Frozen Food Express Industries 10-K 2009
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 1-10006
(Exact name of registrant as specified in its charter)
Registrant's telephone number, including area code: (214) 630-8090
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: Yes [ ] No [ X ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act: Yes [ ] No [ X ]
Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company. See the definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ X ] Non-accelerated filer [ ] Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
The aggregate market value of 15,322,711 shares of the registrant’s $1.50 par value common stock held by non-affiliates as of June 30, 2008 was approximately $103,428,000 (based upon $6.75 per share).
As of February 13, 2009, the number of outstanding shares of the registrant’s common stock was 16,809,628.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Stockholders for the year ended December 31, 2008 and Proxy Statement for use in connection with its Annual Meeting of Stockholders to be held on May 20, 2009, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after December 31, 2008, are incorporated by reference in Part III (Items 10, 11, 12, 13 and 14).
TABLE OF CONTENTS
This Annual Report on Form 10-K contains information and forward-looking statements that are based on management's current beliefs and expectations and assumptions we made based upon information currently available. Such statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements not of historical fact may be considered forward-looking statements. Forward-looking statements include statements relating to our plans, strategies, objectives, expectations, intentions and adequacy of resources and may be identified by words such as "will", "could", "should", "believe", "expect", "intend", "plan", "schedule", "estimate", "project" or other variations of these or similar words, identify such statements. These statements are based on our current expectations and are subject to uncertainty and change.
Although we believe the expectations reflected in such forward-looking statements are reasonable, actual results could differ materially from the expectations reflected in such forward-looking statements. Should one or more of the risks or uncertainties underlying such expectations not materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those we expect.
Factors that are not within our control that could cause actual results to differ materially from those in such forward-looking statements include demand for our services and products, and our ability to meet that demand, which may be affected by, among other things, competition, weather conditions and the general economy, the availability and cost of labor and owner-operators, our ability to negotiate favorably with lenders and lessors, the effects of terrorism and war, the availability and cost of equipment, fuel and supplies, the market for previously-owned equipment, the impact of changes in the tax and regulatory environment in which we operate, operational risks and insurance, risks associated with the technologies and systems we use and the other risks and uncertainties described in Item 1A, Risk Factors of this report and risks and uncertainties described elsewhere in our filings with the Securities and Exchange Commission (“SEC”). We undertake no obligation to correct or update any forward-looking statements, whether as a result of new information, future events, or otherwise.
References in the Annual Report to “we”, “us”, “our”, or the Company or similar terms refer to Frozen Food Express Industries, Inc. and it’s consolidated subsidiaries unless the context otherwise requires.
ITEM 1. Business
Frozen Food Express Industries, Inc. is one of the leading temperature-controlled truckload and less-than-truckload carriers in the United States with core operations in the transport of temperature-controlled products and perishable goods including food, health care and confectionary products. Service is offered in over-the-road and intermodal modes for temperature-controlled truckload and less-than-truckload, as well as dry truckload. We also provide brokerage, or logistics services, including ocean, air, and both domestic and international expedited services, as well as dedicated fleets to our customers.
We were incorporated in Texas in 1969, as successor to a company formed in 1946. Our principal office is located at 1145 Empire Central Place, Dallas, Texas 75247-4305. Our telephone number is (214) 630-8090 and our website is www.ffeinc.com.
Our growth strategy is to expand our business internally by offering shippers a high level of service with expandable shipping capacity. We market our temperature-controlled truckload services primarily to large shippers that offer consistent volumes of freight within our preferred lanes and are willing to compensate us for our high service level. We market our temperature-controlled less-than-truckload services to small and large shippers who need the flexibility to ship varying quantities based upon our scheduled departure and delivery times. Our fleet of 2,029 company and independent contractor tractors allow us to offer high service levels and on-time performance and delivery within narrow time windows at stringent temperature standards.
Our services are further described below:
The following table summarizes and compares the components of our revenue for each of the years in the five-year period ended December 31, 2008:
Additional information regarding our business is presented in the Notes to Consolidated Financial Statements included in Item 8 and in Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Annual Report on Form 10-K.
Temperature-controlled transportation:> The products we haul include meat, ice, poultry, seafood, processed foods, candy and other confectionaries, dairy products, pharmaceuticals, medical supplies, fresh and frozen fruits and vegetables, cosmetics, film and Christmas trees. In the temperature-controlled market, it may be necessary to keep freight frozen, as with ice; to keep freight cool, as with candy; or to keep freight from freezing. The common and contract hauling of temperature-sensitive cargo is highly fragmented and comprised primarily of carriers generating less than $50 million in annual revenue. In addition, many major food companies, food distribution firms and grocery chain companies transport a portion of their freight with their own fleets.
Non-temperature-controlled transportation:> Our non-temperature-controlled (“dry”) trucking fleet conducts business under the brand American Eagle Lines ("AEL"). AEL accounts for approximately 32% of our truckload linehaul revenue. AEL serves the dry truckload market throughout the United States, Mexico and Canada. Also, during 2008, about 10% of the truckload shipments transported by our temperature-controlled fleets were of dry commodities.
Intermodal transportation: > In providing our truckload linehaul service, we often engage railroads to transport shipments between major cities. In such an arrangement, loaded trailers are transported to a rail facility and placed on flat rail cars for transport to their destination. Upon arrival, we pick up the trailer and deliver the freight to the consignee. Intermodal service is generally less costly than using one of our own trucks, but other factors including delivery schedules also influence our decision to utilize intermodal services.
MARKETING AND OPERATIONS
Our temperature-controlled and non-temperature-controlled trucking operations serve nearly 10,000 customers in the United States, Mexico and Canada. Revenue from international activities was less than 1% of total revenue during each of the past five years.
Excluding fuel surcharges, temperature-controlled shipments account for about 81% of our total revenue. Our customers are involved in a variety of products including food products, pharmaceuticals, medical supplies and household goods. Our customer base is diverse in that our top 5, 10 and 20 largest customers accounted for 24%, 34% and 43%, respectively, of our revenue during 2008. None of our markets are dominated by any single competitor nor did any customer account for more than 10% of total revenue during any of the past five years. We compete with several hundred other trucking companies. The principal methods of competition are price, quality of service and availability of equipment needed to satisfy customer requirements.
We approach our business as an integrated effort of marketing and operations. Our marketing efforts are heavily focused on service versus being the lowest cost provider. We target large shippers of temperature sensitive products for our truckload services as well as smaller shippers of temperature sensitive products for our LTL services. Additionally, we service and market directly to shippers for non-temperature-controlled product. During 2008, the Company restructured its sales process to focus on vertical sales efforts to our customers providing them with a one stop provider for any of their needs including brokerage and dedicated services.
Our marketing efforts are conducted by a staff of dedicated sales, customer service and support personnel under the supervision of our senior management team. Marketing personnel travel within their regions to solicit new customers and maintain contact with existing customers. We have a national sales force team of individuals that focus primarily on large truckload temperature-controlled shippers. Additionally, we have a network of company owned logistics stations that market and sell our brokerage services, which include temperature-controlled, dry van and other specialized needs of our customers not typically offered by other carriers, including ocean, air, and expedited domestic and international services.
Our operations personnel strive to improve our asset utilization by seeking freight that allows for rapid turnaround times, minimizes empty miles, carries favorable rate structures and allows our drivers to remain within our preferred network of lanes. Once we have established a relationship with a customer, customer service managers work closely with our fleet managers to match the customer’s needs with our capacity. Load planners or dispatchers utilize various optimization solutions to assign loads, meet the customer’s needs and the routing needs of our drivers. We attempt to route most of our trucks over preferred lanes, which we believe assists us in meeting our customer’s needs, balancing traffic, reducing empty miles and improving the reliability of our delivery schedules. Within our LTL services, we provide for regularly scheduled pick-up and delivery times so our customers can depend upon a pre-existing schedule.
DRIVERS AND OTHER PERSONNEL
We select drivers using specific guidelines for safety records, driving experience and personal evaluations. We believe that maintaining a safe and professional driver group is essential to providing excellent customer service, safer roads for other drivers and achieving profitability. We maintain stringent screening, training and testing procedures for our drivers to reduce the risk for accidents and thereby controlling our insurance and claim costs. We train our drivers at our service centers in all phases of our policies and operations including safety techniques, fuel-efficient operation of the equipment and customer service. We also offer computer and audio based training through our website. All drivers must also pass United States Department of Transportation (“DOT”) required tests prior to commencing employment.
At December 31, 2008 we had 1,732 company drivers and 400 independent contractors. Our turnover for company drivers was approximately 98% compared to industry averages exceeding 120%. We find that if we can retain a driver beyond the first 12 months, we have a much better opportunity to retain them for a longer period of time. We pay our company drivers on a fixed rate per mile basis and the independent contractors either a percentage of the earned revenue or on a per mile basis.
We actively seek to expand our fleet with equipment provided by independent contractors. These independent contractors provide tractors to pull our loaded trailers. We generally utilize the independent contractors based upon our existing capacity and the needs of our customers as those needs increase or decrease. At the end of 2008, we had 283 independent contractors providing truckload services and 117 providing LTL services. Each independent contractor pays for their driver wages, fuel, equipment related expenses and other transportation costs. We bill the customer and pay the independent contractor upon proof of delivery to the destination. The Company assumes the credit risk with the customer and provides all customer support.
Competition in the trucking industry for qualified drivers is intense. Our operations have been impacted from time-to-time based upon the pool of qualified drivers. The general economy affects our ability to recruit and retain drivers. As the general economy slows, more individuals elect to enter into the driver pool. When the economy strengthens, drivers are attracted to other employment opportunities and generally leave the pool.
At December 31, 2008, we had 2,587 employees. This consists of 1,732 drivers, 610 warehouse and service center support individuals including maintenance personnel and 245 support personnel, which includes management, the sales force and administration. None of our employees are represented by a collective bargaining unit, and we consider relations with our employees to be good.
We are dependent on diesel fuel for our transportation services, and we and our customers are impacted by the volatility of fuel prices. The price and availability of diesel fuel can vary significantly and are subject to political, economic and market factors that are beyond our control. While we do not hedge our exposure to volatile energy prices, we attempt to minimize our exposure by buying in bulk in Dallas and at various facilities throughout the country. In addition, we negotiate nationwide volume purchasing arrangements for our drivers in transit. During 2008, approximately 84% of our fuel purchases were made within this national network.
We further manage the price volatility through fuel surcharge programs with our customers. Fuel surcharge programs are intended to offset the increased fuel expenses we incur when prices escalate. However, as the Company adjusts fuel surcharge factors on a weekly basis, it may not fully recover price increases in the preceding week. We have historically been able to pass through most long-term increases in fuel in the form of surcharges to our customers.
Factors that could prevent us from fully recovering fuel cost increases include the competitive environment, empty miles, out-of-route miles, tractor engine idling and fuel to power our trailer refrigeration units. Such fuel consumption often cannot be attributed to a particular load and therefore, there is no incremental revenue to which a fuel surcharge may be applied.
In most years, states increase fuel and road use taxes. Our recovery of future increases or realization of future decreases in fuel prices and fuel taxes, if any, will continue to depend upon competitive freight market conditions.
INSURANCE AND CLAIMS>
We self-insure for a portion of our claims exposure resulting from workers’ compensation, auto liability, general liability, cargo and property damage claims and employees’ health insurance. We are also responsible for our proportionate share of the legal expenses related to such claims. We reserve currently for anticipated losses and related expenses and periodically evaluate and adjust our insurance and claims reserves to reflect our experience. We are responsible for the first $4.0 million on each auto and general liability claim and $300,000 for employees’ health claims. We are also responsible for the first $1.0 million for workers’ compensation claims generated outside of Texas and for $500,000 on work injury claims filed in Texas. We carry excess insurance for which we are responsible for 25% of the losses between $4.0 million and $10.0 million per occurrence. We are fully insured for liability exposures between $10.0 million and $50.0 million. We are fully insured between our retention of $500,000 and $1.0 million for Texas work injury claims and between our retention of $1.0 million and state statutory limits for workers’ compensation claims outside of Texas. We utilize a $300,000 stop-loss retention on employee health claims. We have $5.6 million in standby letters of credit to guarantee settlement of claims under agreements with our insurance carriers and regulatory authorities.
Insurance companies have raised premiums for many businesses, including transportation companies. As a result, our insurance and claims expense could increase, or we could raise our self-insured retention when our policies are renewed in mid-2009. We believe our risk management program is founded on the continual enhancement of safety in our operations. Our safety department conducts programs that include driver education and over-the-road observation and requires that drivers meet or exceed specific safety guidelines, driving experience, drug testing and physical examinations.
Our insurance and claim accruals represent our estimate of ultimate claims outcomes and are established based on the information available at the time of an incident. As additional information regarding the incident becomes available, any necessary adjustments are made to previously recorded amounts, including any expenses related to the incident. We use an independent actuary to assist in developing reserve amounts.
Continued investment in information technology is essential to a successful temperature-controlled trucking operation. On a typical day, our LTL system handles about 6,000 shipments - about 4,000 on the road, 1,000 being delivered and 1,000 being picked up. In 2008, our LTL operation handled almost 273,000 individual shipments. The Company schedules, on average, 600 truckload shipments per day.
Our truckload and LTL fleets use computer and satellite technology to enhance efficiency and customer service. The satellite-based communications system provides automatic hourly position updates of each truckload tractor and permits real-time communication between operations personnel and drivers. Dispatchers relay pick-up, delivery, weather, road and other information to the drivers while shipment status and other information is relayed by the drivers to our computers via the satellite.
The Company has also invested in the following technology that we believe allows us to operate more efficiently:
We operate premium company-owned tractors in order to help attract and retain qualified employee-drivers, promote safe operations, minimize repair and maintenance costs and ensure dependable service to our customers. We believe the higher initial investment for our equipment is recovered through more efficient vehicle performance offered by such premium tractors and improved resale value. Major repair costs are mostly recovered through manufacturers' warranties, but routine and preventative maintenance is our responsibility.
Changes in the size of our fleet depend upon developments in the nation's economy, demand for our services and the availability of qualified drivers. Continued emphasis will be placed on improving the operating efficiency and increasing the utilization of the fleet through enhanced driver training and retention and reducing the percentage of empty, non-revenue producing miles.
As of December 31, 2008, we operated a fleet of 2,029 tractors, including 1,629 company-owned tractors and 400 tractors supplied by independent contractors. The average age of our tractors was approximately 2.3 years. We typically replace our tractors within 42 months after purchase. As of December 31, 2008, we maintained 4,179 company-owned trailers, which were substantially company-owned. Our general policy is to retire our trailers between seven and ten years of service. Occasionally, we retain older equipment for use in local delivery operations. The following represents a breakdown of the age of our tractors and trailers at the end of 2008 and 2007:
Approximately three-fourths of our trailers are insulated and equipped with refrigeration units capable of providing the temperature control necessary to handle perishable freight. Trailers that are used primarily in LTL operations are equipped with movable partitions permitting the transportation of goods requiring different temperatures. We also operate a fleet of non-refrigerated trailers in our non-temperature-controlled truckload operation. Company-operated trailers are primarily 102 inches wide. Truckload trailers used in dry freight and temperature-controlled linehaul operations are primarily 53 feet long.
The federal government has continued to mandate new technology for truck engines. The new technology is designed to reduce emissions from diesel engines, which generally reduces miles per gallon. In 2007 and 2008, we placed 552 trucks with the Environmental Protection Agency (“EPA”) compliant engines in service and expect to add another 473 as replacements for older tractors in 2009. While the EPA-compliant engines are more costly to purchase and maintain, we are committed to the EPA’s Smart-Way Partner Program to minimize the negative environmental impacts of diesel-powered equipment.
Service to and from Canada is provided using tractors from our fleets. We partner with Mexico-based trucking companies to facilitate freight moving both ways across the southern United States border. Freight moving from Mexico is hauled in our trailers to the border by the Mexico-based carrier, where the trailers are exchanged. Southbound shipments work much the same way. This arrangement has been in place for more than ten years, and we do not expect to change our manner of dealing with freight to or from Mexico. Changes in United States, Canadian, or Mexican government regulations could cause us to change on operations, including border management, taxation, or various transportation and safety practices. Less than 1% of our consolidated linehaul revenue during 2008 involved international shipments, all of which was billed and collected in United States currency.
Our trucking operations are regulated by the DOT. The DOT generally governs matters such as safety requirements, registration to engage in motor carrier operations, certain mergers, insurance, consolidations and acquisitions. The DOT conducts periodic on-site audits of our compliance with its safety rules and procedures. Our most recent audit, which was completed in March of 2008, resulted in a rating of "satisfactory", the highest safety rating available.
During 2005, the Federal Motor Carrier Safety Administration ("FMCSA") began to enforce changes to the regulations that govern drivers' hours of service. Hours of Service ("HOS") rules issued by the FMCSA, in effect since 1939, generally limit the number of consecutive hours and consecutive days that a driver may work. The new rules reduced by one hour the number of hours that a driver may work in a shift, but increased by one hour the number of hours that a driver may drive during the same shift. Drivers often are working at a time they are not driving. Duties such as fueling, loading and waiting to load count as part of a driver's shift that are not considered driving. Under the old rules, a driver was required to rest for at least eight hours between shifts. The new rules increased that to ten hours, thereby reducing the amount of time a driver can be "on duty" by two hours.
We believe we are well equipped to minimize the economic impact of the current HOS rules on our business. In many cases, we have negotiated time delay charges with our customers. Additionally, we work directly with our customers in an effort to managing our drivers’ non-driving activities such as loading, unloading or waiting and we continue to actively communicate with our customers regarding these matters. We also are able to assess detention and other charges to offset losses in productivity resulting from the current HOS regulations.
We have experienced higher prices for new tractors over the past few years, partially as a result of government regulations applicable to newly manufactured tractors and diesel engines. The entire linehaul sleeper fleet has either the 2004-EGR (“Exhaust-Gas Recirculation”) or the 2007-EGR EPA-mandated engines. Further restrictions for clean air compliance will be mandated by the EPA for all engines manufactured after January 1, 2010. While the 2010 engines will further increase the costs of our equipment, we plan to continue with our normal equipment replacement cycles.
We are also subject to various environmental laws and regulations by various state regulatory agencies with respect to certain aspects of our operations including the handling of hazardous materials, fuel storage tanks, air emissions from our trucks and engine idling.
Our temperature-controlled truckload operations are affected by seasonal changes. The growing seasons for fruits and vegetables in Florida, California and Texas typically create increased demand for trailers equipped to transport cargo requiring refrigeration. Our LTL operations are also impacted by the seasonality of certain commodities. LTL shipment volume during the winter months is normally lower than other months. Shipping volumes of LTL freight are usually highest during July through October. LTL volumes also tend to increase in the weeks before holidays such as Thanksgiving, Christmas and Easter when significant volumes of food and candy are transported.
INTERNET WEB SITE
We maintain a web site, www.ffeinc.com, on the Internet where additional information about our company is available. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, press releases, earnings releases and other reports filed with and furnished to the SEC, pursuant to Section 13 or 15(d) of the Exchange Act are available, free of charge, on our web site as soon as practical after they are filed.
We have adopted a Code of Business Conduct and Ethics for our Board of Directors, our Chief Executive Officer, principal financial and accounting officer and other persons responsible for financial management and our employees generally. We also have charters for the Audit Committee, Compensation Committee, and Nominating Committee of our Board of Directors. Copies of the foregoing documents may be obtained on our web site, and such information is available in print to any shareholder who requests it. Such requests should be made to the Senior Vice President and Chief Financial Officer at 1145 Empire Central Place, Dallas, Texas 75247-4305.
The annual, quarterly, special and other reports we file with and furnish to the SEC are available at the SEC's Public Reference Room, located at 100 F Street, NE, Room 1580, Washington, D.C. 20549. Information may be obtained on the operation of the Public Reference Room by calling the SEC at 1-800-732-0330. The SEC also maintains a web site at www.sec.gov. The SEC site also contains information we file with and furnish to the agency.
ITEM 1A. Risk Factors>
The following factors are important and should be considered carefully in connection with any evaluation of our business, financial condition, results of operations, prospects, or an investment in our common stock. The risks and uncertainties described below are those we currently believe may materially affect our company or our financial results. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations or affect our financial results.
Our business is subject to general economic factors and business risks that are largely out of our control, any of which could have a material adverse effect on our operating results. Our business is subject to general economic factors and business factors that may have a materially adverse effect on our results of operations, many of which are beyond our control. These factors include excess capacity in the trucking and temperature-controlled industry, strikes, or other work stoppages, significant increases in interest rates, fuel costs, taxes and license and registration fees. Recessionary economic cycles, changes in customers' business activities and excess tractor or trailer capacity in comparison with shipping demands could materially impact our operations. Economic conditions that decrease shipping demand, as we experienced in 2008, or an increase in the supply of tractors and trailers generally available in the transportation sector of the economy can exert downward pressure on our equipment utilization, thereby decreasing asset productivity. Economic conditions also may adversely impact our customers and their ability to pay for our services.
Recently, there has been widespread concern over the instability of the credit markets and the current credit market effects on the economy. If the economy and credit markets continue to weaken, our business, financial results, and results of operations could be materially and adversely affected, especially if consumer confidence continues to decline and domestic spending decreases. Additionally, the stresses in the credit market have caused uncertainty in the equity markets, which may result in volatility of the market price for our securities.
If the credit markets continue to erode, we also may not be able to access our current sources of credit and our lenders may not have the capital to fund those sources. We may need to incur indebtedness or issue debt or equity securities in the future to fund working capital requirements, make investments in revenue generating equipment, or for general operating purposes. As a result of contractions in the credit market, as well as other economic trends in the credit market industry, we may not be able to secure financing for future activities on satisfactory terms, or at all. If we are not successful in obtaining sufficient financing because we are unable to access the capital markets on financially economical or feasible terms, it could impact our ability to provide services to our customers and may materially and adversely affect our business, financial results, current operations, results of operations and potential investments.
It is not possible to predict the effects on the economy or consumer confidence of actual or threatened armed conflicts or terrorist attacks, efforts to combat terrorism, military action against a foreign state or group located in a foreign state, or heightened security requirements.
We operate in a highly competitive and fragmented industry and numerous competitive factors could impair our growth and profitability. Some of these factors include:
We derive a significant portion of our revenue from our major customers, the loss of one or more of which could have a materially adverse effect on our business. A significant portion of our revenue is generated from our major customers. For 2008, our top 20 customers accounted for approximately 43% of our revenue; our top ten customers accounted for 34% of our revenue; and our top five customers accounted for approximately 24% of our revenue. Generally, we enter into one year agreements with our major customers, which generally do not contain minimum shipment volumes with us. We cannot ensure that, upon expiration of existing contracts, these customers will continue to utilize our services at the current levels. Many of our customers periodically solicit bids from multiple carriers for their shipping needs, and this process may depress freight rates or result in a loss of business to one of our competitors. Some of our customers also operate their own private fleets and the expansion of those fleets may result in lowering the demand for our services with such customers.
Future insurance and claims expense could reduce our earnings. Our future insurance and claims expense might exceed historical levels, which could reduce our earnings. We self-insure significant portions of our claims exposure resulting from work-related injuries, auto liability, general liability, cargo and property damage claims, as well as employees' health insurance. We currently reserve for anticipated losses and expenses. We periodically evaluate and adjust our claims reserves to reflect our experience. However, ultimate results usually differ from our estimates, which could result in losses in excess of our reserved amounts.
We maintain insurance above the amounts for which we self-insure. Although we believe the aggregate insurance limits should be sufficient to cover reasonably expected claims, it is possible that one or more claims could exceed our aggregate coverage limits. Insurance carriers have raised premiums for many businesses, including transportation companies. As a result, our insurance and claims expense could increase, or we could raise our self-insured retention when our policies are renewed. If these expenses increase, if we experience a claim in excess of our coverage limits, or if we experience a claim for which coverage is not provided, results of our operations and financial condition could be materially and adversely affected.
Fluctuations in the price or availability of fuel may increase our cost of operations, which could materially and adversely affect our profitability. We are subject to risk with respect to purchases of fuel for use in our tractors and refrigerated trailers. Fuel prices are influenced by many factors that are not within our control.
Because our operations are dependent upon diesel fuel, significant increases in diesel fuel costs could materially and adversely affect our results of operations and financial condition unless we are able to pass increased costs on to customers through rate increases or fuel surcharges. Historically, we have sought to recover increases in fuel prices from customers through fuel surcharges. Fuel surcharges that can be collected have not always fully offset the increase in the cost of diesel fuel in the past, and there can be no assurance that fuel surcharges that can be collected will offset the increase in the cost of diesel fuel in the future.
Seasonality and the impact of weather can affect our profitability. Our tractor productivity generally decreases during the winter season because inclement weather impedes operations and some shippers reduce their shipments. At the same time, operating expenses generally increase, with fuel efficiency declining because of engine idling and harsh weather creating higher accident frequency, increased claims and more equipment repairs. We can also suffer short-term impacts from weather-related events such as hurricanes, blizzards, ice-storms and floods that could harm our results or make our results more volatile.
We will have significant ongoing capital requirements that could negatively impact our growth and profitability. The trucking industry is capital intensive, and replacing older equipment requires significant investment. If we elect to expand our fleet in future periods, our capital needs would increase. We expect to pay for our capital expenditures with cash flows from operations, borrowings under our revolving credit facility and leasing arrangements. If we are unable to generate sufficient cash from operations and obtain financing on favorable terms, we may need to limit our growth, enter into less favorable financing arrangements or operate our revenue equipment for longer periods, any of which could impact our profitability.
We rely on our key management and other employees and depend on recruitment and retention of qualified personnel. Difficulty in attracting or retaining qualified employee-drivers and independent contractors who provide tractors for use in our business could impede our growth and profitability. A limited number of key executives manage our business. Their departure could have a material adverse effect on our operations. In addition, our performance is primarily dependent upon our ability to attract and retain qualified drivers. Our independent contractors are responsible for paying for their own equipment, labor, fuel, and other operating costs. Significant increases in these costs could cause them to seek higher compensation from us or other opportunities. Competition for employee-drivers continues to increase. If a shortage of employee-drivers occurs, or if we were unable to continue to sufficiently contract with independent contractors, we could be forced to limit our growth or experience an increase in the number of our tractors without drivers, which would lower our profitability.
Service instability in the railroad industry could increase our operating costs and reduce our ability to offer intermodal services, which could adversely affect our revenue, results of operations and customer relationships. Our intermodal operations are dependent on railroads, and our dependence on railroads may increase if we expand our intermodal services. In most markets, rail service is limited to a few railroads or even a single railroad. Any reduction in service by the railroads may increase the cost of the rail-based services we provide and reduce the reliability, timeliness and overall attractiveness of our rail-based services. Railroads are relatively free to adjust their rates as market conditions change. That could result in higher costs to our customers and impact our ability to offer intermodal services. There is no assurance that we will be able to negotiate replacement of or additional contracts with railroads, which could limit our ability to provide this service and may negatively impact our profitability.
Interruptions in the operation of our computer and communications systems could reduce our income. We depend on the efficient and uninterrupted operation of our computer and communications systems and infrastructure. Our operations and those of our technology and communications service providers are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure, terrorist attacks, internet failures, computer viruses and other events beyond our control. In the event of a system failure, our business could experience significant disruption. We have established an off-site facility where our data and processing functions are replicated; however, there can be no assurances that the business recovery plan will work as intended or may not prevent significant interruptions of our operations.
Changes in the availability of or the demand for new and used trucks could reduce our growth and negatively impact our income. More restrictive federal emissions standards require new technology diesel engines. As a result, we expect to continue to pay increased prices for equipment and incur additional expenses and related financing costs for the foreseeable future. The new engines are also expected to reduce equipment productivity, increase fuel consumption and be more expensive to maintain.
We have a conditional commitment from our principal tractor vendor regarding the amount we will be paid on the disposal of most of our tractors as part of a trade-in program. We could incur a financial loss upon disposition of our equipment if the vendor cannot meet its obligations under these agreements.
If we are unable to obtain favorable prices for our used equipment, or if the cost of new equipment continues to increase, we will increase our depreciation expense or recognize less gain (or a loss) on the disposition of our tractors and trailers. This may adversely affect our earnings and cash flows.
We operate in a highly regulated industry, and increased costs of compliance with, or liability for violation of, existing or future regulations could have a materially adverse effect on our business. The DOT and various state and local agencies exercise broad powers over our business, generally governing such activities as authorization to engage in motor carrier operations, safety and insurance requirements. Our company drivers and independent contractors also must comply with the safety and fitness regulations promulgated by the DOT, including those relating to drug and alcohol testing and hours-of-service. We also may become subject to new or more restrictive regulations relating to fuel emissions, drivers’ hours-of-service, ergonomics, or other matters affecting safety or operating methods. Other agencies, such as the EPA and the Department of Homeland Security, also regulate our equipment, operations, and drivers. Future laws and regulations may be more stringent and require changes in our operating practices, influence the demand for transportation services, or require us to incur significant additional costs.
Our operations are subject to various environmental laws and regulations, the violation of which could result in substantial fines or penalties. We are subject to various environmental laws and regulations dealing with the handling of hazardous materials, fuel storage tanks, air emissions from our vehicles and facilities, engine idling, and discharge and retention of storm water. We operate in industrial areas, where truck terminals and other industrial activities are located, and where groundwater or other forms of environmental contamination have occurred. Our operations involve the risks of fuel spillage or seepage, environmental damage, and hazardous waste disposal, among others. Although we have instituted programs to monitor and control environmental risks and promote compliance with applicable environmental laws and regulations, if we are involved in a spill or other accident involving hazardous substances or if we are found to be in violation of applicable laws or regulations, we could be subject to liabilities, including substantial fines or penalties or civil and criminal liability, any of which could have a materially adverse effect on our business and operating results.
We may not be able to improve our operating efficiency rapidly enough to meet market conditions. Because the markets in which we operate are highly competitive, we must continue to improve our operating efficiency in order to maintain or improve our profitability. Although we have been able to improve efficiency and reduce costs in the past, there is no assurance we will continue to do so in the future. In addition, the need to reduce ongoing operating costs may result in significant up-front costs to reduce workforce, close or consolidate facilities, or upgrade equipment and technology.
Our operations could be adversely affected by a work stoppage at locations of our customers. Although none of our employees are covered by a collective bargaining agreement, a strike or other work stoppage at a customer could negatively affect our revenue and earnings and could cause us to incur unexpected costs to redeploy or deactivate assets and personnel.
We are subject to anticipated future increases in the statutory federal tax rate. An increase in the statutory tax rate would increase our tax expense. In addition, our net deferred tax liability is stated net of offsetting deferred tax assets. The assets consist of anticipated future tax deductions for items such as personal and work-related injuries and bad debt expenses, which have been reflected on our financial statements but which are not yet tax deductible. We will need to generate sufficient future taxable income in order to fully realize our deferred tax assets. Should we not realize sufficient future taxable income, we may be required to write-off a portion or all of our deferred tax assets, which could materially impact our results of operations and financial condition. Due to probable tax rate increases in the future, we would be required to adjust our deferred tax liabilities at that time to reflect higher federal tax rates.
Other Risks Related to Our Business. Other risk factors include, but are not limited to, changes in the mix of our services, changes in legislation applicable to us, changes in market demand or our business strategies, potential litigation and claims arising in the normal course of business, credit risk of customers, customer product safety issues from the transportation of temperature-controlled food products and potential diseases that could arise, unexpected government bans of certain exports or imports and other risk factors.
At December 31, 2008, we maintained service center or office facilities of 10,000 square feet or more in or near the cities listed below. We also occupy a number of smaller rented recruiting and sales offices around the country. Lease terms range from one month to fifteen years. We expect our present facilities are sufficient to support our operations.
The following table sets forth certain information regarding our properties at December 31, 2008:
*Facilities are part of an industrial park in which we share acreage with other tenants.
Most of our service centers serve as satellite offices for our brokerage operation, FFE Logistics, Inc. (“FFEL”). In other markets, FFEL also leases small sales offices.
During 2007, we were advised that the owned facility near Newark and the leased facility near Los Angeles had been targeted for eminent domain proceedings by the cities in which they are located. We have identified an 84,000 square foot replacement property in Burlington, New Jersey and have signed a 15 year lease. We are currently renovating the facility in preparation for occupancy in mid-year 2009.
With regard to the leased facility near Los Angeles, the city has informed the property owner and us that it plans to construct a maintenance facility on the property. Our lease expires late in 2011, but the city has indicated its intent to take control of the property within six to nine months of the date of this report. Accordingly, we are currently looking for a replacement facility, which we intend to lease on a long-term basis.
ITEM 3. Legal Proceedings
We are involved in litigation incidental to our operations, primarily involving claims for personal injury, property damage, work-related injuries and cargo losses incurred in the ordinary and routine transportation of freight.
On January 4, 2006, Owner Operator Independent Drivers Association, Inc., Warrior Transportation, Roy Clark, and Gregory Colvin d/b/a Wolverine Trucking, Inc. filed a lawsuit in the U.S. District Court for the Northern District of Texas, Dallas Division, on behalf of themselves and all others similarly situated against our principal operating subsidiary FFE Transportation Services, Inc. On June 15, 2007, the Court denied Plaintiffs’ motion for class certification, leaving only the Plaintiffs’ individual claims for adjudication. Those claims were settled, and the entire lawsuit was dismissed with prejudice on October 1, 2008.
On January 8, 2008, a shareholders’ derivative action was filed in the District Court of Dallas County, 192nd District, entitled James L. and Eleanor A. Gayner, Individually and as Trustees of The James L. & Eleanor 81 UAD 02/04/1981 Trust, Derivatively On Behalf of Frozen Food Express Industries, Inc. v. Stoney M. Stubbs, Jr., et al. This action alleged that certain of our current and former officers and directors breached their respective fiduciary duties in connection with our equipment lease arrangements with certain related-parties, which were terminated in September 2006. The shareholders sought, on our behalf, an order that the lease arrangements were null and void from their origination, an unspecified amount of damages, the imposition of a constructive trust on any benefits received by the defendants as a result of their alleged wrongful conduct, and recovery of attorneys’ fees and costs. A special litigation committee (“SLC”) consisting solely of independent directors was created to investigate the claims in the derivative action. The derivative action was stayed while the SLC conducted an investigation. The parties reached a tentative settlement of the disputed claims upon the conclusion of the SLC's investigation. The settlement is subject to court approval. Under the proposed settlement, the Company will make certain corporate governance changes beginning in early March 2009, some of which have already been implemented.
No matters were submitted to a vote of our shareholders during the fourth quarter of the year ended December 31, 2008.
ITEM 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Market for Registrant's Common Equity and Related Shareholder Matters
Our common stock is listed on the NASDAQ Global Select Market under the symbol “FFEX”. The table below shows the range of high and low bid prices for the quarters indicated on the NASDAQ Global Select Market. Such quotations reflect inter-dealer prices, without retail markups, markdowns or commissions and therefore, may not necessarily represent actual transactions. The following table sets forth the high and low prices of our stock within each quarter of the previous two years:
On February 28, 2009, we had approximately 2,400 beneficial stockholders of our common stock.
During each of the four quarters in 2008 and 2007, we paid a cash dividend of $0.03 per share. Our Board of Directors anticipates continuing to pay such dividends on a quarterly basis in the future, subject to provisions in our credit agreement that may restrict our ability to do so without first obtaining consent from our lenders. We have not set any pre-established guidelines as to the per-share or aggregate quarterly amount of such dividends relative to net income or any other measurement.
In November 2007, our Board of Directors renewed our authorization to purchase up to 1,357,900 shares of our common stock. The authorization does not specify an expiration date. Shares may be purchased from time to time on the open market or through private transactions at such times as management deems appropriate. Purchases may be increased, decreased or discontinued by our Board of Directors at any time. At December 31, 2008, there were a total of 1,111,500 remaining authorized shares that could be repurchased. No shares were repurchased during 2008.
During the fourth quarter of 2008, a current employee exchanged 833 shares of restricted stock when it vested as payment against an outstanding debt to the Company. Such transactions are not deemed as having been purchased as part of our publicly announced plans or programs.
Comparative Stock Performance
The graph below compares the cumulative total stockholder return on our common stock with the NASDAQ Transportation Index and the S&P 500 Index for the last five years. The graph assumes $100 is invested in our common stock, the NASDAQ Transportation Index and the S&P 500 Index on December 31, 2003, with reinvestment of dividends. The comparisons in the graph are based on historical data and are not intended to predict future performance of our stock. The information in the graph shall be deemed “furnished” and not “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section.
ITEM 6. Selected Financial Data
The following unaudited data for each of the years in the five-year period ended December 31, 2008 should be read in conjunction with our Consolidated Financial Statements and Notes thereto included under Item 8 of this report and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in Item 7.
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read together with the selected consolidated financial data and our consolidated financial statements and the related notes appearing elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those under the heading “Risk Factors” beginning on page seven. We do not assume, and specifically disclaim, any obligation to update any forward-looking statement contained in this report.
The trucking business is highly competitive. During 2007, the last year for which data are available, there were several thousand companies operating in all sectors of the trucking business in the United States. Among those, the top five companies offering primarily temperature-controlled services collectively generated 2007 revenue of $2.9 billion. The next 20 such companies collectively generated revenues of $2.3 billion. In 2007, we ranked sixth in terms of revenue generated among all temperature-controlled motor carriers.
Trucking companies of our size face significant challenges to be successful. Costs for labor, maintenance, fuel and insurance typically increase every year. Fuel prices can increase or decrease quite rapidly. Due to the high level of competitiveness, it is often difficult to pass these rising costs on to our customers. Over the past few years, many trucking companies have ceased operations, resulting in a reduced number of alternatives and increasing the awareness among customers that prices for trucking services are likely to continue.
There are several companies that provide national temperature-controlled truckload services. We know of no other company operating a nationwide, LTL, temperature-controlled network. Other such LTL providers tend to operate on a regional or lane specific basis. The vast majority of trucking companies that are nationwide in scope, such as our AEL brand, offer only truckload service with no temperature control. Therefore, the markets served by AEL tend to be very price-competitive and generally lack the level of seasonality present in our temperature-controlled operations. Because consumer demand for products requiring temperature control is often less sensitive to economic cycles, linehaul revenue from our temperature-controlled business tends to be less volatile during such cycles.
We generate our revenue from truckload, less-than-truckload, dedicated and brokerage services we provide to our customers. Generally, we are paid either by the mile, the weight or the number of trucks being utilized by our dedicated service customers. We also derive revenue from fuel surcharges, loading and unloading activities, equipment detention and other ancillary services. The main factors that affect our 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 transportation industry and specific customer demand. We monitor our revenue production primarily through average revenue per truck per week, net of fuel surcharges, revenue per hundredweight for our LTL services, empty mile ratio, revenue per loaded (and total) miles, the number of linehaul shipments, loaded miles per shipment and the average weight per shipment.
In 2008, we increased our operating revenue by $38.3 million, or 8.5%. Our operating revenue, net of fuel surcharges, increased $2.6 million, or 0.7%, to $381.4 million from $378.8 million in 2007. Excluding fuel surcharges, our average truckload revenue per tractor per week increased 6.0%, due to a 4.5% decrease in the average weekly trucks in service, an improvement in our empty mile ratio to 9.0% from 9.7%, an increase in our intermodal business, partially offset by a 1.6% decline in our LTL revenue per hundredweight. We were able to increase our truckload revenue by $8.7 million, or 3.8%, by increasing our business with existing and new customers. Due to a challenging freight environment, our truckload revenue per mile remained constant at $1.45 per mile while our LTL revenue per hundredweight decreased to $14.61 from $14.85 in 2007. Dedicated revenue represented 5.0% of our revenue in 2008 versus 3.9% in 2007 while brokerage revenue decreased to 2.7% of our revenues in 2008 compared to 3.4% in 2007.
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 drive, 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 service centers. 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 the last several years. We manage our exposure to changes in fuel prices primarily through fuel surcharge programs with our customers, as well as through volume fuel purchasing arrangements with national fuel centers and bulk purchases of fuel at our service centers. To help further reduce fuel expense, we purchase tractors with opti-idle technology, which monitors the temperature of the cab and allows the engine to operate more efficiently while not on the road.
Our operating expenses as a percentage of operating revenue, or “operating ratio,” was 99.6% in 2008 compared with 102.3% in 2007. Our income per diluted share increased to a profit of $0.04 in 2008 compared to a loss of $0.45 in 2007.
Our business requires substantial, ongoing capital investments, particularly for new tractors and trailers. At December 31, 2008, we had no outstanding borrowings under our credit facility and $106.5 million in stockholders’ equity. In 2008, we added approximately $9.7 million of new revenue equipment, net of proceeds from dispositions, and recognized a gain of $1.4 million on the disposition of used equipment. These capital expenditures were primarily funded with cash flows from operations. We estimate that capital expenditures, net of proceeds from dispositions, will range from $20-$25 million in 2009, which would be higher than our historical levels due to our tractor replacement schedule and the capital required to consolidate two of our facilities into one location in New Jersey. During 2008, we also incurred revenue equipment rent of $35.5 million as we lease many of our trucks and trailers.
The following table summarizes and compares the significant components of revenue and presents our operating ratio and revenue per truck per week for each of the years ended December 31:
The following table summarizes and compares selected statistical data relating to our freight operations for each of the years ended December 31:
The following table summarizes and compares the makeup of our fleets between company-provided tractors and tractors provided by independent contractors as of December 31, 2008:
Comparison of Year Ended December 31, 2008 to Year Ended December 31, 2007
The following table sets forth revenue, operating income, operating ratios and revenue per truck per week and the dollar and percentage changes of each:
Our total revenue increased $38.3 million, or 8.5%, to $490.5 million in 2008 from $452.2 million in 2007. Excluding fuel surcharges our revenue increased $2.6 million, or 0.7%, to $381.4 million from $378.8 million in 2007.
Truckload revenue, excluding fuel surcharges, increased $8.7 million, or 3.8%, to $239.0 million from $230.3 million in 2007. We were able to increase our truckload revenues primarily by increasing our business with our existing customers, attracting new customers and increasing our intermodal business. The number of total truckload shipments increased 0.8% to 152.7 thousand from 151.5 thousand in 2007. While total truckload miles remained relatively flat, we were able to decrease our empty mile ratio from 9.7% to 9.0%. During 2008, the Company continued to focus on providing services within our preferred networks and increasing our intermodal services which allowed better utilization of our equipment. Our weighted average trucks utilized in our truckload services decreased from 1,832 to 1,684. Due to the challenging freight environment, our ability to increase truckload rates was limited throughout 2008. Overall, our revenue per loaded mile remained flat at $1.45 for 2008 and 2007.
Our dry fleet revenue declined 6.6% during 2008 primarily due to a decline in total tonnage shipped. Excess capacity within the transportation industry resulted in increased competition for less available freight, which put downward pressure on pricing. Dedicated fleet revenue increased $6.7 million, or 37.8%, due to increased business with our existing customers as well as attracting new customers. At the end of 2008, we operated 98 tractors in our dedicated fleet business.
Less-than-truckload revenue decreased $3.3 million, or 2.6%, to $124.1 million from $127.4 million. The decline in revenue was primarily driven by increased competition in the LTL market and a decrease in total weight shipped as we focused on maintaining our margins. Total weight shipped for the year declined 1.0% to 849.2 million pounds from 858.2 million pounds in 2007. Although the Company implemented a general rate increase during 2008, other pressures on pricing, in particular in the first half of the year, with our contracted customers resulted in a decrease in revenue per hundredweight to $14.61 in 2008 from $14.85 in 2007.
Fuel surcharges represent the cost of fuel that we are able to pass along to our customers based upon changes in the Department of Energy’s weekly indices. The cost of fuel was highly volatile throughout 2008, resulting in an increase in fuel surcharges of $35.8 million, or 48.7%, over 2007. The additional fuel revenue is offset by increased fuel costs to the Company within fuel and purchased transportation expenses.
The following table sets forth for the years indicated the dollar and percentage increase or decrease of the items in our consolidated statements of operations, and those items as a percentage of revenue:
Total operating expenses for 2008 increased $25.7 million, or 5.6%, to $488.5 million from $462.7 million in 2007, resulting in an operating ratio improvement of 270 basis points to 99.6% from 102.3% in 2007.
Salaries, wages and related expenses consist of compensation for our employees, including drivers and non-drivers. It also includes employee-related costs, including the costs of payroll taxes, work-related injuries, group health insurance, 401(k) plan contributions and other fringe benefits. The most variable of these salary, wage and related expenses is driver pay, which is affected by the mix of drivers and owner-operators in our fleets as well as our efficiencies in our over-the-road operations. Driver salaries including per diem costs increased $3.1 million, or 4.3%, primarily due to the increase in loaded miles driven. These costs were offset by a decline in work related injuries of $1.9 million and a decline in group health insurance costs of $1.1 million. Non-driver headcount ended the year at 855 vs. 900 at the end of 2007.
Purchased transportation expense consists of payments to independent contractors for the equipment and services they provide, payments to other motor carriers who handle our brokerage services and to various railroads for intermodal services. It also includes fuel surcharges paid to our independent contractors for which we charge our customers. These expenses are highly variable with revenue and/or the mix of company drivers versus independent contractors. Purchased transportation expense increased $3.6 million, or 3.2%, in 2008 from 2007. Purchased transportation expense related to our intermodal service increased by $16.0 million including fuel surcharges, or 154%, compared to 2007 as our intermodal movements increased. The portion of our purchased transportation connected with our TL and LTL services decreased $10.4 million, including fuel surcharges, primarily reflecting a decrease in the number of independent contractors utilized during 2008. Purchased transportation associated with our brokerage services decreased $2.0 million, or 15.4%, compared to 2007, as the result of a similar decrease in brokerage revenue.
Fuel expense and fuel taxes increased by $23.3 million, or 27.7%, to $107.7 million from $84.3 million in 2007. The increase was primarily due to a 32.1% increase in the average cost of fuel per gallon in 2008 compared to 2007. This increase was partially offset by a 3.2% improvement in miles per gallon to 6.09 in 2008 from 5.90 in 2007. The increase in miles per gallon was primarily driven by decreasing our speed from 65 to 62 miles per hour during 2008 and a 7.2% improvement in our idling time. The majority of our tractors are equipped with opti-idle technology which monitors the temperature of the cab and allows the engine to operate more efficiently while not on the road. We have fuel surcharge provisions in substantially all of our transportation contracts and attempt to recover a portion of increasing fuel prices through fuel surcharges and rates to our customers. We anticipate that fuel expense will increase in the future as the government mandated emissions that took effect in 2007 may result in further declines in engine efficiency.
Supplies and maintenance expenses primarily consist of repairs, maintenance and tires along with load specific expenses including loading/unloading, tolls, pallets, pickup and delivery and recruiting. Supplies and maintenance costs decreased $985,000, or 1.8%, from 2007 and also declined as a percentage of total revenue to 11.0% from 12.1%. This decrease was primarily driven by lower recruiting costs of approximately $1.8 million as we place additional focus in improving the efficiency of dollars spent in this area. Significant repairs to our equipment are generally covered by manufacturers’ warranties.
Total revenue equipment rent increased $4.4 million, or 14.1%, to $35.5 million from $31.1 million in 2007. The increase is primarily due to an increase in the average number of tractors under lease at the end of 2008 of 1,251 compared to 1,065 at the end of 2007 and the increase in the average cost of equipment as we replace older equipment with new equipment and as our leased versus owned ratio increases. We expect equipment rent expense to increase in future periods as a result of higher prices of new equipment.
Depreciation relates to owned tractors, trailers, communications units, service centers and other assets. Gains or losses on dispositions of revenue equipment are set forth in a separate line item within our statements of operations. Depreciation expense decreased $595,000, or 3.1%, as older equipment was disposed and replaced with newer leased equipment. Depreciation expense is also dependent upon the mix of company-owned equipment versus independent contractors. We expect our annual cost of tractor and trailer ownership will increase in future periods as a result of higher prices of new equipment, which is expected to result in greater depreciation. Future depreciation expense will be impacted by our leasing decisions.
Claims and insurance expenses consist of the costs of premiums for insurance accruals we make within our self-insured retention amounts, primarily for personal injury, property damage, physical damage and cargo claims. These expenses will vary and are dependent on the frequency and severity of accidents, our self-insured retention amounts and the insurance market. Claims and insurance costs decreased by $7.1 million, or 34.3%, to $13.7 million from $20.8 million in 2007. The decrease was primarily due to a decline in both the frequency and severity of personal injury, property damage and physical damage claims. The decrease was also attributable to a claim reaching our retention level in 2007. The Company is responsible for the first $4.0 million on personal injury and property damage liability claims and 25% of the claim amount between $4.0 million and $10.0 million. The Company has excess coverage from $10.0 million to $50.0 million. Our significant self-insured retention exposes 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, a claim that approaches the maximum self-insured retention level, 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.
Miscellaneous expenses consist of facility rents, legal fees, audit fees, customer bad debts and other administrative costs. Miscellaneous expense increased $1.2 million, or 32%, over 2007 primarily due to an increase in our bad debt expense. The Company continues to monitor its overall credit risk given the current market and general economic conditions.
The Company’s effective tax rate increased to 81.4 % in 2008 from a 22.8% benefit in 2007 primarily due to the movement to a pre-tax profit in 2008 from a pre-tax loss in 2007. We pay our drivers a per-diem allowance for travel related expenses for which we are only able to deduct 80% for tax purposes. This, along with other non-deductible items for tax, increased our effective tax rate in 2008.
As a result of factors described above, net income improved to $605,000 compared to a net loss of $7.7 million in 2007. Net earnings per share improved to $0.04 per diluted share from a loss of $0.45 per diluted share in 2007.
Comparison of Year Ended December 31, 2007 to Year Ended December 31, 2006
The following table sets forth revenue, operating income, operating ratios and revenue per truck per week and the dollar and percentage changes of each: