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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q
 
ýQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2011

OR

o 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 in its charter)

Texas
(State or other jurisdiction of
incorporation or organization)
 
75-1301831
(IRS Employer Identification No.)
 
1145 Empire Central Place
Dallas, Texas 75247-4305
(Address of principal executive offices)
 
 
(214) 630-8090
(Registrant's telephone number,
including area code)
 
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 such filing requirements for the past 90 days.   ý Yes     o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
x Yes     o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):
 Large accelerated filer   o
Accelerated Filer   o
Non-accelerated filer   x
Smaller Reporting Company   o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes    ý No

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date.
 
Class
 
Number of Shares Outstanding
 
 
Common stock, $1.50 par value
 
17,743,382 at October 21, 2011
 

 
 
 
 

 
 
INDEX
 
 
PART I  Financial Information
Page No.
     
Item 1
Financial Statements
 
 
Consolidated Condensed Balance Sheets (unaudited)
September 30, 2011 and December 31, 2010
1
     
 
Consolidated Condensed Statements of Operations (unaudited)
Three and nine months ended September 30, 2011 and 2010
2
     
 
Consolidated Condensed Statements of Cash Flows (unaudited)
Nine months ended September 30, 2011 and 2010
3
     
 
Consolidated Condensed Statements of Shareholders’ Equity (unaudited)
Nine months ended September 30, 2011 and year ended December 31, 2010
4
     
 
Notes to Consolidated Condensed Financial Statements (unaudited)
5
     
Item 2
Management's Discussion and Analysis of Financial Condition and Results of Operations
8
     
Item 3
Quantitative and Qualitative Disclosures about Market Risk
24
     
Item 4
Controls and Procedures
24
     
 
PART II Other Information
 
     
Item 1
Legal Proceedings
24
     
Item 1A
Risk Factors
25
     
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds
25
     
Item 3
Defaults Upon Senior Securities
25
     
Item 4
Removed and Reserved
25
     
Item 5
Other Information
25
     
Item 6
Exhibits
26
     
 
Signatures
27
     
 
Exhibit Index
28

 

 
 

 

PART I.  FINANCIAL INFORMATION
 
Item 1.    Financial Statements
 

Frozen Food Express Industries, Inc. and Subsidiaries
Consolidated Condensed Balance Sheets
(Unaudited and in thousands)

Assets
 
September 30, 2011
   
December 31, 2010
 
Current assets
           
Cash and cash equivalents
 
$
2,148
   
$
1,203
 
Accounts receivable, net
   
46,695
     
41,921
 
Tires on equipment in use, net
   
6,999
     
5,982
 
Deferred income taxes
   
1,150
     
1,150
 
Other current assets
   
8,307
     
6,575
 
Assets held for sale, net of accumulated depreciation
   
10,818
     
-
 
Total current assets
   
76,117
     
56,831
 
                 
Property and equipment, net
   
63,507
     
72,993
 
Other assets
   
6,185
     
5,081
 
Total assets
 
$
145,809
   
$
134,905
 
                 
Liabilities and Shareholders' Equity
               
Current liabilities
               
Accounts payable
 
$
26,986
   
$
27,443
 
Insurance and claims accruals
   
11,160
     
8,697
 
Accrued payroll and deferred compensation
   
4,959
     
5,032
 
Accrued liabilities
   
1,196
     
709
 
Current maturities of notes payable and capital lease obligations
   
1,407
     
-
 
Total current liabilities
   
45,708
     
41,881
 
                 
                  Long-term debt 
   
28,352
     
5,689
 
Long-term notes payable and capital lease obligations
   
8,146
     
-
 
Deferred income taxes
   
1,506
     
3,153
 
Insurance and claims accruals
   
7,541
     
5,373
 
Total liabilities
   
91,253
     
56,096
 
                 
Shareholders’ equity
               
Common stock, $1.50 par value per share; 75,000 shares authorized;
               
     18,572 shares issued
   
27,858
     
27,858
 
Additional paid-in capital
   
188
  
   
1,353
 
Accumulated other comprehensive loss
   
(69
)
   
-
 
Retained earnings
   
33,332
     
58,242
 
Total common shareholders’ equity
   
61,309
     
87,453
 
Treasury stock (960 and 1,146 shares), at cost
   
(6,753
)
   
(8,644
)
Total shareholders’ equity
   
54,556
     
78,809
 
Total liabilities and shareholders’ equity
 
$
145,809
   
$
134,905
 

See accompanying notes to consolidated condensed financial statements.

 
 
 



 
1

 



 

Frozen Food Express Industries, Inc. and Subsidiaries
Consolidated Condensed Statements of Operations
(Unaudited and in thousands, except per-share amounts)


   
Three Months
Ended September 30,
   
Nine Months
Ended September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Total operating revenue
 
$
102,834
   
$
93,870
   
$
296,270
   
$
274,669
 
Operating expenses
                               
Salaries, wages and related expenses
   
31,766
     
30,243
     
90,868
     
87,288
 
Purchased transportation
   
18,357
     
18,132
     
51,856
     
55,972
 
Fuel
   
25,854
     
18,469
     
73,654
     
51,782
 
Supplies and maintenance
   
15,710
     
13,447
     
42,561
     
36,010
 
Revenue equipment rent
   
9,200
     
9,353
     
26,553
     
27,116
 
Depreciation
   
4,827
     
4,216
     
13,875
     
12,114
 
Communications and utilities
   
1,171
     
1,287
     
3,518
     
3,658
 
Claims and insurance
   
7,476
     
3,486
     
13,204
     
10,764
 
Operating taxes and licenses
   
985
     
1,003
     
3,089
     
3,209
 
Gain on sale of property and equipment
   
(661
)
   
(12
)
   
(1,234
)
   
(592
)
Miscellaneous
   
1,626
     
1,109
     
4,352
     
3,101
 
 Total operating expenses
   
116,311
     
100,733
     
322,296
     
290,422
 
Loss from operations
   
(13,477
)
   
(6,863
)
   
(26,026
)
   
(15,753
)
Interest and other expense (income)
                               
Interest income
   
-
     
(15
)
     
-
   
(30
)
Interest expense
   
247
     
105
     
479
     
308
 
Equity in earnings of limited partnership
   
(192
)
   
(246
)
   
(551
)
   
(443
)
Life insurance and other
   
63
     
(43
)
   
432
     
84
 
 Total interest and other expense (income)
   
118
     
(199
)
   
360
     
(81
)
Loss before income taxes
   
(13,595
)
   
(6,664
)
   
(26,386
)
   
(15,672
)
Income tax expense (benefit)
   
73
     
(4,383
)
   
(1,476
)
   
(5,241
)
Net loss
 
$
(13,668
)
 
$
(2,281
)
 
$
(24,910
)
 
$
(10,431
)
                                 
Net loss per share of common stock
                               
Basic
 
$
(0.77
)
 
$
(0.13
)
 
$
(1.42
)
 
$
(0.61
)
Diluted
 
$
(0.77
)
 
$
(0.13
)
 
$
(1.42
)
 
$
(0.61
)
Weighted average shares outstanding
                               
Basic
   
17,663
     
17,384
     
17,557
     
17,223
 
Diluted
   
17,663
     
17,384
     
17,557
     
17,223
 

See accompanying notes to consolidated condensed financial statements.




 
2

 



Frozen Food Express Industries, Inc. and Subsidiaries
Consolidated Condensed Statements of Cash Flows
 (Unaudited and in thousands)


   
Nine Months
Ended September 30,
 
   
2011
   
2010
 
Cash flows from operating activities
               
Net loss
 
$
(24,910
)
 
$
(10,431
)
Non-cash items included in net loss
               
Gain on sale of property and equipment
   
(1,234
)
   
(592
)
Depreciation and amortization
   
17,029
     
14,963
 
Provision for losses on accounts receivable
   
1,061
     
678
 
Deferred income tax
   
(1,647
)
   
(5,619
)
Deferred compensation
   
152
     
492
 
Postretirement benefits
   
(69
)
   
-
 
Investment income
   
(551
)
   
(443
)
Changes in operating assets and liabilities
               
Accounts receivable
   
(5,835
)
   
(1,854
)
Tires on equipment in use
   
(4,184
)
   
(2,861
)
Other current assets
   
(1,327
)
   
6,521
 
Accounts payable
   
(122
)
   
7,251
 
Other assets
   
(1,536
)
   
(467
)
Insurance and claims accruals
   
4,631
     
(2,441
)
Accrued liabilities, payroll and other
   
995
     
1,796
 
Net cash (used in) provided by operating activities
   
(17,547
)
   
6,993
 
                 
Cash flows from investing activities
               
Expenditures for property and equipment
   
(19,683
)
   
(16,719
)
Proceeds from sale of property and equipment
   
4,969
     
6,531
 
Cash distributions from investment
   
999
     
1,016
 
Other
   
-
     
76
 
Net cash used in investing activities
   
(13,715
)
   
(9,096
)
                 
Cash flows from financing activities
               
Proceeds from borrowings
   
98,273
     
15,272
 
Payments against borrowings
   
(75,610
)
   
(15,272
)
Proceeds from notes payable and capital lease obligations
   
9,685
     
-
 
Repayments of notes payable and capital lease obligations
   
(132
)
   
-
 
Income tax benefit (expense) of stock options and restricted stock
   
22
     
(6
)
Proceeds from capital stock transactions, net
   
604
     
671
 
Purchases of treasury stock
   
(635
)
   
(71
)
Net cash provided by financing activities
   
32,207
     
594
 
                 
Net increase (decrease) in cash and cash equivalents
   
945
     
(1,509
)
Cash and cash equivalents at beginning of period
   
1,203
     
3,667
 
Cash and cash equivalents at end of period
 
$
2,148
   
$
2,158
 
 
See accompanying notes to consolidated condensed financial statements.

 
3

 


 

 Frozen Food Express Industries, Inc. and Subsidiaries
Consolidated Condensed Statements of Shareholders' Equity
 (Unaudited and in thousands)


   
Common Stock
   
Additional
                         
   
Shares
   
Par
   
Paid-in
   
Retained
   
Accumulated other
   
Treasury Stock
       
   
Issued
   
Value
   
Capital
   
Earnings
   
Comprehensive loss
   
Shares
   
Cost
   
Total
 
January 1, 2010
    18,572     $ 27,858     $ 2,923     $ 70,172     $ -       1,477     $ (11,218 )   $ 89,735  
    Net loss
    -       -       -       (11,930 )     -       -       -       (11,930 )
    Treasury stock reacquired
    -       -       -       -       -       21       (76 )     (76 )
    Retirement plans
    -       -       (12 )     -       -       (1 )     4       (8 )
    Exercise of stock options
    -       -       (1,146 )     -       -       (241 )     1,817       671  
    Restricted stock
    -       -       (352 )     -       -       (110 )     829       477  
    Tax expense of stock options
    -       -       (60 )     -       -       -       -       (60 )
December 31, 2010
    18,572       27,858       1,353       58,242       -       1,146       (8,644 )     78,809  
    Net loss
    -       -       -       (24,910 )     -       -               (24,910 )
    Treasury stock reacquired
    -       -       -       -       -       168       (635 )     (635 )
    Retirement plans
    -       -       (137 )     -       (69 )     (28 )     200       (6 )
    Exercise of stock options
    -       -       (1,362 )     -       -       (278 )     1,966       604  
    Restricted stock
    -       -       312       -       -       (48 )     360       672  
    Tax benefit of stock options
    -       -       22       -       -       -       -       22  
September 30, 2011
    18,572     $ 27,858     $ 188     $ 33,332     $ (69 )     960     $ (6,753 )   $ 54,556  

See accompanying notes to consolidated condensed financial statements.


 
4

 

Frozen Food Express Industries, Inc. and Subsidiaries
Notes to Consolidated Condensed Financial Statements
Nine Months Ended September 30, 2011
  (Unaudited)
 

1.    Basis of Presentation
 
The accompanying unaudited consolidated condensed financial statements include Frozen Food Express Industries, Inc., a Texas corporation, and our subsidiary companies, all of which are wholly-owned (collectively, the “Company”).  Our statements have been prepared by management in accordance with generally accepted accounting principles in the United States of America (“US GAAP”) for interim financial statements, and therefore do not include all information and disclosures required by US GAAP for complete financial statements.  In the opinion of management, such statements reflect all adjustments consisting of normal recurring adjustments considered necessary to fairly present our consolidated financial position, results of operations, shareholders’ equity and cash flows for the interim periods presented. The results of operations for any interim period do not necessarily indicate the results for the full year.  The unaudited interim consolidated condensed financial statements should be read with reference to the consolidated financial statements and notes to consolidated financial statements in our 2010 Annual Report on Form 10-K.  All intercompany balances and transactions have been eliminated in consolidation.
 
2.    Revenue Recognition
 
Revenue and associated direct operating expenses are recognized on the date freight is picked up from the shipper.  One of the preferable methods outlined in US GAAP provides for the recognition of revenue and direct costs when the shipment is completed.  Changing to this method would not have a material impact on the interim financial statements.

The Company is the sole obligor with respect to the performance of our freight services provided by owner operators or through our brokerage and logistics services business and we assume all related credit risk. Accordingly, our revenue and the related direct expenses are recognized on a gross basis on the date the freight is picked up from the shipper.  Revenue from equipment rental is recognized ratably over the term of the associated rental agreements.

3.    Long-term Debt

 
     Long-term debt consisted of the following:
 
   
(in thousands)
 
 
  
September 30, 2011
   
December 31, 2010
 
Borrowings under credit facility
  
$
28,352
  
 
$
5,689
 
Notes payable
  
 
6,601
  
   
-
 
Capitalized lease obligations
  
 
2,952
  
   
-
 
Total long-term debt
  
 
37,905
  
   
5,689
 
Less: Current maturities
  
 
(1,407
   
-
 
Total maturities due after one year
  
$
36,498
  
 
$
5,689
 


As of September 30, 2011, the Company had a secured committed credit facility with an aggregate availability of $50 million that matures in March 2015.  At September 30, 2011, $28.4 million was borrowed under the credit facility and $4.0 million of standby letters of credit were issued under the credit facility, which are used primarily for our self-insurance programs and legal matters, reducing the availability under our credit facility to $17.6 million.   As of September 30, 2011, loans outstanding under the credit facility were categorized as either LIBOR loans, which had an interest rate of 2.5%, or bank base rate loans which had an interest rate of 4.5%.


 
5

 

 
The obligations under the credit facility are guaranteed by our parent company and certain named subsidiaries and secured by a pledge of substantially all of our assets. The obligations shall bear interest (i) if a Base Rate Loan (as defined in the credit facility), at the Base Rate (as defined in the credit facility) in effect from time to time, plus the Applicable Margin (as defined in the credit facility); (ii) if a LIBOR loan, at LIBOR for the applicable interest period, plus the Applicable Margin; and (iii) if any other obligation (including, to the extent permitted by law, interest not paid when due), at the Base Rate in effect from time to time, plus the Applicable Margin for Base Rate Revolver Loans (as defined in the credit facility).  Interest shall accrue from the date the Loan is advanced or the obligation is incurred or payable, until paid by the borrowers.  If a loan is repaid on the same day made, one day's interest shall accrue.  We are obligated to comply with certain covenants under the credit facility.

During  the third quarter of 2011 and in the normal course of business, the Company chose to enter into various master security agreements and a capital lease agreement as a different option from off-balance sheet operating leases to finance the purchase of revenue equipment at more favorable rates. The master security agreements provide for funding structured as promissory notes. The Company entered into these master security agreements to finance $6.7 million of revenue equipment in the third quarter of 2011. The effective interest rates on the promissory notes range from 5.5% to 6.4%.  The capital lease obligation for approximately $3.0 million of revenue equipment is structured as a 60- month rental agreement with a fixed price purchase option.  The effective interest rate on the lease is approximately 6.8%.  The capital lease agreement requires us to pay personal property taxes, maintenance, and operating expenses.
 
4.    Income Taxes
 
The Company’s income is taxed in the United States of America and various state jurisdictions. Our federal returns for 2008 and each subsequent year are presently subject to further examination by the Internal Revenue Service.  State returns are filed in most state jurisdictions, with varying statutes of limitations.

The Company calculates income taxes in accordance with US GAAP which requires that, for interim periods, we project full-year income and permanent differences between book income and taxable income in order to calculate an effective tax rate for the entire year.  The projected effective tax rate is used to calculate our income tax provision or benefit for the interim periods’ year-to-date financial results.  Deferred tax assets and liabilities are measured using the tax rates, based on certain judgments regarding enacted tax laws and published guidance, in effect in the years when those temporary differences are expected to reverse. A valuation allowance is established against the deferred tax assets when it is more likely than not that some portion or all of the deferred taxes may not be realized.  The calculation of the deferred tax assets and liabilities, as well as the decision to recognize a tax benefit from an uncertain position and to establish a valuation allowance require management to make estimates and assumptions. We believe that our assumptions and estimates are reasonable, although actual results may have a positive or negative material impact on the balances of deferred tax assets and liabilities, valuation allowances or net income (loss).  Only the assumptions and estimates for the calendar year 2011 are used to determine the reasonableness of the Company’s deferred tax assets and liabilities as of the period ended September 30, 2011.  Due to the operating results in the third quarter of 2011 and our projections for 2011, an adjustment to our valuation allowance was determined to be necessary.  Therefore, for the nine months ended September 30, 2011, the Company recorded a valuation allowance totaling $7.2 million relating to federal and state deferred tax assets.

For the nine months ended September 30, 2011, our effective tax benefit rate was 5.6% compared to 33.4% in the same period of 2010.   This rate approximates our expected tax benefit rate for the entire year and has been applied to year-to-date results from operations.  The difference between our effective tax rate and the federal statutory rate of 35% is primarily attributable to valuation allowances, non-deductible driver related expenses and state income taxes.

 

 
6

 


5.  Loss per common share

Basic and diluted loss per common share was computed as follows:

   
(in thousands, except per-share amounts)
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Numerator:
                           
   Net loss
 
$
(13,668
)
 
$
(2,281
)
 
$
(24,910
)
 
$
(10,431
)
                                 
Denominator:
                               
   Basic-weighted average shares
   
17,663
     
17,384
     
17,557
     
17,223
 
   Effect of dilutive stock options
   
-
     
-
     
-
     
-
 
   Diluted-weighted average shares
   
17,663
     
17,384
     
17,557
     
17,223
 
                                 
Basic loss per common share
 
$
(0.77
)
 
$
(0.13
)
 
$
(1.42
)
 
$
(0.61
)
Diluted loss per common share
 
$
(0.77
)
 
$
(0.13
)
 
$
(1.42
)
 
$
(0.61
)

 
 
For the three months ended September 30, 2011 and 2010, options totaling 452,000 and 554,000, respectively, were outstanding, but were not included in the calculation of diluted weighted average shares as their exercise prices were greater than the average market price of the common shares.  For the nine months ended September 30, 2011 and 2010, options totaling 443,000 and 552,000, respectively, were outstanding but were not included in the calculation of diluted weighted average shares as their exercise prices were greater than the average market price of the common shares.  As of September 30, 2011, the Company has granted 366,000 deferred stock units which have a contractual participation right to share in current earnings and voting rights. These deferred stock units are included in basic weighted average shares outstanding.
 
6.    Related Party Transactions
 
The Company purchases trailers and trailer refrigeration units that are used in our operations from W&B Service Company, L.P. (“W&B”), an entity in which we own a 19.9% equity interest. The Company accounts for that investment under the equity method of accounting.  As of September 30, 2011 and 2010, our equity investment in W&B was $1.5 million, which is included in "Other Assets" in the accompanying consolidated condensed balance sheets.

For the nine months ended September 30, 2011 and 2010, our equity in the earnings of W&B before profit elimination was $0.7 million and $0.4 million, respectively. Cash distributions to us from W&B’s earnings were $1.0 million for the same period in 2011 and 2010, respectively.

During the three months ended September 30, 2011 and 2010, the Company’s purchases from W&B for trailers and refrigeration units totaled $19.5 million and $11.5 million, respectively.  During the nine month periods ended September 30, 2011 and 2010, the purchases were $23.1 million and $11.5 million, respectively.  The Company also utilizes W&B to provide routine maintenance and warranty repair of trailers and refrigeration units.  During the three months ended September 30, 2011 and 2010, W&B invoiced the Company $0.2 million and $0.3 million, respectively, for maintenance and repair services, accessories and parts.   During the nine months ended September 30, 2011 and 2010, W&B invoiced the Company $0.8 million and $0.9 million, respectively, for maintenance and repair services, accessories and parts.

7.    Commitments and Contingencies
 
The Company is involved in legal actions that arise in the ordinary course of business.  Although the outcomes of any such legal actions cannot be predicted, in the opinion of management, the resolution of any currently pending or threatened actions will not have a material adverse effect upon our financial position or results of operations.  

The Company accrues for costs related to public liability, cargo, employee health insurance and work-related injury claims. When a loss occurs, we record a reserve for the estimated outcome. As additional information becomes available, adjustments are made. Accrued claims liabilities include all such reserves and our estimate for incidents that have been incurred but not reported.

 
7

 
8.    Recent Accounting Pronouncements

We have reviewed recently issued accounting pronouncements and determined that they do not have a material impact on our consolidated financial statements.
 
9.     Assets held for sale

Revenue equipment categorized as assets held for sale, net of accumulated depreciation on the Consolidated Condensed Balance Sheet at September 30, 2011 totaled $10.8 million. Assets held for sale are no longer subject to depreciation, and are recorded at the lower of depreciated carrying value or fair market value less selling costs. We expect to sell these assets by the end of 2011 as stated below in Note 10, Subsequent Events.
 
10.     Subsequent Events

On October 5, 2011, the Company announced that it will restructure its dry-freight service offerings to improve operating efficiencies.  The Company will continue to offer dry-freight options in certain lanes via the Company’s temperature-controlled trailers; however, it will no longer provide dry freight services via a dedicated fleet of dry van trailers.  The Company will use the proceeds of these sales, which it anticipates to be approximately $15.5 million, to reduce debt.
 
On October 20, 2011, the Company announced an agreement to sell substantially all trailers and most of the tractors related to our dry-freight services to a major transportation company specializing in these services.  Further restructuring associated with this business decision are under review, which will include a reduction in back office work force and will be recorded in the fourth quarter of 2011 along with any additional costs related to the restructuring.
 
Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying unaudited consolidated condensed financial statements and our Annual Report on Form 10-K for the year ended December 31, 2010.  This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions.  Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including, but not limited to, those included in our Form 10-K, “Part I, Item 1A . Risk Factors” for the year ended December 31, 2010.  We do not assume, and specifically disclaim, any obligation to update any forward-looking statement contained in this report.

Business Overview

The results for the third quarter ended September 30, 2011 were extremely disappointing.  The unfavorable outcome of two disputed insurance claims from 2005 and 2006, significantly higher maintenance costs as a result of higher average age of tractors and higher than anticipated startup costs attributable to the expansion of logistics services for an existing customer combined to significantly increase operating costs for the quarter.  In addition, hurricane Irene struck the Northeast in late August and caused additional operating inefficiencies including the greater use of purchased transportation from outside carriers. High fuel prices, driver shortages, and equipment costs continued as major challenges for the trucking industry; therefore, emphasis on yield improvement and driver retention and recruitment continued as key areas of focus.  We capitalized on the success of our driver academy to bolster recruitment efforts and implemented yield improvement initiatives to offset the rising costs associated with equipment and fuel.   Influenced by the industry driver shortage and more specifically a reduction in owner operators, we finished the third quarter of 2011 with 41 fewer trucks in service, on average, versus the third quarter of 2010.  The FFE Driver Academy provided 219 drivers to the Company during the third quarter and had 116 drivers enrolled in the training program by the end of the quarter.  In the third quarter of 2011 the Company increased its training and related driver academy costs by approximately $0.5 million compared to the same period in 2010.  These efforts will continue as the driver shortage is expected to continue for the foreseeable future.

Pressure on operating costs continues to increase despite the ongoing softness in the economy.  High fuel prices have put pressure on consumer spending habits.  We are now experiencing rising commodity prices that have caused equipment costs to increase almost 40% over the last six years and approximately 6% in 2011 alone.  Tire prices are increasing this year in the range of 15% to 20% as our tire costs increased $0.6 million in the third quarter of 2011 compared to the same period in 2010.  These costs are placing continued rate pressure on the trucking industry which has not recovered from the rate losses of the past few years.

 
8

 


On a positive note, less-than-truckload (“LTL”) and brokerage and logistics services revenues improved compared to the same quarter last year. Improving demand and tightened capacity for truckload services continued to support rates in the nine months ended September 30, 2011 with overall improved rates per mile compared to last year.  LTL tonnage and shipment count increased during the third quarter of 2011 compared to the same period in 2010.  During the third quarter of 2011, the Company achieved an improvement of 4.3% in its revenue per total mile and 4.4% in revenue per hundredweight, versus the same period in 2010.  While these rate improvements were insufficient to offset increasing costs during the third quarter, we are continuing to implement rate increases and change our business mix to offset costs and improve yield.  The current capacity constraints, increases in LTL tonnage and shipment count ultimately resulted in improved pricing per hundredweight.   Our revenues continued to show improvement in the third quarter of 2011 as a result of continued emphasis on pricing in truckload services and increased tonnage in our LTL service.   We continue to focus on providing excellent service and have deployed information technology that we anticipate will differentiate our services and improve shipping efficiencies.  Compared to last year’s levels, the surge in fuel prices in 2011 has increased shippers’ resistance to fuel price surcharges. Fuel surcharges help to offset the higher cost of tractor fuel only and do not offset higher fuel costs related to refrigerated trailers. Other escalating costs related to equipment, government regulations such as the Compliance Safety Accountability (“CSA”) program, or higher driver recruiting and retention costs must be overcome by higher rates and business levels.

We are a national leader in full service temperature controlled transportation services and other freight services such as, dedicated, brokerage and logistics services, and dry-freight for a wide range of customers.  We generate our revenue from truckload, LTL, dedicated and brokerage and logistics services we provide to our customers.  Generally, we are paid either by the mile, the weight or the number of trucks being utilized by our dedicated service customers.  We also derive revenue from fuel surcharges, loading and unloading activities, equipment detention and other ancillary services.  The main factors that affect our revenue are the rate 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 to, among other things, the United States economy, inventory levels, the level of truck capacity in the transportation industry and specific customer demand.  We monitor our revenue production primarily through average revenue per truck per week, net of fuel surcharges, revenue-per-hundredweight for our LTL services, empty mile ratio, revenue per loaded (and total) miles, the number of linehaul shipments, loaded miles per shipment and the average weight per shipment. 
 
Results of Operations

During the third quarter of 2011, our total operating revenue increased by $8.9 million, or 9.5%, compared to the same period in 2010.  Our total operating revenue, net of fuel surcharges, increased $2.0 million, or 2.6%, to $81.5 million from $79.5 million compared to the same period in 2010.  Excluding fuel surcharges, our average revenue per tractor per week increased 0.6% to $3,229 from $3,209, as a result of a 4.3% increase in revenue per total mile and decrease in our empty mile ratio to 11.4% from 11.7% compared to the same period in 2010.   

Our truckload revenue decreased $2.6 million in the third quarter of 2011, or 5.5%, primarily due to a reduction in weekly average trucks in service and a decrease in revenue related to our dry-freight services.  As a result of continued tightened capacity, targeted price increases and our focus on service, our truckload revenue per loaded mile improved in the third quarter of 2011 to $1.63 from $1.56 compared to the same period in 2010, an increase of 4.5%.  LTL tonnage levels increased 0.1% in the third quarter of 2011 as a result of business from existing customers and the addition of freight from new customers. Although some softness in LTL rates continues, efforts were initiated to address specific pricing increases and other yield enhancements. Revenue-per-hundredweight increased 4.4% in the third quarter of 2011 to $14.44 from $13.83 in the same period of 2010.  In the third quarter of 2011, brokerage and logistics services revenue grew by 244.1%, primarily due to expanded logistics services provided to an existing customer and to a lesser extent, revenue from services provided to customers in the oil field services industry compared to the same period of 2010.  These expanded logistics services include contract-pricing based temperature controlled truckload, LTL and brokered services, while the oil field services revenue pertains to both brokered and asset-based transportation services. Dedicated revenue declined 5.3% in the third quarter of 2011 compared to the same period in 2010. 



 
9

 

The impact on our profitability attributable to operating expense is primarily influenced by variable costs associated with transporting freight for our customers and fixed costs largely related to salaried operations personnel, facilities and equipment. Costs that are more variable in nature include fuel expense, driver-related expenses such as wages, benefits, recruitment and training, and owner operator costs, which are recorded under purchased transportation.  Expenses that have both fixed and variable components include maintenance, tire expense and our total cost of insurance and claims.  These expenses generally vary with the miles we drive, but also have a controllable component based on safety, fleet age, efficiency and other factors.  Our main fixed costs relate to the acquisition and financing of long-term assets, such as revenue equipment and service centers.  Although certain factors affecting our expenses are beyond our control, we monitor them closely and attempt to anticipate changes in these factors to help us manage our business.  For example, fuel prices fluctuated dramatically and quickly at various times during the last several years. We manage our exposure to changes in fuel prices primarily through fuel surcharge programs with our customers, as well as through volume fuel purchasing arrangements with national fuel centers and bulk purchases of fuel at our service centers.  To help further reduce fuel expense, we manage the maximum rate of speed and monitor tractor engine efficiency through controlling cab temperatures when idle.  In addition, new technology currently being deployed will contribute to improved management of out of route miles and other factors that influence fuel costs. 

Our total operating expenses as a percentage of total operating revenue, or “operating ratio,” was 113.1% for the third quarter of 2011 compared to 107.3% for the same period in 2010.  In dollar terms, operating expenses increased at a higher rate than our revenue due to increased fuel costs, settlement of certain insurance claims, increased supplies and equipment expenses due to higher maintenance costs, increased freight handling expenses in our LTL operations and start-up costs related to our logistics services, the driver academy and driver recruiting costs.   Our loss per basic and diluted share increased in the third quarter of 2011 to $0.77 compared to $0.13 in the same period of 2010.

                Our business requires substantial, ongoing capital investments, particularly for new tractors and trailers. At September 30, 2011, we had $28.4 million outstanding under our credit facility and $54.6 million in shareholders’ equity.  In the third quarter of 2011, we added approximately $14.9 million of property and equipment, had $1.2 million of sales proceeds from dispositions, and recognized a gain of $0.7 million for the disposition of used equipment.  These capital expenditures were funded with cash flows from operations, borrowings under our credit facility, proceeds from structured promissory notes and a capital lease.  We estimate capital expenditures, net of proceeds from dispositions, will range from $15 to $17 million in 2011. Due to favorable financing rates and terms compared to operating lease alternatives, our capital expenditures increased from prior estimates as planned equipment acquisitions were purchased instead of procured through operating leases.

 

 
10

 

The following table summarizes and compares the significant components of revenue and presents our operating ratio and revenue per truck per week for each of the three- and nine-month periods ended September 30:   

   
Three Months
   
Nine Months
 
Revenue from: (a)
 
2011
   
2010
   
2011
   
2010
 
Temperature-controlled fleet
 
$
29,875
   
$
29,776
   
$
90,231
   
$
85,935
 
Dry-freight fleet
   
10,444
     
12,906
     
33,567
     
42,197
 
Total truckload linehaul services
   
40,319
     
42,682
     
123,798
     
128,132
 
Dedicated fleets
   
4,140
     
4,374
     
13,051
     
12,985
 
Total truckload
   
44,459
     
47,056
     
136,849
     
141,117
 
Less-than-truckload linehaul services
   
30,740
     
29,408
     
85,908
     
82,412
 
Fuel surcharges
   
21,298
     
14,382
     
62,683
     
41,886
 
Brokerage and logistics services
   
5,585
     
1,623
     
8,269
     
5,388
 
Equipment rental  
   
752
     
1,401
     
2,561
     
3,866
 
Total operating revenue
   
102,834
     
93,870
     
296,270
     
274,669
 
                                 
Operating expenses
   
116,311
     
100,733
     
322,296
     
290,422
 
Loss from operations
 
$
(13,477
)
 
$
(6,863
)
 
$
(26,026
)
 
$
(15,753
)
Operating ratio (b)
   
113.1
%
   
107.3
%
   
108.8
%
   
105.7
%
                                 
Total truckload revenue
 
$
44,459
   
$
47,056
   
$
136,849
   
$
141,117
 
Less-than-truckload  revenue
   
30,740
     
29,408
     
85,908
     
82,412
 
Total linehaul and dedicated fleet revenue 
 
$
75,199
   
$
76,464
   
$
222,757
   
$
223,529
 
                                 
Weekly average trucks
   
1,772
     
1,813
     
1,772
     
1,779
 
Revenue per truck per week (c)
 
$
3,229
   
$
3,209
   
$
3,223
   
$
3,222
 
 

  Computational notes:
(a)
Revenue and expense amounts are stated in thousands of dollars.
(b)
Operating expenses divided by total operating revenue.
(c)
Average daily revenue, times seven, divided by weekly average trucks.
 

 
11

 

            
The following table summarizes and compares selected statistical data relating to our freight operations for each of the three- and nine-month periods ended September 30:
 
   
Three Months
   
Nine Months
 
Truckload
 
2011
   
2010
   
2011
   
2010
 
    Total linehaul miles (a)
   
27,994
     
30,923
     
87,748
     
94,843
 
    Loaded miles (a)
   
24,809
     
27,294
     
77,889
     
83,805
 
    Empty mile ratio (b)
   
11.4
%
   
11.7
%
   
11.2
%
   
11.6
%
    Linehaul revenue per total mile (c)
 
$
1.44
   
$
1.38
   
$
1.41
   
$
1.35
 
    Linehaul revenue per loaded mile (d)
 
$
1.63
   
$
1.56
   
$
1.59
   
$
1.53
 
    Linehaul shipments (a)
   
27.8
     
31.0
     
86.4
     
93.5
 
    Loaded miles per shipment (e)
   
891
     
882
     
902
     
896
 
LTL
                               
    Hundredweight
   
2,128,575
     
2,126,278
     
6,194,980
     
5,990,371
 
    Shipments (a)
   
70.3
     
68.6
     
198.3
     
191.6
 
    Linehaul revenue per hundredweight (f)
 
$
14.44
   
$
13.83
   
$
13.87
   
$
13.76
 
    Linehaul revenue per shipment (g)
 
$
437
   
$
429
   
$
433
   
$
430
 
    Average weight per shipment (h)
   
3,026
     
3,098
     
3,124
     
3,126
 
 
Computational notes:
(a)
Amounts are stated in thousands.
(b)
Total truckload linehaul miles less truckload loaded miles, divided by total truckload linehaul miles.
(c)
Revenue from truckload linehaul services divided by total truckload linehaul miles.
(d)
Revenue from truckload linehaul services divided by truckload loaded miles.
(e)
Total truckload loaded miles divided by number of truckload linehaul shipments.
(f)
LTL revenue divided by LTL hundredweight.
(g)
LTL revenue divided by number of LTL shipments.
(h)
LTL hundredweight times one hundred divided by number of shipments. 

The following table summarizes and compares the makeup of our fleets between company-provided tractors and tractors provided by owner operators as of September 30:

   
2011
 
2010
 
Total company tractors available
   
1,613
 
1,507
 
Total independent contractor tractors available
   
286
 
312
 
Total tractors available
   
1,899
 
1,819
 
Total trailers available
   
3,826
 
3,600
 




 
12

 

 
Comparison of Three Months Ended September 30, 2011 to Three Months Ended September 30, 2010

The following table sets forth revenue, operating income, operating ratios and revenue per truck per week and the dollar and percentage changes of each:

Revenue from (a)
 
2011
   
2010
   
Dollar Change
2011 vs. 2010
 
Percentage Change
2011 vs. 2010
   
Temperature-controlled fleet
 
$
29,875
   
$
29,776
   
$
99
 
0.3
 
%
Dry-freight fleet
   
10,444
     
12,906
     
(2,462
)
(19.1
)
 
     Total truckload linehaul services
   
40,319
     
42,682
     
(2,363
)
(5.5
)
 
Dedicated fleets
   
4,140
     
4,374
     
(234
)
(5.3
)
 
     Total truckload
   
44,459
     
47,056
     
(2,597
)
(5.5
)
 
Less-than-truckload linehaul services
   
30,740
     
29,408
     
1,332
 
4.5
   
Fuel surcharges
   
21,298
     
14,382
     
6,916
 
48.1
   
Brokerage and logistics services
   
5,585
     
1,623
     
3,962
 
244.1
   
Equipment rental  
   
752
     
1,401
     
(649
)
(46.3
)
 
     Total operating revenue 
   
102,834
     
93,870
     
8,964
 
9.5
   
                               
Operating expenses
   
116,311
     
100,733
     
15,578
 
15.5
   
Loss from operations
 
$
(13,477
 
$
(6,863
 
$
(6,614
)
96.4
 
%
Operating ratio (b)
   
113.1
%
   
107.3
%
             
                               
Total truckload revenue
 
$
44,459
   
$
47,056
   
$
(2,597
)
(5.5
)
%
Less-than-truckload revenue
   
30,740
     
29,408
     
1,332
 
4.5
   
     Total linehaul and dedicated fleet revenue 
 
$
75,199
   
$
76,464
   
$
(1,265
)
(1.7
)
%
                               
Weekly average trucks
   
1,772
     
1,813
     
(41
)
(2.3
)
%
Revenue per truck per week (c)
 
$
3,229
   
$
3,209
   
$
20
 
0.6
 
%
  
Computational notes:
(a)
Revenue and expense amounts are stated in thousands of dollars.
(b)
Operating expenses divided by total operating revenue.
(c)
Average daily revenue, times seven, divided by weekly average trucks in service.

Total operating revenue increased $8.9 million, or 9.5%, in the third quarter of 2011 to $102.8 from $93.9 million compared to the same period in 2010.  Excluding fuel surcharges, our total operating revenue increased $2.0 million, or 2.5%, to $81.5 million from $79.5 million compared to the same period in 2010.
 
                Truckload revenue, excluding fuel surcharges, decreased $2.6 million, or 5.5%, to $44.5 million from $47.1 million in 2010.  Truckload revenues declined primarily due to a reduction in the average number of trucks in service to 1,772 from 1,813 and a reduction in revenue from dry-freight services compared to the same period in 2010.  Loaded miles declined 9.1% to 24.8 million from 27.3 million in the same period of 2010.  Our empty mile ratio decreased to 11.4% from 11.7% compared to the same period in 2010.   Following the same pattern from the second quarter, the continued tightened capacity in the truckload sector was reflected in truckload revenue per loaded mile, which improved 4.5% in the third quarter to $1.63 from $1.56 compared to the same period in 2010.

LTL revenue increased $1.3 million, or 4.5%, to $30.7 million from $29.4 million.  The increase in revenue was primarily driven by an increase in the number of shipments combined with higher weight per shipment.  Total tonnage shipped for the quarter increased slightly 0.1% to 212.9 million pounds from 212.6 million pounds compared to the same period in 2010.  Revenue-per-hundredweight improved to $14.44 in the third quarter of 2011 from $13.83 in the same period in 2010.
 
Brokerage and logistics services revenue grew $4.0 million, or 244.1%, primarily due to expanded logistics services provided to an existing customer and to a lesser extent, revenue from services provided to new customers in the oil field services industry.  These expanded logistics services include contract-pricing based temperature controlled truckload, LTL and brokered services, while the oil field services revenue pertains to both brokered and asset-based transportation services.
 
 
13

 
 
Fuel surcharges represent the cost of fuel that we are able to pass along to our customers based upon changes in the Department of Energy’s weekly indices.  Net fuel prices per gallon increased approximately 39.5% during the third quarter of 2011, resulting in increased fuel surcharges of $6.9 million, or an increase of 48.1% compared to the same period in 2010.  The higher fuel surcharge is offset by increased fuel costs to the Company within fuel and purchased transportation expenses.  Since fuel surcharges only apply to billable miles, or laden miles, they do not help offset the fuel costs incurred by empty, or out of route miles, or the use of fuel in our refrigeration units.
 
                The following table sets forth for the periods indicated the dollar and percentage increase or decrease of the items in our consolidated condensed statements of operations and those items as a percentage of revenue:

    
(in thousands)
Dollar Change
 
Percentage Change
 
Percentage of Revenue
 
   
2011 vs. 2010
 
2011 vs. 2010
 
  2011 
 
  2010 
 
Total operating revenue
 
$
8,964
 
9.5
%
100.0
%
100.0
%
                     
Operating expenses
                   
     Salaries, wages and related expenses
   
1,523
 
5.0
 
30.9
 
32.2
 
     Purchased transportation
   
225
 
1.2
 
17.9
 
19.3
 
     Fuel
   
7,385
 
40.0
 
25.1
 
19.7
 
     Supplies and maintenance
   
2,263
 
16.8
 
15.3
 
14.3
 
     Revenue equipment rent
   
(153
)
(1.6
)
8.9
 
10.0
 
     Depreciation
   
611
 
14.5
 
4.7
 
4.5
 
     Communications and utilities
   
(116
)
(9.0
)
1.1
 
3.7
 
     Claims and insurance
   
3,990
 
114.5
 
7.3
 
1.4
 
     Operating taxes and licenses
   
(18
)
(1.8
)
1.0
 
1.1
 
     Gain on sale of property and equipment
   
(649
)
5408.3
 
(0.6
)
0.0
 
     Miscellaneous
   
517
 
46.6
 
1.6
 
1.1
 
Total operating expenses
 
$
15,578
 
15.5
%
113.1
%
107.3
%

Total operating expenses for the third quarter of 2011 increased $15.6 million, or 15.5%, to $116.3 million from $100.7 million during the same period in 2010.  The operating ratio increased in the third quarter of 2011 to 113.1% from 107.3% in the same period of 2010, as our operating expenses increased at a higher rate than our revenue.  The increase was in part due to an adjustment for a liability claim settlement recorded in the third quarter of 2011.  Also contributing to the increase was the ongoing increase in fuel costs, increase in supplies and maintenance costs mainly due to aged equipment repair, and driver costs related to recruiting and the driver academy.
 
Salaries, wages and related expenses consist of compensation for our employees, including drivers and non-drivers.  It also includes employee-related costs, including the costs of payroll taxes, work-related injuries, group health insurance and other employee benefits.  The most variable of these salary, wage and related expenses is driver pay, which is affected by the mix of company drivers and owner operators in our fleets as well as efficiencies in our over-the-road operations.  Driver salaries including per diem costs increased $0.7 million in the third quarter of 2011, or 4.3%, primarily due to an increase in driver headcount offset by decrease in miles driven. Recent graduates of our driving academy continue to train with an experienced driver for six weeks, contributing to the driver headcount increase. Non-driver salaries remained relatively flat in the third quarter of 2011 compared to the same period in 2010. Our non-driving employee headcount was 779 at the end of the third quarter of 2011 compared to 710 at the end of the same period in 2010. The majority of the increase in headcount resulted from additional dock workers, customer service representatives and employees to support new logistics services. Driven by a 50.8% increase in group health costs, group health insurance and work related injury costs increased $0.6 million in the third quarter of 2011.
 
 

 
14

 

Purchased transportation expense consists of payments to owner operators for the equipment and services they provide, payments to other motor carriers who handle our brokerage or cartage services and to various railroads for intermodal services.  It also includes fuel surcharges paid to our owner operators for which we charge our customers.  These expenses are highly variable with revenue and/or the mix of company drivers versus owner operators.  Purchased transportation expense slightly increased $0.2 million, or 1.2%, in the third quarter of 2011 compared to the same period in 2010.   Intermodal purchased transportation expense decreased $0.5 million, or 12.1%, compared to the same period in 2010. The portion of our purchased transportation connected with our truckload and LTL services decreased $1.7 million, excluding fuel surcharges, primarily reflecting a decrease in the number of owner operators utilized during the third quarter of 2011.  Purchased transportation associated with our brokerage and logistics services increased $1.4 million, or 105.0% in the third quarter of 2011 compared to the same period in 2010, primarily due to expanded logistics services provided to an existing customer as well as services provided to customers in the oil field services industry.  Fuel payments to our owner operators increased $0.9 million in the third quarter of 2011, or 35.9%, to $3.5 million from $2.6 million compared to the same period in 2010 due to an increase in fuel surcharges.
 
Fuel expense and fuel taxes increased by $7.4 million, or 40.0%, to $25.9 million from $18.5 million compared to the same period in 2010.   The increase was primarily due to a 39.5% increase in net fuel price per gallon.  We have fuel surcharge provisions in substantially all of our transportation contracts and attempt to recover a portion of fuel price increases through fuel surcharges and rates to our customers.  Our fuel surcharges apply to tractor fuel, but not to fuel used for the refrigeration units.
 
 Supplies and maintenance expenses primarily consist of repairs, maintenance and tires along with load specific expenses including loading/unloading, tolls, pallets, pickup and delivery and recruiting.  Supplies and maintenance costs increased $2.3 million, or 16.8%, in the third quarter of 2011 compared to the same period in 2010.  The increase in expense was primarily a result of higher tractor repairs and maintenance costs of $1.1 million due to an increase in the average age of the fleet, an increase in freight handling of $0.3 million, and driver related expenses of $0.5 million.  In addition, tire cost has been influenced by multiple price increases during the quarter, increasing 15% to 20% compared to earlier in the year.
 
Total revenue equipment rent decreased $0.2 million in the third quarter of 2011, or 1.6%, to $9.2 million from $9.4 million compared to the same period in 2010.  The lower cost is primarily due to a decrease in the average number of tractors under lease at the end of the second quarter of 2011 of 1,105 compared to 1,147 in the same period of 2010. The average cost of equipment will increase as we replace older equipment with new equipment.  We expect equipment costs to increase in future periods as a result of higher prices of new equipment.
 
Depreciation expense relates to owned tractors, trailers, communications units, service centers and other assets. Gains or losses on dispositions of revenue equipment are set forth in a separate line item within our statements of operations.  Depreciation expense increased $0.6 million, or 14.5%, primarily as a result of purchasing revenue equipment off of lease programs, purchasing new trailers as well as an increase in depreciation resulting from new technology equipment placed in service.  Depreciation expense is also dependent upon the mix of Company-owned equipment versus leased equipment.  Future depreciation expense will also be impacted by our leasing decisions.
 
Claims and insurance expense consists of the costs of premiums, as well as reserves we make within our self-insured retention program, primarily for personal injury, property damage, physical damage and cargo claims.  These expenses vary and are dependent on the frequency and severity of accidents, our self-insured retention amounts and the insurance market. Claims and insurance costs increased in the third quarter of 2011 by $4.0 million, or 114.5%, to $7.5 million from $3.5 million in the same period of 2010.  The increase was primarily due to a $3.3 million unfavorable settlement of an award including interest and other legal costs for a claim from 2005 and an adjustment recorded for a liability claim settled during the quarter.  The Company is responsible for the first $4.0 million on each personal injury and property damage claim.  We have excess coverage from $4.0 million to $75.0 million.   Our significant self-insured retention exposes us to the possibility of significant fluctuations in claims expense between periods depending on the frequency, severity and timing of claims and to adverse financial results if we incur large or numerous losses.  In the event of an uninsured claim above our insurance coverage, a claim that approaches the maximum self-insured retention level or an increase in the frequency or severity of claims within our self-insured retention, our financial condition and results of operations could be materially and adversely affected.

The Company’s effective tax expense rate was 0.5% for the three months ended September 30, 2011 versus a tax benefit rate of 65.8% for the three months ended September 30, 2010.  We pay our drivers a per-diem allowance for travel related expenses for which we are only able to deduct 80% for tax purposes.  The difference between our effective tax rate and the federal statutory rate of 35% is primarily attributable to valuation allowances, non-deductible driver related expenses and state income taxes.
 
As a result of factors described above, our net loss increased to $13.7 million in the third quarter of 2011 compared to a net loss of $2.3 million in the same period of 2010.  Our net loss per share decreased to $0.77 per diluted share from a net loss of $0.13 per diluted share in 2010.
 
 
15

 
 
Comparison of Nine Months Ended September 30, 2011 to Nine Months Ended September 30, 2010

The following table sets forth revenue, operating income, operating ratios and revenue per truck per week and the dollar and percentage changes of each:

Revenue from (a)
 
2011
   
2010
   
Dollar Change
2011 vs. 2010
 
Percentage Change
2011 vs. 2010
   
Temperature-controlled fleet
 
$
90,231
   
$
85,935
   
$
4,296
 
5.0
 
%
Dry-freight fleet
   
33,567
     
42,197
     
(8,630
)
(20.5
)
 
     Total truckload linehaul services
   
123,798
     
128,132
     
(4,334
)
(3.4
)
 
Dedicated fleets
   
13,051
     
12,985
     
66
 
0.5
   
     Total truckload
   
136,849
     
141,117
     
(4,268
)
(3.0
)
 
Less-than-truckload linehaul services
   
85,908
     
82,412
     
3,496
 
4.2
   
Fuel surcharges
   
62,683
     
41,886
     
20,797
 
49.7
   
Brokerage and logistics services
   
8,269
     
5,388
     
2,881
 
53.5
   
Equipment rental  
   
2,561
     
3,866
     
(1,305
)
(33.8
)
 
     Total operating  revenue 
   
296,270
     
274,669
     
21,601
 
7.9
   
                               
Operating expenses
   
322,296
     
290,422
     
31,874
 
11.0
   
Loss from operations
 
$
(26,026
 
$
(15,753
 
$
(10,273
)
65.2
 
%
Operating ratio (b)
   
108.8
%
   
105.7
%
             
                               
Total truckload revenue
 
$
136,849
   
$
141,117
   
$
(4,268
)
(3.0
)
%
Less-than-truckload revenue
   
85,908
     
82,412
     
3,496
 
4.2
   
     Total linehaul and dedicated fleet revenue 
 
$
222,757
   
$
223,529
   
$
(772
)
(0.3
)
%
                               
Weekly average trucks
   
1,772
     
1,779
     
(7
)
(0.4
)
%
Revenue per truck per week (c)
 
$
3,223
   
$
3,222
   
$
1
 
-
 
%
  
Computational notes:
(a)
Revenue and expense amounts are stated in thousands of dollars.
(b)
Operating expenses divided by total operating revenue.
(c)
Average daily revenue, times seven, divided by weekly average trucks.

Total operating revenue increased $21.6 million, or 7.9%, in the nine months ended September 30, 2011 to $296.3 million from $274.7 million in the same period in 2010.  Excluding fuel surcharges, our total operating revenue increased $0.8 million, or 0.3%, to $233.6 million from $232.8 million compared to the same period in 2010.

Truckload services continued to be impacted by a shortage of drivers. The nine months ended September 30, 2011 registered average trucks in service that were essentially flat compared to the same period in 2010.  Truckload revenue, excluding fuel surcharges, decreased $4.3 million, or 3.0%, to $136.8 million from $141.1 million in 2010 primarily due to a decrease in dry freight services.  Loaded miles decreased 7.1% to 77.9 million from 83.8 million in the same period of 2010.   Our empty mile ratio decreased to 11.2% from 11.6% compared to the same period in 2011.  Our revenue per loaded mile increased to $1.59 from $1.53 in the same period of 2010 due to the strength of pricing programs, which are successful in part by the capacity supply constraints related to the tight driver market.
 
Driven by increased shipment tonnage and number of shipments, LTL revenue increased $3.5 million, or 4.2%, to $85.9 million from $82.4 million in the same period in 2010.  Total tonnage for the nine months ended September 30, 2011 increased 3.4% to 619.4 million pounds from 599.0 million pounds compared to the same period in 2010.   Unlike the truckload services market, our LTL services met resistance to price increases in the first two quarters of 2011, as this sector has enjoyed more availability to capacity than the truckload market, but we achieved pricing gains in the third quarter of 2011.  Despite this road block, our revenue-per-hundredweight increased to $13.87 in the nine months ended September 30, 2011, from $13.76 compared to the same period in 2010.

 
 

 
16

 

Brokerage and logistics services revenue grew $2.9 million, or 53.5%, primarily due to expanded logistics services provided to an existing customer and to a lesser extent, revenue from services provided to customers in the oil field services industry.  These expanded logistics services include contract-pricing based temperature controlled truckload, LTL and brokered services, while the oil field services revenue pertains to both brokered and asset-based transportation services.

Fuel surcharges represent the cost of fuel that we are able to pass along to our customers based upon changes in the Department of Energy’s weekly indices.  Net fuel prices per gallon increased approximately 37.1% during the nine months ended September 30, 2011, resulting in increased fuel surcharges of $20.8 million, an increase of 49.7% compared to the same period in 2010.  The higher fuel surcharge is offset by increased fuel costs to the Company within fuel and purchased transportation expenses.
 
                The following table sets forth for the periods indicated the dollar and percentage increase or decrease of the items in our consolidated condensed statements of operations and those items as a percentage of revenue:

   
(in thousands)
Dollar Change
 
Percentage Change
 
Percentage of Revenue
 
   
2011 vs. 2010
 
2011 vs. 2010
 
  2011 
 
  2010 
 
Total operating revenue
 
$
21,601
 
7.9
%
100
%
100.0
%
                     
Operating expenses
                   
     Salaries, wages and related expenses
   
3,580
 
4.1
 
30.7
 
31.8
 
     Purchased transportation
   
(4,116
)
(7.4
)
17.5
 
20.4
 
     Fuel
   
21,872
 
42.2
 
24.9
 
18.9
 
     Supplies and maintenance
   
6,551
 
18.2
 
14.4
 
13.1
 
     Revenue equipment rent
   
(563
)
(2.1
)
9.0
 
9.9
 
     Depreciation
   
1,761
 
14.5
 
4.7
 
4.4
 
     Communications and utilities
   
(140
)
(3.8
)
1.2
 
1.3
 
     Claims and insurance
   
2,440
 
22.7
 
4.5
 
3.9
 
     Operating taxes and licenses
   
(120
)
(3.7
)
1.1
 
1.2
 
     Gain on sale of property and equipment
   
(642
)
108.4
 
(0.4
)
(0.2
)
     Miscellaneous
   
1,251
 
40.3
 
1.5
 
1.1
 
Total operating expenses
 
$
31,874
 
11.0
%
108.8
%
105.7
%

Total operating expenses for the nine months ended September 30, 2011 increased $31.9 million, or 11.0%, to $322.3 million from $290.4 million compared to the same period in 2010.   The operating ratio increased 3.1% to 108.8% from 105.7% compared to the same period in 2010.
 
Salaries, wages and related expenses consist of compensation for our employees, including drivers and non-drivers.  It also includes employee-related costs, including the costs of payroll taxes, work-related injuries, group health insurance and other fringe benefits.  The most variable of these salary, wage and related expenses is driver pay, which is affected by the mix of company drivers and owner-operators in our fleets as well as our efficiencies in our over-the-road operations.  Driver salaries including per diem costs increased $2.9 million, or 5.8%, in the nine months ended September 30, 2011 compared to the same period in 2010 primarily due to an increase in driver headcount offset by fewer miles driven.  Non-driver salaries increased $0.4 million as a result of hiring additional operations personnel for dedicated areas including instructors for the FFE Driver Academy, as well as for dock workers, customer service representatives and employees to support new logistics services.  Despite a significant increase in group health costs in the third quarter ended September 30, 2011, group health insurance costs and work-related injury decreased $0.4 million in the nine months ended September 30, 2011 due to a decrease in the average cost of claims in the first half of 2011, offset by an increase in cost of claims dollars incurred in the third quarter of 2011compared to the same period in 2010.
 

 
17

 

Purchased transportation expense consists of payments to owner operators for the equipment and services they provide, payments to other motor carriers who handle our brokerage and cartage services and to various railroads for intermodal services.  It also includes fuel surcharges paid to our owner operators for which we charge our customers.  These expenses are highly variable with revenue and/or the mix of company drivers versus owner operators.  Purchased transportation expense decreased $4.1 million, or 7.4%, in the nine months ended September 30, 2011 compared to the same period in 2010.  Purchased transportation expense related to our intermodal service decreased by $0.7 million excluding fuel surcharges, or 6.7%, compared to the same period in 2010.  The portion of our purchased transportation connected with our truckload and LTL services decreased $6.2 million, excluding fuel surcharges, in the nine months ended September 30, 2011, primarily reflecting a decrease in the number of owner operators utilized during 2011 compared to the same period in 2010.  Purchased transportation associated with our brokerage and logistics services increased $0.5 million, or 11.4% in the nine months ended September 30, 2011 compared to the same period in 2010, primarily due to a significant addition to our brokerage and logistics services customer base in the third quarter of this year.  Fuel payments to our owner operators increased $2.2 million, or 26.1%, to $10.5 million from $8.3 million compared to the same period in 2010 due to an increase in fuel surcharges.

Fuel expense and fuel taxes increased $21.9 million, or 42.2%, in the nine months ended September 30, 2011 to $73.7 million from $51.8 million compared to the same period in 2010.   The increase was primarily due to a 37.1% increase in net fuel price per gallon.  We have fuel surcharge provisions in substantially all of our transportation contracts and attempt to recover a portion of fuel price increases through fuel surcharges and rates to our customers.  Our fuel surcharges apply to tractor fuel burned in loaded miles, but not empty miles, and do not apply to fuel used for the refrigeration units.
 
Supplies and maintenance expenses primarily consist of repairs, maintenance and tires along with load specific expenses including loading/unloading, tolls, pallets, pickup and delivery and recruiting.  Supplies and maintenance costs increased $6.6 million in the nine months ended September 30, 2011, or 18.2%, compared to the same period in 2010.  This increase was primarily driven by an increase in fleet repairs and maintenance costs of $2.1 million due to an increase in the average age of the fleet, an increase in freight handling costs of $1.3 million, additional costs of $1.1 million related the driver academy, and $0.9 million related to driver recruiting compared to the same period in 2010.  
 
Total revenue equipment rent decreased $0.6 million, or 2.1%, in the nine months ended September 30, 2011 to $26.5 million from $27.1 million in the same period of 2010.  The lower costs are primarily due to a decrease in the average number of tractors under lease at the end of September 2011 of 1,074, compared to 1,145 at the same period in 2010.  The average cost of equipment will increase as we replace older equipment with new equipment.  We expect equipment costs to increase in future periods as a result of higher prices of new equipment.
 
Depreciation expense relates to owned tractors, trailers, communications units, service centers and other assets. Gains or losses on dispositions of revenue equipment are set forth in a separate line item within our statements of operations.  Depreciation expense increased $1.8 million, or 14.5%, primarily as a result of purchases of revenue equipment off of lease programs, purchases of new trailers as well as an increase in depreciation resulting from new technology equipment placed in service.  Depreciation expense is also dependent upon the mix of company-owned equipment versus leased equipment.  Future depreciation expense will also be impacted by our leasing decisions.

Claims and insurance expense consists of the costs of premiums, as well as reserves we make within our self-insured retention program, primarily for personal injury, property damage, physical damage and cargo claims.  These expenses vary and are dependent on the frequency and severity of accidents, our self-insured retention amounts and the insurance market. Claims and insurance costs increased by $2.4 million, or 22.7%, in the nine months ended September 30, 2011 to $13.2 million from $10.8 million compared to the same period in 2010.   The increase was primarily due to an unfavorable settlement of a claim from 2005 and an adjustment recorded for a liability claim settled during the current quarter.  The Company is responsible for the first $4.0 million on each personal injury and property damage claim.  We have excess coverage from $4.0 million to $75.0 million.   Our significant self-insured retention exposes us to the possibility of significant fluctuations in claims expense between periods depending on the frequency, severity and timing of claims and to adverse financial results if we incur large or numerous losses.  In the event of an uninsured claim above our insurance coverage, a claim that approaches the maximum self-insured retention level or an increase in the frequency or severity of claims within our self-insured retention, our financial condition and results of operations could be materially and adversely affected.
 
The Company’s effective tax benefit rate was 5.6% in the nine months ended September 30, 2011 compared to 33.4% in the same period of 2010.  We pay our drivers a per-diem allowance for travel related expenses for which we are only able to deduct 80% for tax purposes.  The difference between our effective tax rate and the federal statutory rate of 35% is primarily attributable to valuation allowances, non-deductible driver related expenses and state income taxes.
 
 
18

 
 
As a result of factors described above, our net loss increased to $24.9 million in the nine months ended September 30, 2011 compared to a net loss of $10.4 million in the same period of 2010.  Our net loss per share increased to $1.42 per diluted share from a loss of $0.61 per diluted share in 2010.

Liquidity and Capital Resources
 
Our business requires substantial, ongoing capital investments, particularly for new tractors and trailers. Our primary sources of liquidity are funds provided by operations, our credit facility and our ability to enter into equipment leases with various financing institutions.  A portion of our tractor fleet is provided by owner operators who own and operate their own equipment. We have no capital expenditure requirements relating to those drivers who own their tractors or obtain financing through third parties. However, to the extent we purchase tractors and extend financing to the owner operators through our tractor purchase program, we have an associated capital expenditure requirement.           

    The Company announced a restructure inclusive of selling revenue equipment related to its dry-freight services stated in Item 1, Note 10 Subsequent events.  As a result, we should see a significant reduction in maintenance costs, improvement in fuel economy and other operating efficiencies.  In addition, the Company is in the process of developing and implementing other operational and sales initiatives to reduce costs and improve yield on our service offerings.  These initiatives include, but are not limited to adding service offerings which focus on improving margins and returns on assets, improving insurance and liability claims strategy to reduce, or prevent, the high settlement losses that had significant impact on third quarter operating results, reducing our equipment maintenance costs by improving our average fleet age, and reducing our payroll costs through a reduction in back office staffing levels.  We expect these changes to improve our operating results in the future.
 
 In November 2007, our Board of Directors approved a share repurchase program to repurchase up to 1.3 million shares of our common stock. This program is intended to be implemented through purchases made in either the open market or through private transactions.  The timing and extent to which we will repurchase shares depends on market conditions, our bank agreement, and other corporate considerations.  We made no open market purchases in 2011 or 2010 and have available approximately 747,000 shares that can be repurchased from that and previous authorizations. The repurchase program does not have an expiration date.
             
We establish credit terms with our customers based upon their financial strength and their historical payment pattern.   Many of our largest customers under contract are Fortune 500 companies.  Given the current economic conditions, we have placed additional emphasis on our review of significant outstanding receivable balances.  Accounts receivable are recorded at the invoiced amounts, net of an allowance for doubtful accounts.  A considerable amount of judgment is required in assessing the realization of these receivables including the current creditworthiness of each customer and related aging of the past-due balances, including any billing disputes.  In order to assess the collectability of these receivables, we perform ongoing credit evaluations of our customers’ financial condition.  Through these evaluations, we may become aware of a situation in which a customer may not be able to meet its financial obligations due to deterioration of its financial viability, credit ratings or bankruptcy.  Our allowance for doubtful accounts is based on the best information available to us and is reevaluated and adjusted as additional information is received.  We evaluate the allowance based on historical write-off experience, the size of the individual customer balances, past-due amounts and the overall national economy.  Invoice balances outstanding past the contractual due date are considered past due per our policy and the customer balances are reviewed for collectability.     Initial payments by new customers are monitored for compliance with contractual terms.  Account balances are charged off against the allowance after all means of collection have been exhausted and the potential recovery is considered remote.

On March 28, 2011, the Company secured a committed credit facility with an aggregate availability of $50 million that matures in March 2015.   The facility replaced the Company’s former credit facility and has more favorable terms and provides for the ongoing working capital needs and general corporate purposes required by the company.   At September 30, 2011, $28.4 million was borrowed under the credit facility and $4.0 million of standby letters of credit were issued under the credit facility, which are used primarily for our self-insurance programs and legal matters, reducing the availability under our credit facility to $17.6 million.   As mentioned in Item 1, Note 10, Subsequent events, proceeds from the sale of revenue equipment related to our dry freight services will be used to reduce borrowings under our credit facility.




 
19

 

The obligations under the credit facility are guaranteed by our parent company and certain named subsidiaries and secured by a pledge of substantially all of our assets. The obligations shall bear interest (i) if a Base Rate Loan (as defined in the credit facility), at the Base Rate (as defined in the credit facility) in effect from time to time, plus the Applicable Margin(as defined in the credit facility); (ii) if a LIBOR loan, at LIBOR for the applicable interest period, plus the Applicable Margin; and (iii) if any other obligation (including, to the extent permitted by law, interest not paid when due), at the Base Rate in effect from time to time, plus the Applicable Margin for Base Rate Revolver Loans (as defined in the credit facility).  Interest shall accrue from the date the Loan is advanced or the obligation is incurred or payable, until paid by Borrowers.  If a loan is repaid on the same day it is made, one day's interest shall accrue.  We are obligated to comply with certain covenants under the new credit facility.  These covenants provide various guidelines and/or restrictions related to inspections, financial information, notices, insurance, subsidiaries, permitted debt and permitted liens.  The bank agreement calls for the Applicable Margin to be determined by the fixed charge ratio for the end of the quarter prior to the current quarter as defined in the Loan and Security Agreement.  This provision does not impact the third quarter of 2011 as the margins remain at Level II until September 30, 2011, per the bank agreement.  Should this provision have been in effect for the third quarter, our Applicable Margin would be priced under Level III.    The Applicable Margin table, as determined in the Loan and Security Agreement is shown below.

“Applicable Margin: with respect to any Type of Loan the margin set forth below, as determined by the Fixed Charge Coverage Ratio for the last Fiscal Quarter”:

Level
 
Ratio
 
Base Rate Revolver Loans (other than Base Rate Equipment Loans)
 
LIBOR Revolver Loans (other than LIBOR Equipment Loans)
 
Base Rate Equipment Loans
 
LIBOR Equipment Loans
 
I
 
> 2.00 to 1.00
 
1.00 %
 
2.00 %
 
1.50 %
 
2.50 %
 
II
 
> 1.15 to 1.00 and < 2.00 to 1.00
 
1.25 %
 
2.25 %
 
1.75 %
 
2.75 %
 
III
 
< 1.15 to 1.00
 
1.50 %
 
2.50 %
 
2.00 %
 
3.00 %
 


As of September 30, 2011, we were in compliance with the covenants under the credit facility and anticipate our compliance will continue during the remainder of 2011.

During the third quarter of 2011 and in the normal course of business, the Company chose to enter into various master security agreements and a capital lease agreement as a different option from off-balance sheet operating leases to finance the purchase of revenue equipment at more favorable rates. The master security agreements provide for funding structured as promissory notes. The Company entered into these master security agreements to finance $6.7 million of revenue equipment in the third quarter of 2011. The effective interest rates on the promissory notes range from 5.5% to 6.4%.  The capital lease obligation for approximately $3.0 million of revenue equipment is structured as a 60- month rental agreement with a fixed price purchase option.  The effective interest rate on the lease is approximately 6.8%.  The capital lease agreement requires us to pay personal property taxes, maintenance, and operating expenses. The future payments due under the notes payable and capital lease agreement are shown in Contractual Obligations within this section of Management’s Discussion and Analysis.

Cash Flows

The table below reflects our net cash flows (used in) provided by operating activities, investing activities and financing activities and outstanding debt, for the periods indicated.

   
(in thousands)
 
   
Nine Months Ended September 30,
 
   
2011
   
2010
 
Net cash flows (used in) provided by operating activities
 
$
(17,547
)
 
$
6,993
 
Net cash flows used in investing activities
   
(13,715
)
   
(9,096
)
Net cash flows provided by financing activities
   
32,207
     
594
 
Borrowings under credit facility
   
28,352
     
-
 




 
20

 

For the nine months ended September 30, 2011, cash flows used in operating activities primarily consisted of an increase in insurance and claims of $4.6 million, an increase in accounts receivable of $5.8 million and purchases of tires on equipment in use of $4.2 million.  We believe our sources of liquidity are adequate to meet our current and anticipated needs. Based upon anticipated cash flows, current borrowing availability and sources of financing we expect to be available to us, we do not anticipate any significant liquidity constraints in the foreseeable future.  We estimate that capital expenditures, net of proceeds from dispositions, will range from $15 to $17 million in 2011.

Contractual Obligations

The following is a summary of our contractual obligations as of September 30, 2011:

   
(in thousands)
 
   
Total
   
2011
     
2012-2013
     
2014-2015
   
After 2015
 
Letters of credit
 
$
4,045
   
$
-
   
$
4,045
   
$
-
   
$
-
 
Purchase obligations
   
13,739
     
13,739
     
-
     
-
     
-
 
Borrowings under credit facility
   
28,352
     
-
     
-
     
28,352
     
-
 
Capital lease obligations, including interest
   
3,661
     
139
     
1,110
     
1,110
     
1,302
 
Notes payable
   
6,601
     
253
     
2,168
     
2,434
     
1,746
 
Operating leases obligations
                                       
Rentals
   
97,190
     
9,035
     
52,039
     
20,026
     
16,090
 
Residual guarantees
   
23,049
     
849
     
10,316
     
10,534
     
1,350
 
   
176,637
   
$
24,015
   
$
69,678
   
$
62,456
   
$
20,488
 

                The purchase obligations are commitments for equipment replacement that will be received ratably over the course of the year.

Off-Balance Sheet Arrangements

As of September 30, 2011, we had 1,178 tractors and 2,360 trailers under operating leases as well as six service centers with 10,000 square feet or more, with varying termination dates ranging from October 2011 through May 2024 and total obligations of $97.2 million.  Rent expense related to operating leases involving vehicles during the nine months ended September 30, 2011 and 2010 was $26.6 million and $27.1 million, respectively.  In general, the equipment lease renewal terms include month-to-month extensions of the regular lease terms or an early buy-out option on certain tractor leases.  These lease agreements require us to pay personal property taxes, maintenance, and operating expenses.  As of September 30, 2011, we maintained $4.0 million in standby letters of credit related to self-insured programs and legal matters.  These standby letters of credit allow the Company to self-insure a portion of its insurance exposure.

Inflation and Fuel Costs
 
Most of our operating expenses are inflation-sensitive, with inflation generally producing increased costs of operations. During the past three years, the most significant effects of inflation have been on revenue equipment prices, accident claims, health insurance, employee compensation, maintenance parts and supplies, and fuel.  We attempt to limit the effects of inflation through increases in freight rates, fixed price contracts, and cost control efforts.
 
                 In addition to inflation, fluctuations in fuel prices can affect our profitability. We require substantial amounts of fuel to operate our tractors and power the temperature-control units on our trailers. Substantially all of our contracts with customers contain fuel surcharge provisions. Although we historically have been able to pass through most long-term increases in fuel prices and related taxes to our customers in the form of surcharges and higher rates, such increases usually are not fully recovered.  Fuel cost related to the refrigeration units is not generally offset by a fuel surcharge.  We do not currently hedge our exposure to fuel prices through financial derivatives.

Seasonality
 
                Our temperature-controlled truckload operations are affected by seasonal changes. The growing seasons for fruits and vegetables in Florida, California and Texas typically create increased demand for trailers equipped to transport cargo requiring refrigeration. Our LTL operations are also impacted by the seasonality of certain commodities. LTL shipment volume during the winter months is normally lower than other months. Shipping volumes of LTL freight are usually highest from July through October.  LTL volumes also tend to increase in the weeks before holidays such as Easter, Halloween, Thanksgiving and Christmas when significant volumes of food and candy are transported. 

 
21

 
 
Our tractor productivity generally decreases during the winter season as inclement weather impedes operations and some shippers typically reduce their shipments as there is less need for temperature control during colder months than warmer months. At the same time, operating expenses generally increase with harsh weather creating higher accident frequency, increased claims and more equipment repairs.  To the extent that extreme weather patterns increase in severity or frequency due to climate changes, we would expect to see an increase in the effect of inclement or extreme weather patterns.  We do not have the ability to forecast these potential changes or the impact of these changes.

Effects of Climate Change and Climate Change Regulation

Greenhouse gas emissions have increasingly become the subject of a large amount of international, national, regional, state and local attention. Cap and trade initiatives to limit greenhouse gas emissions have been introduced in the European Union (“EU”). Similarly, numerous bills related to climate change have been introduced in the United States Congress, which could adversely impact all industries. In addition, future regulation of greenhouse gases could occur pursuant to future U.S. treaty obligations, statutory or regulatory changes under the Clean Air Act or new climate change legislation.  It is uncertain whether any of these initiatives will be implemented, although, based on published media reports, we believe it is not reasonably likely the current proposed initiatives will be implemented without substantial modification. If such initiatives are implemented, restrictions, caps, taxes, or other controls on emissions of greenhouse gases, including diesel exhaust, could significantly increase our operating costs. Restrictions on emissions could also affect our customers that use significant amounts of energy or burn fossil fuels in producing or delivering the products we carry including, but not limited to, food producers and distributors. Although significant cost increases, government regulation, and changes of consumer needs or preferences for goods or services relating to alternative sources of energy or emissions reductions or changes in our customers' shipping needs could materially affect the markets for the products we carry, which in turn could have a material adverse effect on our results of operations, financial condition, and liquidity, or, in the alternative, could result in increased demand for our transportation services. We are currently unable to predict the manner or extent of such effect.

Critical Accounting Policies

                The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (“US GAAP”) requires management to make estimates and assumptions about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue and expenses in our consolidated financial statements and related notes.  We base our estimates, assumptions and judgments on historical experience, current trends and other factors believed to be relevant at the time our consolidated financial statements are prepared.  However, because future events and their effects cannot be determined with certainty, actual results could differ from our estimates and assumptions, and such differences could be material.  We believe the following critical accounting policies affect our more significant estimates, assumptions and judgments used in the preparation of our consolidated financial statements.
 
Accounts Receivable.  We are dependent upon contracts with significant customers that generate a large portion of our revenue.  Accounts receivable are recorded at the invoiced amounts, net of an allowance for doubtful accounts.  A considerable amount of judgment is required in assessing the realization of these receivables including the current creditworthiness of each customer and related aging of the past-due balances, including any billing disputes.  In order to assess the collectability of these receivables, we perform ongoing credit evaluations of our customers’ financial condition.  Through these evaluations, we may become aware of a situation in which a customer may not be able to meet its financial obligations due to deterioration of its financial viability, credit ratings or bankruptcy.  The allowance for doubtful accounts is based on the best information available to us and is reevaluated and adjusted as additional information is received.  We evaluate the allowance based on historical write-off experience, the size of the individual customer balances, past-due amounts and the overall state of the economy.  We perform ongoing reviews of the adequacy of our allowance for doubtful accounts.  Invoice balances past the contractual due date are considered past due per our policy and the customer balances are reviewed for collectability.  Account balances are charged off against the allowance after all means of collection have been exhausted and the potential recovery is considered remote.

Revenue Recognition.  The Company recognizes revenue and the related direct costs on the date the freight is picked up from the shipper.  One of the preferable methods under US GAAP provides the recognition of revenue and direct costs when the shipment is completed.  Changing to this method would not have a material impact on the quarterly financial results or operations of the Company.




 
22

 

 
Property and Equipment.  The transportation industry is capital intensive. Our net property and equipment was $63.5 million as of September 30, 2011 and $73.0 million as of December 31, 2010. Our depreciation expense was $13.9 million for the nine months ended September 30, 2011 and $12.1 million for the nine months ended September 30, 2010.  Depreciation is computed based on the cost of the asset, reduced by its estimated residual value, using the straight-line method for financial reporting purposes.  Accelerated methods are used for income tax reporting purposes.  Additions and improvements to property and equipment are capitalized at cost.  Maintenance and repair expenditures are charged to operations as incurred.  Gains and losses on disposals of revenue equipment are included in operations as they are a normal, recurring component of our operations.  We have minimal risk to the used equipment market as the majority of our tractors have a pre-arranged trade-in value typically at the end of 42 months, which is utilized as the residual value in computing depreciation expense.
 
Impairment of Assets.  Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate 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. 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.
 
Insurance and claims.  We are self-insured for a portion of losses relating to workers’ compensation, auto liability, general liability, cargo and property damage claims, along with employees’ health insurance with varying risk retention levels.  We maintain insurance coverage for per-incident occurrences and in excess of these risk retention levels in amounts we consider adequate based upon historical experience and our ongoing review.  We reserve currently for the estimated cost of the uninsured portion of pending claims. These reserves are periodically evaluated and adjusted based on our evaluation of the nature and severity of outstanding individual claims and an estimate of future claims development based on historical claims development factors.  The Company accrues for the anticipated legal and other costs to settle the claims currently.  We are responsible for the first $4.0 million on each personal injury and property damage.  We have excess coverage from $4.0 million to $75.0 million.  Our significant self-insured retention exposes us to the possibility of significant fluctuations in claims expense between periods depending on the frequency, severity and timing of claims and to adverse financial results if we incur large or numerous losses.  In the event of an uninsured claim above our insurance coverage, a claim that approaches the maximum self-insured retention level or an increase in the frequency or severity of claims within our self-insured retention, our financial condition and results of operations could be materially and adversely affected.

Income Taxes.  Income taxes are accounted for in accordance with US GAAP. The Company records income taxes under the asset and liability method, whereby deferred tax assets and liabilities are recognized based on the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and attributable to operating loss and tax credit carryforwards. As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate.  This process involves estimating our current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and financial reporting purposes.  These temporary differences result in deferred tax assets and liabilities, which are included in our accompanying consolidated balance sheets.  Deferred tax assets and liabilities are measured using the tax rates enacted by certain tax laws and published guidance expected to apply to taxable income in effect to those years in which the temporary differences are expected to reverse.  To the extent it is determined it is not likely that our deferred tax assets will be recovered, a valuation allowance must be established for the amount of the deferred tax assets determined not to be realizable.  We believe that our assumptions and estimates are reasonable, although actual results may have a positive or negative material impact on the balances of deferred tax assets and liabilities, valuation allowances or net income. Based upon our recent operating history, we will continue to assess whether we will realize all, part, or none of the deferred tax assets.   We will apply judgment to determine the amount of valuation allowance, if any, that would be required in any given period.  Due to the operating results in the third quarter of 2011 and our projections for   2011, an adjustment to our valuation allowance was determined to be necessary.  Therefore, for the nine months ended September 30, 2011, the Company recorded a valuation allowance totaling $7.2 million relating to federal and state deferred tax assets.

Recent Accounting Pronouncements

We have reviewed recently issued accounting pronouncements and determined that they will not have a material impact on our consolidated financial statements.

 

 
23

 


Item 3.   Quantitative and Qualitative Disclosures about Market Risk
 
We are exposed to a variety of market risks, primarily from price increases in fuel and certain commodities used as raw material in our equipment, and interest rates. These risks have not materially changed between December 31, 2010 and the nine months ended September 30, 2011.
 
Commodity Price Risk
 
Our operations are heavily dependent upon fuel prices.  The price and availability can vary and are subject to political, economic and market factors that are beyond our control.  Significant increases in diesel fuel costs could materially and adversely affect our results of operations and financial condition; however, historically, we’ve been able to recover the majority of diesel fuel price increases from customers in the form of fuel surcharges.  Fuel prices have fluctuated greatly in recent years. In some periods, our operating performance was adversely affected because we were not able to fully offset the impact of higher diesel fuel prices through increased freight rates and fuel surcharges. We cannot predict the extent to which high fuel price levels will continue in the future or the extent to which fuel surcharges could be collected to offset such increases. We do not currently enter into derivative hedging arrangements that protect us against fuel price increases.  Given the volatility in fuel prices and the impact fuel surcharge revenues have on total operating revenue, we often make reference to total operating revenue excluding fuel surcharges to provide a more consistent basis for comparison of operating revenue without the impact of fluctuating fuel prices.  A 5% increase in the average fuel cost per gallon would result in annual increased fuel costs of approximately $4.9 million that would be substantially offset by fuel surcharges.
 
Interest Rate Risk
 
Our market risk is also affected by changes in interest rates.  We have historically maintained a combination of fixed rate and variable rate obligations to manage our interest rate exposure.  Fixed rates are generally maintained within our lease obligations while variable rates are contained within our credit facility.
 
We are exposed to interest rate risk primarily from our credit facility.  Our credit facility provides for borrowings that bear interest based on LIBOR, plus a certain percentage.  At September 30, 2011 there was $28.4 million outstanding under our current credit facility and at December 31, 2010 there was $5.7 million outstanding under our previous credit facility that has since been terminated.
 
As of September 30, 2011, we held no market-risk-sensitive instruments for trading purposes.  For purposes other than trading, we held approximately 56,000 shares of our common stock at a value of $0.1 million in a Rabbi Trust investment. Our consolidated financial statements include the assets and liabilities of the Rabbi Trust established to hold the investments of participants in our 401(k) Wrap Plan and for deferred compensation liabilities under our Executive Bonus and Phantom Stock Plan.  Such liabilities are adjusted from time to time to reflect changes in the market price of our common stock.  To the extent the trust assets are invested in our stock, our future compensation expense and income will be impacted by fluctuations in the market price of our stock.
 
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 Chief Financial Officer.  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2011.  There were no changes in our internal control over financial reporting that occurred during the period covered by this report 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.

 
PART II.  OTHER INFORMATION
 
 Item 1.    Legal Proceedings

We are involved in litigation incidental to our operations, primarily involving claims for personal injury, property damage, work-related injuries and cargo losses incurred in the ordinary and routine transportation of freight.   We believe that the routine litigation is adequately covered by our insurance reserves and adverse effects arising from these events will not have a material impact on our financial statements.
   
 

 
24

 


Item 1A.    Risk Factors
 
Certain risks associated with our operations are discussed in our Annual Report on Form 10-K for the year ended December 31, 2010, under the heading “Risk Factors” in Item 1A of that report.  We do not believe there has been any material changes in these risks during the nine months ended September 30, 2011.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
 
On November 9, 2007, our Board of Directors renewed our authorization to purchase up to 1,263,900 shares of our common stock.  At September 30, 2011, there were a total of 747,200 remaining authorized shares that could be repurchased.  During the third quarter of 2011, 5,700 shares were repurchased.  The authorization did not specify an expiration date.  Shares may be purchased from time to time on the open market or through private transactions at such times as management deems appropriate.  Purchases may be discontinued by our Board of Directors at any time.

Period
Total Number of Shares Purchased
(a)
 
Average Price Paid per Share
(b)
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
(c)
 
Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
(d)
July 2011
-
 
$
-
 
-
 
752,900
August 2011
5,700
   
3.30
 
5,700
 
747,200
September 2011
  -
 
 
-
 
-
 
747,200
Total
5,700
 
$
3.30
 
5,700
 
747,200


Item 3.    Defaults Upon Senior Securities
 
None.
 
Item 4.    Removed and Reserved
 

Item 5.    Other Information
 
None.
 

 
25

 


Item 6.    Exhibits

3.1
Restated Articles of Incorporation of Frozen Food Express Industries, Inc. (filed as Exhibit 3(i) to the Company’s Current Report on Form 8-K on May 29, 2007 and incorporated herein by reference).
   
3.2
Amended and Restated Bylaws of Frozen Food Express Industries, Inc., as amended (filed as Exhibit 99.1 to Registrant's Current Report on Form 8-K filed on March 3, 2011 and incorporated herein by reference).
   
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
 
 
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
 
 
32.1
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
   
101
The following financial statements from Frozen Food Express Industries, Inc. Form 10-Q for the quarter ended September 30, 2011, filed on October 28, 2011, formatted in XBRL (eXtensible Business Reporting Language):  (i) Consolidated Condensed Balance Sheets, (ii) Consolidated Condensed Statement of Operations, (iii) Consolidated Condensed Statement of Cash Flows, (iv) Consolidated Condensed Statement of Shareholder’s Equity and (v) Notes to Consolidated Condensed Financial Statements, tagged as blocks of text.

 
26

 


SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of l934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
 
FROZEN FOOD EXPRESS INDUSTRIES, INC.
 
(Registrant)