Marten Transport, Ltd. 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018; filed March 1, 2019. The filing includes unaudited fourth-quarter results for the three months ended December 31, 2018.
Business context
Marten is a temperature-sensitive and dry-freight transportation company operating through Truckload, Dedicated, Intermodal and Brokerage reporting segments, with additional Mexico-related operations reported within Truckload and Brokerage. Approximately 58% of 2018 Truckload and Dedicated revenue involved temperature-sensitive products and 42% involved dry freight. The company operated 2,755 tractors and 5,347 trailers at year-end, including 3,747 refrigerated trailers and 1,600 dry vans.
Approximately 99% of revenue was generated in the United States. Walmart was the largest customer, representing approximately 15% of 2018 revenue; the top ten customers represented approximately 46%.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Operating revenue | $787.6 million | $698.1 million | +12.8% |
| Operating income | $70.3 million | $56.9 million | +23.7% |
| Operating margin | 8.9% | 8.1% | +0.8 percentage points |
| Operating ratio | 91.1% | 91.9% | Improved 0.8 points |
| Net income | $55.0 million | $90.3 million | -39.1% |
| Adjusted 2017 net income excluding tax benefit | $33.8 million | — | 2018 +62.7% versus adjusted 2017 |
| Diluted EPS | $1.00 | $1.65 | 2017 included a $56.5 million tax benefit |
| Cash flow from operations | $150.6 million | $121.9 million | +23.6% |
| Cash and cash equivalents | $56.8 million | $15.8 million | +$41.0 million |
| Long-term debt | None | None | No outstanding principal |
Operating margin was calculated from reported operating income and revenue. The company’s net property and equipment totaled $588.2 million, and stockholders’ equity was $576.0 million at December 31, 2018.
Segment performance and material changes
| Segment | 2018 revenue | 2018 operating income | Year-over-year change |
|---|---|---|---|
| Truckload | $375.3 million | $35.1 million | Revenue -1.3%; operating income +33.2% |
| Dedicated | $223.9 million | $18.6 million | Revenue +34.1%; operating income +8.9% |
| Intermodal | $102.0 million | $11.2 million | Revenue +26.5%; operating income +34.3% |
| Brokerage | $86.4 million | $5.5 million | Revenue +22.7%; operating income +7.4% |
- Revenue growth was led by Dedicated fleet and contract expansion, higher Intermodal volume and revenue per load, and increased Brokerage volume and rates.
- Truckload revenue declined because the average tractor count fell, although higher customer rates and revenue per tractor improved profitability.
- Fuel surcharge revenue increased to $106.2 million from $67.1 million, partly because of higher fuel prices and partly because certain customer agreements shifted $12.9 million of line-haul revenue into fuel surcharge revenue.
- Net fuel expense declined 37.2% to $29.4 million, aided by fuel surcharges, improved fuel efficiency, shorter lengths of haul, purchasing programs and reduced idling.
- Driver compensation, recruiting and retention costs increased. Salaries, wages and benefits rose 11.5%, while purchased transportation increased 22.2%.
- The company adopted ASC 606 on January 1, 2018 using the modified retrospective method. The adoption increased opening retained earnings by $485,000 and had an immaterial ongoing effect on net income and financial position.
Fourth-quarter 2018 results
| Metric | Q4 2018 | Q4 2017 |
|---|---|---|
| Operating revenue | $204.0 million | $182.8 million |
| Operating income | $19.5 million | $14.3 million |
| Net income | $15.7 million | $65.1 million |
| Diluted EPS | $0.29 | $1.18 |
The fourth-quarter 2017 net income and EPS included the majority of the $56.5 million deferred tax benefit related to the Tax Cuts and Jobs Act. Excluding that benefit, fourth-quarter 2017 net income was $8.6 million and diluted EPS was $0.16.
Liquidity, capital allocation and outlook
- Operating cash flow of $150.6 million was used primarily for $93.9 million of net revenue-equipment purchases, $5.9 million of facility investments, $5.5 million of dividends and $3.8 million of share repurchases.
- Management estimated 2019 capital expenditures, net of dispositions, at approximately $125 million and stated that liquidity should be adequate for current and anticipated needs for at least the next twelve months.
- In August 2018, the unsecured revolving credit facility was reduced from $40.0 million to $30.0 million and extended to August 2023. There was no outstanding principal at year-end, with $15.4 million of remaining borrowing availability after $14.6 million of standby letters of credit.
- The company repurchased and retired 200,000 shares for $3.8 million in the fourth quarter. Up to $12.6 million, or 806,000 shares, remained available under the repurchase program at year-end.
- Quarterly dividends were $0.025 per share throughout 2018, totaling $5.5 million. Future dividends remain subject to board approval, financial condition and credit-facility restrictions.
- Purchase obligations for 2019 revenue equipment totaled $91.1 million. Operating lease obligations totaled $672,000 through 2022.
Risks, contingencies and unusual items
- Major risks include economic and freight-cycle weakness, intense competition, customer concentration, driver shortages and compensation inflation, fuel-price volatility, equipment costs and used-equipment values.
- The company self-insures portions of auto liability, workers’ compensation, cargo, property and health claims. It retains the first $1.0 million of each auto-liability claim and the first $750,000 of each workers’ compensation claim. Insurance and claims accruals were $28.1 million at year-end.
- A 5% increase in the average diesel price would have increased 2018 fuel expense by approximately $6.0 million. The company had no fuel-hedging instruments at year-end.
- Management identified driver availability, ELD and other transportation regulations, railroad capacity and service reliability, environmental compliance, cybersecurity and information-system disruptions as additional risks.
- Routine litigation primarily relates to workers’ compensation, personal injury and property damage. Management considered the likelihood of a material adverse outcome remote.
- Related-party transactions included purchases of fuel, tires and related services from a company affiliated with a director and principal stockholder. Payments totaled $341,000 directly and $2.5 million to tire manufacturers in 2018.
- Grant Thornton LLP issued unqualified opinions on the financial statements and internal control over financial reporting. Management concluded that internal controls and disclosure controls were effective as of December 31, 2018.
Most important facts for investors to verify
- Whether Dedicated, Intermodal and Brokerage growth can offset Truckload volume and tractor-count declines.
- The sustainability of improved operating ratios after higher driver, insurance, equipment and recruiting costs.
- The impact of the $125 million 2019 capital-expenditure plan on free cash flow and equipment replacement needs.
- Customer concentration, particularly Walmart’s 15% revenue contribution and the top ten customers’ 46% contribution.
- Exposure to fuel prices not recovered through surcharges, including non-revenue miles and idling.
- Future self-insurance claims development, standby letters of credit and potential excess-loss exposure.
- The effect of ASC 606 adoption and the 2019 lease-accounting adoption, which management expected to have an immaterial ongoing income-statement effect.