Form 10-Q for EXPRESS-1 EXPEDITED SOLUTIONS INC
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14-Aug-2006
Quarterly Report
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements. This Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts, included or incorporated by reference in this Form 10-Q which address activities, events or developments that the Company expects or anticipates will or may occur in the future, including such things as future capital expenditures (including the amount and nature thereof), finding suitable merger or acquisition candidates, expansion and growth of the Company's business and operations, and other such matters are forward-looking statements. These statements are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments as well as other factors it believes are appropriate in the circumstances. However, whether actual results or developments will conform with the Company's expectations and predictions is subject to a number of risks and uncertainties, general economic market and business conditions; the business opportunities (or lack thereof) that may be presented to and pursued by the Company; changes in laws or regulation; and other factors, most of which are beyond the control of the Company.
This Form 10-Q contains statements that constitute "forward-looking statements." These forward-looking statements can be identified by the use of predictive, future-tense or forward-looking terminology, such as "believes," "anticipates," "expects," "estimates," "plans," "may," "will," or similar terms. These statements appear in a number of places in this filing and include statements regarding the intent, belief or current expectations of the Company, its directors or its officers with respect to, among other things: (i) trends affecting the Company's financial condition or results of operations for its limited history; (ii) the Company's business and growth strategies; (iii) the Company's ability to integrate the companies it has acquired and, (iv) the Company's financing plans. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors. Factors that could adversely affect actual results and performance include, among others, the Company's limited operating history, potential fluctuations in quarterly operating results and expenses, government regulation, technology change and competition. Consequently, all of the forward-looking statements made in this Form 10-Q are qualified by these cautionary statements and there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequence to or effects on the Company or its business or operations. The Company assumes no obligations to update any such forward-looking statements.
Executive Summary
Express-1 Expedited Solutions, Inc. (formerly, Segmentz, Inc.) ("we", "us", "our" and the "Company") operates as an expedited transportation company. We provide our services to over 1,000 customers, specializing in time sensitive transportation fulfilled through a variety of exclusive use vehicles, providing reliable same day or high priority service between points within the United States and parts of Canada. Our services include expedited surface transportation, aircraft charters and dedicated expedited delivery. Our vehicle classifications include cargo vans, both 12 foot and 24 foot straight trucks and tractor-trailers. We offer an ISO 9001:2000 certified, twenty-four hour, seven day a week call center allowing our customers immediate communication and status updates on time sensitive shipments while in-transit. Our customers are provided with electronic alerts, shipment tracking, proof of delivery reconciliation, billing status and performance reports. We are dedicated to providing premium services that are customized to meet our client's individual needs and flexible enough to cope with an ever-changing business environment.
We refer to our primary expedite transportation services which represent approximately 89% of our consolidated revenues as Express-1. Our dedicated expedite operations managed from Evansville, Indiana which represents approximately 11% of our consolidated revenues is referred to as Evansville or Evansville Dedicated.
Our customers are supported through two primary service locations. Our Express-1 operations are located in Buchanan, Michigan, while our dedicated operations are located in Evansville, Indiana. The Express-1 operations have historically been profitable, while the Evansville operations became profitable during 2005, in conjunction
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with our restructuring efforts. These two expedited operations are complementary and provide us with a core base of focused transportation services, on which to build.
Express-1 specializes in time critical deliveries and offers a variety of vehicle capacities, including vans, straight trucks and semis. Using an asset-light model, Express-1 provides its services through a fleet of independent contractors. These services are offered throughout the United States and certain provinces of Canada. Express-1 has been recognized for its excellence in customer service and acts as a Tier 1 supplier to major automotive manufacturers. Express-1 serves the needs of a diverse client base including a number of Fortune 500 companies and third-party logistics providers.
We operate a dedicated expedite service providing order fulfillment from our Evansville, Indiana automotive parts distribution facility. These services are provided via a fleet of company operated trucks and trailers. The dedicated service contract extends through April 2007. We are currently in discussions with our primary customer in an effort to renew the contract for another multi-year term. We are hopeful we will be able to complete this extension, prior to the expiration of the current contract.
Our growth strategy centers on organic initiatives, which we feel will continue to enhance both our top and bottom lines. Through organic means, our management team anticipates we will be able to increase our fleet capacity, expedited market presence and geographic footprint. Complementing this internal growth, we plan to entertain selective acquisitions on occasion, to further support our expedited market focus.
Our board of directors, management team and employees are focused on expanding our expedited operations. In support of this strategy, we asked for and received shareholder approval to change our company name to Express-1 Expedited Solutions in conjunction with our annual shareholder's meeting. Express-1 has become a recognized leader in the expedited transportation market since its inception in 1989. We believe our Company, Express-1 Expedited Solutions, Inc. is the only singularly focused expedited transportation company to be publicly owned within the United States at this time.
Restructuring
In the second half of 2004, shortly after the acquisition of Express-1, Inc., our Board of Directors and management team implemented a restructuring plan (the "Plan") for our Company. The Plan called for the closing of our unprofitable companies, operations and locations. It also refocused our Company on our profitable expedited transportation businesses. Throughout the fall of 2004, we exited our airport-to-airport business and consolidated our Dasher business into our other expediting operations. Continuing this restructuring activity in 2005, we exited our Tampa brokerage in addition to our Temple and Bullet operations. We completed the relocation of our executive offices from Tampa, Florida to Buchanan, Michigan. In conjunction with this move, we appointed new executive leadership with extensive transportation industry experience.
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Due to the restructuring efforts, we were able to eliminate the need for physical facilities in eighteen (18) locations, thereby greatly reducing our overhead burden. Headcount was reduced from a high of approximately 475 to approximately 125 employees at the conclusion of the restructuring period. The table below outlines the restructuring charges recorded during the three and six months ended June 30, 2005. As previously stated, the Company completed its restructuring activities in the third quarter of 2005, and consequently no restructuring charges have been recorded thereafter.
Restructuring Charges
Three Months Six Months
Ended Ended
Classification June 30, 2005 June 30, 2005
Writeoff of goodwill and intangibles $ - $ 2,010,000
Writeoff and impairment of assets - 968,000
Other restructuring expenses - 295,000
Writeoff of uncollectible accounts - 310,000
Employee related expenses 375,000 375,000
Restructuring charges $ 375,000 $ 3,958,000
For the three months ended June 30, 2006 compared to the three months ended June, 2005.
All results normally expressed in dollars have been rounded to the nearest one thousand dollars, with the exception of earnings per share data, which is expressed in whole dollars and cents. Comparisons of results for those line items that have been rounded are approximate, due to rounding.
Revenue - Consolidated revenue increased by $830,000, or 8%, to $11,120,000 for the quarter ended June 30, 2006, as compared to $10,290,000 for the quarter ended June 30, 2005. The change was primarily attributable to organic increases in revenue of approximately 38% and 18% within our core business operations Express-1 and Evansville respectively, during the second quarter of 2006 compared to the second quarter of 2005. Mitigating the increases in revenue within our core business was the period over period decline in revenue associated with the cessation of unprofitable businesses during 2005 in conjunction with our restructuring efforts. Revenue derived from operations closed in our restructuring totaled $2,065,000 during the second quarter of 2005. Fuel prices also played a part in the increase in consolidated revenue during the second quarter. Fuel surcharges were $937,000 or 8% of consolidated revenue during the current quarter compared to $564,000 or 6% of consolidated revenue for the same period in 2005. For purposes of this comparison, we have only considered fuel surcharges within our core business, Express-1 and Evansville, and excluded those associated with our brokerage business and closed operations.
Express-1 Operations - Revenue increased within our Express-1 operations by $2,708,000 or 38% in the second quarter of 2006 as compared to the same quarter in the prior year. The increase in Express-1 revenue was largely attributable to a 28% increase in the average size of our fleet of independent contractors during the second quarter of 2006 compared to the same period in 2005. Supporting this increase in fleet capacity has been an increase in overall demand for our Express-1 expedited services as evidenced by the increase in fleet utilization. Our primary measure of utilization is loaded miles per unit per week. In the current quarter, this measurement increased by 9% at Express-1, as compared to the second quarter of 2005. Loads hauled by third parties (brokerage business) represented approximately 22% and 24% of revenue for the three-month periods ended June 30, 2006 and 2005, respectively.
Evansville Operations - In Evansville our dedicated operations experienced a revenue increase of approximately $187,000 or 18% during the second quarter of 2006 as compared to the second quarter of 2005. The increase is partially due to a rate increase received in mid-year 2005 from our primary Evansville customer. To a lesser extent the Evansville revenue increase was associated with the expansion of local freight movements.
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Direct Expenses - Direct expenses, which consist primarily of payments for trucking services provided by both independent contractors and partner carriers, fuel, insurance, equipment costs and payroll expenses increased by $200,000 or 3%, to $8,257,000 for the three months ended June 30, 2006, compared to $8,057,000 for the three months ended June 30, 2005. As a percentage of revenue, direct expenses decreased to 74% of consolidated revenue for the three months ended June 30, 2006, compared with 78% of consolidated revenue for the same period in the prior year. The dollar increase in direct expense resulted primarily from increases in the volume of purchased transportation and other direct expenses corresponding to the rate of revenue growth in our Express-1 operations. Improvements in operating leverage yielded a lower overall increase in the rate of direct expenses as a percentage of revenue for the current quarter compared to the same period in the prior year. The elimination of expenses associated with closed operations helped further reduce direct expenses both overall and as a percentage of revenue during the second quarter of 2006 compared to the second quarter of 2005. During the second quarter of 2005, we incurred $1,605,000 of direct expense from operations eliminated during our restructuring efforts. Rising fuel prices also played a part in the overall increase in direct expense, during the second quarter of 2006 compared to the second quarter of 2005. On a consolidated basis, we incurred $817,000 of fuel surcharge expense in the second quarter of 2006 compared to $500,000 of fuel surcharge expense for the same period in the prior year.
Express-1 Operations - Within Express-1, while revenue increased by 38%, direct expense only increased by 34% for the period. Contributing to the slower rate of increase in direct expenses for Express-1 were improvements in fuel and equipment costs and decreases in insurance and licensing costs. During 2006 Express-1 recognized a slight increase in its cost of purchased transportation, due to rate adjustments put in place to increase the rates of compensation for our independent contractors and reward them for miles run and driver referrals.
Evansville Operations - Within our Evansville operations, direct expenses as a percentage of associated revenue decreased during the current period to 79% of associated revenue as compared to 97% of associated revenue during the same period in the prior year. The decrease in expenses within Evansville is principally the result of revenue rate increases received during 2005, and a reduction in purchased transportation expense due to a reduced reliance upon third parties to provide transportation. Complementing this increase in revenue were reductions in expenses associated with insurance and equipment maintenance during the second quarter of 2006, as compared to the second quarter of 2005.
Gross Margin - Gross margin improved by $630,000 or 28% during the second quarter of 2006 as compared to the same period in the prior year. Gross margin for the quarter ended June 30, 2006 was $2,863,000 as compared to $2,233,000 for the quarter ended June 30, 2005. As a percentage of revenue, gross margin improved to 26% of revenue for the second quarter of 2006 compared to 22% of revenue in the same quarter in 2005. The improvement in margin resulted primarily from operating improvements within our Express-1 and Evansville businesses due to the reductions in direct cost coupled with a general increase in rates within our Evansville operations as previously mentioned. Complementing the margin improvement from these actions was the elimination of lower margin operations due to our restructuring efforts. Fuel prices negatively affected gross margin during the second quarter of 2006, as compared to the same quarter of 2005. Our Express-1 business effectively passes 100% of fuel surcharge revenue to our fleet of independent drivers in the form of supplemental fuel surcharge payments. Within our Evansville operations, fuel surcharges help offset the cost of fuel for our company operated fleet. During the second quarter of 2006, gross margin as a percentage of revenue was reduced approximately 2 percentage points due to the price of fuel. This compares unfavorably to the same period in the prior year when the effect of fuel price was a reduction in gross margin as a percentage of revenue of approximately 1 percentage point. While reducing our margin expressed as a percentage of revenue, fuel surcharge revenue and fuel expense have not historically had a material impact on our income as we have been successful in matching fuel surcharge payments and fuel expenses to fuel surcharge revenue.
Sales, General and Administrative - Sales, general and administrative expense (SG&A) decreased by $1,355,000 or 41% to $1,923,000 for the quarter ended June 30, 2006 compared to $3,278,000 for the quarter ended June 30, 2005. Included within SG&A expenses was approximately $375,000 of identified restructuring costs in the second quarter of 2005. As a percentage of revenue, SG&A expenses, exclusive of restructuring charges, represented 17% of revenue in the quarter ended June 30, 2006 compared to 28% of revenues for the same quarter of 2005. The decrease in SG&A costs as a percentage of revenue for the current period primarily resulted from our
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successful restructuring efforts. Included within the restructuring activities were the closing of approximately 18 locations, a reduction in headcount by approximately 350 employees, the elimination of corporate offices in Tampa Florida, and a streamlining of our expenses associated with ongoing activities. Included within SG&A costs is a smaller group of expenses we classify as corporate charges, which includes such items as the cost of our executive management, board of directors, public company expenses, legal expenses, professional fees and interest costs for the consolidated company. For the second quarter of 2006, corporate charges were $365,000 compared to $785,000 for the same quarter of 2005. The reduction in corporate charges is associated with the elimination of the Tampa administrative offices and a reduction in the costs associated with executives, legal and professional fees, outside services and other administrative expenses. We believe SG&A, to include corporate charges, as a percentage of revenue, has normalized at a sustainable level, barring any unforeseen events and seasonal fluctuations. We further believe the rate of increase in future SG&A expenses will be lower than the rate of increase for revenue and direct operating expenses, based upon our operational model.
Interest and Other Expense - Interest charges and other expenses decreased $74,000 to $92,000 during the second quarter of 2006, as compared to $166,000 during the same quarter in 2005. The decrease was primarily the result of changes in the line item, gain and loss on sale of assets, mitigated somewhat by a slight increase in overall interest expense. During the second quarter of 2006 we recorded a small gain on sale of assets of $6,000 as compared to the second quarter of 2005 when we recognized a loss on sale of assets of $100,000. The magnitude of the loss on sale in during 2005 resulted from the disposal of various equipment in conjunction with our shift towards a more asset light business model, in accordance with our restructuring plan.
Net Income Before Tax - Net income before tax was $848,000 for the quarter ended June 30, 2006 compared to a loss from of $1,211,000 for the quarter ended June 30, 2005. The improvement is primarily associated with the disposition of our unprofitable business operations in conjunction with our restructuring efforts. Complementing the cessation of unprofitable businesses were increases in revenue within our Express-1 and Evansville operations. These same operations also experienced some decreases in direct and administrative costs as a percentage of revenue as we have continued to focus on increasing our operating leverage and controlling costs. During the three-month period ended June 30, 2006, our operating ratio improved to 91.8% of consolidated revenue. This compares very favorably with the same three-month period in the prior year when our operating ratio was 111.4% of consolidated revenue. We define operating ratio as the ratio of all operating expenses (direct and SG&A) compared to consolidated revenue. For purposes of calculating operating ratio, we exclude both fuel surcharge revenue and associated fuel surcharge payments from our calculations.
Tax Provision (Benefit) - There was no tax provision recorded for the quarter ended June 30, 2006 and no tax benefit recorded for the quarter ended March 31, 2005. The lack of tax provision in the second quarter of 2006 is due primarily to the magnitude of historical losses. The company has a valuation allowance that effectively offsets current tax provisions. During the quarter, this allowance was reduced by approximately $316,000 to approximately $1,534,000. The lack of tax benefit in the second quarter of 2005 was due to the significance of net operating losses in the preceding quarters. Based on the historical lack of profitability in periods leading up to the second quarter of 2005, we estimated we were unlikely to utilize tax benefits in future periods. Consequently, we recorded an adjustment to the valuation allowance equal to the tax benefit that otherwise would have been recorded. Along with the return to profitability, we anticipate reducing the valuation allowance during the fourth quarter of 2006 and anticipate recording a small amount of tax provision later in 2006, due to limitations on the amount of net operating loss carry-forward that can be used to offset federal Alternative Minimum Tax.
Net Income - Net Income for the quarter ended June 30, 2006 was $848,000 as compared to a net loss of $1,211,000 for the quarter ended June 30, 2005. As previously mentioned, the change in net income resulted primarily from the successful completion of our restructuring efforts, increases in revenue within Express-1 and Evansville and reductions in direct and SG&A costs in relationship to associated revenue.
Earning per Share - Basic and diluted income per share for the quarter ended June 30, 2006 was $0.03, compared with basic and diluted loss per share of $0.05 for the three-month period ended June 30, 2005. The shares used in the calculation of diluted loss per share were equivalent to those used in the calculation of the basic loss per share in the quarter ended June 30, 2005, as common stock equivalents were anti-dilutive for the quarter then ended.
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For the six months ended June 30, 2006 compared to the six months ended June, 2005.
All results normally expressed in dollars have been rounded to the nearest one thousand dollars, with the exception of earnings per share data which is expressed in whole dollars and cents. Comparisons of results for those line items that have been rounded are approximate, due to rounding.
Revenue - Consolidated revenue increased by $36,000, or less than 1%, to $20,675,000 for the six months ended June 30, 2006, as compared to $20,639,000 for the six months ended June 30, 2005. The change in revenue was primarily attributable to 2006 calendar year-to-date organic revenue increases of 30% and 14% within our Express-1 and Evansville operations, respectively, compared to the same period in 2005. Mitigating the increase in revenue within our core business was the period over period decline in revenue associated with the closing of unprofitable businesses as part of our restructuring efforts. Revenue derived from closed businesses totaled approximately $4,443,000 during the first six months of 2005. Fuel prices also played a part in our change in revenue within the period. For the first six months of 2006, fuel surcharge revenue for our company was approximately $1,197,000 or 7% of consolidated revenue. During the same six-month period last year, fuel surcharge revenue was approximately $770,000 or 5% of consolidated revenue. For purposes of this comparison of fuel surcharges, we have only considered those charges within our primary operations, Express-1 and Evansville, and further excluded fuel surcharges associated with our brokerage business and closed operations.
Express-1 Operations - Revenue increased within our Express-1 operations by approximately $4,177,000 or 30% in the first six months of 2006 as compared to the same period in the prior year. The increase in Express-1 revenue can be largely attributed to a 17% increase in the average size of our fleet of independent contractors during the first six months of 2006 compared to the same period in 2005. Complementing this increase in fleet capacity has been an increase in overall demand for our Express-1 expedited service offerings. Utilization for Express-1, as measured in loaded miles per truck per week, increased by 11% during the first six months of 2006, as compared to the first half of 2005. Within Express-1, loads hauled by third parties (brokerage business) represented approximately 24% and 22% of revenue for the six-month periods ended June 30, 2006 and 2005, respectively.
Evansville Operations - In Evansville our dedicated operations, revenue increased by $302,000 or 14% during the first six months of 2006 as compared to the first six months of 2005. This increase is partially due to a rate increase received in mid-year 2005 from our primary Evansville customer. To a lesser extent the revenue increase in Evansville was associated with the expansion of local freight movements from this facility.
Direct Expenses - Direct expenses, which consist primarily of payments for trucking services provided by both independent contractors and partner carriers, fuel, insurance, equipment costs and payroll expenses decreased by $1,049,000 or 6%, to $15,386,000 for the six months ended June 30, 2006, compared to $16,435,000 for the six months ended June 30, 2005. As a percentage of revenues, direct expenses decreased to 74% of consolidated revenue for the first half of 2006 compared with 80% of revenue for the same period in the prior year. The decrease in direct expenses resulted primarily from the calendar year 2005 cessation of our unprofitable business operations. In the six months ended June 30, 2005, direct costs associated with businesses closed in our restructuring efforts was approximately $3,879,000 or 87% of associated revenue. Fuel prices played a part in the change in our consolidated direct expenses in the period. During the first six months of 2006, we incurred approximately $1,197,000 of fuel surcharge expense as compared to approximately $770,000 of fuel surcharge expense for the same period in the prior year.
Express-1 Operations - Direct costs within our Express-1 business increased by 27% for the six-month period ended June 30, 2006 compared to the same period in 2005. This compares favorably to an increase of 30% in revenue during the current period compared to the same period in the prior year. The difference between the increase in revenue and the increase in associated direct costs reflects an improvement in operating leverage within the period. Contributing to the reduction in direct expenses for Express-1 were decreases in equipment costs . . .
