OTR Express, Inc.

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OTR Express, Inc.

804 North Meadowbrook Drive
P.O. Box 2819
Olathe, Kansas 66063-0819
U.S.A.
(913) 829-1616
Fax: (913) 829-0622
Web site: http://www.otrx.com

Public Company
Incorporated: 1985
Employees: 651
Sales: $63.8 million (1997)
Stock Exchanges: NASDAQ
Ticker Symbol: OTRX
SICs: 4213 Trucking, Except Local

OTR Express, Inc. (OTR) is a long-haul, dry-van truckload carrier which operates in the 48 continental states and generates operating margins which rank the company in the top 10 percent of all U.S. trucking companies for operating profitability. The company owns and operates more than 520 tractors and 765 trailers, which ship commodities including furniture, hardware, food products, paper products and various retail goods throughout the United States. Customers include Michaels Stores, Anheuser-Busch, Rheem Manufacturing, and J.C. Penney.

1985 Beginnings With One Truck

Beginning with a single truck, OTR Express was founded in 1985 by William P. Ward, along with co-founders Richard Walpole and Ward’s wife, Kathy Ward. Prior to OTR’s inception, Ward had earned his Bachelor of Science Degree in geological engineering from the University of Kansas in 1961, and a Masters of Business Administration Degree in 1963. From 1964–1966, he was an operations research analyst for Hallmark Cards, before leaving to work as an executive vice-president at the Paul Hamilton company—selling and syndicating commercial real estate—until 1973.

Following that period, Ward became chairman and president of ACA Corporation, a real estate management and syndication firm he founded in 1973 for office, multi-family and farm leasing investments. In collaboration with Richard Walpole, the two developed, sold and managed over 35 limited partnerships between the years 1973 to 1985.

By the early 1980s, the languishing real estate market surrounding Kansas City prompted Ward and his wife (a former schoolteacher), along with Walpole, to use the earnings accumulated while at ACA to supply start-up capital for the formation of OTR. The partners decided to apply the same investment concept to their trucking company that had worked for them in the real estate business, feeling that they could just as easily have partners buy shares in an individual truck as in an apartment building. Within a year, however, OTR management decided that operating their own freight line rather than leasing trucks to other carriers was a better way to go, as it would give them greater control over the performance of the drivers (equipment managers) and their vehicles.

Expansion of Assets in the Late 1980s

With little knowledge of the trucking industry, OTR’s management team came into the business without a preconceived idea of how to run it most profitably. The company’s unusual strategy initially targeted the long-haul, low-volume segment of the truckload market in the belief that optimization of available freight rates and trip lengths—coupled with minimization of fixed-cost per road unit—would produce higher operating margins than were considered typical in the industry. The requirements necessary for the success of this strategy included the availability of a large, geographically diverse customer base, along with frequent updates to and reprioritizations of the customers database.

Ward combined his high-tech data processing expertise with the relatively low-tech trucking business in order to compete with efficiencies of scale offered by competitors. His level of technological sophistication was relatively new to the freight industry, and so when Ward instituted the OTR system—using elaborate proprietary software that he and two OTR programmers had developed—it gave OTR an edge. The company now had increased operating flexibility. Its system could function with as much computing power as the mainframe computers utilized by other companies, but at one-tenth the cost. The new OTR software charted, tracked, and measured various facets of the company’s operation, including fuel consumption and comparative automotive-parts costs. Most importantly, the computer could now position and deploy the company’s fleet and freight in the most efficient way possible, saving valuable time and money.

Despite the capital-intensive nature of the trucking business, by November of 1991 OTR had acquired and begun operating a fleet of 150 tractors and 165 trailers (each rig, consisting of both tractor and trailer, costs around $100,000). With 205 employees on the payroll, and operating revenues of $12.3 million, the following year the company made their Initial Public Offering (IPO) of 1.1 million shares of common stock, raising $5 million. Proceeds were used to reduce debt that had accumulated due to the capital expansion, and also to further expand working capital in order to acquire additional equipment and to establish remote fuel facilities.

A Shift in Strategy in the Early 1990s

In 1992, OTR’s trucks consumed more than $3.3 million worth of diesel fuel, accounting for about 15 percent of revenues. To economize, the company built five unmanned fuel depots, each costing around $80,000 and served directly by pipelines. The depots were strategically located in various regions across the country so that drivers could go from coast to coast without having to purchase retail fuel. Drivers used special access cards and paid wholesale prices instead of retail prices, saving as much as 15 cents per gallon. Each of the depots paid for itself within two years of installment, in the form of savings on the cost of fuel.

In 1992, Ward hired Gary Klusman as chief financial officer to help develop a strategy that would redirect the company. By that time, the trucking industry was experiencing problems related to excess capacity, causing freight rates to plummet. Competition was intense, with 40,000 trucking companies operating in the United States. Many companies were failing—as many as 10 percent of the total—and OTR executives worried that being a “spot” carrier that offered efficient and cheap service to freight brokers would no longer sustain them.

Klusman determined that the company needed more intensive management, and that OTR was growing too large to continue as a spot carrier—they owned too many trucks in proportion to the amount of available freight. Klusman steered the company toward becoming a “core” carrier that sought national accounts where they dealt directly with companies, rather than operating through brokers. That meant that OTR could command higher rates, but would need to offer greater services. At that point, the company added a $1.6 million satellite communications systems to each of its trucks. Prior to the system’s installation, drivers had to contact headquarters from pay phones, and the company could not easily contact drivers concerning freight re-routing decisions. Another change brought about by the restructuring was the fact that OTR decided to create a customer service department, and hired sixteen employees to handle customer service calls.

OTR altered its fleet in order to provide better service to customers. Trailer dimensions were lengthened to 53 feet, rather than the 48 foot-length of the previous fleet. The company was equipped with 1.2 trailers for every tractor so that they could use “drop trailers” which could remain situated on a customers’ lot for convenient loading. This made the company more responsive to the timing of their customers’ production and distribution needs.

In 1992, OTR’s trucks ran empty 6.05 percent of the total miles they traveled, compared to the industry average of 10 percent, which gave OTR a revenue-producing advantage. Also, at an average freight rate of $1 per mile, the company gained a 4-cent edge over the average competitor, allowing them to quote lower rates to customers. The company’s average haul was 1,451 miles long, versus an industry average of 700. Despite the higher rates paid for shorter hauls, OTR management believed that the less-frequent loadings and unloadings, and decreased paperwork, were among the time/cost savings advantages that made up for the lower long-haul rates.

Technology-Driven Business in the Mid-1990s

Ward’s technology-driven business stemmed from his belief that the trucking industry experienced daily shifts and turbulence. Factors such as a storm affecting crops on the west coast, for example, could hamper the normal movement of produce; similarly, a midwestern auto strike might eliminate a season of auto shipments across country. Unexpected bad weather might make truck travel impossible for days or weeks—or, possibly create the need for shipping emergency supplies into an area, as was the case when Hurricane Andrew hit Florida.

Company Perspectives:

Our company excels in the areas of technology and customer service. We have the ability and intent to take advantage of our strengths in both of these areas. OTR has always been a cost-conscious company, maintaining a low cost per mile due to our experienced fleet of drivers, dedicated staff and high level of computer automation. We have significant potential to increase our revenue rates by adding new transportation service, modifying our customer data base and optimizing profitability on loads offered to us by customers.

In designing his computer software, Ward decided not only concentrate on where each truck was headed, as all the carriers tended to do, but also on where that truck’s next move should be, since daily fluctuations affected efficient routing. Additionally, his system scanned and evaluated which customers had paid the highest rates, and then ranked which of the possible loads are most desirable to accommodate. OTR’s Dispatch Department came to consist of a room full of “load planners,” who received hourly updates on their video terminals, showing where all their trucks were and when they were due to arrive at their next destination. The planners’ job was to find a new and profitable load for each of those soon-to-be-empty trucks.

The company placed an emphasis on the quality of drivers it hired. The average age of an OTR driver was 43, with 14 years of experience. The company did not hire anyone under the age of 25, or anyone who had a traffic accident within the previous two years—measures which management believed accounted for their lower accident rates and corresponding lower insurance premiums. OTR also offered an incentive-based program, which attracted quality drivers to the company’s policy of providing exceptional equipment and maintaining it well. The company’s Driver Incentive Management System rewarded their equipment managers with mileage pay based on fuel efficiency—which is effected by running equipment at efficient speeds, the reduction of out of route miles, idling less, and maintaining equipment in peak operating condition.

Despite the technological advancements and measures taken to increase customer and employee satisfaction, 1995 was a year of disappointment for OTR. The trucking industry experienced a severe slump in the freight market, and OTR reported a net loss of $ 157,000 for the year, compared to a net income of $ 1,278,000 in 1994. Thus, the company was encouraged to modify its marketing approach again in 1996, following a challenging year. The marketing department grew to three times its former size, and implemented a strategy that would market their services to larger national accounts. In order to attract new business, the company guaranteed equipment availability and set rates. It acquired additional drop trailers, and expanded its brokerage department, which was responsible for finding carriers for loads that OTR could not accommodate efficiently. The company also started providing warehouse solutions for customers.

The End of the Century and Beyond

By 1997 the company had returned to profitability, with especially strong third and fourth quarter results. OTR grew to include several new, large, national account customers—and they continued to improve in areas of customer service and improved technological systems. Credited with developing and implementing the restructuring plan, Gary Klusman was promoted to president and chief executive officer. Commenting on Klusman’s promotion, Ward stated in a press release that “Since joining the company, Gary has led many strategic initiatives that have resulted in substantial operating improvements. I am confident that Gary will successfully lead the implementation of our plans to become a more dynamic transportation services company. This change will provide the framework to take advantage of capital formation opportunities as well as acquisition opportunities.” Ward remained with the company as chairman of the board.

Soon thereafter, OTR increased the percentage of direct shipper freight to 77 percent from 61 percent in 1996, which reduced the company’s reliance on less consistent and lower paying broker freight. To complement its national fleet, a regional short haul division was created at the Olathe terminal facility, and a second short haul division was later created in Chicago. The two short haul divisions accounted for 6 percent of OTR’s fleet.

In July of 1998, OTR’s stockholders voted to increase the number of authorized shares of common stock from 5 million to 20 million shares. The purpose of the share increase was intended to provide the company with the flexibility to meet current and future capital needs through a variety of measures, including possible future stock offerings. It was decided that the filing of the SEC registration would await a favorable pricing climate. In a show of confidence, several OTR executives purchased substantial shares during the first half of the year.