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Previous: CULLEN FROST BANKERS INC, 10-Q, 1999-11-15 |
Next: INDEPENDENT BANK CORP /MI/, 8-K/A, 1999-11-15 |
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| Texas | 75-1301831 |
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(IRS Employer Identification No.) |
| 1145 Empire Central Place | Dallas, Texas | 75247-4309 |
| (Address of principal executive offices) | (Zip Code) |
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Page No.
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| Item l. | Financial Statements | |
| Consolidated Condensed Balance Sheets - | ||
| September 30, 1999 and December 31, 1998 |
2
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| Consolidated Statements of Income - | ||
| Three and Nine months ended September 30, 1999 and 1998 |
3
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| Consolidated Condensed Statements of Cash Flows - | ||
| Nine months ended September 30, 1999 and 1998 |
4
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| Notes to Consolidated Condensed Financial Statements |
5
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| Item 2. | Management's Discussion and Analysis of | |
| Financial Condition and Results of Operations |
7
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| Item 3. | Qualitative and Quantitative Disclosures about Market Risk |
11
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| Item 6. | Exhibits and Reports on Form 8-K |
12
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| Exhibit 27.1 - Financial Data Schedule |
14
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Sept. 30,
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Dec. 31,
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1999
---------
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1998
---------
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| Assets |
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| Current assets |
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| Cash |
$ 5,725
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$ 6,023
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| Accounts receivable, net |
54,454
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43,802
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| Inventories |
16,028
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12,575
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| Tires |
5,310
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5,276
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| Other current assets |
8,374
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3,259
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| Total current assets |
89,891
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70,935
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| Property and equipment, net |
75,264
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64,405
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| Other assets |
15,738
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14,340
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$180,893
======
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$149,680
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| Liabilities and Shareholders' Equity |
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| Current liabilities |
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| Trade accounts payable |
$ 18,282
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$ 17,153
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| Accrued claims liabilities |
3,422
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3,801
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| Accrued payroll |
4,663
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5,759
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| Other |
6,276
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4,869
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| Total current liabilities |
32,643
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31,582
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| Long-term debt |
30,500
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-
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| Other and deferred credits |
21,111
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19,821
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| Total liabilities and deferred credits |
84,254
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51,403
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| Shareholders' equity |
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| Common stock |
25,921
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25,921
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| Paid-in capital |
5,096
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5,323
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| Retained earnings |
72,940
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73,001
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103,957
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104,245
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| Less - Treasury stock |
7,318
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5,968
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| Total shareholders' equity |
96,639
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98,277
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$180,893
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$149,680
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1999
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1998
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1999
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1998
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| Revenue |
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| Freight revenue |
$ 79,346
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$ 78,484
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$232,013
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$226,256
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| Non-freight revenue |
17,825
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15,043
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50,233
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34,198
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97,171
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93,527
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282,246
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260,454
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| Costs and expenses |
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| Freight operating expenses |
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| Salaries, wages and related expenses |
22,711
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21,040
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65,006
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60,840
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| Purchased transportation |
18,285
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17,319
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51,971
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49,696
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| Supplies and expenses |
22,590
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21,437
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63,863
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62,271
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| Revenue equipment rent |
6,568
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6,510
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19,457
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18,739
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| Depreciation |
3,048
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2,374
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8,662
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7,000
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| Communications and utilities |
1,029
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1,029
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2,761
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3,152
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| Claims and insurance |
4,180
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2,952
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11,643
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8,703
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| Operating taxes and licenses |
1,485
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1,258
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4,031
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3,619
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| Gain on sale of equipment |
(25)
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(262)
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(736)
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(725)
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| Miscellaneous expense |
1,067
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876
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2,807
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2,318
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80,938
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74,533
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229,465
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215,613
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| Non-freight costs and operating expenses |
17,063
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14,148
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48,600
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32,721
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98,001
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88,681
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278,065
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248,334
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| (Loss)/income from operations |
(830)
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4,846
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4,181
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12,120
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| Interest and other expense, net |
1,021
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297
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1,937
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650
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| (Loss)/income before income tax |
(1,851)
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4,549
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2,244
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11,470
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| Provision for income tax |
(685)
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1,699
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830
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4,187
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| Net (loss)/income |
$ (1,166)
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$ 2,850
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$ 1,414
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$ 7,283
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| Net (loss)/income per share of common stock |
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| Basic |
$ (.07)
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$
.17
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$
.09
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$
.43
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| Diluted |
$ (.07)
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$
.17
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$
.09
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$
.43
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| Weighted average shares outstanding | ||||
| Basic |
16,315
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16,851
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16,362
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16,866
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| Diluted |
16,315
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16,980
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16,499
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17,084
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Ended Sept. 30, |
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1999
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1998
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| Net cash (used in) provided by operating activities |
$ (7,811)
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$ 6,507
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| Cash flows from investing activities |
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| Expenditures for property and equipment |
(27,310)
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(19,540)
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| Proceeds from sale of property and equipment |
9,996
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4,474
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| Company owned life insurance and other |
(2,621)
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(2,195)
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| Net cash used in investing activities |
(19,935)
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(17,261)
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| Cash flows from financing activities |
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| Borrowings under revolving credit agreement |
51,000
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-
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| Payments against revolving credit agreement |
(20,500)
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-
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| Dividends paid |
(1,474)
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(1,521)
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| Net treasury stock activity |
(1,578)
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(1,861)
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| Net cash provided by (used in) financing activities |
27,448
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(3,382)
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| Net decrease in cash and cash equivalents |
(298)
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(14,136)
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| Cash and cash equivalents at January 1 |
6,023
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23,318
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| Cash and cash equivalents at September 30 |
$ 5,725
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$ 9,182
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1. BASIS OF PRESENTATION
The consolidated financial statements include Frozen Food Express Industries, Inc. (FFEX) and its subsidiary companies (the company), all of which are wholly owned. All significant intercompany accounts and transactions have been eliminated in consolidation. The financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and have not been audited or reviewed by independent public accountants. In the opinion of management, all adjustments (which consisted only of normal recurring accruals) necessary to present fairly the financial position and results of operations have been made. Pursuant to SEC rules and regulations, certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted from these statements unless significant changes have taken place since the end of the most recent fiscal year. FFEX believes that the disclosures contained herein, when read in conjunction with the financial statements and notes included, or incorporated by reference, in FFEX's Form 10-K filed with the SEC on March 26, 1999, are adequate to make the information presented not misleading. It is suggested, therefore, that these statements be read in conjunction with the statements and notes (included, or incorporated by reference), in the aforementioned report on Form 10-K.
2. FINANCING AND INVESTING ACTIVITIES NOT AFFECTING CASH
During the nine months ended September 30, 1998, the company funded contributions to its Employee Savings Plan by transferring 113,324 shares of treasury stock to the Plan trustee. The fair market value of the transferred shares was $1,078,000.
3. SHAREHOLDERS' EQUITY
As of September 30, 1999 and December 31, 1998, respectively, there were 16,306,000 and 16,499,000 shares of stock outstanding. During both of the quarters ended September 30, 1999 and 1998, the company declared dividends on the common stock of three cents per share.
4. COMMITMENTS AND CONTINGENCIES
The company has accrued for costs related to public liability and work-related injury claims, some of which involve litigation. The aggregate amount of these claims is significant. In the opinion of management, these actions can be successfully defended or resolved, and any additional costs incurred over amounts accrued will not have a material adverse effect on the company's financial position, cash flows or results of operations.
5. EARNINGS PER SHARE
Common stock equivalents included in diluted weighted average shares, all of which result from dilutive stock options granted by the company, were as follows:
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| For the three months ended September 30 |
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| For the nine months ended September 30 |
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For the three months ending September 30, 1999, 118,000 common stock equivalent shares were excluded because inclusion would have been anti-dilutive.
6. OPERATING SEGMENTS
The company's operations consist of two reportable segments. The freight segment is engaged primarily in the motor carrier freight transportation business. The smaller segment is primarily engaged in non-freight business relating to the sale and service of refrigeration equipment and of trailers used in freight transportation.
Financial information for each reportable segment for the nine-month
periods ended September 30, 1999 and 1998 is as follows (in millions):
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1999
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1998
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| Freight Operations |
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| Total Revenue |
$232.0
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$226.2
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| Operating Income |
2.6
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10.6
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| Total Assets |
171.9
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141.3
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| Non-Freight Operations |
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| Total Revenue |
$ 60.7
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$ 43.1
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| Operating Income |
1.6
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1.5
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| Total Assets |
30.3
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23.3
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| Intercompany Eliminations |
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| Revenue |
$ (10.5)
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$ (8.8)
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| Operating Income |
-
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-
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| Assets |
(21.3)
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(14.7)
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| Consolidated |
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| Revenue |
$282.2
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$260.5
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| Operating Income |
4.2
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12.1
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| Assets |
180.9
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149.9
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RESULTS OF OPERATIONS
The table sets forth, as a percentage of freight revenue, certain major operating expenses for the three- and nine-month periods ended September 30, 1999 and 1998.
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Three Months
Ended Sept. 30, |
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1999
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1998
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1999
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1998
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| Salaries, wages and related expense |
28.6%
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26.8%
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28.0%
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26.9%
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| Purchased transportation |
23.0
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22.1
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22.4
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22.0
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| Supplies and expenses |
28.5
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27.3
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27.5
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27.5
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| Revenue equipment rent |
8.3
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8.3
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8.4
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8.3
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| Depreciation |
3.8
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3.0
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3.7
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3.1
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| Claims and insurance |
5.3
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3.8
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5.0
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3.8
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| Other |
4.5
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3.7
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3.9
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3.7
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| Total freight operating expenses |
102.0%
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95.0%
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98.9%
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95.3%
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During the third quarter of 1999, revenue increased by 3.9% to $97,171,000 with freight revenue up $0.8 million or 1%. Non-freight revenue aggregated 18.3% and 16.1% of total revenue during the third quarter of 1999 and 1998, respectively. Less-than-truckload (LTL) revenue was 1.8% higher and full-truckload revenue increased by 0.7% as compared to the same period of 1998.
The increase in full-truckload revenue was due primarily to a 5.7% increase in average per-shipment revenue, coupled with a 4.7% decrease in the quantity of full truckload shipments transported.
During the 1999 third quarter, total LTL hundredweight rose by 1.6%, while revenue per LTL hundredweight improved by 0.3%.
The 1999 increase in non-freight revenue was due to improvement in the market for refrigeration equipment and to the continued penetration of the company's non-freight subsidiary of new geographical and product markets.
The number of tractors in the fleet of company-operated, full-truckload equipment fell from approximately 1,235 at the beginning of 1999 to about 1,215 by the end of the third quarter. The number of full-truckload tractors provided by owner-operators had increased by 35 to approximately 465.
Full-truckload activities, which contributed 66% of freight revenue during the third quarter of 1999 and 1998, are conducted primarily with company-operated equipment, while LTL activities are conducted primarily with equipment provided by owner-operators. Changes in the mix of LTL versus full-truckload revenue as well as fluctuations in the amount of total freight handled on company-operated versus owner-operator provided equipment, impacted the percent of freight revenue absorbed by the various categories of operating expenses between the two quarters. The proportion of full-truckload revenue generated by company-operated trucks during the third quarter of 1999 was 75%, as compared to 77% during the third quarter of 1998. Company-operated trucks generated 31% of total LTL revenue for the third quarter of 1999 as compared to 32% during the third quarter of 1998.
During the third quarter of 1999, the percent of freight revenue absorbed by salaries, wages and related expense was 28.6%, as compared to 26.8% during the year-ago quarter. Due primarily to improved incentives and other factors related to driver retention, wages paid to drivers rose by 6% between the quarters. Of the $1,671,000 increase in salaries, wages and related expenses, 39% was driver related and 34% was the result of increased non-driver payroll expenses. During the 1998 quarter, the company capitalized the salaries paid to certain employees who were directly contributing to the development of a new management information system (MIS), which was implemented during the second quarter of 1999. During the third quarter of 1999, these costs were expensed as incurred, resulting in higher non-driver payroll costs. The remaining increase in salaries, wages and related expenses was primarily due to increased claims for work-related injuries.
Purchased transportation expense as a percent of freight revenue also increased from 22.1% in the third quarter of 1998 to 1999's 23%. This was due primarily to the proportional increase in the quantity of shipments transported by contractor-provided tractors.
Per-gallon fuel costs paid by the company rose by 20% during the third quarter of 1999 as compared to 1998. Due to a variety of factors, the impact of fuel price volatility on the company's cost structure and profitability has been mitigated. Owner-operators are responsible for all costs associated with their equipment, including fuel. Therefore, the cost of such fuel is not a direct expense of the company. With regard to fuel expenses for company-operated equipment, the company attempts to mitigate the effect of fluctuating fuel costs by purchasing more fuel-efficient tractors and aggressively managing fuel purchasing. Also, certain rates charged by the company for its service are adjustable by reference to market fuel prices. Relatively high or low per-gallon market fuel prices can result in upward or downward adjustment of freight rates, further mitigating the impact of such volatility on the company's profits.
The sum of revenue equipment rent and depreciation rose by 8.3% during 1999's third quarter to $9.6 million. This increase is associated with the Company's new MIS and the acquisition of tractors and trailers earlier in 1999.
Claims and insurance expense rose from 3.8% of freight revenue during the third quarter of 1998, to 5.3% for 1999. The increase resulted from a variety of factors, including but not limited to an increase in the frequency of physical damage losses and the relative severity of incidents that involve liability for personal injury.
As a result of the above factors, during the third quarter of 1999, the Company incurred a loss from operations of $830,000 compared to income from operations of $4,846,000 during the comparable 1998 period.
Interest and other expense, net rose from $297,000 to $1,021,000 between the two quarters. Increased interest costs associated with borrowed funds and reduced interest income on invested funds were the principal factors affecting this net increase.
First Nine Months of 1999 vs. 1998
For the nine months ended September 30,1999, revenue increased by 8.4%, but income from operations fell by 65.5%. Of the $21,792,000 increase in total revenue, revenue generated by the company-operated, full-truckload fleet increased by $2,170,000, and full-truckload revenue generated by owner-operators provided equipment rose by $4,230,000. LTL revenue declined by $643,000, and non-freight revenue increased by $16,035,000.
The increase in the percent of revenue absorbed by salaries, wages and related expenses relative to the percent of freight revenue absorbed by purchased transportation are related to the change in the mix of company-operated versus owner-operator-provided trucks in the company's fleet and other factors as outlined above in the discussion of third quarter results.
During the nine months of 1999, revenue equipment rent expense, which is primarily related to the company-operated, full-truckload fleet, as a percentage of freight revenue was 8.4%, as compared to 8.3% during 1998. Depreciation expense, which is related to the company's operating fleets as well as other types of property, between the nine-month periods rose from 3.1% to 3.7% of freight revenue. Fluctuations in these expenses are affected by changes in the proportion of owned tractors and trailers versus those that are leased pursuant to long-term operating lease agreements, the revenue which each truck generates during a reporting period as well as the presence during 1999 of depreciation expense associated with the new MIS.
LIQUIDITY AND CAPITAL RESOURCES
The company's primary needs for capital resources are to finance working capital, capital expenditures and, from time to time, acquisitions. Working capital investment typically increases during periods of sales expansion when higher levels of receivables, with regard to non-freight operations inventory are present. The company had long-term debt of $30.5 million as of September 30, 1999. Net of outstanding letters of credit in favor of insurance companies of $5 million, the unused portion of the company's $50,000,000 revolving credit facility was approximately $15 million.
Net cash used in operating activities was $7.8 million and cash provided by operating activities was $6.5 million for the nine months ending September 30, 1999 and 1998, respectively. This change was primarily attributable to fluctuations in the components of working capital.
Net capital expenditures were $17.3 million and $15.1 million for the nine months ended September 30, 1999 and 1998, respectively.
The company believes that its current cash position, funds from operations, and the availability of funds under its credit agreements will be sufficient to meet anticipated liquidity requirements for the next twelve months. At September 30, 1999, working capital was $57.2 million as compared to $39.4 million at December 31, 1998.
For the first nine months of 1999, working capital increased by $17.8 million, represented by increased investments in accounts receivable, inventories and other current assets. Increased accounts receivable resulted in part from temporary delays in the company's collection cycle. The slower collection cycle is believed to be a temporary outcome of the computer systems conversion accomplished during 1999's third quarter. The increased level of other current assets resulted primarily from recoverable expenditures related to the retirement of tractors that had been leased pursuant to operating leases. The higher level of inventories was related to the expansion of the company's non-freight operations and to such operations' seasonal purchases of product anticipated to be marketed during the summer months which constitute the non-freight operations' peak seasonal selling period.
As noted above, the company incurred a net loss during the quarter ended September 30, 1999, and the nine-month profitability was significantly below that of 1998. In light of these changes, the company elected in November 1999 not to declare its regular quarterly cash dividend which had been 3 cents per share of common stock.
YEAR 2000
The company is aware of the potential problems associated with existing information technology systems ("IT systems") as the millennium year (Year 2000) approaches. The company's exposure to such problems does not involve significant date-sensitive financial computations. Rather, problems may occur with regard to IT systems and the impact erroneous dates may have on core business operating activities such as the company's ability to process customer orders, track and manage equipment, and generate customer invoices. Disruptions in any such activity could have a significant negative impact on the company's ability to conduct its routine business operations. New systems have been installed based on more current technology, which address the issues associated with the millennium year. It is not practicable to isolate the portion of "new" system development costs, which are specifically associated with the Year 2000 ("Y2K") problem. Such development costs have, to date, been financed by internally generated funds. Incremental costs associated with the development effort have been capitalized by the company and will be amortized against post-conversion income.
The company also uses a variety of assets that are operated by or reliant upon non-information technology systems ("non-IT systems"), such as equipment or refrigeration systems that contain embedded technology. Modification or replacement would be necessary for proper performance of any IT or non-IT system that is unable to properly interpret and process the Y2K.
STATE OF READINESS. The company continues to evaluate the status of the company's systems for Y2K compliance. In addition, the company has verified the Y2K compliance of third parties with whom the company has a material relationship, such as customers, suppliers and service providers such as financial institutions. To date, no significant Y2K problems have been identified by these evaluations.
The failure of any internal non-IT system to become timely compliant for Y2K is not expected to have a material effect on the business, operations or financial condition of the company. Nevertheless, the company will continue to take steps to modify or replace all non-IT systems that are not Y2K compliant during the 1999 calendar year. The cost of such conversions is not expected to be material.
During the nine months of 1999, the company's principal operating subsidiary converted from its non-Y2K compliant mainframe system, which had been in place for several years, to a newer technology which is believed to be substantially Y2K compliant. The new system is continually evaluated with respect to Y2K compliance. These evaluations are conducted by internal as well as external persons with requisite evaluation skills. To date, no significant Y2K problems have been identified by these evaluations.
The new system is expected to improve and standardize company processes and apply technology to reduce operating costs. This system centers around modifications to software procured from third party systems vendors. The new IT system and related processes are also expected to enhance the Company's competitive position by improving customer service, pricing strategies and logistics management.
The company has reviewed its telecommunications systems with its third party providers and has been assured that they are or will be Y2K compliant. The company is also assessing the requirements to make Y2K compliant all third party IT-system software used in desktop computers. These costs are not expected to be material to the company.
COSTS TO ADDRESS YEAR 2000 ISSUES. As of September 30, 1999, the company has incurred approximately $10 million for the cost of the system project.
RISKS TO THE COMPANY FOR Y2K ISSUES. The most likely worst case scenario to the company associated with its Y2K compliance efforts would be the failure of third parties with whom the company has material business relationships to become Y2K compliant. It is not feasible at this time to predict the impact, if any, on the company's financial condition or results of operations as a result of this scenario.
CONTINGENCY PLAN. Other subsidiaries and divisions of the company are in varying stages of Y2K readiness. Some are prepared while others are actively pursuing Y2K compliance. It is expected that all operations will be substantially compliant prior to the fourth quarter of 1999. Because procedures at these operations are less complex, the company expects that non-compliance of information systems can be quickly resolved.
OUTLOOK
Certain statements contained herein including statements regarding the anticipated development and expansion of the company's business or the industry in which the company operates, the intent, belief or current expectations of the company, its directors or its officers, primarily with respect to the future operating performance of the company and other statements contained herein regarding matters that are not historical facts, are "forward-looking" statements (as such term is defined in the Private Securities Litigation Reform Act of 1995). Because such statements involve risks and uncertainties, actual results may differ materially from those expressed or implied from such forward-looking statements. These risks and uncertainties include demand for the company's services and products, and the company's abilities 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, equipment, fuel and supplies, the impact of changes in the tax and regulatory environment in which the company operates, operational risks and insurance, risks associated with the technologies and systems used by the company and the other risks and uncertainties described in the company's filings with the Securities and Exchange Commission.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
As of September 30, 1999, long-term debt stood at $30.5 million, which
approximated fair market value. No short-term debt was present. Also, as
of September 30, 1999, the company held no material market risk sensitive
instruments (for trading as well as non-trading purposes) which would involve
significant foreign currency exchange rate risk, commodity price risk or
other relevant market risks, such as equity price risk. Accordingly, the
potential loss to the company in future earnings, fair values or cash flows
of market risk sensitive investments resulting from changes in interest
rates, foreign currency exchange rates, commodity prices and other relevant
market rates or prices is not significant.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
Pursuant to the requirements of the Securities and Exchange Act of l934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
FROZEN FOOD EXPRESS INDUSTRIES, INC.
(Registrant)
November 11, 1999 By: /s/Stoney M. Stubbs, Jr.
Stoney M. Stubbs, Jr.
Chairman of the Board
November 11, 1999 By: /s/F. Dixon McElwee, Jr.
F. Dixon McElwee, Jr.
Senior Vice President
Principal Financial and Accounting Officer
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