UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended April 1, 2006
or
For the transition period from to .
Commission File Number: 0-120510
UNIVERSAL TRUCKLOAD SERVICES, INC.
(Exact Name of Registrant as Specified in Its Charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
11355 Stephens Road
Warren, Michigan 48089
(Address, including Zip Code of Principal Executive Offices)
(586) 920-0100
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
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 number of shares of the registrant’s common stock, no par value, issued and outstanding as of May 4, 2006, was 16,117,500.
PART I – FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets
April 1, 2006 and December 31, 2005
(In thousands, except share data)
April 1,
2006
Current assets:
Cash and cash equivalents
Marketable securities
Accounts receivable – net of allowance for doubtful accounts of $2,659 and $2,472, respectively
Due from CenTra and affiliates
Prepaid income taxes
Prepaid expenses and other
Deferred income taxes
Total current assets
Property and equipment
Less accumulated depreciation
Property and equipment – net
Goodwill
Intangible assets – net of accumulated amortization of $2,179 and $1,832, respectively
Other assets
Total
Current liabilities:
Accounts payable
Accrued expenses
Due to CenTra
Total current liabilities
Long-term liabilities:
Other long-term liabilities
Total long-term liabilities
Shareholders’ equity:
Common stock, no par value. Authorized 40,000,000 shares; issued and outstanding 16,117,500 shares
Paid-in capital
Retained earnings
Accumulated other comprehensive income
Total shareholders’ equity
See accompanying notes to unaudited consolidated financial statements.
2
Unaudited Consolidated Statements of Income
Thirteen Weeks ended April 1, 2006 and April 2, 2005
(In thousands, except per share data)
Operating revenues:
Truckload
Brokerage
Intermodal
Total operating revenues
Operating expenses:
Purchased transportation
Commissions expense
Other operating expense, net
Selling, general, and administrative
Insurance and claims
Depreciation and amortization
Total operating expenses
Income from operations
Interest income
Interest expense
Income before provision for income taxes
Provision for income taxes
Net income
Earnings per common share:
Basic
Diluted
Average common shares outstanding:
3
Unaudited Consolidated Statements of Cash Flows
(In thousands)
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Loss on disposal of property and equipment
Bad debt expense
Change in assets and liabilities:
Accounts receivable and due from CenTra and affiliates
Prepaid expenses, income taxes and other
Accounts payable and accrued expenses
Net cash provided by operating activities
Cash flows from investing activities:
Capital expenditures
Proceeds from the sale of property and equipment
Purchases of marketable securities
Repayment of loans to CenTra
Additions to goodwill
Acquisition of businesses
Net cash (used in) provided by investing activities
Cash flows from financing activities:
Repayments of long-term debt
Net repayments under lines of credit
Payment of dividend
Proceeds from the issuance of common stock, net of offering costs
Net cash provided by financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents – beginning of period
Cash and cash equivalents – end of period
Supplemental cash flow information:
Cash paid for interest
Cash paid for taxes
Fair value of assets acquired, including goodwill
Debt issued
Liabilities assumed
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Notes to Unaudited Consolidated Financial Statements
Pursuant to the rules and regulations of the Securities and Exchange Commission, the accompanying consolidated financial statements of Universal Truckload Services, Inc. and its wholly owned subsidiaries (the Company or UTSI) have been prepared by UTSI, without audit by an independent registered public accounting firm. In the opinion of management, the unaudited consolidated financial statements include all normal recurring adjustments necessary to present fairly the information required to be set forth therein. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted from these statements pursuant to such rules and regulations and, accordingly, should be read in conjunction with the consolidated financial statements as of December 31, 2005 and 2004 and for each of the years in the three-year period ended December 31, 2005 in the Company’s Form 10-K and Form 10-K/A filed with the Securities and Exchange Commission.
The Company’s fiscal year ends on December 31. The Company’s fiscal year consists of four quarters, each with thirteen weeks.
UTSI’s former parent, Centra, Inc., or CenTra, has historically provided management services to UTSI, including treasury, legal, human resources, and tax services. The cost of these services is based on the utilization of the specific services. Management believes the allocation methods are reasonable; however, the costs of these services charged to UTSI are not necessarily indicative of the costs that would have been incurred if UTSI had internally performed or acquired these services as a separate unaffiliated entity. The amounts charged to UTSI for the thirteen weeks ended April 1, 2006 and April 2, 2005 are presented in the table below. In connection with UTSI’s spin-off on December 31, 2004, it entered into a transition services agreement with CenTra that ensures UTSI will continue to have access to these services. Pursuant to the transition services agreement, UTSI has agreed to pay CenTra $305,000 per year. The transition services agreement terminates on December 31, 2006, which will permit UTSI to engage in an orderly transition of the services to its own administrative staff. The level of administrative services can be cut back by UTSI without penalty at any time, but CenTra is not obligated to provide substantial additional services beyond the current level.
In addition to management services, UTSI reimburses CenTra for other services. Following is a schedule of services provided and amounts paid to CenTra (in thousands):
Management services
Building and terminal rents (month to month basis)
Maintenance services
Trailer rents
Health insurance
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Notes to Unaudited Consolidated Financial Statements - Continued
An affiliate of CenTra charged UTSI approximately $2,990,000 and $1,633,000 for personal liability and property damage insurance for the thirteen weeks ended April 1, 2006 and April 2, 2005, respectively.
Operating revenues for the thirteen weeks ended April 1, 2006 and April 2, 2005 include approximately $150,000 and $316,000, respectively, of freight services provided to CenTra. Related accounts receivable due from CenTra and affiliates was $135,000 and $298,000 as of April 1, 2006 and December 31, 2005, respectively. During the thirteen weeks ended April 1, 2006 and April 2, 2005, UTSI paid CenTra $2,195,000 and $1,397,000, respectively, for transportation services provided to UTSI.
The Company provides certain computer services to a subsidiary of CenTra. Amounts charged for such services totaled $60,000 and $29,000 for the thirteen weeks ended April 1, 2006 and April 2, 2005, respectively and are reflected as a reduction of selling, general, and administrative expenses in the statements of income.
In March 2002, the Company established a line of credit with First Tennessee Bank, secured by the accounts receivable of Universal Am-Can, Ltd., or UACL, and Mason & Dixon Lines, Inc., or MADL. The line of credit agreement provided for maximum borrowings of $20,000,000 and contained certain restrictive covenants to be maintained by UACL and MADL, including limitations on the payment of dividends. Borrowings on the line of credit were at an interest rate of LIBOR as of the first day of the calendar month plus 1.65%. On June 29, 2004, the Company’s line of credit agreement was amended, increasing its maximum borrowings to $40,000,000 and changing the interest rate to LIBOR as of the first day of the calendar month plus 1.80%. The amended line of credit agreement was secured by all of the Company’s accounts receivable, except AFA Enterprises, Inc. and CrossRoad Carriers, Inc., and contained various restrictive covenants. In August 2005, the Company’s line of credit was further amended, reducing maximum borrowings to $20,000,000, decreasing the interest rate to LIBOR as of the first day of the calendar month plus 1.65% (effective rate of 6.5% at April 1, 2006) and extending its expiration date to August 31, 2006. The amended line of credit agreement is secured by the accounts receivable of UACL and MADL and contains various financial and restrictive covenants to be maintained by the Company, UACL and MADL. The Company did not have any amounts outstanding under its line of credit at April 1, 2006 or December 31, 2005.
Basic earnings per common share amounts are based on the weighted average number of common shares outstanding, and diluted earnings per share amounts are based on the weighted average number of common shares outstanding plus the incremental shares that would have been outstanding upon the assumed exercise of all dilutive stock options.
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The following table provides a reconciliation of the number of average common shares outstanding used to calculate basic earnings per share to the weighted average number of common shares and common share equivalents outstanding used in calculating diluted earnings per share (in thousands):
Weighted average number of common shares
Incremental shares from assumed exercise of stock options
Weighted average number of common shares and common share equivalents
At April 2, 2005, 260,000 options were outstanding to purchase shares of common stock, which were excluded from the calculation of diluted earnings per share because such options were anti-dilutive.
In December 2004, UTSI’s board of directors adopted the 2004 Stock Incentive Plan (or “the Plan”), which became effective upon completion of the Company’s initial public offering. The Plan allows for the issuance of a total of 500,000 shares. The grants may be made in the form of restricted stock bonuses, restricted stock purchase rights, stock options, phantom stock units, restricted stock units, performance share bonuses, performance share units or stock appreciation rights. On February 11, 2005, UTSI granted 260,000 options to certain of its employees. The stock options granted vested immediately, mature in seven years and have an exercise price of $22.50 per share. Prior to January 1, 2006, the Company accounted for stock options issued under the Plan pursuant to the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. No stock-based employee compensation was reflected in net income from the Plan, as all options granted under the Plan had an exercise price equal to the fair market value of the underlying common stock on the date of grant. As of April 1, 2006, none of the stock options were forfeited or exercised. The intrinsic value of all outstanding stock options as of April 1, 2006 and April 2, 2005 was $663,000 and $0 respectively.
The following table illustrates the effect on net income and earnings per share from the Plan, as if UTSI had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share Based Payment.”
Net income, as reported
Less: Total stock based compensation determined using the fair value method, net of income tax
Pro forma net income
Earnings per common share – basic
As reported
Pro forma
Earnings per common share - diluted
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The estimated grant date fair value of the stock options granted during the thirteen weeks ended April 2, 2005 was $10.88 per share and was determined using the Black-Scholes option-pricing model. The assumptions used in estimating the grant date fair value are as follows:
Underlying share price
Exercise price of the option
Expected dividend rate
Expected volatility
Expected term of the option (in years)
Risk-free interest rate
In 2006, UTSI acquired the following companies for a total cost of $3,830,000, which was paid in cash:
The pro forma effect of these acquisitions has been omitted as the effect is immaterial to UTSI’s results of operations, financial position and cash flows. The preliminary allocation of the purchase price of these two companies is as follows:
Equipment
Intangible assets
Accrued liabilities
The intangible assets acquired represent the acquired companies’ customer relationships and are amortized over a period of seven years.
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Comprehensive income includes the following (in thousands).
Unrealized holding gains on available for sale investments, net of income tax
Comprehensive income
The Company is involved in claims and litigation arising in the ordinary course of business. These matters primarily involve claims for personal injury and property damage incurred in the transportation of freight. Management believes all such claims and litigation are adequately covered by insurance or otherwise reserved for and that adverse results in one or more of those cases would not have a materially adverse effect on the Company’s financial condition. However, if the ultimate outcome of these matters, after provisions thereof, is materially different from the Company’s estimates, they could have a material effect on the Company’s operating results and cash flows in any given quarter or year.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment,” to address the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS No. 123(R) requires an entity to recognize the grant date fair value of stock options and other equity based compensation issued to employees in the statement of income. The revised statement generally requires that an entity account for those transactions using the fair value based method and eliminates an entity’s ability to account for share-based compensation transactions using the intrinsic value method of accounting. SFAS 123(R) was effective for the Company on January 1, 2006. The adoption of SFAS No. 123(R) did not have an impact on its financial position, results of operations, cash flows or earnings per share. This statement will result in compensation expense being recorded for grants of stock or stock options on or after January 1, 2006.
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3,” which changes the requirements for the accounting and reporting of a change in accounting principle. SFAS No. 154 applies to all voluntary changes in accounting principle and changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS No. 154 did not have an impact on the Company’s financial position, results of operations, cash flows or earnings per share.
9
On May 1, 2006, UTS Realty, LLC, or Realty, received a $1,000,000 loan from the County of Cuyahoga, Ohio, or the County, to be used for improvements to its Cleveland, OH container storage facility. The loan agreement requires quarterly interest payments at a rate of 5.0%. Through January 31, 2011, subject to certain conditions, the County will forgive $450,000 of the principal amount owed. The remaining principal of $550,000 is due at maturity. The loan matures on January 31, 2011; however, at Realty’s option, the maturity date may be extended until January 31, 2021. In connection with this loan, Realty and the Company entered into an environmental indemnity agreement with the County and the Company issued a $1,000,000 standby letter of credit that expires February 14, 2021. Under the terms of the environmental indemnity agreement, Realty and the Company have agreed to indemnify the County, without limitation, against any loss attributable to the generation, storage, release or presence of Regulated Materials, as defined in the environmental indemnity agreement, at the container storage facility. In connection with the acquisition of the Cleveland, OH property in August 2005, Realty received indemnity from the seller from any and all claims, which Realty may incur as a direct consequence of any environmental condition of which the seller had actual knowledge as of the date of the acquisition of the property.
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ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Some of the statements and assumptions in this Form 10-Q are forward-looking statements. These statements identify prospective information. Important factors could cause actual results to differ, possibly materially, from those in the forward-looking statements. In some cases you can identify forward-looking statements by words such as “anticipate,” “believe,” “could,” “estimate,” “plan,” “intend,” “may,” “should,” “will” and “would” or other similar words. You should read statements that contain these words carefully because they discuss our future expectations, contain projections of our future results of operations or of our financial position or state other “forward-looking” information. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by which, such performance or results will be achieved. Forward-looking information is based on information available at the time and/or management’s good faith belief with respect to future events, and is subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements. The factors listed in the section captioned “Risk Factors” in Item 1A in our Form 10-K for the year ended December 31, 2005, as well as any other cautionary language in that Form 10-K, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements.
Forward-looking statements speak only as of the date the statements are made. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect thereto or with respect to other forward-looking statements.
Unless the context indicates otherwise, “we,” “our” and “us” refers to Universal Truckload Services, Inc. and its subsidiaries.
Overview
We are a primarily non-asset based provider of transportation services to shippers throughout the United States and in the Canadian provinces of Ontario and Quebec. We offer flatbed and dry van trucking services, as well as rail-truck and steamship-truck intermodal and truck brokerage services. We primarily operate through a contractor network of independent sales agents and owner-operators of tractors and trailers. In return for their services, we pay our agents and owner-operators a percentage of the revenue they generate for us.
Our use of agents and owner-operators reduces our need to provide non-driver facilities and tractor and trailer fleets. The primary physical assets we provide to our agents and owner-operators include a portion of our trailer fleet, our headquarters facility, our management information systems and our intermodal depot facilities. Our business model provides us with a highly variable cost structure, allows us to grow organically using relatively small amounts of cash, gives us a higher return on assets compared to many of our asset-based competitors and preserves an entrepreneurial spirit among our agents and owner-operators that we believe leads to improved operating performance. For the thirteen weeks ended April 1, 2006, approximately 86.8% of our total operating expenses were variable in nature and our capital expenditures were $2.9 million.
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Results of Operations
The following table sets forth items derived from our consolidated statements of income for the thirteen weeks ended April 1, 2006 and April 2, 2005, presented as a percentage of operating revenues:
Operating revenues
Other operating expenses
Selling, general and administrative
Operating income
Interest income (expense), net
Thirteen Weeks Ended April 1, 2006 Compared to Thirteen Weeks ended April 2, 2005
Operating revenues. Operating revenues for the thirteen weeks ended April 1, 2006 increased by $24.9 million, or 20.6%, to $145.9 million from $120.9 million for the thirteen weeks ended April 2, 2005. The increase in operating revenues is primarily attributable to our 4th quarter 2005 and 1st quarter 2006 acquisitions and improved economic conditions, which contributed to increased freight demand and higher rates. Our 4th quarter 2005 and 1st quarter 2006 acquisitions generated $3.8 million of intermodal revenue. For the thirteen weeks ended April 1, 2006, our operating revenue per loaded mile, excluding fuel surcharges, from our combined truckload and brokerage operations increased to $2.13 from $1.90 for the thirteen weeks ended April 2, 2005. Revenue from our truckload operations increased by $13.2 million, or 17.9%, to $87.3 million for thirteen weeks ended April 1, 2006 from $74.1 million for the thirteen weeks ended April 2, 2005. Revenue from our brokerage operations increased by $2.0 million, or 5.4%, to $38.1 million for the thirteen weeks ended April 1, 2006 compared to $36.2 million for the thirteen weeks ended April 2, 2005. Excluding our 4th quarter 2005 and 1st quarter 2006 acquisitions, revenue from our intermodal support services increased by $5.9 million, or 55.2%, to $16.6 million for the thirteen weeks ended April 1, 2006 from $10.7 million for the thirteen weeks ended April 2, 2005.
Purchased transportation. Purchased transportation expense for the thirteen weeks ended April 1, 2006 increased by $19.4 million, or 21.1%, to $110.9 million from $91.5 million for the thirteen weeks ended April 2, 2005. As a percentage of operating revenues, purchased transportation expense increased to 76.0% for the thirteen weeks ended April 1, 2006 from 75.7% for the thirteen weeks ended April 2, 2005. The absolute increase was primarily due to the growth in our operating revenues. Purchased transportation expense generally increases or decreases in proportion to the revenues generated through owner-operators and other third party providers. The increase in purchased transportation as a percent of operating revenues is primarily due to a $6.1 million increase in fuel surcharges, which are passed through to owner-operators. Fuel surcharges for the thirteen weeks ended April 1, 2006 were $12.0 million compared to $5.9 million for the thirteen weeks ended April 2, 2005.
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Commissions expense. Commissions expense for the thirteen weeks ended April 1, 2006 increased by $1.8 million, or 24.3%, to $9.5 million from $7.6 million for the thirteen weeks ended April 2, 2005. As a percentage of operating revenues, commissions expense increased slightly to 6.5% for the thirteen weeks ended April 1, 2006 compared to 6.3% for thirteen weeks ended April 2, 2005. The absolute increase was primarily due to the growth in our operating revenues.
Other operating expense. Other operating expense for the thirteen weeks ended April 1, 2006 increased by $128,000, or 7.0%, to $2.0 million from $1.8 million for the thirteen weeks ended April 2, 2005. As a percentage of operating revenues, other operating expense decreased slightly to 1.3% for the thirteen weeks ended April 1, 2006 from 1.5% for the thirteen weeks ended April 2, 2005. The absolute increase was primarily due to the increase in intermodal activity during the thirteen weeks ended April 1, 2006.
Selling, general and administrative. Selling, general and administrative expense for the thirteen weeks ended April 1, 2006 increased by $1.8 million, or 19.4%, to $11.3 million from $9.5 million for the thirteen weeks ended April 2, 2005. As a percentage of operating revenues, selling, general and administrative expense decreased slightly to 7.7% for the thirteen weeks ended April 1, 2006 from 7.8% for the thirteen weeks ended April 2, 2005. The absolute increase in selling, general and administrative expense was primarily a result of a $1.6 million increase in salaries and wages and related payroll taxes and fringe benefits, $804,000 of which resulted from our 4th quarter 2005 and 1st quarter 2006 acquisitions. Additionally, we incurred $236,000 in facility rental costs relating to these acquisitions. The decrease in selling, general and administrative expense as a percent of revenue is a result of increased operating revenues and our holding the increase in selling, general and administrative expense below the operating revenue growth rate primarily because rate increases were a substantial source of our revenue growth and rate increases do not typically result in increases in overhead expenses.
Insurance and claims. Insurance and claims expense for the thirteen weeks ended April 1, 2006 increased by $146,000, or 3.9%, to $3.8 million from $3.7 million for the thirteen weeks ended April 2, 2005. As a percentage of operating revenues, insurance and claims decreased to 2.6% for the thirteen weeks ended April 1, 2006 from 3.1% for the thirteen weeks ended April 2, 2005. The absolute increase was primarily due to an increase in insurance premiums resulting from the growth in our owner-operator provided fleet of tractors which are covered under our liability insurance policies. This increase was partially offset by a reduction in cargo claims during the thirteen weeks ended April 1, 2006.
Depreciation and amortization. Depreciation and amortization for the thirteen weeks ended April 1, 2006 increased by $235,000, or 22.7%, to $1.3 million from $1.0 million for the thirteen weeks ended April 2, 2005. As a percent of operating revenues, depreciation and amortization remained constant at 0.9%. The absolute increase is primarily a result of a $129,000 increase in amortization expense relating to our 4th quarter 2005 and 1st quarter 2006 acquisitions and depreciation relating to the $2.9 million of capital expenditures in 2006.
Interest expense (income), net. Net interest income for the thirteen weeks ended April 1, 2006 was $250,000 compared to net interest expense of $165,000 for the thirteen weeks ended April 2, 2005. The decrease in net interest expense of $415,000 or 251.5% resulted from the repayment of $38.0 million under our secured lines of credit and secured equipment loans during the thirteen weeks ended April 2, 2005 using the proceeds from our initial public offering. Additionally, in 2006, interest income has been generated on the remaining proceeds from our offering and cash provided by operations.
Provision for income taxes. Provision for income taxes for the thirteen weeks ended April 1, 2006 increased by $741,000, or 34.7%, to $2.9 million from $2.1 million for the thirteen weeks ended April 2, 2005. For the thirteen weeks ended April 1, 2006 and April 2, 2005, we had an effective income tax rate of 38.7% and 38.0%, respectively, based upon our income before provision for income taxes. We do not expect any material change to our effective income tax rate in future periods.
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Liquidity and Capital Resources
Our primary sources of liquidity are the net proceeds from our initial public offering, funds generated by operations and our revolving secured line of credit with First Tennessee Bank.
We employ a primarily non-asset based operating strategy. Substantially all of the tractors and more than 50% of the trailers utilized in our business are provided by our owner-operators and we have no capital expenditure requirements relating to this equipment. As a result, our capital expenditure requirements are limited in comparison to most large trucking companies which maintain sizable fleets of owned tractors and trailers, requiring significant capital expenditures.
During the thirteen weeks ended April 1, 2006, we made capital expenditures totaling $2.9 million. These expenditures primarily consisted of tractors and trailers.
Through the end of 2006, exclusive of acquisitions, we estimate that we will incur capital expenditures of $9 million to $12 million relating to real property acquisitions, renovations and improvements to our existing facilities and the acquisition of additional terminal yards or container facilities. Additionally, we expect to incur capital expenditures of $2 million to $5 million for tractors, trailers and other equipment. We expect that our working capital and available borrowings will be sufficient to meet our capital commitments and fund our operational needs for at least the next twelve months. Based on the availability under our line of credit and other financing sources and assuming the continuation of our current level of profitability, we do not expect that we will experience any liquidity constraints in the foreseeable future.
We continue to evaluate business development opportunities, including potential acquisitions that fit our strategic plans. There can be no assurance that we will identify any opportunities that fit our strategic plans or that we will be able to execute any such opportunities on terms acceptable to us. Any such opportunities will be financed from available cash on hand and our secured line of credit.
We currently intend to retain our future earnings to finance our growth and do not anticipate paying cash dividends in the foreseeable future.
Secured Lines of Credit
Under our secured line of credit with First Tennessee Bank, as amended on August 31, 2005, our maximum permitted borrowings are $20.0 million. The secured line of credit is collateralized by the accounts receivable of Universal Am-Can, Ltd., or UACL, and Mason & Dixon Lines, Inc., or MADL, and bears interest at a rate equal to LIBOR plus 1.65% (effective rate of 6.5% at April 1, 2006). The agreement governing our secured line of credit contains various financial and restrictive covenants to be maintained by us, UACL and MADL, including requiring us to maintain a tangible net worth of at least $20.0 million and a ratio of total liabilities to tangible net worth not to exceed 2 to 1. Additionally, UACL and MADL are required to maintain tangible net worth of $3.5 million and $12.5 million, respectively. For purposes of this agreement, net worth is defined as the difference between our total assets and total liabilities and tangible net worth is defined as net worth, plus subordinated debt, less the value assigned to intangibles in accordance with generally accepted accounting principles. In addition, the agreement may, in certain circumstances, limit our ability and the ability of our subsidiaries to sell or dispose of assets, incur additional debt, pay dividends or distributions or redeem common stock. The agreement also contains customary representations and warranties, affirmative and negative covenants and events of default. As of April 1, 2006, there were no amounts outstanding under our line of credit.
Discussion of Cash Flows
At April 1, 2006, we had cash and cash equivalents of $11.1 million compared to $10.4 million at December 31, 2005. The increase in cash and cash equivalents of $653,000 for the thirteen weeks ended April 1, 2006 resulted from $7.4 million in cash generated from operations, offset by a $6.7 million of cash used in investing activities.
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The $7.4 million in cash provided by operations was generated from $4.6 million of net income, $1.3 million of depreciation and amortization, $251,000 of bad debt expense, a $934,000 decrease in prepaid expenses, income taxes and other assets and an increase in accounts payable and accrued expenses of $3.0 million, offset by a $2.6 million increase in accounts receivable.
Net cash used in investing activities for thirteen weeks ended April 1, 2006 was $6.7 million, consisting primarily of capital expenditures of $2.9 million, the purchase of marketable securities totaling $1.4 million and cash paid for the acquisitions of Assure and DeJewels totaling $2.5 million.
Off Balance Sheet Arrangements
In connection with the 2004 acquisition of Nunn Yoest Principals & Associates, Inc. (NYP), we are required to pay cash consideration to the former owner of NYP based on a percentage of all revenues generated through November 2007.
In connection with the 2005 acquisition of Marc Largent, Inc. (Largent), we are required to pay cash consideration to the former owner of Largent based on a percentage of all revenues generated through October 2008.
In connection with the 2005 acquisition of Diamond Logistics of Houston, Inc. (Diamond), we are required to pay cash consideration to the former owners of Diamond based on a percentage of all revenues generated through November 2008.
In connection with the 2006 acquisition of Assure, we are required to pay cash consideration to the former owners of Assure based on a percentage of all revenues generated through January 2009.
In connection with the 2006 acquisition of DeJewels, we are required to pay cash consideration to the former owner of DeJewels based on a percentage of all revenues generated through February 2008.
Critical Accounting Policies
A summary of critical accounting policies is presented in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies” of our Form 10-K for the year ended December 31, 2005. There have been no changes in the accounting policies followed by us during the thirteen weeks ended April 1, 2006.
Effect of Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, to address the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS No. 123(R) requires an entity to recognize the grant-date fair-value of stock options and other equity-based compensation issued to employees in the statement of income. The revised SFAS No. 123(R) generally requires that an entity account for those transactions using the fair-value based method, and eliminates an entity’s ability to account for share-based compensation transactions using the intrinsic value method of accounting under APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123(R) was effective for the Company beginning January 1, 2006. The adoption of SFAS No. 123(R) did not have an impact on our financial position, results of operations of cash flows.
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3,” which changes the requirements for the accounting and reporting of a change in accounting principle. SFAS No. 154 applies to all voluntary changes in accounting principle and changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS No. 154 did not have an impact on our financial position, results of operations or cash flows.
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Effects of Inflation
Management does not believe general inflation has had a material impact on our results of operations or financial condition in the past five years; however, inflation higher than that experienced in the past five years might have an adverse effect on our results of operations.
Seasonality
Our operations are subject to seasonal trends common to the trucking industry. Results of operations in the first quarter are typically lower than the second, third and fourth quarters.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our market risk is affected by changes in interest rates. Our secured line of credit bears interest at a floating rate equal to LIBOR plus 1.65%. Accordingly, changes in LIBOR would affect the interest rate on and therefore our cost under the line of credit. We currently do not have a balance outstanding under the line of credit.
Included in cash and cash equivalents is $5.1 million in short-term investment grade instruments. The interest rates on these instruments are adjusted to market rates at least monthly. In addition, we have the ability to put these instruments back to the issuer at any time. Accordingly, any future interest rate risk on these short-term investments would not be material.
Included in marketable securities is $13.2 million in short-term investment grade instruments. The interest rates on these instruments are adjusted to market rates at least monthly. Accordingly, any future interest rate risk on these short-term investments would not be material.
We did not have any interest rate swap agreements as of the date of this Form 10-Q.
Commodity Price Risk
Fluctuations in fuel prices can affect our profitability by affecting our ability to retain or recruit owner-operators. Our owner-operators bear the costs of operating their tractors, including the cost of fuel. The tractors operated by our owner-operators consume large amounts of diesel fuel. Diesel fuel prices fluctuate greatly due to economic, political and other factors beyond our control. To address fluctuations in fuel prices, we seek to impose fuel surcharges on our customers and pass these surcharges on to our owner-operators. Historically, these arrangements have not fully protected our owner-operators from fuel price increases. If costs for fuel escalate significantly it could make it more difficult to attract additional qualified owner-operators and retain our current owner-operators. If we lose the services of a significant number of owner-operators or are unable to attract additional owner-operators, it could have a materially adverse effect on our financial condition and results of operations.
ITEM 4: CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934, as amended (or the Exchange Act). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of April 1, 2006, our disclosure controls and procedures were effective in causing the material information required to be disclosed in the reports that it files or submits under the Exchange Act to be recorded, processed, summarized and reported, to the extent applicable, within the time periods required for us to meet the Securities and Exchange Commission’s (or SEC) filing deadlines for these reports specified in the SEC’s rules and forms.
Internal Controls
There have been no changes in our internal controls over financial reporting during the thirteen weeks ended April 1, 2006 identified in connection with our evaluation that has materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
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PART II – OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
We are involved in claims and litigation arising in the ordinary course of business. These matters primarily involve claims for personal injury and property damage incurred in the transportation of freight. We believes all such claims and litigation are adequately covered by insurance or otherwise reserved for and that adverse results in one or more of those cases would not have a materially adverse effect on our financial condition; however, if the ultimate outcome of these matters, after provisions thereof, is materially different from our estimates, they could have a material effect on our operating results and cash flows in any given quarter or year. We are not currently involved in any material legal proceedings or litigation.
ITEM 1A: RISK FACTORS
Except as discussed below, there have been no material changes to our risk factors as previously disclosed in Item 1A to Part 1 of our Form 10-K for the fiscal year ended December 31, 2005.
Use of Estimates in Preparation of Our Consolidated Financial Statements
The preparation of our consolidated financial statements requires us to make a number of estimates and assumptions related to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include the carrying amount of property and equipment and intangible assets; valuation allowances for receivables and deferred income tax assets; and liabilities related to insurance claim costs. Actual results could differ from those estimates.
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5: OTHER INFORMATION
ITEM 6: EXHIBITS
(a) Exhibits
The exhibits listed on the Exhibit Index are furnished as part of this quarterly report on Form 10-Q.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.
/S/ Robert E. Sigler
Robert E. Sigler, Vice President,
Chief Financial Officer,
Secretary and Treasurer
/S/ Donald B. Cochran
Donald B. Cochran, President and
Chief Executive Officer
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Exhibit Index
Description
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Security Agreement, dated as of June 29, 2004, by and between Louisiana Transportation, Inc.
and First Tennessee Bank National Association (Incorporated by reference to Exhibit 10.13 to the Registrant’s Registration Statement on Form S-1 filed on November 15, 2004 (Commission File No. 333-120510))
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