UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

ý                      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended January 31, 2005

 

OR

 

o                            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

Commission file number: 000-21057

 

 

 

DYNAMEX INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

 

Registrant’s telephone number, including area code:

(214) 561-7500

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ý   No   o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes   ý  No   o

 

The number of shares of the registrant’s common stock, $.01 par value, outstanding as of March 1, 2005 was 11,585,897 shares.

 

 

 

 

INDEX
		Page
PART I
FINANCIAL INFORMATION
Item 1.    Financial Statements
Condensed Consolidated Balance Sheets        January 31, 2005 (Unaudited) and July 31, 2004		2
Condensed Statements of Consolidated Operations (Unaudited)         Three and six months ended January 31, 2005 and 2004		3
Condensed Statements of Consolidated Cash Flows (Unaudited)        Six months ended January 31, 2005 and 2004		4
Notes to Condensed Consolidated Financial Statements (Unaudited)		5
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations		8
Item 3.    Quantitative and Qualitative Disclosures About Market Risk		16
Item 4.    Controls and Procedures		17
PART II
OTHER INFORMATION
Item 1.    Legal Proceedings		18
Item 4.    Submission of Matters to a Vote of Security Holders		18
Item 6.    Exhibits and Reports on Form 8-K		19
Signatures		20
Exhibit Index		E-1

 

 

 

1

 

PART I

FINANCIAL INFORMATION

 

Item 1.    Financial Statements

 

DYNAMEX INC.
Condensed Consolidated Balance Sheets
(in thousands, except per share data)

 

		January 31,				July 31,
		2005				2004
		(Unaudited)
ASSETS
CURRENT
Cash and cash equivalents		$		8,257		$	7,927
Accounts receivable (net of allowance for doubtful accounts of $733 and $751, respectively)		31,049				27,355
Prepaid and other current assets		2,667				1,825
Deferred income taxes		2,088				2,359
Total current assets		44,061				39,466
PROPERTY AND EQUIPMENT - net		4,943				4,731
GOODWILL		45,973				45,271
INTANGIBLES - net		447				475
DEFERRED INCOME TAXES		9,210				10,910
OTHER		1,474				1,219
Total assets		$	106,108			$	102,072
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable trade		$	7,421			$	5,910
Accrued liabilities		15,058				16,852
Total current liabilities		22,479				22,762
LONG-TERM DEBT		5,810				10,000
Total liabilities		28,289				32,762
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY
Preferred stock; $0.01 par value, 10,000 shares authorized; none outstanding		—				—
Common stock; $0.01 par value, 50,000 shares authorized; 11,585 and 11,435 outstanding, respectively		116				114
Additional paid-in capital		76,768				75,309
Accumulated deficit		(1,684			)	(7,417		)
Accumulated other comprehensive income		2,619				1,304
Total stockholders’ equity		77,819				69,310
Total liabilities and stockholders’ equity		$	106,108			$	102,072

 

See accompanying notes to the condensed consolidated financial statements.

 

2

 

DYNAMEX INC.
Condensed Statements of Consolidated Operations
(in thousands except per share data)
(Unaudited)

 

		Three months ended							Six months ended
		January 31,							January 31,
		2005				2004			2005			2004
Sales		$	78,756			$	69,375		$	155,316		$	139,449
Cost of sales:
Purchased transportation		50,511				43,537			98,948			87,482
Other direct costs		6,461				6,425			12,875			13,074
Cost of sales		56,972				49,962			111,823			100,556
Gross profit		21,784				19,413			43,493			38,893
Selling, general and administrative expenses:
Salaries and employee benefits		12,206				11,213			23,593			22,080
Other		5,171				5,016			10,005			9,489
Selling, general and administrative expenses		17,377				16,229			33,598			31,569
Depreciation and amortization		369				467			745			979
(Gain) loss on disposal of property and equipment		(2			)	(2		)	3			(20		)
Operating income		4,040				2,719			9,147			6,365
Interest expense		116				322			273			654
Other income, net		(54			)	(14		)	(104		)	(103		)
Income before income taxes		3,978				2,411			8,978			5,814
Income taxes		1,417				(2,808		)	3,244			(1,656		)
Net income		$		2,561		$	5,219		$	5,734		$	7,470
Basic earnings per common share:		$	0.22			$	0.46		$	0.50		$	0.66
Diluted earnings per common share:		$		0.22		$	0.45		$	0.49		$	0.65
Weighted average shares:
Common shares outstanding		11,547				11,271			11,496			11,254
Adjusted common shares - assuming exercise of stock options		11,798				11,535			11,732			11,499

 

 

3

 

DYNAMEX INC.
Condensed Statements of Consolidated Cash Flows
(in thousands)
(Unaudited)

 

		Six months ended
		January 31,
		2005			2004
OPERATING ACTIVITIES
Net income		$	5,734		$	7,470
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		745			979
Amortization of deferred bank financing fees		17			128
Provision for losses on accounts receivable		233			382
Stock option compensation		275			202
Deferred income taxes		1,971			(2,840		)
Tax benefit realized by exercise of stock options		126			—
(Gain) loss on disposal of property and equipment		3			(20		)
Changes in current operating assets and liabilities:
Accounts receivable		(3,927		)	(2,507		)
Prepaids and other current assets		(851		)	585
Accounts payable and accrued liabilities		(279		)	(267		)
Net cash provided by operating activities		4,047			4,112
INVESTING ACTIVITIES
Purchase of property and equipment		(888		)	(1,198		)
Proceeds from sale of property and equipment		2			12
Purchase of investments		(210		)	—
Net cash used in investing activities		(1,096		)	(1,186		)
FINANCING ACTIVITIES
Principal payments on long-term debt		—			(2,979		)
Net payments under line of credit		(4,201		)	1,000
Proceeds from stock option exercise		1,059			555
Other assets and deferred financing fees		—			(546		)
Net cash used in financing activities		(3,142		)	(1,970		)
EFFECT OF EXCHANGE RATES ON CASH		521			342
NET INCREASE IN CASH AND CASH EQUIVALENTS		330			1,298
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		7,927			4,338
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	8,257		$	5,636
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest		$	266		$	491
Cash paid for taxes		$	1,483		$	982

 

See accompanying notes to the condensed consolidated financial statements.

 

4

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

1.             Summary of Significant Accounting Polices

 

Description of Business - Dynamex Inc. (the “Company” or “Dynamex”) provides same-day delivery and logistics services in the United States and Canada.  The Company’s primary services are (i) same-day, on-demand delivery, (ii) local and regional distribution and (iii) fleet outsourcing and facilities management.

 

The operating subsidiaries of the Company, with country of incorporation, are as follows:

 

·         Dynamex Operations East Inc. (U.S.)

·         Dynamex Operations West Inc. (U.S.)

·         Dynamex Dedicated Fleet Services, Inc. (U.S.)

·         Dynamex Fleet Services, Inc. (U.S.)

·         Dynamex Canada Corp. (Canada)

·         Alpine Enterprises Ltd. (Canada)

·         Roadrunner Transportation, Inc. (U.S.)

·         New York Document Exchange Corp. (U.S.)

 

Basis of presentation - The consolidated financial statements include the accounts of Dynamex Inc. and its wholly-owned subsidiaries.  All significant inter-company accounts and transactions have been eliminated.  All dollar amounts in the financial statements and notes to the financial statements, except per share data, are stated in thousands of dollars unless otherwise indicated.  Except as otherwise indicated, references to years mean the Company’s fiscal year ending July 31, 2004 or ended July 31 of the year referenced, and comparisons are to the corresponding period of the prior year.

 

The accompanying interim financial statements are unaudited.  Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted, although the Company believes the disclosures included herein are adequate to make the information presented not misleading.  The results of the interim periods presented are not necessarily indicative of results to be expected for the full fiscal year, and should be read in conjunction with the Company’s audited financial statements for the fiscal year ended July 31, 2004.

 

The accompanying interim financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position at January 31, 2005, the results of its operations for the three and six month periods ended January 31, 2005 and 2004, and cash flows for the six month periods ended January 31, 2005 and 2004.  The tax provision for the six month periods ended January 31, 2005 and 2004 are based upon management’s estimate of the Company’s annualized effective tax rate.

 

Certain reclassifications have been made to conform prior period data to the current presentation.

 

2.             Comprehensive Income

 

The three components of comprehensive income are net income, foreign currency translation adjustments and unrealized gains (losses) on investments.  Investments consist of payroll withholdings from participants in the Company’s deferred compensation plan that are invested in funds designated by the individual participants.  These investments have been classified as available-for-sale in accordance with Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities.  Comprehensive income for the three and six months ended January 31, 2005 and 2004 was as follows:

 

5

 

 

		Three months ended						Six months ended
		January 31,						January 31,
		2005			2004			2005			2004
Net income		$	2,561		$	5,219		$	5,734		$	7,470
Unrealized gains on investments		31			—			37			—
Foreign currency translation gain (loss)		(270		)	(112		)	1,277			914
Comprehensive income		$	2,322		$	5,107		$	7,048		$	8,384

 

3.             Intangibles

 

At January 31, 2005, intangibles and related amortization expense for the three and six months ended January 31, 2005 and 2004 consisted of the following:

 

					Accumulated
		Asset			amortization			Net
Deferred bank financing fees		$	124		$	(28	)	$	96
Trademarks and other		470			(119		)	351
Total		$	594		$	(147	)	$	447

 

		Amortization expense						Amortization expense
		Three months ended January 31,						Six months ended January 31,
		2005			2004			2005			2004
Deferred bank financing fees		$	9		$	64		$	17		$	128
Trademarks and other		6			5			11			11
Total		$	15		$	69		$	28		$	139

 

Amortization of deferred financing fees is classified as interest expense in the condensed statements of consolidated operations.  Estimated amortization expense for the succeeding five fiscal years, including deferred bank financing fees, is $55 for 2005, $53 for 2006, $52 for 2007, $29 for 2008 and $18 in 2009.

 

4.             Computation of Earnings Per Share

 

The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computation as required by Statement of Financial Accounting Standards No. 128, Earnings Per Share.  Common stock equivalents related to stock options are excluded from diluted earnings per share calculation if their effect would be anti-dilutive to earnings per share.

 

6

 

 

		Three months ended						Six months ended
		January 31,						January 31,
		2005			2004			2005			2004
Net income		$	2,561		$	5,219		$	5,734		$	7,470
Weighted average common shares outstanding		11,547			11,271			11,496			11,254
Common share equivalents related to options		251			264			236			245
Common shares and common share equivalents		11,798			11,535			11,732			11,499
Net income per common share:
Basic		$	0.22		$	0.46		$	0.50		$	0.66
Diluted		$	0.22		$	0.45		$	0.49		$	0.65

 

5.             Commitments and Contingencies

 

The Company has entered into an agreement with a vehicle leasing company, guaranteeing lease payments on approximately 20 vehicles leased to independent contractors.  The agreement runs through January 2007 and the maximum potential amount of future payments that Dynamex could be required to make is approximately $600.  The independent contractors use these vehicles to service a specific customer contract whose term runs concurrent with the guarantee.  Should an independent contractor default on their lease, the Company would facilitate the transfer of the leased vehicle to a new independent contractor to complete the service commitment to the customer.  In addition, the Company currently holds security deposits from these independent contracts which would be used to offset any lease payments required to be made by Dynamex.

 

7

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This discussion contains forward-looking statements, which involve assumptions regarding Company operations and future prospects.  Although the Company believes its expectations are based on reasonable assumptions, such statements are subject to risk and uncertainty, including, among other things, competition, foreign exchange, and risks associated with the same-day transportation industry.  These and other risks are mentioned from time to time in the Company’s filings with the Securities and Exchange Commission.  Caution should be taken that these factors could cause the actual results to differ from those stated or implied in this and other Company communications.

 

General

 

The Company, through its national network of same-day delivery and logistics operations, is the leading provider of such services in the United States and Canada.

 

A significant portion of the Company’s revenues are generated in Canada.  For the six month period ended January 31, 2005, Canadian revenues accounted for approximately 33.6% of total consolidated revenue, compared to 34% for the same period in 2004.  The exchange rate between the Canadian dollar and the U.S. dollar increased 6.9% in the six month period ended January 31, 2005 compared to the corresponding period in the prior year.  Had the exchange rate been the same as in the prior period, Canadian sales for the six month period ended January 31, 2005 would have accounted for 32.2% of total sales.

 

Sales consist primarily of charges to customers for delivery services and weekly or monthly charges for recurring services, such as facilities management.  Sales are recognized when the service is performed.  The yield (value per transaction) for a particular service is dependent upon a number of factors including size and weight of articles transported, distance transported, special handling requirements, requested delivery time and local market conditions.  Generally, articles of greater weight transported over longer distances and those that require special handling produce higher yields.

 

Cost of sales consist of costs relating directly to performance of services, including driver and messenger costs, third party delivery charges, warehousing, sorting costs, facilities management, bad debts, insurance, and workers’ compensation costs.  As of January 31, 2005, substantially all of the drivers used by the Company provided their own vehicles and 99% of these owner-operators were independent contractors as opposed to employees of the Company.  Drivers and messengers are generally compensated based on a percentage of the delivery charge.  Consequently, the Company’s driver and messenger costs are variable in nature.  To the extent that drivers and messengers are employees of the Company, employee benefit costs related to them, such as payroll taxes and insurance, are also included in cost of sales.

 

Selling, general and administrative expenses (“SG & A”) include salaries, wages and benefit costs incurred at the branch level related to taking orders and dispatching drivers and messengers, as well as administrative costs related to such functions.  Also included in SG & A expenses are regional and corporate level marketing and administrative costs and occupancy costs related to branch and corporate locations.

 

Generally, the Company’s on-demand services provide higher gross profit margins than do local and regional distribution or dedicated fleet management services because driver compensation for on-demand services is generally lower as a percentage of sales from such services primarily due to the size of the vehicles required.  However, local and regional distribution and dedicated fleet management services generally have fewer administrative requirements related to order taking, dispatching drivers and billing.  As a result of these variances, the Company’s gross margin is dependent in part on the mix of business for a particular period.

 

During the six months ended January 31, 2005, sales to Office Depot, Inc. represented approximately 9.7% of the Company’s revenue.  Management believes that sales to this customer may exceed 10% of consolidated sales for the full fiscal year.

 

Except as otherwise indicated herein, all dollar amounts except per share data are stated in thousands of dollars.

 

8

Critical Accounting Policies

 

The Company’s discussion and analysis of its financial condition and results of operations are based on the Company’s financial statements, which have been prepared in accordance with accounting policies generally accepted in the United States of America.  The Company believes certain critical accounting policies, as set forth in the Company’s Form 10-K for the year ended July 31, 2004, affect its more significant judgments and estimates used in the preparation of financial statements.  As of, and for the six month period ended January 31, 2005, there have been no material changes or updates to the Company’s critical accounting policies.

 

Results of Operations

 

The following table sets forth for the periods indicated, certain items from the Company’s condensed statements of consolidated operations, expressed as a percentage of sales:

 

		Three months ended				Six months ended
		January 31,				January 31,
		2005		2004		2005		2004
Sales		100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales:
Purchased transportation		64.1	%	62.8	%	63.7	%	62.7	%
Other direct costs		8.2	%	9.3	%	8.3	%	9.4	%
Cost of sales		72.3	%	72.1	%	72.0	%	72.1	%
Gross profit		27.7	%	27.9	%	28.0	%	27.9	%
Selling, general and administrative expenses:
Salaries and employee benefits		15.5	%	16.2	%	15.2	%	15.8	%
Other		6.6	%	7.2	%	6.4	%	6.8	%
Selling, general and administrative expenses		22.1	%	23.4	%	21.6	%	22.6	%
Depreciation and amortization		0.5	%	0.7	%	0.5	%	0.7	%
(Gain) loss on disposal of property and equipment		0.0	%	0.0	%	0.0	%	0.0	%
Operating income		5.1	%	3.8	%	5.9	%	4.6	%
Interest expense		0.1	%	0.5	%	0.2	%	0.5	%
Other income, net		-0.1	%	0.0	%	-0.1	%	-0.1	%
Income before income taxes		5.1	%	3.3	%	5.8	%	4.2	%
Income taxes		1.8	%	-4.0	%	2.1	%	-1.2	%
Net income		3.3	%	7.3	%	3.7	%	5.4	%

 

9

The following tables sets forth for the periods indicated, the Company’s sales accumulated by service type and country:

 

		Three months ended
		January 31,
		2005					2004
Sales by service type:
On demand		$	30,794		39.1	%	$	27,859		40.2	%
Scheduled/distribution		23,636			30.0	%	19,649			28.3	%
Outsourcing		24,326			30.9	%	21,867			31.5	%
Total sales		$	78,756		100.0	%	$	69,375		100.0	%
Sales by country:
United States		$	51,865		65.9	%	$	45,925		66.2	%
Canada		26,891			34.1	%	23,450			33.8	%
Total sales		$	78,756		100.0	%	$	69,375		100.0	%

 

		Six months ended
		January 31,
		2005						2004
Sales by service type:
On demand		$		61,406		39.5	%	$		58,559		42.0	%
Scheduled/distribution		45,606				29.4	%	38,136				27.3	%
Outsourcing		48,304				31.1	%	42,754				30.7	%
Total sales		$	155,316			100.0	%	$	139,449			100.0	%
Sales by country:
United States		$		103,093		66.4	%	$	92,091			66.0	%
Canada		52,223				33.6	%	47,358				34.0	%
Total sales		$		155,316		100.0	%	$	139,449			100.0	%

 

Three months ended January 31, 2005 compared to the three months ended January 31, 2004

 

Net income for the three months ended January 31, 2005 was $2.6 million ($0.22 per fully diluted share) compared to $5.2 million ($0.45 per fully diluted share) for the three months ended January 31, 2004.  The prior year period includes a $3.7 million tax benefit realized from the recognition of a U.S. net operating loss carryforward of approximately $10.6 million that was not recognized in prior years due to the uncertainty of realization.  Net income before income taxes increased 65% to $4.0 million in the current year from $2.4 in the prior year.  The increase is attributable to increased sales, and higher gross profit, which was offset in part by higher SG & A expenses.

 

Sales for the three months ended January 31, 2005 were $79 million, a 13.5% increase over the sales in the same period in 2004 of $69 million.  U.S. sales increased 12.9% and Canadian sales increased 14.6%.  The current year quarter had two more business days than the prior year.  On a sales per day basis, sales increased 10.4% in the current year quarter versus the prior year.  The average conversion rate between the Canadian dollar and the U.S. dollar increased 7.8% over the prior year quarter, which had the effect of increasing sales for the three months ended January 31, 2005 by approximately $1.9 million had the conversion rate been the same as the prior year period.  Excluding the effect of this increase, sales per day would have been approximately 7.7% higher in the current quarter compared to the prior year.  Canadian sales per day in Canadian dollars increased approximately 4.5% this quarter compared to last year.

 

Cost of sales for the three months ended January 31, 2005 increased $7.0 million, or 14.0%, to $57 million from $50 million for the same period in the prior year.  Cost of sales, as a percentage of sales was 72.3% for the three months ended January 31, 2005, compared to 72.1% for the same period in the prior year.  The current quarter, as well as the

 

10

 

same quarter last year, was impacted by one-time costs and operating inefficiencies during the startup of significant new business.  In the current year, the Company also accepted, for a large new contract, a reduced margin during a two-month transition phase.  Management expects to realize normal profit margins on this new business in future quarters; however, management still expects the overall gross margin to be negatively pressured in future quarters as sales of local and regional distribution and outsourcing services continue to grow at a faster rate than on-demand sales.  On-demand sales generally produce a higher gross margin primarily due to lower driver commissions resulting from the smaller size of delivery vehicles compared to other services; however, on-demand services are transaction intensive, requiring higher SG & A costs compared to other services.  While on-demand sales will continue to be a major component of the Company’s comprehensive service menu, management expects on-demand sales will comprise a smaller portion of overall sales as local and regional distribution and outsourcing services likely will account for the majority of future growth.

 

SG & A expenses for the three months ended January 31, 2005 increased $1.2 million, or 7.1%, to $17.4 million from $16.2 million for the same period in the prior year.  Approximately one third of this increase is due to the increase in the exchange rate between the Canadian dollar and the U.S. dollar.  Excluding the impact of the exchange rate, salaries and benefits increased $715.  This increase is primarily attributable to additional personnel necessary to operate and manage the new business and the planned increase in sales personnel.  The Company also incurred the following incremental SG & A expenses in this quarter compared to the same quarter in the prior year: stock options expense ($42) and Sarbanes-Oxley related costs ($59).  As a percentage of sales, SG & A expenses were 22.1% for the three months ended January 31, 2005, compared to 23.4% in the same period last year.

 

For the three months ended January 31, 2005, depreciation and amortization was $369 compared to $467 for the same period in the prior year.  During the third quarter of FY 2005, the Company began implementation of a new Order/Entry/Dispatch system (“DECS”), an acronym for Dynamex Enterprise Computer System, which is expected to increase depreciation expense by approximately $50 per quarter.  Other than DECS, management does not expect a significant change in the level of depreciation and amortization expense due to limited capital requirements associated with its non-asset based business.

 

Interest expense was $116, a decrease of $206 or 64.0% for the current quarter.  This decrease is primarily attributable to lower outstanding debt.  Interest expense, as a percentage of sales, was 0.1% in the current quarter compared to 0.5% in the prior period.

 

The effective income tax rate was 35.6% for the current quarter.  The prior year period includes a $3.7 million tax benefit realized from the recognition of a U.S. net operating loss carryforward of approximately $10.6 million that was not recognized in prior years due to the uncertainty of realization, resulting in a negative effective tax rate of 116%.

 

Six months ended January 31, 2005 compared to six months ended January 31, 2004

 

Net income for the six months ended January 31, 2005 was $5.7 million ($0.49 per fully diluted share) compared to $7.5 million ($0.65 per fully diluted share) for the six months ended January 31, 2004.  The prior year period includes a $3.7 million tax benefit realized from the recognition of a U.S. net operating loss carryforward of approximately $10.6 million that was not recognized in prior years due to the uncertainty of realization.  Net income before income taxes increased 54% to $9.0 million in the current year from $5.8 in the prior year.  The increase is attributable to increased sales, and higher gross profit, which was offset in part by higher SG & A expenses.

 

Sales for the six months ended January 31, 2005 were $155 million, an 11.4% increase over the sales in the same period in 2004 of $139 million.  U.S. sales increased 11.9% and Canadian sales increased 10.2%.  The current year period had one more business day than the prior year.  On a sales per day basis, sales increased 11.7% in the current year period versus the prior year.  The average conversion rate between the Canadian dollar and the U.S. dollar increased 6.9% over the prior year period, which had the effect of increasing sales for the six months ended January 31, 2005 by approximately $3.4 million had the conversion rate been the same as the prior year period.  Excluding the effect of this increase, sales per day would have been approximately 8.2% higher in the current period compared to the prior year.  Canadian sales per day in Canadian dollars increased approximately 3.1% this period compared to last year.

 

Cost of sales for the six months ended January 31, 2005 increased $11.3 million, or 11.2%, to $111.8 million from $100.6 million for the same period in the prior year.  Cost of sales, as a percentage of sales was 72.0% for the six

 

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months ended January 31, 2005, compared to 72.1% for the same period in the prior year.  The current period, as well as the same period last year, was impacted by one-time costs and operating inefficiencies during the startup of significant new business.  In the current year, the Company also accepted, for a large new contract, a reduced margin during a two-month transition phase.  Management expects to realize normal profit margins on this new business in future periods; however, management still expects the overall gross margin to be negatively pressured in future quarters as sales of local and regional distribution and outsourcing services continue to grow at a faster rate than on-demand sales.  On-demand sales generally produce a higher gross margin primarily due to the smaller size of delivery vehicles compared to other services; however, on-demand services are transaction intensive, requiring higher SG & A costs compared to other services.  While on-demand sales will continue to be a major component of the Company’s comprehensive service menu, management expects on-demand sales will comprise a smaller portion of overall sales as local and regional distribution and outsourcing services likely will account for the majority of future growth.

 

SG & A expenses for the six months ended January 31, 2005 increased $2.0 million, or 6.4%, to $33.6 million from $31.6 million for the same period in the prior year.  Approximately one third of this increase is due to the increase in the exchange rate between the Canadian dollar and the U.S. dollar.  Excluding the impact of the exchange rate, the largest increase in SG & A was salaries and benefits ($1,038).  This increase is primarily attributable to additional personnel necessary to manage the new business, commissions on new sales and the planned increase in sales personnel.  The Company also incurred the following incremental SG & A expenses in this period compared to the same period in the prior year: stock options expense ($72) and Sarbanes-Oxley related costs ($109).  As a percentage of sales, SG & A expenses were 21.6% for the six months ended January 31, 2005, compared to 22.6% in the same period last year.

 

For the six months ended January 31, 2005, depreciation and amortization was $745 compared to $979 for the same period in the prior year.  During the third quarter of FY 2005, the Company began implementation of a new Order/Entry/Dispatch system (“DECS”), an acronym for Dynamex Enterprise Computer System, which is expected to increase depreciation expense by approximately $50 per quarter.  Other than DECS,management does not expect a significant change in the level of depreciation and amortization expense due to limited capital requirements associated with its non-asset based business.

 

Interest expense was $273, a decrease of $381 or 58.3% for the current period.  This decrease is primarily attributable to lower outstanding debt.  Interest expense as a percentage of sales was 0.2% in the current period compared to 0.5% in the prior period.

 

The effective income tax rate was 36.1% for the current period compared to a negative 28.5% effective rate in the same period last year.  The prior year includes a $3.7 million tax benefit realized from the recognition of a U.S. net operating loss carryforward of approximately $10.6 million that was not recognized in prior years due to the uncertainty of realization.

 

Liquidity and Capital Resources

 

Net cash provided by operating activities was $4.0 million for the six months ended January 31, 2005 compared to $4.1 million for the same period in 2004.  The large increase in accounts receivable in the six months ended January 31, 2005 is due primarily to the increase in sales during that period and is consistent with changes in the prior year.  In addition, cash was required to prepay annual insurance premiums during the six months ended January 31, 2005 as opposed to the prior year, when insurance premiums were billed and paid on a monthly basis.  Net cash provided by operations, prior to changes in current operating assets and liabilities, was $9.1 million for the six months ended January 31, 2005 an increase of 44% compared to $6.3 million for the six months ended January 31, 2004.

 

Capital expenditures for the six months ended January 31, 2005 were approximately $0.9 million.  These expenditures relate primarily to improvements in the Company’s technology infrastructure to support its operations.  Management expects capital expenditures to be in the $2 million to $3 million range for the full fiscal year.  The Company does not have significant capital expenditure requirements to replace or expand the number of vehicles used in its operations because substantially all of its drivers provide their own vehicles.

 

On March 2, 2004, the Company replaced its existing bank credit agreement with a new $30,000,000 Senior Secured, Revolving Credit Facility that matures on November 30, 2007.  Under the terms of the new facility, interest is payable quarterly at prime, or LIBOR plus a margin ranging from 1.25% to 1.75% (1.25% at January 31, 2005),

 

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based on the ratio of Funded Debt to EBITDA, as defined in the Credit Facility.  There are no scheduled principal payments; however, the Company is required to maintain certain financial ratios related to minimum amounts of stockholders’ equity, fixed charges to cash flow, funded debt to cash flow and funded debt to eligible receivables, as defined.  Amounts outstanding under the Credit Facility are secured by all of the Company’s U.S. assets and 100% of the stock of its domestic subsidiaries.  The Credit Facility also contains restrictions on incurring additional debt and investments by the Company.  Amounts outstanding under the Revolving Credit Facility at January 31, 2005 included borrowings of $5.8 million and outstanding letters of credit totaling $4.1 million.

 

The Company’s EBITDA (earnings before interest, taxes, depreciation and amortization) was approximately $4.5 million (5.7% of sales) for the three months ended January 31, 2005, compared to $3.2 million (4.6% of sales) in the same period last year.  The increase is due to higher gross profit from increased sales that was partially offset by the increased SG & A costs mentioned above including salaries and wages, stock options expense, and Sarbanes-Oxley consultant costs.  Management has included EBITDA in its discussion herein as a measure of liquidity because it believes that it is a widely accepted financial indicator of a company’s ability to service and/or incur indebtedness, maintain current operating levels of fixed assets and acquire additional operations and businesses.  EBITDA should not be considered as a substitute for statement of operations or cash flow data from the Company’s financial statements, which have been prepared in accordance with generally accepted accounting principles.  In addition, the Company’s definition of EBITDA may not be identical to similarly entitled measures used by other companies.  The following table reconciles net income presented in accordance with generally accepted accounting principles (“GAAP”) to EBITDA, which is a non-GAAP financial measure:

 

		Three months ended						Six months ended
		January 31,						January 31,
		2005			2004			2005			2004
Net income		$	2,561		$	5,219		$	5,734		$	7,470
Adjustments:
Income tax expense		1,417			(2,808		)	3,244			(1,656		)
Interest expense		116			322			273			654
Depreciation and amortization		369			467			745			979
EBITDA		$	4,463		$	3,200		$	9,996		$	7,447

 

 

Management expects that its future capital requirements will generally be met from internally generated cash flow.  The Company’s access to other sources of capital, such as additional bank borrowings and the issuance of debt securities, is affected by, among other things, general market conditions affecting the availability of such capital.

 

Contractual Obligations

 

The Company recently organized a new subsidiary, Dynamex Fleet Services, Inc. (“Fleet Services”), to expand capacity of larger vehicles, primarily for dedicated outsourcing applications, and increase the pool of independent contractor drivers available to service the Company’s customers.  The Company leases vehicles from suppliers for specific customer applications and sub-leases those vehicles to independent contractor drivers.  The Company is not obligated, nor does it intend, to purchase any of the leased vehicles.

 

The following table sets forth the Company’s contractual commitments as of January 31, 2005 for the periods indicated:

					Less than
		Total			1 year			1 - 3 years			3 - 5 years			Thereafter
Long-Term Debt		$	5,800		$	—		$	5,800		$	—		$	—
Capital Lease		10			4			4			2
Operating Leases (Non-Vehicle)		16,763			5,718			7,302			3,357			386
Operating Leases (Vehicle)		2,583			671			1,211			538			163
Total		$	25,156		$	6,393		$ 14,317			$	3,897		$	549

 

The Company has entered into an agreement with a vehicle leasing company, guaranteeing lease payments on approximately 20 vehicles leased to independent contractors.  The agreement runs through January 2007 and the maximum potential amount of future payments that Dynamex could be required to make is approximately $600.  The independent contractors use these vehicles to service a specific customer contract whose term runs concurrent with the guarantee.  Should an independent contractor default on their lease, the Company would facilitate the transfer of the leased vehicle to a new independent contractor to complete the service commitment to the customer.  In addition, the Company currently holds security deposits from these independent contracts which would be used to offset any lease payments required to be made by Dynamex.

 

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Inflation

 

The Company does not believe that inflation has had a material effect on the Company’s results of operations nor does it believe it will do so in the foreseeable future.  However, there can be no assurance the Company’s business will not be affected by inflation in the future.

 

Risk Factors

 

In addition to other information in this report, the following risk factors should be considered carefully in evaluating the Company and its business.  This report contains forward-looking statements, which involve risks and uncertainties.  The Company’s actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the following risk factors and elsewhere in this report.

 

Certain Tax Matters Related to Drivers

 

Substantially all of the Company’s drivers supply their own vehicles and as of January 31, 2005, approximately 99% of these owner-operators were independent contractors as opposed to employees of the Company.  The Company does not pay or withhold any federal, state or provincial employment tax with respect to or on behalf of independent contractors.  From time to time, taxing authorities in the U.S. and Canada have sought to assert that owner-operators in the transportation industry, including those utilized by the Company, are employees, rather than independent contractors.  The Company believes that the owner-operators utilized by the Company are not employees under existing interpretations of federal (U.S. and Canadian), state and provincial laws.  However, there can be no assurance that federal (U.S. and Canadian), state or provincial authorities will not challenge this position, or that other laws or regulations, including tax laws, or interpretations thereof, will not change.  If, as a result of any of the foregoing, the Company were required to pay withholding taxes and pay for and administer added employee benefits to these drivers, the Company’s operating costs would increase.  Additionally, if the Company is required to pay back-up withholding with respect to amounts previously paid to such drivers, it may also be required to pay penalties or be subject to other liabilities as a result of incorrect classification of such drivers.  Any of the foregoing circumstances could have a material adverse impact on the Company’s financial condition and results of operations, and/or require the Company to restate financial information from prior periods.

 

In addition to the drivers that are independent contractors, certain of the Company’s drivers are employed by the Company and supply and operate their own vehicles during the course of their employment.  The Company reimburses these employees for all or a portion of the operating costs of those vehicles.  The Company believes that these reimbursement arrangements do not represent additional compensation to those employees.  However, there can be no assurance that federal (U.S. and Canadian), state or provincial taxing authorities will not seek to recharacterize some or all of such payments as additional compensation.  If such amounts were so recharacterized, the Company would have to pay additional employment related taxes on such amounts, and may also be required to pay penalties, which could have an adverse impact on the Company’s financial condition and results of operations, and/or to restate financial information from prior periods.

 

Claims Exposure

 

As of January 31, 2005, the Company utilized the services of approximately 4,400 drivers and messengers.  From time to time such persons are involved in accidents or other activities that may give rise to liability claims.  The Company currently carries liability insurance with a per occurrence and an aggregate limit of $30 million.  Owner-operators are required to maintain liability insurance of at least the minimum amounts required by applicable state or provincial law (generally such minimum requirements range from $35 to $75).  The Company also has insurance policies covering property and fiduciary trust liability, which coverage includes all drivers and messengers.  There can be no assurance that claims against the Company, whether under the liability insurance or the surety bonds, will not exceed the applicable amount of coverage, that the Company’s insurer will be solvent at the time of settlement of an insured claim, or that the Company will be able to obtain insurance at acceptable levels and costs in the future.  If the Company were to experience a material increase in the frequency or severity of accidents, liability claims, workers’ compensation claims or unfavorable resolutions of claims, the Company’s business, financial condition and results of operations could be materially adversely affected.  In addition, significant increases in insurance costs could reduce the Company’s profitability.

 

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