ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
The Company leased facilities in 84 locations at July 31, 2008. These facilities are principally used for operations and general and administrative functions. The chart below summarizes the locations of facilities that the Company leases:
The Company believes that its properties are well maintained, in good condition and adequate for its present needs. The Company anticipates that suitable additional or replacement space will be available when required.
Facility rental expense for the fiscal years ended July 31, 2008, 2007 and 2006 was approximately $10.6 million, $9.8 million and $7.8 million, respectively. The Company’s principal executive offices are located in Dallas, Texas. See Note 7 of Notes to the Consolidated Financial Statements for additional information.
The California Employment Development Department (the “EDD”), in 2005, conducted an employment tax audit of certain of the Company’s 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 was 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 Company subsequently pursued an administrative appeal of the denial of its Refund Claim. The California Unemployment Appeals Board upheld the denial following an evidentiary hearing in May. After weighing the cost, management time, and legal fees involved in an appeal to a California court against the value of the potential recovery, the Company made a business decision not to pursue further appeals. The decision has no legal effect on other audits conducted by the EDD.
The California EDD conducted an employment tax audit of the Company’s 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 million of which the EDD claims represents personal income tax of the reclassified individuals. As in the earlier matter, the Company has collected and submitted documentation which will work to reduce the personal income tax portion of the assessment. The Company has filed a Petition for Reassessment and intends to vigorously contest the assessment.
On April 15, 2005, a putative 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. Plaintiff’s Motion for Class Certification was denied in December 2006, and appealed by Plaintiff. Following the exchange of Briefs, an Appellate Hearing was held in August, 2008. The Appellate Court determined that the Trial Court’s denial of Plaintiff’s earlier Motion to Compel Disclosure of the names and contact information for all members of the putative class prejudiced Plaintiff’s ability to support his Motion for Class Certification. The ruling reversed the Denial of the Motion for Class Certification and remanded the matter for additional discovery and eventual re-hearing of the Motion.
On October 17, 2007, two former independent contractor drivers in New York filed a purported class action / collective action against the Company in the United States District Court in New York alleging that the Company had unlawfully misclassified its drivers in New York and in the United States as independent contractors rather than as employees, and that the Company had unlawfully failed to comply with the “Truth In Truck Leasing” and “Leasing Regulations” under U.S. Transportation Statutes. The Complaint sought relief under the New York Labor and Wage Statutes and the U.S. Fair Labor Standards Act including payment of wages for all hours worked plus overtime, as well as for reimbursement of business expenses and improper deductions made from driver wages and injunctive relief to prevent further violations. The truck leasing claims sought unspecified amounts by which plaintiffs were underpaid and amounts for which the Company had over deducted. Following various written discovery, Plaintiffs voluntarily dismissed the wage claims, With Prejudice, and the transportation law claims, Without Prejudice.
On July 25, 2008, two California independent contractor drivers filed a purported class action suit alleging that the Company’s classification of California drivers as independent contractors was unlawful, and that as a consequence they were denied the benefit of various California wage laws. They further alleged that such misclassification constituted unfair competition under California business statutes. Because the Complaint in large measure contains the same causes of action as the on-going 2005 California case, the Company filed a Special Demurrer and a Motion to Stay further proceedings pending the outcome of the earlier action. A Hearing is scheduled for early November, 2008.
The Company believes that all independent contractor owner-operator drivers are properly classified as independent contractors and intends to vigorously defend these various actions. Given the nature and preliminary status of the existing claims, however, the Company cannot yet determine with certainty the amount of any alleged liability or reasonable range of potential loss in these matters, if any.
The Company is a party to other legal proceedings and claims arising in the ordinary course of its business. Overall, the Company believes that the ultimate liability, if any and resolution of these pending legal proceedings and claims will not, in the aggregate, have a material adverse effect on the financial condition, results of operations, or liquidity of the Company.
ITEM 4.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information - The Company’s common stock commenced trading on the Nasdaq Global Select Market under the symbol “DDMX” on March 14, 2005. Previously, the common stock was listed on the AMEX. The following table summarizes, for the periods indicated, the range of high and low closing sale prices for our common stock, as reported on the Nasdaq Global Select Market. The NASDAQ prices represent inter-dealer quotations without retail markups, markdowns or commissions and may not represent actual transactions.
Stock Price Performance
Set forth below is a line graph indicating the stock price performance of the Company’s common stock for the period beginning August 1, 2003 and ending July 31, 2008 as contrasted with the Nasdaq Composite Index ** and the AMEX Composite Index and the Russell 2000 Stock Index***. The graph assumes that $100 was invested at the beginning of the period and has been adjusted for any stock dividends distributed after August 1, 2008. No cash or stock dividends have been paid during this period.
COMPARATIVE CUMULATIVE TOTAL RETURN
AMONG DYNAMEX INC.,
NASDAQ COMPOSITE INDEX, AMEX COMPOSITE INDEX
AND RUSSELL 2000 INDEX
ASSUMES $100 INVESTED ON AUGUST 1, 2003
ASSUMES DIVIDENDS REINVESTED
FISCAL YEAR ENDING JULY 31, 2008
**
The Company transferred its listing to the Nasdaq Global Select Market from the AMEX on March 14, 2005.
***
The Russell 2000 Stock Index represents companies with a market capitalization similar to that of the Company. The Company does not believe it can reasonably identify a peer group because it believes that there is only one public company engaged in lines of business directly comparative to those of the Company.
Holders - At September 30, 2008, the approximate number of holders of record of common stock was 238.
Dividends - The Company has not declared or paid any cash dividends on its common stock since its inception. The Company does not anticipate paying any cash dividends in fiscal 2008. See “Management’s Discussion and Analysis of Financial Condition and Results of Operation - Liquidity and Capital Resources”.
Securities Authorized for Issuance Under Equity Compensation Plans - The following table provides information regarding the Company’s equity compensation plan as of July 31, 2008.
Common Stock Repurchase - As of July 31, 2008, the Board of Directors had authorized management to purchase up to $58 million of Dynamex Inc. common stock on the open market. As of that date, the Company had repurchased a total of 1,962,000 shares at an average price of $20.07 per share for a total dollar cost of $39,368,000. Delaware law permits treasury shares to be retired when appropriately authorized by the Board of Directors, and the Company has retired such shares by appropriate reductions in the value of common stock and additional paid-in capital. During the year ended July 31, 2008, the Company repurchased a total of 121,000 shares at an average price of $24.51 per share for a total dollar cost of $2,966,000. Subsequent to July 31, 2008, the Company repurchased 281,800 shares of Dynamex common stock at an average price of $27.95 per share, leaving a balance of $10,756,000 in the authorization. The Board of Directors increased the share repurchase authorization by $20 million on September 16, 2008. Management intends to continue to purchase shares from time to time using available cash or temporary borrowings from the bank facility.
The following table sets forth the purchases made during each month of the fourth quarter of the Company’s fiscal year ended July 31, 2008:
All purchases were made pursuant to a publicly announced program approved by the Board of Directors of the Company authorizing management to acquire up to $58 million of the Company’s common stock with no expiration date.
The following selected historical financial and other data for the three years ended July 31, 2008 and the balance sheet data at July 31, 2008 and 2007 have been derived from the audited consolidated financial statements of the Company appearing elsewhere herein. The following selected historical financial and other data for the two years ended July 31, 2005 and 2004 and the balance sheet data at July 31, 2006, 2005 and 2004 have been derived from the consolidated financial statements of the Company not appearing herein. The selected financial data are qualified in their entirety, and should be read in conjunction with the Company’s consolidated financial statements, including the notes thereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operation” appearing elsewhere herein.
1)
Selling, general and administrative expenses include salaries, wages and employee benefits as well as facility costs, communication, travel and entertainment, office supplies, equipment rentals and general corporate expenses.
2)
The increase in other income in the year ended July 31, 2007, is principally attributable to the resolution of inter-company, 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 U.S. 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. The result was to increase net income by $972,000, $0.09 per fully diluted share, for the 2007 year. See Footnote 13 of Notes to the Consolidated Financial Statements for additional information.
3)
Income tax expense for the year ended July 31, 2004, was reduced by $3.7 million as a result of recognizing the tax benefit of U.S. net operating loss carryforwards of approximately $10.6 million that were not recognized in prior years due to uncertainty in those prior periods. Accordingly, net income increased $3.7 million, $0.32 per fully diluted share for 2004. Without the income tax adjustment, fully diluted earnings per share for the year ending July 31, 2004 would have been reported as $0.79.
4)
EBITDA is defined as income excluding interest, taxes, depreciation and amortization (as presented on the face of the income statement). 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. In addition, the Company’s definition of EBITDA may not be identical to similarly entitled measures used by other companies.
ITEM 7.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion should be read in conjunction with the information contained in the Company’s consolidated financial statements, including the notes thereto, and the other financial information appearing elsewhere in this report. Statements regarding future economic performance, management’s plans and objectives, and any statements concerning its assumptions related to the foregoing contained in Management’s Discussion and Analysis of Financial Condition and Results of Operation constitute forward-looking statements. Certain factors, which may cause actual results to vary materially from these forward-looking statements, accompany such statements or appear elsewhere in this report, including without limitation, the factors disclosed under “Risk Factors.”
General
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 consists of costs relating directly to performance of services, including driver and messenger costs, third party delivery charges, warehousing and sorting expenses, insurance and workers’ compensation costs. Substantially all of the drivers used by the Company are independent contractor owner-operators who provide their own vehicles as opposed to employees of the Company. Drivers and messengers are generally compensated based on a percentage of the delivery charge. Consequently, the Company’s 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, wages 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 Company’s 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 primarily 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 and collection. As a result of these variances, the Company’s gross profit margin is dependent in part on the mix of business for a particular period.
During the years ended July 31, 2008, 2007 and 2006, sales to Office Depot, Inc. represented approximately 14.6%, 14.2% and 10.6%, respectively, of the Company’s revenue. Sales to the Company’s five largest customers, including Office Depot, represented approximately 27%, 28% and 25% of the Company’s consolidated sales for the years ended July 31, 2008, 2007 and 2006, respectively.
The Company has no significant investment in transportation equipment. Depreciation and amortization expense primarily relates to office, communication, IT equipment and software, leasehold improvements and intangible assets, which are primarily customer lists.
A significant portion of the Company’s sales is generated in Canada. For the fiscal years ended July 31, 2008, 2007 and 2006, approximately 38%, 38%, and 36%, respectively, of the Company’s sales were generated in Canada. Before deduction of corporate costs, the majority of which are incurred in the U.S., the cost structure of the Company’s operations in the U.S. and Canada are similar.
The conversion rate of Canadian dollars to U.S. dollars increased during the fiscal year ending July 31, 2008 compared to July 31, 2007 and increased during the fiscal year ending July 31, 2007 compared to July 31, 2006. As the Canadian dollar is the functional currency for the Company’s Canadian operations, these changes in the exchange rate have affected the Company’s reported sales and net income. Management does not believe that the effect of these changes on the Company’s net income for the fiscal years ended July 31, 2008, 2007 and 2006 has been significant, although there can be no assurance that fluctuations in such currency exchange rate will not, in the future, have a material effect on the Company’s business, financial condition or results of operations.
Critical Accounting Policies
The Company believes that the following are its most significant accounting policies:
Use of estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenues and expenses. Actual results may differ from such estimates. The Company reviews all significant estimates affecting the financial statements on a recurring basis and records the effect of any necessary adjustments prior to their issuance.
Revenue recognition - Revenues are recognized after services are rendered to customers. There may be a time lag between pickup and delivery and the generation of an invoice. Accordingly, unbilled revenue is recognized for those shipments that have been delivered but have not been invoiced.
Intangibles - Intangibles arise from acquisitions accounted for as purchased business combinations and include goodwill, covenants not-to-compete and other identifiable intangibles and from the payment of financing costs associated with the Company’s credit facility. Goodwill represents the excess of the purchase price over all tangible and identifiable intangible net assets acquired. The Company tests goodwill for impairment at least annually. The Company has two reporting units for the purposes of assessing potential future impairments of goodwill, Canada and the United States. These two regions were identified as reporting units in accordance with paragraph 30 of SFAS No. 142 because discrete financial information is available and management regularly reviews the operating results of these regions. The Company performs its annual goodwill impairment test as of the first day of the fourth quarter of each year. Based on this test, the Company determined that no impairment exists during the three years ended July 31, 2008. Other intangible assets are being amortized over periods ranging from 3 to 25 years.
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 July 31, 2008 and 2007 amount to $1,172 thousand and $1,381 thousand, respectively.
Self-insured claims liability - The Company is primarily self-insured for U.S. workers’ compensation and vehicle liability claims. A liability for unpaid claims and the associated claim expenses, including incurred but unreported losses, are recorded based on the Company’s estimates of the aggregate liability for claims incurred. The Company’s estimates are based on actual experience and historical assumptions of development of unpaid liabilities over time. Factors affecting the determination of amounts to be accrued for claims include, but are not limited to, cost, frequency, or payment patterns resulting from new types of claims, the hazard level of our operations, tort reform or other legislative changes, unfavorable jury decisions, court interpretations, changes in the medical conditions of claimants and economic factors such as inflation. The method of calculating the estimated accrued liability for claims is subject to inherent uncertainty. If actual results are less favorable than what are used to calculate the accrued liability, the Company would have to record expenses in excess of what has already been accrued.
Allowance for doubtful accounts - The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make payments when due or within a reasonable period of time thereafter. Estimates are used in determining this allowance based on the Company’s historical collection experience, current trends, credit policy and a percentage of accounts receivable by aging category. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make required payments, additional allowances may be required. The allowance for doubtful accounts represented approximately 1.9% of accounts receivable at July 31, 2008 compared to approximately 2.0% at July 31, 2007.
Income taxes - Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the basis of assets and liabilities for financial and income tax reporting. The net deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled.
During the year ended July 31, 2007 and 2006, the Company repatriated approximately $3.6 million and $12.7 million, respectively from its Canadian subsidiary. Except for certain applicable state income taxes, the Company was able to substantially offset the U.S. income tax liability arising from the dividends with foreign tax credits. The Company establishes valuation allowances in accordance with the provisions of Statement of Financial Accounting Standards No. 109 “Accounting for Income Taxes” (“SFAS No. 109”).
Stock-based compensation - Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment,” (“SFAS No. 123(R)”) requires the measurement of all employee share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in our consolidated statements of operations. The accounting provisions of SFAS No. 123(R) were adopted by the Company effective August 1, 2005.
The fair value of each grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2008, 2007, and 2006, respectively: dividend yield of 0% for all years; expected volatility of 43%, 44%, and 51%; risk-free interest rate of 3.9%, 4.6%, and 4.3%, and expected lives of an average of 7.2, 7.2 and 5.3 years for options granted to employees and of 6.8, 6.8 and 7.7 years for options granted to non-employee directors for all years. The weighted average grant-date fair value of stock options granted during the years 2008, 2007 and 2006 was $14.80, $11.97 and $8.82, respectively.
As discussed in Note 10 of Notes to the Consolidated Financial Statements, option expense in 2008, 2007 and 2006 amounted to $1,180,000, $771,000 and $717,000, respectively, under the fair value approach. Based on the outstanding and unvested awards as of July 31, 2008, the anticipated effect on net income for fiscal 2009, net of taxes, will be approximately $810,000.
Foreign currency translation - Assets and liabilities in foreign currencies are translated into U.S. dollars at the rates in effect at the balance sheet date. Revenues and expenses are translated at average rates during the year. The net exchange differences resulting from these translations are recorded in stockholders’ equity. Where amounts denominated in a foreign currency are converted into U.S. dollars by remittance or repayment, the realized exchange differences are included as other income (expense) in the Consolidated Statement of Operations.
Treasury stock acquired and retired - Treasury stock is recorded at cost. Delaware law permits treasury shares to be retired when appropriately authorized by the Board of Directors, and the Company has retired such shares by appropriate reductions in the value of common stock and additional paid-in capital.
Other long-term liabilities - The Company recognizes a deferred rent liability for tenant improvement allowances within other long-term liabilities and amortizes those 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.
Results of Operations
The following table sets forth for the periods indicated certain items from the Company’s consolidated statement of operations, expressed as a percentage of sales:
The following tables sets forth for the periods indicated, the Company’s sales accumulated by service type and country:
Year Ended July 31, 2008 Compared to Year Ended July 31, 2007
Net income for the year ended July 31, 2008 was $15.8 million ($1.53 per fully diluted share) compared to $15.0 million ($1.39 per fully diluted share) for the year ended July 31, 2007. Net income for the year ended July 31, 2007, was favorably impacted by approximately $972,000 ($0.09 per fully diluted share) from the settlement of prior year cross border transfer pricing issues between the U.S. and Canada. See Footnote 13 of the Notes to the
Condensed Consolidated Financial Statements.
Sales for the year ended July 31, 2008 were $456 million, a $42 million (10.2%) increase over the prior year. The average conversion rate between the Canadian dollar and the U.S. dollar increased 11.4% over the prior year period, which had the effect of increasing sales for the year ended July 31, 2008 by approximately $17.6 million (4.2%). Also, management estimates that approximately 2.7% of the year-over-year increase in sales is attributable to fuel surcharges. The core growth rate, the rate excluding the impact of the fuel surcharge and changes in the foreign exchange rate, was approximately 3.6% for the year ended July 31, 2008 (6.7% in the U.S. and -1.9% in Canada). Canadian sales, including fuel surcharges, increased approximately 0.2% in Canadian dollars in the current fiscal year compared to last year. Sales for the year ended July 31, 2007 include sales for services provided on an interim basis to one customer in Canada of approximately $11 million U.S. Excluding the temporary sales last year in Canada, the core growth rate per day was approximately 6.3%. The remaining sales increase is primarily attributable to volume increases from the expansion of business with existing and new customers. Price increases did not account for a substantial increase in FY2008 sales.
Cost of sales for the year ended July 31, 2008 increased $30 million, or 9.9%, to $334 million from $304 million for the same period in the prior year. Cost of sales, as a percentage of sales was 73.4% for the year ended July 31, 2008, compared to 73.5% for the year ended July 31, 2007. Purchased transportation costs were 65.9% of sales this year compared to 65.4% last year, partially due to the decline in on-demand sales as a percentage of total sales in the year ended 2008 compared to the prior year. Although on-demand sales increased slightly this year compared to the prior year, it represented only 32.6% of total sales compared to 33.2% last year, as distribution sales increased 11%. The decrease in other cost of sales from 8.1% last year to 7.5% this year is primarily due to the year-over-year improvement from the optimization of the operations of new business started during the last fiscal year.
SG & A expenses for the year ended July 31, 2008 increased $8.0 million, or 9.4%, to $93 million compared to the prior year. As a percentage of sales, SG & A expenses were 20.5% for the year ended July 31, 2008, compared to 20.6% in the same period last year. Approximately $3.3 million of the increase is attributable to the stronger Canadian dollar with the balance primarily attributable to the impact of additional personnel hired over the last twelve months to support not only the current level of business but also future sales growth, in addition to normal increases in compensation and higher premiums related to medical and dental coverage. As the core growth rate accelerates above the current level, management expects to realize additional leverage from its relatively fixed cost infrastructure.
For the year ended July 31, 2008, depreciation and amortization was $2,825,000 compared to $2,357,000 for the same period in the prior year. The increase is primarily attributable to the lessor financed leasehold improvements that occurred during fiscal year 2007. Management expects the level of depreciation and amortization expense to increase next year due to the higher level of planned capital expenditures in FY 2009 above historical levels.
Other income, net for the year ended July 31, 2008, was $516,000 compared to $2,079,000 for the same period in the prior year. This decrease is principally attributable to the prior year resolution of cross-border transfer pricing issues between Canada and the U.S. 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 in 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. The inter-company charges were denominated in Canadian dollars, the value of which increased in U.S. dollars from those prior year levels. See Footnote 13 of the Notes to the Condensed Consolidated Financial Statements.
Interest expense was $232,000, a decrease of $67,000 or 22.4% for the year ended July 31, 2008.
The effective income tax rate was 38.1% for the current year compared to 36.4% for the prior year. The higher income rate this year results from the higher proportion of pre-tax income generated in the U.S. than the previous year. The Company’s current year effective income tax rate in the U.S. was approximately 41.6% and 33.3% in Canada. Excluding the impact of the one-time benefit from the resolution of prior year cross-border transfer pricing issues, the prior year income tax expense would have been approximately $8.2 million, 36.9% of income before taxes. See Footnote 8 of the Notes to the Condensed Consolidated Financial Statements.
Year Ended July 31, 2007 Compared to Year Ended July 31, 2006
Net income for the year ended July 31, 2007 was $15.0 million ($1.39 per fully diluted share) compared to $12.4 million ($1.11 per fully diluted share) for the year ended July 31, 2006. Net income for the year ended July 31, 2007, was favorably impacted by approximately $972,000 ($0.09 per fully diluted share) from the settlement of prior year cross border transfer pricing issues between the U.S. and Canada. See Footnote 13 of the Notes to the Condensed Consolidated Financial Statements.
Sales for the year ended July 31, 2007 were $414 million, a $56 million (15.5%) increase over the prior year. The average conversion rate between the Canadian dollar and the U.S. dollar increased 2.6% over the prior year period, which had the effect of increasing sales for the year ended July 31, 2007 by approximately $3.9 million (1.1%). 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 14.2% for the year ended July 31, 2007 (11.2% in the U.S. and 19.6% in Canada). Canadian sales, including fuel surcharges, increased approximately 19.7% in Canadian dollars in the current fiscal year compared to last year. Sales for the year ended July 31, 2007 include sales for services provided on an interim basis to one customer in Canada of approximately $10 million U.S. (approximately $3 million for the three months ended July 31, 2007). The remaining sales increase is primarily attributable to volume increases from the expansion of business with existing and new customers. Management estimates that price increases accounted for substantially less than 5% of the increase in sales in FY 2007.
Cost of sales for the year ended July 31, 2007 increased $45.0 million, or 17.4%, to $304.3 million from $259.3 million for the same period in the prior year. Cost of sales, as a percentage of sales was 73.5% for the year ended July 31, 2007, compared to 72.3% for the year ended July 31, 2006. Purchased transportation costs were 65.4% of sales this year compared to 65.0% last year, partially due to the decline in on-demand sales as a percentage of total sales in the year ended 2007 compared to the prior year. Although on-demand sales increased slightly this year compared to the prior year, it represented only 33.2% of total sales compared to 37.5% last year, as distribution and dedicated sales increased 33%. The increase in other cost of sales from 7.3% last year to 8.1% in this year was due principally to additional warehouse personnel, equipment and space required to support new business added this fiscal year.
SG & A expenses for the year ended July 31, 2007 increased $8.2 million, or 10.7%, to $85.3 million compared to the prior year. Approximately $4.7 million of the dollar increase is attributable to higher compensation and benefits. The increase in compensation and benefits results from normal salary increases plus the additional personnel added over the last year to operate and manage new business and to increase engineering capacity in order to facilitate route optimization, enhance driver economics and reduce costs. Also, the current year includes approximately $1.4 million for additional warehouse and office space, computer licenses and support of $0.6 million and professional fees and contract start-up costs of $0.6 million. As a percentage of sales, SG & A expenses were 20.6% for the year ended July 31, 2007, compared to 21.5% for the year ended July 31, 2006.
For the year ended July 31, 2007, depreciation and amortization was $2,357,000 compared to $1,931,000 for the same period in the prior year. The increase is primarily attributable to higher capital expenditures including lessor financed leasehold improvements, the acquisition of new route optimization software and the installation at corporate headquarters and some business centers of a voice-over-internet protocol (VoIP) telephone system beginning late in FY 2006.
Other income, net for the year ended July 31, 2007, was $2,079,000 compared to $275,000 for the same period in the prior year. This increase is principally attributable to the resolution of cross-border transfer pricing issues between Canada and the U.S. for inter-company services 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 13 of the Notes to the Condensed Consolidated Financial Statements.
Interest expense was $299,000, an increase of $4,000 or 1.4% for the year ended July 31, 2007. Interest
expense, as a percentage of sales, was 0.1% in the current year, the same as the prior year.
The effective income tax rate was 36.4% for the current year compared to 38.0% 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 $8.2 million, 36.9% of income before taxes. See Footnote 8 of the Notes to the Condensed Consolidated Financial Statements.
Liquidity and Capital Resources
Our primary sources of liquidity are cash flow provided from operations and our revolving credit facility. Net cash provided by operating activities for the fiscal years ended July 31, 2008, 2007 and 2006 were $16.4 million, $24.6 million and $15.5 million, respectively. The reduced level of cash provided this year is primarily attributable to the $4.7 million payment in August 2007 for stock repurchase transactions consummated and accrued in FY 2007, higher cash taxes paid in the current year and the benefit last year from lessor financed leasehold improvements and non-cash rent expense.
Net cash used in investing activities declined $1.6 million in FY 2008 compared to the prior year. The prior year included approximately $2.0 million for leasehold improvements that were financed by the lessor while the current year includes approximately $500 for acquisition of customer lists. 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. The Company does not have significant capital expenditure requirements to replace or expand the number of vehicles used in its operations because substantially all of its drivers are independent contractors who provide their own vehicles.
As of July 31, 2008, The Board of Directors had authorized management to purchase up to $58 million of Dynamex Inc. common stock on the open market. As of that date, the Company had repurchased a total of 1,962,000 shares at an average price of $20.07 per share for a total dollar cost of $39.4 million. Delaware law permits treasury shares to be retired when appropriately authorized by the Board of Directors, and the Company has retired such shares by appropriate reductions in the value of common stock and additional paid-in capital. During the year ended July 31, 2008, the Company repurchased a total of 121,000 shares at an average price of $24.51 per share for a total dollar cost of $3.0 million. Subsequent to July 31, 2008, the Company repurchased 281,800 shares of Dynamex common stock at an average price of $27.95 per share, leaving a balance of $10.8 million in the authorization. The Board of Directors increased the share repurchase authorization by $20 million on September 16, 2008. Management intends to continue to purchase shares from time to time using available cash or temporary borrowings from the bank facility.
Our revolving credit facility was initially established in 2004 and last amended in September 17, 2008. The credit facility has a maturity date of July 31, 2013 and has no scheduled principal payments. The revolving credit facility is secured by all of the Company’s U.S. assets and 100% of the stock of its domestic subsidiaries. At July 31, 2008, there were $6.1 million letters of credit issues but no outstanding borrowings under the revolving credit agreement.
The revolving credit facility requires us to satisfy certain financial and other covenants, including:
Management expects internally generated cash flow and temporary borrowings from its bank credit facility will be sufficient to fund its operations, capital requirements and common stock repurchases.
Contractual Obligations
The following table sets forth the Company’s contractual commitments as of July 31, 2008 for the periods indicated (in thousands):
The Company has entered into an employment agreement with its President and CEO which provides for the payment of a base salary in the annual amount of $525,000, participation in an executive bonus plan, an auto allowance, and participation in other employee benefit plans. On September 16, 2008 the Company's Board of Directors approved a special compensation award to the Company's President and CEO of $1.5 million in cash. In addition, the Company has entered into retention agreements with certain key executive officers and other employees that provide certain benefits in the event their employment is terminated subsequent to a change in control of the Company, as defined in the retention agreements. The Company believes that it is unlikely that these circumstances will transpire, but if they did the potential exposure could range between $3.7 million and $4.1 million. As of July 31, 2008 the Company had outstanding letters of credit totaling $6.1 million.
Income Taxes
The provision for income taxes was $9.7 million in fiscal 2008 compared to $8.6 million and $7.6 million in the years ended July 31, 2007 and 2006, respectively. The difference between the statutory rates and the effective federal income tax rates is primarily attributable to foreign and state income taxes, changes in the valuation allowance on net operating loss carry forwards and foreign tax credits, and other expenses that are non-deductible for tax purposes.
During the year ended July 31, 2007, the Company repatriated approximately $3.6 million from its Canadian subsidiary. Except for certain applicable state income taxes, the Company was able to offset substantially all of the U.S. income tax liability arising from the dividends with foreign tax credits. The Company utilized substantially all of its available NOL’s during the 2004 and 2005 fiscal years and all of its foreign tax credits in fiscal year 2007.
Inflation
The Company believes that it is experiencing some inflationary impacts from the rapid rise in fuel prices and will, along with other segments of the economy, experience further impacts of inflation in the form of utility cost and other cost increases. However, such inflationary pressures have not had a material effect on the Company’s results of operations for fiscal 2008. There can be no assurance the Company’s business will not be affected by inflation in the future.
Financial Condition
The Company believes its financial condition is strong and that it has the financial resources necessary to meet its needs. Cash provided by operating activities and the Company’s credit facility should be sufficient to meet the Company’s operational requirements.
Recent Accounting Pronouncements
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 Company’s 2009 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.
In February 2007, the FASB issued Statement No. 159 (“SFAS 159”), “The Fair Value Option for Financial
Assets and Financial Liabilities - Including an Amendment of FASB Statement No 115.” This Statement permits an entity to choose to measure many financial instruments and certain other items at fair value. A business entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings. The fair value option (a) may be applied instrument by instrument, (b) is irrevocable, and (c) is applied to entire instruments and not to portions of instruments. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company believes the adoption of SFAS No. 159 will have no material impact on its consolidated financial statements.
In December 2007, the FASB issued Statement No. 141R (“SFAS No. 141R”), “Business Combinations.” This Statement requires most identifiable assets, liabilities, noncontrolling interests, and goodwill acquired in a business combination to be recorded at full fair value. The Statement applies to all business combinations, including combinations among mutual entities and combinations by contract alone. Under SFAS 141R, all business combinations will be accounted for by applying the acquisition method. SFAS 141R is effective for periods beginning on or after December 15, 2008 and will be effective for us beginning in the second quarter of fiscal 2009 for business combinations occurring after the effective date. The Company believes the adoption of SFAS No. 141R will have no material impact on its consolidated financial statements.
“Safe Harbor” Statement Under The Private Securities Litigation Reform Act:
With the exception of historical information, the matters discussed in this report are “forward looking statements” as that term is defined in Section 21E of the Securities Exchange Act of 1934.
The risk factors described in this report could cause actual results to differ materially from those predicted. By way of example:
•
The competitive nature of the same-day delivery business.
•
The ability of the Company to attract and retain qualified courier personnel as well as retain key management personnel.
•
A change in the current tax status of courier drivers from independent contractor drivers to employees.
•
A significant increase in the number of workers’ compensation or vehicle liability claims such that the Company’s self insurance expense would increase significantly.
•
A significant reduction in the exchange rate between the Canadian dollar and the U.S. dollar.
•
Failure of 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 Company’s authority to conduct certain of its operations.
•
The ability of the Company to obtain adequate financing.
•
The ability of the Company to pass on fuel cost increases to customers to maintain profit margins and the quality of driver pay.
ITEM 7A.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Foreign Exchange Exposure
Significant portions of the Company’s 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 Company’s 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 over the previous four quarters at the actual exchange rate versus a 10% decrease in the exchange rate. Based on this model, a 10% decrease would result in a decrease in revenue of approximately $17.4 million and a decrease in net income of approximately $0.7 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 Company’s management.
Interest Rate Exposure
The Company has no interest rate protection arrangements in effect at the present time. The Company does not hold or issue derivative financial instruments for speculative or trading purposes.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 15(a).
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES
(a). Evaluation of disclosure control and procedures
An evaluation was carried out under the supervision and with the participation of the Company’s 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 Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the Company’s fiscal year. 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 Company’s 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.
(b). Management’s report on internal control over financial reporting.
Management’s report on internal control over financial reporting, which appears on page of this Annual Report, is incorporated herein by reference.
None.
PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information set forth under the caption “Directors and Executive Officers” in the Company’s definitive proxy statement to be filed in connection with the 2009 Annual Meeting of Stockholders is incorporated herein by reference.
The Company has adopted a code of ethics that applies to all members of Board of Directors and employees of the Company, including, the principal executive officer, principal financial officer, principal accounting officer, or persons performing similar functions. The Company has notice of amendments to, or waivers of, the code posted on the Company’s internet website at the internet address: http://www.dynamex.com. Copies of the code may be obtained free of charge from the Company’s website at the above internet address.
The information set forth under the caption “Directors and Executive Officers” in the Company’s definitive proxy statement to be filed in connection with the 2009 Annual Meeting of Stockholders is incorporated herein by reference.
The information set forth under the caption “Beneficial Ownership of Common Stock” in the Company’s definitive proxy statement to be filed in connection with the 2009 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information set forth under the caption “Certain Relationships and Related Transactions” in the Company’s definitive proxy statement to be filed in connection with the 2009 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information set forth under the caption “Principal Accountant Fees and Services” in the Company’s definitive proxy statement to be filed in connection with the 2008 Annual Meeting of Stockholders is incorporated herein by reference.
PART IV
ITEM 15.
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1)
Financial Statements
See Index to Consolidated Financial Statements on page.
Reference is made to the Exhibit Index on page E-1 for a list of all exhibits filed as a part of this report.
(c)
Financial Statement Schedules
All schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are considered inapplicable and therefore have been omitted.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.,
A Delaware corporation
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons of the registrant and in the capacities indicated on October xx, 2008.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F - 1
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Board of Directors and
Stockholders of Dynamex Inc.
Management of Dynamex Inc. is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Dynamex Inc.’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, including our Chief Executive Officer and our Chief Financial Officer, assessed the effectiveness of Dynamex Inc.’s internal control over financial reporting as of July 31, 2008. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework. Based on our assessment and those criteria, we believe that Dynamex Inc. maintained effective internal control over financial reporting as of July 31, 2008.
Dynamex Inc.’s independent registered public accounting firm, BDO Seidman, LLP, has issued an attestation report dated October 14, 2008 on the effectiveness of Dynamex Inc.’s internal control over financial reporting. That report is included herein.
/s/ Richard K. McClelland
/s/ Ray E. Schmitz
Richard K. McClelland
Ray E. Schmitz
Chairman of the Board, Chief Executive
Officer, President and Director
(Principal Executive Officer)
Vice President, Chief Financial Officer
(Principal Financial Officer)
F - 2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Dynamex Inc.
Dallas, Texas
We have audited the accompanying consolidated balance sheets of Dynamex Inc. and Subsidiaries (the “Company”) as of July 31, 2008 and 2007 and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended July 31, 2008. 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement. 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 the Company at July 31, 2008 and 2007, and the results of its operations and its cash flows for each of the three years in the period ended July 31, 2008, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 8 to the consolidated financial statements, effective August 1, 2007, the Company changed its method of accounting for income taxes to conform to Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109”.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of July 31, 2008, 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 October 14, 2008 expressed an unqualified opinion thereon.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Dallas, Texas
October 14, 2008
F - 3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Dynamex Inc.
Dallas, Texas
We have audited the internal control over financial reporting maintained by Dynamex Inc. and Subsidiaries (the “Company”) as of July 31, 2008, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Management of the Company is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of July 31, 2008, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of July 31, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended July 31, 2008. Our report dated October 14, 2008 expressed an unqualified opinion on those consolidated financial statements.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Dallas, Texas
October 14, 2008
F - 4
DYNAMEX INC.
Consolidated Balance Sheets
July 31, 2008 and 2007
(in thousands, except per share data)
See accompanying notes to the consolidated financial statements.
F -5
DYNAMEX INC.
Consolidated Statements of Operations
Years ended July 31, 2008, 2007 and 2006
(in thousands except per share data)
See accompanying notes to the consolidated financial statements.
F -6
DYNAMEX INC.
Consolidated Statements of Stockholders’ Equity
Years ended July 31, 2008, 2007 and 2006
(in thousands)
See accompanying notes to the consolidated financial statements.
F -7
DYNAMEX INC.
Consolidated Statements of Cash Flows
Years ended July 31, 2008, 2007 and 2006
(in thousands)
F -8
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business - Dynamex Inc. and Subsidiaries (the “Company” or “Dynamex”) provide same-day delivery and logistics services in the United States and Canada. The Company’s primary services are (i) same-day, on-demand delivery, (ii) scheduled and distribution and (iii) fleet outsourcing and facilities management.
The operating subsidiaries of the Company, with country of incorporation, are as follows:
•
Dynamex Operations East Inc. (U.S.)
•
Dynamex Operations West Inc. (U.S.)
•
Dynamex Fleet Services, Inc. (U.S.)
•
Dynamex Franchise Holdings, Inc. (U.S.)
•
Dynamex Domestic Franchising, Inc. (U.S.)
•
Dynamex Canada Corp. (Canada)
•
Dynamex Canada Franchise Holdings, Inc. (Canada)
Principles of consolidation - 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 are stated in thousands of dollars unless otherwise indicated.
Use of estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenues and expenses. Actual results may differ from such estimates. The Company reviews all significant estimates affecting the financial statements on a recurring basis and records the effect of any necessary adjustments prior to their issuance.
Property and equipment - Property and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is provided using the straight-line method over the estimated useful lives of the related assets for financial reporting purposes and principally on accelerated methods for tax purposes. Leasehold improvements are depreciated using the straight-line method over their estimated useful lives or the lease term, whichever is shorter. Ordinary maintenance and repairs are charged to expense as incurred. Expenditures that extend the physical or economic life of property and equipment are capitalized. The estimated useful lives of property and equipment are as follows:
Equipment
3-7 years
Software
3-5 years
Furniture
7 years
Vehicles
5 years
The Company periodically reviews property and equipment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable or their depreciation or amortization periods should be accelerated. When any such impairment exists, the related assets will be written down to their fair value.
The Company capitalizes both internal and external costs of developing or obtaining computer software for internal use. Costs incurred to develop internal-use software during the application development stage are capitalized, while data conversion, training and maintenance costs associated with internal-use software are expensed as incurred. As of July 31, 2008 and 2007, the net book value of capitalized software costs was $1,554 and $2,291, respectively. Amortization expense related to capitalized software was $756, $737 and $626 in fiscal years 2008, 2007 and 2006, respectively.
Business and credit concentrations - Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and trade receivables.
The Company places its temporary cash investments with high-credit, quality financial institutions. At times such amounts may exceed F.D.I.C. limits. The Company limits the amount of credit exposure with any one financial institution and believes no significant concentration of credit risk exists with respect to cash investments.
The Company’s customers are not concentrated in any specific geographic region or industry. During the years ended July 31, 2008, 2007 and 2006, sales to Office Depot, Inc. represented approximately 14.6%, 14.2% and 10.6%, respectively, of the Company’s revenue. Sales to the Company’s five largest customers, including Office Depot, represented approximately 27%, 28% and 25% of the Company’s consolidated sales for the years ended July 31, 2008, 2007 and 2006, respectively.
A significant number of the Company’s customers are located in Canada. For the fiscal years ended July 31, 2008, 2007 and 2006, approximately 38%, 38% and 36% of the Company’s sales, respectively, were generated in Canada. See Note 14 of Notes to the Consolidated Financial Statements for additional information concerning the Company’s foreign operations.
Office Depot represented approximately 10.5% of the net accounts receivable at July 31, 2008 and July 31, 2007. There were no other significant accounts receivable from a single customer. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.
Goodwill and intangibles - Intangibles arise from acquisitions accounted for as purchased business combinations and include goodwill, covenants not-to-compete and other identifiable intangibles and from the payment of financing costs associated with the Company’s credit facility. Goodwill represents the excess purchase price over all tangible and identifiable intangible net assets acquired. Effective August 1, 2001 the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”) which requires, among other things, that companies no longer amortize goodwill and instead sets forth methods to periodically evaluate goodwill for impairment. The Company conducts on at least an annual basis a review of its reporting units to determine whether their carrying value exceeds their market value and, if so, performs a detailed analysis of the reporting unit’s assets and liabilities to determine whether the goodwill is impaired. The Company performed its goodwill impairment test as of the first day of the fourth quarter of fiscal 2008. Based on this test, no impairment was indicated. Other intangible assets are being amortized over periods ranging from 3 to 25 years. Deferred bank financing fees are amortized over the term of the related credit facility. Amortization of deferred financing fees is classified as interest expense in the consolidated statement of operations. Aggregate amortization expense during the years ended July 31, 2008, 2007 and 2006 totaled $81, $51 and $51, respectively. Estimated amortization expense for the succeeding five fiscal years is approximately $153 for the year 2009, $116 for 2010, $33 for 2011, $23 for 2012 and $19 for 2013.
Revenue recognition - Revenues are recognized when services are rendered to customers, that is, primarily when the pickup and delivery is complete. There may be a time lag between the completion of the service and the generation of an invoice. Accordingly, unbilled revenue is recognized for those shipments that have been completed but have not been invoiced.
Cash and cash equivalents - The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Allowance for doubtful accounts - The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make payments when due or within a reasonable period of time thereafter. Estimates are used in determining this allowance based on the Company’s historical collection experience, current trends, credit policy and aging category. If the financial condition of the Company’s customers were to deteriorate, thus impairing their ability to make required payments, additional allowances may be required. The Company’s allowance at July 31, 2008 is approximately 1.9% of outstanding accounts receivable compared to approximately 2.0% at July 31, 2007.
Financial instruments - Carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value due to the short-term maturities of these assets and liabilities.
Long-term debt consists primarily of variable rate borrowings under the bank credit agreement. The carrying value of these borrowings approximates fair value.
Financing costs - During the fiscal years ended July 31, 2008, 2007, and 2006, the Company capitalized $0, $3 and $74, respectively of costs incurred in connection with debt financings and amendments. These costs are being amortized over the terms of the respective financings and are included in interest expense. The amounts of amortization and the write-off of previous deferred financing costs were $10 in 2008, $32 in 2007 and $24 in 2006.
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 July 31, 2008 and 2007 amount to $1,172 and $1,381, respectively.
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.
Self-insured claims liability - The Company is primarily self-insured for U.S. workers’ compensation and vehicle liability claims. A liability for unpaid claims and the associated claim expenses, including incurred but unreported losses, are recorded based on the Company’s estimates of the aggregate liability for claims incurred. The Company’s estimates are based on actual experience and historical assumptions of development of unpaid liabilities over time. Factors affecting the determination of amounts to be accrued for claims include, but are not limited to, cost, frequency, or payment patterns resulting from new types of claims, the hazard level of our operations, tort reform or other legislative changes, unfavorable jury decisions, court interpretations, changes in the medical conditions of claimants and economic factors such as inflation. The method of calculating the estimated accrued liability for claims is subject to inherent uncertainty. If actual results are less favorable than what are used to calculate the accrued liability, the Company would have to record expenses in excess of what has already been accrued.
Income taxes - Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the basis of assets and liabilities for financial and income tax reporting. The net deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled.
Stock-based compensation - Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment,” (“SFAS No. 123(R)”) requires the measurement and recording of all share-based payments to employees, including grants of stock options, be determined using a fair-value-based method.
The fair value of each grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2008, 2007, and 2006, respectively: dividend yield of 0% for all years; expected volatility of 43%, 44%, and 51%; risk-free interest rate of 3.9%, 4.6%, and 4.3%, and expected lives of an average of 7.2 years for options granted to employees and of 6.8 years for options granted to non-employee directors for all years. The weighted average grant-date fair value of stock options granted during the years 2008, 2007 and 2006 was $14.80, $11.97 and $8.82, respectively.
As discussed in Note 10 of Notes to the Consolidated Financial Statements, option expense in 2008, 2007 and 2006 amounted to $1,180, $771 and $717, respectively, under the fair value approach. Based on the outstanding and unvested awards as of July 31, 2008, the anticipated effect on net income for fiscal 2009, net of taxes, will be approximately $810.
Net income per share - Basic net income per common share is based on the weighted average number of common shares outstanding during the period. Diluted net income per common share is based on the weighted average common shares outstanding and all potentially dilutive common shares outstanding during the period determined using the treasury stock method. Diluted earnings per share reflect the potential dilution that could occur if outstanding stock options were exercised, that would then share in the earnings of the Company. Outstanding options to purchase 146, 20 and 10 shares of common stock at July 31, 2008, 2007 and 2006, respectively, were not included in the computation of net income per share as their effect would be antidilutive. Outstanding stock options issued by the Company represent the only dilutive effect reflected in diluted weighted average shares.
Foreign currency translation - Assets and liabilities in foreign currencies are translated into U.S. dollars at the rates in effect at the balance sheet date. Revenues and expenses are translated at average rates during the year. The net exchange differences resulting from these translations are recorded in stockholders’ equity. Where amounts denominated in a foreign currency are converted into dollars by remittance or repayment, the realized exchange differences are included in the Consolidated Statement of Operations.
Treasury stock acquired and retired - Treasury stock is recorded at cost. Delaware law permits treasury shares to be retired when appropriately authorized by the Board of Directors, and the Company has retired such shares by appropriate reductions in the value of common stock and additional paid-in capital.
New accounting pronouncements - 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 Company’s 2009 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.
In February 2007, the FASB issued Statement No. 159 (“SFAS 159”), “The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No 115.” This Statement permits an entity to choose to measure many financial instruments and certain other items at fair value. A business entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings. The fair value option (a) may be applied instrument by instrument, (b) is irrevocable, and (c) is applied to entire instruments and not to portions of instruments. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company believes the adoption of SFAS No. 159 will have no material impact on its consolidated financial statements.
In December 2007, the FASB issued Statement No. 141R (“SFAS No. 141R”), “Business Combinations.” This Statement requires most identifiable assets, liabilities, noncontrolling interests, and goodwill acquired in a business combination to be recorded at full fair value. The Statement applies to all business combinations, including combinations among mutual entities and combinations by contract alone. Under SFAS 141R, all business combinations will be accounted for by applying the acquisition method. SFAS 141R is effective for periods beginning on or after December 15, 2008 and will be effective for us beginning in the second quarter of fiscal 2009 for business combinations occurring after the effective date. The Company believes the adoption of SFAS No. 141R will have no material impact on its consolidated financial statements.
Reclassification - Certain reclassifications have been made to conform prior year data to the current presentation.
2.
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 calculation if their effect would be antidilutive to earnings per share.
Intangibles consist of the following:
4.
PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
Depreciation expense included in the accompanying consolidated statements of operations for the years ended July 31, 2008, 2007 and 2006 was $2,745, $2,306 and $1,879, respectively.
5.
ACCRUED LIABILITIES
Accrued liabilities consist of the following:
6.
LONG-TERM DEBT AND OTHER LONG-TERM LIABILITIES
Other long-term liabilities consist of the following:
a) Operating leases
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.
Long-Term Debt
The revolving credit facility was initially established in 2004 and last amended in September 17, 2008..The revolving credit facility line of credit is $40 million, has a maturity date of July 31, 2013 and has no scheduled principal payments. The revolving credit facility is secured by all of the Company’s U.S. assets and 100% of the stock of its domestic subsidiaries. At July 31, 2008, there were $6.1 million letters of credit issues but no outstanding borrowings under the revolving credit agreement The revolving credit facility requires the Company to satisfy certain financial and other covenants. As of July 31, 2008, the Company was in compliance with all financial and other covenants.
7.
COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company leases certain equipment and properties under non-cancelable operating lease agreements, which expire at various dates.
At July 31, 2008, minimum annual lease payments for such operating leases are as follows:
Rent expense related to operating leases amounted to approximately $16,606, $17,855, and $14,350 for the years ended July 31, 2008, 2007 and 2006, respectively.
The Company has entered into an employment agreement with its President and CEO which provides for the payment of a base salary in the annual amount of $525, participation in an executive bonus plan, an auto allowance, and participation in other employee benefit plans. On September 16, 2008 the Company's Board of Directors approved a special compensation award to the Company's President and CEO of $1.5 million in cash. In addition, the Company has entered into retention agreements with certain key executive officers and other employees that provide certain benefits in the event their employment is terminated subsequent to a change in control of the Company, as defined in the retention agreements. The Company believes that it is unlikely that these circumstances will transpire, but if they did the potential exposure could range between $3.7 million and $4.1 million.
CONTINGENCIES
The California Employment Development Department (the “EDD”), in 2005, conducted an employment tax audit of certain of the Company’s 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 was 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 Company subsequently pursued an administrative appeal of the denial of its Refund Claim. The California Unemployment Appeals Board upheld the denial following an evidentiary hearing in May. After weighing the cost, management time, and legal fees involved in an appeal to a California court against the value of the potential recovery, the Company made a business decision not to pursue further appeals. The decision has no legal effect on other audits conducted by the EDD.
The California EDD conducted an employment tax audit of the Company’s 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 million of which the EDD claims represents personal income tax of the reclassified individuals. As in the earlier matter, the Company has collected and submitted documentation which will work to reduce the personal income tax portion of the assessment. The Company has filed a Petition for Reassessment and intends to vigorously contest the assessment.
On April 15, 2005, a putative 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. Plaintiff’s Motion for Class Certification was denied in December 2006, and appealed by Plaintiff. Following the exchange of Briefs, an Appellate Hearing was held in August, 2008. The Appellate Court determined that the Trial Court’s denial of Plaintiff’s earlier Motion to Compel Disclosure of the names and contact information for all members of the putative class prejudiced Plaintiff’s ability to support his Motion for Class Certification. The ruling reversed the Denial of the Motion for Class Certification and remanded the matter for additional discovery and eventual re-hearing of the Motion.
On October 17, 2007, two former independent contractor drivers in New York filed a purported class action / collective action against the Company in the United States District Court in New York alleging that the Company had unlawfully misclassified its drivers in New York and in the United States as independent contractors rather than as employees, and that the Company had unlawfully failed to comply with the “Truth In Truck Leasing” and “Leasing Regulations” under U.S. Transportation Statutes. The Complaint sought relief under the New York Labor and Wage Statutes and the U.S. Fair Labor Standards Act including payment of wages for all hours worked plus overtime, as well as for reimbursement of business expenses and improper deductions made from driver wages and injunctive relief to prevent further violations. The truck leasing claims sought unspecified amounts by which plaintiffs were underpaid and amounts for which the Company had over deducted. Following various written discovery, Plaintiffs voluntarily dismissed the wage claims, With Prejudice, and the transportation law claims, Without Prejudice.
On July 25, 2008, two California independent contractor drivers filed a purported class action suit alleging that the Company’s classification of California drivers as independent contractors was unlawful, and that as a consequence they were denied the benefit of various California wage laws. They further alleged that such misclassification constituted unfair competition under California business statutes. Because the Complaint in large measure contains the same causes of action as the on-going 2005 California case, the Company filed a Special Demurrer and a Motion to Stay further proceedings pending the outcome of the earlier action. A Hearing is scheduled for early November, 2008.
The Company believes that all independent contractor owner-operator drivers are properly classified as independent contractors and intends to vigorously defend these various actions. Given the nature and preliminary status of the existing claims, however, the Company cannot yet determine with certainty the amount of any alleged liability or reasonable range of potential loss in these matters, if any.
The Company is a party to other legal proceedings and claims arising in the ordinary course of its business. Overall, the Company is optimistic and believes that the ultimate liability, if any and resolution of these pending legal proceedings and claims will not, in the aggregate, have a material adverse effect on the financial condition, results of operations, or liquidity of the Company.
8. INCOME TAXES
The United States and Canadian components of income before income taxes are as follows:
The provision for income tax expense consisted of the following:
Differences between financial accounting principles and tax laws cause differences between the bases of certain assets and liabilities for financial reporting purposes and tax purposes. The tax effects of these differences, to the extent they are temporary, are recorded as deferred tax assets and liabilities under Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (“SFAS No. 109”) and consisted of the following components:
The Company establishes valuation allowances in accordance with the provisions of SFAS No. 109. The Company continually reviews the adequacy of its valuation allowances and adjusts the allowances for changes in expected realization.
During the year ended July 31, 2007, the Company repatriated approximately $3.6 million from its Canadian subsidiary. Except for certain applicable state income taxes, the Company was able to offset substantially all the U.S. income tax liability with foreign tax credits. At July 31, 2007 the Company had utilized substantially all of its foreign tax credit carryforwards.
The Company has not provided for U.S. Federal and foreign withholding taxes on the foreign subsidiaries’ undistributed earnings as of July 31, 2008. Such earnings were intended to be reinvested indefinitely. The Company intends to repatriate cash in excess of its operating needs from its Canadian operations in FY 2009. As a result, the U.S. effective income tax rate for FY 2009 is expected to be approximately 45%.
Total income tax expense was $9.7 million, 38.1% of income before taxes in the current fiscal year compared to $8.6 million, 36.4% of income before taxes in fiscal year 2007. Excluding the impact of the one-time benefit from the resolution of prior year cross-border transfer pricing issues as shown in Footnote 13 below, income tax expense in fiscal year 2007 would have been approximately $8.2 million, 36.9% of income before taxes. The higher income rate this year results from the higher proportion of pre-tax income generated in the U.S. than the previous year.
The Company adopted FIN 48 on August 1, 2007. The adoption of the FIN 48 provision did not have a material effect on the Company’s financial position, results of operations or cash flows.
The differences in income tax provided and the amounts determined by applying the statutory rate to income before income taxes result from the following:
9. RESERVE FOR DOUBTFUL ACCOUNTS
The changes in the reserve for doubtful accounts are summarized below:
10. STOCK OPTION PLAN
On September 19, 2007, the Company’s Board of Directors approved the 2008 Equity Compensation Plan (the “Equity Plan”), to replace the 1996 Stock Option Plan and reserved a total of 1,200,000 shares for issuance under the Equity Plan, inclusive of 339,579 shares remaining available for issuance under the Company’s 1996 Stock Option Plan (the “Stock Option Plan”) and being transferred to the new Equity Plan. On January 8, 2008, the Equity Plan was approved by the Company’s shareholders. The Equity Plan provides for the granting of incentive stock options and non-qualified stock options and restricted stock. Awards under the Equity Plan may also take the form of stock appreciation rights or performance units. Subject to certain restrictions that are set forth in the plan, the Compensation Committee will have complete and absolute authority to set the terms, conditions and provisions of each award, including the size of the award, the exercise or base price, the vesting and exercisability schedule (including provisions regarding acceleration of vesting and exercisability) and termination, cancellation and forfeiture provisions. The exercise price of all options granted under the Equity Plan may not be less than the fair market value of the underlying common stock on the date of grant. Generally, the options and restricted stock grants vest and become exercisable ratably over a four-year period, commencing one year after the grant date. The options expire 10 years from the date of grant. Performance units and performance based options vest at the end of the performance period, generally three years.
Effective August 1, 2003, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”) for stock-based employee compensation. During the years ended July 31, 2008, 2007 and 2006, the Company recognized $1,180, $771 and $717 of stock based compensation.
Stock option activity during the year ended July 31, 2008, is as follows:
Nonvested stock option activity during the year ended July 31, 2008, is as follows:
The following table summarizes information about stock options outstanding at July 31, 2008:
At July 31, 2008, the aggregate intrinsic value (i.e., the difference in market price of $28.07 and the exercise price to be paid by the optionee) of stock options outstanding was $4.0 million. The aggregate intrinsic value of exercisable stock options at that date was $2.3 million.
At July 31, 2008, the total future compensation cost related to non-vested stock options not yet recognized in the statement of income was $3.1 million and the weighted average period over which these awards are expected to be recognized was 1.8 years. Of that total, $1,064, $829, $705, $446 and $97 will be recognized in 2009, 2010, 2011, 2012 and 2013, respectively.
The following table summarizes information about options granted, options exercised and options becoming exercisable during the years shown:
11. REPURCHASE OF EQUITY SECURITIES
The Board of Directors has authorized the Company to purchase up to $58 million of Dynamex Inc. common stock on the open market. Through July 31, 2008, the Company had repurchased a total of 1,962 shares at an average price of $20.07 per share for a total dollar cost of $39,368. Delaware law permits treasury shares to be retired when appropriately authorized by the Board of Directors, and the Company has retired such shares by appropriate reductions in the value of common stock and additional paid-in capital. During the year ended July 31, 2008, the Company had repurchased a total of 121 shares at an average price of $24.51 per share for a total dollar cost of $2,966. Subsequent to fiscal year 2008, the Company repurchased 282 shares of Dynamex common stock at an average price of $27.95 per share, leaving a balance of $10,756 in the current authorization. Management intends to continue to purchase shares from time to time using available cash or temporary borrowings from the bank facility.
12. EMPLOYEES’ DEFINED CONTRIBUTION PLAN
The Company sponsors a defined contribution 401K plan (the “Plan”) for the benefit of substantially all of its employees who meet certain eligibility requirements, primarily age and length of service. The Plan allows employees to invest up to 15% of their current gross cash compensation on a pre-tax basis at their option up to a maximum of $15,500. Beginning January 1, 2002, changes in the tax law provided for catch-up contributions which allow participants over 50 years of age to contribute an additional $1 per year, rising $1 per year each year thereafter, until reaching an additional $5 per year in 2006. The Company may make discretionary contributions to the Plan as determined by the Company’s Board of Directors. The Company made 401K matched contributions of $295 and $138 for 2008 and 2007, respectively. The Company did not make any discretionary contributions to the Plan during the year ended July 31, 2006.
13. 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 ($0.09 per
basic and per fully diluted share for the year ended April 30, 2007). Excluding the impact of this transaction, fully diluted earnings per common share for the year ended April 30, 2007, would have been $1.30 as shown in the following table:
Transfer pricing impact on the year ended:
14. GEOGRAPHIC AREA INFORMATION
Dynamex Inc. operates in one reportable business segment, same-day delivery services, with two primary service offerings: (i) same-day on-demand delivery services and (ii) same-day local and regional distribution services including outsourcing services such as fleet management and facilities management. The Company evaluates the performance of its geographic regions, United States and Canada, based upon operating income before unusual and non-recurring items.
The following table summarizes selected financial information for the United States and Canada for the years ended July 31, 2008, 2007 and 2006:
15. QUARTERLY DATA (Unaudited)
Summarized quarterly financial data for 2008 and 2007 is as follows (in thousands except per share amounts and business days):
(1)
Includes net income of $972, $0.09 per basic and fully diluted earnings per share, resulting from resolution of cross-border transfer pricing issues, a foreign currency transaction gain and interest income. See Note 13 of the Notes to Consolidated Financial Statements for additional information.
INDEX TO EXHIBITS
E-1
E-2