10-Q 1 c05268e10vq.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006 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 000-20793 SMITHWAY MOTOR XPRESS CORP. (Exact name of registrant as specified in its charter) NEVADA 42-1433844 (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.)
2031 QUAIL AVENUE FORT DODGE, IOWA 50501 (Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 515/576-7418 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. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X] As of April 28, 2006, the registrant had 3,971,624 shares of Class A Common Stock and 1,000,000 shares of Class B Common Stock outstanding. 1
PAGE NUMBER ------ PART I FINANCIAL INFORMATION Item 1 Financial Statements........................................... 3 Condensed Consolidated Balance Sheets as of December 31, 2005 and March 31, 2006 (unaudited).............................. 3 Condensed Consolidated Statements of Operations for the three months ended March 31, 2005 and 2006 (unaudited)............ 5 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2006 (unaudited)............ 6 Notes to Condensed Consolidated Financial Statements (unaudited)................................................. 7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations....................................... 9 Item 3 Quantitative and Qualitative Disclosures About Market Risk..... 16 Item 4 Controls and Procedures........................................ 17 PART II OTHER INFORMATION Item 1 Legal Proceedings.............................................. 17 Item 1A Risk Factors................................................... 17 Item 2 Unregistered Sales of Equity Securities and Use of Proceeds.... 17 Item 3 Defaults Upon Senior Securities................................ 17 Item 4 Submission of Matters to a Vote of Security Holders............ 17 Item 5 Other Information.............................................. 17 Item 6 Exhibits....................................................... 18 Signatures............................................................. 19
2 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Dollars in thousands, except per share data)
DECEMBER 31, MARCH 31, 2005 2006 ------------ ----------- (unaudited) ASSETS Current assets: Cash and cash equivalents............ $ 168 $ 346 Receivables, net: Trade............................. 19,209 20,180 Other............................. 611 1,048 Inventories.......................... 938 993 Deposits, primarily with insurers.... 976 1,076 Prepaid expenses..................... 1,597 2,148 Deferred income taxes................ 3,133 3,141 -------- -------- Total current assets........... 26,632 28,932 -------- -------- Property and equipment: Land................................. 1,137 1,137 Buildings and improvements........... 7,052 7,052 Tractors............................. 72,354 70,862 Trailers............................. 36,260 36,568 Other equipment...................... 4,323 4,377 -------- -------- 121,126 119,996 Less accumulated depreciation........ 59,704 58,669 -------- -------- Net property and equipment..... 61,422 61,327 -------- -------- Goodwill................................ 1,745 1,745 Other assets............................ 312 313 -------- -------- $ 90,111 $ 92,317 ======== ========
See accompanying notes to condensed consolidated financial statements. 3 SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Dollars in thousands, except per share data)
DECEMBER 31, MARCH 31, 2005 2006 ------------ ----------- (unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt... $ 8,363 $ 8,344 Accounts payable....................... 7,401 8,304 Accrued loss reserves.................. 6,681 6,697 Accrued compensation................... 2,463 2,898 Other accrued expenses................. 493 463 Income tax payable..................... 313 862 ------- -------- Total current liabilities........ 25,714 27,568 Long-term debt, less current maturities... 24,425 24,487 Line of credit............................ 760 -- Deferred income taxes..................... 11,734 11,729 ------- -------- Total liabilities................ 62,633 63,784 ------- -------- Stockholders' equity: Preferred stock........................ -- -- Common stock: Class A............................. 40 40 Class B............................. 10 10 Additional paid-in capital............. 11,511 11,523 Retained earnings...................... 16,058 17,101 Reacquired shares, at cost............. (141) (141) ------- -------- Total stockholders' equity....... 27,478 28,533 Commitments ------- -------- $90,111 $ 92,317 ======= ========
See accompanying notes to condensed consolidated financial statements. 4 SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES Condensed Consolidated Statements of Operations (Dollars in thousands, except per share data) (Unaudited)
THREE MONTHS ENDED MARCH 31, ----------------------- 2005 2006 ---------- ---------- Operating revenue: Freight.................................... $ 49,447 $ 57,277 Other...................................... 277 412 ---------- ---------- Operating revenue.................... 49,724 57,689 ---------- ---------- Operating expenses: Purchased transportation................... 16,368 20,553 Compensation and employee benefits......... 13,660 15,129 Fuel, supplies, and maintenance............ 11,078 12,758 Insurance and claims....................... 2,008 1,433 Taxes and licenses......................... 873 954 General and administrative................. 1,942 1,866 Communications and utilities............... 331 344 Gain on disposal of assets................. (540) (562) Depreciation and amortization.............. 2,678 2,864 ---------- ---------- Total operating expenses............. 48,398 55,339 ---------- ---------- Earnings from operations................ 1,326 2,350 Financial (expense) income Interest expense........................... (369) (501) Interest income............................ 33 18 ---------- ---------- Earnings before income taxes............ 990 1,867 Income tax expense............................ 487 824 ---------- ---------- Net earnings............................ $ 503 $ 1,043 ========== ========== Basic earnings per share...................... $ 0.10 $ 0.21 ========== ========== Diluted earnings per share.................... $ 0.10 $ 0.21 ========== ========== Basic weighted average shares outstanding..... 4,903,845 4,971,624 Effect of dilutive stock options........ 118,534 104,269 ---------- ---------- Diluted weighted average shares outstanding... 5,022,379 5,075,893 ========== ==========
See accompanying notes to condensed consolidated financial statements. 5 SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Dollars in thousands) (Unaudited)
THREE MONTHS ENDED MARCH 31, ------------------ 2005 2006 ------- ------- Cash flows from operating activities: Net earnings......................................................... $ 503 $ 1,043 ------- ------- Adjustments to reconcile net earnings to cash provided by operating activities: Depreciation and amortization..................................... 2,678 2,864 Gain on disposal of assets........................................ (540) (562) Deferred income tax expense....................................... 52 (12) Change in: Receivables.................................................... (2,092) (1,408) Inventories.................................................... (20) (55) Deposits, primarily with insurers.............................. (116) (100) Prepaid expenses............................................... (1,505) (551) Accounts payable and other accrued liabilities................. 2,288 1,873 ------- ------- Total adjustments........................................... 745 2,049 ------- ------- Net cash provided by operating activities................ 1,248 3,092 ------- ------- Cash flows from investing activities: Purchase of property and equipment................................... (216) (1,598) Proceeds from sale of property and equipment......................... 979 1,577 Other................................................................ 8 (1) ------- ------- Net cash provided by (used in) investing activities............ 771 (22) ------- ------- Cash flows from financing activities: Net repayment on line of credit...................................... -- (760) Principal payments on long-term debt................................. (3,062) (2,144) Treasury stock reissued.............................................. 84 -- Other................................................................ 6 12 ------- ------- Net cash used in financing activities............................. (2,972) (2,892) ------- ------- Net (decrease) increase in cash and cash equivalents.............. (953) 178 Cash and cash equivalents at beginning of period........................ 5,054 168 ------- ------- Cash and cash equivalents at end of period.............................. $ 4,101 $ 346 ======= ======= Supplemental disclosure of cash flow information: Cash paid during period for: Interest.......................................................... $ 373 $ 504 Income taxes...................................................... 76 288 ======= ======= Supplemental schedules of noncash investing and financing activities: Notes payable issued for tractors and trailers....................... $ 3,312 $ 2,186 ======= =======
See accompanying notes to condensed consolidated financial statements. 6 SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited) NOTE 1. BASIS OF PRESENTATION The condensed consolidated financial statements include the accounts of Smithway Motor Xpress Corp., a Nevada holding company, and its four wholly owned subsidiaries ("we," "us," or "our"). All significant intercompany balances and transactions have been eliminated in consolidation. The condensed consolidated financial statements have been prepared, without audit, in accordance with U.S. generally accepted accounting principles, pursuant to the published rules and regulations of the Securities and Exchange Commission. In our opinion, the accompanying condensed consolidated financial statements include all adjustments that are necessary for a fair presentation of the results for the interim periods presented, such adjustments being of a normal recurring nature. Certain information and footnote disclosures have been condensed or omitted pursuant to such rules and regulations. The December 31, 2005, Condensed Consolidated Balance Sheet was derived from our audited balance sheet for the year then ended. It is suggested that these condensed consolidated financial statements and notes thereto be read in conjunction with the consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2005. Results of operations in interim periods are not necessarily indicative of results to be expected for a full year. NOTE 2. NET EARNINGS PER COMMON SHARE Basic earnings per share have been computed by dividing net earnings by the weighted-average outstanding Class A and Class B common shares during each of the quarters. Diluted earnings per share have been calculated by also including in the computation the effect of employee stock options, nonvested stock, and similar equity instruments granted to employees and directors as potential common shares. The dilutive effect of stock options excludes 57,000 and 30,000 shares for the first quarter of 2005 and 2006, respectively, as the exercise prices of the underlying options were out of the money and the effect was anti-dilutive. Stock options outstanding at March 31, 2005 and 2006, totaled 216,850 and 205,350, respectively. NOTE 3. STOCK OPTION PLANS We have two active stock-based compensation plans: (1) We have reserved 400,000 shares of Class A common stock for issuance pursuant to an employee incentive stock plan adopted during 2001. Any shares subject to awards which expire unexercised or are forfeited become available again for issuance under this plan. Under this plan, no award of incentive stock options may be made after August 6, 2011. (2) We have reserved 500,000 shares of Class A common stock for issuance pursuant to an omnibus stock plan adopted on May 13, 2005. Any shares subject to awards which expire unexercised or are forfeited become available again for issuance under this plan. This plan expires on May 13, 2015. Options granted under these plans become exercisable in installments from twelve to sixty months after the date of grant. The options are exercisable over a period not to exceed ten years from the date of grant. At March 31, 2006, 834,500 shares were available for granting additional options. Effective January 1, 2006, we adopted Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004), Share-Based Payment ("No. 123R") using a modified version of the prospective transition method. Under this transition method, compensation cost is recognized on or after the required effective date for the portion of outstanding awards for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated under SFAS No. 123R for either recognition or pro forma disclosures. Stock-based employee compensation expense for the three months ended March 31, 2006 was $12 and included as an expense within the consolidated statements of operations. As of March 31, 2006, the total compensation cost related to non-vested awards not yet recognized was $50 and the weighted-average period over which it is expected to be recognized was one year. There was no cumulative effect of initially adopting SFAS No. 123R. 7 We granted no stock options during the three month periods ended March 31, 2005 and 2006. The following table summarizes Stock Option Plan activity for the three months ended March 31, 2006:
WEIGHTED WEIGHTED AVERAGE AVERAGE REMAINING NUMBER OF EXERCISE CONTRACTUAL TERM AGGREGATE OPTIONS PRICE (YEARS) INTRINSIC VALUE --------- -------- ---------------- --------------- Outstanding at beginning of period 205,350 $4.38 Options granted -- -- Options exercised -- -- Options forfeited -- -- Options expired -- -- ------- ----- ---- ------ Outstanding at end of period 205,350 $4.38 4.48 $1,120 ======= ===== ==== ====== Options exercisable at end of period 151,850 $4.79 3.72 $ 784
In periods prior to January 1, 2006, we accounted for these plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. No stock-based employee compensation cost was reflected in our statements of operations, as all options granted under these plans had an exercise price equal to the market value of the common stock on the date of the grant. The following table illustrates the effect on net earnings and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123R to stock-based employee compensation. For purposes of pro forma disclosures, the estimated fair value of options is amortized to expense over the options' vesting periods.
THREE MONTHS ENDED MARCH 31, 2005 ------------------ Net earnings, as reported $ 503 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (2) ----- Pro forma net earnings $ 501 ===== Basic earnings per share - as reported $0.10 - pro forma $0.10 Diluted earnings per share - as reported $0.10 - pro forma $0.10
We use the Black-Scholes option pricing model to determine the fair value of stock options issued. Although we do not have a formal policy for issuing shares upon exercise of stock options, such shares are generally issued from treasury stock. Based on current treasury stock levels, we do not expect to repurchase additional shares specifically for stock option exercises during 2006. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION Except for the historical information contained herein, the discussion in this quarterly report on Form 10-Q contains forward-looking statements that involve risk, assumptions, and uncertainties that are difficult to predict. Words such as "anticipates," "believes," "estimates," "projects," "plans," "expects," "may," "could," "likely," variations of these words, and similar expressions, are intended to identify such forward-looking statements. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based upon the current beliefs and expectations of our management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in forward-looking statements. The following factors, among others, could cause actual results to differ materially from those in forward-looking statements: economic recessions or downturns in customers' business cycles; excessive increases in capacity within truckload markets; surplus inventories; decreased demand for transportation services offered by us; increases or rapid fluctuations in inflation, interest rates, fuel prices, and fuel hedging; the availability and costs of attracting and retaining qualified drivers and owner-operators; failure to sustain profitability, which could result in violation of bank covenants and acceleration of indebtedness at several financial institutions; the ability to obtain financing on acceptable terms; increases in insurance premiums and deductible amounts, or changes in excess coverage, relating to accident, cargo, workers' compensation, health, and other claims; the resale value of used equipment and prices of new equipment; seasonal factors such as harsh weather conditions that increase operating costs; regulatory requirements that increase costs and decrease efficiency, including new emissions standards and hours-of-service regulations; changes in management; and the ability to negotiate, consummate, and integrate acquisitions. Readers should review and consider the various disclosures made by us in our press releases, stockholder reports, and public filings, as well as the factors explained in greater detail under "Risk Factors" and elsewhere in our annual report on Form 10-K. Our fiscal year ends on December 31 of each year. Thus, this report discusses the first quarter of our 2005 and 2006 fiscal years. We generate substantially all of our revenue by transporting freight for our customers. Generally, we are paid by the mile for our services. We also derive revenue from fuel surcharges, loading and unloading activities, equipment detention, and other accessorial services. The main factors that affect our revenue are the revenue per mile we receive from our customers, the percentage of miles for which we are compensated, and the number of miles we generate with our equipment. These factors relate, among other things, to the United States economy, inventory levels, the level of capacity in the trucking industry, specific customer demand, and driver availability. We monitor our revenue production primarily through average revenue per tractor per week (excluding fuel surcharge, brokerage, and other revenues). We exclude fuel surcharge, brokerage and other more volatile revenues in this measurement because we believe the analysis of tractor productivity is more meaningful if these revenues are excluded from the computation, providing useful information to investors regarding business trends relating to our financial condition and results of ongoing operations. The components of operating revenue are as follows:
THREE MONTHS ENDED MARCH 31, (dollars in thousands) ----------------- 2005 2006 ------- ------- Trucking revenue $42,766 $46,419 Brokerage revenue 1,801 2,661 Fuel surcharge revenue 4,880 8,197 ------- ------- Total freight revenue 49,447 57,277 Other revenue 277 412 ------- ------- Operating revenue $49,724 $57,689 ======= =======
During the first quarter of 2006, our average revenue per tractor per week (excluding fuel surcharge, brokerage, and other revenues) increased to $2,816 from $2,672 in the first quarter of 2005, reflecting a 5.4% increase in our average revenue per loaded mile (excluding fuel surcharge, brokerage, and other revenues) and a 3.0% increase in our weighted average tractors to 1,268 in the 2006 quarter from 1,231 in the 2005 quarter. Our ending fleet size grew by 36 units (2.9%) to 1,269 units at March 31, 2006 compared to 1,233 units at March 31, 2005. 9 The main factors that impact our profitability on the expense side are the variable costs of transporting freight for our customers. These costs include fuel expense, driver-related expenses, such as wages, benefits, training, and recruitment, and independent contractor costs, which are recorded under purchased transportation. Expenses that have both fixed and variable components include maintenance and tire expense and our total cost of insurance and claims. These expenses generally vary with the miles we travel, but also have a controllable component based on safety, fleet age, efficiency, and other factors. Our main fixed costs are the acquisition and financing of long-term assets, such as revenue equipment and the compensation of non-driver personnel. For the three months ended March 31, 2006, operating revenue increased 16.0% to $57.7 million from $49.7 million during the same quarter in 2005. Net earnings were $1.0 million, or $0.21 per basic and diluted share, compared with net earnings of $503,000, or $0.10 per basic share and diluted share, during the 2005 quarter. RESULTS OF OPERATIONS The following table sets forth the percentage relationship of certain items to revenue for the three months ended March 31, 2005 and 2006:
THREE MONTHS ENDED MARCH 31, --------------- 2005 2006 ----- ----- Operating revenue ...................... 100.0% 100.0% Operating expenses: Purchased transportation ............ 32.9 35.6 Compensation and employee benefits .. 27.5 26.2 Fuel, supplies, and maintenance ..... 22.3 22.1 Insurance and claims ................ 4.0 2.5 Taxes and licenses .................. 1.8 1.7 General and administrative .......... 3.9 3.2 Communication and utilities ......... 0.7 0.6 Gain from disposal of assets ........ (1.1) (1.0) Depreciation and amortization ....... 5.4 5.0 ----- ----- Total operating expenses ............ 97.3 95.9 ----- ----- Earnings from operations ............... 2.7 4.1 Interest expense, net .................. (0.7) (0.9) ----- ----- Earnings before income taxes ........... 2.0 3.2 Income tax expense ..................... 1.0 1.4 ----- ----- Net earnings ........................... 1.0% 1.8% ===== =====
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2006, WITH THREE MONTHS ENDED MARCH 31, 2005. Operating revenue increased $8.0 million (16.0%) to $57.7 million in the 2006 quarter from $49.7 million in the 2005 quarter. The increase in operating revenue resulted from increased average operating revenue per tractor per week and a 3.0% increase in our weighted average tractors to 1,268 in the 2006 quarter from 1,231 in the 2005 quarter. Average operating revenue per tractor per week increased to $3,500 in the 2006 quarter from $3,107 in the 2005 quarter. Operating revenue includes revenue from operating our trucks as well as other, more volatile revenue items, including fuel surcharge, brokerage, and other revenue. We believe the analysis of tractor productivity is more meaningful if fuel surcharge, brokerage, and other revenue are excluded from the computation as this provides useful information to investors regarding business trends relating to our financial condition and results of ongoing operations. Average revenue per tractor per week (excluding fuel surcharge, brokerage, and other revenue) increased to $2,816 in the 2006 quarter from $2,672 in the 2005 quarter, primarily due to improvements in our freight rates. Revenue per loaded mile (excluding fuel surcharge, brokerage, and other revenue) increased $0.09 to $1.61 in the 2006 quarter from $1.52 in the 2005 quarter, reflecting improved lane and customer selection, increased trucking demand, and improved general economic conditions. Fuel surcharge revenue increased $3.3 million to $8.2 million in the 2006 quarter from $4.9 million in the 2005 quarter. During the first quarter of 2006 and 2005, approximately $4.7 million and $2.9 million, respectively, of the fuel surcharge revenue collected helped to offset our fuel costs. The remainder was passed through to independent contractors. 10 Purchased transportation consists primarily of payments to independent contractor providers of revenue equipment, expenses related to brokerage activities, and payments under operating leases of revenue equipment. Purchased transportation increased $4.2 million (25.6%) to $20.6 million in the 2006 quarter from $16.4 million in the 2005 quarter. As a percentage of revenue, purchased transportation increased to 35.6% in the 2006 quarter from 32.9% in the 2005 quarter. The changes reflect higher pay to independent contractors resulting from increases in fuel surcharge revenue and average revenue per billed mile, higher payments to broker carriers and an increase in the percentage of our fleet supplied by independent contractors. The percentage of total operating revenue provided by independent contractors increased to 37.1% in the 2006 quarter from 35.1% in the 2005 quarter. Compensation and employee benefits increased $1.4 million (10.8%) to $15.1 million in the 2006 quarter from $13.7 million in the 2005 quarter reflecting increases in the number of company drivers and in their rate of pay, increases in non-driver employee wages, and increased worker's compensation expense. As a percentage of revenue, compensation and employee benefits decreased to 26.2% in the 2006 quarter from 27.5% in the 2005 quarter, reflecting the changes described above and an increase in our revenue per loaded mile and fuel surcharge revenue, which increases revenue without a proportionate increase in wages. Our ratio of tractors to non-driver employees, a key measure of administrative efficiency, improved to 5.13 during the 2006 quarter compared to 4.97 in the 2005 quarter. The market for recruiting drivers continues to be challenging. We increased driver pay in April 2006 and expect that further increases will be necessary. Future increases in driver pay will negatively impact our results of operations to the extent that corresponding freight rate increases are not obtained. Fuel, supplies, and maintenance increased $1.7 million (15.2%) to $12.8 million in the 2006 quarter from $11.1 million in the 2005 quarter. As a percentage of revenue, fuel, supplies, and maintenance decreased to 22.1% of revenue in the 2006 quarter compared with 22.3% in the 2005 quarter. This reflects higher fuel prices, partially offset by an increase in our average revenue per loaded mile, which increases revenue without a corresponding increase in maintenance costs. As expected, maintenance costs have decreased as we continue to update our fleet with new equipment. Fuel prices increased approximately 22% to an average of $2.39 per gallon in the 2006 quarter from $1.96 per gallon in the 2005 quarter. The $0.43 per gallon increase in fuel prices was partially offset by a $0.39 per gallon ($1.7 million) increase in fuel surcharge revenue attributable to company-owned tractors that is included in operating revenue, mitigating 89% of the increase in fuel prices. Insurance and claims decreased $575,000 (28.6%) to $1.4 million in the 2006 quarter from $2.0 million in the 2005 quarter. As a percentage of revenue, insurance and claims decreased to 2.5% of revenue in the 2006 quarter compared with 4.0% in the 2005 quarter. This reflects a reduction in the cost of auto liability, physical damage, and cargo claims and an increase in our average revenue per loaded mile, which increases revenue without a corresponding increase in insurance and claims costs. The insurance policies are scheduled for renewal on July 1, 2006. Taxes and licenses increased $81,000 (9.3%) to $954,000 in the 2006 quarter from $873,000 in the 2005 quarter reflecting a slight increase in the number of company-owned tractors subject to annual license and increased over-dimensional permit costs. As a percentage of revenue, taxes and licenses decreased to 1.7% of revenue in the 2006 quarter compared with 1.8% of revenue in the 2005 quarter, reflecting the items noted above and an increase in our average revenue per loaded mile and fuel surcharge revenue, which increases revenue without a proportionate increase in taxes and licenses. General and administrative expenses were $1.9 million in both the 2006 quarter and 2005 quarter, but reflected a $76,000 (3.9%) decrease in the 2006 quarter due to decreased professional fees related to Sarbanes-Oxley compliance efforts. As a percentage of revenue, general and administrative expenses decreased to 3.2% of revenue in the 2006 quarter compared to 3.9% in the 2005 quarter, reflecting the items noted above and an increase in our average revenue per loaded mile and fuel surcharge revenue, which increases revenue without a proportionate increase in general and administrative expenses. Communications and utilities increased $13,000 (3.9%) to $344,000 in the 2006 quarter from $331,000 in the 2005 quarter. As a percentage of revenue, communications and utilities decreased to 0.6% of revenue in the 2006 quarter from 0.7% of revenue in the 2005 quarter, reflecting an increase in our average revenue per loaded mile and fuel surcharge revenue which increases revenue without a proportionate increase in communications and utilities expenses. 11 Gains on the disposal of assets increased $22,000 (4.1%) to $562,000 in the 2006 quarter from $540,000 in the 2005 quarter. As a percentage of revenue, gains on the disposal of assets remained relatively constant at 1.0% of revenue in the 2006 quarter compared to 1.1% of revenue in the 2005 quarter. Depreciation and amortization increased $186,000 (6.9%) to $2.9 million in the 2006 quarter from $2.7 million in the 2005 quarter reflecting an increase in company owned tractors and trailers and an increase in the value of equipment subject to depreciation. As a percentage of revenue, depreciation and amortization decreased to 5.0% of revenue in the 2006 quarter compared with 5.4% in the 2005 quarter, reflecting an increase in our average revenue per loaded mile and fuel surcharge revenue which increases revenue without a proportionate increase in depreciation and amortization. As we continue to upgrade our equipment fleet, we expect depreciation expense to increase. Interest expense, net, increased $147,000 (43.8%) to $483,000 in the 2006 quarter from $336,000 in the 2005 quarter. This increase was attributable to higher average debt outstanding and higher interest rates. As a percentage of revenue, interest expense, net, increased to 0.9% of revenue in the 2006 quarter from 0.7% of revenue in the 2005 quarter. As a result of the foregoing, our pre-tax margin increased to 3.2% in the 2006 quarter from 2.0% in the 2005 quarter. Our income tax expense in the 2006 quarter was $824,000, or 44.1% of earnings before income taxes. Our income tax expense in the 2005 quarter was $487,000, or 49.2% of earnings before income taxes. In both quarters, the effective tax rate was different from the expected combined tax rate for a company headquartered in Iowa because a portion of the cost of driver per diem expense is not deductible. The impact of paying per diem travel expenses varies depending upon the ratio of drivers to independent contractors and the level of our pre-tax earnings. As a result of the factors described above, net earnings were $1.0 million in the 2006 quarter (1.8% of revenue), compared with $503,000 in the 2005 quarter (1.0% of revenue). In addition, our operating ratio (operating expenses as a percentage of operating revenue) was 95.9% during the 2006 quarter as compared with 97.3% during the 2005 quarter. Our adjusted operating ratio (operating expenses minus fuel surcharge revenue as a percentage of operating revenue excluding fuel surcharge revenue) was 95.3% during the 2006 quarter as compared with 97.0% during the 2005 quarter. LIQUIDITY AND CAPITAL RESOURCES USES AND SOURCES OF CASH We require cash to fund working capital requirements and to service our debt. We have historically financed acquisitions of new equipment with borrowings under installment notes payable to commercial lending institutions and equipment manufacturers, borrowings under lines of credit, cash flow from operations, and equipment leases from third-party lessors. We also have obtained a portion of our revenue equipment fleet from independent contractors who own and operate the equipment, which reduces overall capital expenditure requirements compared with providing a fleet of entirely company-owned equipment. Our primary sources of liquidity have been funds provided by operations and borrowings under credit arrangements with commercial lending institutions and equipment manufacturers. At March 31, 2006, we had $346,000 in cash and adequate borrowing availability on our line of credit to finance any near-term needs for working capital. During the three months of 2006 we purchased 33 new tractors and 42 new trailers for $3.5 million, which was financed, in part, with $2.2 million of new long term debt. We plan to purchase approximately 180 new tractors throughout the remainder of 2006, allowing for the replacement of older, high mileage tractors. At March 31, 2006, we had positive working capital of $1.4 million compared to positive working capital of $3.5 million at March 31, 2005. Working capital, defined as current assets minus current liabilities, is not always fully representative of our liquidity position because cash and trade receivables account for a large portion of our current assets. Our trade accounts receivable are generally collected within 31 days. Alternatively, current maturities of long term debt, a large portion of our current liabilities, are paid over one year. Our ability to fund cash requirements in future periods will depend on our ability to comply with covenants contained in financing arrangements and the availability of other financing options, as well as our financial condition and results of operations. Our financial condition and results of operations will depend on insurance and claims experience, 12 general shipping demand by our customers, fuel prices, the availability of drivers and independent contractors, the continued success of our profit improvement plan, and other factors. Although there can be no assurance, we believe that cash generated by operations and available sources of financing for acquisitions of revenue equipment will be adequate to meet our currently anticipated working capital requirements and other cash needs through March 2007. We will require additional sources of financing over the long-term to upgrade our tractor and trailer fleets. To the extent that actual results or events differ from our financial projections or business plans, our liquidity may be adversely affected and we may be unable to meet our financial covenants. Specifically, our short- and long-term liquidity may be adversely affected by one or more of the following factors: costs associated with insurance and claims; weak freight demand or a loss in customer relationships or volume; the impact of new hours-of-service regulations on asset productivity; the impact of stricter emissions standards; the ability to attract and retain sufficient numbers of qualified drivers and independent contractors; elevated fuel prices and the ability to collect fuel surcharges; inability to maintain compliance with, or negotiate amendments to, loan covenants; the ability to finance the tractors and trailers delivered and scheduled for delivery; and the possibility of shortened payment terms by our suppliers and vendors worried about our ability to meet payment obligations. Based upon our profitability, anticipated future cash flows, current availability under the financing arrangement with LaSalle Bank, and sources of equipment financing that are available, we do not expect to experience significant liquidity constraints in the foreseeable future. To the extent that actual results or events differ from our financial projections or business plans, our liquidity may be adversely affected and we may be unable to meet our financial covenants. In such event, we believe we could renegotiate the terms of our debt or that alternative financing would be available, although this cannot be assured. Net cash provided by operating activities was $3.1 million for the three months ended March 31, 2006, compared to $1.2 million for the three months ended March 31, 2005. Historically, our principal use of cash from operations is to service debt and to internally finance acquisitions of revenue equipment. Total receivables increased $1.4 million for the three months ended March 31, 2006. The average age of our trade accounts receivable was approximately 31.9 days in the 2005 period and 30.9 days in the 2006 period. Net cash used by investing activities was $22,000 for the three months ended March 31, 2006. Cash used to purchase property and equipment was nearly offset by proceeds from the sale of equipment. Net cash used in financing activities was $2.9 million for the three months ended March 31, 2006, consisting primarily of net payments of principal under our long-term debt agreements. We have a financing arrangement with LaSalle Bank, which expires on October 31, 2010, and provides for automatic month-to-month renewals under certain conditions after that date. LaSalle Bank may terminate the arrangement prior to October 31, 2010, in the event of default, and may terminate at the end of any renewal term. The agreement provides for a revolving line of credit which allows for borrowings at up to 85% of eligible receivables. At March 31, 2006, there was no balance owed under our revolving line of credit. The LaSalle Bank financing arrangement also includes financing for letters of credit. At March 31, 2006, we had outstanding letters of credit totaling $7.6 million for self-insured amounts under our insurance programs. We are required to pay an annual fee of 1.25% of the outstanding letters of credit. These letters of credit directly reduce the amount of potential borrowings available under the financing arrangement discussed above. Any increase in self-insured retention, as well as increases in claim reserves, may require additional letters of credit to be posted, which would negatively affect our liquidity. The combination of borrowings under the line of credit and outstanding letters of credit with LaSalle Bank cannot exceed the lower of $15 million or a specified borrowing base, which at March 31, 2006 was $15.0 million, leaving $7.4 million in remaining availability at such date. We are required to pay a facility fee on the LaSalle Bank financing arrangement of .25% of the unused loan limit. Borrowings under the arrangement are secured by accounts receivable. The interest rate on outstanding borrowings under the arrangement is equal to a spread on LaSalle Bank's prime rate or LIBOR, at our option. The spread is determined by our ratio of funded debt to earnings before interest, taxes, depreciation, amortization and rent, or EBITDAR, as defined under the agreement. At March 31, 2006 the applicable interest rate under the arrangement was equal to the prime rate minus 50 basis points. The LaSalle Bank financing arrangement requires compliance with certain financial covenants, including compliance with a minimum tangible net worth, debt to EBITDAR, and a fixed charge coverage ratio. We were in compliance with these requirements at March 31, 2006. We believe we will maintain compliance with all covenants throughout 2006, although there can be no assurance that the required financial performance will be achieved. In 13 addition, equipment financing provided by a manufacturer contains a minimum tangible net worth requirement. We were in compliance with the required minimum tangible net worth requirement for March 31, 2006 and we expect to remain in compliance for the foreseeable future. If we fail to maintain compliance with these financial covenants, or to obtain a waiver of any noncompliance, the lenders will have the right to declare all sums immediately due and pursue other remedies. In this event, we believe we could renegotiate the terms of our debt or that alternative financing would be available, although this cannot be assured. As of the filing date, we were in compliance with all financial covenants. CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS The following tables set forth our contractual obligations and other commercial commitments as of March 31, 2006:
PAYMENTS (IN THOUSANDS) DUE BY PERIOD ----------------------------------------------------- Less than After Contractual Obligations Total One year 1-3 years 3-5 years 5 years ----------------------- ------- --------- --------- --------- ------- Long-term debt $32,831 $ 8,344 $15,807 $8,680 $-- Operating lease obligations 5,166 1,971 3,117 78 -- Purchase obligations 5,669 5,669 -- -- -- ------- ------- ------- ------ --- Total $43,666 $15,984 $18,924 $8,758 $-- ======= ======= ======= ====== ===
In our normal course of business we place orders with equipment manufacturers for future delivery of new tractors and trailers. The orders for trailers can be cancelled at any time without penalty prior to taking delivery. The orders for tractors can be cancelled without penalty at any time up to 60 days prior to production of the tractor. If the termination occurs less than 60 days, but more than 45 days prior to production, we retain the right to cancel subject to a per truck penalty of $500. Orders generally cannot be cancelled within 45 days prior to production. At March 31, 2006, we had commercial commitments of approximately $5.7 million, related to tractor and trailer orders that cannot be cancelled. Financing for these commitments has been prearranged. Approximately 26% of our long-term debt carries a variable interest rate making reliable estimates of future interest payments difficult. Using our weighted average interest rate of 6.20% as of March 31, 2006, the following approximately represents our expected obligations for future interest payments:
PAYMENTS (IN THOUSANDS) DUE BY PERIOD ---------------------------------------------------- Less than After Total One year 1-3 years 3-5 years 5 years ------ --------- --------- --------- ------- Total interest payments $4,218 $1,777 $2,005 $436 $-- ====== ====== ====== ==== ===
We had no other commercial commitments at March 31, 2006. OFF-BALANCE SHEET ARRANGEMENTS Our liquidity is not materially affected by off-balance sheet transactions. During the last six months of 2004 we leased 117 new tractors under operating leases. These new leases increase equipment rent expense, a component of purchased transportation expense, rather than depreciation and interest expense. These obligations are included in our schedule of contractual obligations, and exclude potential Terminal Remainder Adjustment Clause (TRAC) payments or refunds on 117 tractors amounting to 40% of the original purchase price due at the end of the original 48 month term of the lease. After 48 months, we expect the residual value of the tractors to be greater than 40% of the original cost, allowing us to return the tractors without penalty. 14 CRITICAL ACCOUNTING POLICIES The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make decisions based upon estimates, assumptions, and factors we consider as relevant to the circumstances. Such decisions include the selection of applicable accounting principles and the use of judgment in their application, the results of which impact reported amounts and disclosures. Changes in future economic conditions or other business circumstances may affect the outcomes of our estimates and assumptions. Accordingly, actual results could differ from those anticipated. A summary of the significant accounting policies followed in preparation of the financial statements included in this Form 10-Q is contained in Note 1 of the consolidated financial statements included in our Form 10-K for the year ended December 31, 2005. Other footnotes in the Form 10-K describe various elements of the financial statements included in this Form 10-Q and the assumptions on which specific amounts were determined. Our critical accounting policies include the following: REVENUE RECOGNITION We generally recognize operating revenue when the freight to be transported has been loaded. We operate primarily in the short-to-medium length haul category of the trucking industry; therefore, our typical customer delivery is completed one day after pickup. Accordingly, this method of revenue recognition is not materially different from recognizing revenue based on completion of delivery. We recognize operating revenue when the freight is delivered for longer haul loads where delivery is completed more than one day after pickup. Amounts payable to independent contractors for purchased transportation, to company drivers for wages, and other direct expenses are accrued when the related revenue is recognized. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation is provided by use of the straight-line and declining-balance methods over lives of 5 to 39 years for buildings and improvements, 5 years for tractors, 7 years for trailers, and 3 to 10 years for other equipment. Tires purchased as part of revenue equipment are capitalized as a cost of the equipment. Replacement tires are expensed when placed in service. Expenditures for maintenance and minor repairs are charged to operations, and expenditures for major replacements and betterments are capitalized. The cost and related accumulated depreciation on property and equipment retired, traded, or sold are eliminated from the property accounts at the time of retirement, trade, or sale. The gain or loss on retirement or sale is recognized in accordance with Statement of Financial Accounting Standards No. 153, "Exchange of Nonmonetary Assets" (SFAS 153). ESTIMATED LIABILITY FOR INSURANCE CLAIMS Losses resulting from auto liability, physical damage, workers' compensation, and cargo loss and damage are covered by insurance subject to certain self-retention levels. Losses resulting from uninsured claims are recognized when such losses are incurred. We estimate and accrue a liability for our share of ultimate settlements using all available information. We accrue for claims reported, as well as for claims incurred but not reported, based upon our past experience. Expenses depend on actual loss experience and changes in estimates of settlement amounts for open claims that have not been fully resolved. However, final settlement of these claims could differ materially from the amounts we have accrued at year-end. Our judgment concerning the ultimate cost of claims and modification of initial reserved amounts is an important part of establishing claims reserves, and is of increasing significance with higher self-insured retention and lack of excess coverage. IMPAIRMENT OF LONG-LIVED ASSETS Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. Our judgment concerning future cash flows is an important part of this determination. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less the costs to sell. 15 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to a variety of market risks, most importantly the effects of the price and availability of diesel fuel and changes in interest rates. Commodity Price Risk Our operations are heavily dependent upon the use of diesel fuel. The price and availability of diesel fuel can vary and are subject to political, economic, and market factors that are beyond our control. Significant increases in diesel fuel prices could materially and adversely affect our results of operations and financial condition. We presently use fuel surcharges to address the risk of increasing fuel prices. We believe these fuel surcharges are an effective means of mitigating the risk of increasing fuel prices, although the competitive nature of our industry prevents us from recovering the full amount of fuel price increases through the use of such surcharges. In the past, we have used derivative instruments, including heating oil price swap agreements, to reduce a portion of our exposure to fuel price fluctuations. Since 2000, we have had no such agreements in place. We do not trade in such derivatives with the objective of earning financial gains on price fluctuations. Interest Rate Risk We also are exposed to market risks from changes in certain interest rates on our debt. Our financing arrangement with LaSalle Bank carries a variable interest rate equal to a spread on LaSalle's prime rate or LIBOR, at our option. The spread is determined by our ratio of funded debt to EBITDAR, as defined under the agreement. In addition, approximately $8.5 million of our other debt carries variable interest rates. This variable interest exposes us to the risk that interest rates may rise. Assuming borrowing levels at March 31, 2006, a one-point increase in the prime rate would increase interest expense by approximately $85,000. The remainder of our other debt carries fixed interest rates. At March 31, 2006, approximately 26% of our debt carried a variable interest rate and the remainder was fixed. 16 ITEM 4. CONTROLS AND PROCEDURES As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the "Exchange Act"), we have carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report. This evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2006. During our first fiscal quarter, there were no changes in our internal control over financial reporting that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting. We intend to periodically evaluate our disclosure controls and procedures as required by the Exchange Act rules. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosures. We have confidence in our internal controls and procedures. Nevertheless, our management, including our Chief Executive Officer and our Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors or intentional fraud. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the internal controls are met. Further, the design of an internal control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all internal control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not applicable. ITEM 1A. RISK FACTORS Not applicable. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. 17 ITEM 6. EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.1 Articles of Incorporation (1) 3.2 Amended and Restated Bylaws (2) 10.1 Description of 2006 Bonus Program (3) 31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer * 31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer * 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by G. Larry Owens, the Registrant's principal executive officer * 32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Douglas C. Sandvig, the Registrant's principal financial officer *
---------- (1) Incorporated by reference to the same numbered exhibit to our Registration Statement on Form S-1, Registration No. 33-90356, effective June 27, 1996. (2) Incorporated by reference to the same numbered exhibit to our Annual Report on Form 10-K for the year ended December 31, 2003. (3) Incorporated by reference to item 1.01 of our Current Report on Form 8-K filed on February 21, 2006. * Filed herewith. 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SMITHWAY MOTOR XPRESS CORP. Date: May 12, 2006 By: /s/ Douglas C. Sandvig ------------------------------------ Douglas C. Sandvig Senior Vice President, Treasurer, and Chief Financial Officer, in his capacity as such and on behalf of the issuer 19 Exhibit Index
EXHIBIT METHOD NUMBER DESCRIPTION OF FILING ------- ----------- --------- 3.1 Articles of Incorporation Incorporated by reference 3.2 Amended and Restated Bylaws (as in effect on March Incorporated by 5, 2004) reference 10.1 Description of 2006 Bonus Plan Incorporated by reference 31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Filed herewith Executive Officer 31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Filed herewith Financial Officer 32.1 Certification pursuant to 18 U.S.C. Section 1350, as Filed herewith adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by G. Larry Owens, the Registrant's principal executive officer 32.2 Certification pursuant to 18 U.S.C. Section 1350, as Filed herewith adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Douglas C. Sandvig, the Registrant's principal financial officer