form10k_2012.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ý
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Fiscal Year Ended December 31, 2012
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 No. 0-15057


P.A.M. TRANSPORTATION SERVICES, INC.
(Exact name of registrant as specified in its charter)

Delaware
 
71-0633135
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)

297 West Henri De Tonti Blvd, Tontitown, Arkansas 72770
 
(Address of principal executive offices) (Zip Code)

 
 (479) 361-9111
 
Registrant's telephone number, including area code

Securities registered pursuant to section 12(b) of the Act:

Title of each class
 
Name of each exchange on which registered
Common Stock, $.01 par value
 
NASDAQ Global Market

Securities registered pursuant to section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes  o
 
No  þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes  o
 
No  þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  þ
 
No  o


 
 

 

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).
Yes  þ
 
No  o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o
 
Accelerated filer þ
 
       
Non-accelerated filer o
 
Smaller reporting company o
 

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

The aggregate market value of the common stock of the registrant held by non-affiliates of the registrant computed by reference to the average of the closing bid and ask prices of the common stock as of the last business day of the registrant's most recently completed second quarter was $38,671,942. Solely for the purposes of this response, executive officers, directors and beneficial owners of more than five percent of the registrant’s common stock are considered the affiliates of the registrant at that date.

The number of shares outstanding of the registrant’s common stock, as of February 15, 2013: 8,701,607 shares of $.01 par value common stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for its Annual Meeting of Stockholders to be held on May 23, 2013, are incorporated by reference in answer to Part III of this report. Such proxy statement will be filed with the Securities and Exchange Commission within 120 days of the Registrant’s fiscal year ended December 31, 2012.


FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K (this “Report”) contains forward-looking statements, including statements about our operating and growth strategies, our expected financial position and operating results, industry trends, our capital expenditure and financing plans and similar matters. Such forward-looking statements are found throughout this Report, including under Item 1, Business, Item 1A, Risk Factors, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 7A, Quantitative and Qualitative Disclosures About Market Risk. In those and other portions of this Report, the words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “project” and similar expressions, as they relate to us, our management, and our industry are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends affecting our business. Actual results may differ materially. Some of the risks, uncertainties and assumptions that may cause actual results to differ from these forward-looking statements are described under the headings “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Quantitative and Qualitative Disclosures About Market Risk.”

All forward-looking statements attributable to us, or to persons acting on our behalf, are expressly qualified in their entirety by this cautionary statement.

We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this Report might not transpire.

 
 

 


P.A.M. TRANSPORTATION SERVICES, INC.
FORM 10-K
For the fiscal year ended December 31, 2012
TABLE OF CONTENTS


 
PART I
Page
Item 1
1
Item 1A
8
Item 1B
15
Item 2
16
Item 3
16
Item 4
16
     
 
PART II
 
Item 5
 
17
Item 6
19
Item 7
 
20
Item 7A
33
Item 8
34
Item 9
 
63
Item 9A
63
Item 9B
65
     
 
PART III
 
Item 10
65
Item 11
65
Item 12
 
65
Item 13
66
Item 14
66
     
 
PART IV
 
Item 15
66
     
 
69
     
 
70


 
 

 

PART I

Item 1. Business.

Unless the context otherwise requires, all references in this Annual Report on Form 10-K to “P.A.M.,” the “Company,” “we,” “our,” or “us” mean P.A.M. Transportation Services, Inc. and its subsidiaries.

We are a truckload dry van carrier transporting general commodities throughout the continental United States, as well as in certain Canadian provinces. We also provide transportation services in Mexico under agreements with Mexican carriers. Our freight consists primarily of automotive parts, expedited goods, consumer goods, such as general retail store merchandise, and manufactured goods, such as heating and air conditioning units.

P.A.M. Transportation Services, Inc. is a holding company incorporated under the laws of the State of Delaware in June 1986. We conduct operations through the following wholly owned subsidiaries: P.A.M. Transport, Inc., T.T.X., LLC, P.A.M. Cartage Carriers, LLC, P.A.M. Logistics Services, Inc., Choctaw Express, LLC, Choctaw Brokerage, Inc., Transcend Logistics, Inc., Decker Transport Co., LLC, East Coast Transport and Logistics, LLC, S & L Logistics, Inc., P.A.M. International, Inc. and P.A.M. Canada, Inc. Our operating authorities are held by P.A.M. Transport, Inc., P.A.M. Cartage Carriers, LLC, Choctaw Express, LLC, Choctaw Brokerage, Inc.,  T.T.X., LLC, Decker Transport Co., LLC, and East Coast Transport and Logistics, LLC. Effective on January 1, 2010, the operations of most of the Company’s operating subsidiaries were consolidated under the P.A.M. Transport, Inc. name in a effort to more clearly reflect the Company’s scope and available service offerings. Effective September 30, 2010, the Company sold the assets of East Coast Transport and Logistics, LLC which effectively closed the Company’s New Jersey based brokerage office.

We are headquartered and maintain our primary terminal and maintenance facilities and our corporate and administrative offices in Tontitown, Arkansas, which is located in northwest Arkansas, a major center for the trucking industry and where the support services (including warranty repair services) for most major truck and trailer equipment manufacturers are readily available.

Segment Financial Information

The Company's operations are all in the motor carrier segment and are aggregated into a single reporting segment in accordance with the aggregation criteria under Generally Accepted Accounting Principles (“GAAP”).

Operations

Our operations can generally be classified into truckload services or brokerage and logistics services. Truckload services include those transportation services in which we utilize company owned trucks or owner-operator owned trucks for the pickup and delivery of freight. The brokerage and logistics services consists of services such as transportation scheduling, routing, mode selection, transloading and other value added services related to the transportation of freight which may or may not involve the use of company owned or owner-operator owned equipment. Both our truckload operations and our brokerage and logistics operations have similar economic characteristics and are impacted by virtually the same economic factors as discussed elsewhere in this Report. Truckload services operating revenues, before fuel surcharges represented 91.8%, 93.5% and 85.9% of total operating revenues for the years ended December 31, 2012, 2011 and 2010, respectively. The remaining operating revenues, before fuel surcharge for the same periods were generated by brokerage and logistics services, representing 8.2%, 6.5%, and 14.1%, respectively.

Approximately 60% of the Company's revenues are derived from domestic shipments while approximately 40% of our revenues are derived from freight originating from or destined to locations in Mexico or Canada.
 
1

 

Business and Growth Strategy

Our strategy focuses on the following elements:

Providing a Full Suite of Complimentary Truckload Transportation Solutions. Our objective is to provide our customers with a comprehensive solution to their truckload transportation needs. Our asset-based service offerings consist of dedicated, expedited, regional, automotive, and long-haul truckload services with non-asset based supply chain management, logistics and brokerage solutions rounding out our service offerings. Our range of service offerings also include our complete range of asset-based and non-asset based services to Mexico and Canada.

Developing Customer Relationships within High Density Traffic Lanes. We strive to maximize utilization and increase revenue per truck while minimizing our time and empty miles between loads. In this regard, we seek to provide equipment to our customers in defined regions and disciplined traffic lanes. This strategy enables us to:

 
·
maintain more consistent equipment capacity;

 
·
provide a high level of service to our customers, including time-sensitive delivery schedules;

 
·
attract and retain drivers; and

 
·
maintain a sound safety record as drivers travel familiar routes.

Providing Superior and Flexible Customer Service. Our wide range of services includes expedited services, dedicated fleet services, logistics services, time-definite delivery, two-person driving teams, cross-docking and consolidation programs, specialized trailers, international services to Mexico and Canada, and Internet-based customer access to delivery status. These services allow us to quickly and reliably respond to the diverse needs of our customers, and provide an advantage in securing new business.

Many of our customers depend on us to make delivery on a time-definite basis, meaning that parts or raw materials are scheduled for delivery as they are needed on a manufacturer’s production line. The need for this service is a product of modern manufacturing and assembly methods that are designed to decrease inventory levels and handling costs. Such requirements place a premium on the freight carrier’s delivery performance and reliability.

Employing Stringent Cost Controls. Throughout our organization, emphasis is placed on gaining efficiency in our processes with the primary goals of decreasing costs and improving customer satisfaction. Maintaining a high level of efficiency and prioritizing our focus on improvements allows us to minimize the number of non-driving personnel we employ and positively influence other overhead costs. Expenses are intensely scrutinized for opportunities for elimination, reduction or to further leverage our purchasing power to achieve more favorable pricing.
 
2

 

Industry

According to the American Trucking Association’s “American Trucking Trends 2012” report, the trucking industry transported approximately 67% of the total volume of freight transported in the United States during 2011, which equates to 9.2 billion tons and approximately $604 billion in revenue. The truckload industry is highly fragmented and is impacted by several economic and business factors, many of which are beyond the control of individual carriers. The state of the economy, coupled with equipment capacity levels, can impact freight rates. Volatility of various operating expenses, such as fuel and insurance, make the predictability of profit levels uncertain. Availability, attraction, retention and compensation of drivers also affect operating costs, as well as equipment utilization. In addition, the capital requirements for equipment, coupled with potential uncertainty of used equipment values, impact the ability of many carriers to expand their operations. The current operating environment is characterized by the following:

·
Intense competition for freight

·
Price increases by truck and trailer equipment manufacturers

·
Volatile fuel costs, generally trending higher

·
In recent years, many less profitable or undercapitalized carriers have been forced to consolidate or to exit the industry

Competition

The trucking industry is highly competitive and includes thousands of carriers, none of which dominates the market in which the Company operates. The Company's market share is less than 1% and we compete primarily with other irregular route medium- to long-haul truckload carriers, with private carriage conducted by our existing and potential customers, and, to a lesser extent, with the railroads. We compete on the basis of quality of service and delivery performance, as well as price. Many of the other irregular route long-haul truckload carriers have substantially greater financial resources, own more equipment or carry a larger total volume of freight as compared to the Company.

Marketing and Significant Customers

Our marketing emphasis is directed to that portion of the truckload market which is generally service-sensitive, as opposed to being solely price competitive. We seek to become a “core carrier” for our customers in order to maintain high utilization and capitalize on recurring revenue opportunities. Our marketing efforts are diversified and designed to gain access to dedicated, expedited, regional, automotive, and long-haul opportunities (including those in Mexico and Canada) and to expand supply chain solutions offerings.

Our marketing efforts are conducted by a sales staff of twelve employees who are located in our major markets and supervised from our headquarters. These individuals work to improve profitability by maintaining an even flow of freight traffic (taking into account the balance between originations and destinations in a given geographical area), high utilization, and minimizing movement of empty equipment.

Our five largest customers, for which we provide carrier services covering a number of geographic locations, accounted for approximately 39%, 47% and 52% of our total revenues in 2012, 2011 and 2010, respectively. General Motors Corporation accounted for approximately 17%, 26% and 34% of our revenues in 2012, 2011 and 2010, respectively.

We also provide transportation services to other manufacturers who are suppliers for automobile manufacturers. Approximately 37%, 38% and 40% of our revenues were derived from transportation services provided to the automobile industry during 2012, 2011 and 2010, respectively.

3

 
 
Revenue Equipment

At December 31, 2012, we operated a fleet of 1,800 trucks, which includes 220 owner-operator trucks, and 4,943 trailers, which includes 36 leased trailers. Our company-owned trucks are late model, well-maintained, premium trucks, which we believe help to attract and retain drivers, maximize fuel efficiency, promote safe operations, minimize maintenance and repair costs, and improve customer service by minimizing service interruptions caused by breakdowns. We evaluate our equipment purchasing decisions based on factors such as initial cost, useful life, warranty terms, expected maintenance costs, fuel economy, driver comfort, customer needs, manufacturer support, and resale value.

We contract with owner-operators to provide greater flexibility in responding to fluctuations in consumer demand. Owner-operators provide their own trucks and are contractually responsible for all associated expenses, including financing costs, fuel, maintenance, insurance, and taxes, among other things. They are also responsible for maintaining compliance with the Federal Motor Carrier Safety Administration regulations.

During 1999, the U.S. Environmental Protection Agency (“EPA”) mandated a three-phase strategy to reduce engine emissions from heavy-duty vehicles through a combination of advanced emissions control technologies and diesel fuel with a reduced sulfur content. The first phase (Phase I) mandated new engine emission standards for all model year 2004 heavy-duty trucks; however, through agreements with heavy-duty diesel engine manufacturers, the effective date was accelerated to October 1, 2002. Since October 1, 2002, all newly manufactured truck engines had to comply with the new engine emission standards. As of December 31, 2012, the Company-owned truck fleet does not contain any trucks with the older Phase I engines.

In the second phase (Phase II), effective January 1, 2007, the EPA mandated a new set of more stringent emission standards for vehicles powered by diesel fuel engines manufactured in 2007 through 2009. As of December 31, 2012, approximately 20% of our Company-owned truck fleet consisted of trucks with engines that comply with the Phase II emission standards (Phase II trucks). As compared to trucks powered by the Phase I engines, the trucks powered by the Phase II compliant diesel engines had a significantly higher purchase price and as a result, our depreciation expense increased over time as we replaced Phase I trucks with Phase II trucks.
 
During the third phase (Phase III), which was effective in 2010, final emission standards became effective. During 2012, the Company took delivery of approximately 675 trucks, all of which contained engines compliant with the Phase III emission standards. As of December 31, 2012, approximately 80% of our Company-owned truck fleet consisted of trucks with engines that comply with the Phase III emission standards (Phase III trucks). During 2013, the Company expects to take delivery of 550 additional Phase III trucks. To date, the Company-owned Phase III trucks have shown increased fuel efficiency as compared to either the Phase I or Phase II truck fuel efficiency, however, Phase III trucks have a significant purchase price premium as compared to the purchase price of the Phase I and Phase II trucks and as a result, our depreciation expense has increased and will continue to increase over time as we replace Phase II trucks with Phase III trucks. We also expect that the Phase III diesel engines will cost more to maintain compared to Phase I and Phase II trucks of a similar age. To the extent we are unable to offset these anticipated increased costs with rate increases charged to customers or offsetting cost savings in other areas, our results of operations will be adversely affected.

Technology

We have installed Qualcomm display units in all of our trucks. The Qualcomm system is a satellite-based global positioning and communications system that allows fleet managers to communicate directly with drivers. Drivers can provide location, status and updates directly to our computer system which increases productivity and convenience. This system provides us with accurate estimated time of arrival information, which optimizes load selection and service levels to our customers.

4

 
 
Our information systems manage the data provided by the Qualcomm devices to provide us with real-time information regarding the location, status and load assignment of our trucks, which permits us to better meet delivery schedules, respond to customer inquiries and match equipment with the next available load. Our system also provides real-time information electronically to our customers regarding the status of freight shipments and anticipated arrival times. This system provides our customers flexibility and convenience by extending supply chain visibility through electronic data interchange, the Internet and e-mail.

Maintenance

We have a strictly enforced comprehensive preventive maintenance program for our trucks and trailers. Inspections and various levels of preventive maintenance are performed at set intervals on both trucks and trailers. A maintenance and safety inspection is performed on all vehicles each time they return to a terminal.

Our trucks carry full warranty coverage for at least three years or 375,000 miles. Extended warranties are negotiated with the truck manufacturer and manufacturers of major components, such as engine, transmission and differential manufacturers, for up to four years or 500,000 miles. Our trailers carry full warranties by the manufacturer for up to 5 years with certain components covered for up to ten years.

Employees

At December 31, 2012, we employed 3,031 persons, of whom 2,507 were drivers, 178 were maintenance personnel, 149 were employed in operations, 41 were employed in marketing, 80 were employed in safety and personnel, and 76 were employed in general administration and accounting. None of our employees is represented by a collective bargaining unit and we believe that our employee relations are good.

Drivers

At December 31, 2012, we utilized 2,507 company drivers in our operations. We also had 220 owner-operators under contract compensated on a per mile basis. Our drivers are compensated on the basis of miles driven, loading and unloading, extra stops, and layovers in transit. Drivers can earn bonuses by recruiting other qualified drivers who become employed by us and both cash and non-cash prizes are awarded for consecutive periods of safe, accident-free driving. All of our drivers are recruited, screened, drug tested and trained and are subject to the control and supervision of our operations and safety departments. Our driver training program stresses the importance of safety and reliable, on-time delivery. Drivers are required to report to their driver managers daily and at the earliest possible moment when any condition en route occurs that might delay their scheduled delivery time.

In addition to strict application screening and drug testing, before being permitted to operate a vehicle our drivers must undergo classroom instruction on our policies and procedures, safety techniques as taught by the Smith System of Defensive Driving, and the proper operation of equipment, and must pass both written and road tests. Instruction in defensive driving and safety techniques continues after hiring, with seminars at several of our terminals. At December 31, 2012, we employed 38 persons on a full-time basis in our driver recruiting, training and safety instruction programs.

Intense competition in the trucking industry for qualified drivers has resulted in additional expense to recruit and retain an adequate supply of drivers, and has had a negative impact on the industry. Our operations have also been impacted and from time to time we have experienced under-utilization and increased expenses due to a shortage of qualified drivers. We place a high priority on the recruitment and retention of an adequate supply of qualified drivers.

5

 

Available Information

The Company maintains a website where additional information concerning its business can be found. The address of that website is www.pamtransport.com. The Company makes available free of charge on its Internet website its Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) as soon as reasonably practicable after it electronically files or furnishes such materials to the Securities and Exchange Commission.

Seasonality

Our revenues do not exhibit a significant seasonal pattern due primarily to our varied customer mix. Operating expenses can be somewhat higher in the winter months primarily due to decreased fuel efficiency and increased maintenance costs associated with inclement weather. In addition, the automobile plants for which we transport a large amount of freight typically utilize scheduled shutdowns in July and December and the volume of automotive freight we ship is reduced during such scheduled plant shutdowns.

Regulation
 
 
We are a common and contract motor carrier regulated by various United States federal and state, Canadian provincial, and Mexican federal agencies. These regulatory agencies have broad powers, generally governing matters such as authority to engage in motor carrier operations, motor carrier registration, driver hours-of-service (“HOS”), drug and alcohol testing of drivers, and safety, weight and dimensions of transportation equipment.  The primary regulatory agencies affecting the Company’s operations include the Federal Motor Carrier Safety Administration (“FMCSA”), the Pipeline and Hazardous Materials Safety Agency, and the Surface Transportation Board, which are all agencies within the U.S. Department of Transportation (“DOT”). We believe that we are in compliance in all material respects with applicable regulatory requirements relating to our business and operate with a “satisfactory” rating (the highest of three grading categories) from the DOT. In addition, we are subject to compliance with cargo-security and transportation regulations issued by the Transportation Security Administration, a component department within the U.S. Department of Homeland Security. To the extent that we conduct operations outside the United States, we are subject to the Foreign Corrupt Practices Act, which generally prohibits U.S. companies and their intermediaries from offering bribes to foreign officials for the purpose of obtaining or retaining favorable treatment.

In 2004, the FMCSA issued updated rules related to driver HOS limits that became effective October 1, 2005 (the "2005 Rules"). In July 2007, a federal appeals court vacated certain provisions of the 2005 Rules relating to the expansion of the daily driving limit from 10 hours to 11 hours, and the "34-hour restart," which allowed drivers to restart calculations of the weekly on-duty time limits after the driver had at least 34 consecutive hours off duty. The court indicated that, in addition to other reasons, it vacated these two provisions because the FMCSA failed to provide adequate data supporting its decision to increase the daily driving limit and provide for the 34-hour restart provision. In November 2008, following the submission of additional data by FMCSA and a series of appeals and related court rulings, the FMCSA published its final rule, which retained the 11 hour daily driving limit and the 34-hour restart provision. Safety advocacy groups continued to challenge the final rule and in an effort to end litigation by these groups, the FMCSA agreed to propose new rules by July 26, 2011. During December 2010, the FMCSA released the proposed new rules for public comment which included provisions that would shorten allowable daily driving time from 11 hours to 10 hours and also require that drivers take two nights of rest during the 34-hour restart provision. The proposed rules, which were generally not well received by either safety advocacy groups or by the trucking industry, were finalized and published by the FMCSA in December 2011. The final rule, effective July 1, 2013, retained the 11 hour daily driving limit but placed restrictions on the use of the 34-hour restart provision and requires drivers to take a break during the day. During 2012, both the American Trucking Association and safety advocacy groups had filed petitions with the D.C. U.S. Circuit Court of Appeals requesting the court to review the FMCSA’s final rule. Oral arguments are set to begin on March 15, 2013. We are unable to predict the final outcome of any particular HOS rule proposals or how a court may rule on any challenges related to the proposals but expect that any significant changes to the driver HOS rules that, in effect, reduce available driving time or restrict scheduling flexibility would have a negative impact our current operations.
 
6

 
 
During February 2012, the FMCSA announced its intent to continue to pursue a rule that would require all interstate motor carriers to install electronic on-board recorders (“EOBRs”) to monitor compliance with HOS regulations. The FMCSA’s previous efforts to implement a rule requiring EOBRs was successfully challenged in court and was later vacated during August 2011 as the court ruled that the FMCSA failed to directly address the potential for harassment of vehicle operators. The vacated rule applied to phase one of a two-phase rule implementation process whereby implementation of phase one would require EOBR use only by habitual HOS regulation violators while phase two would require EOBR use by all motor carriers. The FMCSA refers to these two-phases as EOBR 1 and EOBR 2, respectively. Under EOBR 1, any motor carrier found to have a HOS regulation violation rate of 10% or greater would be required to install EOBRs on all of its commercial motor vehicles for a period of two years. The final rule related to EOBR 1 was published in April 2010 and, prior to being vacated, was to be effective for any single compliance review completed on or after June 4, 2012. Under EOBR 2, all motor carriers required to maintain HOS record keeping would be required to use EOBRs to monitor their drivers' compliance with HOS requirements. Motor carriers would have three years after the effective date of the EOBR 2 final rule to comply with these requirements. As of December 31, 2012, the Company is not subject to any requirement that EOBRs be installed on any it’s trucks, however all the Company’s trucks currently have EOBRs installed.

During 2010, the FMCSA also implemented its “Compliance, Safety, Accountability” program (“CSA”), formerly known as “Comprehensive Safety Analysis 2010” or “CSA 2010”. The stated goal under CSA is to achieve a greater reduction in large truck and bus crashes, injuries and fatalities, while maximizing the resources of the FMCSA and its state partners. Since the 1970s, federal and state enforcement agencies, in partnership with the motor carrier industry, have progressively reduced the commercial vehicle related fatality crash rate. Under CSA, the FMCSA will use a comprehensive measurement system of all safety-based violations found during roadside inspections, weighing such violations by their relationship to crash risk. CSA data analysis expands on the previous system utilized by the FMCSA and covers more behavioral areas specifically linked to crash risk such as unsafe or fatigued driving, driver fitness, controlled substances, crash history, vehicle maintenance, and improper loading. Safety performance information will be accumulated to assess the safety performance of both carriers and drivers. This expanded methodology for determining a carrier's DOT safety rating may have an adverse effect on our DOT safety rating. We currently have a satisfactory DOT rating, which is the highest available rating. A conditional or unsatisfactory DOT safety rating could adversely affect our business because some of our customer contracts may require a satisfactory DOT safety rating, and a conditional or unsatisfactory rating could negatively impact or restrict our operations.

Our motor carrier operations are also subject to environmental laws and regulations, including laws and regulations dealing with underground fuel storage tanks, the transportation of hazardous materials and other environmental matters, and our operations involve certain inherent environmental risks. We maintain two bulk fuel storage and fuel islands. Our operations involve the risks of fuel spillage or seepage, environmental damage, and hazardous waste disposal, among others. We have instituted programs to monitor and control environmental risks and assure compliance with applicable environmental laws. As part of our safety and risk management program, we periodically perform internal environmental reviews so that we can achieve environmental compliance and avoid environmental risk. We transport a minimum amount of environmentally hazardous substances and, to date, have experienced no significant claims for hazardous materials shipments. If we should fail to comply with applicable regulations, we could be subject to substantial fines or penalties and to civil and criminal liability.

Company operations conducted in industrial areas, where truck terminals and other industrial activities are conducted, and where groundwater or other forms of environmental contamination have occurred, potentially expose us to claims that we contributed to the environmental contamination.

We believe we are currently in material compliance with applicable laws and regulations and that the cost of compliance has not materially affected results of operations.
7

 
 
In addition to environmental regulations directly affecting our business, we are also subject to the effects of the new truck engine design requirements implemented by the EPA. See "Revenue Equipment" above.

Item 1A. Risk Factors.

Set forth below, and elsewhere in this Report and in other documents we file with the SEC, are risks and uncertainties that could cause our actual results to differ materially from the results contemplated by the forward-looking statements contained in this Report.

Our business is subject to general economic and business factors that are largely beyond our control, any of which could have a material adverse effect on our operating results.

Our business is dependent upon a number of general economic and business factors that may adversely affect our results of operations. These factors include significant increases or rapid fluctuations in fuel prices, excess capacity in the trucking industry, surpluses in the market for used equipment, interest rates, fuel taxes, license and registration fees, insurance premiums, self-insurance levels, and difficulty in attracting and retaining qualified drivers and independent contractors.

We operate in a highly competitive and fragmented industry, and our business may suffer if we are unable to adequately address any downward pricing pressures or other factors that may adversely affect our ability to compete with other carriers.

Further, we are affected by recessionary economic cycles and downturns in customers’ business cycles, particularly in market segments and industries, such as the automotive industry, where we have a significant concentration of customers. Economic conditions may also adversely affect our customers and their ability to pay for our services.

Deterioration in the United States and world economies could exacerbate any difficulties experienced by our customers and suppliers in obtaining financing, which, in turn, could materially and adversely impact our business, financial condition, results of operations and cash flows.

Numerous competitive factors could impair our ability to operate at an acceptable profit. These factors include, but are not limited to, the following:

·
we compete with many other truckload carriers of varying sizes and, to a lesser extent, with less-than-truckload carriers and railroads, some of which have more equipment and greater capital resources than we do;

·
some of our competitors periodically reduce their freight rates to gain business, especially during times of reduced growth rates in the economy, which may limit our ability to maintain or increase freight rates, maintain our margins or maintain significant growth in our business;

·
many customers reduce the number of carriers they use by selecting so-called “core carriers” as approved service providers, and in some instances we may not be selected;

·
many customers periodically accept bids from multiple carriers for their shipping needs, and this process may depress freight rates or result in the loss of some of our business to competitors;

·
the trend toward consolidation in the trucking industry may create other large carriers with greater financial resources and other competitive advantages relating to their size and with whom we may have difficulty competing;
 
8

 
 
·
advances in technology require increased investments to remain competitive, and our customers may not be willing to accept higher freight rates to cover the cost of these investments;

·
competition from Internet-based and other logistics and freight brokerage companies may adversely affect our customer relationships and freight rates; and

·
economies of scale that may be passed on to smaller carriers by procurement aggregation providers may improve their ability to compete with us.

We are highly dependent on our major customers, the loss of one or more of which could have a material adverse effect on our business.

A significant portion of our revenue is generated from our major customers. For 2012, our top five customers, based on revenue, accounted for approximately 39% of our revenue, and our largest customer, General Motors Corporation, accounted for approximately 17% of our revenue. We also provide transportation services to other manufacturers who are suppliers for automobile manufacturers. As a result, the concentration of our business within the automobile industry is greater than the concentration in a single customer. Approximately 37% of our revenues for 2012 were derived from transportation services provided to the automobile industry.

Generally, we do not have long-term contractual relationships with our major customers, and we cannot assure that our customer relationships will continue as presently in effect. A reduction in or termination of our services by our major customers could have a material adverse effect on our business and operating results.

We may be adversely impacted by fluctuations in the price and availability of diesel fuel.

Diesel fuel represents a significant operating expense for the Company and we do not currently hedge against the risk of diesel fuel price increases. An increase in diesel fuel prices or diesel fuel taxes, or any change in federal or state regulations that results in such an increase, could have a material adverse effect on our operating results to the extent we are unable to recoup such increases from customers in the form of increased freight rates or through fuel surcharges. Historically, we have been able to offset, to a certain extent, diesel fuel price increases through fuel surcharges to our customers but we cannot be certain that we will be able to do so in the future. We continuously monitor the components of our pricing, including base freight rates and fuel surcharges, and address individual account profitability issues with our customers when necessary. While we have historically been able to adjust our pricing to help offset changes to the cost of diesel fuel, through changes to base rates and/or fuel surcharges, we cannot be certain that we will be able to do so in the future.

Difficulty in attracting drivers could affect our profitability and ability to grow.

Periodically, the transportation industry experiences difficulty in attracting and retaining qualified drivers, including independent contractors, resulting in intense competition for drivers. We have from time to time experienced under-utilization and increased expenses due to a shortage of qualified drivers. If we are unable to attract drivers when needed or contract with independent contractors when needed, we could be required to further adjust our driver compensation packages or let trucks sit idle, which could adversely affect our growth and profitability.

If we are unable to retain our key employees, our business, financial condition and results of operations could be harmed.

We are highly dependent upon the services of our key employees and executive officers. The loss of any of their services could have a material adverse effect on our operations and future profitability. We must continue to develop and retain a core group of managers if we are to realize our goal of expanding our operations and continuing our growth. We cannot assure that we will be able to do so.
 
9

 
 
Ongoing insurance and claims expenses could significantly reduce our earnings.

Our future insurance and claims expenses might exceed historical levels, which could reduce our earnings. The Company is self insured for health and workers’ compensation insurance coverage up to certain limits. If medical costs continue to increase, or if the severity or number of claims increase, and if we are unable to offset the resulting increases in expenses with higher freight rates, our earnings could be materially and adversely affected.

Purchase price increases for new revenue equipment and/or decreases in the value of used revenue equipment could have an adverse effect on our results of operations, cash flows and financial condition.

During the last decade, the purchase price of new revenue equipment has increased significantly as equipment manufacturers recover increased materials costs and engine design costs resulting from compliance with increasingly stringent EPA engine emission standards. The final phase of the new EPA engine design requirements were effective in 2010, however, additional EPA emission mandates in the future could result in higher purchase prices of revenue equipment which could result in higher than anticipated depreciation expenses. If we were unable to offset any such increase in expenses with freight rate increases, our cash flows and results of operations could be adversely affected. If the market prices for used revenue equipment declines, we could incur substantial losses upon disposition of our revenue equipment which could adversely affect our results of operations and financial condition.

We have significant ongoing capital requirements that could affect our liquidity and profitability if we are unable to generate sufficient cash from operations or obtain sufficient financing on favorable terms.

The trucking industry is capital intensive. If we are unable to generate sufficient cash from operations in the future, we may have to limit our growth, enter into unfavorable financing arrangements, or operate our revenue equipment for longer periods, any of which could have a material adverse effect on our profitability.

We have a substantial amount of debt, which could restrict our growth, place us at a competitive disadvantage or otherwise materially adversely affect our financial health. Our substantial debt levels could have important consequences such as the following:

·
impair our ability to obtain additional future financing for working capital, capital expenditures, acquisitions or general corporate expenses;

·
limit our ability to use operating cash flow in other areas of our business due to the necessity of dedicating a substantial portion of these funds for payments on our indebtedness;

·
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

·
make it more difficult for us to satisfy our obligations;

·
increase our vulnerability to general adverse economic and industry conditions; and

·
place us at a competitive disadvantage compared to our competitors.
 
10

 

Our ability to make scheduled payments on, or to refinance, our debt and other obligations will depend on our financial and operating performance, which, in turn, is subject to our ability to implement our strategic initiatives, prevailing economic conditions and certain financial, business and other factors beyond our control. If our cash flow and capital resources are insufficient to fund our debt service and other obligations, we may be forced to reduce or delay expansion plans and capital expenditures, sell material assets or operations, obtain additional capital or restructure our debt. We cannot provide any assurance that our operating performance, cash flow and capital resources will be sufficient to pay our debt obligations when they become due. We also cannot provide assurance that we would be able to dispose of material assets or operations or restructure our debt or other obligations if necessary or, even if we were able to take such actions, that we could do so on terms that are acceptable to us.

Disruptions in the credit markets may adversely affect our business, including the availability and cost of short-term funds for liquidity requirements and our ability to meet long-term commitments, which could adversely affect our results of operations, cash flows and financial condition.

If cash from operations is not sufficient, we may be required to rely on the capital and credit markets to meet our financial commitments and short-term liquidity needs. Disruptions in the capital and credit markets, as have been experienced during recent years, could adversely affect our ability to draw on our bank revolving credit facility. Our access to funds under the credit facility is dependent on the ability of banks to meet their funding commitments. A bank may not be able to meet their funding commitments if they experience shortages of capital and liquidity or if they experience excessive volumes of borrowing requests from other borrowers within a short period of time.
 
Longer term disruptions in the capital and credit markets as a result of uncertainty, changing or increased regulation, reduced alternatives, or failures of significant financial institutions could adversely affect our access to liquidity needed for our business. Any disruption could require us to take measures to conserve cash until the markets stabilize or until alternative credit arrangements or other funding for our business needs can be arranged, which could adversely affect our growth and profitability.

We operate in a highly regulated industry and increased costs of compliance with, or liability for violation of, existing or future regulations could have a material adverse effect on our business.

The DOT and various state agencies exercise broad powers over our business, generally governing such activities as authorization to engage in motor carrier operations, safety, and financial reporting. We may also become subject to new or more restrictive regulations relating to fuel emissions, drivers’ hours in service, and ergonomics. Compliance with such regulations could substantially impair equipment productivity and increase our operating expenses.

The EPA adopted new emission control regulations, which required progressive reductions in exhaust emissions from diesel engines through 2010. In order to partially offset the costs of compliance with the new EPA engine design requirements, manufacturers have increased new equipment prices and eliminated or sharply reduced the price of repurchase or trade-in commitments. If new equipment prices continue to increase, or if the price of repurchase commitments by equipment manufacturers were to decrease more than anticipated, we may be required to increase our depreciation and financing costs and/or retain some of our equipment longer, which may result in an increase in maintenance expenses. To the extent we are unable to offset any such increases in expenses with rate increases or cost savings, our results of operations would be adversely affected. If our fuel or maintenance expenses were to increase as a result of our use of the new, EPA-compliant engines, and we are unable to offset such increases with fuel surcharges or higher freight rates, our results of operations would be adversely affected. Further, our business and operations could be adversely impacted if we experience problems with the reliability of the new engines. Although we have not experienced any significant reliability issues with these engines to date, the expenses associated with the trucks containing these engines have been slightly elevated, primarily as a result of higher depreciation expense due to increased purchase prices.
 
11

 

During 2010, the FMCSA implemented its “Compliance, Safety, Accountability” program (“CSA”), formerly known as “Comprehensive Safety Analysis 2010” or “CSA 2010”. CSA is an enforcement and compliance initiative that provides for driver standards in addition to the carrier standards previously in place. Under CSA, the methodology for determining a carrier's DOT safety rating will be expanded to include the on-road safety performance of the carrier's drivers. As a result of these new regulations, including the expanded methodology for determining a carrier's DOT safety rating, there may be an adverse effect on our DOT safety rating. We currently have a satisfactory DOT rating, which is the highest available rating. A conditional or unsatisfactory DOT safety rating could adversely affect our business because some of our customer contracts may require a satisfactory DOT safety rating, and a conditional or unsatisfactory rating could negatively impact or restrict our operations.

During December 2011, the FMCSA published final HOS rules which could have a material adverse effect on our profitability. The final HOS rules include changes that place limits on the 34-hour restart provision and add required driver breaks. The changes could have an adverse effect on the Company’s productivity and could add complexity to load scheduling.

The enacted legislation on healthcare reform and proposed amendments thereto could affect the healthcare benefits required to be provided by the Company and cause our compensation costs to increase, adversely affecting our results and cash flows.
 
The Patient Protection and Affordable Care Act and proposed amendments thereto contain provisions which could materially impact the future healthcare costs of the Company. While the legislation’s ultimate impact is not yet known, it is possible that these changes could significantly increase our compensation costs which would adversely affect our results and cash flows.

We are subject to certain risks arising from doing business in Mexico.
 
As we continue to grow our business in Mexico, we are subject to greater risks of doing business internationally, including fluctuations in foreign currencies, changes in the economic strength of Mexico, difficulties in enforcing contractual obligations and intellectual property rights, burdens of complying with a wide variety of international and U.S. export and import laws, and social, political, and economic instability. We also face additional risks associated with our Mexico business, including potential restrictive trade policies and imposition of duties, taxes, or government royalties imposed by the Mexican government. If we are unable to address business concerns related to our international operations in a timely and cost efficient manner, our financial position, results of operations or cash flows could be adversely affected.

A determination by regulators that owner-operators are employees, rather than independent contractors, could expose us to various liabilities and additional costs.

Tax and other regulatory authorities have sometimes sought to assert that independent contractors in the transportation service industry, such as our owner-operators, are employees rather than independent contractors. There can be no assurance that these interpretations and tax laws that consider these persons independent contractors will not change or that these authorities will not successfully assert this position. If our owner-operators are determined to be our employees, that determination could materially increase our exposure under a variety of federal and state tax, workers’ compensation, unemployment benefits, labor, employment and tort laws, as well as our potential liability for employee benefits. In addition, such changes may be applied retroactively, and if so, we may be required to pay additional amounts to compensate for prior periods. Any of the above increased costs would adversely affect our business and operating results.

12

 

Our results of operations may be affected by seasonal factors and severe weather conditions.
 
Our productivity may decrease during the winter season when severe winter weather impedes operations. Also, some shippers may reduce their shipments after the winter holiday season. At the same time, operating expenses may increase and fuel efficiency may decline due to engine idling during periods of inclement weather. Harsh weather conditions generally also result in higher accident frequency, increased freight claims, and higher equipment repair expenditures. Our operations may be adversely impacted from weather-related events such as tornadoes, hurricanes, blizzards, ice storms, floods, fires, earthquakes, and other natural disasters. These events may also disrupt fuel supplies, increase fuel costs, disrupt freight shipments or routes, affect regional economies, destroy our assets, or adversely affect the business or financial condition of our customers, any of which could harm our results or make our results more volatile.

Our business may be disrupted by natural disasters causing supply chain disruptions.

Natural disasters such as earthquakes, tsunamis, hurricanes, tornadoes, floods or other adverse weather and climate conditions, whether occurring in the United States or abroad, could disrupt our operations or the operations of our customers or could damage or destroy infrastructure necessary to transport products as part of the supply chain. These events could make it difficult or impossible for us to provide logistics and transportation services; disrupt or prevent our ability to perform functions at the corporate level; and/or otherwise impede our ability to continue business operations in a continuous manner consistent with the level and extent of business activities prior to the occurrence of the unexpected event, which could adversely affect our business and results of operations.

We may incur additional operating expenses or liabilities as a result of potential future requirements to address climate change issues.

Regulations or legislation related to climate change that potentially imposes restrictions, caps, taxes, or other controls on emissions of greenhouse gases such as carbon dioxide, a by-product of burning fossil fuels such as those used in the Company’s trucks, could adversely affect our operations and financial results. More specifically, legislative or regulatory actions related to climate change could adversely impact the Company by increasing our fuel costs and reducing fuel efficiency and could result in the creation of substantial additional capital expenditures and operating costs in the form of taxes, emissions allowances, or required equipment upgrades. Any of these factors could impair our operating efficiency and productivity and result in higher operating costs.

Our operations are subject to various environmental laws and regulations, the violation of which could result in substantial fines or penalties.

We are subject to various environmental laws and regulations dealing with the handling of hazardous materials, underground fuel storage tanks, and discharge and retention of storm-water. We operate in industrial areas, where truck terminals and other industrial activities are located, and where groundwater or other forms of environmental contamination could occur. In prior years, we also maintained bulk fuel storage and fuel islands at two of our facilities. Our operations may involve the risks of fuel spillage or seepage, environmental damage, and hazardous waste disposal, among others. If we are involved in a spill or other accident involving hazardous substances, or if we are found to be in violation of applicable laws or regulations, it could have a materially adverse effect on our business and operating results. If we should fail to comply with applicable environmental regulations, we could be subject to substantial fines or penalties and to civil and criminal liability.

In addition, as global warming issues become more prevalent, federal, state and local governments as well as some of our customers, are beginning to respond to these issues. This increased focus on sustainability may result in new regulations and customer requirements that could negatively affect us as we may incur additional costs or be required to make changes to our operations in order to comply with any new regulations or customer requirements. Revenues could decrease if we are unable to meet regulatory or customer sustainability requirements. These additional costs, changes in operations, or loss of revenues could have a material adverse effect on our business, financial condition and results of operations.
 
13

 
 
If our employees were to unionize, our operating costs would increase and our ability to compete would be impaired.

None of our employees are currently represented by a collective bargaining agreement. However, we can offer no assurance that our employees will not unionize in the future, particularly if legislation is passed that facilitates unionization. If our employees were to unionize, our operating costs would increase and our profitability could be adversely affected.

Our information technology systems are subject to certain risks that are beyond our control.
 
We depend on the proper functioning and availability of our information systems, including communications and data processing systems, in operating our business. Although we have implemented redundant systems and network security measures, our information technology remains susceptible to outages, computer viruses, break-ins and similar disruptions that may inhibit our ability to provide services to our customers and the ability of our customers to access our systems. This may result in the loss of customers or a reduction in demand for our services, which could adversely affect our growth and profitability.

We have substantial fixed costs and, as a result, our operating income fluctuates disproportionately with changes in our net sales.

A significant portion of our expenses are fixed costs that that neither increase nor decrease proportionately with sales. There can be no assurance that we would be able to reduce our fixed costs proportionately in response to a decline in our sales and therefore our competitiveness could be significantly impacted. As a result, a decline in our sales would result in a higher percentage decline in our income from operations and net income.

Our financial results may be adversely impacted by potential future changes in accounting practices.
 
Future changes in accounting standards or practices, and related legal and regulatory interpretations of those changes, may adversely impact public companies in general, the transportation industry or our operations specifically. New accounting standards or requirements, such as a conversion from U.S. Generally Accepted Accounting Principles to International Financial Reporting Standards, could change the way we account for, disclose and present various aspects of our financial position, results of operations or cash flows and could be costly to implement.

Our business may be harmed by terrorist attacks, future war or anti-terrorism measures.

In the aftermath of the terrorist attacks of September 11, 2001, federal, state and municipal authorities have implemented and continue to follow various security measures, including checkpoints and travel restrictions on large trucks. Our international operations in Canada and Mexico may be affected significantly if there are any disruptions or closures of border traffic due to security measures. Such measures may have costs associated with them, which, in connection with the transportation services we provide, we or our owner-operators could be forced to bear. In addition, war or risk of war also may have an adverse effect on the economy. A decline in economic activity could adversely affect our revenue or restrict our future growth. Instability in the financial markets as a result of terrorism or war also could affect our ability to raise capital. In addition, the insurance premiums charged for some or all of the coverage currently maintained by us could increase dramatically or such coverage could be unavailable in the future.


14

 

We may be unable to successfully integrate businesses we acquire into our operations.

Integrating businesses we acquire may involve unanticipated delays, costs or other operational or financial problems. Successful integration of the businesses we acquire depends on a number of factors, including our ability to transition acquired companies to our management information systems. In integrating businesses we acquire, we may not achieve expected economies of scale or profitability or realize sufficient revenues to justify our investment. We also face the risk that an unexpected problem at one of the companies we acquire will require substantial time and attention from senior management, diverting management’s attention from other aspects of our business. We cannot be certain that our management and operational controls will be able to support us as we grow.

We currently do not intend to pay future dividends on our common stock.

We currently do not anticipate paying future cash dividends on our common stock. We anticipate that we will retain all of our future earnings, if any, for use in the development and expansion of our business and for general corporate purposes. Any determination to pay future dividends and other distributions in cash, stock, or property by the Company in the future will be at the discretion of our board of directors and will be dependent on then-existing conditions, including our financial condition and results of operations and contractual restrictions. Therefore, you should not rely on future dividend income from shares of our common stock.
 
We have a recent history of net losses.

We incurred net losses during each of the two years preceding the most recently completed year. Our net losses for the years ended December 31, 2011 and 2010 were $2.9 million and $655,000, respectively. Sustaining profitability depends upon numerous factors, including our ability to increase our trucking revenue per tractor, expand our overall volume, and control expenses.

Item 1B. Unresolved Staff Comments.

None.
 
15

 

Item 2. Properties.

Our executive offices and primary terminal facilities, which we own, are located in Tontitown, Arkansas. These facilities are located on approximately 49.3 acres and consist of 114,403 square feet of office space and maintenance and storage facilities.

Our subsidiaries lease facilities in Indianapolis, Indiana; Romulus, Michigan; Brandon, Mississippi; North Jackson, Ohio; Tahlequah, Oklahoma; Bath, Pennsylvania; El Paso, Texas; and Monterrey, Mexico. Our terminal facilities in Columbia, Mississippi; Irving and Laredo, Texas; North Little Rock, Arkansas; and Willard, Ohio are owned. The leased facilities are leased primarily on contractual terms typically ranging from one to five years. As of December 31, 2012, the following table provides a summary of the ownership and types of activities conducted at each location:

 
Location
Own/
Lease
Dispatch
Office
Maintenance
Facility
Safety
Training
Tontitown, Arkansas
Own
Yes
Yes
Yes
North Little Rock, Arkansas
Own
No
Yes
Yes
Indianapolis, Indiana
Lease
No
Yes
No
Romulus, Michigan
Lease
No
Yes
No
Brandon, Mississippi
Lease
No
No
No
Columbia, Mississippi
Own
No
No
No
North Jackson, Ohio
Lease
Yes
Yes
Yes
Willard, Ohio
Own
Yes
Yes
No
Tahlequah, Oklahoma
Lease
No
No
No
Bath, Pennsylvania
Lease
No
Yes
No
El Paso, Texas
Lease
No
No
No
Irving, Texas
Own
Yes
Yes
Yes
Laredo, Texas
Own
Yes
Yes
Yes
Monterrey, Mexico
Lease
No
No
No

We also have access to trailer drop and relay stations in various other locations across the country. We lease certain of these facilities on a month-to-month basis from affiliates of our largest stockholder.

We believe that all of the properties that we own or lease are suitable for their purposes and adequate to meet our needs.

Item 3. Legal Proceedings.

The nature of our business routinely results in litigation, primarily involving claims for personal injuries and property damage incurred in the transportation of freight. We believe that all such routine litigation is adequately covered by insurance and that adverse results in one or more of those cases would not have a material adverse effect on our financial statements.

Item 4. Mine Safety Disclosures.

Not applicable.

16

 

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our common stock is traded on the NASDAQ Global Market under the symbol PTSI. The following table sets forth, for the quarters indicated, the range of the high and low sales prices per share for our common stock as reported on the NASDAQ Global Market and our dividends declared per common share.

Fiscal Year Ended December 31, 2012
   
High
   
Low
   
Dividends Declared Per Common Share
 
First Quarter
  $ 12.58     $ 9.45     $ 1.00  
Second Quarter
    11.75       9.32       -  
Third Quarter
    10.18       8.95       -  
Fourth Quarter
    10.89       8.81       1.00  

Fiscal Year Ended December 31, 2011
   
High
   
Low
   
Dividends Declared Per Common Share
 
First Quarter
  $ 12.44     $ 10.47     $ -  
Second Quarter
    13.14       9.40       -  
Third Quarter
    11.50       9.03       -  
Fourth Quarter
    10.85       9.25       -  

As of February 20, 2013, there were approximately 119 holders of record of our common stock.

Dividends

The Company paid cash dividends of $1.00 per common share during each of the months of April 2012 and December 2012. No other dividends have been paid during any year prior to 2012. Future dividend policy and the payment of dividends, if any, will be determined by the Board of Directors in light of circumstances then existing, including our earnings, financial condition and other factors deemed relevant by the Board of Directors. Currently, the Company does not intend to pay dividends in the foreseeable future.

Repurchases of Equity Securities by the Issuer

The Company’s stock repurchase program has been extended and expanded several times, most recently in September 2011, when the Board of Directors announced that it had authorized the Company to repurchase up to 500,000 additional shares of its common stock. The Company repurchased 224,000 shares of its common stock during the fourth quarter of 2011 under the program and did not repurchase any additional shares during 2012.

Securities Authorized for Issuance Under Equity Compensation Plans

See Part III, Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of this Annual Report for a presentation of compensation plans under which equity securities of the Company are authorized for issuance.

17

 

Performance Graph

Set forth below is a line graph comparing the yearly percentage change in the cumulative total stockholder return on our common stock against the cumulative total return of the CRSP Total Return Index for the NASDAQ Stock Market (U.S. companies) and the CRSP Total Return Index for the NASDAQ Trucking and Transportation Stocks for the period of five years commencing December 31, 2007 and ending December 31, 2012. The graph assumes that the value of the investment in our common stock and in each index was $100 on December 31, 2007 and that all dividends were reinvested.
 
18

 

Item 6. Selected Financial Data.

The following selected financial and operating data should be read in conjunction with the Consolidated Financial Statements and notes thereto included elsewhere in this Report.

   
Year Ended December 31,
 
   
2012
   
2011
   
2010
   
2009
   
2008
 
   
(in thousands, except per share amounts)
 
Statement of Operations Data:
                             
Operating revenues:
                             
   Operating revenues, before fuel surcharge
  $ 297,698     $ 284,178     $ 282,524     $ 260,774     $ 323,272  
   Fuel surcharge
    82,935       75,065       49,470       31,136       83,451  
Total operating revenues
    380,633       359,243       331,994       291,910       406,723  
                                         
Operating expenses:
                                       
   Salaries, wages and benefits
    139,062       118,321       109,728       101,833       123,961  
   Fuel expense
    111,378       124,956       97,523       73,562       150,776  
   Rent and purchased transportation
    23,815       21,842       42,469       40,713       39,887  
   Depreciation and amortization
    38,298       34,163       27,035       37,742       37,477  
   Goodwill impairment charge
    -       -       -       -       15,413  
   Operating supplies
    39,011       38,659       30,105       26,572       30,514  
   Operating taxes and licenses
    5,003       4,952       4,954       5,020       5,692  
   Insurance and claims
    13,744       13,070       12,820       12,579       16,018  
   Communications and utilities
    2,235       2,496       2,731       2,644       2,869  
   Other
    5,350       6,029       5,169       4,967       5,119  
   (Gain) loss on sale or disposal of property
    (166 )     98       (337 )     931       952  
Total operating expenses
    377,730       364,586       332,197       306,563       428,678  
Operating income (loss)
    2,903       (5,343 )     (203 )     (14,653 )     (21,955 )
Non-operating income (loss)
    3,288       1,551       852       (745 )     (4,996 )
Interest expense
    (2,596 )     (1,798 )     (2,252 )     (2,373 )     (2,429 )
Income (loss) income before income taxes
    3,595       (5,590 )     (1,603 )     (17,771 )     (29,380 )
Income tax expense (benefit)
    1,416       (2,733 )     (948 )     (6,924 )     (10,615 )
Net income (loss)
  $ 2,179     $ (2,857 )   $ (655 )   $ (10,847 )   $ (18,765 )
                                         
Earnings (loss) per common share:
                                       
Basic
  $ 0.25     $ (0.32 )   $ (0.07 )   $ (1.15 )   $ (1.94 )
Diluted
  $ 0.25     $ (0.32 )   $ (0.07 )   $ (1.15 )   $ (1.94 )
                                         
Average common shares outstanding – Basic
    8,700       9,056       9,415       9,411       9,683  
Average common shares outstanding – Diluted(1)
    8,702       9,056       9,415       9,411       9,683  
                                         
Cash dividends declared per common share
  $ 2.00     $ -     $ -     $ -     $ -  
                                         
__________
(1)  
Diluted income per share for 2012 assumes the exercise of stock options to purchase an aggregate of 4,454 shares of common stock.

19

 
 
   
At December 31,
 
   
2012
   
2011
   
2010
   
2009
   
2008
 
Balance Sheet Data:
 
(in thousands)
 
Total assets
  $ 317,669     $ 279,093     $ 264,340     $ 260,656     $ 290,361  
Long-term debt, excluding current portion
    78,583       44,135       17,201       27,202       35,492  
Stockholders' equity
    122,195       137,477       147,948       147,127       155,477  
                                         
   
Year Ended December 31,
 
      2012       2011       2010       2009       2008  
Operating Data:
                                       
Operating ratio (1)
    99.0 %     101.9 %     100.1 %     105.6 %     106.8 %
Average number of truckloads per week
    5,704       5,586       6,054       6,275       7,559  
Average miles per trip
    693       687       625       556       598  
Total miles traveled (in thousands)
    200,765       195,081       192,139       177,872       221,450  
Average miles per truck
    114,071       110,215       110,236       102,816       111,114  
Average revenue, before fuel surcharge per truck per day
  $ 666     $ 632     $ 639     $ 591     $ 662  
Average revenue, before fuel surcharge per loaded mile
  $ 1.49     $ 1.49     $ 1.35     $ 1.36     $ 1.41  
Empty mile factor
    8.7 %     8.3 %     6.3 %     7.7 %     7.3 %
                                         
At end of period:
                                       
Total company-owned/leased trucks
    1,800 (2)     1,770 (3)     1,768 (4)     1,731 (5)     1,839 (6)
Average age of company-owned trucks (in years)
    1.70       2.62       3.24       2.60       1.90  
Total company-owned/leased trailers
    4,943 (7)     4,696 (8)     4,632 (9)     4,630       4,809  
Average age of company-owned trailers (in years)
    6.99       7.09       6.21       5.22       4.43  
Number of employees
    3,031       2,764       2,658       2,591       2,931  
__________
(1) Total operating expenses, net of fuel surcharge as a percentage of operating revenues, before fuel surcharge.
(2) Includes 220 owner operator trucks; (3) Includes 79 owner operator trucks; (4) Includes 28 owner operator trucks;
(5) Includes 34 owner operator trucks; (6) Includes 33 owner operator trucks; (7) Includes 36 leased trailers;
(8) Includes 53 leased trailers; (9) Includes 50 leased trailers.

The Company paid cash dividends of $1.00 per common share during each of the months of April 2012 and December 2012.
 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Business Overview

The Company's administrative headquarters are in Tontitown, Arkansas. From this location we manage operations conducted through our wholly owned subsidiaries based in various locations around the United States, Mexico, and Canada. The operations of these subsidiaries can generally be classified into either truckload services or brokerage and logistics services. Truckload services include those transportation services in which we utilize company owned trucks or owner-operator owned trucks. Brokerage and logistics services consist of services such as transportation scheduling, routing, mode selection, transloading and other value added services related to the transportation of freight which may or may not involve the usage of company owned or owner-operator owned equipment. Both our truckload operations and our brokerage/logistics operations have similar economic characteristics and are impacted by virtually the same economic factors as discussed elsewhere in this Report. All of the Company's operations are in the motor carrier segment.

For both operations, substantially all of our revenue is generated by transporting freight for customers and is predominantly affected by the rates per mile received from our customers, equipment utilization, and our percentage of non-compensated miles. These aspects of our business are carefully managed and efforts are continuously underway to achieve favorable results. Truckload services revenues, excluding fuel surcharges, represented 91.8%, 93.5% and 85.9% of total revenues, excluding fuel surcharges for the twelve months ended December 31, 2012, 2011 and 2010, respectively.
 
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The main factors that impact our profitability on the expense side are costs incurred in transporting freight for our customers. Currently, our most challenging costs include fuel, driver recruitment, training, wage and benefit costs, independent broker costs (which we record as purchased transportation), insurance, and maintenance and capital equipment costs.

In discussing our results of operations we use revenue, before fuel surcharge, (and fuel expense, net of surcharge), because management believes that eliminating the impact of this sometimes volatile source of revenue allows a more consistent basis for comparing our results of operations from period to period. During 2012, 2011 and 2010, approximately $82.9 million, $75.1 million and $49.5 million, respectively, of the Company's total revenue was generated from fuel surcharges. We also discuss certain changes in our expenses as a percentage of revenue, before fuel surcharge, rather than absolute dollar changes. We do this because we believe the high variable cost nature of certain expenses makes a comparison of changes in expenses as a percentage of revenue more meaningful than absolute dollar changes.

Results of Operations - Truckload Services
 
The following table sets forth, for truckload services, the percentage relationship of expense items to operating revenues, before fuel surcharges, for the periods indicated. Fuel costs are shown net of fuel surcharges.

   
Years Ended December 31,
 
 
 
 
2012
   
2011
   
2010
 
Operating revenues, before fuel surcharge
    100.0 %     100.0 %     100.0 %
Operating expenses:
                       
   Salaries, wages and benefits
    50.7       44.4       44.4  
   Fuel expense, net of fuel surcharge
    10.4       18.8       19.8  
   Rent and purchased transportation
    0.3       1.6       2.3  
   Depreciation and amortization
    14.0       12.8       11.1  
   Operating supplies and expenses
    14.3       14.5       12.4  
   Operating taxes and licenses
    1.8       1.9       2.0  
   Insurance and claims
    5.0       4.9       5.3  
   Communications and utilities
    0.8       0.9       1.1  
   Other
    1.9       2.3       2.0  
   Loss on sale or disposal of property
    0.0       0.0       0.1  
Total operating expenses
    99.2       102.1       100.5  
Operating income (loss)
    0.8       (2.1 )     (0.5 )
Non-operating income
    1.2       0.6       0.3  
Interest expense
    (0.9 )     (0.7 )     (0.8 )
Income (loss) before income taxes
    1.1 %     (2.2 )%     (1.0 )%

2012 Compared to 2011

For the year ended December 31, 2012, truckload services revenue, before fuel surcharges, increased 2.9% to $273.4 million as compared to $265.8 million for the year ended December 31, 2011. The increase relates primarily an increase in the average number of miles traveled per unit each work day from 434 miles during 2011 to 449 miles during 2012.

Salaries, wages and benefits increased from 44.4% of revenues, before fuel surcharges, during 2011 to 50.7% of revenues, before fuel surcharges, during 2012. The increase relates primarily to an increase in driver lease expense, which is a component of salaries, wages and benefits. The increase in driver lease expense is the result of an increase in the average number of owner operators under contract from 48 during 2011 to 149 during 2012. The increase in costs in this category, as they relate to the increase in owner operators, are partially offset by a decrease in other expense categories, such as repairs and fuel, which are generally borne by the owner operator. Partially offsetting the increase related to owner operator expenses was a decrease in expenses associated with employee workers’ compensation benefits.
 
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Fuel expense, net of fuel surcharge, decreased from 18.8% of revenues, before fuel surcharges, during 2011 to 10.4% of revenues, before fuel surcharges, during 2012. The decrease relates primarily to a decrease in the average surcharge-adjusted fuel price paid per gallon of diesel fuel and to an increase in the average miles-per-gallon (“mpg”) experienced. The average surcharge-adjusted fuel price paid per gallon of diesel fuel decreased from $1.43 during 2011 to $0.91 during 2012 as a result of more favorable fuel surcharge arrangements made with customers and to an increase in the number of owner operators in our fleet. Fuel surcharge collections can fluctuate significantly from period to period as they are generally based on changes in fuel prices from period to period so that during periods of rising fuel prices fuel surcharge collections increase while fuel surcharge collections decrease during periods of falling fuel prices. Fuel surcharge revenue generated from transportation services performed by owner operators is reflected as a reduction in net fuel expense, while fuel surcharges paid to owner operators for their services is reported along with their base rate of pay in the Salaries, wages and benefits category. These categorizations have the effect of reducing our net fuel expense while increasing Salaries, wages and benefits category, as discussed above. The average mpg experienced increased during 2012 as compared to the mpg experienced during 2011 as a result of replacing older trucks with newer trucks, which are more fuel efficient and to the implementation of driver bonus programs which are tied directly to fuel efficiency.

Rent and purchased transportation decreased from 1.6% of revenues, before fuel surcharges, during 2011 to 0.3% of revenues, before fuel surcharges, during 2012. The decrease relates primarily to a decrease in amounts paid for third-party equipment rentals and to third-party transportation service providers as well as a decrease in amounts reserved for excess mileage fees paid to certain equipment manufacturers upon the trade of older trucks for new trucks.

Depreciation and amortization increased from 12.8% of revenues, before fuel surcharges, during 2011 to 14.0% of revenues, before fuel surcharges, during 2012. The increase relates primarily to purchases of new trucks made during 2012 which replaced older trucks within the fleet. These new truck replacements have a significantly higher purchase price than those trucks that are being replaced and are also being depreciated over a shorter period of time as the Company accelerates its truck replacement cycle from every five years to a replacement cycle of every three years. This reduction in replacement cycle, combined with a higher purchase price, results in higher depreciation expense over a shorter period of time. The decrease in the truck replacement cycle time is intended to reduce fuel costs, improve driver and customer satisfaction, and to reduce long-term maintenance costs as well as increase fleet efficiency by reducing maintenance down-time.

Operating supplies and expenses decreased from 14.5% of revenues, before fuel surcharges, during 2011 to 14.3% of revenues, before fuel surcharges, during 2012. The decrease relates primarily to a decrease in amounts paid for equipment maintenance costs during 2012 as compared to amounts paid during 2011 as a result of replacing older equipment with new equipment. Partially offsetting this decrease was an increase in amounts paid for driver training schools during 2012 as compared to amounts paid during 2011. The increase in driver training and recruiting costs are a result of heightened competition for qualified drivers as industry demand has increased and increased regulations have forced some drivers to exit the profession.
 
Operating taxes and licenses decreased from 1.9% of revenues, before fuel surcharges, during 2011 to 1.8% of revenues, before fuel surcharges, during 2012. The decrease, as a percentage of revenue, resulted from the interaction of expenses with fixed-cost characteristics, such as registration fees, with an increase in revenues for the periods compared. On a dollar basis, operating taxes and licenses, which consists primarily of equipment registration fees, increased from $4.9 million during 2011 to $5.0 million during 2012.
 
Insurance and claims expense increased from 4.9% of revenues, before fuel surcharges, during 2011 to 5.0% of revenues, before fuel surcharges, during 2012. The increase relates primarily to an increase in auto liability and cargo related claims expenses incurred during 2012 as compared to 2011.
 
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Other expenses decreased from 2.3% of revenues, before fuel surcharges, during 2011 to 1.9% of revenues, before fuel surcharges, during 2012. The decrease relates primarily to a decrease in amounts expensed for uncollectible revenue, professional services, and for other supplies and expenses.

The truckload services division operating ratio, which measures the ratio of operating expenses, net of fuel surcharges, to operating revenues, before fuel surcharges, decreased to 99.2% for 2012 from 102.1% for 2011.

Non-operating income increased from 0.6% of revenues, before fuel surcharges, during 2011 to 1.2% of revenues, before fuel surcharges, during 2012. The components of this category consist primarily of dividends earned and gains or losses on the Company’s investments in marketable equity securities. The increase relates primarily to an increase in the amount of dividends and capital gains recognized between the periods on the Company’s investments in marketable equity securities.

2011 Compared to 2010

For the year ended December 31, 2011, truckload services revenue, before fuel surcharges, increased 9.5% to $265.8 million as compared to $242.8 million for the year ended December 31, 2010. The increase related primarily to an increase in the average rate charged to customers per total mile during 2011 as compared to 2010. During 2011, the average rate charged to customers per total mile increased by $0.10 as compared to the average rate charged during 2010.

Salaries, wages and benefits remained at 44.4% of revenues, before fuel surcharges, for both 2010 and 2011. Using a dollar-based comparison, salaries, wages and benefits increased from $107.9 million during 2010 to $118.0 million during 2011. The dollar-based increase related primarily to the rescission of a pay rate reduction plan, an increase in driver wages, and an increase in driver lease expense. Rescission of the 5% pay rate reduction plan, which had been in effect during the first seven months of 2010 but not at anytime during 2011, had the effect of increasing comparative salaries and wages by 5% following the rescission date in August 2010. Driver wages increased as the number of company driver compensated miles increased from 192.1 million miles during 2010 to 195.1 million miles during  2011. Driver lease expense, which is a component of salaries, wages and benefits, increased as the average number of owner-operators under contract increased from 29 during 2010 to 48 during 2011. The Company also experienced an increase in expenses associated with employee workers compensation benefits.
 
Fuel expense, net of fuel surcharge, decreased from 19.8% of revenues, before fuel surcharges, during 2010 to 18.8% of revenues, before fuel surcharges, during 2011. The decrease, as a percentage of revenue, related to interaction of higher revenues without a proportional increase in fuel costs as the increase in the average rate charged to customers on a per-mile basis outpaced the per-mile increase in fuel costs. Using a dollar-based comparison, fuel expense increased from $48.1 million during 2010 to $49.9 million during 2011. The dollar-based increase related primarily to an increase in the average surcharge-adjusted price paid per gallon of fuel from $1.35 during 2010 to $1.43 paid per gallon during 2011. The fuel surcharge collections vary from period to period as they are generally based on changes in fuel prices from period to period so that during periods of rising fuel prices fuel surcharge collections increase while fuel surcharge collections decrease during periods of declining fuel prices.
 
Rent and purchased transportation decreased from 2.3% of revenues, before fuel surcharges, in 2010 to 1.6% of revenues, before fuel surcharges, in 2011. The decrease related primarily to a decrease in amounts paid to third party transportation service providers.

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Depreciation and amortization increased from 11.1% of revenues, before fuel surcharges, in 2010 to 12.8% of revenues, before fuel surcharges, in 2011. The increase related primarily to 2011 revenue equipment acquisitions placed in service during 2011 and to revisions made during 2011 to the estimated useful lives and residual values of our trucks to facilitate the acceleration of our planned truck replacement cycle from five years to three years. Using a dollar-based comparison, depreciation and amortization increased from $26.9 million during 2010 to $34.1 million during 2011 as the revisions generally resulted in higher monthly depreciation expense over a shorter period of time.

Operating supplies and expenses increased from 12.4% of revenues, before fuel surcharges, during 2010 to 14.5% of revenues, before fuel surcharges, during 2011. The increase related primarily to an increase in equipment maintenance and repair costs as the Company extended the life of its existing fleet of trucks and trailers during 2010. Also contributing to the increase was an increase in amounts paid to driver training schools for the periods compared as competition for qualified drivers increased during a period when increased regulations forced some drivers to exit the profession. On a dollar basis, operating supplies and expenses increased from $30.1 million during 2010 to $38.7 million during 2011. The primary components of the increase were an increase in maintenance and repair costs of $6.6 million and an increase in driver recruiting costs of $1.5 million.
 
Operating taxes and licenses decreased from 2.0% of revenues, before fuel surcharges, during 2010 to 1.9% of revenues, before fuel surcharges, during 2011. The decrease, as a percentage of revenue, resulted from the interaction of expenses with fixed-cost characteristics, such as registration fees, with an increase in revenues for the periods compared. On a dollar basis, operating taxes and licenses, which consists primarily of equipment registration fees, remained constant at $4.9 million during each of the periods compared.
 
Insurance and claims expense decreased from 5.3% of revenues, before fuel surcharges, during 2010 to 4.9% of revenues, before fuel surcharges, during 2011. The decrease, as a percentage of revenue, related to the interaction of insurance premiums, based on a factor other than revenue, with increased revenues. Insurance premiums based on a mileage basis, such as auto liability premiums, and on a value basis, such as physical damage premiums, decreased as a percentage of revenues as a result of higher revenues for the periods compared. On a dollar basis, insurance and claims expense increased from $12.8 million during 2010 to $13.1 million during 2011. This dollar-based increase related primarily to an increase in amounts reserved for auto liability claims during 2011 as compared to 2010.

Other expenses increased from 2.0% of revenues, before fuel surcharges, during 2010 to 2.3% of revenues, before fuel surcharges, during 2011. The increase related primarily to an increase in building rents, advertising expenses and professional services fees.

The truckload services division operating ratio, which measures the ratio of operating expenses, net of fuel surcharges, to operating revenues, before fuel surcharges, increased to 102.1% for 2011 from 100.5% for 2010.

Non-operating income increased from 0.3% of revenues, before fuel surcharges, during 2010 to 0.6% of revenues, before fuel surcharges, during 2011. The components of this category consist primarily of dividends earned and gains or losses on the Company’s investments in marketable equity securities. The increase related primarily to an increase in the amount of dividends and capital gains recognized between the periods on the Company’s investments in marketable equity securities.
 
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Results of Operations - Logistics and Brokerage Services
 
The following table sets forth, for logistics and brokerage services, the percentage relationship of expense items to operating revenues, before fuel surcharges, for the periods indicated. Brokerage service operations occur specifically in certain divisions; however, brokerage operations occur throughout the Company in similar operations having substantially similar economic characteristics. Rent and purchased transportation, which includes costs paid to third party carriers, are shown net of fuel surcharges.

   
Years Ended December 31,
 
 
 
 
2012
   
2011
   
2010
 
Operating revenues, before fuel surcharge
    100.0 %     100.0 %     100.0 %
Operating expenses:
                       
   Salaries, wages and benefits
    1.8       1.9       4.6  
   Fuel expense
    0.0       0.0       0.0  
   Rent and purchased transportation, net of fuel surcharge
    95.2       95.7       93.0  
   Depreciation and amortization
    0.0       0.0       0.0  
   Operating supplies and expenses
    0.0       0.0       0.0  
   Operating taxes and licenses
    0.0       0.0       0.0  
   Insurance and claims
    0.0       0.0       0.1  
   Communications and utilities
    0.1       0.2       0.3  
   Other
    0.2       0.3       0.7  
   Gain on sale or disposal of property
    0.0       0.0       (1.2 )
Total operating expenses
    97.3       98.1       97.5  
Operating income
    2.7       1.9       2.5  
Non-operating income
    0.2       0.1       0.3  
Interest expense
    (0.2 )     (0.1 )     (0.6 )
Income before income taxes
    2.7 %     1.9 %     2.2 %

2012 Compared to 2011

For the year ended December 31, 2012, logistics and brokerage services revenues, before fuel surcharges, increased 32.1% to $24.3 million as compared to $18.4 million for the year ended December 31, 2011. The increase was primarily the result of an increase in the number of loads brokered during 2012 as compared to 2011.

Salaries, wages and benefits decreased from 1.9% of revenues, before fuel surcharges, in 2011 to 1.8% of revenues, before fuel surcharges, in 2012. The decrease, as a percentage of revenues, resulted primarily from the fixed cost characteristics of wages which do not fluctuate with changes in revenue, such as general and administrative and marketing wages. Using a dollar-based comparison, salaries, wages and benefits increased from $0.3 million during 2011 to $0.4 million during 2012 as the number of employees assigned to the logistics and brokerage services division increased.

Rent and purchased transportation decreased from 95.7% of revenues, before fuel surcharges, in 2011 to 95.2% of revenues, before fuel surcharges, in 2012. The decrease relates to a decrease in amounts charged by third party logistics and brokerage service providers.

The logistics and brokerage services division operating ratio, which measures the ratio of operating expenses, net of fuel surcharges, to operating revenues, before fuel surcharges, decreased to 97.3% for 2012 from 98.1% for 2011.
 
25

 

2011 Compared to 2010

For the year ended December 31, 2011, logistics and brokerage services revenues, before fuel surcharges, decreased 53.7% to $18.4 million as compared to $39.7 million for the year ended December 31, 2010. The decrease was primarily the result of a decrease in the number of loads brokered during 2011 as compared to 2010. The decrease in the number of loads resulted primarily from the closing of a brokerage office located in New Jersey during the third quarter of 2010.

Salaries, wages and benefits decreased from 4.6% of revenues, before fuel surcharges, in 2010 to 1.9% of revenues, before fuel surcharges, in 2011. The decrease related to a decrease in salaries and benefits associated with the closing of a brokerage office located in New Jersey during the third quarter of 2010.

Rent and purchased transportation increased from 93.0% of revenues, before fuel surcharges, in 2010 to 95.7% of revenues, before fuel surcharges, in 2011. The increase related to an increase in amounts charged by third party logistics and brokerage service providers.

The logistics and brokerage services division operating ratio, which measures the ratio of operating expenses, net of fuel surcharges, to operating revenues, before fuel surcharges, increased to 98.1% for 2011 from 97.5% for 2010.

Results of Operations - Combined Services
 
2012 Compared to 2011

Income tax expense was approximately $1.4 million in 2012 resulting in an effective rate of 39.4%, as compared to an income tax benefit of approximately $2.7 million in 2011 resulting in an effective rate of 48.9%. The effective tax rate differs from the statutory rate primarily due to the existence of partially non-deductible meal and incidental expense per-diem payments to company drivers. Per-diem payments may cause a significant difference in the Company’s effective tax rate from period-to-period as the proportion of non-deductible expenses to pre-tax net income increases or decreases.
 
We determined, based on significant judgment, that a valuation allowance against our deferred tax assets has not been necessary. Management evaluates the ability to realize its deferred tax assets based upon negative and positive evidence available and, based on the evidence available at this time, management concludes that it is "more likely than not" that we will be able to realize the benefit of our deferred tax assets in the near future.
 
As of December 31, 2012, there were no significant unrecognized tax benefits and an adjustment to the Company’s consolidated financial statements for uncertain tax positions was not required as management believes that the Company’s significant tax positions taken in income tax returns filed or to be filed are supported by clear and unambiguous income tax laws.

The Company and its subsidiaries are subject to U.S. and Canadian federal income tax laws as well as the income tax laws of multiple state jurisdictions. The major tax jurisdictions in which we operate generally provide for a deficiency assessment statute of limitation period of three years and as a result, the Company’s tax years 2009 and forward remain open to examination in those jurisdictions. During 2012, the Company has not recognized or accrued any interest or penalties related to uncertain income tax positions and does not believe it is reasonably possible that our unrecognized tax benefits will significantly change within the next twelve months.

The combined net income for all divisions was $2.2 million, or 0.7% of revenues, before fuel surcharge, for 2012 as compared to the combined net loss for all divisions of $2.9 million or 1.0% of revenues, before fuel surcharge, for 2011. The increase in income resulted in an increase in diluted earnings per share to $0.25 for 2012 from a diluted loss per share of $0.32 for 2011.
 
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2011 Compared to 2010

Income tax benefit was approximately $2.7 million in 2011 resulting in an effective rate of 48.9%, as compared to an income tax benefit of approximately $0.9 million in 2010 resulting in an effective rate of 59.2%. The effective tax rate differed from the statutory rate primarily due to the existence of partially non-deductible meal and incidental expense per-diem payments to company drivers as well as tax credits related to the Company’s purchase of qualified alternative motor fuel vehicles during 2010. Per-diem payments may cause a significant difference in the Company’s effective tax rate from period-to-period as the proportion of non-deductible expenses to pre-tax net income increases or decreases.
 
We determined, based on significant judgment, that a valuation allowance against our deferred tax assets was not necessary. Management evaluates the ability to realize its deferred tax assets based upon negative and positive evidence available and, based on the evidence available, management concluded that it was "more likely than not" that we would be able to realize the benefit of our deferred tax assets in the near future.
 
As of December 31, 2011, there were no significant unrecognized tax benefits and an adjustment to the Company’s consolidated financial statements for uncertain tax positions was not required as management believed that the Company’s significant tax positions taken in income tax returns filed or to be filed are supported by clear and unambiguous income tax laws.

The Company and its subsidiaries are subject to U.S. and Canadian federal income tax laws as well as the income tax laws of multiple state jurisdictions. The major tax jurisdictions in which we operate generally provide for a deficiency assessment statute of limitation period of three years and as a result, the Company’s tax years 2009 and forward remain open to examination in those jurisdictions. During 2011, the Company had not recognized or accrued any interest or penalties related to uncertain income tax positions and did not believe it was reasonably possible that our unrecognized tax benefits would significantly change within the next twelve months.

The combined net loss for all divisions was $2.9 million, or 1.0% of revenues, before fuel surcharge, for 2011 as compared to the combined net loss for all divisions of $0.7 million or 0.2% of revenues, before fuel surcharge, for 2010. The decrease in income resulted in an increase in the diluted loss per share from $0.07 for 2010 to a diluted loss per share of $0.32 for 2011.

Quarterly Results of Operations

The following table presents selected consolidated financial information for each of our last eight fiscal quarters through December 31, 2012. The information has been derived from unaudited consolidated financial statements that, in the opinion of management, reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the quarterly information.

   
Quarter Ended
 
   
Mar. 31,
2012
   
June 30,
2012
   
Sept. 30,
2012
   
Dec. 31,
2012
   
Mar. 31,
2011
   
June 30,
2011
   
Sept. 30,
2011
   
Dec. 31,
2011
 
   
(unaudited)
 
   
(in thousands, except earnings per share data)
 
Operating revenues
  $ 96,155     $ 94,156     $ 94,549     $ 95,773     $ 85,026     $ 95,890     $ 88,938     $ 89,389  
Total operating expenses
    95,069       92,884       93,610       96,167       88,839       94,291       91,634       89,822  
Operating income (loss)
    1,086       1,272       939       (394 )     (3,813 )     1,599       (2,696 )     (433 )
Net income (loss)
    674       935       881       (311 )     (1,978 )     693       (1,705 )     133  
Earnings (loss) per common share:
                                                               
Basic
  $ 0.08     $ 0.11     $ 0.10     $ (0.04 )   $ (0.21 )   $ 0.08     $ (0.19 )   $ 0.02  
Diluted
  $ 0.08     $ 0.11     $ 0.10     $ (0.04 )   $ (0.21 )   $ 0.08     $ (0.19 )   $ 0.02  
 
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Liquidity and Capital Resources

Our business has required, and will continue to require, a significant investment in new revenue equipment. Our primary sources of liquidity have been funds provided by operations, proceeds from the sales of revenue equipment, issuances of equity securities, and borrowings under our lines of credit, installment notes, and investment margin account.

During 2012, we generated $33.6 million in cash from operating activities compared to $34.9 million and $15.0 million in 2011 and 2010, respectively. Investing activities used $72.6 million in cash during 2012 compared to $61.4 million and $14.2 million in 2011 and 2010, respectively. The cash used for investing activities in all three years related primarily to the purchase of revenue equipment such as trucks and trailers or related equipment such as auxiliary power units. Financing activities provided $39.3 million in cash during 2012 compared to $12.9 million and $3.1 million in cash provided during 2011 and 2010, respectively. See the Consolidated Statements of Cash Flows in Item 8 of this Report.

Our primary use of funds is for the purchase of revenue equipment. We typically use installment notes, our existing lines of credit on an interim basis, proceeds from the sale or trade of equipment, and cash flows from operations, to finance capital expenditures and repay long-term debt. During 2012 and 2011, we utilized cash on hand, installment notes, and our lines of credit to finance revenue equipment purchases of approximately $95.1 million and $67.6 million, respectively.

Occasionally we finance the acquisition of revenue equipment through installment notes with fixed interest rates and terms ranging from 12 to 60 months. At December 31, 2012, the Company’s subsidiaries had combined outstanding indebtedness under such installment notes of $102.1 million. These installment notes are payable in monthly installments, ranging from 36 monthly installments to 60 monthly installments, at a weighted average interest rate of 3.02%. At December 31, 2011, the Company’s subsidiaries had combined outstanding indebtedness under such installment notes of $52.2 million. These installment notes were payable in 36 monthly installments at a weighted average interest rate of 3.66%.

In order to maintain our truck and trailer fleet count it is often necessary to purchase replacement units and place them in service before trade units are removed from service. The timing of this process often requires the Company to pay for new units without any reduction in price for trade units. In this situation, the Company later receives payment for the trade units as they are delivered to the equipment vendor and have passed vendor inspection. During the twelve months ended December 31, 2012 and 2011, the Company received approximately $12.7 million and $4.0 million, respectively, for units delivered for trade.

During 2012, the Company negotiated an increase in its revolving line of credit from $30.0 million to $35.0 million. Amounts outstanding under the line bear interest at LIBOR (determined as of the first day of each month) plus 1.95% (2.16% at December 31, 2012), are secured by our trade accounts receivable and mature on June 1, 2014. At December 31, 2012, outstanding advances on the line were approximately $6.5 million, including letters of credit of $1.1 million, with availability to borrow $28.5 million.

The Company also maintains an investment margin account which is periodically used as a source for the purchase of marketable equity securities and short-term liquidity.

Trade accounts receivable at December 31, 2012 increased approximately $2.0 million as compared to December 31, 2011. The increase relates to a general increase in freight revenue and fuel surcharge revenue, which flows through the accounts receivable account, during 2012 as compared to the freight revenue and fuel surcharge revenue generated during 2011.
 
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Marketable equity securities at December 31, 2012 decreased approximately $2.9 million as compared to December 31, 2011. The decrease was primarily related to sales of marketable equity securities with a combined cost basis of $2.2 million and to a decrease in market value of approximately $0.9 million. At December 31, 2012, the remaining marketable equity securities have a combined cost basis of approximately $10.5 million and a combined fair market value of approximately $17.3 million. The Company has developed a strategy to invest in securities from which it expects to receive dividends that qualify for favorable tax treatment, as well as appreciate in value. The Company anticipates that increases in the market value of the investments combined with dividend payments will exceed interest rates paid on borrowings for the same period. During 2012 the Company had net unrealized pre-tax losses of approximately $0.8 million and received dividends of approximately $0.8 million. The holding term of these securities depends largely on the general economic environment, the equity markets, borrowing rates and the Company's cash requirements.

Revenue equipment, at December 31, 2012, which generally consists of trucks, trailers, and revenue equipment accessories such as Qualcomm™ satellite tracking units and auxiliary power units, increased approximately $6.6 million as compared to December 31, 2011. The increase relates primarily to the purchase of new trucks to replace older trucks which have not yet been retired or are otherwise in the process of being traded or sold and to the purchase of new trailers during 2012 without corresponding trailer retirements as the Company intends to increase its trailer fleet size. Partially offsetting the increase was the disposition of older, fully depreciated, Qualcomm™ units as the Company replaced older units with newer units offering more advanced capabilities.
 
Accounts payable at December 31, 2012 decreased approximately $4.8 million as compared to December 31, 2011. The decrease is primarily related to a decrease in the amount of bank drafts outstanding in excess of bank balance as compared to bank drafts outstanding at December 31, 2011. As of December 31, 2012 bank drafts of approximately $4.8 million were reclassified to accounts payable as compared to approximately $7.0 million reclassified as of December 31, 2011. Also contributing to the decrease was a decrease in amounts accrued for the purchase of revenue equipment received which had not been paid for by the end of the period and a decrease in amounts accrued for the purchase of fuel.

Accrued expenses and other liabilities at December 31, 2012 increased approximately $11.6 million as compared to December 31, 2011. The increase is primarily related to a $10.7 million increase in margin account borrowings secured by the Company’s investments in marketable equity securities. The Company periodically uses this margin account for the purchase of marketable equity securities and as a source of short-term liquidity.

Current maturities of long term-debt and long-term debt fluctuations are reviewed on an aggregate basis as the classification of amounts in each category are typically affected merely by the passage of time. Current maturities of long-term debt and long-term debt, on an aggregate basis at December 31, 2012, increased approximately $45.9 million as compared to December 31, 2011. The increase was related to additional borrowings received during 2012 net of the principal portion of scheduled installment note payments made during 2012.
 
During 2012, the Company paid cash dividends of approximately $17.4 million and we currently intend to retain our future earnings to finance our growth and do not anticipate paying additional dividends in the foreseeable future.

For 2013, we expect to purchase 550 new trucks and 720 new trailers while continuing to sell or trade older equipment, which we expect to result in net capital expenditures of approximately $53.1 million. Management believes we will be able to finance our near term needs for working capital over the next twelve months, as well as acquisitions of revenue equipment during such period, with cash balances, cash flows from operations, and borrowings believed to be available from financing sources. We will continue to have significant capital requirements over the long-term, which may require us to incur debt or seek additional equity capital. The availability of additional capital will depend upon prevailing market conditions, the market price of our common stock and several other factors over which we have limited control, as well as our financial condition and results of operations. Nevertheless, based on our anticipated future cash flows and sources of financing that we expect will be available to us, we do not expect that we will experience any significant liquidity constraints in the foreseeable future.
 
29

 
 
Contractual Obligations and Commercial Commitments

The following table sets forth the Company's contractual obligations and commercial commitments as of December 31, 2012:

   
Payments due by period
(in thousands)
 
   
Total
   
Less than
1 year
   
1 to 3
Years
   
3 to 5
Years
   
More than
5 Years
 
                               
Long-term debt (1)
  $ 123,321     $ 31,608     $ 89,435     $ 2,278     $ -  
Operating leases (2)
    1,905       741       638       321       205  
Lease residual value guarantees
    197       32       165       -       -  
Total
  $ 125,423     $ 32,381     $ 90,238     $ 2,599     $ 205  
                                         
(1)  
Including interest.
(2)  
Represents equipment, building, facilities, and drop yard operating leases.

Off-Balance Sheet Arrangements

During 2010, the Company entered into an operating lease for the lease of trailers. This lease included a requirement that we guarantee a portion of the residual value of the trailers at the end of the lease term up to a certain amount. As a result, we are subject to the risk that equipment values may decline below the amount of the guaranteed residual amount which would result in the Company being required to make cash payments for a limited deficiency amount. At December 31, 2012, the maximum amount of the potential deficiency obligation equates to $197,000. We currently anticipate that the value of the trailers at the end of the lease will be sufficient to cover the guaranteed portion of the expected residual value of the trailers and that a cash payment will not be required. To the extent the expected value at the end of the lease becomes lower than the amount of the residual value guaranteed, we would begin accruing for the difference over the remaining lease term.

The trailers held under operating leases are not carried on our balance sheet and respective lease payments are reflected in our consolidated statement of operations as a component of the caption “Rents and purchased transportation”. Rent expense related to the trailers under the operating lease agreements totaled $371,000 for the year ended December 31, 2012.

Insurance

With respect to physical damage for trucks, cargo loss and auto liability, the Company maintains insurance coverage to protect it from certain business risks. These policies are with various carriers and have per occurrence deductibles of $2,500, $10,000 and $2,500 respectively. The Company maintains workers’ compensation coverage in Arkansas, Ohio, Oklahoma, Mississippi, and Florida with a $500,000 self-insured retention and a $500,000 per occurrence excess policy. The Company has elected to opt out of workers' compensation coverage in Texas and is providing coverage through the P.A.M. Texas Injury Plan. The Company has reserved for estimated losses to pay such claims as well as claims incurred but not yet reported. The Company has not experienced any adverse trends involving differences in claims experienced versus claims estimates for workers’ compensation claims. Letters of credit aggregating approximately $1,101,000 and certificates of deposit totaling $300,000 are held by banks as security for workers’ compensation claims. The Company self insures for employee health claims with a stop loss of $275,000 per covered employee per year and estimates its liability for claims incurred but not reported.

Inflation

Inflation has an impact on most of our operating costs. Over the past three years, the effect of inflation has been minimal.
 
30

 

Adoption of Accounting Policies

See “Item 8. Financial Statements and Supplementary Data, Note 1 to the Consolidated Financial Statements - Recent Accounting Pronouncements.”

Critical Accounting Policies

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to adopt accounting policies and make significant judgments and estimates that impact the amounts reported in our consolidated financial statements and accompanying notes. Therefore, the reported amounts of assets, liabilities, revenue, expenses, and associated disclosures of contingent assets and liabilities are affected by judgments and estimates. In many cases, there are alternative assumptions, policies, or estimation techniques that could be used. Management evaluates its assumptions, policies, and estimates on an ongoing basis, utilizing historical experience, and other methods considered reasonable in the particular circumstances. Nevertheless, actual results may differ significantly from our estimates and assumptions, and it is possible that materially different amounts would be reported using differing estimates or assumptions. Management considers our critical accounting policies to be those that require more significant judgments and estimates when we prepare our consolidated financial statements. Our critical accounting policies include the following:
 
Accounts receivable and allowance for doubtful accounts. Accounts receivable are presented in the Company’s consolidated financial statements net of an allowance for estimated uncollectible amounts. Management estimates this allowance based upon an evaluation of the aging of our customer receivables and historical write-offs, as well as other trends and factors surrounding the credit risk of specific customers. The Company continually updates the history it uses to make these estimates so as to reflect the most recent trends, factors and other information available. In order to gather information regarding these trends and factors, the Company also performs ongoing credit evaluations of its customers. Customer receivables are considered to be past due when payment has not been received by the invoice due date. Write-offs occur when we determine an account to be uncollectible and could differ from the allowance estimate as a result of a number of factors, including unanticipated changes in the overall economic environment or factors and risks surrounding a particular customer. Management believes its methodology for estimating the allowance for doubtful accounts to be reliable however, additional allowances may be required if the financial condition of our customers were to deteriorate and could have a material effect on the Company’s consolidated financial statements.

Depreciation of trucks and trailers. Depreciation of trucks and trailers is calculated by the straight-line method over the assets estimated useful life, which range from three to 12 years, down to an estimated salvage value at the end of the assets estimated useful life. Management must use its judgment in the selection of estimated useful lives and salvage values for purposes of this calculation. In some cases, the Company has agreements in place with certain manufacturers whereby salvage values are guaranteed. In other cases, where salvage values are not guaranteed, estimates of salvage value are based on the expected market values of equipment at the time of disposal.

The depreciation of trucks and trailers over their estimated useful lives and the determination of any salvage value also require management to make judgments about future events. Therefore, the Company’s management periodically evaluates whether changes to estimated useful lives or salvage values are necessary to ensure these estimates accurately reflect the economic reality of the assets. This periodic evaluation may result in changes in the estimated lives and/or salvage values used by the Company to depreciate its assets, which can affect the amount of periodic depreciation expense recognized and, ultimately, the gain or loss on the disposal of an asset. Future changes in our estimated useful life or salvage value estimates, or fluctuations in market value that is not reflected in current estimates, could have a material effect on the Company’s consolidated financial statements.
 
31

 

Impairment of long-lived assets. Long-lived assets are reviewed for impairment in accordance with Topic ASC 360, “Property, Plant, and Equipment”. This authoritative guidance provides that whenever there are certain significant events or changes in circumstances the value of long-lived assets or groups of assets must be tested to determine if their value can be recovered from their future cash flows. In the event that undiscounted cash flows expected to be generated by the asset are less than the carrying amount, the asset or group of assets must be evaluated for impairment. Impairment exists if the carrying value of the asset exceeds its fair value. In light of the sustained general economic downturn in the United States and world economies, the decline in the Company’s market capitalization and the net operating losses of the Company in recent periods, triggering events and changes in circumstances have occurred which require management to test the Company’s long-lived assets for recoverability each reporting period.
 
Significantly all of the Company’s cash flows from operations are generated by trucks and trailers, and as such, the cost of other long-lived assets are funded by those operations. Therefore, management tests for the recoverability of all of the Company’s long-lived assets as a single group at the entity level and examines the forecasted future cash flows generated by trucks and trailers, including their eventual disposition, to determine if those cash flows exceed the carrying value of the long-lived assets. As of December 31, 2012, the projected cash flows expected to be generated from long-lived assets exceeded their carrying value. As such, no impairment indicators existed and no impairment losses were recorded during the period. The forecasted cash flows were estimated using assumptions about future operations. To the extent that facts and circumstances change in the future, our estimates of future cash flows may also change either positively or negatively.

Claims accruals. The Company is self-insured for health and workers' compensation benefits up to certain stop-loss limits. Such costs are accrued based on known claims and an estimate of incurred, but not reported (IBNR) claims. IBNR claims are estimated using historical lag information and other data either provided by outside claims administrators or developed internally. Actual claims payments may differ from management’s estimates as a result of a number of factors, including evaluation of severity, increases in legal or medical costs, and other case-specific factors. The actual claims payments are charged against the Company’s recorded accrued claims liabilities and have been reasonable with respect to the estimates of the liabilities made under the Company’s methodology. However, the estimation process is generally subjective, and to the extent that future actual results materially differ from original estimates made by management, adjustments to recorded accruals may be necessary which could have a material effect on the Company’s consolidated financial statements. Based upon our 2012 health and workers' compensation expenses, a 10% increase in both claims incurred and claims incurred but not reported, would increase our annual health and workers' compensation expenses by $0.7 million.

Revenue recognition. Revenue is recognized in full upon completion of delivery to the receiver's location. For freight in transit at the end of a reporting period, the Company recognizes revenue pro rata based on relative transit time completed as a portion of the estimated total transit time. Expenses are recognized as incurred.
 
Income Taxes. The Company’s deferred tax assets and liabilities represent items that will result in taxable income or a tax deduction in future years for which the Company has already recorded the related tax expense or benefit in its consolidated statements of operations. Deferred tax accounts arise as a result of timing differences between when items are recognized in the Company’s consolidated financial statements compared to when they are recognized in the Company’s tax returns. In establishing the Company’s deferred income tax assets and liabilities, management makes judgments and interpretations based on the enacted tax laws and published tax guidance that are applicable to its operations. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. When it is more likely than not that all or some portion of specific deferred income tax assets will not be realized, a valuation allowance must be established for the amount of deferred income tax assets that are determined not to be realizable. A valuation allowance for deferred income tax assets has not been deemed to be necessary. Significant management judgment is required as it relates to future taxable income, future capital gains, tax settlements, valuation allowances, and the Company’s ability to utilize tax loss and credit carryforwards.
 
32

 
 
Management believes that future tax consequences have been adequately provided for based on the current facts and circumstances and current tax law. However, should current circumstances change or the Company’s tax positions be challenged, different outcomes could result which could have a material effect on the Company’s consolidated financial statements.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

Our primary market risk exposures include equity price risk, interest rate risk, commodity price risk (the price paid to obtain diesel fuel for our trucks), and foreign currency exchange rate risk. The potential adverse impact of these risks are discussed below.

The following sensitivity analyses do not consider the effects that an adverse change may have on the overall economy nor do they consider additional actions we may take to mitigate our exposure to such changes. Actual results of changes in prices or rates may differ materially from the hypothetical results described below.

Equity Price Risk

We hold certain actively traded marketable equity securities which subjects the Company to fluctuations in the fair market value of its investment portfolio based on current market price. The recorded value of marketable equity securities decreased to $17.3 million at December 31, 2012 from $20.3 million at December 31, 2011. The decrease includes additional purchases of $0.2 million, sales of $2.2 million, return of capital proceeds of $0.1 million, and a decrease in the fair market value, net of write-downs, of approximately $0.9 million during 2012. A 10% decrease in the market price of our marketable equity securities would cause a corresponding 10% decrease in the carrying amounts of these securities, or approximately $1.7 million. For additional information with respect to the marketable equity securities, see Note 3 to our consolidated financial statements.

Interest Rate Risk

Our line of credit bears interest at a floating rate equal to LIBOR plus a fixed percentage. Accordingly, changes in LIBOR, which are affected by changes in interest rates, will affect the interest rate on, and therefore our costs under, the line of credit. Assuming $5.0 million of variable rate debt was outstanding under our line of credit for a full fiscal year, a hypothetical 100 basis point increase in LIBOR would result in approximately $50,000 of additional interest expense.

Commodity Price Risk

Prices and availability of all petroleum products are subject to political, economic and market factors that are generally outside of our control. Accordingly, the price and availability of diesel fuel, as well as other petroleum products, can be unpredictable. Because our operations are dependent upon diesel fuel, significant increases in diesel fuel costs could materially and adversely affect our results of operations and financial condition. Based upon our 2012 fuel consumption, a 10% increase in the average annual price per gallon of diesel fuel would increase our annual fuel expenses by approximately $11.1 million.

Foreign Currency Exchange Rate Risk

We are exposed to foreign currency exchange rate risk related to the activities of our branch office located in Mexico. Currently, we do not hedge our exchange rate exposure through any currency forward contracts, currency options, or currency swaps as all of our revenues, and substantially all of our expenses and capital expenditures, are transacted in U.S. dollars. However, certain operating expenditures and capital purchases related to our Mexico branch office are incurred in or exposed to fluctuations in the exchange rate between the U.S. Dollar and the Mexican peso. Based on 2012 expenditures denominated in pesos, a 10% increase in the exchange rate would increase our annual operating expenses by approximately $50,000.
 
33

 
 
Item 8. Financial Statements and Supplementary Data.

The following statements are filed with this report:

Report of Independent Registered Public Accounting Firm – Grant Thornton LLP
Consolidated Balance Sheets - December 31, 2012 and 2011
Consolidated Statements of Operations - Years ended December 31, 2012, 2011 and 2010
Consolidated Statements of Comprehensive Income - Years ended December 31, 2012, 2011 and 2010
Consolidated Statements of Stockholders’ Equity - Years ended December 31, 2012, 2011 and 2010
Consolidated Statements of Cash Flows - Years ended December 31, 2012, 2011 and 2010
Notes to Consolidated Financial Statements


34

 


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
P.A.M. Transportation Services, Inc.
 
We have audited the accompanying consolidated balance sheets of P.A.M. Transportation Services, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of P.A.M. Transportation Services, Inc. and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 15, 2013 expressed an unqualified opinion thereon.
 

/s/ GRANT THORNTON LLP
Tulsa, Oklahoma
March 15, 2013
 
35

 
 
 
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2012 AND 2011
(in thousands, except share and per share data)
 
             
             
ASSETS
 
2012
   
2011
 
             
CURRENT ASSETS:
           
Cash and cash equivalents
  $ 507     $ 180  
Accounts receivable—net:
               
Trade
    50,017       48,019  
Other
    3,558       2,218  
Inventories
    1,770       1,658  
Prepaid expenses and deposits
    11,274       10,993  
Marketable equity securities
    17,320       20,264  
Income taxes refundable
    354       233  
                 
Total current assets
    84,800       83,565  
                 
PROPERTY AND EQUIPMENT:
               
Land
    4,924       4,924  
Structures and improvements
    15,952       14,206  
Revenue equipment
    331,197       324,644  
Office furniture and equipment
    6,719       9,002  
                 
Total property and equipment
    358,792       352,776  
                 
Accumulated depreciation
    (128,353 )     (159,646 )
                 
Net property and equipment
    230,439       193,130  
                 
OTHER ASSETS
    2,430       2,398  
                 
TOTAL ASSETS
  $ 317,669     $ 279,093  
                 
                 
           
(Continued)
 
                 
See notes to consolidated financial statements.
 
 
36

 
 
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2012 AND 2011
(in thousands, except share and per share data)
 
             
             
LIABILITIES AND STOCKHOLDERS' EQUITY
 
2012
   
2011
 
             
CURRENT LIABILITIES:
           
Accounts payable
  $ 19,025     $ 23,803  
Accrued expenses and other liabilities
    21,308       9,670  
Current maturities of long—term debt
    28,918       17,438  
Deferred income taxes—current
    3,272       2,277  
                 
Total current liabilities
    72,523       53,188  
                 
Long-term debt—less current portion
    78,583       44,135  
Deferred income taxes—less current portion
    44,368       44,293  
                 
Total liabilities
    195,474       141,616  
                 
COMMITMENTS AND CONTINGENCIES (Note 15)
               
                 
STOCKHOLDERS’ EQUITY
               
Preferred stock, $.01 par value, 10,000,000 shares
 authorized; none issued
    -       -  
Common stock, $.01 par value, 40,000,000 shares
 authorized; 11,384,207 and 11,378,207 shares issued;
 8,701,607 and 8,695,607 shares outstanding at
 December 31, 2012 and December 31, 2011, respectively
    114       114  
Additional paid-in capital
    78,448       78,036  
Accumulated other comprehensive income
    4,235       4,705  
Treasury stock, at cost; 2,682,600 shares
    (37,239 )     (37,239 )
Retained earnings
    76,637       91,861  
                 
Total stockholders’ equity
    122,195       137,477  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 317,669     $ 279,093  
                 
                 
           
(Concluded)
 
See notes to consolidated financial statements.
 
 
37

 
 
 
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010
(in thousands, except per share data)
 
                   
   
2012
   
2011
   
2010
 
OPERATING REVENUES:
                 
Revenue, before fuel surcharge
  $ 297,698     $ 284,178     $ 282,524  
Fuel surcharge
    82,935       75,065       49,470  
                         
Total operating revenues
    380,633       359,243       331,994  
                         
OPERATING EXPENSES AND COSTS:
                       
Salaries, wages and benefits
    139,062       118,321       109,728  
Fuel expense
    111,378       124,956       97,523  
Rents and purchased transportation
    23,815       21,842       42,469  
Depreciation
    38,298       34,163       27,035  
Operating supplies and expenses
    39,011       38,659       30,105  
Operating taxes and licenses
    5,003       4,952       4,954  
Insurance and claims
    13,744       13,070       12,820  
Communications and utilities
    2,235       2,496       2,731  
Other
    5,350       6,029       5,169  
(Gain) loss on disposition of equipment
    (166 )     98       (337 )
                         
Total operating expenses and costs
    377,730       364,586       332,197  
                         
OPERATING INCOME (LOSS)
    2,903       (5,343 )     (203 )
                         
NON-OPERATING INCOME
    3,288       1,551       852  
INTEREST EXPENSE
    (2,596 )     (1,798 )     (2,252 )
                         
INCOME (LOSS) BEFORE INCOME TAXES
    3,595       (5,590 )     (1,603 )
                         
FEDERAL & STATE INCOME TAX EXPENSE (BENEFIT):
                       
Current
    51       35       195  
Deferred
    1,365       (2,768 )     (1,143 )
                         
Total federal & state income tax expense (benefit)
    1,416       (2,733 )     (948 )
                         
NET INCOME (LOSS)
  $ 2,179     $ (2,857 )   $ (655 )
                         
EARNINGS (LOSS) PER COMMON SHARE:
                       
Basic
  $ 0.25     $ (0.32 )   $ (0.07 )
Diluted
  $ 0.25     $ (0.32 )   $ (0.07 )
                         
AVERAGE COMMON SHARES OUTSTANDING:
                       
Basic
    8,700       9,056       9,415  
Diluted
    8,702       9,056       9,415  
                         
DIVIDENDS DECLARED PER COMMON SHARE
  $ 2.00     $ -     $ -  
                         
See notes to consolidated financial statements.
 

38

 
 
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010
(in thousands)
 
                   
   
2012
   
2011
   
2010
 
                   
NET INCOME (LOSS)
  $ 2,179     $ (2,857 )   $ (655 )
                         
Other comprehensive income (loss), net of tax:
                       
                         
Reclassification adjustment for realized gains on marketable
                       
securities included in net income (1)
    (1,009 )     (526 )     (189 )
                         
Reclassification adjustment for unrealized losses on marketable
                       
securities included in net income (2)
    44       196       37  
                         
Changes in fair value of marketable securities (3)
    495       629       1,495  
                         
COMPREHENSIVE INCOME (LOSS)
  $ 1,709     $ (2,558 )   $ 688  
                         
                         
                         
                         
_______________
                       
(1) Net of deferred income taxes of $(618), $(322) and $(125), respectively.
         
(2) Net of deferred income taxes of $27, $120 and $24, respectively.
         
(3) Net of deferred income taxes of $304, $386 and $842, respectively.
         
                         
                         
                         
See notes to consolidated financial statements.
 

39

 
 

 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010
(in thousands, except per share data)
 
   
Common Stock
Shares / Amount
   
Additional
Paid-In Capital
   
Accumulated
 Other Comprehensive Income
   
Treasury Stock
   
Retained Earnings
   
Total
 
                                           
BALANCE— January 1, 2010
    9,414     $ 114     $ 77,704     $ 3,063     $ (29,127 )   $ 95,373     $ 147,127  
                                                         
Net loss
                                            (655 )     (655 )
Other comprehensive income, net of tax of $741
                            1,343                       1,343  
Exercise of stock options-shares issued including tax benefits
    1               10                               10  
Share-based compensation
                    123                               123  
                                                         
BALANCE— December 31, 2010
    9,415       114       77,837       4,406       (29,127 )     94,718       147,948  
                                                         
Net loss
                                            (2,857 )     (2,857 )
Other comprehensive income, net of tax of $184
                            299                       299  
Exercise of stock options-shares issued including tax benefits
    5               35                               35  
Treasury stock repurchases
    (724 )                             (8,112 )             (8,112 )
Share-based compensation
                    164                               164  
                                                         
BALANCE— December 31, 2011
    8,696       114       78,036       4,705       (37,239 )     91,861       137,477  
                                                         
Net income