2% from 16.3% for the
corresponding quarter in the prior year. These increases were due primarily to
higher fuel prices. See "Quantitative and Qualitative Disclosure About Market
Risk - Commodity Price Risk," below.
Operations and maintenance expense increased, as a percentage of revenue,
before fuel surcharge, to 6.4% for the nine months ended September 30, 2004,
compared to 6.3% for the same period in 2003. For the quarter ended September
30, 2004, operations and maintenance expense increased, as a percentage of
revenue, before fuel surcharge, to 6.8% compared to 6.4% for the same quarter in
2003. These increases were primarily due to the timing of maintenance and tire
replacement activity on our revenue equipment, along with increases in driver
hiring costs.
Insurance and claims expense increased as a percentage of revenue, before
fuel surcharge, to 5.4% for the nine months ended September 30, 2004, compared
to 5.1% for the same period in 2003. Insurance and claims expense increased as a
percentage of revenue, before fuel surcharge, to 5.1% for the quarter ended
September 30, 2004, compared to 4.9% for the same quarter in 2003. These
increases were primarily a result of higher insurance premiums and an increase
in claims incurred by the Company.
Operating taxes and licenses expense as a percentage of revenue, before
fuel surcharge, decreased to 2.4% for nine months ended September 30, 2004 from
2.8% for the same period in 2003. For the quarter ended September 30, 2004, this
expense decreased, as a percentage of revenue before fuel surcharge, to 2.3%
from 2.8% for the same quarter of 2003. These decreases resulted primarily from
the
14
improvements in average revenue per tractor per week in the 2004 periods
described above, which more efficiently covered this largely fixed cost.
Communications expenses as a percentage of revenue, before fuel surcharge,
remained constant at 0.9% for each of the 2004 and 2003 periods.
Depreciation and amortization expense, as a percentage of revenue before
fuel surcharge, increased to 9.8% for the nine months ended September 30, 2004
from 9.1% for the same period in 2003. Depreciation and amortization expense, as
a percentage of revenue before fuel surcharge, increased to 9.9% for the quarter
ended September 30, 2004 from 9.2% for the same quarter in 2003. These increases
were primarily related to an increase in the percentage of our Company fleet
comprised of purchased vehicles. At September 30, 2004, 96% of our Company fleet
was comprised of purchased vehicles, compared to 76% at September 30, 2003. Our
Company fleet includes purchased vehicles and vehicles held under operating
leases, while our total fleet includes vehicles in our Company fleet as well as
vehicles provided by independent contractors.
Lease expense for revenue equipment as a percentage of revenue, before fuel
surcharge, decreased to 1.0% for the nine months ended September 30, 2004,
compared to 2.4% for the same period in 2003. Lease expense for revenue
equipment as a percentage of revenue, before fuel surcharge, decreased to 0.6%
for the quarter ended September 30, 2004, compared to 2.3% for the same quarter
in 2003. These decreases primarily resulted from the reduction in the percentage
of the Company fleet comprised of vehicles held under operating leases discussed
above.
Purchased transportation expense as a percentage of revenue, before fuel
surcharge, decreased to 7.3% for the nine months ended September 30, 2004
compared to 7.8% for the same period in 2003. Purchased transportation expense
as a percentage of revenue, before fuel surcharge, decreased to 7.1% for the
quarter ended September 30, 2004 compared to 7.7% for the same quarter in 2003.
These decreases were primarily the result of the improvements in revenue per
mile during the 2004 periods described above, along with the slight decrease in
the percentage of our total fleet comprised of independent contractors. As of
September 30, 2004, 9.3% of our fleet was operated by independent contractors,
compared to 9.8% at September 30, 2003.
Miscellaneous operating expenses as a percentage of revenue, before fuel
surcharge, decreased to 2.0% for the nine months ended September 30, 2004 from
2.3% for the same period in 2003. This decrease was primarily due to the
improvements in average revenue per tractor per week in the 2004 periods
described above. Miscellaneous operating expenses as a percentage of revenue,
before fuel surcharge, remained constant at 2.1% for the quarters ended
September 30, 2004 and 2003.
As a result of the above factors, our operating ratio (operating expenses,
net of fuel surcharge, expressed as a percentage of revenue, before fuel
surcharge) was 81.4% for the nine months ended September 30, 2004, compared to
82.2% for same period in 2003. For the quarter ended September 30, 2004, our
operating ratio was 80.4% compared to 81.3% for same quarter in 2003.
Income taxes have been provided at the statutory federal and state rates,
adjusted for certain permanent differences between financial statement income
and income for tax reporting. Our effective tax rate was 40.0% for 2004 and
2003. As a percentage of revenue, before fuel surcharge, income tax expense
increased to 7.5% for the nine months ended September 30, 2004, from 7.1% for
the same period in 2003. For the quarter ended September 30, 2004, income tax
expense, as a percentage of revenue, before fuel surcharge, increased to 7.9%
from 7.5% for the same quarter in 2003. These increases were primarily due to
the increases in our income before income taxes.
15
As a result of the preceding changes, our net income, as a percentage of
revenue before fuel surcharge, was 11.2% for the nine months ended September 30,
2004, compared to 10.6% for the same period in 2003. For the quarter ended
September 30, 2004, our net income, as a percentage of revenue before fuel
surcharge, was 11.8% compared to 11.2% in the same quarter in 2003.
Liquidity and Capital Resources
The growth of our business has required, and will continue to require, a
significant investment in new revenue equipment. Our primary sources of
liquidity have been funds provided by operations, and to a lesser extent lease
financing arrangements, issuances of equity securities, and borrowings under our
line of credit.
Net cash provided by operating activities was approximately $74.7 million
for the nine months ended September 30, 2004, compared to $60.1 million for the
same period in 2003. The increase for the 2004 period was primarily the result
of an increase in revenue and the improvement in our operating ratio.
Capital expenditures for the purchase of revenue equipment, office
equipment, land and leasehold improvements, totaled $92.7 million for the nine
months ended September 30, 2004 compared to $53.1 million for the same period in
2003. During the 2004 period, we acquired a significant number of tractors and
trailers for cash, including some that previously had been held under operating
leases, and continued to upgrade our network of terminal facilities.
Net cash provided by financing activities was approximately $1.1 million
for the nine months ended September 30, 2004, compared to net cash used for
financing activities of approximately $1.1 million for same period in 2003. Net
cash provided by financing during the 2004 period was the result of stock option
exercises. The net cash used for financing during the 2003 period was primarily
for the payments on our line of credit and long-term debt, which was retired in
full during the fourth quarter of 2003, offset by proceeds from the exercise of
stock options.
At September 30, 2004, we did not have any borrowings outstanding. We
currently maintain a line of credit, which permits revolving borrowings and
letters of credit totaling $11.0 million. At September 30, 2004, the line of
credit consisted solely of issued but unused letters of credit totaling $9.8
million. Historically this line of credit had been maintained at $50.0 million.
However, due to our continued strong positive cash position, and in an effort to
minimize bank fees, we do not believe a revolving credit facility or term loans
are necessary to meet our current and anticipated near-term cash needs. We
believe any necessary increase in our line of credit to provide for a revolving
line or credit or term loans could be accomplished quickly as needed. We are
obligated to comply with certain financial covenants under our line of credit
and were in compliance with these covenants at September 30, 2004.
As of September 30, 2004, we held $24.4 million in cash and cash
equivalents. Management believes we will be able to finance our near term needs
for working capital over the next twelve months, as well as capital expenditures
during such period, with cash balances, cash flows from operations, and
borrowings and operating lease financing believed to be available from financing
sources. 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 additional capital will depend upon prevailing market
conditions, the market price of our common stock and other factors over which we
have limited control, as well as our financial condition and results of
operations. Nevertheless, based on our recent operating results, current cash
position, anticipated future cash flows, and sources of financing that we expect
will be available to us, we do not expect that we will experience any
significant liquidity constraints in the foreseeable future.
16
Off-Balance Sheet Transactions
Our liquidity is not materially affected by off-balance sheet transactions.
Like many other trucking companies, from time-to-time we have utilized
non-cancelable operating leases to finance a portion of our revenue equipment
acquisitions. At September 30, 2004, we leased 97 tractors under operating
leases with varying termination dates ranging from October 2004 to April 2006.
Vehicles held under operating leases are not carried on our balance sheet, and
lease payments in respect of such vehicles are reflected in our income
statements in the line item "lease expense - revenue equipment." Our rental
expense related to operating leases was $2.9 million for the nine months ended
September 30, 2004, compared to $5.8 million for the same period of 2003. The
total amount outstanding under operating leases as of September 30, 2004, was
$2.1 million, with $1.1 million due in the next 12 months. The effective annual
interest rates under these operating leases are approximately 5.2%.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires that
management make a number of assumptions and estimates that affect the reported
amounts of assets, liabilities, revenue and expenses in our consolidated
financial statements and accompanying notes. Management bases its estimates on
historical experience and various other assumptions believed to be reasonable.
Although these estimates are based on management's best knowledge of current
events and actions that may impact the Company in the future, actual results may
differ from these estimates and assumptions. Our critical accounting policies
are those that affect our financial statements materially and involve a
significant level of judgment by management.
Revenue Recognition. We recognize revenue, including fuel surcharges, upon
delivery of a shipment.
Revenue Equipment. Property and equipment are stated at cost. Depreciation
on property and equipment is calculated by the straight-line method over the
estimated useful life down to an estimated salvage value of the property and
equipment. We periodically evaluate the useful lives and salvage values of our
property and equipment based upon, among other things, our experience with
similar assets, including gains or losses upon dispositions of such assets. Our
determinations with respect to salvage values are based upon the expected market
values of equipment at the end of the expected life. We presently do not expect
any decrease in the salvage values of our revenue equipment as a result of
conditions in the used equipment market or otherwise. We do not conduct "fair
value" assessments of our capital assets in the ordinary course of business and,
unless a triggering event under SFAS 144 occurs, we do not expect to do so in
the future.
Tires on revenue equipment purchased are capitalized as a part of the
equipment cost and depreciated over the life of the vehicle. Replacement tires
and recapping costs are expensed when placed in service.
Claims Reserves and Estimates. Reserves and estimates for claims is another
of our critical accounting policies. The primary claims arising for us consist
of cargo liability, personal injury, property damage, collision and
comprehensive, workers' compensation, and employee medical expenses. We maintain
self-insurance levels for these various areas of risk and have established
reserves to cover these self-insured liabilities. We also maintain insurance to
cover liabilities in excess of the self-insurance amounts. The claims reserves
represent accruals for the estimated uninsured portion of pending claims,
including adverse development of known claims, as well as incurred but not
reported claims. These estimates are based on historical information, primarily
our own claims experience and the experience of our third party administrator,
along with certain assumptions about future events. Changes in assumptions as
well as changes in actual experience could cause these estimates to change in
the near
17
term. The significant recent increases in our self-insured retention for
personal injury and property damage claims amplify the importance and potential
impact of these estimates.
Estimates also are involved in other aspects of our business. For instance,
we make similar types of estimates concerning the collectibility of our accounts
receivable and the concentration of our credit exposure based on our historical
experience and certain assumptions about future events.
Accounting for Income Taxes. Significant management judgment is required in
determining our provision for income taxes and in determining whether deferred
tax assets will be realized in full or in part. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. When it is more likely than not that all or some portion
of specific deferred tax assets will not be realized, a valuation allowance must
be established for the amount of the deferred tax assets that are determined not
to be realizable. A valuation allowance for deferred tax assets has not been
deemed necessary due to the Company's profitable operations. We continually
evaluate strategies that would allow for the future utilization of our deferred
tax assets and currently believe we have the ability to enact strategies to
fully realize our deferred tax assets should our earnings in future periods not
support the full realization of the deferred tax assets.
Factors That May Affect Future Results
The following issues and uncertainties, among others, should be considered
in evaluating our business outlook:
Business Uncertainties. 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, interest rates, the availability of qualified drivers,
fluctuations in the resale value of revenue equipment, economic and customer
business cycles and shipping demands are factors over which we have little or no
control. Significant increases or rapid fluctuations in fuel prices, interest
rates or insurance costs or claims, to the extent not offset by fuel surcharges
and 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 effects of 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.
Managing Growth. 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.
In addition, we have recently commenced operation of a refrigerated division as
part of our growth strategy and are subject to the risks inherent in entering a
new market, including but not limited to: unfamiliarity with pricing, service,
and operational issues; the risk that customer relationships may be difficult to
obtain or that we may have to reduce rates to gain customer relationships; the
risk that the specialized refrigerated equipment may not be adequately utilized;
and the risk that cargo claims may exceed our past experience.
Insurance. Our future insurance and claims expenses might exceed historical
levels, which could reduce our earnings. Insurance premiums have increased
significantly over the past several years, which we have managed, in part, by
increasing the levels of our self-insured retention. We are self-insured for
personal injury and property damage liability, cargo liability, collision and
comprehensive up to a maximum limit of $2.0 million per occurrence. Our maximum
self-retention for workers'
18
compensation where a traffic accident is not involved is $500,000 per
occurrence. We maintain insurance with licensed insurance companies above the
amounts for which we self-insure. Our insurance policies provide for excess
personal injury and property damage liability up to a total of $40.0 million per
occurrence and cargo liability, collision, comprehensive and workers'
compensation coverage up to a total of $10.0 million per occurrence. Our
personal injury and property damage policies also include coverage for punitive
damages where such coverage is allowed.
If these costs were to increase further, or if the severity or number of
claims were to increase, our earnings could be materially and adversely
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, a significant
decline in used revenue equipment values, or the unavailability of independent
contractors) could restrict future growth.
EPA emissions control regulations require that diesel engines manufactured
in October 2002 and thereafter must satisfy considerably more restrictive
emissions standards. Furthermore, even more restrictive engine design
requirements will take effect in 2007. In part to offset the costs of compliance
with the EPA engine design requirements, some manufacturers have significantly
increased new equipment prices and further increases may result in connection
with the implementation of the 2007 standards. If new equipment prices increase
more than anticipated, we may be required to increase our depreciation and
financing costs and/or retain some of our equipment longer, with a resulting
increase in maintenance expenses. To the extent we are unable to offset any such
increases in expenses with rate increases or cost savings, our results of
operations would be adversely affected.
In addition to increases in equipment costs, the EPA-compliant engines are
generally less fuel efficient than those in later model tractors manufactured
before October 2002, and compliance with the 2007 EPA standards is expected to
result in further declines in fuel economy. To the extent we are unable to
offset resulting increases in fuel expenses with higher rates or surcharge
revenue, our results of operations would be adversely affected.
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 the first nine months of 2004, we experienced
fluctuations in fuel costs, as a result of conditions in the petroleum industry.
We maintain an aggressive program to obtain rate and fuel surcharge increases in
an effort to cover a considerable portion of increases in expenses resulting
from higher fuel costs. Competitive conditions in the transportation industry,
including lower demand for transportation services, could limit our ability to
continue to obtain rate increases or fuel surcharges. Due to our significant
operations in the West Coast region, we are particularly affected by the
substantially higher fuel prices currently prevailing in that portion of the
country. Generally, West Coast fuel prices are on average approximately $0.10
per gallon higher than the national average. For much of the first nine months
of 2004, however, this regional difference has been considerably more
pronounced. As fuel surcharges generally are based on national fuel price
averages, this fuel price disparity disproportionately affects carriers, like
us, with substantial operations on the West Coast. We continue to address this
situation by implementing a higher West Coast surcharge on our tariff customers
and negotiating with our contract customers to obtain higher fuel surcharge
rates. To the extent we do not have continuing success in these negotiations,
our results of operations may be adversely affected. See "Quantitative and
Qualitative Disclosure About Market Risk - Commodity Price Risk," below.
We also have periodically experienced some wage increases for drivers.
Increases in driver compensation could continue during 2004 and may affect our
operating income, unless we are able to pass those increased costs to customers
through rate increases.
19
Driver Retention. Difficulty in attracting or retaining qualified drivers,
including independent contractors, also could have a materially 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 make further adjustments to our
driver compensation package, which could adversely affect our profitability if
not offset by a corresponding increase in rates.
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."
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk changes in interest rate on debt and from
changes in commodity prices.
Under Financial Accounting Reporting Release Number 48 and Securities and
Exchange Commission rules and regulations, 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.
We generally have not had occasion to use derivative financial instruments
for risk management purposes and do not use them for either speculation or
trading. 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 the Company borrows
against its line of credit or incurs debt in the acquisition of revenue
equipment. We attempt to manage our interest rate risk by managing the amount of
debt we carry. At September 30, 2004, we did not have any outstanding
borrowings. In the opinion of management, an increase in short-term interest
rates could have a materially adverse effect on our financial condition if our
debt levels increase. 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.
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 fully
offset an increase in the cost of diesel fuel. Based on our recent historical
experience, we believe that we generally pass through to our customers
approximately 80% to 90% of increases in fuel prices. For the nine months ended
September 30, 2004, fuel expense, net of fuel surcharge, represented 16.6% of
our total operating expenses, net of fuel surcharge, compared to 16.2% for the
same period in 2003.
We are party to three fuel contracts relating to the price of heating oil
on the New York Mercantile Exchange ("NYMX") that we entered into between
October 2000 and February 2002 in connection with volume diesel fuel purchases.
If the price of heating oil on the NYMX falls below $0.58 per gallon we may be
required to pay the difference between $0.58 and the index price (1) for 1.0
million
20
gallons per month for any selected twelve months through March 31, 2005, and (2)
for 750,000 gallons per month for the twelve months of 2005. At October 8, 2004,
the price of heating oil on the NYMX was $1.45 for November 2004 contracts. For
each $0.05 per gallon the price of heating oil would fall below $0.58 per gallon
during the relevant periods, our potential loss on the contracts would be
approximately $750,000. However, our net savings on fuel costs resulting from
lower fuel prices under our volume diesel fuel purchase contracts would be
approximately $1.6 million, after taking the loss on the contracts into
consideration. We have valued these contracts at fair value in the accompanying
September 30, 2004 consolidated financial statements.
Item 4. Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, the Company has carried
out an evaluation of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of the end of the period covered
by this report. This evaluation was carried out under the supervision and with
the participation of the Company's management, including our Chief Executive
Officer and our Chief Financial Officer. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective as of the end of the period covered by
this report. During the Company's third fiscal quarter, there were no changes in
the Company's internal control over financial reporting that have materially
affected, or that are reasonably likely to materially affect, the Company's
internal control over financial reporting.
Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in the
Company's reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure controls and
procedures include controls and procedures designed to ensure that information
required to be disclosed in Company reports filed under the Exchange Act is
accumulated and communicated to management, including the Company's Chief
Executive Officer and Chief Financial Officer as appropriate, to allow timely
decisions regarding disclosures.
The Company has confidence in its internal controls and procedures.
Nevertheless, the Company's management, including the Chief Executive Officer
and Chief Financial Officer, does not expect that our disclosure controls and
procedures or our internal controls will prevent all errors or intentional
fraud. An internal control system, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of such
internal controls are met. Further, the design of an internal control system
must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent
limitations in all internal control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected.
21
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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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
Exhibits required by Item 601 of Regulation S-K
Exhibit No. Description
Exhibit 3 Articles of Incorporation and Bylaws
(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 ended
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.)
(3.1.3) Third Amendment to Restated Articles of Incorporation of the
Company.(Incorporated by reference to Exhibit 3.1.3 to the
Company's Report on Form 10-K for the period ended
December 31, 2002.)
22
(3.2) Restated Bylaws of the Company (Incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on Form S-3
No. 333-72130.)
(3.2.1) First Amendment to Restated Bylaws of the Company
(Incorporated by reference to Exhibit 3.2.1 to the Company's
Report on Form 10-K for the period ended December 31, 2002.)
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 this
Report on Form 10-Q.)
(4.2) Sections 2 and 5 of the Restated Bylaws of the Company.
(Incorporated by reference to Exhibit 3.2 to this Report on Form
10-Q.)
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 contained in this Report on
Form 10-Q.)
Exhibit 31 Section 302 Certifications
(31.1) Certification pursuant to Item 601(b)(31) of Regulation S-K,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, by Kevin P. Knight, the Company's Chief Executive Officer
(31.2) Certification pursuant to Item 601(b)(31) of Regulation S-K,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, by David A. Jackson, the Company's Chief Financial Officer
Exhibit 32 Section 906 Certifications
(32.1) Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by
Kevin P. Knight, the Company's Chief Executive Officer
(32.2) Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by
David A. Jackson, the Company's Chief Financial Officer
23
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: November 8, 2004 By: /s/ Kevin P. Knight
----------------------------------------------------
Kevin P. Knight
Chief Executive Officer, in his capacity as such and
on behalf of the registrant
Date: November 8, 2004 By: /s/ David A. Jackson
----------------------------------------------------
David A. Jackson
Chief Financial Officer, in his capacity as such and
on behalf of the registrant
Date: November 8, 2004 By: /s/ Robert Johnson
----------------------------------------------------
Robert Johnson
Chief Accounting Officer, in his capacity as such
and on behalf of the registrant
24