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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 1-10006
FROZEN FOOD EXPRESS INDUSTRIES, INC.
------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 75-1301831
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1145 EMPIRE CENTRAL PLACE, DALLAS, TEXAS 75247-4309
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 630-8090
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to section 12(g) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
i) Common Stock $1.50 par value The Nasdaq Stock Market
ii) Rights to purchase Common Stock The Nasdaq Stock Market
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT MAY 12, 2004
----- --------------------------
Common Stock, $1.50 par value 17,324,066
INDEX
PAGE NO.
--------
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEETS -
MARCH 31, 2004 AND DECEMBER 31, 2003 2
CONSOLIDATED CONDENSED STATEMENTS OF INCOME -
THREE MONTHS ENDED MARCH 31, 2004 AND 2003 3
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS -
THREE MONTHS ENDED MARCH 31, 2004 AND 2003 4
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 7
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 13
ITEM 4. CONTROLS AND PROCEDURES 14
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER
PURCHASES OF EQUITY SECURITIES 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
1
PART I - FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
CONSOLIDATED CONDENSED BALANCE SHEETS
FROZEN FOOD EXPRESS INDUSTRIES, INC. AND SUBSIDIARIES
(IN THOUSANDS)
(UNAUDITED)
Mar. 31, Dec. 31,
2004 2003
-------- --------
Assets
Current assets
Cash and cash equivalents $ 1,088 $ 1,396
Accounts receivable, net 52,732 55,094
Inventories 3,551 4,054
Tires on equipment in use 5,126 5,657
Deferred income taxes 1,464 2,657
Other current assets 7,490 7,843
-------- --------
Total current assets 71,451 76,701
Property and equipment, net 63,646 66,551
Other assets 11,599 12,358
-------- --------
$146,696 $155,610
======== ========
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 20,859 $ 25,045
Accrued claims 7,622 7,195
Accrued payroll 5,943 3,813
Accrued liabilities 2,218 2,907
-------- --------
Total current liabilities 36,642 38,960
Long-term debt 6,500 14,000
Deferred income taxes 2,746 2,878
Accrued claims and liabilities 14,522 15,718
-------- --------
60,410 71,556
-------- --------
Shareholders' equity
Par value of common stock (17,314 and 17,281 shares issued) 25,971 25,921
Capital in excess of par value 951 1,097
Retained earnings 59,789 57,849
-------- --------
86,711 84,867
Less - Treasury stock (128 and 195 shares), at cost 425 813
-------- --------
Total shareholders' equity 86,286 84,054
-------- --------
$146,696 $155,610
======== ========
See accompanying notes to consolidated condensed financial statements.
****************************************************
2
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
FROZEN FOOD EXPRESS INDUSTRIES, INC. AND SUBSIDIARIES
THREE MONTHS ENDED MARCH 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
2004 2003
--------- ---------
Revenue
Freight revenue $100,905 $ 88,521
Non-freight revenue 2,472 2,933
--------- ---------
103,377 91,454
--------- ---------
Freight operating expenses
Salaries, wages and related expenses 25,549 23,778
Purchased transportation 26,339 21,734
Supplies and expenses 28,861 26,455
Revenue equipment rent 6,739 6,678
Depreciation 4,612 3,512
Communications and utilities 974 1,073
Claims and insurance 2,888 2,991
Operating taxes and licenses 1,128 1,074
Miscellaneous expense 505 1,137
--------- ---------
97,595 88,432
Non-freight costs and operating expenses 2,462 3,528
--------- ---------
100,057 91,960
--------- ---------
Income (loss) from operations 3,320 (506)
Interest and other expense, net 226 363
--------- ---------
Income (loss) before income tax 3,094 (869)
Income tax provision (benefit) 1,154 (201)
--------- ---------
Net income (loss) $ 1,940 $ (668)
========= =========
Net income (loss) per share of common stock
Basic $ .11 $ (.04)
========= =========
Diluted $ .11 $ (.04)
========= =========
Weighted average shares outstanding
Basic 17,139 16,706
========= =========
Diluted 18,261 16,706
========= =========
See accompanying notes to consolidated condensed financial statements.
****************************************************
3
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FROZEN FOOD EXPRESS INDUSTRIES, INC. AND SUBSIDIARIES
THREE MONTHS ENDED MARCH 31,
(IN THOUSANDS)
(UNAUDITED)
2004 2003
--------- ---------
Net cash provided by (used in) operating activities $ 8,398 $ (1,905)
--------- ---------
Cash flows from investing activities
Expenditures for properly and equipment (4,904) (2,494)
Proceeds from sale of property and equipment 2,443 3,546
Life insurance and other 819 492
--------- ---------
Net cash (used in) provided by investing activities (1,642) 1,544
--------- ---------
Cash flows from financing activities
Borrowings and revolving credit agreement 7,200 11,700
Payments against revolving credit agreement (14,700) (9,700)
Treasury stock, net 441 --
Capital leases and other, net (5) (232)
--------- ---------
Net cash (used in) provided by financing activities (7,064) 1,768
--------- ---------
Net (decrease) increase in cash and cash equivalents (308) 1,407
Cash and cash equivalents at January 1 1,396 2,861
--------- ---------
Cash and cash equivalents at March 31 $ 1,088 $ 4,268
========= =========
See accompanying notes to consolidated condensed financial statements.
****************************************************
4
FROZEN FOOD EXPRESS INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
March 31, 2004 and 2003
(Unaudited)
1. BASIS OF PRESENTATION
---------------------
These consolidated financial statements include Frozen Food Express
Industries, Inc. and its subsidiary companies, all of which are
wholly-owned. All significant intercompany accounts and transactions
have been eliminated in consolidation. The financial statements
included herein have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). In the
opinion of management, all adjustments (which consisted only of normal
recurring accruals) necessary to present fairly our financial position,
cash flows and results of operations have been made. Pursuant to SEC
rules and regulations, certain information and disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America, have
been condensed or omitted from these statements unless significant
changes have taken place since the end of the most recent fiscal year.
We believe that the disclosures contained herein, when read in
conjunction with the financial statements and notes included, or
incorporated by reference, in our Form 10-K filed with the SEC on March
25, 2004, are adequate to make the information presented not
misleading. It is suggested, therefore, that these statements be read
in conjunction with the statements and notes (included, or incorporated
by reference), in our most recent Annual Report on Form 10-K.
2. REVENUE AND EXPENSE RECOGNITION
-------------------------------
Freight revenue and associated direct operating expenses are recognized
on the date the freight is picked up from the shipper in accordance
with the FASB's Emerging Issues Task Force's Issue No. 91-9 "REVENUE
AND EXPENSE RECOGNITION FOR FREIGHT SERVICES IN PROGRESS" ("EITF No.
91-9").
One of the preferable methods outlined in EITF No. 91-9 provides for
the allocation of revenue between reporting periods based on relative
transit time in each reporting period with expense recognized as
incurred. Changing to this method would not have a material impact on
quarterly or annual financial statements.
We are the sole obligor with respect to the performance of our freight
services and we assume all of the related credit risk. Accordingly, our
revenue and our related direct freight expenses are recognized on a
gross basis. Payments we make to independent contractors for the use of
their trucks in transporting freight are typically calculated based on
the gross revenue generated by their trucks. Such payments to
independent contractors are recorded as purchased transportation
expense.
3. STOCK-BASED COMPENSATION
------------------------
In March of 2004, the Financial Accounting Standards Board ("FASB")
announced that it had voted to rescind the option that companies have
to apply APB Opinion No. 25 to account for stock options. If adopted,
the new standard will affect periods beginning in fiscal 2005. Until
such time as the new accounting standard takes effect, we will continue
to apply APB Opinion No. 25 to account for our stock options.
Accordingly, no expense has been recognized for stock option grants to
employees. The following table illustrates how our net income (loss)
and our basic and diluted net income (loss) per share would have been
impacted for each of the three month periods ended March 31, 2004 and
2003 had we elected to apply FASB Statement of Financial Accounting
Standards ("SFAS") No. 123 to account for our stock options (in
millions, except per-share amounts):
2004 2003
-------- --------
Net income (loss):
As reported $ 1.9 $ (0.7)
Impact of SFAS No. 123 (0.1) (0.1)
-------- --------
$ 1.8 $ (0.8)
======== ========
5
Net income (loss) per share:
As reported $ 0.11 $ (0.04)
Impact of SFAS No. 123 (0.01) (0.01)
-------- --------
$ 0.10 $ (0.05)
======== ========
In calculating the above amounts we assumed that expenses from employee
stock options would accrue over each option's vesting period.
4. LONG-TERM DEBT
--------------
As of March 31, 2004, we had a $40 million secured line of credit
pursuant to a revolving credit agreement with two commercial banks.
Interest is due monthly. We may elect to borrow at a daily interest
rate based on the bank's prime rate or for specified periods of time at
fixed interest rates which are based on the London Interbank Offered
Rate in effect at the time of a fixed rate borrowing. At March 31,
2004, $6.5 million was borrowed against this facility, and an
additional $6.6 million was being used as collateral for letters of
credit. Accordingly, approximately $26.9 million was available under
the agreement. To the extent that the line of credit is not used for
borrowing or letters of credit, we pay a commitment fee to the banks.
Loans may be secured by liens against our inventory, trade accounts
receivable and over-the-road trucking equipment. The agreement also
contains a pricing "grid" where increased levels of profitability and
cash flows or reduced levels of indebtedness can reduce the rates of
interest expense we incur. The agreement restricts, among other things,
payments of cash dividends, repurchases of our stock and the amount of
our capital expenditures. The amount we may borrow under the facility
may not exceed the lesser of $40 million, as adjusted for letters of
credit and other debt as defined in the agreement, a borrowing base or
a multiple of a measure of cash flow as described in the agreement. The
agreement expires on May 30, 2005, at which time loans and letters of
credit will become due. As of March 31, 2004, we were in compliance
with the terms of the agreement.
5. COMMITMENTS AND CONTINGENCIES
-----------------------------
We have accrued for costs related to public liability, cargo and
work-related injury claims. When an incident occurs we record a reserve
for the incident's estimated outcome. As additional information becomes
available, adjustments are often made. Accrued claims liabilities
include all such reserves and our estimate for incidents which have
been incurred but not reported.
6. NET INCOME (LOSS) PER SHARE OF COMMON STOCK
-------------------------------------------
Our basic income or loss per share was computed by dividing our net
income or loss by the weighted average number of shares of common stock
outstanding during the period. The table below sets forth information
regarding weighted average basic and diluted shares for the three
months ended March 31, 2004 and 2003 (in thousands):
2004 2003
-------- --------
Basic shares 17,139 16,706
Common stock equivalents 1,122 --
-------- --------
Diluted shares 18,261 16,706
======== ========
For the three months ended March 31, 2003, approximately 191,000 of
common stock equivalent ("CSE") shares were excluded because we
incurred a net loss in that year. Therefore, their impact would have
been anti-dilutive. All CSEs result from stock options. For the three
month periods ended March 31, 2004, and 2003, respectively, we excluded
900,000 and 2 million stock options from our calculation of CSEs
because their exercise prices exceed the market price of our stock,
which would have caused further anti-dilution.
6
7. OPERATING SEGMENTS
------------------
We have two operating segments. The larger segment consists of our
motor carrier operations, which are conducted in a number of divisions
and subsidiaries and are similar in nature. Our primary motor carrier
division provides both less-than-truckload (LTL) and full-truckload
refrigerated transportation services. Our full-truckload and LTL
services are commonly managed and we constantly redeploy our trucks and
trailers between these types of service. Many of the division's
customers use both types of service throughout the year. Accordingly,
we report all of our motor carrier operations as one segment.
Our non-freight segment is engaged in the sale and service of air
conditioning and refrigeration components. We have presented below
financial information for each of the three-month periods ended March
31, 2004 and 2003 (in millions):
2004 2003
-------- --------
Freight operations
Revenue $ 100.9 $ 88.5
Operating income (loss) 3.3 0.1
Total assets 149.0 140.2
Non-Freight Operations
Revenue $ 2.5 $ 2.9
Operating income (loss) -- (0.6)
Total assets 12.8 19.4
Intercompany Eliminations
Total assets $ (15.1) $ (18.8)
Consolidated
Revenue $ 103.4 $ 91.5
Operating income (loss) 3.3 (0.5)
Total assets 146.7 140.8
8. SUBSEQUENT EVENT
----------------
After the end of 2004's first quarter, one of our trucks was involved
in a major accident. At this time, it is not possible to determine the
extent, if any, to which our driver was responsible for the accident,
nor is it possible to reliably estimate what amount of money damages,
if any, may result from this event. We will continue to investigate
this event and as more information becomes available in the future, we
will be better able to determine what amount to accrue as a contingent
liability reserve relative to this potential claim. We do not presently
expect the amount of any such reserve to approach the deductibles under
our liability insurance policies. However, any such reserve could
negatively impact our 2004 operating results.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
GENERAL
- -------
The following management's discussion and analysis describes the principal
factors affecting our results of operations, liquidity, and capital resources.
This discussion should be read in conjunction with the accompanying unaudited
financial statements and our Annual Report on Form 10-K for the year ended
December 31, 2003, which include additional information about our business, our
significant accounting policies and other relevant information that underlies
our financial results. Without limiting the foregoing, the "Overview" and
"Critical Accounting Estimates" sections of our last Form 10-K should be read in
conjunction with this Quarterly Report.
Our website address is www.ffex.net. All of our filings with the SEC are
available free of charge through our website as soon as reasonably practicable
after we file them with the SEC.
7
RESULTS OF OPERATIONS - FIRST QUARTER 2004 COMPARED TO FIRST QUARTER 2003
- ---------------------
FREIGHT REVENUE: The rates we charge for our freight transportation
services include fuel adjustment charges. In periods when the price we incur for
diesel fuel is high, we raise our prices to recover this increase from our
customers. During the first quarter of 2004, our freight revenue rose by 14% to
$100.9 million. During the first three months of 2004 and 2003, fuel adjustment
charges comprised 4.9% and 4.7%, respectively, of our freight revenue, as
follows (in millions):
2004 2003
-------------------------------------------------------------------------
FULL-TRUCKLOAD REVENUE:
Excluding fuel adjustments $ 67.2 $ 57.3
Fuel adjustments 3.4 2.9
$ 70.6 $ 60.2
LTL REVENUE:
Excluding fuel adjustments $ 28.8 $ 27.0
Fuel adjustments 1.5 1.3
$ 30.3 $ 28.3
TOTAL FREIGHT REVENUE:
Excluding fuel adjustments $ 96.0 $ 84.3
Fuel adjustments 4.9 4.2
$ 100.9 $ 88.5
Our freight business serves two related markets with separate revenues, but
with many shared costs. Full-truckload freight services typically include the
transportation of a single shipment from a single origin to one or a few
destinations. Full-truckload shipments typically weigh about 35,000 pounds.
Although we principally transport full-truckload shipments of products that
require temperature control while in transit, we also have a fleet of trucks
that focuses on full-truckload transportation of non-perishable commodities.
Less-than-truckload ("LTL") freight services typically involve the
transportation of multiple shipments at the same time in one load. Each load of
LTL freight involves multiple shipments, each with different origins and
destinations. LTL shipments typically weigh 3,000 pounds or less. More than 90%
of our LTL shipments are of commodities requiring temperature control. LTL
shipments typically travel from the origin through one or more of our freight
terminals and then to the destination.
Our full-truckload and LTL services are commonly managed and we constantly
redeploy our trucks and trailers between these types of service. Many of our
customers use both types of service throughout the year.
The following discussion of our freight revenue excludes fluctuations due
to fuel adjustment charges. The following table sets forth information regarding
revenue (excluding fuel adjustment charges) from our full-truckload and LTL
freight services for the three month periods ended March 31, 2004 and 2003:
2004 2003
-------------------------------------------------------------------------
FULL-TRUCKLOAD:
Revenue (1) $ 67.2 $ 57.3
Total miles (1) 54.6 49.4
Shipments (2) 53.6 47.0
Per-mile revenue $ 1.23 $ 1.16
Per-shipment revenue $ 1,254 $ 1,219
LESS-THAN-TRUCKLOAD:
Revenue (1) $ 28.8 $ 27.0
Total miles (1) 9.6 9.5
Shipments (2) 85.0 77.9
Per-mile revenue $ 3.00 $ 2.84
Per-shipment revenue $ 339 $ 347
OTHER INFORMATION:
As of March 31
Tractors in service 2,304 2,180
Trailers in service 3,753 3,569
(1) In millions (2) In thousands
Excluding the impact of fuel adjustment charges, our full-truckload revenue
increased by $9.9 million (17.2%), to $67.2 million during the first quarter of
2004. This resulted from a 14% increase in the number of shipments, which was
enhanced by an increase in average per-mile revenue.
LTL revenue excluding fuel adjustment charges rose by $1.8 million (6.5%)
to $28.8 million between the first quarters of 2003 and 2004. This increase was
due to a 9.1% increase in the number of LTL shipments we hauled partially offset
by a reduction in average per-shipment revenue.
8
As of March 31, 2004 we had about 1,410 tractors in our company-operated
full-truckload fleet as compared to about 1,295 at March 31, 2003. The number of
tractors in the fleet has declined by 15 trucks since the beginning of 2004. The
number of full-truckload tractors provided to us by owner-operators rose by
about 30 during the first quarter of 2004. At the end of 2004's first quarter,
we had about 35 more independent contractor-provided full-truckload trucks than
we did one year ago. Between March 31, 2003 and 2004 our number of
company-operated LTL trucks increased by about 15% to 110.
Full-truckload activities, which contributed about 67% of freight revenue
during the first quarters of 2004 and 2003, respectively, are conducted
primarily with company-operated equipment, while LTL activities are conducted
primarily with equipment provided by owner-operators. Changes in the mix of LTL
versus full-truckload revenue, as well as fluctuations in the amount of total
freight handled on company-operated versus owner-operator provided equipment,
impact the percent of freight revenue absorbed by the various categories of
operating expenses between the two quarters.
Until the last half of 2003, capacity in the trucking industry often
exceeded demand for trucking services. This imbalance was a result of generally
weak economic conditions. In the temperature-controlled sector of the trucking
industry, several of our competitors ceased or reduced the scope of their
operations, but this reduced capacity had not enabled us to significantly
increase the prices we charge for our trucking services.
Beginning in the third quarter of 2003, as the economy improved, demand for
trucking services also improved. We have begun to increase some of our rates.
This increased demand may afford us opportunities to increase more of our rates
by the middle of 2004. Our efforts to increase our rates during the first
quarter of 2004 have met with some success, as evidenced by the $0.07 and $0.16
increases, respectively, in our full-truckload and less-than-truckload revenue
per mile during the first three months of 2004 over the comparable year-ago
period.
FREIGHT OPERATING EXPENSES: The following table sets forth, as a percentage
of freight revenue, certain major operating expenses for the three-month periods
ended March 31, 2004 and 2003.
2004 2003
-----------------------------------------------------------------------
Salaries, wages and related expenses 25.3% 26.9%
Purchased transportation 26.1 24.6
Supplies and expenses 28.6 29.9
Revenue equipment rent and depreciation 11.2 11.5
Claims and insurance 2.9 3.4
Miscellaneous and other 2.6 3.6
-------- --------
Total freight operating expenses 96.7% 99.9%
======== ========
SALARIES AND WAGES: Salaries, wages and related expenses were 25.3% and
26.9% of freight revenue during the quarters ended March 31, 2004 and 2003,
respectively. The following table summarizes and compares the major components
of these expenses between the 2004 and 2003 three-month periods (in millions):
AMOUNT OF SALARIES, WAGES AND
RELATED EXPENSES INCURRED FOR: 2004 2003
-----------------------------------------------------------------------
Driver salaries $ 13.5 $ 12.1
Non-driver salaries 8.3 7.3
Payroll taxes 2.3 2.1
Work-related injuries 0.6 0.8
Health insurance and other 0.8 1.5
-------- --------
$ 25.5 $ 23.8
======== ========
Payroll expenses related to drivers rose by about $1.4 million (11.5%)
between the quarters, due to the increase in our company-operated
less-than-truckload tractor count. Non-driver salaries and wages increased by
about $1.0 million (13.7%) due to the increase in our LTL business and our
continuing efforts to refocus our marketing efforts.
9
PURCHASED TRANSPORTATION: Purchased transportation expenses comprised 26.1%
and 24.6% of freight revenue during the first three months of 2004 and 2003,
respectively. The following table summarizes and compares the major components
of these expenses between the 2004 and 2003 three-month periods (in millions):
AMOUNT OF PURCHASED
TRANSPORTATION EXPENSE
INCURRED FOR: 2004 2003
-----------------------------------------------------------------------
Full-truckload $ 14.6 $ 12.4
LTL 10.4 9.3
Intermodal and other 1.3 --
-------- --------
$ 26.3 $ 21.7
======== ========
Independent contractors are entities that own tractors which are engaged by
us to transport our customers' freight. As consideration for the use of their
tractors, we pay the independent contractors amounts which are generally
calculated based upon the revenue from the freight they haul.
The amounts we paid to independent contractors for purchased
transportation, as a percent of revenue, has not changed appreciably since last
year. The increase in purchased transportation expenses during 2004 is
principally related to the higher volume of freight revenue and to the increased
use of intermodal service providers to transport our freight.
SUPPLIES AND EXPENSES: Supplies and expenses were 28.6 % and 29.9% of
freight revenue during the first three months of 2004 and 2003, respectively.
The following table summarizes and compares the major components of these
expenses between the 2004 and 2003 three-month periods (in millions):
AMOUNT OF SUPPLIES AND
EXPENSES INCURRED FOR: 2004 2003
-----------------------------------------------------------------------
Fuel $ 13.1 $ 12.0
Repairs and maintenance 3.4 3.3
Employee-driver travel expenses 4.1 3.7
Freight handling 2.6 2.2
Tires 1.7 1.5
Other 4.0 3.8
-------- --------
$ 28.9 $ 26.5
======== ========
Supplies and expenses rose by $2.4 million (9%) between the first quarters
of 2003 and 2004. More than 40% of this increase was related to fuel consumed by
our company-operated fleet. Per-gallon costs we paid for fuel fell by 1.6%
during the first quarter of 2004 as compared to 2003. However, after the end of
2004's first quarter, fuel prices have increased substantially to levels about
20% higher than the comparable year-ago prices.
Fuel price volatility impacts our profitability. We have in place a number
of strategies designed to address such volatility. Pursuant to the contracts and
tariffs by which our freight rates are determined, those rates automatically
fluctuate as diesel fuel prices rise and fall. With regard to fuel expenses for
company-operated equipment, we attempt to mitigate the impact of fluctuating
fuel costs by purchasing more fuel-efficient tractors and aggressively managing
fuel purchasing. Also, owner-operators are responsible for all costs associated
with their equipment, including fuel. Therefore, the cost of such fuel is not a
direct expense of ours.
RENTAL AND DEPRECIATION: For the first quarter of 2004, the total of
depreciation and revenue equipment rent expense rose by $1.2 million (11.4%) as
compared to the first quarter of 2003. The increase is primarily attributable to
an increase in the number of tractors we owned and leased. There were
approximately 1,525 tractors in our company-operated fleets as of March 31,
2004, an increase of about 125 as compared to one year before. The number of
tractors we own and lease to independent contractors increased by approximately
90. Therefore, we owned or were the lessee of about 215 more tractors as of
March 31, 2004 than was the case as of March 31, 2003. The income we receive
from leasing tractors to independent contractors increased by approximately
$300,000 between the first three months of 2003 and 2004.
CLAIMS AND INSURANCE: Claims and insurance expense fell from 3.4% of
freight revenue during the first quarter of 2003 to 2.9% for the first quarter
of 2004. These expenses vary with the severity and frequency of personal injury
and property damage claims. Because we retain a large deductible for our
personal injury claims, the occurrence of any single event can significantly
impact our periodic earnings.
10
After the end of 2004's first quarter, one of our trucks was involved in a
major accident. At this time, it is not possible to determine the extent, if
any, to which our driver was responsible for the accident, nor is it possible to
reliably estimate what amount of money damages, if any, may result from this
event. We will continue to investigate this event and as more information
becomes available in the future, we will be better able to determine what amount
to accrue as a contingent liability reserve relative to this potential claim. We
do not presently expect the amount of any such reserve to approach the
deductibles under our liability insurance policies. However, any such reserve
could negatively impact our 2004 operating results.
OTHER AND MISCELLANEOUS EXPENSES: Other and miscellaneous expenses
decreased by $0.6 million (55.6%) between the quarters. Legal fees associated
with general corporate matters and reduced accruals for accounts receivable
which may not ultimately be collected were the primary reasons for this change.
NON-FREIGHT OPERATIONS: For the first three months of 2004, revenue from
AirPro Holdings, Inc. ("AirPro"), our non-freight business, declined by 15.7% as
compared to the first quarter of 2003. During the fourth quarter of 2003, we
sold one of our non-freight businesses that installs air-conditioning systems on
large passenger vehicles, such as school buses. This transaction was a primary
reason for the decline in our non-freight revenue to $2,472,000 during the first
quarter of 2004, from $2,933,000 during the first three months of 2003. Our
non-freight operating expenses for the three month period of 2003 fell by 30.2%.
AirPro earned an operating profit of $10,000 during the first three months
of 2004, as compared to an operating loss of $595,000 during the comparable
period of 2003. In November 2003, we engaged a consulting firm to manage AirPro
and the principal of the consulting firm was appointed as AirPro's President.
The consulting firm has been retained to lead our efforts to eliminate the
potential for future losses from AirPro, and to conduct a review of strategic
alternatives for AirPro.
OPERATING INCOME OR LOSS: For the first quarter of 2003, 118% of our
consolidated operating loss was from our non-freight operations. Non-freight
revenue for the first quarter of 2004 was $2.4 million, a decrease of $0.5
million from the first quarter of 2003, but operating expenses for our
non-freight segment fell by $1.1 million between the quarters. We will continue
to focus on and implement strategies designed to restore the non-freight segment
to profitability. The following table summarizes and compares our operating
income for the first three months of 2004 to our operating loss during the first
three months of 2003 (in thousands):
INCOME (LOSS) FROM 2004 2003
-----------------------------------------------------------------------
Freight operations $ 3,310 $ 89
Non-freight operations 10 (595)
-------- --------
$ 3,320 $ (506)
======== ========
INTEREST AND OTHER: The following table summarizes and compares our
interest and other expenses during the first three months of 2004 to the
comparable period of 2003 (in thousands):
2004 2003
-------------------------------------------------------------------------
Interest expense $ 122 $ 102
Interest income (15) (16)
Life insurance and other expense 119 277
-------- --------
$ 226 $ 363
======== ========
Primarily as a result of decreased expenses related to our life insurance
investments, interest and other expense, net, fell by 37.7% from $363,000 to
$226,000 between the two quarters.
PRE-TAX AND NET INCOME: We earned a pre-tax profit of $3,094,000 during the
first quarter of 2004 as compared to a pre-tax loss of $869,000 during the
comparable quarter of 2003.
Our provision for income tax was 37.2% of our pre-tax income for the first
quarter of 2004. For the comparable three months of 2003, our benefit from
income tax was 23.1% of our pre-tax loss. Our effective tax rate is impacted by
the presence of expenses in our income statement which are not included in
taxable income.
Our net income for the three months ended March 31, 2004 was $1.94 million,
as compared to a net loss of $668,000 during the comparable year-ago period.
11
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
DEBT AND WORKING CAPITAL : Our primary needs for capital resources are to
finance working capital, expenditures for property and equipment and, from time
to time, acquisitions. Working capital investment typically increases during
periods of sales expansion when higher levels of receivables and, with regard to
non-freight operations, inventory are present. We had long-term debt of $6.5
million as of March 31, 2004. The unused portion of the company's $40 million
revolving credit facility was approximately $26.9 million. We believe that the
funds available to us from our working capital, future operating cash flows and
our credit and leasing facilities will be sufficient to finance our operation
during the next twelve months.
CASH FLOWS: During the three month period ended March 31, 2004 net cash
provided by operation activities was $8.4 million as compared to net cash used
in operating activities of $1.9 million during the year-ago quarterly period.
Improved profitability and high non-cash expenses such as depreciation and
amortization were the principal contributors to this increase.
OBLIGATIONS AND COMMITMENTS: As of March 31, 2004, our debt was $6.5
million and letters of credit issued by us for insurance purposes and to
equipment leasing companies were $6.6 million in total.
As of March 31, 2004, we had contracts to purchase tractors and trailers
later in 2004 totaling approximately $38.7 million. We expect to lease most of
the tractors and trailers when they are placed into service.
We lease equipment and real estate. Rentals are due under non-cancelable
operating leases for facilities, tractors and trailers. Facility and trailer
leases do not contain guaranteed residual values in favor of the lessors. Most
of the tractors we leased prior to 2003 and many of the tractors we leased since
2002 are leased pursuant to agreements under which we have partially guaranteed
the assets end-of lease-term residual value. Tractor leases entered into before
2003 typically have 36-month terms, and tractor leases entered into after 2002
have either 42 or 48-month terms. The portions of the residuals we have
guaranteed vary from lessor to lessor. Gross residuals are between 40% and 55%
of the leased asset's historical cost, of which we have guaranteed the first 27%
to 40% of the leased asset's historical cost. The lessors remain at risk for
between 13% and 15% of the remainder of such leased asset's historical cost.
Because our lease payments and residual guarantees do not exceed 90% of the
tractor's cost, the leases are accounted for as operating leases and rentals are
recorded as rent expense over the term of the leases.
The table below sets forth information as to the amounts (in millions) of
our obligations and commitments as well as the year in which they will become
due.
Remainder After
Payments due by year Total of 2004 2005 2006 2007 2008 2008
- --------------------------- -------- -------- -------- -------- -------- -------- --------
Debt and letters of credit $ 13.1 $ -- $ 13.1 $ -- $ -- $ -- $ --
Purchase obligations 38.7 38.7 -- -- -- -- --
Operating leases for:
Rentals 73.6 19.0 20.0 15.1 8.4 5.2 5.9
Residual guarantees 27.1 13.7 2.4 7.9 2.0 1.1 --
-------- -------- -------- -------- -------- -------- --------
Total $ 152.5 $ 71.4 $ 35.5 $ 23.0 $ 10.4 $ 6.3 $ 5.9
======== ======== ======== ======== ======== ======== ========
Forward-looking Statements
- --------------------------
This report contains information and forward-looking statements that are
based on our current beliefs and expectations and assumptions we made based upon
information currently available. Forward-looking statements include statements
relating to our plans, strategies, objectives, expectations, intentions, and
adequacy of resources, and may be identified by words such as "will", "could",
"should", "believe", "expect", intend", "plan", "schedule", "estimate",
"project" and similar expressions. These statements are based on current
expectations and are subject to uncertainty and change.
Although we believe that the expectations reflected in such forward-looking
statements are reasonable, actual results could differ materially from the
expectations reflected in such forward-looking statements.
12
Factors that could cause actual results to differ materially from those in
the forward-looking statements include demand for our services and products, and
our ability to meet that demand, which may be affected by, among other things,
competition, weather conditions and the general economy, the availability and
cost of labor, our ability to negotiate favorably with lenders and lessors, the
effects of terrorism and war, the availability and cost of equipment, fuel and
supplies, the market for previously-owned equipment, the impact of changes in
the tax and regulatory environment in which we operate, operational risks and
insurance, risks associated with the technologies and systems used and the other
risks and uncertainties described elsewhere in our filings with the Securities
and Exchange Commission. We do not assume any obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
As of March 31, 2004, we held no market risk sensitive instruments for
trading purposes.
For purposes other than trading, we held the following market risk
sensitive instruments as of March 31, 2003:
Description Discussion
----------- ----------
Long-term debt, The value of our debt at March 31, 2004 was $6.5
$6.5 million million, which approximates fair market value.
Our debt is incurred pursuant to our credit
agreement, which matures on May 30, 2005.
Rabbi Trust Our consolidated financial statements included the
Investment in 128,000 shares of our assets and liabilities of a Rabbi Trust. As of
stock, $425 thousand March 31, 2004, the trust held 128,000 share of
our stock for benefit of participants in our
401(k) Wrap Plan.
The plan participants control whether the
trust's assets are invested in our stock or
other instruments. Trust investments in our stock
are required to be accounted for by us in a
manner that reflects trust liabilities based on the
market value of our stock, but precludes the
valuation of trust assets based on the market value
of our stock. Therefore, as of March 31, 2004 a
$1.00 increase or decrease in the value of our stock
would result in a $128,000 increase or decrease,
respectively, in the amount of our salaries,
wages and related expenses for the three-month period
then ended.
Cash surrender value of The cash surrender value of our life insurance
life insurance policies, $6.6 million policies is a function of the amounts we pay to
the insurance companies, the insurance charges
taken by the insurance companies and the
investment returns earned by or losses incurred by
the insurance company. Changes in any of these
factors will impact the cash surrender value of
our life insurance policies. Insurance
charges and investment performance have a
proximate effect on the value of our life
insurance assets and on our net income.
We held no other material market risk sensitive instruments (for trading or
non-trading purposes) that would involve significant relevant market risks, such
as equity price risk. Accordingly, the potential loss in our future earnings
resulting from changes in such market rates or prices is not significant.
13
Item 4. Controls and Procedures
-----------------------
As of the end of the period covered by this report, we evaluated, under the
supervision and with the participation of our management, including the Chief
Executive Officer and the Chief Financial Officer, the effectiveness of, the
design and the operation of our disclosure controls and procedures pursuant to
Exchange Act Rules 13a-15 and 15d-15. Based on the evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective for the purposes of gathering, analyzing
and disclosing the information that we are required to disclose in the reports
we file under the Securities Exchange Act of 1934, within the time periods
specified in the SEC's rules and forms. There have been no significant changes
in our internal controls or in other factors that could significantly affect
internal controls subsequent to the date of the evaluation.
PART II - OTHER INFORMATION
- ---------------------------
Items 1, 3, 4 and 5 of Part II are omitted due to the lack of updated
information to disclose pursuant to said items.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
---------------------------------------------------------------------
Securities
----------
Issuer Purchases of Equity Securities for Quarter Ended March 31, 2004
- ----------------------------------------------------------------------
Total Number Maximum Number
of Shares (or Approximate
Total Average Purchased as Dollar Value) of
Number Price Part of Shares That May Yet Be
of Shares Paid per Publicly Announced Purchased Under the
Purchased(1) Share Plans or Programs Plans or Programs
------------ ----- ----------------- -----------------
January, 2004 0 $ 0 0 $ 0
February, 2004 897 6.31 0 0
March, 2004 0 0 0 0
------- ------- ------- -------
Total 897 $ 6.31 0 $ 0
======= ======= ======= =======
(1) All shares were purchased on February 21, 2004 and were acquired at
market value from two shareholders who contacted the company and
offered to sell the shares at market price. We do not plan to engage in
similar transactions in the future.
14
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits
3.1 Articles of Incorporation of the Registrant and all amendments to date
(filed as Exhibit 3.1 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1993 and incorporated herein by
reference).
3.2 Bylaws of the Registrant, as amended (filed as Exhibit 3.2 to
Registrants Annual Report on Form 10-K for the fiscal year ended
December 31, 2003 and incorporated herein by reference).
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b.) Reports on Form 8-K.
On February 19, 2004, we filed a current report on Form 8-K announcing
our results of operations for the year ended December 31, 2003.
15
SIGNATURES
- ----------
Pursuant to the requirements of the Securities and Exchange Act of l934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Frozen Food Express Industries, Inc.
------------------------------------
(Registrant)
May 14, 2004 By: /s/ Stoney M. Stubbs, Jr.
--------------------------------
Stoney M. Stubbs, Jr.
Chairman of the Board
and Chief Executive Officer
May 14, 2004 By: /s/ F. Dixon McElwee, Jr.
--------------------------------
F. Dixon McElwee, Jr.
Senior Vice President
Principal Financial and
Accounting Officer
16
EXHIBIT INDEX
-------------
3.1 Articles of Incorporation of the Registrant and all amendments to date
(filed as Exhibit 3.1 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1993 and incorporated herein by
reference).
3.2 Bylaws of the Registrant, as amended (filed as Exhibit 3.2 to
Registrants Annual Report on Form 10-K for the fiscal year ended
December 31, 2003 and incorporated herein by reference).
31.1 Certification of Chief Executive pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
17