P.A.M. Transportation Services, Inc. — FY2017 Form 10-K Summary
Business context and reporting period
P.A.M. Transportation Services, Inc. is a truckload dry-van carrier serving the continental United States and selected provinces in Canada, with transportation services into Mexico through Mexican carriers. Operations include asset-based truckload services and brokerage/logistics services, reported as one motor-carrier segment. This filing covers the fiscal year ended December 31, 2017; fourth-quarter results are also presented.
- 2017 revenue mix before fuel surcharge: 86.3% truckload and 13.7% brokerage/logistics.
- Approximately 46% of revenue came from the automobile industry; the top five customers represented approximately 41% of revenue.
- Fleet at year-end included 1,721 trucks, including 560 independent-contractor trucks, and 5,795 trailers. The Company employed 2,409 people and used 629 independent-contractor drivers.
Financial performance and key metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total operating revenue | $437.8 million | $432.9 million | +1.2% |
| Revenue before fuel surcharge | $373.5 million | $382.7 million | -2.4% |
| Fuel surcharge revenue | $64.3 million | $50.1 million | +28.3% |
| Operating income | $12.7 million | $19.9 million | -36.4% |
| Operating margin on total revenue | 2.9% | 4.6% | Down 1.7 points |
| Operating ratio | 96.6% | 94.8% | Up 1.8 points |
| Income before taxes | $14.6 million | $17.8 million | -17.7% |
| Net income | $38.9 million | $11.1 million | +250.4% |
| Diluted EPS | $6.08 | $1.67 | +264.1% |
| Cash flow from operations | $50.5 million | $47.4 million | +6.5% |
| Capital expenditures, gross | $67.7 million | $86.1 million | -21.4% |
Net income was materially affected by a $29.3 million fourth-quarter deferred tax benefit from revaluing deferred tax liabilities following the Tax Cuts and Jobs Act. The reported effective tax rate was negative 165.9%, compared with 37.5% in 2016; reported earnings therefore are not representative of recurring operating profitability.
- Truckload revenue before fuel surcharge declined 4.7% to $322.4 million. Miles traveled fell to 229.4 million from 237.3 million, and average trucks in service declined to 1,835 from 1,891.
- Brokerage and logistics revenue before fuel surcharge increased 15.1% to $51.1 million. Its operating ratio improved to 96.0% from 97.6%.
- Company-wide operating expenses rose 3.0% despite lower revenue before fuel surcharge. Rent and purchased transportation increased to $174.5 million from $158.3 million, while depreciation increased to $42.3 million from $39.1 million.
- Average revenue before fuel surcharge per truck per day increased to $805 from $797, while revenue per loaded mile declined to $1.51 from $1.53. Empty miles remained 6.8% of total miles.
- Quarterly fourth-quarter revenue was $110.9 million and net income was $31.6 million, compared with $108.4 million and $0.7 million, respectively, in fourth-quarter 2016. The fourth-quarter earnings comparison was dominated by the tax benefit.
Liquidity, debt and capital resources
- Cash and cash equivalents were $0.2 million at December 31, 2017, versus $0.1 million at December 31, 2016. Current assets were $102.2 million and current liabilities were $110.9 million.
- Total equipment financing debt was $172.6 million at year-end, compared with $165.3 million in 2016, at a weighted-average interest rate of 2.52%. Contractual long-term debt payments, including interest, totaled $185.4 million, with $77.5 million due within one year.
- The Company maintained a $40.0 million revolving credit facility. Outstanding advances were approximately $0.7 million, consisting of letters of credit, leaving approximately $39.3 million available. The Company was in compliance with its covenants.
- Stockholders’ equity increased to $127.6 million from $94.2 million, primarily reflecting net income. The Company repurchased 254,175 shares during 2017, including 143,859 shares in the Dutch auction tender offer at $30 per share, for approximately $4.4 million including fees.
- Marketable equity securities had a fair value of $26.7 million and an unrealized gain of $10.0 million at year-end. Margin-account borrowings were $5.9 million.
Material changes, outlook and unusual items
- Management expects approximately $107.1 million of net 2018 capital expenditures, including 725 new trucks and 1,000 new trailers. Management believes operating cash flow, cash balances and available financing will fund near-term requirements and does not expect significant liquidity constraints.
- Equipment costs and depreciation increased because of higher new-equipment prices, fleet replacement, replacement of leased trucks with owned trucks, replacement of rented trailers, and lower expected residual values for certain tractors. The residual-value change increased 2017 depreciation by approximately $2.7 million.
- The final 56 trucks under operating leases were returned or purchased by January 31, 2018. Operating-lease commitments remaining at year-end totaled $0.5 million.
- The Company does not hedge diesel fuel or foreign-currency exposure. A 10% increase in diesel prices would increase annual fuel expense by approximately $4.1 million based on 2017 consumption; a 10% adverse Mexican-peso movement would increase annual expenses by approximately $57,000.
- Management identified no long-lived-asset impairment indicators and recorded no impairment loss in 2017. The 2017 audit opinion on the financial statements and internal control over financial reporting was unqualified.
Principal risks and contingencies
- Customer and industry concentration: General Motors, Fiat Chrysler and Ford represented approximately 18%, 10% and 9% of revenue, respectively; the automobile industry represented approximately 46% of revenue. Major customer relationships generally are not long-term contracts.
- Exposure to freight-rate pressure, economic cycles, fuel-price volatility, driver shortages, insurance and self-insurance claims, equipment prices and used-equipment values.
- Substantial capital requirements and debt maturities could constrain growth or liquidity if operating cash flow or financing availability declines.
- Regulatory risks include hours-of-service rules, electronic logging devices, safety requirements, emissions standards, environmental compliance and potential reclassification of independent contractors as employees.
- A collective-action lawsuit by former drivers alleges wage, travel-time, deduction and breach-of-contract violations. The matter was under preliminary review; management could not estimate a possible loss, and any loss would not be covered by existing insurance.
- Matthew T. Moroun and a related trust controlled approximately 63.2% of outstanding common stock. The Company therefore qualifies as a NASDAQ controlled company, limiting certain independent-board and committee requirements.
- The Company does not currently intend to pay dividends. Cybersecurity, severe weather, cross-border operations, customer credit and environmental liabilities are additional identified risks.
Investor verification points
- Separate recurring operating earnings from the $29.3 million one-time deferred tax benefit and other investment-related non-operating income.
- Verify the sustainability of the 96.6% operating ratio, declining truckload miles, lower revenue per loaded mile and rising rent, purchased transportation and depreciation costs.
- Review 2018 capital-expenditure funding, debt maturities and compliance with the revolving-credit facility covenant.
- Monitor customer concentration, especially automotive exposure and the absence of long-term contracts with major customers.
- Track the former-driver collective-action lawsuit, self-insurance claims and any changes in independent-contractor classification or transportation regulations.