MARTEN TRANSPORT LTD - Quarter Report: 2005 September (Form 10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C.  20549

 

Form 10-Q

 

Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934

 

For the Quarter ended September 30, 2005

 

Commission File Number 0-15010

 

MARTEN TRANSPORT, LTD.

(Exact name of registrant as specified in its charter)

 

Delaware		39-1140809
(State of incorporation)		(I.R.S. employer identification no.)

 

129 Marten Street, Mondovi, Wisconsin 54755

(Address of principal executive offices)

 

715-926-4216

(Registrant’s telephone number)

 

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 Exchange Act Rule 12b-2).

Yes ý   No o

 

Indicate by check mark whether the Registrant is a shell company (as defined in Exchange Act Rule 12b-2).

Yes o   No ý

 

The number of shares outstanding of the Registrant’s Common Stock, par value $.01 per share, was 14,377,393 as of November 4, 2005.

 

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

 

MARTEN TRANSPORT, LTD.

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

 

		September 30,			December 31,
(In thousands, except share information)		2005			2004
ASSETS
Current assets:
Cash		$	768		$	—
Marketable securities		611			62
Receivables:
Trade, net		48,804			39,090
Other		10,753			8,372
Prepaid expenses and other		10,158			11,869
Deferred income taxes		4,549			5,856
Total current assets		75,643			65,249
Property and equipment:
Revenue equipment, buildings and land, office equipment and other		330,453			302,765
Accumulated depreciation		(91,765		)	(87,067		)
Net property and equipment		238,688			215,698
Other assets		7,509			7,127
TOTAL ASSETS		$	321,840		$	288,074
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Checks issued in excess of cash balances		$	—		$	2,849
Accounts payable and accrued liabilities		22,867			16,871
Insurance and claims accruals		12,424			13,654
Current maturities of long-term debt		5,095			5,000
Total current liabilities		40,386			38,374
Long-term debt, less current maturities		31,228			25,257
Deferred income taxes		63,642			56,522
Total liabilities		135,256			120,153
Stockholders’ equity:
Preferred stock, $.01 par value per share; 2,000,000 shares authorized; no shares issued and outstanding		—			—
Common stock, $.01 par value per share; 48,000,000 shares authorized; 14,366,143 shares, at September 30, 2005, and 14,307,027 shares, at December 31, 2004, issued and outstanding		144			143
Additional paid-in capital		70,821			70,111
Retained earnings		115,619			97,667
Total stockholders’ equity		186,584			167,921
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	321,840		$	288,074

 

The accompanying notes are an integral part of these consolidated condensed financial statements.

 

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MARTEN TRANSPORT, LTD.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands, except per share information)		2005			2004			2005			2004
OPERATING REVENUE		$	119,081		$	97,892		$	334,787		$	274,329
OPERATING EXPENSES (INCOME):
Salaries, wages and benefits		31,994			27,527			92,606			78,224
Purchased transportation		21,375			20,314			62,016			57,963
Fuel and fuel taxes		29,644			18,789			76,264			50,261
Supplies and maintenance		7,336			6,579			20,796			18,681
Depreciation		9,447			8,256			27,782			24,180
Operating taxes and licenses		1,965			1,651			5,282			4,835
Insurance and claims		4,429			4,558			13,307			13,019
Communications and utilities		836			738			2,488			2,285
Gain on disposition of revenue equipment		(1,182		)	(544		)	(3,292		)	(1,722		)
Other		2,465			2,174			7,251			6,282
Total operating expenses		108,309			90,042			304,500			254,008
OPERATING INCOME		10,772			7,850			30,287			20,321
OTHER EXPENSES (INCOME):
Interest expense		549			512			1,690			1,539
Interest income		(430		)	(379		)	(1,216		)	(1,106		)
INCOME BEFORE INCOME TAXES		10,653			7,717			29,813			19,888
PROVISION FOR INCOME TAXES		4,279			2,933			11,861			7,558
NET INCOME		$	6,374		$	4,784		$	17,952		$	12,330
BASIC EARNINGS PER COMMON SHARE		$	0.44		$	0.34		$	1.25		$	0.88
DILUTED EARNINGS PER COMMON SHARE		$	0.44		$	0.33		$	1.23		$	0.85

 

The accompanying notes are an integral part of these consolidated condensed financial statements.

 

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MARTEN TRANSPORT, LTD.

CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

 

							Additional						Total
		Common Stock					Paid-In			Retained			Stockholders’
(In thousands)		Shares		Amount			Capital			Earnings			Equity
Balance at December 31, 2003		13,760		$	138		$	64,265		$	80,131		$	144,534
Net income		—		—			—			12,330			12,330
Issuance of common stock from stock option exercises		386		3			2,248			—			2,251
Tax benefit of stock option exercises		—		—			1,824			—			1,824
Balance at September 30, 2004		14,146		141			68,337			92,461			160,939
Net income		—		—			—			5,206			5,206
Issuance of common stock from stock option exercises		161		2			986			—			988
Tax benefit of stock option exercises		—		—			788			—			788
Balance at December 31, 2004		14,307		143			70,111			97,667			167,921
Net income		—		—			—			17,952			17,952
Issuance of common stock from stock option exercises		59		1			422			—			423
Tax benefit of stock option exercises		—		—			288			—			288
Balance at September 30, 2005		14,366		$	144		$	70,821		$	115,619		$	186,584

 

The accompanying notes are an integral part of these consolidated condensed financial statements.

 

3

 

MARTEN TRANSPORT, LTD.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Nine Months
		Ended September 30,
(In thousands)		2005			2004
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Operations:
Net income		$	17,952		$	12,330
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation		27,782			24,180
Gain on disposition of revenue equipment		(3,292		)	(1,722		)
Deferred tax provision		8,427			2,429
Tax benefit of stock option exercises		288			1,824
Changes in other current operating items		(5,618		)	(3,816		)
Net cash provided by operating activities		45,539			35,225
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Purchases of marketable securities		(30,703		)	(62,154		)
Sales of marketable securities		30,154			81,265
Revenue equipment additions		(68,333		)	(82,841		)
Proceeds from revenue equipment dispositions		24,212			25,317
Buildings and land, office equipment and other additions, net		(3,359		)	(854		)
Net change in other assets		(382		)	(1,104		)
Net cash used for investing activities		(48,411		)	(40,371		)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Borrowings under credit facility and long-term debt		80,152			15,000
Repayment of borrowings under credit facility and long-term debt		(74,086		)	(12,728		)
Issuance of common stock from stock option exercises		423			2,251
Change in net checks issued in excess of cash balances		(2,849		)	623
Net cash provided by financing activities		3,640			5,146
NET CHANGE IN CASH		768			—
CASH:
Beginning of period		—			—
End of period		$	768		$	—
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest		$	1,684		$	1,555
Income taxes		$	1,192		$	3,555

 

The accompanying notes are an integral part of these consolidated condensed financial statements.

 

4

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2005

(Unaudited)

 

(1)           Basis of Presentation

 

The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements, and therefore do not include all information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, such statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary to fairly present our consolidated financial condition, results of operations and cash flows for the interim periods presented. The results of operations for any interim period do not necessarily indicate the results for the full year. The unaudited interim consolidated financial statements should be read with reference to the financial statements and notes to financial statements in our 2004 Annual Report on Form 10-K.

 

The accompanying unaudited consolidated condensed balance sheet as of September 30, 2005 and consolidated condensed statements of operations for the three and nine months ended September 30, 2005 include the accounts of Marten Transport, Ltd. and its 45% owned affiliate, MW Logistics, LLC (“MWL”).  MWL is a third-party provider of logistics services to the transportation industry.  We have applied the provisions of FASB Interpretation No. 46, “Consolidation of Variable Interest Entities,” as revised, to our investment in MWL effective March 31, 2004.  As a result, the accounts of MWL are included in our unaudited consolidated condensed balance sheet as of September 30, 2005, and in our consolidated condensed statement of operations beginning April 1, 2004.  All material intercompany accounts and transactions have been eliminated in consolidation. Prior to April 1, 2004, we accounted for our investment in MWL using the equity method of accounting.  We recorded our share of the equity loss of MWL in the amount of $6,000 for the three months ended March 31, 2004.

 

(2) Accounting for Stock-Based Compensation

 

We have adopted the disclosure provisions of Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure.”  Statement No. 148 amends the disclosure requirements of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation.”  As of September 30, 2005, we have two stock-based employee compensation plans. We account for these plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of Statement No. 123:

 

		Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands, except per share amounts)		2005			2004			2005			2004
Net income, as reported		$	6,374		$	4,784		$	17,952		$	12,330
Deduct: total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(29		)	(40		)	(68		)	(119		)
Pro forma net income		$	6,345		$	4,744		$	17,884		$	12,211
Earnings per common share:
Basic-as reported		$	0.44		$	0.34		$	1.25		$	0.88
Basic-pro forma		$	0.44		$	0.34		$	1.25		$	0.87
Diluted-as reported		$	0.44		$	0.33		$	1.23		$	0.85
Diluted-pro forma		$	0.43		$	0.33		$	1.22		$	0.84

 

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(3)           Earnings Per Common Share

 

Basic and diluted earnings per common share were computed as follows:

 

		Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands, except per share amounts)		2005			2004			2005			2004
Numerator:
Net income		$	6,374		$	4,784		$	17,952		$	12,330
Denominator:
Basic earnings per common share - weighted-average shares		14,361			14,119			14,334			13,992
Effect of dilutive stock options		284			410			299			486
Diluted earnings per common share - weighted-average shares and assumed conversions		14,645			14,529			14,633			14,478
Basic earnings per common share		$	0.44		$	0.34		$	1.25		$	0.88
Diluted earnings per common share		$	0.44		$	0.33		$	1.23		$	0.85

 

All outstanding options were included in the calculation of diluted earnings per share for all periods presented.

 

(4)           Long-Term Debt

 

In June 2005, we entered into an amendment to our unsecured committed credit facility.  This amendment reduced the number of banks subject to the agreement to one, adjusted our financial covenants and extended the maturity of the facility from April 2006 to April 2008.

 

(5)           Amendment to Amended and Restated Certificate of Incorporation

 

In May 2005, our stockholders approved an amendment to our Amended and Restated Certificate of Incorporation increasing the authorized number of shares of common stock from 23,000,000 shares to 48,000,000 shares.

 

(6)           2005 Stock Incentive Plan

 

In May 2005, our stockholders approved our 2005 Stock Incentive Plan (the “2005 Plan”).  Our Board of Directors adopted the 2005 Plan in March 2005 and approved amendments to the 2005 Plan in April 2005.  Under the 2005 Plan, all of our employees and any subsidiary employees, as well as all of our non-employee directors, consultants, advisors and independent contractors, may be granted stock-based awards, including incentive and non-statutory stock options and restricted stock awards, none of which have been awarded as of September 30, 2005.  The maximum number of shares of common stock that will be available for issuance under the 2005 Plan is approximately 1.9 million shares. The 2005 Plan replaces our 1995 Stock Incentive Plan (the “1995 Plan”), which expired by its terms in March 2005.  Any awards issued under the 1995 Plan that remain outstanding will continue according to their terms.

 

(7)           Recent Accounting Pronouncements

 

In December 2004, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 123 (revised 2004), “Share-Based Payment.”  SFAS No. 123, as revised, requires entities to recognize the grant-date fair value of stock options and other equity-based compensation issued to employees in the income statement.  The statement eliminates entities’ ability to account for share-based compensation transactions using the intrinsic value method of accounting in Accounting Principles Board, or APB, Opinion No. 25, “Accounting for Stock Issued to Employees,” which was permitted under SFAS No. 123, as originally issued.  In April 2005, the Securities and Exchange Commission deferred the

 

6

 

effective date of SFAS No. 123, as revised, to the beginning of the first annual reporting period beginning after June 15, 2005.  Accordingly, we will recognize the grant-date fair value of stock options in our consolidated statements of operations beginning in our first quarter of 2006.  The average annual stock-based employee compensation expense, net of related tax effects, for 2002 through 2004 was $185,000.  Therefore, the adoption of this pronouncement is not expected to have a significant impact on our results of operations or financial position. However, the ultimate amount of increased compensation expense will be dependent upon whether we adopt SFAS No. 123, as revised, using the modified prospective or retrospective method, the number of option shares granted during the year, their timing and vesting period and the method used to calculate the fair value of the awards, among other factors.

 

In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations.”  The Interpretation clarifies that the term “conditional asset retirement obligations” as used in SFAS No. 143, “Accounting for Asset Retirement Obligations,” refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity.  The Interpretation states that conditional obligations meet the definition of an asset retirement obligation in SFAS No. 143 and therefore should be recognized if their fair value can be reasonably estimated.  Interpretation No. 47 is effective no later than the end of fiscal years ending after December 15, 2005.  The adoption of Interpretation No. 47 is not expected to have a significant impact on our results of operations or financial position.

 

(8) Reclassifications

 

The purchases and sales of marketable securities, along with revenue equipment additions and proceeds from dispositions, in our 2004 consolidated condensed statement of cash flows have been reclassified to be consistent with the 2005 presentation.  These reclassifications do not have a material effect on our consolidated financial statements.

 

7

 

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

 

Overview

 

The primary source of our operating revenue is freight revenue, which we generate by transporting freight for our customers.  Generally, we are paid by the mile for our services.  We also derive freight revenue from loading and unloading activities, equipment detention and other accessorial services.  Our operating revenue also includes revenue from fuel surcharges and non-freight revenue, primarily logistics services.  The main factors that affect our freight revenue are the rate 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 United States economy, inventory levels, the level of truck capacity in the temperature-sensitive market and specific customer demand.  We monitor our revenue production primarily through revenue per tractor per week. We also analyze our rate per total mile, non-revenue miles percentage, the miles per tractor we generate, our accessorial revenue and our other sources of operating revenue.

 

In discussing our results of operations, we have included in certain instances a discussion of freight revenue, which excludes fuel surcharge and non-freight revenue.  We do this because we believe that eliminating these sources of revenue provides a more consistent basis for comparing our results of operations from period to period.

 

Our operating results for the first nine months of 2005 reflect improved average freight revenue per total mile compared with the first nine months of 2004.  The improvement in asset productivity helped us overcome the continuing challenges of a tight driver market and high fuel prices.  In the first nine months of 2005, we increased our operating revenue 22.0% and our freight revenue 12.5% compared with the first nine months of 2004. We were able to increase our freight revenue by increasing our freight rates, the size of our fleet, our detention charges and our business with existing and new customers.  We increased our average operating revenue per tractor per week 13.4% in the first nine months of 2005.  Our average freight revenue per tractor per week increased 4.6%, due to an 8.1% improvement in average freight revenue per total mile, partially offset by a 3.3% decrease in average miles per tractor.  Our weighted average number of tractors increased 7.6% in the first nine months of 2005 over the first nine months of 2004.

 

Our profitability on the expense side is impacted by variable costs of transporting freight for our customers, fixed costs and expenses containing both fixed and variable components.  The variable costs include fuel expense, driver-related expenses, such as wages, benefits, training, and recruitment, and independent contractor 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 relate to the acquisition and financing of long-term assets, such as revenue equipment and operating terminals.  Although certain factors affecting our expenses are beyond our control, we monitor them closely and attempt to anticipate changes in these factors in managing our business.  For example, fuel prices fluctuated dramatically and quickly at various times during 2004 and the first nine months of 2005. We manage our exposure to changes in fuel prices primarily through fuel surcharge programs with our customers, as well as volume fuel purchasing arrangements with national fuel centers and bulk purchases of fuel at our terminals.  The transportation industry is currently experiencing substantial difficulty in attracting and retaining qualified drivers.  Effective January 1, 2005, we increased the amount paid to company drivers by 1 cent per mile and increased the incentives paid to independent contractors.  We also instituted a second pay increase of 2 cents per mile for company drivers effective April 1, 2005.  We continue to offer driver compensation that we believe ranks near the top of the industry.  Like other companies in our industry, our insurance costs have increased dramatically over the last few years.  In order to control increases in insurance premiums, we have increased our self-insured retention levels periodically during the last several years.  We are responsible for the first $1.0 million on each auto liability claim and as of June 1, 2005, we also are responsible for up to $1.0 million in the aggregate for all auto liability claims between $1.0 million and $2.0 million.  We are also responsible for the first $750,000 on each workers’ compensation claim.

 

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Additionally, we operate in a highly competitive and regulated industry that is currently responding to significant regulatory changes regarding drivers’ hours-of-service.  The United States Department of Transportation, or DOT, adopted revised hours-of-service regulations effective in January 2004.  In response, we negotiated delay time charges with the majority of our customers.  In July 2004, the United States Court of Appeals for the District of Columbia vacated the new hours-of-service regulations in their entirety and remanded the matter to the Federal Motor Carriers Safety Administration, or FMCSA, for reconsideration.  In October 2004, the Surface Transportation Extension Act of 2004 (Part V) extended the current hours-of-service regulations until the earlier of the FMCSA developing a revised set of regulations or September 30, 2005.  In August 2005, the FMCSA issued a revised set of regulations effective October 1, 2005.  We do not expect the current regulations to have a significant impact on our operations or financial results.  However, uncompensated shortfalls in our utilization due to compliance with the regulations could adversely impact our profitability.

 

By increasing our revenue and controlling our expenses, we improved our operating ratio (operating expenses as a percentage of operating revenue) to 91.0% in the first nine months of 2005 from 92.6% in the first nine months of 2004.  We increased our earnings per diluted share to $1.23 in the first nine months of 2005 from $0.85 in the first nine months of 2004.

 

Our business requires substantial, ongoing capital investments, particularly for new tractors and trailers. At September 30, 2005, we had approximately $36.3 million of long-term debt, including current maturities, and $186.6 million in stockholders’ equity.  In the first nine months of 2005, we spent approximately $44.1 million, net of trade-ins, to purchase 528 tractors and 594 trailers.  We also recognized a gain of $3.3 million on the disposition of used equipment in the first nine months of 2005.  We estimate that capital expenditures, net of trade-ins, will be approximately $40 million for the remainder of 2005, primarily for new revenue equipment.  This estimate may be impacted by the timing of tractor and trailer deliveries between 2005 and 2006.  Based on our current operating performance, the market for used trucks, our liquidity and our expectations concerning tractors manufactured in 2007, we have decided to accelerate our tractor fleet replacement during 2005 and 2006 to allow flexibility with purchasing tractors in 2007 when the next round of diesel emissions reduction directives of the Environmental Protection Agency, or EPA, go into effect.  We expect to fund these capital expenditures with cash flows from operations and borrowings under our $45 million revolving credit facility.

 

9

 

Results of Operations

 

The following table sets forth for the periods indicated certain operating statistics regarding our revenue and operations:

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2005			2004			2005			2004
For period:
Average operating revenue per total mile		$	1.735		$	1.457		$	1.636		$	1.395
Average freight revenue per total mile (1)		$	1.436		$	1.319		$	1.392		$	1.288
Average miles per tractor(2)		28,729			29,663			85,469			88,380
Average operating revenue per tractor per week(2)		$	3,793		$	3,289		$	3,585		$	3,161
Average freight revenue per tractor per week(1) (2)		$	3,140		$	2,976		$	3,051		$	2,918
Total miles – company employed drivers (in thousands)		52,097			47,354			152,598			137,201
Total miles – independent contractors (in thousands)		16,533			19,817			52,080			59,490

 

(1)		Excludes revenue from fuel surcharges and non-freight revenue.
(2)		Includes tractors driven by both company-employed drivers and independent contractors. Independent contractors provided 502 and 589 tractors as of September 30, 2005, and 2004, respectively.

 

Comparison of Three Months Ended September 30, 2005 to Three Months Ended September 30, 2004

 

The following table sets forth for the periods indicated the components of our operating revenue and the dollar and percentage change for each component:

 

								Dollar			Percentage
								Change			Change
		Three Months						Three Months			Three Months
		Ended						Ended			Ended
		September 30,						September 30,			September 30,
(Dollars in thousands)		2005			2004			2005 vs. 2004			2005 vs. 2004
Freight revenue		$	98,575		$	88,582		$	9,993		11.3	%
Fuel surcharge revenue		15,690			6,770			8,920			131.8
Non-freight revenue		4,816			2,540			2,276			89.6
Operating revenue		$	119,081		$	97,892		$	21,189		21.6	%

 

The following table sets forth for the periods indicated the dollar and percentage increase or decrease of the items in our unaudited consolidated condensed statements of operations, and those items as a percentage of operating revenue:

 

		Dollar			Percentage		Percentage of
		Change			Change		Operating Revenue
		Three Months			Three Months		Three Months
		Ended			Ended		Ended
		September 30,			September 30,		September 30,
(Dollars in thousands)		2005 vs. 2004			2005 vs. 2004		2005		2004
Operating revenue		$	21,189		21.6	%	100.0	%	100.0	%
Operating expenses (income):
Salaries, wages and benefits		4,467			16.2		26.9		28.1
Purchased transportation		1,061			5.2		17.9		20.8
Fuel and fuel taxes		10,855			57.8		24.9		19.2
Supplies and maintenance		757			11.5		6.2		6.7
Depreciation		1,191			14.4		7.9		8.4
Operating taxes and licenses		314			19.0		1.7		1.7
Insurance and claims		(129		)	(2.8	)	3.7		4.7
Communications and utilities		98			13.3		0.7		0.8
Gain on disposition of revenue equipment		(638		)	(117.3	)	(1.0	)	(0.6	)
Other		291			13.4		2.1		2.2
Total operating expenses		18,267			20.3		91.0		92.0
Operating income		2,922			37.2		9.0		8.0
Other expenses (income):
Interest expense		37			7.2		0.5		0.5
Interest income		(51		)	(13.5	)	(0.4	)	(0.4	)
Income before income taxes		2,936			38.0		8.9		7.9
Provision for income taxes		1,346			45.9		3.6		3.0
Net income		$	1,590		33.2	%	5.4	%	4.9	%

 

Our operating revenue increased $21.2 million, or 21.6%, to $119.1 million in the 2005 period from $97.9 million in the 2004 period.  Freight revenue increased $10.0 million, or 11.3%, to $98.6 million in the 2005 period from $88.6 million in the 2004 period.  We were able to increase our freight revenue by increasing our freight rates, the size of our fleet, our detention charges and our business with existing and new customers.  Our fuel surcharge revenue increased $8.9 million, or 131.8%, to $15.7 million in the 2005 period from $6.8 million

 

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in the 2004 period primarily due to significantly higher average fuel prices in the 2005 period more fully discussed below under “fuel and fuel taxes.”  The increase in non-freight revenue in the 2005 period resulted from increased logistics services provided by MWL, as well as the formation by the Company of a logistics division in March 2005.  Our average operating revenue per tractor per week increased 15.3% in the 2005 period from the 2004 period.  Our average freight revenue per tractor per week increased 5.5% in the 2005 period from the 2004 period, due to an 8.9% increase in average freight revenue per total mile partially offset by a 3.1% decrease in average miles per tractor.  Our weighted average number of tractors increased 5.5% in the 2005 period from the 2004 period.

 

Salaries, wages and benefits consist of compensation for our employees, including both driver and non-driver employees, employees’ health insurance, 401(k) plan contributions and other fringe benefits.  These expenses vary depending upon the ratio of company drivers to independent contractors, our efficiency, our experience with employees’ health insurance claims, changes in health care premiums and other factors. The increase in salaries, wages and benefits resulted primarily from an increase in the size of our company-owned fleet and increases in the amount paid to company drivers of 1 cent per mile effective January 1, 2005 and 2 cents per mile effective April 1, 2005.  This increase was partially offset by a decrease of $360,000 in compensation expensed for our non-driver employees under our incentive compensation program in the 2005 period.

 

Purchased transportation consists of payments to independent contractor providers of revenue equipment and to carriers for transportation services arranged by the Company.  This category will vary depending upon the ratio of company drivers versus independent contractors, the amount of fuel surcharges passed through to independent contractors and the amount paid to carriers by the Company.  Payments to carriers for transportation services arranged by the Company were $3.5 million in the 2005 period and $1.6 million in the 2004 period.  The amount of fuel surcharges passed through to independent contractors increased $1.6 million in the 2005 period.  Purchased transportation expense, excluding fuel surcharges passed through to independent contractors and carrier payments by the Company, decreased $2.5 million, or 14.6%, in the 2005 period from the 2004 period.  This decrease was primarily due to a decrease in the number of independent contractor-owned tractors in our fleet, partially offset by an increase in incentives paid to independent contractors effective January 1, 2005.

 

Fuel and fuel taxes, which we refer to as fuel expense, net of fuel surcharge revenue of $15.7 million in the 2005 period and $6.8 million in the 2004 period, increased $1.9 million, or 16.1%, to $14.0 million in the 2005 period from $12.0 million in the 2004 period. Our fuel prices, which remain high based on historical standards, significantly increased to an average of $2.45 per gallon in the 2005 period from an average of $1.76 per gallon in the 2004 period. The elevated level of fuel prices is expected to continue for the remainder of 2005.  We have fuel surcharge provisions in substantially all of our transportation contracts and attempt to recover a portion of these increased expenses through fuel surcharges and higher rates.  We expect our fuel expense to increase in the future because we believe that government mandated emissions standards, which became effective October 1, 2002, have resulted in less fuel-efficient engines, and that more restrictive emissions standards that take effect in 2007 will result in further declines in engine efficiency.

 

Depreciation relates to owned tractors, trailers, communications units and terminal facilities. Gains or losses on dispositions of revenue equipment are set forth in a separate line item, rather than included in this category. The increase in depreciation was due to an increase in revenue equipment and the relative percentage of company-owned tractors to independent contractor-owned tractors in the 2005 period.  We expect our annual cost of tractor and trailer ownership will increase in future periods as a result of our accelerated tractor fleet replacement and higher prices of new equipment, which would result in greater depreciation over the useful life.

 

Insurance and claims consist of the costs of insurance premiums and the accruals we make for claims within our self-insured retention amounts, primarily for personal injury, property damage, physical damage to our equipment, cargo claims and workers’ compensation claims.  These expenses will vary primarily based upon the frequency and severity of our accident experience, our self-insured retention levels and the market for insurance.  The decrease in insurance and claims in the 2005 period was comprised of a $80,000 decrease in the cost of self-insured accident claims and a $49,000 decrease in insurance premiums.  We are responsible for the first $1.0 million on each auto liability claim and as of June 1, 2005, we also are responsible for up to $1.0 million

 

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in the aggregate for all auto liability claims between $1.0 million and $2.0 million.  We are also responsible for the first $750,000 on each workers’ compensation claim.  Our significant self-insured retention and our risk on the first $1.0 million of auto liability claims in the $1.0 million to $2.0 million corridor expose us to the possibility of significant fluctuations in claims expense between periods depending on the frequency, severity and timing of claims and to adverse financial results if we incur large or numerous losses.  In the event of an uninsured claim above our insurance coverage, or an increase in the frequency or severity of claims within our self-insured retention, our financial condition and results of operations could be materially and adversely affected.

 

In the 2005 period, increases in the market value for used revenue equipment caused our gain on disposition of revenue equipment to increase to $1.2 million from $544,000 in the 2004 period.  Future gains or losses on disposition of revenue equipment are impacted by the market for used revenue equipment, which is beyond our control.

 

As a result of the foregoing factors, we improved our operating expenses as a percentage of operating revenue, or “operating ratio,” to 91.0% in the 2005 period from 92.0% in the 2004 period.  Our operating expenses as a percentage of operating revenue, with both amounts net of fuel surcharge revenue, improved to 89.6% in the 2005 period from 91.4% in the 2004 period.

 

Interest expense primarily consists of interest on our unsecured committed credit facility and senior unsecured notes.  These expenses are partially offset by interest income from the financing we provide to independent contractors under our tractor purchase program and from our investment in short-term marketable securities.  Net interest expense was consistent in the 2005 and 2004 periods.

 

Our effective income tax rate was 40.2% in the 2005 period compared with 38.0% in the 2004 period.  We expect our effective income tax rate to be in the range of 39% to 40% for the remainder of 2005.

 

As a result of the factors described above, net income increased 33.2%, to $6.4 million in the 2005 period from $4.8 million in the 2004 period. Net earnings per share increased to $0.44 per diluted share in the 2005 period from $0.33 per diluted share in the 2004 period.

 

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Comparison of Nine Months Ended September 30, 2005 to Nine Months Ended September 30, 2004

 

The following table sets forth for the periods indicated the components of our operating revenue and the dollar and percentage change for each component:

 

								Dollar			Percentage
								Change			Change
		Nine Months						Nine Months			Nine Months
		Ended						Ended			Ended
		September 30,						September 30,			September 30,
(Dollars in thousands)		2005			2004			2005 vs. 2004			2005 vs. 2004
Freight revenue		$	284,934		$	253,296		$	31,638		12.5	%
Fuel surcharge revenue		38,059			16,406			21,653			132.0
Non-freight revenue		11,794			4,627			7,167			154.9
Operating revenue		$	334,787		$	274,329		$	60,458		22.0	%

 

The following table sets forth for the periods indicated the dollar and percentage increase or decrease of the items in our unaudited consolidated condensed statements of operations, and those items as a percentage of operating revenue:

 

		Dollar			Percentage		Percentage of
		Change			Change		Operating Revenue
		Nine Months			Nine Months		Nine Months
		Ended			Ended		Ended
		September 30,			September 30,		September 30,
(Dollars in thousands)		2005 vs. 2004			2005 vs. 2004		2005		2004
Operating revenue		$	60,458		22.0	%	100.0	%	100.0	%
Operating expenses (income):
Salaries, wages and benefits		14,382			18.4		27.7		28.5
Purchased transportation		4,053			7.0		18.5		21.1
Fuel and fuel taxes		26,003			51.7		22.8		18.3
Supplies and maintenance		2,115			11.3		6.2		6.8
Depreciation		3,602			14.9		8.3		8.8
Operating taxes and licenses		447			9.2		1.6		1.8
Insurance and claims		288			2.2		4.0		4.7
Communications and utilities		203			8.9		0.7		0.8
Gain on disposition of revenue equipment		(1,570		)	(91.2	)	(1.0	)	(0.6	)
Other		969			15.4		2.2		2.3
Total operating expenses		50,492			19.9		91.0		92.6
Operating income		9,966			49.0		9.0		7.4
Other expenses (income):
Interest expense		151			9.8		0.5		0.6
Interest income		(110		)	(9.9	)	(0.4	)	(0.4	)
Income before income taxes		9,925			49.9		8.9		7.2
Provision for income taxes		4,303			56.9		3.5		2.8
Net income		$	5,622		45.6	%	5.4	%	4.5	%

 

Our operating revenue increased $60.5 million, or 22.0%, to $334.8 million in the 2005 period from $274.3 million in the 2004 period.  Freight revenue increased $31.6 million, or 12.5%, to $284.9 million in the 2005 period from $253.3 million in the 2004 period.  We were able to increase our freight revenue by increasing our freight rates, the size of our fleet, our detention charges and our business with existing and new customers.  Our fuel surcharge revenue increased $21.7 million, or 132.0%, to $38.1 million in the 2005 period from $16.4 million in the 2004 period primarily due to significantly higher average fuel prices in the 2005 period.  The

 

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increase in non-freight revenue in the 2005 period resulted from increased logistics services provided by MWL, as well as the formation by the Company of a logistics division in March 2005.  Our average operating revenue per tractor per week increased 13.4% in the 2005 period from the 2004 period.  Our average freight revenue per tractor per week increased 4.6% in the 2005 period from the 2004 period, due to an 8.1% increase in average freight revenue per total mile, partially offset by a 3.3% decrease in average miles per tractor.  Our weighted average number of tractors increased 7.6% in the 2005 period from the 2004 period.

 

The increase in salaries, wages and benefits resulted primarily from an increase in the size of our company-owned fleet and increases in the amount paid to company drivers of 1 cent per mile effective January 1, 2005 and 2 cents per mile effective April 1, 2005.  Additionally, our employees’ health insurance expense increased $643,000 in the 2005 period due to less favorable claims experience which increased our estimated costs of our self-insured medical claims from the 2004 period.  These increases were partially offset by a decrease of $880,000 in compensation expensed for our non-driver employees under our incentive compensation program in the 2005 period.

 

Purchased transportation expense increased $4.1 million, or 7.0%, in the 2005 period from the 2004 period.  This expense, excluding fuel surcharges passed through to independent contractors and carrier payments by the Company, decreased $5.3 million, or 10.6%, in the 2005 period from the 2004 period.  This decrease was primarily due to a decrease in the number of independent contractor-owned tractors in our fleet, partially offset by a 1 cent per mile increase in the amount paid to independent contractors effective April 1, 2004 and an increase in incentives paid to independent contractors effective January 1, 2005.  Payments to carriers for transportation services arranged by the Company were $8.1 million in the 2005 period and $2.8 million in the 2004 period.  The amount of fuel surcharges passed through to independent contractors increased $4.1 million in the 2005 period.

 

Fuel and fuel taxes, which we refer to as fuel expense, net of fuel surcharge revenue of $38.1 million in the 2005 period and $16.4 million in the 2004 period, increased $4.4 million, or 12.9%, to $38.2 million in the 2005 period from $33.9 million in the 2004 period. Our fuel prices, which remain high based on historical standards, significantly increased to an average of $2.19 per gallon in the 2005 period from an average of $1.63 per gallon in the 2004 period.

 

The increase in depreciation was due to an increase in revenue equipment and the relative percentage of company-owned tractors to independent contractor-owned tractors in the 2005 period.

 

The increase in insurance and claims in the 2005 period was comprised of a $213,000 increase in the cost of self-insured accident claims and a $75,000 increase in insurance premiums.

 

In the 2005 period, increases in the market value for used revenue equipment caused our gain on disposition of revenue equipment to increase to $3.3 million from $1.7 million in the 2004 period.

 

As a result of the foregoing factors, we improved our operating expenses as a percentage of operating revenue, or “operating ratio,” to 91.0% in the 2005 period from 92.6% in the 2004 period.  Our operating expenses as a percentage of operating revenue, with both amounts net of fuel surcharge revenue, improved to 89.8% in the 2005 period from 92.1% in the 2004 period.

 

Our effective income tax rate was 39.8% in the 2005 period compared with 38.0% in the 2004 period.

 

As a result of the factors described above, net income increased 45.6%, to $18.0 million in the 2005 period from $12.3 million in the 2004 period. Net earnings per share increased to $1.23 per diluted share in the 2005 period from $0.85 per diluted share in the 2004 period.

 

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Liquidity and Capital Resources

 

Our business requires substantial, ongoing capital investments, particularly for new tractors and trailers. Our primary sources of liquidity are funds provided by operations, our unsecured senior notes and our revolving credit facility. A portion of our tractor fleet is provided by independent contractors who own and operate their own equipment. We have no capital expenditure requirements relating to those drivers who own their tractors or obtain financing through third parties. However, to the extent we purchase tractors and extend financing to the independent contractors through our tractor purchase program, we have an associated capital expenditure requirement.

 

The table below reflects our net cash flows provided by operating activities, net cash flows used for investing activities and total long-term debt, including current maturities, for the periods indicated.

 

		Nine Months Ended
		September 30,
(In thousands)		2005			2004
Net cash flows provided by operating activities		$	45,539		$	35,225
Net cash flows used for investing activities		48,411			40,371
Long-term debt, including current maturities, at September 30		36,323			30,129

 

In the first nine months of 2005, we spent approximately $44.1 million, net of trade-ins, to purchase 528 tractors and 594 trailers.  We also recognized a gain of $3.3 million on the disposition of used equipment in the first nine months of 2005.  We estimate that capital expenditures, net of trade-ins, will be approximately $40 million for the remainder of 2005, primarily for new revenue equipment.  This estimate may be impacted by the timing of tractor and trailer deliveries between 2005 and 2006.  Based on our current operating performance, the market for used trucks, our liquidity and our expectations concerning tractors manufactured in 2007, we have decided to accelerate our tractor fleet replacement during 2005 and 2006 to allow flexibility with purchasing tractors in 2007 when the next round of diesel emissions reduction directives of the EPA go into effect.  We expect to fund these capital expenditures with cash flows from operations and borrowings under our revolving credit facility.  We believe our sources of liquidity are adequate to meet our current and anticipated needs for at least the next twelve months.  Over the longer term, based upon anticipated cash flows, current borrowing availability and sources of financing we expect to be available to us, we do not anticipate any significant liquidity constraints in the foreseeable future.

 

We have outstanding Series A Senior Unsecured Notes with an aggregate principal balance of $14.3 million at September 30, 2005. These notes mature in October 2008, require annual principal payments of $3.57 million and bear interest at a fixed rate of 6.78%. We also have outstanding Series B Senior Unsecured Notes with an aggregate principal balance of $7.1 million at September 30, 2005. These notes mature in April 2010, require annual principal payments of $1.43 million and bear interest at a fixed rate of 8.57%.

 

We maintain an unsecured committed credit facility in the amount of $45.0 million.  We entered into an amendment to the credit facility in June 2005.  The amendment reduced the number of banks subject to the agreement to one, adjusted our financial covenants and extended the maturity of the facility from April 2006 to April 2008.  At September 30, 2005, the credit facility had an outstanding principal balance of $14.8 million, outstanding letters of credit of $4.2 million and remaining borrowing availability of $26.0 million. This facility bears interest at a variable rate based on the London Interbank Offered Rate or the bank’s Prime Rate, in each case plus applicable margins.  The weighted average interest rate for the credit facility was 5.1% at September 30, 2005.

 

Our credit facility prohibits us from paying, in any fiscal year, dividends in excess of 25% of our net income from the prior fiscal year. The debt agreements discussed above also contain restrictive covenants which, among other matters, require us to maintain certain financial ratios, including debt-to-equity, cash flow

 

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leverage, interest coverage and fixed charge coverage. We were in compliance with all of these covenants at September 30, 2005.

 

We had $10.2 million in direct financing receivables from independent contractors under our tractor purchase program as of September 30, 2005, compared with $10.3 million in receivables as of December 31, 2004. These receivables, which are collateralized by the tractors financed, are used to attract and retain qualified independent contractors. We deduct payments from the independent contractors’ settlements weekly and, as a result, have experienced minimal collection issues for these receivables.

 

The following is a summary of our contractual obligations as of September 30, 2005.  We have entered into agreements to purchase $56.4 million of revenue equipment in the remainder of 2005, which is included in the following summary.  We also plan to purchase an additional $8.2 million and $38.5 million of revenue equipment in 2005 and 2006, respectively, for which we have not entered into binding agreements.

 

		Payments Due by Period
		Remainder			2006			2008
		of			and			and
(In thousands)		2005			2007			2009			Thereafter			Total
Purchase obligations for revenue equipment		$	56,363		$	—		$	—		$	—		$	56,363
Long-term debt obligations		3,630			10,037			21,228			1,428			36,323
Operating lease obligations		49			264			49			—			362
Total		$	60,042		$	10,301		$	21,277		$	1,428		$	93,048

 

Related Parties

 

MWL, our 45% owned affiliate, is a third-party provider of logistics services to the transportation industry.  In the first nine months of 2005 and the first nine months of 2004, we received $16.0 million and $15.8 million, respectively, of our revenue from transportation services arranged by MWL. We have applied the provisions of FASB Interpretation No. 46, “Consolidation of Variable Interest Entities,” as revised, to our investment in MWL effective March 31, 2004.  As a result, the accounts of MWL are included in our consolidated balance sheet as of September 30, 2005, and in our consolidated statement of operations beginning April 1, 2004. We accounted for our investment in MWL’s operating results using the equity method of accounting prior to April 1, 2004.

 

We purchase fuel and obtain tires and related services from Bauer Built, Incorporated, or BBI. Jerry M. Bauer, one of our directors, is the president and a stockholder of BBI.  We paid BBI $834,000 in the first nine months of 2005 and $676,000 in the first nine months of 2004 for fuel and tire services. In addition, we paid $1.2 million in the first nine months of 2005 and $935,000 in the first nine months of 2004 to tire manufacturers for tires that we purchased from the tire manufacturers but were provided by BBI.  BBI received commissions from the tire manufacturers related to these purchases.  Other than any benefit received from his ownership interest, Mr. Bauer receives no compensation or other benefits from our business with BBI.

 

Off-Balance Sheet Arrangements

 

We did not have any material off-balance sheet arrangements at September 30, 2005.

 

Inflation and Fuel Costs

 

Most of our operating expenses are inflation-sensitive, with inflation generally producing increased costs of operations. During 2004 and the first nine months of 2005, the most significant effects of inflation have been on revenue equipment prices, accident claims, health insurance and employee compensation. We attempt to limit the effects of inflation through increases in freight rates and cost control efforts.

 

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