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KNX > SEC Filings for KNX > Form 10-Q on 10-May-2013All Recent SEC Filings

Show all filings for KNIGHT TRANSPORTATION INC | Request a Trial to NEW EDGAR Online Pro



Quarterly Report

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations

Cautionary Note Regarding Forward-Looking Statements

Except for certain historical information contained herein, this report contains certain statements that may be considered "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Section 27A of the Securities Act of 1933, as amended, and such statements are subject to the safe harbor created by those sections and the Private Securities Litigation Reform Act of 1995, as amended. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including without limitation: any projections of revenues, earnings, cash flows, capital expenditures, or other financial items; any statement of plans, strategies, and objectives of management for future operations; any statements concerning proposed acquisition plans, new services, or developments; any statements regarding future economic conditions or performance; and any statements of belief and any statement of assumptions underlying any of the foregoing. Words such as "believe," "may," "could," "will," "expects," "hopes," "estimates," "projects," "intends," "anticipates," and "likely," and variations of these words, or similar expressions, terms, or phrases, are intended to identify such forward-looking statements. Forward-looking statements are inherently subject to risks, assumptions, and uncertainties, some of which cannot be predicted or quantified, which could cause future events and actual results to differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section entitled "Item 1A. Risk Factors," set forth in our Form 10-K for the year ended December 31, 2012, along with any supplements in Part II below.

All such forward-looking statements speak only as of the date of this Form 10-Q. You are cautioned not to place undue reliance on such forward-looking statements. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company's expectations with regard thereto or any change in the events, conditions, or circumstances on which any such statement is based.


Business Overview

We are a provider of multiple truckload transportation services, which generally involve the movement of full trailer or container loads of freight from origin to destination for a single customer. We are headquartered in Phoenix, Arizona and use our nationwide network of service centers, one of the country's largest company-owned tractor fleets, as well as access to the fleets of thousands of third-party equipment providers, to provide significant capacity and a broad range of solutions to truckload shippers. Our services include dry van truckload, temperature-controlled truckload, dedicated truckload services, drayage, intermodal, and truckload freight brokerage services. Through our multiple service offerings and transportation modes, we are able to transport, or arrange for the transportation of, general commodities for customers throughout the United States and parts of Canada and Mexico.

Our operations involve a range of investments in capital assets, and expected operating margins. Our asset-based businesses generally include dry van truckload, temperature-controlled truckload, dedicated truckload, and drayage services. Our non-asset-based services generally include intermodal and truckload brokerage services. However, within our asset-based services, the use of independent contractors to provide tractors lowers the capital investment in certain of our dry van, temperature-controlled and drayage services operations. In addition, drayage operations generally involve less expensive tractors with longer lives, and do not require a large investment in trailers. We evaluate the growth opportunities for each of our businesses based on customer demand and supply chain trends, availability of drivers, expected returns on invested capital, expected net cash flows, and our company-specific capabilities.

Our operating strategy is to gain truckload market share by leveraging our services, relationships, and service center network, and to improve asset productivity through enhanced technology and market knowledge, while maintaining an extreme focus on cost. To achieve these goals, we operate primarily in high-density, predictable freight lanes in select geographic regions, and attempt to develop and expand our customer base around each of our service centers by providing multiple truckload alternatives for our customers. This operating strategy allows us to take advantage of the large amount of truckload freight transported in regional markets. Our decentralized service centers enable us to better serve our customers and work more closely with our driving associates. We operate a modern fleet to appeal to drivers and customers, reduce maintenance expenses and downtime, and enhance our operating efficiencies. We employ technology in a cost-effective manner to assist us in controlling operating costs and enhancing revenue. Our operating strategy for our non-asset-based activities is to match quality capacity with the shipping needs of our customers through the capacity provided by our network of third-party truckload carriers and our rail providers. Our goal is to increase our market presence, both in existing operating regions and in other areas where we believe the freight environment meets our operating strategy, while seeking to achieve industry-leading operating margins and returns on investment.

The main factors that affect our results are industry-wide economic factors, such as supply and demand, fuel prices, the number of tractors we operate, our revenue per tractor (which includes primarily our revenue per total mile and our number of miles per tractor), the freight volumes brokered to third-party equipment providers (including our rail partners), and our ability to control costs.

We are committed to providing our customers a broad and growing range of truckload services and continue to invest considerable resources toward developing a range of solutions for truckload customers across multiple service offerings and transportation modes. Our objective is to operate truckload businesses that, when combined, are industry leading for margin and growth, while providing cost-effective solutions for our customers.


We have created a service network with financial accountability, a modern fleet, and the capability of providing multiple truckload modes to customers in North America. We believe our operating strategies are contributing factors to our revenue and earnings growth.

While all our businesses produced revenue growth during the first quarter of 2013, a meaningful percentage of our growth occurred in less capital-intensive operations such as brokerage, intermodal, drayage services, and our independent contractor fleet. We expect our investment in providing multiple solutions for our customers will lead to additional revenue opportunities.

For the remainder of 2013, we expect truckload freight demand to improve based on our expectation of a moderately growing economy. In addition, we expect that the U.S. Department of Transportation Federal Motor Carrier Safety Administration's Compliance Safety Accountability ("CSA") program, new hours-of-service rules, pending electronic on-board recorders mandate, and other regulations could result in a reduction in effective trucking capacity to serve increased freight demand. In addition, an expanding United States economy could create alternative employment opportunities for drivers we wish to hire. Reduced hours of operation and driver shortages could negatively impact equipment utilization, even in a stronger demand environment. In such an environment, we believe carriers that are well-positioned to develop and retain drivers, withstand supply and demand fluctuations, and provide safe, dependable, and high-quality service to customers will have opportunities to increase freight rates and market share. We believe domestic and global economic and political conditions present the most direct challenges to improved freight demand. These threats include the possibility that rising energy prices, an inability of the United States government to timely and adequately address fiscal issues, currency fluctuations, or other factors outside our control could reduce consumer spending or industrial investment, thus negatively affecting freight volumes. From a cost perspective, we expect recruiting and retaining sufficient numbers of professional truck drivers will become increasingly costly, equipment prices will continue to rise, and higher fuel prices will not be fully offset by fuel surcharges. In the current economic and regulatory environments, it will be important to allocate equipment to more compensatory shipments, use technology to generate efficiencies, and effectively manage fuel and other costs. We believe we have the service center network, the modern fleet, the comprehensive truckload services, the management team, the technology, an intense focus on cost control, and the capital resources to successfully overcome these challenges and capitalize on future opportunities.

We will continue to utilize the flexibility of our decentralized service center network model to react and adapt to market conditions. We will attempt to optimize our model and refine our execution in reaction to, or in anticipation of, truckload market dynamics. We will continue to evaluate acquisition candidates and other opportunities that we anticipate will create value for our shareholders and further advance our long-term strategy.

Revenue and Expenses

We primarily generate revenue by transporting freight for our customers. Generally, we are paid a predetermined rate per mile or per load for our services. We enhance our revenue by charging for tractor and trailer detention, loading and unloading activities, and other specialized services, as well as through the collection of fuel surcharges to mitigate the impact of increases in the cost of fuel. 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, the number of miles we generate with our equipment, and the freight volumes we successfully broker to third-party equipment providers. These factors relate, among other things, to the general level of economic activity in the United States, inventory levels, specific customer demand, the level of capacity in the trucking industry, and driver availability.

The most significant expenses in our business are primarily variable and include fuel, driver-related expenses (such as wages, benefits, training, and recruitment), and independent contractor and third-party carrier costs (which are recorded on the "Purchased transportation" line of our consolidated statements of income). 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 depreciation of long-term assets, such as revenue equipment and service centers and the compensation of non-driver personnel. Effectively controlling our expenses is an important element of assuring our profitability. The primary measure we use to evaluate our profitability is operating ratio, excluding the impact of fuel surcharge revenue (operating expenses, net of fuel surcharge, as a percentage of revenue, before fuel surcharge).

Since our inception, an important element of our operating model has been an extreme focus on our cost per mile. We intend to continue this focus as we expand service offerings, grow existing service centers, and make selective acquisitions.

Recent Results of Operations and Quarter-End Financial Condition

Our results of operations for the quarter ended March 31, 2013 in comparison to the same period in 2012 were:

Revenue, before fuel surcharge, increased 8.0%, to $189.6 million from $175.6 million;

Net income attributable to Knight increased 44.8%, to $15.2 million from $10.5 million; and

Net earnings attributable to Knight per diluted share increased 43.8%, to $0.19 per share from $0.13 per share.

We continued to add capacity and develop our customer relationships during the quarter. Our overall revenue and net income growth was driven by an increase in our average fleet count, increase in our non-asset based services revenue, and our rates per mile improved slightly, while average fuel prices per gallon were up, and tractor utilization was down.

The first quarter of 2012 included a $4.0 million pretax, non-cash stock compensation charge ($3.9 million after tax) relating to the accelerated vesting of certain stock options that had been issued prior to 2009. Excluding the non-cash charge, which is a non-GAAP measurement, net income for the first quarter of 2012 would have been $14.4 million, or $0.18 per diluted share.

In the first quarter of 2013, average revenue per tractor decreased 1.2% while average fleet count increased 2.5% when compared to the same period of 2012. The revenue per tractor decrease was the result of a 1.6% decrease in miles per tractor, offset by a 0.4% increase in revenue per total mile. We realized slight improvement in revenue per loaded mile, which improved 0.7%, while non-paid empty miles increased to 11.0% in the current quarter compared to 10.7% for the same quarter of 2012.

We averaged 4,076 tractors for the first quarter of 2013, compared to an average of 3,978 tractors a year ago; which includes tractors operated by independent contractors that grew from 471 tractors at March 31, 2012 to 480 tractors at March 31, 2013.

Our consolidated operating ratio (operating expenses, net of fuel surcharge, expressed as a percentage of revenue, before fuel surcharge), which is a non-GAAP measurement, was 86.5% for the quarter ended March 31, 2013, compared to 88.7%, or 86.4% excluding the $4.0 million non-cash stock compensation charge, for the quarter ended March 31, 2012.

Our net proceeds from equipment sales, net of capital expenditures, was $1.8 million for the three months ended March 31, 2013, compared to $24.3 million of net capital expenditures, net of proceeds from equipment sales, for the same period a year ago. At March 31, 2013, our cash and cash equivalents totaled $10.2 million, and our shareholders' equity was $501.8 million, compared to $5.7 million and $490.2 million at December 31, 2012.

Results of Operations

The following table sets forth the percentage relationships of our expense items to total revenue, including fuel surcharge (Column A), and revenue, before fuel surcharge (Column B), for the three-month periods ended March 31, 2013 and 2012, respectively. Fuel expense as a percentage of revenue, before fuel surcharge, is calculated using fuel expense, net of fuel surcharge. We believe that eliminating the impact of this sometimes volatile source of revenue affords a more consistent basis for comparing our results of operations from period to period.

We also discuss the changes in our expenses as a percentage of revenue, before fuel surcharge, rather than absolute dollar changes. We do this because we believe the high variable cost nature of our business makes a comparison of changes in expenses as a percentage of revenue, before fuel surcharge, more meaningful than absolute dollar changes.

                                     (A)                                                          (B)
                         (Fuel surcharge included in                             (Fuel surcharge excluded from revenue
                                  revenue)                                            and netted to fuel expense)
                             Three Months Ended                                           Three Months Ended
                                  March 31,                                                    March 31,
                          2013                2012                                  2013                      2012

Total revenue,
including fuel                                           Revenue, before fuel
surcharge                    100.0 %             100.0 % surcharge                      100.0 %                   100.0 %
Operating expenses:                                      Operating expenses:
Salaries, wages and                                      Salaries, wages and
benefits                      24.5                27.8   benefits                        30.4                      34.7
Fuel                          23.7                26.1   Fuel                             5.2                       7.6
Operations and                                           Operations and
maintenance                    6.8                 6.3   maintenance                      8.4                       7.8
Insurance and claims           3.0                 3.5   Insurance and claims             3.8                       4.4
Operating taxes and                                      Operating taxes and
licenses                       1.7                 1.9   licenses                         2.1                       2.4
Communications                 0.5                 0.6   Communications                   0.6                       0.8
Depreciation and                                         Depreciation and
amortization                   9.1                 9.3   amortization                    11.3                      11.6
Purchased                                                Purchased
transportation                18.2                14.5   transportation                  22.6                      18.1
Miscellaneous                                            Miscellaneous
operating expenses             1.6                 1.0   operating expenses               2.1                       1.3
Total operating                                          Total operating
expenses                      89.1                91.0   expenses                        86.5                      88.7
Income from                                              Income from
operations                    10.9                 9.0   operations                      13.5                      11.3
Interest income                0.0                 0.1   Interest income                  0.0                       0.1
Interest expense               0.1                 0.1   Interest expense                 0.1                       0.1
Other income                   0.1                 0.1   Other income                     0.1                       0.1
Income before income                                     Income before income
taxes                         10.9                 9.1   taxes                           13.5                      11.4
Income taxes                   4.4                 4.2   Income taxes                     5.4                       5.3
Net Income                     6.5                 4.9   Net Income                       8.1                       6.1
Net income                                               Net income
attributable to                                          attributable to
noncontrolling                                           noncontrolling
interest                       0.1                 0.1   interest                         0.1                       0.1
Net Income                                               Net Income
attributable to                                          attributable to
Knight                                                   Knight

Transportation 6.4 % 4.8 % Transportation 8.0 % 6.0 %

There are minor rounding differences in the above table.

A discussion of our results of operations for the three months ended March 31, 2013 and March 31, 2012, is set forth below.

Comparison of Three Months Ended March 31, 2013 to Three Months Ended March 31, 2012

Total revenue for the three months ended March 31, 2013, increased 7.2% to $235.4 million from $219.5 million for the same period in 2012. Total revenue included $45.8 million of fuel surcharge revenue in the three-month period of 2013, compared to $43.9 million in the three-month period of 2012.

Revenue, before fuel surcharge, increased 8.0% to $189.6 million for the three months ended March 31, 2013, from $175.6 million for the same period in 2012.

In the first quarter of 2013, our revenue continued to trend positively and we experienced revenue growth in all of our operating segments compared to the same period in 2012. Our asset-based operations increased revenue 2.1%, and our non-asset based service offerings increased revenue 57.9%, while both experienced improved margins in the first quarter of 2013, compared to the same quarter of 2012. We continue to offer the full range of our asset-based offerings and non-asset based offerings to match the best truckload solutions for our customers.

We operated 2.5% additional average tractors in the 2013 quarter versus the 2012 quarter, increased our average revenue per total mile 0.4%, and our average length of haul increased 0.2%, while our non-paid empty mile percentage increased 2.8%. As a result, our average revenue per tractor (excluding fuel surcharges) declined 1.2% due to lower utilization along with the additional tractor count.

Salaries, wages and benefits expense as a percentage of revenue, before fuel surcharge, decreased to 30.4% for the three months ended March 31, 2013, compared to 34.7% for the same period in 2012. The decrease in the 2013 period, as a percentage of revenue, is partially due to the $4.0 million pre-tax, non-cash stock compensation charge recorded in the first quarter of 2012 related to the acceleration of certain stock options issued prior to 2009. Excluding this charge in the 2012 period, salaries, wages and benefits expense would have been 32.4%, expressed as a percentage of revenue, a decrease over the 2012 period due to increased revenue generated from our non-asset based operations serviced by independent contractors, the expenses of which are reflected in purchased transportation. Costs associated with healthcare benefits provided to our employees, and accruals for workers' compensation benefits are a component of our salaries, wages and benefits in our consolidated statements of income. We believe that the driver market remains challenging and the implementation of CSA has further reduced the pool of available drivers. Having a sufficient number of qualified driving associates continues to be a major concern. We have implemented a performance related bonus plan for our drivers, and could be required to create further pay incentives during 2013 given these conditions. However, we continue to seek ways to attract and retain qualified driving associates.

Fuel expense, net of fuel surcharge, as a percentage of revenue before fuel surcharge, decreased to 5.2% for the three months ended March 31, 2012, from 7.6% for the same period in 2012. The decrease as a percentage of revenue before fuel surcharge is primarily due to a combination of growth in our non-asset-based businesses, where no fuel expense is incurred, and improved effectiveness of our fuel efficiency initiatives. We have made changes to minimize empty miles, reduce out of route miles and idle time, improve fuel cost, enhance equipment operations through training, and significantly improve aerodynamics and engine efficiency. We continue to update our fleet with more fuel-efficient 2010 U.S. EPA emission engines; our average fleet age at March 31, 2013 was 2.0 years compared to 1.7 years at March 31, 2012. The national average diesel fuel price increased 1.0% in the three months ended March 31, 2012, when compared to the same period a year ago. Our fuel surcharge program helps to offset increases in fuel prices, but applies only to loaded miles and typically does not offset empty miles, idle time, or out of route miles driven. Typical fuel surcharge programs involve a computation based on the change in national or regional fuel prices. These programs may update as often as weekly, but typically require a specified minimum change in fuel cost to prompt a change in fuel surcharge revenue. Therefore, many of these programs have a time lag between when fuel costs change and when the change is reflected in fuel surcharge revenue. Due to this time lag, during periods of sharply rising fuel costs, our fuel expense, net of fuel surcharge, negatively impacts our operating income, and positively impacts our operating income during periods of falling fuel costs.

Operations and maintenance expense as a percentage of revenue, before fuel surcharge, increased to 8.4% compared to 7.8% for the three month periods ended March 31, 2013 and 2012, respectively. Our average fleet age increased to 2.0 years at March 31, 2013, from 1.7 years at March 31, 2012. Operations and maintenance consists of direct operating expense, maintenance, and tire expense. The increase in the periods, year over year, is due to a combination of rising tire costs and increases in costs associated with preparing trucks for trade as we continue to refresh our fleet. Most of our business segments incurred higher general operating expenses, including driver hire related costs.

Insurance and claims expense as a percentage of revenue, before fuel surcharge, decreased to 3.8% for the quarter ended March 31, 2013, from 4.4% for the quarter ended March 31, 2012. A decrease in frequency of accidents affected the expense positively for this quarter.

Operating taxes and licenses expense as a percentage of revenue, before fuel surcharge, decreased to 2.1% for the three-month period ended March 31, 2013, compared to 2.4% for the same period in 2012. The decrease is due to the increased revenue from our non-asset based service offerings.

Communications expense as a percentage of revenue, before fuel surcharge, decreased to 0.6% for the three-month period ended March 31, 2013, from 0.8% for the same period of 2012, due to the increase in overall revenue.

Depreciation and amortization expense as a percentage of revenue, before fuel surcharge, decreased to 11.3%, compared to 11.6% for the same quarter in 2012. The decrease is due to an increase in revenue from our non-asset based businesses. On a dollar basis, depreciation and amortization expense increased to $21.5 million for the three months ended March 31, 2013, from $20.4 million for the same period in 2012. This increase is due to higher equipment prices for EPA compliant engines. Absent offsetting improvements in revenue per tractor or continued growth in our independent contractor fleet, our expense in this category may increase going forward if equipment prices continue to increase.

Purchased transportation is comprised of amounts paid to independent contractors for our dry van and temperature-controlled operations, as well as contracted carriers for our brokerage operations, to railroads for our intermodal operations, and our sourcing activities. Purchased transportation expense as a percentage of revenue, before fuel surcharge, increased to 22.6% for the three months ended March 31, 2013, from 18.1% for the same period in 2012. The increase in this category is due to the combination of growth in our non-asset . . .

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