MARTEN TRANSPORT LTD quarterly report, Q2 FY2020

Marten Transport, Ltd. — Form 10-Q Summary

Business Context and Reporting Period

Marten Transport is a temperature-controlled and dry freight transportation provider operating through Truckload, Dedicated, Intermodal and Brokerage segments, with cross-border services reported within Truckload and Brokerage. This unaudited Form 10-Q covers the three and six months ended June 30, 2020, compared with the same 2019 periods.

Key Financial Metrics

Metric	Q2 2020	Q2 2019	Six Months 2020	Six Months 2019
Operating revenue	$212.4 million	$212.1 million	$431.0 million	$411.1 million
Operating income	$25.3 million	$19.9 million	$43.3 million	$37.7 million
Net income	$18.1 million	$15.2 million	$31.9 million	$28.7 million
Diluted EPS	$0.33	$0.28	$0.58	$0.52
Operating ratio	88.1%	90.6%	90.0%	90.8%
Net cash from operating activities	Not separately provided	Not separately provided	$104.1 million	$75.1 million

Q2 net margin was approximately 8.5%, versus 7.2% in the prior-year quarter. Six-month net margin was approximately 7.4%, versus 7.0% in 2019. Revenue excluding fuel surcharges increased 4.7% in Q2 and 7.4% for the six-month period.

Six-month segment revenue: Truckload $189.3 million, Dedicated $150.5 million, Intermodal $44.0 million and Brokerage $47.3 million.
Six-month segment operating income: Truckload $17.8 million, Dedicated $20.0 million, Intermodal $2.3 million and Brokerage $3.2 million.
Cash and cash equivalents were $75.3 million at June 30, 2020, compared with $31.5 million at December 31, 2019.
Total assets were $840.8 million and stockholders’ equity was $629.4 million at June 30, 2020.
There was no outstanding principal balance under the $30.0 million unsecured revolving credit facility. Standby letters of credit totaled $16.3 million, leaving $13.7 million of borrowing availability.
Capital spending for revenue equipment was $75.5 million, partly offset by $19.8 million of equipment disposition proceeds. Management estimated approximately $71 million of net capital expenditures for the remainder of 2020.
Dividends of $0.04 per share were declared in each of the first two quarters, totaling $4.4 million for the first six months. The company repurchased 35,376 shares for $597,000 in the first quarter and made no repurchases in Q2.

Material Changes Versus the Prior Comparable Period

Q2 revenue was essentially flat, increasing $0.3 million, or 0.1%, while operating income increased 26.6% and net income increased 19.4%.
Six-month revenue increased 4.8%, operating income increased 14.9% and net income increased 10.8%.
Dedicated was the primary growth driver, with six-month revenue up 20.6%, supported by fleet growth and more customer contracts; segment operating income increased 51.2%.
Truckload six-month revenue increased 0.8%, while revenue net of fuel surcharges increased 3.9%, primarily from a larger tractor fleet.
Intermodal revenue increased 0.9% for six months, but operating income declined 42.5% and the operating ratio worsened to 94.9% from 91.0%.
Brokerage revenue declined 14.2% for six months because of lower revenue per load; operating income declined 34.7% and the operating ratio worsened to 93.2% from 91.0%.
Lower fuel prices reduced six-month fuel and fuel tax expense by $9.5 million and net fuel expense by $3.0 million. Fuel surcharge revenue declined to $43.6 million from $50.3 million.
Six-month salaries, wages and benefits increased 10.7%, depreciation increased 11.7% and insurance and claims increased 21.2%, partly offsetting fuel savings.
Operating cash flow increased $29.0 million year over year, while net investing cash outflows increased to $59.2 million from $45.8 million.

Guidance, Outlook, Risks and Unusual Items

No formal earnings or revenue guidance was provided. Management expected liquidity to be adequate for at least the next twelve months and did not anticipate significant liquidity constraints.
Management described COVID-19 as a source of reduced manufacturing and retail activity and lower overall freight volumes, with demand varying materially by customer, product and freight lane. The company emphasized its diversified business model and ability to redeploy drivers and equipment.
The company implemented employee health and safety measures, including remote work, facility cleaning, social distancing, masks and hand sanitizer.
Management expects future tractor and trailer ownership costs and depreciation to rise because of higher equipment prices and potential fleet growth.
The company self-insures portions of workers’ compensation, auto liability, general liability, cargo, property damage and employee health claims. Insurance and claims accruals were $35.8 million at June 30, 2020; significant claim volatility could materially affect results.
Revenue equipment purchase obligations totaled $69.0 million through the remainder of 2020. Total contractual obligations presented in the filing were $70.1 million, excluding a $5.9 million nonqualified deferred compensation obligation because its payment timing was uncertain.
The company was exposed to diesel fuel price risk; a 5% increase in average diesel costs would have increased first-half 2020 fuel expense by approximately $2.4 million. No fuel hedging instruments were outstanding.
Q2 effective tax rate increased to 28.2% from 25.3%, and the six-month rate increased to 26.6% from 25.1%, partly because of an additional $1.1 million tax expense related to discrete tax benefit reserves.
On July 16, 2020, the board declared a three-for-two stock split, payable August 13, 2020, expected to increase shares outstanding from approximately 55.1 million to approximately 82.7 million.
The company sold its 45% interest in MW Logistics on October 31, 2019 for approximately $1.3 million; related revenue was $1.2 million in the first six months of 2019 and was not present in the 2020 period.
Management stated that there were no material changes to previously disclosed risk factors. Disclosure controls and procedures were evaluated as effective at June 30, 2020.

Important Facts for Investors to Verify

Assess whether Dedicated growth and improved Truckload productivity can offset continued weakness in Brokerage and pressure in Intermodal.
Monitor freight volumes, customer demand, driver availability, equipment utilization and revenue excluding fuel surcharges as COVID-19 effects evolve.
Verify the timing and funding of the remaining $69.0 million of 2020 equipment commitments and approximately $71 million of expected net capital expenditures.
Track self-insured claims development, insurance costs and the $16.3 million of standby letters of credit supporting insurance programs.
Review compliance with credit-facility covenants and dividend restrictions despite the absence of outstanding borrowings.
Adjust per-share comparisons for the three-for-two stock split and verify the resulting share count and per-share amounts after August 13, 2020.