e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended April 30, 2007
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 000-21057
DYNAMEX INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State of incorporation)
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86-0712225
(I.R.S. Employer Identification No.) |
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5429 LBJ Freeway, Suite 1000, Dallas, Texas
(Address of principal executive offices)
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75240
(Zip Code) |
Registrants telephone number, including area code:
(214) 560-9000
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 is a large accelerated filer, an accelerated
filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The number of shares of the registrants common stock, $.01 par value, outstanding as of May 31, 2007 was 10,622,963 shares.
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
DYNAMEX INC.
Condensed Consolidated Balance Sheets
(in thousands, except per share data)
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April 30, |
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July 31, |
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2007 |
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2006 |
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(Unaudited) |
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ASSETS |
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CURRENT |
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Cash and cash equivalents |
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$ |
6,552 |
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$ |
6,058 |
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Accounts receivable (net of allowance for doubtful accounts
of $819 and $676, respectively) |
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46,565 |
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36,425 |
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Income taxes receivable |
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1,504 |
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1,577 |
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Prepaid and other current assets |
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3,350 |
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2,689 |
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Deferred income taxes |
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3,164 |
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2,322 |
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Total current assets |
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61,135 |
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49,071 |
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PROPERTY AND EQUIPMENT net |
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7,416 |
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5,967 |
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GOODWILL |
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47,150 |
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46,934 |
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INTANGIBLES net |
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335 |
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390 |
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DEFERRED INCOME TAXES |
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2,051 |
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5,580 |
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OTHER |
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3,818 |
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2,357 |
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Total assets |
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$ |
121,905 |
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$ |
110,299 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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CURRENT LIABILITIES |
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Accounts payable trade |
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$ |
9,140 |
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$ |
11,168 |
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Accrued liabilities |
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20,961 |
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19,014 |
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Total current liabilities |
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30,101 |
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30,182 |
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LONG-TERM DEBT |
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2 |
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905 |
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OTHER LONG-TERM LIABILITIES |
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2,472 |
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Total liabilities |
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32,575 |
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31,087 |
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COMMITMENTS AND CONTINGENCIES |
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STOCKHOLDERS EQUITY |
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Preferred stock; $0.01 par value, 10,000 shares authorized;
none outstanding |
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Common stock; $0.01 par value, 50,000 shares authorized;
10,671 and 10,638 outstanding, respectively |
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107 |
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106 |
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Additional paid-in capital |
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58,373 |
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58,514 |
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Retained earnings |
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27,017 |
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16,160 |
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Accumulated other comprehensive income |
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3,833 |
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4,432 |
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Total stockholders equity |
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89,330 |
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79,212 |
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Total liabilities and stockholders equity |
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$ |
121,905 |
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$ |
110,299 |
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See accompanying notes to the condensed consolidated financial statements.
2
DYNAMEX INC.
Condensed Statements of Consolidated Operations
(in thousands except per share data)
(Unaudited)
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Three months ended |
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Nine months ended |
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April 30, |
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April 30, |
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2007 |
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2006 |
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2007 |
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2006 |
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Sales |
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$ |
103,526 |
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$ |
86,916 |
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$ |
305,129 |
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$ |
263,831 |
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Cost of sales: |
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Purchased transportation |
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67,530 |
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56,255 |
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199,476 |
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171,507 |
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Other direct costs |
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8,735 |
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6,195 |
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25,289 |
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19,702 |
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Cost of sales |
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76,265 |
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62,450 |
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224,765 |
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191,209 |
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Gross profit |
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27,261 |
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24,466 |
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80,364 |
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72,622 |
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Selling, general and administrative expenses: |
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Salaries and employee benefits |
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14,609 |
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12,855 |
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43,274 |
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39,729 |
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Other |
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6,691 |
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5,795 |
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19,948 |
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17,044 |
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Selling, general and administrative expenses |
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21,300 |
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18,650 |
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63,222 |
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56,773 |
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Depreciation and amortization |
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554 |
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523 |
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1,742 |
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1,464 |
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(Gain) loss on disposal of property and equipment |
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(12 |
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(6 |
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1 |
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Operating income |
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5,419 |
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5,293 |
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15,406 |
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14,384 |
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Interest expense |
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32 |
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38 |
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260 |
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213 |
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Other income, net |
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(45 |
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(55 |
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(1,777 |
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(219 |
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Income before income taxes |
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5,432 |
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5,310 |
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16,923 |
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14,390 |
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Income taxes |
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1,945 |
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2,098 |
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6,066 |
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5,310 |
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Net income |
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$ |
3,487 |
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$ |
3,212 |
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$ |
10,857 |
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$ |
9,080 |
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Basic earnings per common share: |
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$ |
0.33 |
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$ |
0.29 |
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$ |
1.02 |
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$ |
0.81 |
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Diluted earnings per common share: |
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$ |
0.32 |
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$ |
0.29 |
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$ |
1.01 |
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$ |
0.80 |
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Weighted average shares: |
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Common shares outstanding |
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10,643 |
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10,915 |
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10,615 |
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11,192 |
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Adjusted common shares assuming
exercise of stock options |
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10,783 |
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11,143 |
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10,734 |
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11,404 |
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See accompanying notes to the condensed consolidated financial statements.
3
DYNAMEX INC.
Condensed Statements of Consolidated Cash Flows
(in thousands)
(Unaudited)
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Nine months ended |
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April 30, |
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2007 |
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2006 |
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OPERATING ACTIVITIES |
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Net income |
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$ |
10,857 |
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$ |
9,080 |
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Adjustments to reconcile net income to net cash provided
by operating activities: |
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Depreciation and amortization |
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1,742 |
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1,464 |
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Amortization of deferred bank financing fees |
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25 |
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18 |
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Provision for losses on accounts receivable |
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368 |
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556 |
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Stock option compensation |
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608 |
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606 |
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Deferred income taxes |
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2,656 |
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216 |
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Lessor financed leasehold improvements |
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1,997 |
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Non-cash rent expense |
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741 |
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(Gain) loss on disposal of property and equipment |
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(6 |
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1 |
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Changes in current operating assets and liabilities: |
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Accounts receivable |
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(10,453 |
) |
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(5,460 |
) |
Prepaids and other current assets |
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(603 |
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555 |
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Accounts payable and accrued liabilities |
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(339 |
) |
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828 |
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Net cash provided by operating activities |
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7,593 |
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7,864 |
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INVESTING ACTIVITIES |
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Purchase of property and equipment |
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(3,307 |
) |
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(560 |
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Purchase of investments |
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(256 |
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(134 |
) |
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Net cash used in investing activities |
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(3,563 |
) |
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(694 |
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FINANCING ACTIVITIES |
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Principal payments on long-term debt |
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(3 |
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(2 |
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Net (payments) proceeds under line of credit |
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(900 |
) |
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2,400 |
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Proceeds from stock option exercise |
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1,058 |
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844 |
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Tax benefit realized from exercise of stock options |
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246 |
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|
708 |
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Purchase and retirement of treasury stock |
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(2,021 |
) |
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(18,607 |
) |
Other assets and deferred financing fees |
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(1,138 |
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(198 |
) |
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Net cash used in financing activities |
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(2,758 |
) |
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(14,855 |
) |
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EFFECT OF EXCHANGE RATES ON CASH |
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(778 |
) |
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805 |
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
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494 |
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(6,880 |
) |
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR |
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6,058 |
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|
11,678 |
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CASH AND CASH EQUIVALENTS, END OF YEAR |
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$ |
6,552 |
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$ |
4,798 |
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
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Cash paid for interest |
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$ |
238 |
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$ |
200 |
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Cash paid for taxes |
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$ |
4,159 |
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$ |
4,324 |
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|
See accompanying notes to the condensed consolidated financial statements.
4
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Summary of Significant Accounting Polices
Description
of Business Dynamex Inc. (the Company or Dynamex) provides same-day delivery and
logistics services in the United States and Canada. The Companys primary services are (i)
same-day, on-demand delivery, (ii) scheduled and distribution and (iii) fleet outsourcing and
facilities management.
Basis of presentation The consolidated financial statements include the accounts of Dynamex Inc.
and its wholly-owned subsidiaries. All significant inter-company accounts and transactions have
been eliminated. All dollar amounts in the financial statements and notes to the financial
statements, except per share data, are stated in thousands of dollars unless otherwise indicated.
Except as otherwise indicated, references to years mean our fiscal year ending July 31, 2006 or
ended July 31 of the year referenced, and comparisons are to the corresponding period of the prior
year.
The accompanying interim financial statements are unaudited. Certain information and disclosures
normally included in financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted, although the Company believes the disclosures included
herein are adequate to make the information presented not misleading. The results of the interim
periods presented are not necessarily indicative of results to be expected for the full fiscal
year, and should be read in conjunction with the Companys audited financial statements for the
fiscal year ended July 31, 2006.
The accompanying interim financial statements contain all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the Companys financial position at
April 30, 2007, the results of its operations for the three and nine months periods ended April 30,
2007 and 2006, and cash flows for the nine-month periods ended April 30, 2007 and 2006. The tax
provisions for the three and nine months periods ended April 30, 2007 and 2006 are based upon
managements estimates of the Companys annualized effective tax rate.
Business and credit concentrations The Companys customers are not concentrated in any specific
geographic region or industry. During the nine months ended April 30, 2007 and 2006, sales to
Office Depot, Inc. represented approximately 14.4% and 10.3%, respectively, of the Companys
revenue. Sales to the Companys five largest customers, including Office Depot, represented
approximately 27.0% and 24.0% of the Companys consolidated sales for the nine months ended April
30, 2007 and 2006, respectively.
A significant portion of the Companys revenues are generated in Canada. For the nine month period
ended April 30, 2007, Canadian revenues accounted for approximately 37.4% of total consolidated
revenue, compared to 35.3% for the same period in 2006. The exchange rate between the Canadian
dollar and the U.S. dollar increased 2.0% in the nine month period ended April 31, 2007 compared to
the corresponding period in the prior year. Had the exchange rate been the same as in the prior
period, Canadian sales for the nine month period ended April 30, 2007 would have accounted for
36.9% of total sales.
Office Depot represented approximately 14.1% of net accounts receivable at April 30, 2007. The
Company establishes an allowance for doubtful accounts based upon factors surrounding the credit
risk of specific customers, historical trends and other information.
Other
assets Recoverable contract contingency costs The Company has recorded as an Other Asset
certain costs related to contractually reimbursable contingency costs incurred in connection with
the launch of certain contracts in accordance with EITF 99-5, Accounting for Pre-Production Costs
Related to Long-Term Supply Arrangements, these costs will be recovered during the initial
contract term, from a designated portion of the unit price specified in the contract. Should the
contract be cancelled for any reason, the customer is obligated to reimburse the Company for any
unamortized balance. Total recoverable contract contingency costs capitalized at April 30, 2007
amount to $1,470 compared to $581 at July 31, 2006.
Other
long-term liabilities During July 2006 the Company entered into a new lease for its U.S.
corporate headquarters. This lease agreement contains tenant improvement allowances and rent
escalation clauses. The Company recognizes a deferred rent liability for tenant improvement allowances within other
long-term liabilities and amortizes these amounts over the term of the lease as a reduction of rent
expense. For scheduled rent escalation clauses during the lease term, the Company records rental
expense on a straight-line basis over the term of the lease.
5
Certain reclassifications have been made to conform prior period data to the current
presentation.
2. Comprehensive Income
The three components of comprehensive income are net income, foreign currency translation gain
(loss) and unrealized gain on investments. Investments consist of payroll withholdings from
participants in the Companys deferred compensation plan that are invested in funds designated by
the individual participants. Comprehensive income for the three and nine months ended April 30,
2007 and 2006 was as follows:
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|
|
Three months ended |
|
|
Nine months ended |
|
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|
April 30, |
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|
April 30, |
|
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|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,487 |
|
|
$ |
3,212 |
|
|
$ |
10,857 |
|
|
$ |
9,080 |
|
Unrealized gain on investments |
|
|
35 |
|
|
|
34 |
|
|
|
67 |
|
|
|
42 |
|
Foreign currency translation gain (loss) |
|
|
1,322 |
|
|
|
391 |
|
|
|
(666 |
) |
|
|
1,851 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
4,844 |
|
|
$ |
3,637 |
|
|
$ |
10,258 |
|
|
$ |
10,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3. Intangibles net
At April 30, 2007, intangibles and related amortization expense for the three and nine months ended
April 30, 2007 and 2006 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Asset |
|
|
amortization |
|
|
Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred bank financing fees |
|
$ |
132 |
|
|
$ |
(116 |
) |
|
$ |
16 |
|
Customer lists |
|
|
80 |
|
|
|
(69 |
) |
|
|
11 |
|
Trademarks and other |
|
|
470 |
|
|
|
(162 |
) |
|
|
308 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
682 |
|
|
$ |
(347 |
) |
|
$ |
335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense |
|
|
Amortization expense |
|
|
|
Three months ended April 30, |
|
|
Nine months ended April 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred bank financing fees |
|
$ |
11 |
|
|
$ |
6 |
|
|
$ |
25 |
|
|
$ |
18 |
|
Customer lists |
|
|
8 |
|
|
|
8 |
|
|
|
24 |
|
|
|
24 |
|
Trademarks and other |
|
|
5 |
|
|
|
6 |
|
|
|
14 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
24 |
|
|
$ |
20 |
|
|
$ |
63 |
|
|
$ |
57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred bank financing fees is classified as interest expense in the
condensed statements of consolidated operations. Estimated amortization expense for the succeeding
five fiscal years, including deferred bank financing fees, is $76 for 2007, $31 for 2008 and $19
each year thereafter.
6
4. Computation of Earnings Per Share
The following is a reconciliation of the numerators and denominators of the basic and diluted
earnings per share computation as required by Statement of Financial Accounting Standards No. 128,
Earnings Per Share. Common stock equivalents related to stock options are excluded from diluted
earnings per share calculations if their effect would be anti-dilutive to earnings per share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
April 30, |
|
|
April 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,487 |
|
|
$ |
3,212 |
|
|
$ |
10,857 |
|
|
$ |
9,080 |
|
|
Weighted average common shares outstanding |
|
|
10,643 |
|
|
|
10,915 |
|
|
|
10,615 |
|
|
|
11,192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common share equivalents related to options |
|
|
140 |
|
|
|
228 |
|
|
|
119 |
|
|
|
212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares and common share equivalents |
|
|
10,783 |
|
|
|
11,143 |
|
|
|
10,734 |
|
|
|
11,404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.33 |
|
|
$ |
0.29 |
|
|
$ |
1.02 |
|
|
$ |
0.81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.32 |
|
|
$ |
0.29 |
|
|
$ |
1.01 |
|
|
$ |
0.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5. Repurchase of Equity Securities
The Board of Directors has authorized management to purchase up to $38 million of Dynamex Inc.
common stock. During the nine months ended April 30, 2007, the Company purchased and retired 90
shares at an average price of $22.34 for a total cost of $2,021. Through July 31, 2006, the Company
had repurchased a total of 1,219 shares at an average price of $17.66 per share for a total dollar
cost of $21,538. The Company intends to purchase additional common shares from time to time at
prices acceptable to the Company.
6. Contingencies
On April 15, 2005, a purported class action was filed against the Company by a former Company
driver in the Superior Court of California, Los Angeles County, alleging that the Company
unlawfully misclassified its California drivers as independent contractors, rather than employees,
and asserting, as a consequence, entitlement on behalf of the purported class claimants to overtime
compensation and other benefits under California wage and hour laws, reimbursement of certain
operating expenses, and various insurance and other benefits and the obligation of the Company to
pay employer payroll taxes under federal and state law. The plaintiff filed a Motion for Class
Certification on November 2, 2006. The Company responded in a Memorandum of Points and Authorities
in Support of Defendants Opposition to Plaintiffs Motion for Class Certification on November 29,
2006. A hearing was held on December 12, 2006, and on December 14, 2006, the Plaintiffs Motion
for Class Certification was denied. The Plaintiff filed a Notice of Appeal on January 5, 2007.
We believe that the Companys drivers are properly classified as independent contractors and intend
to vigorously defend this litigation. Given the nature and preliminary status of the claims,
however, we cannot yet determine the amount or a reasonable range of potential loss in these
matters, if any.
The California Employment Development Department (the EDD), in 2005, conducted an employment tax
audit of certain of the Companys operations in California for the period April 2003 through March
2005. As a result of the audit, the EDD concluded that certain independent contractors used by the
Company should be reclassified as employees. Based on such reclassification, the EDD made a $345
assessment plus accrued interest against the Company, the bulk of which is for personal income
taxes. The Company subsequently provided documentation to the EDD related to the original
assessment which resulted in a reduction in the assessment of approximately $100. The assessment
has been paid, and the Company intends to file a Refund Claim within the 60 day statutory period.
7
The California EDD conducted an employment tax audit of the Companys other California
operations in 2006. Based on its conclusion that independent contractors used by the Company in
California should be reclassified as employees, a Notice of Assessment was issued by the EDD in
April 2007 in the amount of $2.8 million, $2.0 of which the EDD claims represents personal income
tax of the reclassified individuals. The Company has filed a Petition for Reassessment and intends
to vigorously contest the assessment.
On January 19, 2006, a purported class action was filed against the Company by an employee in the
United States District Court, Southern District of New York, alleging that the Company unlawfully
failed to pay wages for work performed, for which they received no compensation as well as for
overtime work for which they received no overtime pay to which the employees were entitled under
the Fair Labor Standards Act (FLSA) and the New York Labor Law and the supporting New York State
Department of Labor regulations (NYLL). The plaintiff seeks recovery of unpaid wages, overtime
compensation, liquidated damages, additional liquidated damages for unreasonably delayed payment of
wages, reasonable attorneys fees and costs under the action. The Company and the plaintiff
settled the purported class action in New York. The settlement did not have a material adverse
effect on the financial condition, results of operations, or liquidity of the Company.
The Company is a party to various legal proceedings arising in the ordinary course of its business.
Management believes that the ultimate resolution of these proceedings will not, in the aggregate,
have a material adverse effect on the financial condition, results of operations, or liquidity of
the Company.
7. Other Income
In December 2006 the Company reached agreement with Canadian taxing authorities on the valuation of
intercompany services performed by the U.S. on behalf of Dynamex Canada. The Canadian Revenue
Authority (CRA) specifically challenged certain allocations of expenses between the Canadian and
United States operations during audits of fiscal years 2001 and 2002. As a result of the
agreement, Canadian taxable income was reduced approximately $4 million with a corresponding
increase in U.S. taxable income. During the second quarter of fiscal 2007 Dynamex Canada
transferred cash to the U.S. in payment for services provided by the U.S. from 2001 to 2005 which
resulted in a foreign currency transaction gain of approximately $937.
In December 2006, Dynamex Canada received approximately $1.35 million Cdn from the CRA in income
tax refunds for tax years 2001 to 2003 and approximately $345 Cdn in interest on the overpayment of
such Canadian income taxes. The effects of the foreign currency transaction gain and the total
interest income of $425 are recorded in Other Income in the Condensed Statements of Consolidated
Operations.
Management recorded the net effects of the above described items during the second quarter of
fiscal 2007. Since the challenge by the CRA and the resulting transfer pricing studies were
accounting estimates resolved during the second quarter, management considers it appropriate to
record the effects during the second quarter of fiscal 2007. The effect of this resolution was an
increase in net income of approximately $972 ($0.10 per basic share for the nine months ended April
30, 2007, respectively, and $0.09 per fully diluted share for the nine months ended April 30,
2007). Excluding the impact of this transaction, fully diluted earnings per common share for the
nine months ended April 30, 2007, would have been $0.92 as shown in the following table:
8
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
April 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
Transfer pricing impact on the nine months: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes As reported |
|
$ |
16,923 |
|
|
$ |
14,390 |
|
|
|
|
|
|
|
|
|
|
Income from transfer pricing (foreign exchange
gain and interest income) |
|
|
1,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes Excluding
transfer pricing effects |
|
$ |
15,561 |
|
|
$ |
14,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes As reported |
|
$ |
6,066 |
|
|
$ |
5,310 |
|
|
|
|
|
|
|
|
|
|
Income tax effects (foreign exchange
gain, interest income and intercompany services) |
|
|
390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes Excluding transfer pricing effects |
|
$ |
5,676 |
|
|
$ |
5,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income As reported |
|
$ |
10,857 |
|
|
$ |
9,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income Excluding transfer pricing effects |
|
$ |
9,885 |
|
|
$ |
9,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from the transfer pricing transactions |
|
$ |
972 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
Basic As reported |
|
$ |
1.02 |
|
|
$ |
0.81 |
|
Transfer pricing adjustment |
|
|
0.10 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic Excluding transfer pricing effects |
|
$ |
0.92 |
|
|
$ |
0.81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully diluted As reported |
|
$ |
1.01 |
|
|
$ |
0.80 |
|
Transfer pricing adjustment |
|
|
0.09 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic Excluding transfer pricing effects |
|
$ |
0.92 |
|
|
$ |
0.80 |
|
|
|
|
|
|
|
|
8. Provision for Income Taxes
Total income tax expense was $6.0 million, 35.8% of income before taxes in the current nine-month
period compared to $5.3 million, 36.9% of income before taxes in the same period of the prior year.
Excluding the impact of the one-time benefit from the resolution of prior year cross-border
transfer pricing issues, income tax expense would have been approximately $5.7 million, 36.5% of
income before taxes as shown in Footnote 7 above. Income tax expense for the three months ended
April 30, 2007 was $1.9 million compared to $2.1 million for the same period of the prior year.
The effective tax rate was 35.8% for the current quarter compared to 39.5% for the prior year. The
current year quarter includes a positive tax adjustment of approximately $80. Excluding the
adjustment, the effective tax rate would have been approximately 37.5%. The effective income tax
rate for the prior year was adjusted to reflect the impact of increased taxable earnings associated
with dividends received from the Companys Canadian subsidiary that resulted in an increase in the
U.S. federal income tax rate from 34% to 35% and from the true-up of the estimated state income
tax rates based on actual tax returns for tax year 2005. The current year tax rate includes the
impact of the new Texas margin tax, true-up of estimated state income taxes based on actual
returns for tax year 2006 and a slightly lower effective income tax rate in Canada.
9
9. Related Party Transaction
The Company purchased Zipper Transportation Services Ltd. and K.H.B. & Associates LTD. (Zipper)
from Mr. Kenneth H. Bishop, the principal owner, and Mr. Bruce Bishop effective August 16, 1996.
Mr. Kenneth Bishop served as a Director of Dynamex from August 1996 until his retirement on
February 14, 2007. In the Zipper purchase agreement, Mr. Kenneth H. Bishop indemnified the Company
for the after-tax value of damages, losses, costs and expenses arising from claims or actions prior
to the closing date. Effective November 16, 1996, the indemnification provisions of the share
purchase agreement were amended to include only amounts above $160 Cdn. An action titled Barron et
al. v. Dynamex Canada Inc. et al was filed in January 1998, by twelve Zipper drivers alleging they
were short paid for work performed on certain contracts. This action was settled on December 21,
2006 through a payment of $215 Cdn to plaintiffs, bringing the total amount of costs to
approximately $400 Cdn. In April 2007, Mr. Bishop settled this matter by paying the Company $19
Cdn in cash and surrendering 8,500 previously issued but unexercised
stock option grants.
10
Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations
This discussion contains forward-looking statements, which involve assumptions regarding Company
operations and future prospects. Although the Company believes its expectations are based on
reasonable assumptions, such statements are subject to risk and uncertainty, including, among other
things, competition, foreign exchange, and risks associated with the same-day transportation
industry. These and other risks are mentioned from time to time in the Companys filings with the
Securities and Exchange Commission. Caution should be taken that these factors could cause the
actual results to differ from those stated or implied in this and other Company communications.
General
The Company, through its national network of same-day delivery and logistics operations, is the
leading provider of such services in the United States and Canada.
A significant portion of the Companys revenues are generated in Canada. For the nine month period
ended April 30, 2007, Canadian revenues accounted for approximately 37.4% of total consolidated
revenue, compared to 35.3% for the same period in 2006. The exchange rate between the Canadian
dollar and the U.S. dollar increased 2.0% in the nine month period ended April 30, 2007 compared to
the corresponding period in the prior year. Had the exchange rate been the same as in the prior
period, Canadian sales for the nine month period ended April 30, 2007 would have accounted for
36.9% of total sales.
Sales consist primarily of charges to customers for delivery services and weekly or monthly charges
for recurring services, such as facilities management. Sales are recognized when the service is
performed. The yield (value per transaction) for a particular service is dependent upon a number
of factors including size and weight of articles transported, distance transported, special
handling requirements, requested delivery time and local market conditions. Generally, articles of
greater weight transported over longer distances and those that require special handling produce
higher yields.
Cost of sales consist of costs relating directly to performance of services, including driver and
messenger costs, third party delivery charges, warehousing and sorting expenses, bad debts,
insurance, and workers compensation costs. Substantially all of the drivers used by the Company
provide their own vehicles, and more than 99% are independent contractors as opposed to employees
of the Company. Drivers and messengers are generally compensated based on a percentage of the
delivery charge. Consequently, the Companys driver and messenger costs are variable in nature.
To the extent that delivery personnel are employees of the Company, employee benefit costs related
to them, such as payroll taxes and insurance, are also included in cost of sales.
Selling, general and administrative expenses (SG & A) include salaries and benefit costs incurred
at the business center level related to taking orders and dispatching drivers and messengers, as
well as administrative costs related to such functions. Also included in SG & A expenses are
regional and corporate level marketing and administrative costs and occupancy costs related to
business center and corporate locations.
Generally, the Companys on-demand services provide higher gross profit margins than do local and
regional distribution or fleet management services because driver payments for on-demand services
are generally lower as a percentage of sales from such services due to the smaller size of the
vehicle required. However, scheduled distribution and fleet management services generally have
fewer administrative requirements related to order taking, dispatching drivers and billing. As a
result of these variances, the Companys gross margin is dependent in part on the mix of business
for a particular period.
During the nine months ended April 30, 2007 and 2006, sales to Office Depot, Inc. represented
approximately 14.4% and 10.3%, respectively, of the Companys consolidated sales. Sales to the
Companys five largest customers, including Office Depot, represented approximately 27.0% and 24.0%
of the Companys consolidated sales for the nine months ended April 30, 2007 and 2006,
respectively.
11
Critical Accounting Policies
The Companys discussion and analysis of its financial condition and results of operations are
based on the Companys financial statements, which have been prepared in accordance with accounting
policies generally accepted in the United States of America. The Companys critical accounting
policies are set forth in the Companys Form 10-K for the year ended July 31, 2006. As of, and for
the nine month period ended April 30, 2007, there have been no material changes or updates to the
Companys critical accounting policies.
Recent Accounting Pronouncements
In June 2006, the FASB issued FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in
Income Taxes, (FIN 48) that provides guidance on the accounting for uncertainty in income taxes
recognized in financial statements. The Company will adopt FIN 48 on August 1, 2007. We are
currently evaluating the impact of adopting FIN 48; however, we do not expect the adoption of this
provision to have a material effect on our financial position, results of operations or cash flows.
In September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108 in order to eliminate
the diversity of practice surrounding how public companies quantify financial statement
misstatements. In SAB No. 108, the SEC staff established an approach that requires quantification
of financial statement misstatements based on the effects of the misstatements on each of the
Companys financial statements and the related financial statement disclosures. SAB No. 108 is
effective for fiscal years ending after November 15, 2006. The Company believes the adoption of
SAB No. 108 will have no material impact on its consolidated financial statements.
In September 2006, the FASB issued Statement No. 157 (SFAS 157), Fair Value Measurement, This
Statement establishes a framework for measuring fair value in generally accepted accounting
principles and expands disclosures about fair value measurements. While SFAS 157 does not require
any new value measurements, it may change the application of fair value measurements embodied in
other accounting standards. SFAS 157 will be effective at the beginning of the Companys 2008
fiscal year. The Company is currently assessing the effect of this pronouncement, but does not
expect the impact on our consolidated financial statements to be material.
12
Results of Operations
The following table sets forth for the periods indicated, certain items from the Companys
condensed statements of consolidated operations, expressed as a percentage of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
April 30, |
|
April 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased transportation |
|
|
65.2 |
% |
|
|
64.7 |
% |
|
|
65.4 |
% |
|
|
65.0 |
% |
Other direct costs |
|
|
8.4 |
% |
|
|
7.1 |
% |
|
|
8.3 |
% |
|
|
7.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
73.6 |
% |
|
|
71.8 |
% |
|
|
73.7 |
% |
|
|
72.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
26.4 |
% |
|
|
28.2 |
% |
|
|
26.3 |
% |
|
|
27.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
14.2 |
% |
|
|
14.8 |
% |
|
|
14.2 |
% |
|
|
15.1 |
% |
Other |
|
|
6.4 |
% |
|
|
6.7 |
% |
|
|
6.5 |
% |
|
|
6.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
20.6 |
% |
|
|
21.5 |
% |
|
|
20.7 |
% |
|
|
21.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
0.5 |
% |
|
|
0.6 |
% |
|
|
0.6 |
% |
|
|
0.6 |
% |
(Gain) loss on disposal of property and equipment |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
5.3 |
% |
|
|
6.1 |
% |
|
|
5.0 |
% |
|
|
5.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.1 |
% |
|
|
0.1 |
% |
Other income, net |
|
|
0.0 |
% |
|
|
-0.1 |
% |
|
|
-0.6 |
% |
|
|
-0.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
5.3 |
% |
|
|
6.2 |
% |
|
|
5.5 |
% |
|
|
5.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
|
1.9 |
% |
|
|
2.4 |
% |
|
|
2.0 |
% |
|
|
2.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
3.4 |
% |
|
|
3.8 |
% |
|
|
3.5 |
% |
|
|
3.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
The following tables sets forth for the periods indicated, the Companys sales accumulated by
service type and country:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
April 30, |
|
|
|
2007 |
|
|
2006 |
|
Sales by service type: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On demand |
|
$ |
32,329 |
|
|
|
31.2 |
% |
|
$ |
31,868 |
|
|
|
36.7 |
% |
Scheduled/distribution |
|
|
39,051 |
|
|
|
37.7 |
% |
|
|
26,284 |
|
|
|
30.2 |
% |
Outsourcing |
|
|
32,146 |
|
|
|
31.1 |
% |
|
|
28,764 |
|
|
|
33.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales |
|
$ |
103,526 |
|
|
|
100.0 |
% |
|
$ |
86,916 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales by country: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
63,479 |
|
|
|
61.3 |
% |
|
$ |
56,187 |
|
|
|
64.6 |
% |
Canada |
|
|
40,047 |
|
|
|
38.7 |
% |
|
|
30,729 |
|
|
|
35.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales |
|
$ |
103,526 |
|
|
|
100.0 |
% |
|
$ |
86,916 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
April 30, |
|
|
|
2007 |
|
|
2006 |
|
Sales by service type: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On demand |
|
$ |
101,664 |
|
|
|
33.3 |
% |
|
$ |
98,477 |
|
|
|
37.3 |
% |
Scheduled/distribution |
|
|
106,912 |
|
|
|
35.0 |
% |
|
|
80,987 |
|
|
|
30.7 |
% |
Outsourcing |
|
|
96,553 |
|
|
|
31.7 |
% |
|
|
84,367 |
|
|
|
32.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales |
|
$ |
305,129 |
|
|
|
100.0 |
% |
|
$ |
263,831 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales by country: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
191,150 |
|
|
|
62.6 |
% |
|
$ |
170,815 |
|
|
|
64.7 |
% |
Canada |
|
|
113,979 |
|
|
|
37.4 |
% |
|
|
93,016 |
|
|
|
35.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales |
|
$ |
305,129 |
|
|
|
100.0 |
% |
|
$ |
263,831 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 30, 2007 compared to three months ended April 30, 2006
Net income for the three months ended April 30, 2007 was $3.5 million ($0.32 per fully diluted
share) compared to $3.2 million ($0.29 per fully diluted share) for the three months ended April
30, 2006.
Sales for the three months ended April 30, 2007 were $104 million, a 19.1% increase compared to the
same period in 2006. The average conversion rate between the Canadian dollar and the U.S. dollar
was slightly lower this quarter than the prior year quarter, which had the effect of decreasing
sales for the three months ended April 30, 2007 by approximately 0.3%. The Company estimates that
higher fuel surcharges increased sales this quarter by approximately 0.2% compared to the prior
year. The organic growth rate, the rate excluding the impact of foreign exchange and fuel
surcharge, was approximately 19.2%. U.S. sales increased approximately 13.0% and Canadian sales,
in Canadian dollars, increased approximately 31.2% this quarter compared to last year. The current
quarter includes sales for services provided on an interim basis to one customer in Canada of
approximately $4.0 million. We expect additional sales for this interim service to total
approximately $2.0 million before the service ends in the FY 2007 fourth quarter.
Cost of sales for the three months ended April 30, 2007 increased $13.8 million, or 22.1%, to $76.3
million from $62.5 million for the same period in the prior year. Cost of sales, as a percentage
of sales was 73.6% for the three months ended April 30, 2007, higher than the 71.8% for the same
period in the prior year. Purchased transportation costs increased to 65.2% of sales this quarter
compared to 64.7% last year, principally due to the decline in on-demand sales as a percentage of
total sales. Although on-demand sales increased slightly this quarter compared to
14
the prior year, it represented only 31.2% of total sales compared to 36.7% last year, due to
the 29% increase in distribution and dedicated sales. The increase in other cost of sales from
7.1% in last years quarter to 8.4% this quarter was due principally to additional warehouse
personnel, equipment and space required to support new business added this fiscal year.
SG & A expenses increased 14.2% to $21.3 million in the current year quarter compared to the same
period last year. As a percentage of sales, SG & A expenses were 20.6% in current year compared to
21.5% in the prior year. Approximately $1.7 million of the dollar increase is attributable to
salaries and employee benefits. Normal wage increases as well as additional personnel required to
manage and operate new business over the last nine months contributed to the increase in SG & A
expenses., We also added additional engineering capacity to optimize routing, enhance driver
economics and reduce costs.
For the three months ended April 30, 2007, depreciation and amortization was $554,000 compared to
$523,000 for the same period in the prior year. The increase is primarily attributable to lessor
financed leasehold improvements associated with the recent move of the corporate headquarters.
Other income, net for the three months ended April 30, 2007, was $45,000 compared to $55,000 for
the same period in the prior year. This decrease is principally due to less interest income
compared to the prior year.
Interest expense was $32,000, a decrease of $6,000 or 15.8% for the current quarter. The decrease
below the prior year is primarily attributable to reduced borrowings this quarter. Interest
expense was less than 0.1% of sales in both the current quarter and the prior quarter.
The effective income tax rate was 35.8% for the current quarter compared to 39.5% for the prior
year. The current quarter includes a positive tax adjustment of approximately $80,000 related to
the reallocation of franchise costs between Canada and the U.S. and a higher percentage of income
before taxes generated in Canada which has a lower tax rate. The effective income tax rate for the
prior year was adjusted to reflect the impact of increased taxable earnings associated with
dividends received from the Companys Canadian subsidiary that resulted in an increase in the U.S.
federal income tax rate from 34% to 35% and from the true-up of the estimated state income tax
rates based on actual tax returns for tax year 2005.The current year tax rate includes the impact
of the new Texas margin tax, true-up of estimated state income taxes based on actual returns for
tax year 2006 and a slightly lower effective income tax rate in Canada. See Footnote 8 to the
Condensed Consolidated Financial Statements.
Nine months ended April 30, 2007 compared to nine months ended April 30, 2006
Net income for the nine months ended April 30, 2007 was $10.9 million ($1.01 per fully diluted
share) compared to $9.1 million ($0.80 per fully diluted share) for the nine months ended April 30,
2006. Net income for the nine months ended April 30, 2007, was favorably impacted by approximately
$972,000 ($0.09 per fully diluted share) from the settlement of cross border transfer pricing
issues with the Canadian tax authorities. See Footnote 7 to the Condensed Consolidated Financial
Statements.
Sales for the nine months ended April 30, 2007 were $305 million, a 15.7% increase over $264
million for the same period in 2006. The average conversion rate between the Canadian dollar and
the U.S. dollar increased 2.0% over the prior year period, which had the effect of increasing sales
for the nine months ended April 30, 2007 by approximately $2.1 million (0.8%). Also during the
period, fuel surcharges included in consolidated sales were essentially unchanged this year
compared to last year. The core growth rate, the rate excluding the impact of the fuel surcharge
and changes in the foreign exchange rate, was approximately 14.7% for the nine months ended April
30, 2007 (12.5% in the U.S. and 20.1% in Canada). Canadian sales including fuel surcharges, in
Canadian dollars, increased approximately 20.1% in the first nine months of the current fiscal year
compared to the same period last year.
Cost of sales for the nine months ended April 30, 2007 increased $33.6 million, or 17.5%, to $224.8
million from $191.2 million for the same period in the prior year. Cost of sales, as a percentage
of sales was 73.7% for the nine months ended April 30, 2007, compared to 72.5% for the nine months
ended April 30, 2006. Purchased transportation costs increased to 65.4% of sales this period
compared to 65.0% last year, partially due to the decline
in on-demand sales as a percentage of total sales in the third quarter and the nine months of 2007
compared to the same periods of the prior year. Although on-demand sales increased slightly this
year compared to the prior year, it represented only 33.3% of total sales compared to 37.3% last
year, due to the 23% increase in distribution and
15
dedicated sales. The increase in other cost of
sales from 7.5% last year to 8.3% in this year was due principally to additional warehouse
personnel, equipment and space required to support new business added this fiscal year. In
addition, over the last three quarters, we substantially increased sales with attractively priced
new contracts; however, the customers short time window for implementation caused a number of
large and complex startups to be initiated almost simultaneously. And due to the short time frame
for implementation, we primarily used existing employees to operate and manage this new business
which stretched our operational and management capacity. As a result, the period normally required
to stabilize and fully optimize the new operations has taken longer and the costs have been higher
than we originally forecast resulting in an increase in the cost of sales. In addition, we added
additional warehouse space and labor to service the new business.
SG & A expenses for the nine months ended April 30, 2007 increased $6.4 million, or 11.4%, to $63.2
million from $56.8 million for the same period in the prior year. Approximately $3.5 million of
the dollar increase is attributable to salaries and employee benefits. Also, the current year
quarter includes charges totaling approximately $1.0 million for additional space, computer
licenses and support of $0.6 million and professional fees and start-up cost of $0.5 million. The
increase in compensation results from normal salary increases plus additional personnel added over
the last year to operate and manage new business and additional engineering capacity to optimize
routing, enhance driver economics and reduce costs. As a percentage of sales, SG & A expenses were
20.7% for the nine months ended April 30, 2007, compared to 21.6% for the nine months ended April
30, 2006.
For the nine months ended April 30, 2007, depreciation and amortization was $1,742,000 compared to
$1,464,000 for the same period in the prior year. The increase is primarily attributable to higher
capital expenditures which include lessor financed leasehold improvements associated with the
recent move of the corporate headquarters, the acquisition of new route optimization software and
the installation at corporate headquarters of a voice-over-internet protocol (VoIP) telephone
system late in FY 2006.
Other income, net for the nine months ended April 30, 2007, was $1,777,000 compared to $219,000 for
the same period in the prior year. This increase is principally attributable to the resolution of
cross-border transfer pricing issues for fiscal years 2001 through 2005. As a result, the Company
realized interest income of approximately $425,000 from the overpayment of prior year Canadian
taxes without a corresponding increase in interest expense from the U.S. as the Company had
available net operating losses to offset the additional income, and the realization of $937,000 in
foreign currency transaction gains on cash settlement of those inter-company charges. These
inter-company charges were denominated in Canadian dollars, the value of which increased in U.S.
dollars from those prior year levels. See Footnote 7 to the Condensed Consolidated Financial
Statements.
Interest expense was $260,000, an increase of $47,000 or 22.1% for the nine months ended April 30,
2007. The increase over the prior year is primarily attributable to a higher average outstanding
debt and a higher average interest rate. Interest expense as a percentage of sales, was 0.1% in the
current quarter compared to 0.1% in the prior period.
The effective income tax rate was 35.8% for the current period compared to 36.9% for the prior
year. Excluding the impact of the one-time benefit from the resolution of prior year cross-border
transfer pricing issues, income tax expense would have been approximately $5.6 million, 36.5% of
income before taxes. The current year tax rate includes the impact of the new Texas margin tax and
a slightly lower effective income tax rate in Canada. See Footnote 8 to the Condensed Consolidated
Financial Statements.
Liquidity and Capital Resources
Our primary sources of liquidity are cash flow provided by our operations and our revolving credit
facility. Net cash provided by operating activities was $7.6 million for the nine months ended
April 30, 2007 compared to $7.9 million for the same period in 2006. The year-over-year decline is
due primarily to the increase in accounts receivable in the nine months ended April 30, 2007
compared to the nine months ended April 30, 2006. The $10.5 million increase in accounts receivable
is attributable to the 19.1% increase in sales (approximately $7.0 million) with the remaining
increase generally due to temporary delays in collecting some of the new accounts. We expect that
the
percentage increase in accounts receivable will be more in line with the increase in sales by the
end of the current fiscal year.
16
Net cash provided by operations, prior to changes in current operating assets and liabilities, was
$19.0 million for the nine months ended April 30, 2007 compared to $11.9 million for the nine
months ended April 30, 2006. This increase is attributable to higher net income of $1.8 million, a
decrease in cash taxes of $2.4 million from the use of available deductions and tax credits
(deferred income taxes), lessor financed leasehold improvements of approximately $2.0 million and
$741,000 of non-cash rent expense.
Capital expenditures for the nine months ended April 30, 2007 were approximately $3.3 million
compared to $0.6 million in 2006. The 2007 expenditures include $2.0 million of lessor financed
leasehold improvements. Management expects capital expenditures to be in the $4 million to $5
million range for the full fiscal year, excluding lessor financed leasehold improvements. The
increase over previous estimates is an expectation that the Company may purchase certain assets
including trailers and associated equipment needed to service a particular customer contract. Our
cash flow from operations has been our primary source of liquidity, and we expect it to continue to
be the primary source in the future.
Our revolving credit facility was initially established in 2005 and last amended in October 2006.
The credit facility has no scheduled principal payments; however, the maturity date is currently
extended to July 31, 2009. The revolving credit facility is secured by all of the Companys U.S.
assets and 100% of the stock of its domestic subsidiaries.
The revolving credit facility requires us to satisfy certain financial and other covenants,
including:
|
|
|
|
|
|
|
Requirement |
|
Level at April 30, 2007 |
Ratio of funded debt to EBITDA
|
|
2.00 to 1.00
|
|
0.29 |
Total indebtedness
|
|
$20 million, including LOCs
|
|
$5.2 million |
Letters
of credit sublimit
|
|
$7.5 million
|
|
$5.2 million |
Maximum
treasury stock purchases
|
|
$35 million
|
|
$23.6 million |
Fixed charge coverage ratio
|
|
Equal to or greater than 1.50 to 1.00
|
|
1.68 |
The Companys EBITDA (earnings before interest, taxes, depreciation and amortization) was
approximately $6.0 million (5.8% of sales) for the three months ended April 30, 2007, compared to
$5.9 million (6.8% of sales) in the same period last year. The Companys EBITDA was approximately
$18.9 million (6.2% of sales) for the nine months ended April 30, 2007, compared to $16.1 million
(6.1% of sales) in the same period last year. EBITDA margin for the nine months ended April 30,
2007 was positively impacted by the one-time benefit from resolution of prior year cross-border
transfer pricing issues. Excluding this one-time benefit, EBITDA was $17.5 million (5.7% of sales).
The decrease in EBITDA margin in both periods of FY 2007 (excluding the transfer pricing benefit)
is primarily attributable to higher cost of sales, which was only partially offset by the reduction
in selling, general and administrative expenses, both as a percentage of sales. EBITDA is
supplementally presented because management believes that it is a widely accepted and useful
financial indicator regarding our results of operations. Management believes EBITDA assists in
analyzing and benchmarking the performance and value of our business. Although our management uses
EBITDA as a financial measure to assess the performance of our business compared to that of others
in our industry, the use of EBITDA is limited because it does not include certain costs that are
material in amount, such as interest, taxes, depreciation and amortization, necessary to operate
our business. EBITDA is not a recognized term under generally accepted accounting principles and,
when analyzing our operating performance, investors should use EBITDA in addition to, not as an
alternative for, operating income, net income and cash flows from operating activities. The
following table reconciles net income presented in accordance with generally accepted accounting
principles (GAAP) to EBITDA, which is a non-GAAP financial measure:
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
(in thousands) |
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
April 30, |
|
|
April 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,487 |
|
|
$ |
3,212 |
|
|
$ |
10,857 |
|
|
$ |
9,080 |
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
1,945 |
|
|
|
2,098 |
|
|
|
6,066 |
|
|
|
5,310 |
|
Interest expense |
|
|
32 |
|
|
|
38 |
|
|
|
260 |
|
|
|
213 |
|
Depreciation and amortization |
|
|
554 |
|
|
|
523 |
|
|
|
1,742 |
|
|
|
1,464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
6,018 |
|
|
$ |
5,871 |
|
|
$ |
18,925 |
|
|
$ |
16,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA margin |
|
|
5.8 |
% |
|
|
6.8 |
% |
|
|
6.2 |
% |
|
|
6.1 |
% |
Management expects that its future capital requirements will generally be met from internally
generated cash flow. The Companys access to other sources of capital, such as additional bank
borrowings and the issuance of debt securities, is affected by, among other things, general market
conditions affecting the availability of such capital.
Inflation
The Company does not believe that inflation has had a material effect on the Companys results of
operations nor does it believe it will do so in the foreseeable future. However, there can be no
assurance the Companys business will not be affected by inflation in the future.
18
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Exchange Exposure
Significant portions of the Companys operations are conducted in Canada. Exchange rate
fluctuations between the U.S. and Canadian dollar result in fluctuations in the amounts relating to
the Canadian operations reported in the Companys consolidated financial statements. The Company
historically has not entered into hedging transactions with respect to its foreign currency
exposure, but may do so in the future.
The sensitivity analysis model used by the Company for foreign exchange exposure compares the
revenue and net income figures from Canadian operations, at the actual exchange rate, to a 10%
decrease in the exchange rate. Based on this model, a 10% decrease would result in a decrease in
quarterly revenue of approximately $4.0 million and a decrease in quarterly net income of
approximately $0.3 million over this period. There can be no assurances that the above projected
exchange rate decrease will materialize. Fluctuations of exchange rates are beyond the control of
the Companys management.
Interest Rate Exposure
The sensitivity analysis model used by the Company for interest rate exposure compares interest
expense fluctuations over a one-year period based on current debt levels and current average
interest rates versus current debt levels at current average interest rates with a 10% increase.
Based on this model, a 10% increase would result in no material increase in interest expense.
There can be no assurances that the above projected interest rate increase will materialize.
Fluctuations of interest rates are beyond the control of the Companys management.
19
Item 4. Controls and Procedures
An evaluation was carried out under the supervision and with the participation of the Companys
management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness
of the design and operation of its disclosure controls and procedures
(as defined in Rules 13a
15(e) and 15d 15(e) under the Securities Exchange Act of 1934) as of April 30, 2007 (the end of
the period covered by this Quarterly Report on Form 10-Q). Based upon the evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the design and operation of these
disclosure controls and procedures were effective.
There were no significant changes in the Companys internal controls or in other factors that
could significantly affect these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material weaknesses.
20
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
On April 15, 2005, a purported class action was filed against the Company by a former Company
driver in the Superior Court of California, Los Angeles County, alleging that the Company
unlawfully misclassified its California drivers as independent contractors, rather than employees,
and asserting, as a consequence, entitlement on behalf of the purported class claimants to overtime
compensation and other benefits under California wage and hour laws, reimbursement of certain
operating expenses, and various insurance and other benefits and the obligation of the Company to
pay employer payroll taxes under federal and state law. The plaintiff filed a Motion for Class
Certification on November 2, 2006. The Company responded in a Memorandum of Points and Authorities
in Support of Defendants Opposition to Plaintiffs Motion for Class Certification on November 29,
2006. A hearing was held on December 12, 2006, and on December 14, 2006, the Plaintiffs Motion
for Class Certification was denied. The Plaintiff filed a Notice of Appeal on January 5, 2007.
We believe that the Companys drivers are properly classified as independent contractors and intend
to vigorously defend this litigation. Given the nature and preliminary status of the claims,
however, we cannot yet determine the amount or a reasonable range of potential loss in these
matters, if any.
The California Employment Development Department (the EDD), in 2005, conducted an employment tax
audit of certain of the Companys operations in California for the period April 2003 through March
2005. As a result of the audit, the EDD concluded that certain independent contractors used by the
Company should be reclassified as employees. Based on such reclassification, the EDD made a
$345,000 assessment plus accrued interest against the Company, the bulk of which is for personal
income taxes. The Company subsequently provided documentation to the EDD related to the original
assessment which resulted in a reduction in the assessment of approximately $100,000. The
assessment has been paid, and the Company intends to file a Refund Claim within the 60 day
statutory period.
The California EDD conducted an employment tax audit of the Companys other California operations
in 2006. Based on its conclusion that certain independent contractors used by the Company should
be reclassified as employees, a Notice of Assessment was issued by the EDD in April 2007 in the
amount of $2.8 million, $2.0 of which the EDD claims represents personal income tax of the
reclassified individuals. The Company has filed a Petition for Reassessment and intends to
vigorously contest the assessment.
On January 19, 2006, a purported class action was filed against the Company by an employee in the
United States District Court, Southern District of New York, alleging that the Company unlawfully
failed to pay wages for work performed, for which they received no compensation as well as for
overtime work for which they received no overtime pay to which the employees were entitled under
the Fair Labor Standards Act (FLSA) and the New York Labor Law and the supporting New York State
Department of Labor regulations (NYLL). The plaintiff seeks recovery of unpaid wages, overtime
compensation, liquidated damages, additional liquidated damages for unreasonably delayed payment of
wages, reasonable attorneys fees and costs under the action. The Company and the plaintiff
settled the purported class action in New York. The settlement did not have a material adverse
effect on the financial condition, results of operations, or liquidity of the Company.
The Company is a party to various legal proceedings arising in the ordinary course of its business.
Management believes that the ultimate resolution of these proceedings will not, in the aggregate,
have a material adverse effect on the financial condition, results of operations, or liquidity of
the Company.
Item 1A. Risk Factors.
In addition to other information in this report, the following risk factors should be considered
carefully in evaluating the Company and its business. This report contains forward-looking
statements, which involve risks and uncertainties. The Companys actual results could differ
materially from those anticipated in these forward-looking statements as a result of certain
factors, including those set forth in the following risk factors and elsewhere in this report.
21
Highly Competitive Industry
The market for same-day delivery and logistics services has been and is expected to remain highly
competitive. Competition is often intense, particularly for basic delivery services. High
fragmentation and low barriers to entry characterize the industry. Other companies in the industry
compete with the Company not only for provision of services but also for qualified drivers. Some
of these companies have longer operating histories and greater financial and other resources than
the Company. Additionally, companies that do not currently operate delivery and logistics
businesses may enter the industry in the future.
Claims Exposure
As of April 30, 2007, the Company utilized the services of approximately 4,700 independent
contractor owner-operator drivers and messengers. From time to time such persons are involved in
accidents or other activities that may give rise to liability claims. The Company currently
carries liability insurance with a per occurrence and an aggregate limit of $30 million.
Independent contractor owner-operators are required to maintain liability insurance of at least the
minimum amounts required by applicable state or provincial law (generally such minimum requirements
range from $35,000 to $75,000). The Company also has insurance policies covering property and
fiduciary trust liability, which coverage includes all drivers and messengers. There can be no
assurance that claims against the Company, whether under the liability insurance or the surety
bonds, will not exceed the applicable amount of coverage, that the Companys insurer will be
solvent at the time of settlement of an insured claim, or that the Company will be able to obtain
insurance at acceptable levels and costs in the future. If the Company were to experience a
material increase in the frequency or severity of accidents, liability claims, workers
compensation claims or unfavorable resolutions of claims, the Companys business, financial
condition and results of operations could be materially adversely affected. In addition,
significant increases in insurance costs could reduce the Companys profitability.
Certain Tax Matters Related to Drivers
Substantially all of the Companys drivers at April 30, 2007 were independent contractors who own
their own vehicles. The Company does not pay or withhold any federal, state or provincial
employment tax with respect to or on behalf of independent contractors. From time to time, taxing
authorities in the U.S. and Canada have sought to assert that independent contractor
owner-operators in the transportation industry, including those utilized by the Company, are
employees, rather than independent contractors. The Company believes that the independent
contractor owner-operators utilized by the Company are not employees under existing interpretations
of federal (U.S. and Canadian), state and provincial laws. However, there can be no assurance that
federal (U.S. and Canadian), state, provincial authorities or independent contractors will not
challenge this position, or that other laws or regulations, including tax laws, or interpretations
thereof, will not change. If, as a result of any of the foregoing, the Company were required to
pay withholding taxes and pay for and administer added employee benefits to these drivers, the
Companys operating costs would increase. Additionally, if the Company is required to pay back-up
withholding with respect to amounts previously paid to such drivers, it may also be required to pay
penalties or be subject to other liabilities as a result of incorrect classification of such
drivers. Any of the foregoing circumstances could have a material adverse impact on the Companys
financial condition and results of operations, and/or to restate financial information from prior
periods.
Local Delivery Industry; General Economic Conditions
The Companys sales and earnings are especially sensitive to events that affect the delivery
services industry including extreme weather conditions, economic factors affecting the Companys
significant customers and shortages of or disputes with labor, any of which could result in the
Companys inability to service its clients effectively or the inability of the Company to
profitably manage its operations. In addition, downturns in the level of general economic activity
and employment in the U.S. or Canada may negatively impact demand for the Companys services.
Foreign Exchange
Significant portions of the Companys operations are conducted in Canada. Exchange rate
fluctuations between the U.S. and Canadian dollar result in fluctuations in the amounts relating to
the Canadian operations reported in the
22
Companys consolidated financial statements. The Canadian dollar is the functional currency for
the Companys Canadian operations; therefore, any change in the exchange rate will affect the
Companys reported sales for such period. The Company historically has not entered into hedging
transactions with respect to its foreign currency exposure, but may do so in the future. There can
be no assurance that fluctuations in foreign currency exchange rates will not have a material
adverse effect on the Companys business, financial condition or results of operations. See
Managements Discussion and Analysis of Financial Condition and Results of Operation.
Permits and Licensing
Although certain aspects of the transportation industry have been significantly deregulated, the
Companys delivery operations are still subject to various federal (U.S. and Canadian), state,
provincial and local laws, ordinances and regulations that in many instances require certificates,
permits and licenses. Failure by the Company to maintain required certificates, permits or
licenses or to comply with applicable laws, ordinances or regulations could result in substantial
fines or possible revocation of the Companys authority to conduct certain of its operations.
Dependence on Key Personnel
The Companys success is largely dependent on the skills, experience and performance of certain key
members of its management. The loss of the services of any of these key employees could have a
material adverse effect on the Companys business, financial condition and results of operations.
The Companys future success and plans for growth also depend on its ability to attract and retain
skilled personnel in all areas of its business. There is strong competition for skilled personnel
in the same-day delivery and logistics businesses.
Technological Advances
Technological advances in the nature of facsimile, electronic mail and electronic signature capture
have affected the market for on-demand document delivery services. Although the Company has
shifted its focus to the distribution of non-faxable items and logistics services, there can be no
assurance that these or other technologies will not have a material adverse effect on the Companys
business, financial condition and results of operations in the future.
Technology Infrastructure
The Company relies heavily on technology to operate its transportation and business networks, and
any disruption to its technology infrastructure or the internet could harm its operations and its
reputation among its customers. The Companys ability to attract and retain customers and to
compete effectively depends in part upon the sophistication and reliability of its technology
network, including its ability to provide features of service that are important to its customers.
Any disruption to its computer systems and web site could adversely impact its customer service,
its ability to receive orders and respond to prompt delivery assignments and result in increased
costs. While the Company has invested and will continue to invest in technology security
initiatives and disaster recovery plans, these measures cannot fully insulate it from technology
disruptions and the resulting adverse effect on its operations and financial results.
Dependence on Availability of Qualified Delivery Personnel
The Company is dependent upon its ability to attract and retain, as employees or through
independent contractor or other arrangements, qualified delivery personnel who possess the skills
and experience necessary to meet the needs of its operations. The Company competes in markets in
which unemployment is generally relatively low and the competition for independent contractor
owner-operators and other employees is intense. The Company must continually evaluate and upgrade
its pool of available independent contractor owner-operators to keep pace with demands for delivery
services. There can be no assurance that qualified delivery personnel will continue to be
available in sufficient numbers and on terms acceptable to the Company. The inability to attract
and retain qualified delivery personnel could have a material adverse impact on the Companys
business, financial condition and results of operations.
Acquisition Strategy; Possible Need for Additional Financing
The Company completed its last significant acquisition in August 1998. Currently, there are no
pending nor are there any contemplated acquisitions. Should the Company pursue acquisitions in the
future, the Company may be
23
required to incur additional debt, issue additional securities that may potentially result in
dilution to current holders and also may result in increased goodwill, intangible assets and
amortization expense. There can be no assurance that the Company will be able to obtain additional
financing if necessary, or that such financing can be obtained on terms the Company deems
acceptable. As a result, the Company might be unable to successfully implement its acquisition
strategy. See Managements Discussion and Analysis of Financial Condition and Results of
Operation Liquidity and Capital Resources.
Volatility of Stock Price
Prices for the Companys common stock will be determined in the marketplace and may be influenced
by many factors, including the depth and liquidity of the market for the common stock, investor
perception of the Company and general economic and market conditions. Variations in the Companys
operating results, general trends in the industry and other factors could cause the market price of
the common stock to fluctuate significantly. In addition, general trends and developments in the
industry, government regulation and other factors could have a significant impact on the price of
the common stock. The stock market has, on occasion, experienced extreme price and volume
fluctuations that have often particularly affected market prices for smaller companies and that
often have been unrelated or disproportionate to the operating performance of the affected
companies, and the price of the common stock could be affected by such fluctuations.
Fuel Costs
The independent contractor owner-operators utilized by the Company are responsible for all vehicle
expense including maintenance, insurance, fuel and all other operating costs. The Company makes
every reasonable effort to include fuel cost adjustments in customer billings that are paid to
independent contractor owner-operators to offset the impact of fuel price increases. If future
fuel cost adjustments are insufficient to offset independent contractor owner-operators costs, the
Company may be unable to attract a sufficient number of independent contractor owner-operators that
may negatively impact the Companys business, financial condition and results of operations.
24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(c) Common Stock Repurchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total number |
|
Average |
|
Total number of shares |
|
Approximate dollar value |
|
|
of shares |
|
price paid |
|
purchased as part of a |
|
of shares that may yet be |
Period |
|
purchased |
|
per share |
|
publicly announced plan |
|
purchased under the plan |
|
February 1 to February 28, 2007 |
|
|
6,184 |
|
|
$ |
24.43 |
|
|
|
6,184 |
|
|
$15.2 million |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 1 to April 30, 2007 |
|
|
29,900 |
|
|
$ |
25.95 |
|
|
|
29,900 |
|
|
$14.5 million |
All purchases were made in open market transactions pursuant to a plan approved by the
Board of Directors of the Company during
fiscal years 2006 and 2007 authorizing management to acquire up to $38 million of the
Companys common stock outstanding.
Item 6. Exhibits
Exhibits:
|
|
|
31.1
|
|
Certification of Chief Executive Officer of the Registrant,
pursuant to 17 CFR 240. 13a 15(e) or 17 CFR 240. 15d 15(e) |
|
|
|
31.2
|
|
Certification of Chief Financial Officer of the Registrant,
pursuant to 17 CFR 240. 13a 15(e) or 17 CFR 240. 15d 15(e) |
|
|
|
32.1
|
|
Certification of Chief Executive Officer of the Registrant,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
32.2
|
|
Certification of Chief Financial Officer of the Registrant,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
DYNAMEX INC.
|
|
Dated: June 8, 2007 |
by |
/s/ Richard K. McClelland
|
|
|
|
Richard K. McClelland |
|
|
|
President, Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer) |
|
|
|
|
|
Dated: June 8, 2007 |
by |
/s/ Ray E. Schmitz
|
|
|
|
Ray E. Schmitz |
|
|
|
Vice President Chief Financial Officer
(Principal Financial Officer) |
|
|
|
|
|
Dated: June 8, 2007 |
by |
/s/ Samuel T. Hicks
|
|
|
|
Samuel T. Hicks |
|
|
|
Corporate Controller
(Principal Accounting Officer) |
|
26
EXHIBIT INDEX
Exhibits
|
|
|
31.1
|
|
Certification of Chief Executive
Officer of the Registrant, pursuant to 17 CFR 240. 13a
15(e) or 17 CFR 240. 15d 15(e) |
|
|
|
31.2
|
|
Certification of Chief Financial
Officer of the Registrant, pursuant to 17 CFR 240. 13a 15(e) or 17 CFR 240. 15d 15(e) |
|
|
|
32.1
|
|
Certification of Chief Executive Officer of the Registrant, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.2
|
|
Certification of Chief Financial Officer of the Registrant, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
E-1