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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 March 31, 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 April 30, 2004 was 37,557,486 shares.
KNIGHT TRANSPORTATION, INC.
INDEX
PART I - FINANCIAL INFORMATION Page Number
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2004 1
and December 31, 2003 (Unaudited)
Condensed Consolidated Statements of Income for the three 3
months ended March 31, 2004 and 2003 (Unaudited)
Condensed Consolidated Statements of Cash Flows for the three 4
months ended March 31, 2004 and 2003 (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition 14
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
Item 4. Controls and Procedures 25
Part II - OTHER INFORMATION
26
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 29
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (unaudited)
As of March 31, 2004 and December 31, 2003
(In thousands)
March 31, 2004 December 31, 2003
------------------------ -----------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 40,933 $ 40,550
Accounts receivable, net 44,488 38,751
Notes receivable, net 409 515
Inventories and supplies 1,614 1,336
Prepaid expenses 6,699 7,490
Income tax receivable - 1,761
Deferred tax asset 5,670 5,667
------------------------ -----------------------
Total current assets 99,813 96,070
------------------------ -----------------------
PROPERTY AND EQUIPMENT:
Land and improvements 13,936 13,911
Buildings and improvements 18,356 17,166
Furniture and fixtures 5,241 4,916
Shop and service equipment 2,503 2,409
Revenue equipment 275,223 256,803
Leasehold improvements 1,007 968
------------------------ -----------------------
316,266 296,173
Less: Accumulated depreciation
nd amortization (88,064) (83,238)
------------------------ -----------------------
PROPERTY AND EQUIPMENT, net 228,202 212,935
------------------------ -----------------------
NOTES RECEIVABLE - long-term 187 362
GOODWILL 7,504 7,504
OTHER ASSETS 4,416 4,355
------------------------ -----------------------
$ 340,122 $ 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 March 31, 2004 and December 31, 2003
(In thousands, except par values)
March 31, 2004 December 31, 2003
------------------------ ---------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 6,453 $ 3,408
Accrued payroll 3,988 3,448
Accrued liabilities 8,880 4,493
Claims accrual 15,708 14,805
------------------------ ---------------------------
Total current liabilities 35,029 26,154
DEFERRED INCOME TAXES 55,292 55,149
------------------------ ---------------------------
Total liabilities 90,321 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; 37,531 and 37,489
issued and outstanding at March 31, 2004
and December 31, 2003, respectively 375 375
Additional paid-in capital 78,509 77,942
Retained earnings 170,917 161,606
------------------------ ---------------------------
Total shareholders' equity 249,801 239,923
------------------------ ---------------------------
$ 340,122 $ 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
March 31,
2004 2003
---- ----
REVENUE:
Revenue, before fuel surcharge $90,243 $73,551
Fuel surcharge 4,069 3,658
----------------- ----------------
Total revenue 94,312 77,209
----------------- ----------------
OPERATING EXPENSES:
Salaries, wages and benefits 30,130 23,791
Fuel 16,714 14,228
Operations and maintenance 5,661 4,688
Insurance and claims 4,889 3,827
Operating taxes and licenses 2,224 2,126
Communications 869 720
Depreciation and amortization 8,898 6,786
Lease expense - revenue
equipment 1,233 1,975
Purchased transportation 6,588 5,512
Miscellaneous operating
expenses 1,719 1,703
----------------- ----------------
78,925 65,356
----------------- ----------------
Income from operations 15,387 11,853
----------------- ----------------
OTHER INCOME (EXPENSE):
Interest income 124 136
Interest expense - (202)
----------------- ----------------
124 (66)
----------------- ----------------
Income before taxes 15,511 11,787
INCOME TAXES (6,200) (4,710)
----------------- ----------------
Net income $9,311 $7,077
================= ================
Net income per common share and common share
equivalent:
Basic $0.25 $0.19
================= ================
Diluted $0.24 $0.19
================= ================
Weighted average number of common shares and
common share equivalents outstanding:
Basic 37,507 37,192
================= ================
Diluted 38,273 38,087
================= ================
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (unaudited)
(In thousands)
Three Months Ended
March 31,
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 9,311 $ 7,077
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 8,898 6,786
Non-cash compensation expense for issuance of
common stock to certain members of board of directors 13 18
Provision for allowance for doubtful accounts
and notes receivable (53) 136
Interest rate swap agreement - fair value change - 84
Tax benefit on stock option exercises 298 567
Deferred income taxes 140 2,143
Changes in assets and liabilities:
(Increase) decrease in trade receivables (5,733) 426
(Increase) in inventories and supplies (279) (155)
Decrease (increase) in prepaid expenses 791 (2,514)
Decrease in income tax receivable 1,762 -
(Increase) in other assets (62) (66)
(Decrease) increase in accounts payable (731) 304
Increase in accrued liabilities and claims accrual 5,830 3,696
--------------------- ------------------
Net cash provided by operating activities 20,185 18,502
--------------------- ------------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (20,390) (20,498)
Investment in/advances to other companies - (100)
Decrease in notes receivable 332 281
--------------------- ------------------
Net cash used in investing activities (20,058) (20,317)
--------------------- ------------------
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (unaudited) (continued)
(In thousands)
Three Months Ended
March 31,
2004 2003
---- ----
CASH FLOW FROM FINANCING ACTIVITIES:
Payments on long-term debt - (1,393)
Proceeds from exercise of stock options 256 594
---------------------- ---------------------
Net cash provided by (used in) financing activities 256 (799)
---------------------- ---------------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 383 (2,614)
CASH AND CASH EQUIVALENTS,
beginning of period 40,550 36,198
---------------------- ---------------------
CASH AND CASH EQUIVALENTS, end of period $ 40,933 $ 33,584
====================== =====================
SUPPLEMENTAL DISCLOSURES:
Noncash investing and financing transactions:
Equipment acquired in accounts payable $ 3,849 $ 7,341
Net book value of revenue equipment traded 2,338 2,249
Cash flow information:
Income taxes paid $ 145 $ 216
Interest paid - 169
The accompanying notes are an integral part of these 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. 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 condensed consolidated financial statements and
notes thereto should be read in conjunction with the Company's consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 2003.
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 condensed
consolidated financial statements, and the reported amounts of the revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
a. Nature of Business
Knight Transportation, Inc. (an Arizona corporation) and subsidiaries (the
Company) is a short to medium-haul, truckload carrier of general
commodities. The operations are based in Phoenix, Arizona, where the
Company has its corporate offices, fuel island, truck terminal, dispatching
and maintenance services. The Company also has operations in Katy, Texas;
Indianapolis, Indiana; Charlotte, North Carolina; Salt Lake City, Utah;
Gulfport, Mississippi; Kansas City, Kansas; Portland, Oregon; Memphis,
Tennessee; Atlanta, Georgia; Denver, Colorado; and Las Vegas, Nevada. The
Company operates in one industry, road transportation, which is subject to
regulation by the Department of Transportation and various state regulatory
authorities. The Company has an owner-operator program. Owner-operators are
independent contractors who provide their own tractors. The Company views
owner-operators as an alternative method to obtaining additional revenue
equipment.
b. Significant Accounting Policies
Principles of Consolidation - The accompanying consolidated financial
statements include the parent company Knight Transportation, Inc., and its
wholly owned subsidiaries (the Company). All material intercompany items
and transactions have been eliminated in consolidation.
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
6
Cash Equivalents - The Company considers all highly liquid instruments
purchased with original maturities of three months or less to be cash
equivalents.
Notes Receivable - Included in notes receivable are amounts due from
independent contractors under a program whereby the Company finances
tractor purchases for its independent contractors. These notes receivable
are collateralized by revenue equipment and are due in monthly
installments, including principal and interest at 10%, over periods
generally ranging from three to five years.
Inventories and Supplies - Inventories and supplies consist primarily of
tires and spare parts which are stated at the lower of cost, using the
first-in, first-out (FIFO) method, or net realizable value.
Property and Equipment - Property and equipment are stated at cost.
Depreciation and amortization on property and equipment is calculated by
the straight-line method over the following estimated useful lives:
Years
-------
Land improvements 5
Buildings and improvements 20-30
Furniture and fixtures 5
Shop and service equipment 5-10
Revenue equipment 5-10
Leasehold improvements 10
Goodwill - Effective January 1, 2002, we adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets," which establishes financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes Accounting Principles
Board Opinion No. 17, "Intangible Assets." Under SFAS No. 142, goodwill and
indefinite-lived intangible assets are no longer amortized but are reviewed
at least annually for impairment.
SFAS No. 142 requires that goodwill be tested for impairment at the
reporting unit level at adoption and at least annually thereafter,
utilizing a two-step methodology. The initial step requires us to determine
the fair value of the reporting unit and compare it to the carrying value,
including goodwill, of such unit. If the fair value exceeds the carrying
value, no impairment loss would be recognized. However, if the carrying
value of the reporting unit exceeds its fair value, the goodwill of the
reporting unit may be impaired. The amount, if any, of the impairment would
then be measured in the second step.
In connection with adopting this standard as of January 1, 2002, during the
first quarter of 2002 we identified our reporting units to be at the same
level as the operating segments; however, these operating segments have
been aggregated and reported as one reportable segment in accordance with
the aggregation provisions of SFAS No. 131. In applying this same
aggregation criteria, we determined that we had one reporting unit, and we
completed step one of the test for impairment, which indicated that the
fair value, as determined utilizing various evaluation techniques including
discounted cash flow and comparative market analysis, of the reporting unit
exceeded the carrying value of the reporting unit. In accordance with SFAS
No. 142, our policy is to evaluate this goodwill for impairment at least
annually, or more frequently should any of the certain circumstances as
listed in SFAS No. 142 occur.
7
Other Assets - Other assets include:
2004 2003
------------- -------------
(In thousands) (In thousands)
Investment in and related advances to Concentrek, Inc. $ 2,245 $ 2,245
Investment in Knight Flight, LLC 1,388 1,388
Other 783 722
--- ---
$ 4,416 $ 4,355
============= =============
In April 1999, we acquired a 17% interest in Concentrek, Inc.
("Concentrek") through the purchase of shares of Concentrek's Class A
Preferred Stock for $200,000. This stock does not have voting rights except
in connection with certain major corporate events, such as a merger,
consolidation, or sale of substantially all of Concentrek's assets. The
remaining 83% interest in Concentrek is owned by Randy, Kevin, Gary and
Keith Knight and members of Concentrek's management. We have made loans to
Concentrek to fund start-up costs. At March 31, 2004, the total outstanding
amount of these loans was approximately $2.0 million. Of the total loan
amounts, $824,500 is evidenced by a promissory note that is convertible
into Concentrek's Class A Preferred Stock, and according to the note
agreement, the conversion of which would not result in our ownership in
Concentrek to exceed 17%. The remaining $1.2 million is evidenced by a
promissory note which is personally guaranteed by Randy, Kevin, Gary and
Keith Knight. Both loans are secured by a lien on Concentrek's assets.
These loans are on parity with respect to their security. This investment
is recorded at cost and our ownership percentage in this investment was
less than 20% at March 31, 2004 and we do not have significant influence
over the operating decisions of that entity.
In November 2000, we acquired a 19% interest in Knight Flight Services, LLC
("Knight Flight") which purchased and operates a Cessna Citation 560 XL jet
aircraft. The aircraft is leased to Pinnacle Air Charter, L.L.C., an
unaffiliated entity, which leases the aircraft on behalf of Knight Flight.
We have no further financial commitments to Knight Flight. The remaining
81% interest in Knight Flight is owned by Randy, Kevin, Gary and Keith
Knight, who have personally guaranteed the balance of the debt incurred to
finance the purchase of the aircraft, and have agreed to contribute any
capital required to meet any cash short falls. We have a priority use right
for the aircraft. This investment is accounted for on the equity method.
We evaluate equity securities for other than temporary declines in value at
each balance sheet date.
Impairment of Long-Lived Assets - Statement of Financial Accounting
Standards ("SFAS") No. 144 provides a single accounting model for
long-lived assets to be disposed of. SFAS No. 144 also changes the criteria
for classifying an asset as held for sale; and broadens the scope of
businesses to be disposed of that qualify for reporting as discontinued
operations and changes the timing of recognizing losses on such operations.
We adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144
did not affect our financial statements. Prior to the adoption of SFAS No.
144, we accounted for long-lived assets in accordance with SFAS No. 121,
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of."
In accordance with SFAS No. 144, long-lived assets, such as property and
equipment, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated undiscounted
future
8
cash flows expected to be generated by the asset. If the carrying amount of
an asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds
the fair value of the asset. Assets to be disposed of would be separately
presented in the balance sheet and reported at the lower of the carrying
amount or fair value less costs to sell, and are no longer depreciated. The
assets and liabilities of a disposal group classified as held for sale
would be presented separately in the appropriate asset and liability
sections of the balance sheet.
Recoverability of long-lived assets is dependent upon, among other things,
our ability to continue to achieve profitability, in order to meet our
obligations when they become due. In the opinion of management, based upon
current information, the carrying amount of long-lived assets will be
recovered by future cash flows generated through the use of such assets
over respective estimated useful lives.
Revenue Recognition - We recognize revenues, including fuel surcharges,
when persuasive evidence of an arrangement exists, delivery has occurred,
the fee is fixed or determinable and collectibility is probable. These
conditions are met upon delivery.
Income Taxes - We use the asset and liability method of accounting for
income taxes. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amount of existing assets and liabilities and their
respective tax bases. 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.
Financial Instruments - The Company's financial instruments include cash
equivalents, trade receivables, notes receivable, accounts payable and
notes payable. Due to the short-term nature of cash equivalents, trade
receivables and accounts payable, the fair value of these instruments
approximates their recorded value. In the opinion of management, based upon
current information, the fair value of notes receivable and notes payable
approximates market value. The Company does not have material financial
instruments with off-balance sheet risk, with the exception of operating
leases.
Segment Information - Although we have sixteen operating divisions, we have
determined that we have one reportable segment. Fifteen of the divisions
are managed based on the regions of the United States in which each
operates. Each of these divisions has similar economic characteristics as
they all provide short to medium haul truckload carrier service 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". 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.
Derivative and Hedging information - All derivatives are recognized on the
balance sheet at their fair value. On the date the derivative contract is
entered into, we designate the derivative as either a hedge of the fair
value of a recognized asset or liability or of firm commitment ("fair
value" hedge), or a hedge of a forecasted transaction or the variability of
cash flows to be received or paid related to a recognized asset or
liability ("cash flow" hedge). We formally assess, both at the hedge's
inception and on an ongoing basis, whether the derivatives that are used in
hedging transactions are effective in offsetting changes in fair values or
cash flows of
9
hedged items. When it is determined that a derivative is not effective as a
hedge or that it has ceased to be an effective hedge, we discontinue hedge
accounting prospectively. In August and September 2000, and in July 2001,
we entered into three agreements, respectively; these three contracts
relate to the price of heating oil on the New York Mercantile 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.
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 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 and auditing guidance and
SEC rules and regulations. The changes noted in SAB No. 104 did not have a
material effect on our consolidated financial statements.
Reclassifications - Certain prior period amounts have been reclassified to
conform to the current period presentation.
Note 2. Stock-Based Compensation
Stock-Based Compensation - At March 31, 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
10
fair-value-based method had been applied to all outstanding and unvested awards
for the three-month periods ended March 31, 2004 and 2003 (in thousands, except
per share data):
2004 2003
------------- -------------
Net income, as reported $ 9,311 $ 7,077
Deduct total stock-based employee
compensation expense determined under
fair-value-based method for all rewards, net
of tax (289) (220)
------------- -------------
Pro forma net income $ 9,022 $ 6,857
============= =============
Diluted earnings per share - as reported $ 0.24 $ 0.19
============= =============
Diluted earnings per share - pro forma $ 0.24 $ 0.18
============= =============
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 3.5%; expected
life of seven years; expected volatility of 50%; expected dividend yield rate of
zero; and expected forfeitures of 3.39%. The following weighted average
assumptions were used for grants in 2003: risk free interest rate 3.36%;
expected life of six years; expected volatility of 52%; expected dividend yield
rate of zero; and expected forfeitures of 3.92%.
Note 3. Net Income Per Share
A reconciliation of the basic and diluted earnings per share computations for
the three months ended March 31, 2004 and 2003, is as follows:
Three Months Ended
March 31,
2004 2003
---- ----
Weighted average common
shares outstanding - basic 37,507 37,192
Effect of stock options 766 895
---------------- ----------------
Weighted average common
share and common share
equivalents outstanding -
diluted 38,273 38,087
================ ================
Net income $9,311 $7,077
================ ================
Net income per common share and
common share equivalent
Basic $0.25 $0.19
================ ================
Diluted $0.24 $0.19
================ ================
11
Note 4. Comprehensive Income
Comprehensive income for the period was as follows:
Three Months Ended
March 31,
2004 2003
---- ----
Net income $9,311 $7,077
Other comprehensive income:
Interest rate swap agreement - fair
market value adjustment - 84
---------------- ----------------
Comprehensive income $9,311 $7,161
================ ================
Note 5. Segment Information
Although we have sixteen operating divisions, we have determined that we have
one reportable segment. Fifteen 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 and Hedging Activities
All derivatives are recognized on the balance sheet at their fair value. On the
date the derivative contract is entered into, we designate the derivative as
either a hedge of the fair value of a recognized asset or liability or of an
unrecognized firm commitment ("fair value" hedge) or a hedge of a forecasted
transaction or the variability of cash flows to be received or paid related to a
recognized asset or liability ("cash flow" hedge). We formally assess, both at
the hedge's inception and on an ongoing basis, whether the derivatives that are
used in hedging transactions are effective in offsetting changes in fair values
or cash flows of hedged items. When it is determined that a derivative is not
effective as a hedge or that it has ceased to be an effective hedge, we
discontinue hedge accounting prospectively.
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 Mercantile 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.
12
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. 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.
13
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 a dry van truckload carrier based in Phoenix, Arizona. 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 15 operating divisions 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
almost exclusively on operating dry-vans 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 driver to non-driver
employee ratio, and regulating vehicle speed.
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 a satellite-based tracking and communications system to permit us
to stay in contact with our drivers, obtain load position updates, and
provide our customers with freight visibility. A significant
14
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
regional facilities in certain geographic areas and operate these facilities at
a profit. During 2003, we established presences in Atlanta, Georgia and Denver,
Colorado, and opened a regional facility in Las Vegas, Nevada in February 2004.
We anticipate opening our 16th operating division in Eastern Pennsylvania during
the second quarter of 2004. Based on our current expectations concerning the
economy, we anticipate opening at least one other new regional facility in 2004
and adding 350 to 400 new tractors system-wide during the year. 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.
Revenue and Expenses
We primarily generate revenue by transporting freight for our customers.
Generally, we are paid by the 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. Going forward, the recently
effective revised hours-of-service regulations could have a negative impact on
our miles per truck if they reduce the amount of time that our drivers spend
driving. To the extent we are not able to offset any such impact through the
collection of fees from shippers who retain our equipment or drivers, our
revenue would be adversely affected. Although it is still too early to ascertain
the ultimate impact of the new hours-of-service regulations, our preliminary
expectation is that they will not materially affect our results of operations.
We invested significant time and resources training our driver and non-driver
personnel and communicating with our customers in preparation for the
effectiveness of the new rules in January 2004, and have experienced minimal
disruption in our operations to date.
For much of the past three years, economic activity in the United States
has been somewhat sluggish, which has limited to some extent our ability to
obtain rate increases. During the second half of 2003, however, the United
States economy experienced strong growth, which many forecasters anticipate will
continue throughout 2004. Business inventory levels also improved in late 2003.
We believe that if the economy continues to improve and inventory levels
continue to increase, we should experience stronger and more stable freight
demand among current and prospective customers in 2004 than we experienced in
2001, 2002, and the first half of 2003. Historically, the excess capacity in the
transportation industry has limited our ability to improve rates. Over the past
two years, however, the transportation industry has seen some reduction in
capacity. We hope that, in 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 operating terminals, 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, 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.
15
Recent Results of Operations and Quarter-End Financial Condition
For the quarter ended March 31, 2004, our results of operations improved as
follows versus the same period in 2003:
o Revenue, before fuel surcharge, increased 22.7%, to $90.2 million from
$73.6 million;
o Net income increased 31.6%, to $9.3 million from $7.1 million; and
o Net income per diluted share increased to $0.24 from $0.19.
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 8.6% to $2,853 in the first
quarter of 2004 from $2,628 in the first quarter of 2003. This improvement was
driven by a 4.1% increase in average revenue per loaded mile (excluding fuel
surcharge) to $1.489 from $1.430 and a 4.9% increase in average miles per
tractor to 28,142 from 26,838. 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. Rate and mile improvements were
partially offset by a 6.3% increase in our percentage of non-revenue miles to
11.8% for the first quarter of 2004 from 11.1% 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
highest rates.
In addition, in the first quarter of 2004 we saw considerable improvement
in our driver hiring and retention situation. During the fourth quarter of 2003,
we experienced a temporary challenge attracting a sufficient number of drivers
to optimize utilization of our tractor fleet. In response to this challenge, we
placed additional emphasis on our driver recruiting and retention efforts. We
believe these steps, coupled with one cent per mile increases in driver
compensation implemented in September 2003 and January 2004, which affected our
costs in the first quarter of 2004 and will continue to affect our costs going
forward, have effectively addressed the driver issues that we previously were
experiencing.
At March 31, 2004 our balance sheet reflected $40.9 million in cash and
cash equivalents, no long-term debt, and shareholders' equity of $249.8 million.
For the quarter, we generated $20.2 million in cash flow from operations and
used $20.4 million for net capital expenditures.
16
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 quarters
ended March 31, 2004, and 2003. 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.
Quarter Ended Quarter Ended
March 31, March 31,
--------------------- ---------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Total revenue 100.0% 100.0% Revenue, before fuel surcharge 100.0% 100.0%
--------- --------- --------- ---------
Operating expenses: Operating expenses:
Salaries, wages and Salaries, wages and
benefits 32.0 30.8 benefits 33.4 32.3
Fuel 17.7 18.4 Fuel(1) 14.0 14.4
Operations and Operations and
maintenance 6.0 6.1 maintenance 6.3 6.4
Insurance and claims 5.2 5.0 Insurance and claims 5.4 5.2
Operating taxes and Operating taxes and
licenses 2.4 2.8 licenses 2.5 2.9
Communications 0.9 0.9 Communications 1.0 1.0
Depreciation and Depreciation and
amortization 9.4 8.8 amortization 9.9 9.2
Lease expense - revenue Lease expense - revenue
equipment 1.3 2.5 equipment 1.4 2.7
Purchased transportation 7.0 7.1 Purchased transportation 7.3 7.5
Miscellaneous operating Miscellaneous operating
expenses 1.8 2.2 expenses 1.9 2.3
--------- --------- --------- ---------
Total operating expenses 83.7 84.6 Total operating expenses 82.9 83.9
--------- --------- --------- ---------
Income from operations 16.3 15.4 Income from operations 17.1 16.1
Net interest and other Net interest and other
expense 0.1 (0.1) expense 0.1 (0.1)
--------- --------- --------- ---------
Income before income 16.4 15.3 Income before income 17.2 16.0
taxes taxes
Income taxes 6.5 6.1 Income taxes 6.9 6.4
--------- --------- --------- ---------
Net Income 9.9% 9.2% Net Income 10.3% 9.6%
========= ========= ========= =========
___________________________
(1) Net of fuel surcharge.
A discussion of our results of operations for the quarters ended March 31,
2004 and 2003 is set forth below.
17
Comparison of Three Months Ended March 31, 2004 to Three Months Ended
March 31, 2003
Our total revenue for the quarter ended March 31, 2004 increased to $94.3
million from $77.2 million for the same quarter in 2003. Total revenue included
$4.1 million of fuel surcharge revenue in the 2004 quarter compared to $3.7
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 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 22.7% to $90.2 million in the
quarter ended March 31, 2004 from $73.6 million in the same quarter in 2003.
This increase primarily resulted from the expansion of our customer base as we
continue to add additional regional facilities, 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 2,477 tractors
(including 249 owned by independent contractors) as of March 31, 2004, from
2,168 tractors (including 212 owned by independent contractors) as of March 31,
2003, a 14.3% increase. This growth in our fleet, coupled with higher average
revenue per loaded mile and average miles per tractor in the 2004 quarter,
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 33.4% for the quarter ended March 31, 2004 from 32.3%
for the same quarter in 2003, primarily due to the increases in driver pay rates
implemented during the previous 6 months. As of March 31, 2004, 90.0% of our
fleet was operated by Company drivers, compared to 90.2% as of March 31, 2003.
For our drivers, 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, decreased, as a percentage of revenue
before fuel surcharge, to 14.0% for the quarter ended March 31, 2004 from 14.4%
for the same quarter in 2003, due mainly to a 3.4% increase in average revenue
per total mile (excluding fuel surcharge) to $1.314 from $1.271. The Company
maintains a fuel surcharge program to assist us in recovering a portion of
increased fuel costs. As a percentage of total revenue, including fuel
surcharge, fuel expense decreased to 17.7% for the quarter ended March 31, 2004
from 18.4% for the same quarter in 2003 as a result of the increase in average
revenue per total mile. See "Quantitative and Qualitative Disclosure About
Market Risk - Commodity Price Risk," below.
Operations and maintenance expense remained relatively constant as a
percentage of revenue, before fuel surcharge, at 6.3% for the quarter ended
March 31, 2004, compared to 6.4% for the same quarter in 2003.
Insurance and claims expense increased slightly as a percentage of revenue,
before fuel surcharge, to 5.4% for the quarter ended March 31, 2004, compared to
5.2% for the same quarter in 2003, primarily as a result of an increase in
insurance premiums and higher self-insurance retention levels assumed by the
Company.
Operating taxes and licenses expense as a percentage of revenue, before
fuel surcharge, decreased to 2.5% for the quarter ended March 31, 2004 from 2.9%
for the same quarter in 2003. This decrease resulted primarily from the
improvements in rates and utilization during the 2004 quarter described above.
18
Communications expenses as a percentage of revenue, before fuel surcharge,
remained constant at 1.0% for both the 2004 and 2003 quarters.
Depreciation and amortization expense, as a percentage of revenue before
fuel surcharge, increased to 9.9% for the quarter ended March 31, 2004 from 9.2%
for the same quarter in 2003. This increase was primarily related to an increase
in the percentage of our Company fleet comprised of purchased vehicles. At March
31, 2004, 87% of our Company fleet was comprised of purchased vehicles, compared
to 75% at March 31, 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 1.4% for the quarter ended March 31, 2004, compared to
2.7% for the same quarter in 2003, primarily as a result of a decrease in the
percentage of the Company fleet comprised of vehicles held under operating
leases.
Purchased transportation expense as a percentage of revenue, before fuel
surcharge, decreased to 7.3% for the quarter ended March 31, 2004 compared to
7.5% for the same period in 2003. This decrease was primarily the result of the
improvements in revenue per mile during the 2004 quarter described above. As of
March 31, 2004, 10.0% of our fleet was operated by independent contractors,
compared to 9.8% at March 31, 2003.
Miscellaneous operating expenses as a percentage of revenue, before fuel
surcharge, decreased to 1.9% for the quarter ended March 31, 2004 from 2.3% for
the same quarter in 2003, primarily due to the improvements in rates and
utilization during the 2004 quarter described above.
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 82.9% for the quarter ended March 31, 2004, compared to 83.9% for
same quarter in 2003.
We generated net interest income of less than 1.0% of revenue, before fuel
surcharge, for the quarter ended March 31, 2004, and net interest expense as a
percentage of revenue, before fuel surcharge, of less than 1.0% for the quarter
ended March 31, 2003. We had no outstanding debt at March 31, 2004, compared to
$13.5 million at March 31, 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 6.9% for the quarter ended March 31, 2004, from 6.4% for the same
quarter in 2003, primarily due to the improvement in our operating ratio.
As a result of the preceding changes, our net income, as a percentage of
revenue before fuel surcharge, was 10.3% for 2004, compared to 9.6% 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 $20.2 million
for the quarter ended March 31, 2004, compared to $18.5 million for the same
quarter in 2003. The increase for the 2004 quarter was primarily the result of
an increase in revenue and the improvement in our operating ratio.
19
Capital expenditures for the purchase of revenue equipment, net of
trade-ins, office equipment, land and leasehold improvements, totaled $20.4
million for the quarter ended March 31, 2004 compared to $20.5 million for the
same quarter in 2003.
Net cash provided by financing activities was approximately $0.3 million
for the quarter ended March 31, 2004, compared to net cash used for financing
activities of approximately $0.8 million for same quarter in 2003. Net cash
provided by financing during the 2004 quarter 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.
At March 31, 2004, we did not have any borrowing outstanding. We currently
maintain a line of credit, which permits revolving borrowings and letters of
credit totaling $10.0 million. At March 31, 2004, the line of credit consisted
solely of issued but unused letters of credit totaling $8.0 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 March 31, 2004.
As of March 31, 2004, we held $40.9 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 acquisitions of revenue
equipment 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 several 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.
Off-Balance Sheet Transactions
Our liquidity is not materially affected by off-balance sheet transactions.
Like many other trucking companies, historically we have utilized non-cancelable
operating leases to finance a portion of our revenue equipment acquisitions. At
March 31, 2004, we leased 285 tractors under operating leases with varying
termination dates ranging from April 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 $1.2 million for the quarter ended March 31, 2004, compared to $2.0
million for the same quarter of 2003. The total amount outstanding under
operating leases as of March 31, 2004, was $4.7 million, with $2.0 million due
in the next 12 months. The effective annual interest rates under these operating
leases range from 5.2% to 6.4%.
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
20
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 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, such as certain tax credit carryovers, 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. Accordingly, if the facts or financial results
were to change, thereby impacting the likelihood of realizing the deferred tax
assets, judgment would have to be applied to determine the amount of valuation
allowance required in any given period. 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.
21
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, 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.
The following issues and uncertainties, among others, should be considered
in evaluating our business 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 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' 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 the number of claims for which we are self-insured increases, our
operating results could be adversely affected. After several years of aggressive
pricing in the 1990s, insurance carriers raised premiums and sought higher
self-insurance retention levels, which increased our insurance and claims
expense. The terrorist attacks of September 11, 2001, exacerbated already
difficult conditions in the United States insurance market resulting in
additional increases in our insurance expenses. If these costs continue to
increase, or if the severity or number of claims increase, and if we are unable
to offset the resulting increases in expenses with higher freight rates, 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 or affect our profitability.
22
The EPA recently adopted new emissions control regulations, which require
progressive reductions in exhaust emissions from diesel engines through 2007,
for engines manufactured in October 2002 and thereafter. In part to offset the
costs of compliance with the new EPA engine design requirements, some
manufacturers have significantly increased new equipment prices. 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.
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 2003 and the first three months of 2004, we experienced
fluctuations in fuel costs, as a result of conditions in the petroleum industry.
We have initiated an aggressive program to obtain rate and fuel surcharge
increases. 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. Recently, however, this fuel price difference has been over
$0.40 per gallon. 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 are attempting 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 are not successful 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.
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 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 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
have significant operations in Arizona, California and the western United
States, winter weather generally has not adversely affected our business. The
continued expansion of our operations throughout the United States 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 availability of energy.
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."
23
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.
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 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. 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 and if the interest rate increases are not offset by
freight rate increases or other items. Management does not foresee or expect in
the near future any significant changes in 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 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 quarter ended
March 31, 2004, fuel expense, net of fuel surcharge, represented 16.9% of our
total operating expenses, net of fuel surcharge, compared to 17.1% for the same
quarter ending in 2003.
We are party to three fuel hedging 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 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 April 8, 2004, the price of heating oil on the NYMX was $0.93 for May 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 hedging
contracts would be approximately $1.0 million. However, our net savings on fuel
costs resulting from lower fuel prices under our volume diesel fuel purchase
contracts would be approximately $1.0 million, after taking the loss on the
hedging contracts into consideration. We have valued these items at fair value
in the accompanying March 31, 2004 consolidated financial statements.
24
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 first 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.
25
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. Changes in 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 and Reports on Form 8-K
(a) 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.)
26
(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
(b) Reports on Form 8-K
During the quarter ended March 31, 2004, the Company filed with,
or furnished to, the Securities and Exchange Commission (the
"Commission") the following Current Reports on Form 8-K:
27
Current Report on Form 8-K dated December 31, 2003 (filed with the
Commission on January 5, 2004) reporting the announcement of new
management titles for certain of the Company's executive officers;
Current Report on Form 8-K dated January 21, 2004 (furnished to the
Commission on January 22, 2004) reporting the issuance of a press
releasing announcing the Company's financial results for the quarter
and year ended December 31, 2003; and
Current Report on Form 8-K dated March 16, 2004 (filed with the
Commission on March 23, 2004) reporting the resignation of KPMG LLP as
the Company's principal independent public accountants.
28
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: May 7, 2004 By: /s/ Kevin P. Knight
----------------------------------------------------
Kevin P. Knight
Chief Executive Officer, in his capacity as such and
on behalf of the registrant
Date: May 7, 2004 By: /s/ David A. Jackson
----------------------------------------------------
David A. Jackson
Chief Financial Officer, in his capacity as such and
on behalf of the registrant
29