10-Q 1 q310q.txt 10Q REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the period ended September 30, 2000 ------------------------------------------------------------- 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 Frozen Food Express Industries, Inc. ------------------------------------------------------------------ (Exact name of registrant as specified on its charter) Texas 75-1301831 ------------------------------------------------------------------ (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 1145 Empire Central Place Dallas, Texas 75247-4309 ------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) (2l4) 630-8090 ------------------------------------------------------------------ (Registrant's telephone number, including area code) None ----------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) 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 filing requirements for the past 90 days. [X] Yes [ ] No As of November 3, 2000, 16,395,000 shares of the Registrant's Common Stock, $1.50 par value, were outstanding. INDEX PART I - FINANCIAL INFORMATION Page No. Item l. Financial Statements Consolidated Condensed Balance Sheets - September 30, 2000 and December 31, 1999 2 Consolidated Statements of Income - Three and Nine months ended September 30, 2000 and 1999 3 Consolidated Condensed Statements of Cash Flows - Nine months ended September 30, 2000 and 1999 4 Notes to Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Item 3. Qualitative and Quantitative Disclosures 10 about Market Risk PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 12 Exhibit 27.1 - Financial Data Schedule 13 FROZEN FOOD EXPRESS INDUSTRIES, INC. AND SUBSIDIARIES Consolidated Condensed Balance Sheets (In thousands) (Unaudited) Sept. 30, Dec. 31, 2000 1999 ---- ---- Assets Current assets Cash $ 2,813 $ 1,613 Accounts receivable, net 47,981 52,312 Inventories 19,156 17,719 Tires 4,405 5,036 Other current assets 6,760 4,267 ------ ------ Total current assets 81,115 80,947 Property and equipment, net 64,026 73,640 Other assets 15,678 15,496 ------- ------- $160,819 $170,083 ======= ======= Liabilities and Shareholders' Equity Current liabilities Accounts payable $ 21,391 $ 24,797 Accrued claims 6,933 6,631 Accrued payroll 7,073 5,890 Short-term debt - 26,500 Other 5,792 5,075 ------- ------- Total current liabilities 41,189 68,893 Long-term debt 20,000 - Deferred federal income tax 1,675 2,795 Other and deferred credits 16,178 15,274 ------- ------- Total liabilities & deferred credits 79,042 86,962 ------- ------- Shareholders' equity Common stock 25,921 25,921 Paid-in capital 4,902 5,056 Retained earnings 58,120 59,399 ------- ------- 88,943 90,376 Less - Treasury stock 7,166 7,255 ------- ------- Total shareholders' equity 81,777 83,121 ------- ------- $160,819 $170,083 ======= ======= See accompanying notes. FROZEN FOOD EXPRESS INDUSTRIES, INC. AND SUBSIDIARIES Consolidated Statements of Income (In thousands, except per-share amounts) (Unaudited) For the Three For the Nine Months Ended Months Ended Sept. 30, Sept. 30, ------------- ------------- 2000 1999 2000 1999 Revenue ------ ------ ------ ------ Freight revenue $ 82,189 $ 79,346 $240,113 $232,013 Non-freight revenue 19,213 17,825 53,704 50,233 ------- ------ ------- ------- 101,402 97,171 293,817 282,246 ------- ------ ------- ------- Costs and expenses Freight operating expenses Salaries, wages and related expenses 22,884 22,711 65,785 65,006 Purchased transportation 20,012 18,285 58,082 51,971 Supplies and expenses 25,126 22,590 69,385 63,863 Revenue equipment rent 6,321 6,568 18,902 19,457 Depreciation 2,848 3,048 8,743 8,662 Communications & utilities 977 1,029 3,332 2,761 Claims and insurance 5,037 4,180 12,257 11,643 Operating taxes & licenses 444 1,485 3,210 4,031 Gain on sale of equipment (108) (25) (1,128) (736) Miscellaneous expense 778 1,067 2,602 2,807 ------- ------- ------- ------- 84,319 80,938 241,170 229,465 Non-freight costs and operating expenses 18,454 17,063 51,856 48,600 ------- ------- -------- ------- 102,773 98,001 293,026 278,065 (Loss)/income from ------- ------- -------- ------- operations (1,371) (830) 791 4,181 Interest & other expense, net 890 1,021 2,759 1,937 ------- ------- -------- ------- (Loss)/income before income tax (2,261) (1,851) (1,968) 2,244 Provision for income tax (792) (685) (689) 830 ------- ------- -------- ------- Net(loss)/income $ (1,469) $ (1,166) $ (1,279) $ 1,414 ======= ======= ======= ======= Net(loss)/income per share of common stock Basic $ (.09) $ (.07) $ (.08) $ .09 ======= ======= ======= ======= Diluted $ (.09) $ (.07) $ (.08 $ .09 ======= ======= ======= ======= Weighted average shares outstanding Basic 16,317 16,315 16,319 16,362 ======= ======= ======= ======= Diluted 16,317 16,315 16,319 16,499 ======= ======= ======= ======= See accompanying notes. FROZEN FOOD EXPRESS INDUSTRIES, INC. AND SUBSIDIARIES Consolidated Condensed Statements of Cash Flows (In thousands) (Unaudited) For the Nine Months Ended Sept. 30, -------------------- 2000 1999 ---- ---- Net cash provided by (used in) operating activities $ 7,841 $ (7,811) ------ ------ Cash flows from investing activities Expenditures for property and equipment (5,088) (27,310) Proceeds from sale of property and equipment 6,279 9,996 Company owned life insurance and other (1,268) (2,621) ------ ------ Net cash used in investing activities (77) (19,935) ------ ------ Cash flows from financing activities Borrowings under revolving credit agreement 19,000 51,000 Payments against revolving credit agreement (25,500) (20,500) Dividends paid - (1,474) Net treasury stock activity (64) (1,578) Net cash (used in) provided by financing ------ ------ activities (6,564) 27,448 Net increase (decrease) in cash and cash ------ ------ equivalents 1,200 (298) Cash and cash equivalents at January 1 1,613 6,023 ------ ------ Cash and cash equivalents at September 30 $ 2,813 $ 5,725 ====== ====== See accompanying notes. FROZEN FOOD EXPRESS INDUSTRIES, INC. AND SUBSIDIARIES Notes to Consolidated Condensed Financial Statements September 30, 2000 and 1999 (Unaudited) 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 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 of normal recurring accruals) necessary to present fairly the financial position and results of operations have been made. 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 29, 2000, 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 report on Form 10-K. 2. SHAREHOLDERS' EQUITY As of September 30, 2000 and December 31, 1999, respectively, there were 16,316,000 and 16,321,000 shares of stock outstanding. During the quarter ended September 30, 1999, the company declared a dividend on the common stock of three cents per share. 3. 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. 4. 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: 2000 1999 ---- ---- For the three months ended September 30 - - For the nine months ended September 30 - 137,000 For the three and nine months ended September 30, 2000, respectively, 20,530 and 55,163, common stock equivalent shares were excluded because inclusion would have been anti-dilutive. 5. PROPERTY AND EQUIPMENT Property and equipment is at historical cost and consists of the following (in thousands): September 30, December 2000 1999 ---- ---- Land $ 4,832 $ 4,845 Buildings and improvements 16,410 15,599 Revenue equipment 54,566 64,046 Service equipment 17,143 16,642 Computer, software and related equipment 19,680 18,292 ------- ------- 112,631 119,424 Less accumulated depreciation (48,605) (45,784) ------- ------- $ 64,026 $ 73,640 ======= ======= 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, 2000 and 1999 is as follows (in millions): 2000 1999 ---- ---- Freight Operations Total Revenue $240.1 $232.0 Operating Income (1.0) 2.6 Total Assets 153.2 171.9 Non-Freight Operations Total Revenue $ 58.2 $ 60.7 Operating Income 1.8 1.6 Total Assets 36.0 30.3 Intercompany Eliminations Revenue $ (4.5) $(10.5) Operating Income - - Assets (28.4) (21.3) Consolidated Revenue $293.8 $282.2 Operating Income 0.8 4.2 Assets 160.8 180.9 Intercompany elimination of revenue relates to transfers, at cost, of inventory such as trailers and refrigeration units from the non-freight segment for use by the freight segment. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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, 2000 and 1999. Three Months Ended Nine Months Ended Sept. 30, Sept. 30, ------------------ ----------------- 2000 1999 2000 1999 ---- ---- ---- ---- Salaries, wages and related expenses 27.8% 28.6% 27.4% 28.0% Purchased transportation 24.3 23.0 24.2 22.4 Supplies and expenses 30.6 28.5 28.9 27.5 Revenue equipment rent 7.7 8.3 7.9 8.4 Depreciation 3.5 3.8 3.6 3.7 Claims and insurance 6.1 5.3 5.1 5.0 Other 2.6 4.5 3.3 3.9 Total freight operating ----- ----- ----- ----- expenses 102.6% 102.0% 100.4% 98.9% ===== ===== ===== ===== Third Quarter of 2000 vs. 1999 During the third quarter of 2000, revenue increased by 4.3% to $101,402,000 with freight revenue up $2.8 million or 3.6%. Non- freight revenue aggregated 18.9% and 18.3% of total revenue during the third quarter of 2000 and 1999, respectively. Less- than-truckload (LTL) revenue was 1.4% higher and full-truckload revenue increased by 5.0% as compared to the same period of 1999. The increase in freight revenue resulted from significantly increased fuel adjustment revenue during the third quarter of 2000. During the third quarter of 2000, the company transported 5.5% more full-truckload shipments and 1.9% fewer LTL shipments than during the comparable 1999 quarter. Full-truckload average miles per shipment declined by 9.4% during the 2000 third quarter. Total LTL hundredweight fell by 1.0% as compared to the third quarter of 1999 while revenue (including fuel adjustment charges) per LTL hundredweight improved by 2.4%. The impact of the 9.4% decline in average loaded miles per full- truckload shipment was mitigated by a 9.8% improvement in revenue per full truckload loaded mile. Of the 13 cent increase in revenue per loaded mile, 38% resulted from incremental fuel adjustment charges as compared to 1999's third quarter. The 2000 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. Full-truckload activities, which contributed 67.0% and 66.1%, respectively, of freight revenue during the third quarter of 2000 and 1999, 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 number of tractors in the fleet of company-operated, full- truckload equipment increased from approximately 1,150 at the beginning of 2000 to about 1,170 by the end of the third quarter. However, the average number of such tractors declined by 6.2% from 1999's third quarter. The number of full-truckload tractors provided by owner-operators increased by 40 to 515 during the first nine months of 2000, and the average number of these tractors rose by 12.9% as compared to the third quarter of 1999. During the third quarter of 2000, the percent of freight revenue absorbed by salaries, wages and related expense was 27.8%, as compared to 28.6% during the year-ago quarter. Due primarily to a driver pay increase introduced during the second quarter of 2000, average driver wages rose by 5.5% between the quarters. Of the $173,000 increase in salaries, wages and related expenses, 76% was driver related. Purchased transportation expense as a percent of freight revenue also increased from 23% to 24.3% between the third quarters of 1999 and 2000. This was due in part to the proportional increase in the quantity of shipments transported by owner-operator- provided tractors. Increased use of equipment provided by owner- operators also impacts other categories of operating expenses. An owner-operator is responsible for providing a truck together with all resources necessary for the operation of the truck. Accordingly, costs associated with labor, equipment rental or depreciation, fuel, maintenance and other such activities associated with owner-operators are not present in the various categories of operating expenses, but are reflected in purchased transportation expense. Costs associated with operating supplies and expenses rose by 11.2% between the two quarters. For the third quarters of 2000 and 1999, respectively, 44% and 38% of such costs were associated with fuel consumed by the company-operated fleet of trucks. Per- gallon fuel costs paid by the company rose by 30% during the third quarter of 2000 as compared to 1999. Sudden and dramatic fuel price volatility can impact the company's cost structure and profitability. A number of factors tend to diminish the impact of such volatility. 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. Such fluctuations result from many external market factors that cannot be influenced or predicted by the company. In addition, each year several states increase fuel taxes. 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. The sum of revenue equipment rent and depreciation fell by 4.6% during 2000's third quarter to $9.2 million. This decrease is associated with the disposition of company-operated tractors and trailers. Claims and insurance expense rose from 5.3% of freight revenue during the third quarter of 1999 to 6.1% for 2000. The increase resulted from a variety of factors, including but not limited to the relative severity and frequency of incidents that involve liability for personal injury. As a result of the above factors, during the third quarter of 2000, the Company incurred a loss from operations of $1.4 million compared to a loss from operations of $830,000 during the comparable 1999 period. Interest and other expense, net fell from $1,021,000 to $890,000 between the two quarters. Reduced interest costs associated with the reduced use of borrowed funds was the principal factor affecting this net decrease. First Nine Months of 2000 vs. 1999 For the nine months ended September 30, 2000, revenue increased by 4.1%. Of the $11,571,000 increase in total revenue, revenue generated by the company-operated, full-truckload fleet fell by $900,000, and full-truckload revenue generated by owner-operators provided equipment rose by $5,854,000. LTL revenue rose by $3,146,000, and non-freight revenue increased by $3,471,000. For several years, customers have indicated moderate levels of dissatisfaction with the company's (and the industry's) ability to provide reliable and timely service. One of the most critical resources required to provide superior service is labor to operate the truck. During 1999 and early 2000, customers began to signal acceptance of freight-rate (prices) increases in order to receive improved service. Accordingly, near the end of 2000's second quarter, the company initiated a revised payroll offering for its employee drivers. The impact of the revision was to increase the take-home pay of all employee drivers in order to improve recruiting and retention of such employees. The company began seeking to pass this increased cost on to customers during the second quarter of 2000. Another resource that is critical to the operation of a truck is fuel. Beginning in the second quarter of 1999, fuel prices began to increase at an alarming rate. At the end of 1999, one United States Department of Transportation's national average diesel fuel per gallon price was 32% more than at the beginning of 1999. By August 2000, that government average stood at a level 95% above the early 1999 benchmark. This rapid and dramatic increase in fuel prices triggered the introduction of fuel adjustments to the prices the company charges for its services. Such adjustments are common in the industry, and customers typically have limited objections to their introduction. Fuel adjustment charges are designed to track the cost of fuel as reported by government agencies. As fuel prices escalate, fuel adjustment charges follow suit, creating upward pressure on the prices the company charges for its services. In the environment of rapidly escalating pricing, the company's customers began to resist further price increases required to mitigate the impact of the increased driver payroll. As a result, the company has been unable to fully offset increases in both payroll and fuel costs. During 2000's first three quarters, purchased transportation expense rose by 11.8%, as compared to the first nine months of 1999, while the average quantity of tractors provided by owner- operators rose by 8.7%. The more rapid escalation of such expense relative to expansion of the owner-operator fleet is primarily due to fuel adjustment charges. Owner-operators are responsible for all expenses associated with the operation of their trucks, including fuel. Accordingly, to the extent that the company receives fuel adjustment charges in connection with shipments transported by owner-operator equipment, approximately 100% of such charges are passed on to the owner-operators who paid for the fuel. This 100% incremental pass-through was a factor in purchased transportation expense having escalated at a rate faster than did the fleet of owner-operator trucks. 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 $20 million as of September 30, 2000. Net of outstanding letters of credit in favor of insurance companies of $3.5 million, the unused portion of the company's $50,000,000 revolving credit facility was approximately $26.5 million. Net cash provided by operating activities was $7.8 million and cash used in operating activities was $7.8 million for the nine months ending September 30, 2000 and 1999, respectively. This change was primarily attributable to fluctuations in the components of working capital. Net capital expenditures were $17.3 million for the nine months ended September 30, 1999. For the first nine months of 2000, proceeds from the disposition of property equipment exceeded other capital expenditures by $1.2 million. 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, 2000, working capital was $39.9 million as compared to $12.1 million at December 31, 1999. This change principally reflects the temporary classification of the company's debt as a short-term liability at December 31, 1999. OUTLOOK Certain statements contained in this Report on Form 10-Q, except for the historical information, are forward-looking statements regarding the anticipated development of and changes in 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 are dependent upon a number of risks and uncertainties that could cause actual results to differ materially from those conveyed in such forward looking statements. These risks and uncertainties include competition, weather conditions and the general economy, the availability and cost of labor, equipment, fuel and supplies, the ability of the company to negotiate favorably with lenders and equipment lessors, 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 Annual Report on Form 10-K and other reports which was filed with the Securities and Exchange Commission. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK As of September 30, 2000, debt stood at $20 million, which approximated fair market value. Also, as of September 30, 2000, 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 (b) No reports on Form 8-K were filed during the quarter ended September 30, 2000. SIGNATURES 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 10, 2000 By: /s/Stoney M. Stubbs, Jr. -------------------------- Stoney M. Stubbs, Jr. Chairman of the Board November 10, 2000 By: /s/F. Dixon McElwee, Jr. -------------------------- F. Dixon McElwee, Jr. Senior Vice President Principal Financial and Accounting Officer