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Frozen Food Express Industries 10-K 2009 Documents found in this filing:
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
[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
or
[
] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the
transition period from ________ to ________
Commission
file number 1-10006
 (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).
-i- TABLE
OF CONTENTS
-ii-
FORWARD-LOOKING
STATEMENTS
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
OVERVIEW
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.
1
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.
2
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. 3
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.
FUEL
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. 4
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.
INFORMATION
TECHNOLOGY
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:
5
REVENUE
EQUIPMENT
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.
6
INTERNATIONAL
OPERATIONS
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.
REGULATION
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.
SEASONALITY
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.
7
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.
SEC
FILINGS
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. 8
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. 9
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. 10
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.
None
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. 11
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. 12
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. 13
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. 14
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.
 15
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.
OVERVIEW
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. 16
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. 17
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:
18
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:
19
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.
20
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.
21
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. 22
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:
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