Pamt Corp: Form 10-Q for the period ended Sep 30, 2023

FORWARD-LOOKING INFORMATION

Certain information included in this Quarterly Report on Form 10-Q constitutes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may relate to expected future financial and operating results, prospects, plans or events, and are thus prospective. Such forward-looking statements are subject to risks, uncertainties and other factors which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Potential risks and uncertainties include, but are not limited to, excess capacity in the trucking industry; surplus inventories; recessionary economic cycles and downturns in customers' business cycles; increases or rapid fluctuations in fuel prices, inflation, interest rates, fuel taxes, tolls, and license and registration fees; potential economic, business or operational disruptions or uncertainties that may result from any future outbreaks of the COVID-19 pandemic or other public health crises; the resale value of the Company's used equipment and the price of new equipment; increases in compensation for and difficulty in attracting and retaining qualified drivers and owner-operators; increases in insurance premiums and deductible amounts relating to accident, cargo, workers' compensation, health, and other claims; increases in the number or amount of claims for which the Company is self-insured; inability of the Company to continue to secure acceptable financing arrangements; seasonal factors such as harsh weather conditions that increase operating costs; competition from trucking, rail, and intermodal competitors including reductions in rates resulting from competitive bidding; the ability to identify acceptable acquisition candidates, consummate acquisitions, and integrate acquired operations; our ability to develop and implement suitable information technology systems and prevent failures in or breaches of such systems; the impact of pending or future litigation; general risks associated with doing business in Mexico, including, without limitation, exchange rate fluctuations, inflation, import duties, tariffs, quotas, political and economic instability and terrorism; the potential impact of new laws, regulations or policy, including, without limitation, tariffs, import/export, trade and immigration regulations or policies; a significant reduction in or termination of the Company's trucking service by a key customer; and other factors, including risk factors, included from time to time in filings made by the Company with the Securities and Exchange Commission. The Company undertakes no obligation to publicly update or revise forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks and uncertainties, the forward-looking events and circumstances discussed above and in company filings might not transpire.

CRITICAL ACCOUNTING ESTIMATES

There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our Form 10-K for the fiscal year ended December 31, 2022.

BUSINESS OVERVIEW

The Company is a holding company that owns subsidiaries engaged in providing truckload dry van carrier services transporting general commodities throughout the continental United States, as well as in the Canadian provinces of Ontario and Quebec. The Company’s consolidated operating subsidiaries also provide transportation services in Mexico through its gateways in Laredo and El Paso, Texas under agreements with Mexican carriers. Unless the context otherwise requires, this report presents information regarding the Company and its subsidiaries on a consolidated basis. The Company’s administrative headquarters are in Tontitown, Arkansas. From this location we manage operations conducted through our wholly-owned subsidiaries based in various locations around the United States and in Mexico and Canada. The operations of these subsidiaries can generally be classified into either truckload services or brokerage and logistics services. This designation is based primarily on the ownership of the asset that performed the freight transportation service. Truckload services are performed by Company divisions that generally utilize Company-owned trucks, long-term contractors, or single-trip contractors to transport loads of freight for customers, while brokerage and logistics services coordinate or facilitate the transport of loads of freight for customers and generally involve the utilization of single-trip contractors. Both our truckload operations and our brokerage and logistics operations have similar economic characteristics and are impacted by virtually the same economic factors as discussed elsewhere in this report.

For both operations, substantially all of our revenue is generated by transporting freight for customers and is predominantly affected by the rates per mile received from our customers, equipment utilization, and our percentage of non-compensated miles. These aspects of our business are carefully managed, and efforts are continuously underway to achieve favorable results. Truckload services revenues, excluding fuel surcharges, represented 64.4% and 67.0% of total revenues, excluding fuel surcharges, for the quarters ended September 30, 2023, and 2022, respectively. The remaining revenues, excluding fuel surcharges, were generated from brokerage and logistics services.

The main factors that impact our profitability on the expense side are costs incurred in transporting freight for our customers. Currently, our most challenging costs include fuel, driver recruitment, training, wage and benefits costs, independent broker costs (which we record as purchased transportation), insurance, maintenance and capital equipment costs.

In discussing our results of operations, we use revenue before fuel surcharge (and fuel expense, net of fuel surcharge), because management believes that eliminating the impact of this sometimes-volatile source of revenue allows a more consistent basis for comparing our results of operations from period to period. During the three months ended September 30, 2023 and 2022, approximately $27.2 million and $36.2 million, respectively, of the Company’s total revenue was generated from fuel surcharges. During the nine months ended September 30, 2023 and 2022, approximately $80.8 million and $93.9 million, respectively, of the Company’s total revenue was generated from fuel surcharges. We may also discuss certain changes in our expenses as a percentage of revenue, before fuel surcharge, rather than absolute dollar changes. We do this because we believe the variable cost nature of certain expenses makes a comparison of changes in expenses as a percentage of revenue more meaningful than absolute dollar changes.

On June 14, 2022, newly formed subsidiaries of the Company completed the acquisition of substantially all the assets and certain liabilities of Metropolitan Trucking, Inc. and related entities (“Metropolitan”). Metropolitan was a 320-truck dry van truckload carrier, with the East Coast serving as its primary operating territory. The purchase price paid at closing included approximately $15.5 million in assumed debt and $64.3 million paid using available cash balances. The Company is currently operating these assets through its newly formed subsidiary, Met Express, Inc. See Note O to the condensed consolidated financial statements for more information regarding this acquisition.

RESULTS OF OPERATIONS – TRUCKLOAD SERVICES

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

THREE MONTHS ENDED SEPTEMBER 30, 2023 VS. THREE MONTHS ENDED SEPTEMBER 30, 2022

During the third quarter of 2023, truckload services revenue, before fuel surcharges, decreased 22.6% to $112.3 million as compared to $145.0 million during the third quarter of 2022. The decrease in revenue was primarily the result of a market driven decrease in the average rate per mile charged to our customers during the third quarter of 2023 compared to third quarter 2022. Also contributing to the revenue reduction was a 150 truck decrease in the average number of trucks operated by the Company during the third quarter 2023 compared to the third quarter 2022 as the company aligned fleet size to decreased demand from customers. To a lesser extent, revenue was negatively impacted by the United Auto Workers strike that began in mid-September of 2023 against a group of our automotive customers.

Salaries, wages and benefits increased from 32.8% of revenues, before fuel surcharges, in the third quarter of 2022 to 38.2% of revenues, before fuel surcharges, during the third quarter of 2023. This percentage-based increase is primarily a result of a decrease in the average rate per mile charged to our customers, coupled with an increase in proportion of total miles driven by drivers employed by the Company, as opposed to transportation purchased from third parties, in the third quarter of 2023 compared to the third quarter of 2022, as well as the result of the interaction of expenses with fixed-cost characteristics, such as general and administrative wages, maintenance wages, and operations wages with a decrease in revenues for the periods compared.

Operating supplies and expenses increased from 8.1% of revenues, before fuel surcharges, during the third quarter of 2022 to 13.3% of revenues, before fuel surcharges, during the third quarter of 2023. The increase relates primarily to an increase in the average surcharge-adjusted fuel price paid per gallon of diesel fuel, which was a result of decreased fuel surcharge collections from customers. Fuel surcharge collections can fluctuate significantly from period to period as they are generally based on changes in fuel prices from period to period so that, during periods of rising fuel prices, fuel surcharge collections increase, while fuel surcharge collections decrease during periods of falling fuel prices. Fuel surcharge revenue generated from transportation services performed by owner-operators is reflected as a reduction in net operating supplies and expenses, while fuel surcharges paid to owner-operators for their services is reported along with their base rate of pay in the rent and purchased transportation category. These categorizations have the effect of increasing our net operating supplies and expenses while decreasing the rent and purchased transportation category.

Rent and purchased transportation decreased from 25.2% of revenues, before fuel surcharges, during the third quarter of 2022 to 22.6% of revenues, before fuel surcharges, during the third quarter of 2023. The decrease was primarily due to a decrease in the rates charged by third-party carriers during the third quarter of 2023 compared to the third quarter of 2022. Also contributing to the decrease was a decrease in the average number of owner-operators under contract during the third quarter of 2023, compared to the third quarter of 2022, as well as a decrease in the average rate per mile, including fuel surcharges, paid to owner-operators during the respective periods.

Depreciation increased from 11.0% of revenues, before fuel surcharges, during the third quarter of 2022 to 13.6% of revenues, before fuel surcharges, during the third quarter of 2023. This percentage-based increase is primarily a result of the interaction of a decrease in operating revenues with the fixed-cost nature of depreciation expense. Due to the fixed-cost nature of depreciation, a decrease in operating revenues, before fuel surcharge, without a corresponding proportional decrease in depreciation, increases depreciation expense as a percentage of operating revenues.

The truckload services division operating ratio, which measures the ratio of operating expenses, net of fuel surcharges, to operating revenues, before fuel surcharges, increased from 82.6% for the third quarter of 2022 to 95.8% for the third quarter of 2023.

Non-operating income (expense) improved from a loss of 0.9% of revenues, before fuel surcharges, during the third quarter of 2022 to income of 1.0% of revenues, before fuel surcharges, during the third quarter of 2023. This increase primarily resulted from the change in the market values of our portfolio of marketable equity securities. The Company recorded a $0.1 million increase in the market value of our marketable equity securities in non-operating income (expense) during the third quarter of 2023, compared to a $2.4 million decrease in the market value of our marketable equity securities during the third quarter of 2022.

NINE MONTHS ENDED SEPTEMBER 30, 2023 VS. NINE MONTHS ENDED SEPTEMBER 30, 2022

For the nine months ended September 30, 2023, truckload services revenue, before fuel surcharges, decreased 11.6% to $357.7 million as compared to $404.7 million for the nine months ended September 30, 2022. The decrease in revenue was primarily the result of a decrease in the average rate per mile charged to our customers during the first nine months of 2023 compared to the first nine months of 2022. The decrease in revenue during the first nine months of 2023, as compared to the first nine months of 2022, was intensified by the United Auto Workers strike that began in September of 2023. To a lesser extent, revenue was negatively impacted by the United Auto Workers strike that began in mid-September of 2023 against a group of our automotive customers.

Salaries, wages and benefits increased from 30.5% of revenues, before fuel surcharges, in the first nine months of 2022 to 37.2% of revenues, before fuel surcharges, during the first nine months of 2023. This percentage-based increase is primarily a result of a decrease in the average rate per mile charged to our customers, coupled with an increase in total miles and related driver pay in the first nine months of 2023 compared to the first nine months of 2022, as well as the result of the interaction of expenses with fixed-cost characteristics, such as general and administrative wages, maintenance wages, and operations wages with a decrease in revenues for the periods compared.

Operating supplies and expenses increased from 7.1% of revenues, before fuel surcharges, during the first nine months of 2022 to 11.7% of revenues, before fuel surcharges, during the first nine months of 2023. The percentage-based increase relates primarily to an increase in the average surcharge-adjusted fuel price paid per gallon of diesel fuel, which increased as a result of decreased fuel surcharge collections from customers. Fuel surcharge collections can fluctuate significantly from period to period as they are generally based on changes in fuel prices from period to period so that, during periods of rising fuel prices, fuel surcharge collections increase, while fuel surcharge collections decrease during periods of falling fuel prices. Fuel surcharge revenue generated from transportation services performed by owner-operators is reflected as a reduction in net operating supplies and expenses, while fuel surcharges paid to owner-operators for their services is reported along with their base rate of pay in the rent and purchased transportation category. These categorizations have the effect of increasing our net operating supplies and expenses while decreasing the rent and purchased transportation category.

Rent and purchased transportation decreased from 25.7% of revenues, before fuel surcharges, during the first nine months of 2022 to 23.0% of revenues, before fuel surcharges, during the first nine months of 2023. The decrease was primarily due to a decrease in the rates charged by third-party carriers during the first nine months of 2023 compared to the first nine months of 2022. Also contributing to the decrease was a decrease in the average number of owner-operators under contract during the first nine months of 2023, compared to the first nine months of 2022, as well as a decrease in the average rate per mile, including fuel surcharges, paid to owner-operators during the respective periods.

Depreciation increased from 11.2% of revenues, before fuel surcharges, during the first nine months of 2022 to 13.1% of revenues, before fuel surcharges, during the first nine months of 2023. This percentage-based increase is primarily a result of the interaction of a decrease in operating revenues with the fixed-cost nature of depreciation expense. Due to the fixed-cost nature of depreciation, a decrease in operating revenues, before fuel surcharge, without a corresponding proportional decrease in depreciation, increases depreciation expense as a percentage of operating revenues.

Insurance and claims expense increased from 4.8% of revenues, before fuel surcharges, during the first nine months of 2022 to 7.0% of revenues before fuel surcharges, during the first nine months of 2023. This increase relates primarily to an increase in accident reserves recognized in the first quarter of 2023. During the quarter ended March 31, 2023, the Company recorded a $10.0 million liability for claims expected to settle in excess of insurance limits, specific to an accident in February 2022.

The truckload services division operating ratio, which measures the ratio of operating expenses, net of fuel surcharges, to operating revenues, before fuel surcharges, increased from 81.3% for the first nine months of 2022 to 96.0% for the first nine months of 2023.

RESULTS OF OPERATIONS – LOGISTICS AND BROKERAGE SERVICES

The following table sets forth, for logistics and brokerage services, the percentage relationship of expense items to operating revenues, before fuel surcharges, for the periods indicated. Brokerage service operations occur specifically in certain divisions; however, brokerage operations occur throughout the Company in similar operations having substantially similar economic characteristics.

THREE MONTHS ENDED SEPTEMBER 30, 2023 VS. THREE MONTHS ENDED SEPTEMBER 30, 2022

During the third quarter of 2023, logistics and brokerage services revenue, before fuel surcharges, decreased 13.2% to $62.1 million as compared to $71.5 million during the third quarter of 2022. The decrease relates to a decrease in the average rates charged to customers, offset by an increase in the number of loads serviced during the third quarter of 2023 as compared to the third quarter of 2022.

Rents and purchased transportation increased from 80.4% of revenues, before fuel surcharges, during the third quarter of 2022 to 86.8% of revenues, before fuel surcharges, during the third quarter of 2023. The increase resulted from paying third-party carriers a larger percentage of customer revenue.

The logistics and brokerage services division operating ratio, which measures the ratio of operating expenses, net of fuel surcharges, to operating revenues, before fuel surcharges, increased from 85.7% for the third quarter of 2022 to 93.3% for the third quarter of 2023.

NINE MONTHS ENDED SEPTEMBER 30, 2023 VS. NINE MONTHS ENDED SEPTEMBER 30, 2022

During the first nine months of 2023, logistics and brokerage services revenue, before fuel surcharges, decreased 8.8% to $192.2 million as compared to $210.6 million during the first nine months of 2022. The decrease relates to a decrease in the average rates charged to customers, offset by an increase in the number of loads serviced during the first nine months of 2023 as compared to the first nine months of 2022.

Rents and purchased transportation increased from 81.5% of revenues, before fuel surcharges, during the first nine months of 2022 to 85.1% of revenues, before fuel surcharges, during the first nine months of 2023. The increase resulted from paying third-party carriers a larger percentage of customer revenue.

The logistics and brokerage services division operating ratio, which measures the ratio of operating expenses, net of fuel surcharges, to operating revenues, before fuel surcharges, increased from 86.9% for the first nine months of 2022 to 91.2% for the first nine months of 2023.

RESULTS OF OPERATIONS – COMBINED SERVICES

THREE MONTHS ENDED SEPTEMBER 30, 2023 VS. THREE MONTHS ENDED SEPTEMBER 30, 2022

Net income for all divisions was approximately $6.1 million, or 3.5% of revenues, before fuel surcharges for the third quarter of 2023 as compared to net income of $24.6 million, or 11.3% of revenues, before fuel surcharges for the third quarter of 2022. The decrease in net income resulted in diluted earnings per share of $0.28 for the third quarter of 2023 as compared to diluted earnings per share of $1.09 for the third quarter of 2022.

NINE MONTHS ENDED SEPTEMBER 30, 2023 VS. NINE MONTHS ENDED SEPTEMBER 30, 2022

Net income for all divisions was approximately $20.6 million, or 3.8% of revenues, before fuel surcharges for the first nine months of 2023 as compared to net income of $72.7 million, or 11.8% of revenues, before fuel surcharges for the first nine months of 2022. The decrease in net income resulted in a diluted earnings per share of $0.93 for the first nine months of 2023 as compared to diluted earnings per share of $3.24 for the first nine months of 2022.

LIQUIDITY AND CAPITAL RESOURCES

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

During the first nine months of 2023, we generated $93.8 million in cash from operating activities. Investing activities used $10.9 million in cash in the first nine months of 2023. Financing activities used $54.7 million in cash in the first nine months of 2023.

Our primary use of funds is for the purchase of revenue equipment. We typically use installment notes with fixed interest rates and terms ranging from 36 to 84 months, our existing line of credit on an interim basis, proceeds from the sale or trade of equipment, and cash flows from operations to finance capital expenditures and repay long-term debt. During the first nine months of 2023, we utilized cash on hand, installment notes, and our line of credit to finance purchases of revenue equipment and other assets of approximately $26.8 million.

During the remainder of 2023, we expect to purchase approximately 330 trucks and 1,130 trailers while continuing to sell or trade older equipment, which we expect to result in net capital expenditures of approximately $90.8 million.

We currently intend to retain our future earnings to finance our growth and do not anticipate paying cash dividends in the foreseeable future.

During the first nine months of 2023, we maintained a revolving line of credit. Amounts outstanding under the line bear interest at Term SOFR plus 1.35% (6.65% at September 30, 2023), are secured by our trade accounts receivable and mature on July 1, 2024. An “unused fee” of 0.25% is charged if average borrowings are less than $18.0 million. At September 30, 2023 borrowings against the line of credit were $0, but there were letters of credit of approximately $0.4 million which reduced the availability to borrow against the line of credit to $59.6 million.

Trade accounts receivable decreased from $134.7 million at December 31, 2022 to $96.5 million at September 30, 2023. The decrease resulted from a decrease in freight revenues, which flow through accounts receivable, during the third quarter of 2023 as compared to the fourth quarter of 2022.

Prepaid expenses and deposits decreased from $15.7 million at December 31, 2022 to $10.9 million at September 30, 2023. The decrease relates to the normal amortization of items prepaid as of December 31, 2022.

Revenue equipment decreased from $637.5 million at December 31, 2022 to $634.2 million at September 30, 2023. The decrease is primarily due to the disposition of aging trucks and trailers during the first nine months of 2023.

Accounts payable increased from $48.9 million at December 31, 2022 to $57.7 million at September 30, 2023. This increase was primarily attributable to accruals for fixed asset purchases during the first nine months of 2023.

Accrued expenses and other liabilities decreased from $34.2 million at December 31, 2022 to $22.1 million at September 30, 2023. The decrease is primarily due to the payment of claims reserves that were accrued at December 31, 2022.

Long-term debt and current maturities of long term-debt are reviewed on an aggregate basis, as the classification of amounts in each category are typically affected merely by the passage of time. Long-term debt and current maturities of long-term debt, on an aggregate basis, decreased from $264.3 million at December 31, 2022 to $227.6 million at September 30, 2023. The decrease was primarily related to a decrease in the financing of additional revenue equipment during the first nine months of 2023.

NEW ACCOUNTING PRONOUNCEMENTS

See Note B to the condensed consolidated financial statements for a description of the most recent accounting pronouncements and their impact, if any, on the Company.

Our primary market risk exposures include equity price risk, interest rate risk, commodity price risk (the price paid to obtain diesel fuel for our trucks), and foreign currency exchange rate risk. The potential adverse impacts of these risks are discussed below. While the Company has used derivative financial instruments in the past to manage its interest rate and commodity price risks, the Company does not currently enter into such instruments for risk management purposes or for speculation or trading.

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

Equity Price Risk

We hold certain actively traded marketable equity securities, which subjects the Company to fluctuations in the fair market value of its investment portfolio based on the current market price of such securities. The recorded value of marketable equity securities decreased to $41.3 million at September 30, 2023 from $41.7 million at December 31, 2022. A 10% decrease in the market price of our marketable equity securities would cause a corresponding 10% decrease in the carrying amounts of these securities, or approximately $4.1 million. For additional information with respect to marketable equity securities, see Note D to our condensed consolidated financial statements.

Interest Rate Risk

Our line of credit bears interest at a floating rate equal to SOFR plus a fixed percentage. Accordingly, changes in SOFR, which are affected by changes in interest rates, or a change to a new index rate, will affect the interest rate on, and therefore our costs under, the line of credit. Assuming $1.0 million of variable rate debt was outstanding under our line of credit for a full fiscal year, a hypothetical 100 basis point increase in SOFR would result in approximately $10,000 of additional interest expense.

Commodity Price Risk

Prices and availability of all petroleum products are subject to political, economic, and market factors that are generally outside of our control. Accordingly, the price and availability of diesel fuel, as well as other petroleum products, can be unpredictable. Because our operations are dependent upon diesel fuel, significant increases in diesel fuel costs could materially and adversely affect our results of operations and financial condition. Based upon our 2022 fuel consumption, a 10% increase in the average annual price per gallon of diesel fuel would increase our annual fuel expenses by $9.7 million.

Foreign Currency Exchange Rate Risk

We are exposed to foreign currency exchange rate risk related to the activities of our branch office located in Mexico. Currently, we do not hedge our exchange rate exposure through any currency forward contracts, currency options, or currency swaps as all of our revenues, and substantially all of our expenses and capital expenditures, are transacted in U.S. dollars. However, certain operating expenditures and capital purchases related to our Mexico branch office are incurred in or exposed to fluctuations in the exchange rate between the U.S. dollar and the Mexican peso. Based on 2022 expenditures denominated in pesos, a 10% increase in the exchange rate would increase our annual operating expenses by $0.6 million.

Evaluation of disclosure controls and procedures. Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Based on management’s evaluation, our chief executive officer and chief financial officer concluded that, as of September 30, 2023, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in internal controls over financial reporting. We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes.

There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

There have been no material changes to the Company’s risk factors as previously disclosed in Item 1A to Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, except as set forth below.

Risks Related to Our Business

A significant labor dispute that involves one of our customers, or that could otherwise affect our operations, could reduce our revenues and harm our profitability.

A substantial number of our largest customers are members of industrial trade unions, and they are employed under the terms of collective bargaining agreements. The United Auto Workers started a trilateral strike against Ford, General Motors, and Stellantis on September 15, 2023. The UAW has initially employed a new strategy of targeted strikes at select plants, which could have unintended ripple effects on other customer plants and workers. If the UAW expands the scope of the strikes, our revenue and profitability could be negatively impacted. If the UAW and our automotive customers are unable to negotiate new contracts and the customer plants continue to experience slowdowns or closures, our revenue and profitability could be negatively impacted. A labor dispute involving another supplier to our customers that results in a slowdown or closure of our customers’ plants where we provide services could also have a material adverse effect on our business.

Risks Related to Our Common Stock

Our public shareholders may have limited influence over our significant corporate actions.

Matthew T. Moroun, the Chairman of our Board of Directors, is the trustee of family trusts that collectively own greater than 50% of our outstanding common stock. In this capacity, Mr. Moroun holds investment power over the shares of our common stock held by the family trusts. Frederick P. Calderone, a member of our Board of Directors, is the special trustee of certain of these family trusts, and in that capacity, he exercises voting power over the shares held by such trusts, while Mr. Moroun exercises voting power over the shares held by the other family trust of which he is trustee. The special trustee serves at the discretion of the trustee of the trusts, and members of the Moroun family are the beneficiaries of the family trusts. Messrs. Moroun and Calderone have entered into a voting agreement under which Mr. Moroun agreed to vote the shares of our common stock over which he exercises voting power in accordance with and in the same manner as Mr. Calderone votes the shares of our common stock held by the family trusts over which the special trustee exercises voting power. Therefore, votes cast on behalf of the family trusts control any action requiring the general approval of our shareholders, including the election of our board of directors, the adoption of amendments to our certificate of incorporation and bylaws, and the approval of any merger or sale of substantially all of our assets. This concentration of ownership could also limit the price that some investors might be willing to pay for shares of our common stock.

The interests of our controlling shareholders may conflict with those of the Company and our other shareholders.

The interests of the Moroun family trusts could conflict with the interests of the Company or our other shareholders. For example, the concentration of ownership in the trusts could delay, defer, or prevent a change of control of the Company that may otherwise be favorable to the Company and our other shareholders. The votes cast on behalf of the family trusts could also result in our entry into transactions or agreements that our other shareholders do not approve. Our controlling shareholders might also refrain from voting in favor of a transaction that would result in our other shareholders receiving consideration for our common stock that is much higher than its then-current market price. Any such decisions that may be made in the future by our controlling shareholders will be in their absolute discretion, subject to applicable laws and fiduciary duties.

Because we are a “controlled company” under NASDAQ rules, we are not subject to certain corporate governance standards that apply to other publicly traded companies.

The NASDAQ rules state that a controlled company is one in which more than 50% of the voting power is held by another person or group of persons acting together. A controlled company may elect not to comply with certain corporate governance requirements, including:

• a majority of the board of directors consist of independent directors;
• a nominating and corporate governance committee composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and
• the compensation committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities.

We are a controlled company under these rules, and these requirements will not apply to us as long as we retain that status. Accordingly, you may not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of NASDAQ.