P.A.M. Transportation Services, Inc. — Q1 2019 Form 10-Q Summary
Business Context and Reporting Period
P.A.M. Transportation Services, Inc. operates truckload transportation and brokerage and logistics services in the United States, Mexico, and Canada. The filing covers the three months ended March 31, 2019, with comparisons to the three months ended March 31, 2018. Financial statements are unaudited and presented in accordance with interim U.S. GAAP.
Financial Performance and Position
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue before fuel surcharge | $110.3 million | $99.1 million |
| Fuel surcharge revenue | $18.3 million | $20.4 million |
| Total operating revenue | $128.7 million | $119.5 million |
| Operating income | $9.7 million | $3.8 million |
| Operating margin on revenue before fuel surcharge | 8.8% | 3.8% |
| Net income | $8.3 million | $1.4 million |
| Net margin on revenue before fuel surcharge | 7.5% | 1.4% |
| Diluted EPS | $1.39 | $0.22 |
| Cash flow from operations | $19.7 million | $15.7 million |
Truckload revenue before fuel surcharge increased 11.8% to $90.0 million, while brokerage and logistics revenue increased 9.4% to $20.3 million. The consolidated operating ratio improved to 91.0% from 96.4% for truckload services and to 92.4% from 95.5% for brokerage and logistics services.
Operating income benefited from higher revenue, improved utilization of company-owned capacity, lower purchased transportation costs, and lower insurance and claims expense. Non-operating income was $3.5 million versus a $0.9 million expense in the prior-year quarter, primarily because of a $3.2 million unrealized gain on marketable equity securities compared with a $1.1 million loss in Q1 2018. Interest expense increased to $2.0 million from $1.2 million, largely due to higher market interest rates.
At March 31, 2019, cash and cash equivalents were $0.3 million, marketable equity securities were $30.8 million, and total assets were $465.1 million. Total debt, including current maturities, was approximately $205.5 million, down from $221.2 million at December 31, 2018. Shareholders’ equity increased to $146.3 million from $139.4 million.
Operating activities provided $19.7 million of cash. Investing activities used $2.2 million, including $7.9 million of property and equipment purchases and $5.8 million of equipment-sale proceeds. Financing activities used $17.5 million, including $19.5 million of long-term debt repayments and $1.6 million of stock repurchases. Cash increased by approximately $4,000 to $0.3 million.
Material Changes Versus the Prior Comparable Period
- Total operating revenue increased 7.7%, despite a decline in fuel surcharge revenue, reflecting higher freight revenue.
- Operating income increased approximately 158%, and net income increased approximately 498%.
- Average rate per mile and average fleet size increased, while miles driven per truck declined.
- Salaries, wages, and benefits declined to 33.3% of truckload revenue before fuel surcharge from 34.6%, primarily due to lower workers’ compensation and health insurance claims.
- Rent and purchased transportation declined to 30.3% of truckload revenue from 36.3%, as increased company-owned capacity reduced reliance on third-party carriers.
- Operating supplies increased to 5.7% of truckload revenue from 2.8%, mainly because lower fuel surcharge collections increased the surcharge-adjusted fuel cost burden.
- The effective tax rate increased to 25.4% from 19.2%, largely due to state taxes and tax benefits related to stock-based compensation.
- The Company repurchased 39,648 shares for approximately $1.6 million. Approximately 248,282 shares remained available under the repurchase authorization at March 31, 2019.
Guidance, Outlook, Risks, and Unusual Items
Management expects to purchase approximately 500 new trucks and 500 new trailers during the remainder of 2019, with expected net capital expenditures of approximately $63.4 million. Management believes cash balances, operating cash flow, and available financing will fund near-term working capital and planned capital expenditures and does not expect significant liquidity constraints in the foreseeable future. The Company does not anticipate paying cash dividends in the foreseeable future.
On January 25, 2019, the revolving credit facility borrowing limit increased from $40.0 million to $60.0 million, the maturity was extended by one year, and the interest rate was reduced by 25 basis points. At March 31, 2019, outstanding advances were approximately $8.7 million, including $0.6 million of letters of credit, with $51.3 million of availability. The facility bears interest at LIBOR plus 1.25%, or 3.74% at March 31, 2019, and matures July 1, 2021.
Results include a material favorable mark-to-market gain on equity securities. A 10% decline in the securities portfolio would reduce carrying value by approximately $3.1 million. A 100-basis-point increase in LIBOR would add approximately $81,000 of annual interest expense based on the stated debt assumption. A 10% increase in diesel prices would increase annual fuel expense by approximately $5.2 million based on 2018 consumption.
Key risks include trucking-industry overcapacity, economic and customer-cycle weakness, fuel and interest-rate volatility, driver recruitment and compensation costs, insurance and self-insurance exposure, equipment values and financing availability, competition, weather, customer concentration, and acquisition execution. The Company is defending a collective-action lawsuit brought by former drivers alleging wage, deduction, travel-time, and contract violations. The potential loss cannot currently be reasonably estimated, and management states that any loss would not be covered by existing insurance.
Adoption of the cited 2019 accounting updates, including the new lease guidance, did not have a material impact on the financial statements. Management concluded that disclosure controls and procedures were effective as of March 31, 2019, with no material changes to internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether operating improvement persists after excluding the $3.2 million unrealized gain on marketable equity securities.
- Fleet growth, utilization, miles per truck, rate per mile, and the planned $63.4 million of 2019 net capital expenditures.
- Debt repayment capacity, credit-facility availability, floating-rate exposure, and the approximately $205.5 million of aggregate debt.
- Fuel surcharge recovery relative to actual diesel costs and the effect of fuel-price volatility on margins.
- Claims development following the Company’s decision to self-insure property damage on company-owned trucks.
- Potential exposure from the pending driver collective-action lawsuit, for which no loss estimate or insurance coverage is currently available.
- Volatility in the $30.8 million marketable equity securities portfolio and its effect on reported earnings and liquidity.