Item 1A. RISK FACTORS.
Our future results may be affected by a number of factors over which we have little or no control. The following issues, uncertainties, and risks, among others, should be considered in evaluating our business and outlook. Also, note that additional risks not currently identified or known to us could also negatively impact our business or financial results.
Risks Related to the Merger
Risks related to the merger could materially affect our business, financial condition, results of operations, cash flows, projected results, and future prospects.
Completion of the merger is subject to a number of closing conditions, including obtaining the approval of our shareholders and upon UPT’s ability to obtain debt financing (as defined in the merger agreement). We can provide no assurance that all closing conditions will otherwise be satisfied (or waived, if applicable), and, even if all closing conditions are satisfied (or waived, if applicable), we can provide no assurance as to the terms, conditions and timing of such approvals or the timing of the completion of the merger. Many of the conditions to completion of the merger are not within our control, and we cannot predict when or if these conditions will be satisfied (or waived, if applicable). Any adverse consequence of the pending merger could be exacerbated by any delays in completion of the merger or termination of the merger agreement.
Each party’s obligation to consummate the merger is subject to the accuracy of the representations and warranties of the other party (subject to customary materiality qualifications) and compliance in all material respects with the covenants and agreements contained in the merger agreement as of the closing of the merger, including, with respect to us, covenants to conduct our business in the ordinary course and to not engage in certain kinds of material transactions prior to closing. In addition, the merger agreement may be terminated under certain specified circumstances, including, but not limited to, in connection with a change in the recommendation of our Board to enter into an agreement for a Superior Proposal (as defined in the merger agreement). As a result, we cannot assure you that the merger will be completed, even if our shareholders approve the merger, or that, if completed, it will be
exactly on the terms set forth in the merger agreement or within the expected time frame. In addition, we are subject to the following risks related to the merger:
legal proceedings, judgments or settlements, including those that may be instituted against the Company, the Board, the Company’s executive officers and others following the announcement of the merger;
disruptions of current plans and operations caused by the announcement and pendency of the merger;
disruption of management’s attention from the Company’s ongoing business operations due to the merger;
potential difficulties in employee retention due to the announcement and pendency of the merger;
the response of customers, suppliers and drivers to the announcement and pendency of the merger;
disruptions in the execution of plans, strategies, goals and objectives of management for future operations caused by the merger; and
the price of the Company’s common stock price may decline significantly if the merger is not completed.
The occurrence of any of these events individually or in combination could affect the Company’s business, financial condition, results of operations, cash flows, projected results, and future prospects.
Strategic Risks
Our operations and financial results are subject to the demand for hauling petroleum products in our markets, which is determined by factors outside our control.
We derive approximately 86% of our revenues from the hauling of petroleum products, including gasoline, diesel fuel and ethanol. The demand for these services is determined by motor fuel consumption in our markets, which is affected by gasoline prices, general economic conditions, employment levels, remote work, consumer confidence and spending patterns . Gasoline prices can be highly volatile and are impacted by factors outside of our control (including production decisions made by oil producing nations).
Developments related to climate change, fuel efficiency, vehicle manufacturing and increased acceptance of electric vehicles are expected to reduce demand for petroleum products.
Increasing concern regarding the impacts of climate change resulting from greenhouse gas emissions has resulted in proposed regulations to improve fuel efficiency and legislation such as the Inflation Reduction Act that create incentives for the purchase of electric vehicles, as well as legislative proposals such as carbon taxes and cap and trade programs. Many major automobile manufacturers have plans to increase production of electric vehicles over time. These factors, together with increasing social consciousness about climate change and consumer acceptance of electric vehicles, could reduce demand for petroleum products over time.
Human Capital Risks
Our ability to recruit and retain drivers is critical to our financial results and the ability to grow our business.
Our industry is subject to a shortage of qualified drivers. This shortage is exacerbated during periods of economic expansion, in which attractive employment opportunities, including in the construction and manufacturing industries, may offer better compensation and better hours. We suffer from high turnover. We have implemented driver pay increases to address this shortage in the hopes of reducing turnover, however our efforts to reduce turnover may be unsuccessful.
There is substantial competition for qualified personnel, particularly drivers, in the trucking industry. Supply chain challenges could continue to reduce the number of eligible drivers in our markets. This results in temporary under-utilization of our equipment, difficulty in meeting our customers’ demands and increased compensation levels, each
of which could have a material adverse effect on our business, results of operations and financial condition. A decrease in quality drivers could lead to an increased frequency in the number of accidents, potential claims exposure and, indirectly, insurance costs.
Difficulty in attracting qualified drivers limits our ability to accept or service new business opportunities or could require us to increase the wages we pay in order to attract and retain drivers. If we are unable to hire qualified drivers to service new or existing business, we may have to temporarily send drivers from other terminals to those struggling markets, causing us to incur significant costs relating to out-of-town driver pay and expenses.
If our relationship with our employees were to deteriorate, we may be faced with unionization efforts, labor shortages, disruptions or stoppages, which could adversely affect our business and reduce our operating margins and income.
Our operations rely heavily on our employees, and any labor shortage, disruption or stoppage caused by poor relations with our employees, whether as a result of the pending merger or another reason, could reduce our operating margins and income. None of our employees are subject to collective bargaining agreements, although unions have traditionally been active in the U.S. trucking industry. Our workforce has been subject to union organization efforts from time to time, and we could be subject to future unionization efforts as our operations expand. Unionization of our workforce could result in higher compensation and working condition demands that could increase our operating costs or constrain our operating flexibility. We believe we are exempt from overtime pay rules under regulations of the Department of Transportation (“DOT”). However, our operating costs would increase if this exemption were rescinded or if a court determined that we were not exempt from these overtime pay rules.
If we lose key members of our senior management, our business may be adversely affected.
Our ability to implement our business strategy successfully and to operate profitably depends in large part on the continued employment of our senior management team, led by Robert Sandlin, President and CEO. If Mr. Sandlin or the other members of senior management become unable or unwilling to continue in their present positions, our business or financial results could be adversely affected.
Operational Risks
We may be adversely affected by fluctuations in the price and availability of fuel.
We require large amounts of diesel fuel to operate our tractors. In 2021, 2022 and 2023, cost of fuel (including fuel taxes) represented approximately 11.9%, 15.1%, and 12.6%, respectively, of our total revenue. The market price for fuel can be extremely volatile and can be affected by a number of economic and political factors. In addition, changes in federal or state regulations can impact the price of fuel, as well as increase the amount we pay in fuel taxes.
We typically incorporate a fuel surcharge provision in all customer contracts. The intended effect of that provision is to neutralize the impacts of fluctuations in the price of diesel fuel on both the Company and our customer. The amount of the fuel surcharge is typically set at the beginning of each month and is based on the actual price of diesel fuel recorded in the preceding month. This provision produces a lag in the timing of the recovery of the price move for both the Company and our customer. However, our customers may be able to negotiate contracts that minimize or eliminate our ability to pass on fuel price increases.
We currently do not hedge our fuel purchases to protect against fluctuations in fuel prices.
Our operations may also be adversely affected by any limit on the availability of fuel. Disruptions in the political climate in key oil producing regions in the world, particularly in the event of wars or other armed conflicts, could severely limit the availability of fuel in the United States. In the event our customers face significant difficulty in obtaining fuel, our business, results of operations and financial condition would be materially adversely affected.
We operate in a highly competitive industry, and competitive pressures may adversely affect our operations and profitability.
The tank lines transportation business is extremely competitive and fragmented. We compete with many other carriers of varying sizes as well as our customers’ private fleets. Numerous competitive factors could impair our ability to maintain our current level of revenues and profitability and adversely affect our financial condition. These factors include the following:
we compete with many other fuels delivery service providers, particularly smaller regional competitors, some of which may have more equipment in, or stronger ties to, the geographic regions in which they operate or other competitive advantages;
some of our competitors periodically reduce their prices to gain business, which may limit our ability to maintain or increase prices, implement new pricing strategies or maintain significant growth in our business;
many customers periodically accept bids from multiple carriers, and this process may depress prices or result in the loss of some business to competitors;
many customers are looking to reduce the number of carriers they use, and in some instances we may not be selected to provide services;
consolidation in the fuels delivery industry could create other large carriers with greater financial resources than we have and other competitive advantages relating to their size;
the development of alternative power sources for cars and trucks could reduce demand for gasoline; and
advances in technology require increased investments to maintain competitiveness, and we may not have the financial resources to invest in technology improvements or our customers may not be willing to accept higher prices to cover the cost of these investments.
If we are unable to address these competitive pressures, our operations and profitability may be adversely affected.
Our operations present hazards and risks, which are not fully covered by insurance. If a significant accident happens, for which we are not fully insured, our operations and financial results could be adversely affected.
The primary accident risks associated with our business are:
motor-vehicle related bodily injury and property damage;
workers’ compensation claims;
environmental pollution liability claims;
cargo loss and damage; and
general liability claims.
We currently maintain insurance for:
motor-vehicle related bodily injury and property damage claims;
workers’ compensation insurance coverage on our employees; and
general liability claims.
Our insurance program includes a self-insured deductible of $250,000 per incident for bodily injury and property damage. The deductible on workers’ compensation is $500,000. In addition, the Company maintains a minimum of $10 million of insurance coverage which is the largest amount required by any of our customers. The deductible per incident could adversely affect our profitability, particularly in the event of an increase in the frequency or severity of incidents. Additionally, we are self-insured for damage to the equipment that we own and lease, as well as for cargo losses and such self-insurance is not subject to any maximum limitation. In addition, even where we have insurance, our insurance policies may not provide coverage for certain claims against us or may not be sufficient to cover all possible liabilities.
Our self-insured retentions require us to make estimates of expected loss amounts and accrue such estimates as expenses. Changes in estimates may materially and adversely affect our financial results. In addition, our insurance does not cover claims for punitive damages.
We are subject to changing conditions and pricing in the insurance marketplace that in the future could change dramatically the cost or availability of various types of insurance. To the extent these costs cannot be passed on to our customers in increased prices, increases in insurance costs could reduce our future profitability and cash flow.
Moreover, any accident or incident involving us, even if we are fully insured or not held to be liable, could negatively affect our reputation among customers and the public, thereby making it more difficult for us to compete effectively, and could significantly affect the cost and availability of insurance in the future. Because we provide “last mile” fuels delivery services, we generally perform our services in more crowded areas, which increases the possibility of an accident involving our trucks.
If we fail to develop, integrate or upgrade our information technology systems, we may lose customers or incur costs beyond our expectations.
We rely heavily on information technology and communications systems to operate our business and manage our network in an efficient manner. We have equipped our tractors with various mobile communications systems and electronic logging devices that enable us to monitor our tractors and communicate with our drivers in the field and enable customers to track the location and monitor the progress of their cargo through the Internet.
Increasingly, we compete for customers based upon the flexibility and sophistication of our technologies supporting our services. The failure of hardware or software that supports our information technology systems, the loss of data contained in the systems, or the inability of our customers to access or interact with our website, could significantly disrupt our operations and cause us to lose customers. If our information technology systems are unable to handle additional volume for our operations as our business and scope of service grow, our service levels and operating efficiency will decline. In addition, we expect customers to continue to demand more sophisticated fully integrated information systems. If we fail to hire and retain qualified personnel to implement and maintain our information technology systems or if we fail to upgrade or replace these systems to handle increased volumes, meet the demands of our customers and protect against of our operations, we may customers, which could our business.
Our business could be negatively impacted by cyberattacks targeting our computer and telecommunications systems and infrastructure, or targeting those of our third-party service providers.
Our business, like other companies in our industry, has become increasingly dependent on digital technologies, including technologies that are managed by third-party service providers on whom we rely to help us collect, host or process information. Such technologies are integrated into our business operations. Use of the internet and other public networks for communications, services, and storage, including "cloud" computing, exposes all users (including our business) to cybersecurity risks.
While we and our third-party service providers commit resources to the design, implementation, and monitoring of our information systems, there is no guarantee that our security measures will provide absolute security. Despite these security measures, we may not be able to anticipate, detect, or prevent cyberattacks, particularly because the methodologies used by attackers change frequently or may not be recognized until launched, and because attackers are increasingly using techniques designed to circumvent controls and avoid detection. We and our third-party service providers may therefore be vulnerable to security events that are beyond our control, and we may be the target of cyber-attacks, as well as physical attacks, which could result in information security breaches and significant disruption to our business.
As cyberattacks continue to evolve, we may be required to expend significant additional resources to respond to cyberattacks, to continue to modify or enhance our protective measures, or to investigate and remediate any information.
We operate in a highly regulated industry, and increased costs of compliance with, or liability for violation of, existing or future regulations could significantly increase our costs of doing business.
As a motor carrier, we are subject to regulation by the Federal Motor Carrier Safety Administration (“FMCSA”) and DOT, and by various federal and state agencies. These regulatory authorities exercise broad powers governing various aspects such as operating authority, safety, hours of service, hazardous materials transportation, financial reporting and acquisitions. There are additional regulations specifically relating to the trucking industry, including testing and specification of equipment, product-handling requirements and drug testing of drivers. In 2019, Florida Rock & Tank Lines, Inc. underwent a compliance review by the FMCSA in which we retained our satisfactory DOT safety rating. Any downgrade in our DOT safety rating (as a result of new regulations or otherwise) could adversely affect our business.
The trucking industry is subject to possible regulatory and legislative changes that may affect the economics of the industry by requiring changes in operating practices, emissions or by changing the demand for common or contract carrier services or the cost of providing trucking services. Possible changes include:
increasingly stringent environmental regulations, including changes intended to address climate change;
restrictions, taxes or other controls on emissions;
regulation specific to the energy market and logistics providers to the industry;
changes in the hours-of-service regulations, which govern the amount of time a driver may drive in any specific period;
driver and vehicle electronic logging requirements;
requirements leading to accelerated purchases of new tractors;
mandatory limits on vehicle weight and size;
driver hiring restrictions;
increased bonding or insurance requirements; and
mandatory regulations imposed by the Department of Homeland Security.
From time to time, various legislative proposals are introduced, including proposals to increase federal, state, or local taxes, including taxes on motor fuels and emissions, which may increase our operating costs, require capital expenditures or adversely impact the recruitment of drivers.
Restrictions on emissions or other climate change laws or regulations could also affect our customers that use significant amounts of energy or burn fossil fuels in producing or delivering the products we carry. We also could lose revenue if our customers divert business from us because we have not complied with their sustainability requirements.
Our business may be adversely affected by additional security measures and regulations applicable to the transport of hazardous materials.
Federal, state and municipal authorities have implemented and continue to implement various security measures, including checkpoints and travel restrictions on large trucks and fingerprinting of drivers in connection with new hazardous materials endorsements on their licenses. Such measures may have costs associated with them which we are forced to bear. While we believe we are in compliance with these regulations, if existing requirements are interpreted differently by governmental authorities or additional new security measures are required, the timing of our deliveries may be disrupted and we may fail to meet the needs of our customers or incur increased expenses to do so. Such developments could have a material adverse effect on our operating results. Moreover, large trucks containing petroleum products are potential terrorist targets, and we may be obligated to take measures, including possible capital expenditures intended to protect our trucks. In addition, the insurance premiums charged for some or all of the coverage maintained by us could continue to increase dramatically or such coverage could be unavailable in the future.
Our operations involve hazardous materials and could result in significant environmental liabilities and costs.
Our activities, which involve the transportation, storage and disposal of fuels and other hazardous substances and wastes, are subject to various federal, state and local health and safety laws and regulations relating to the protection of the environment, including, among others, those governing the transportation, management and disposal of hazardous materials, vehicle emissions, underground and above ground storage tanks and the cleanup of contaminated sites. Our operations involve risks of fuel spillage or seepage, hazardous waste disposal and other
activities that are potentially damaging to the environment. If we are involved in a spill or other accident involving hazardous substances, or if we are found to be in violation of or liable under applicable laws or regulations, it could significantly increase our cost of doing business.
Most of our truck terminals are located in industrial areas, where groundwater or other forms of environmental contamination may have occurred. Under environmental laws, we could be held responsible for the costs relating to any contamination at those or other of our past or present facilities and at third-party waste disposal sites, including cleanup costs, fines and penalties and personal injury and property damages. Under some of these laws, such as the Comprehensive Environmental Response Compensation and Liability Act (also known as the Superfund law) and comparable state statutes, liability for the entire cost of the cleanup of contaminated sites can be imposed upon any current or former owner or operator, or upon any party who sent waste to the site, regardless of the lawfulness of any disposal activities or whether a party owned or operated a contaminated property at the time of the release of hazardous substances. From time to time, we have incurred remedial costs and/or regulatory penalties with respect to spills and releases in connection with our operations and, notwithstanding the existence of our environmental management program, such obligations may be incurred in the future. The discovery of contamination or the imposition of additional obligations or liabilities in the future could result in a material effect on our financial condition, results of operations or our business reputation.
Risks Relating to Our Common Stock
Your percentage of ownership in the Company may be diluted in the future.
In the future, your percentage ownership in the Company may be diluted because of equity issuances for acquisitions, capital market transactions or other corporate purposes, including equity awards that we will grant to our directors, officers and employees. Our employees have options to purchase shares of our common stock and we anticipate our compensation committee will grant additional stock options or other stock-based awards to our employees. Such awards will have a dilutive effect on our earnings per share, which could adversely affect the market price of our common stock. From time to time, we will issue additional options or other stock-based awards to our employees under our employee benefits plans.
In addition, our amended and restated articles of incorporation authorizes us to issue, without the approval of our shareholders, one or more classes or series of preferred stock having such designation, powers, preferences and relative, participating, optional and other special rights, including preferences over our common stock respecting dividends and distributions, as our board of directors generally may determine. The terms of one or more classes or series of preferred stock could dilute the voting power or reduce the value of our common stock. For example, we could grant the holders of preferred stock the right to elect some number of our directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences we could assign to holders of preferred stock could affect the residual value of the common stock.
Certain shareholders have effective control of a significant percentage of our common stock and likely will control the outcome of any shareholder vote.
Two of our directors, John D Baker II and Thompson S. Baker II, and their respective family members, beneficially own a significant percentage of our common stock. As a result, these individuals effectively may have the ability to direct the election of all members of our board of directors and to exercise a controlling influence over our business and affairs, including any determinations with respect to mergers or other business combinations involving us, our acquisition or disposition of assets, our borrowing of monies, our issuance of any additional securities, our repurchase of common stock and our payment of dividends. In connection with the pending merger, John D Baker II and Thompson S. Baker II entered into an Irrevocable Proxy and Agreement, pursuant to which, among other things, they have granted an irrevocable proxy to vote the shares of Company common stock owned by such shareholders in favor of the adoption of the merger agreement.
Provisions in our articles of incorporation and bylaws and certain provisions of Florida law could delay or prevent a change in control of us.
The existence of some provisions of our articles of incorporation and bylaws and Florida law could discourage, delay
or prevent a change in control of us that a shareholder may consider favorable. These include provisions:
providing that our directors may be removed by our shareholders only for cause;
establishing supermajority vote requirements for our shareholders to approve certain business combinations;
establishing supermajority vote requirements for our shareholders to amend certain provisions of our articles of incorporation and our bylaws;
authorizing a large number of shares of stock that are not yet issued, which would allow our board of directors to issue shares to persons friendly to current management, thereby protecting the continuity of our management, or which could be used to dilute the stock ownership of persons seeking to obtain control of us;
prohibiting shareholders from calling special meetings of shareholders or taking action by written consent; and
imposing advance notice requirements for nominations of candidates for election to our board of directors at the annual shareholder meetings.
These provisions apply even if a takeover offer may be considered beneficial by some shareholders and could delay or prevent an acquisition that our board of directors determines is not in our and our shareholders’ best interests.
