PAMT CORP annual report, FY2018

P.A.M. Transportation Services, Inc. — FY2018 Form 10-K Summary

Business context and reporting period

The filing covers the fiscal year ended December 31, 2018, with fourth-quarter information for the three months ended December 31, 2018. P.A.M. is a truckload dry-van carrier serving the continental United States, Mexico and selected Canadian provinces, with complementary brokerage and logistics operations. The company reports one motor-carrier segment.

Truckload services represented 80.0% of 2018 revenue before fuel surcharges; brokerage and logistics represented 20.0%.
Approximately 46% of revenue came from the automotive industry, and the five largest customers represented approximately 42% of revenue.
At year-end, the company operated 2,031 trucks, including 597 independent-contractor trucks, and 6,397 trailers.

Financial performance and key metrics

Metric	2018	2017	Change
Total operating revenue	$533.3 million	$437.8 million	21.8% increase
Revenue before fuel surcharge	$445.9 million	$373.5 million	19.4% increase
Operating income	$41.6 million	$12.7 million	Increase
Operating margin on total revenue	7.8%	2.9%	Improved
Net income	$24.0 million	$38.9 million	38.3% decrease
Diluted EPS	$3.90	$6.08	35.9% decrease
Operating ratio	90.7%	96.6%	Improved by 5.9 points
Cash flow from operations	$82.3 million	$50.6 million	Increase

Net income was 5.4% of revenue before fuel surcharge, compared with 10.4% in 2017. The comparison is distorted by a $29.3 million tax benefit recorded in fourth-quarter 2017 following the Tax Cuts and Jobs Act.
2018 income before taxes was $31.3 million, with $7.3 million of income tax expense and a 23.4% effective tax rate.
Truckload revenue before fuel surcharge increased 10.6% to $356.6 million; the average rate per loaded mile increased 13.3% to $1.71.
Brokerage and logistics revenue before fuel surcharge increased 74.7% to $89.3 million, while its operating ratio improved to 94.4% from 96.0%.
Fourth-quarter 2018 revenue was $138.2 million, operating income was $14.7 million and net income was $6.1 million, compared with fourth-quarter 2017 revenue of $110.9 million, operating income of $3.4 million and net income of $31.6 million. Fourth-quarter 2017 net income included the significant tax benefit.

Cash flow, debt and liquidity

Operating cash flow was $82.3 million. Investing activities used $55.3 million, primarily for revenue equipment, and financing activities used $27.0 million.
Capital expenditures for property and equipment were $73.9 million, partly offset by $24.9 million of proceeds from equipment dispositions.
Total long-term debt was $221.2 million at December 31, 2018, including $63.9 million of current maturities and $211.0 million of equipment financing. Debt increased from $172.6 million at year-end 2017.
The company had $10.9 million outstanding, including letters of credit, under a $40.0 million revolving credit facility, leaving approximately $29.1 million available. The facility bore interest at LIBOR plus 1.50%.
Cash and cash equivalents were only $0.3 million, while marketable equity securities were $27.5 million and trade accounts receivable were $63.4 million.
Contractual obligations totaled $229.9 million, including $229.7 million of long-term debt and interest. Approximately $71.1 million was due within one year.

Material changes versus the prior comparable period

The company replaced trucks formerly operated under leases with company-owned equipment. The final 56 leased trucks were returned or purchased by January 31, 2018, reducing truck-lease expense but increasing depreciation and debt.
Revenue equipment increased by approximately $81.3 million, and equipment financing increased by approximately $38.4 million.
Driver wages increased, including approximately $7.4 million from per-mile pay increases and approximately $5.1 million associated with expanded regional and short-haul operations.
Rent and purchased transportation declined as a percentage of revenue before fuel surcharge, from 39.9% to 34.4%, while depreciation increased from 13.1% to 13.7%.
Insurance and claims expense declined to 4.8% of revenue before fuel surcharge from 5.4%, partly because the company became self-insured for physical damage to company-owned trucks beginning September 1, 2018.
Non-operating results deteriorated from $5.9 million of income to $4.0 million of expense. Adoption of ASU 2016-01 required equity-market gains and losses to be recorded in net income; 2018 included approximately $5.8 million of unrealized pre-tax marketable-securities losses.
The company repurchased 287,351 shares in 2018, including 185,597 shares through a Dutch-auction tender offer, for total treasury-stock purchases of approximately $13.4 million.

Guidance, outlook, risks and unusual items

Management expected approximately $62.4 million of net 2019 capital expenditures, including 500 new trucks and 500 new trailers. Management stated that available cash, operating cash flow and expected financing would cover anticipated working-capital and equipment needs and that no significant near-term liquidity constraints were expected.
In January 2019, the revolving credit facility was amended to increase capacity to $60.0 million, extend maturity to July 1, 2021 and reduce pricing to LIBOR plus 1.25%, subject to an unused fee under specified conditions.
Key risks include economic and freight-rate cyclicality, diesel-price volatility, driver shortages, insurance and self-insurance claims, high capital requirements, substantial debt, used-equipment values, regulatory compliance and customer concentration.
Automotive exposure is material: Fiat Chrysler, General Motors and Ford represented approximately 16%, 13% and 8% of 2018 revenue, respectively. The company generally does not have long-term contracts with major customers.
The company does not hedge diesel or foreign-currency exposure. A 10% increase in diesel prices would have increased annual fuel expense by approximately $5.2 million based on 2018 consumption. A 10% decline in the market value of equity securities would reduce their carrying value by approximately $2.8 million.
A collective-action lawsuit by former drivers alleges wage, travel-time, deduction and related violations. The litigation remains ongoing, the potential loss cannot be reasonably estimated, and management states that losses would not be covered by insurance.
Matthew T. Moroun and a related trust controlled approximately 65.6% of the outstanding common stock. The company therefore qualifies as a controlled company under Nasdaq rules and is not required to meet certain independent-board and committee requirements.
No dividends were paid after 2012, and management did not anticipate paying dividends in the foreseeable future.
Grant Thornton issued unqualified opinions on the financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal controls were effective as of December 31, 2018.

Important facts for investors to verify

Whether the sharp 2018 improvement in operating performance is sustainable after separating freight-rate gains, fuel surcharges, and unusually favorable cost comparisons.
The effect of converting leased trucks to owned equipment on future depreciation, debt service, capital expenditures and free cash flow.
Near-term debt maturities and compliance with credit-facility covenants, particularly given the $63.9 million of current debt maturities.
Customer and automotive concentration, including renewal and volume risks for the three largest customers.
Potential exposure and legal costs from the former-driver collective-action lawsuit.
Volatility in the marketable-equity-securities portfolio and the impact of recognizing unrealized gains and losses in earnings.
Developments in driver availability, wages, fuel prices, insurance claims and transportation regulation.