P.A.M. Transportation Services, Inc. — 2018 Q3 Form 10-Q
Business context and reporting period
P.A.M. Transportation Services, Inc. operates primarily in truckload transportation and brokerage/logistics services. The filing covers the unaudited quarter and nine months ended September 30, 2018, compared with the corresponding 2017 periods. The company reports one aggregated motor carrier segment.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Total operating revenue | $140.3 million | $108.9 million | $395.1 million | $326.9 million |
| Revenue before fuel surcharge | $117.3 million | $93.5 million | $329.2 million | $280.2 million |
| Operating income | $13.2 million | $3.8 million | $26.9 million | $9.3 million |
| Net income | $9.2 million | $3.4 million | $17.9 million | $7.3 million |
| Diluted EPS | $1.52 | $0.54 | $2.89 | $1.14 |
| Cash flow from operating activities | Not separately provided | Not separately provided | $57.5 million | $43.7 million |
- Q3 revenue before fuel surcharge increased 25.5%; total revenue increased 28.9%. Nine-month revenue before fuel surcharge increased 17.5%; total revenue increased 20.8%.
- Q3 operating margin on total revenue was approximately 9.4%, compared with 3.5% in 2017. Nine-month operating margin was approximately 6.8%, compared with 2.9%.
- Net income as a percentage of revenue before fuel surcharge increased to 7.9% in Q3 from 3.7%, and to 5.4% for nine months from 2.6%.
- At September 30, 2018, cash and cash equivalents were $0.3 million, marketable equity securities were $28.7 million, and total current assets were $121.0 million.
- Total debt was $205.5 million, including $62.4 million of current maturities and $143.0 million of long-term debt. Debt increased from $172.6 million at December 31, 2017.
- Shareholders’ equity was $136.3 million, compared with $127.6 million at year-end 2017. Total assets increased to $465.7 million from $392.2 million.
- Operating cash flow of $57.5 million was offset by $40.6 million of investing cash use and $16.9 million of financing cash use, resulting in a $51,000 increase in cash and restricted cash.
Material changes versus the prior comparable period
- Truckload revenue before fuel surcharge increased 16.4% in Q3 and 7.4% for nine months, primarily from higher customer rates and, in Q3, a larger tractor fleet. Average miles per tractor declined, partly because of growth in shorter-haul local and regional business.
- Brokerage and logistics revenue before fuel surcharge increased 78.0% in Q3 and 86.2% for nine months, driven by more loads and higher average rates. Its operating ratio improved to 94.1% from 95.8% in Q3 and to 94.6% from 96.5% for nine months.
- The truckload operating ratio improved to 87.4% from 96.0% in Q3 and to 91.1% from 96.7% for nine months.
- Salaries, wages and benefits increased as a percentage of truckload revenue because of a driver pay increase implemented in December 2017 and expansion of local dedicated services.
- Rent and purchased transportation declined as a percentage of truckload revenue because operating leases expired and leased tractors were replaced with company-owned equipment. Depreciation increased as a result.
- Interest expense increased to $1.7 million in Q3 and $4.2 million for nine months, compared with $0.9 million and $2.8 million, respectively, due to higher interest rates and increased equipment financing.
- Non-operating income declined to $0.9 million in Q3 and $0.7 million for nine months, compared with $2.8 million and $5.5 million, respectively, largely because 2017 included realized investment gains of $2.5 million in Q3 and $4.7 million for nine months.
- Adoption of ASU 2016-01 moved changes in the fair value of equity securities into net income and reclassified approximately $7.4 million from accumulated other comprehensive income to retained earnings.
Guidance, outlook, risks and unusual items
- Management expected to purchase approximately 260 new trucks and 500 new trailers during the remainder of 2018, resulting in estimated net capital expenditures of approximately $32.9 million.
- Management stated that cash, operating cash flow and expected financing availability should support working capital and planned capital expenditures over the next twelve months, while noting that long-term capital needs may require additional debt or equity.
- The company does not anticipate paying cash dividends in the foreseeable future and intends to retain earnings to finance growth.
- The $40.0 million revolving credit facility bears interest at LIBOR plus 1.50%, matures July 1, 2020, and had approximately $18.8 million outstanding, including $0.7 million of letters of credit, with $21.2 million of borrowing availability at September 30, 2018. The company was in compliance with its debt covenant.
- A collective-action lawsuit by former drivers alleges wage, travel-time, deduction and contract violations. The company is vigorously defending the matter, cannot reasonably estimate any potential loss, and states that losses would not be covered by existing insurance.
- Key market risks include fuel prices, interest rates, equity prices, driver availability and compensation, insurance and claims, equipment resale values, competition, customer concentration, economic cycles and financing availability.
- A 10% decline in the market value of equity securities would reduce their carrying value by approximately $2.9 million. A 100-basis-point increase in LIBOR applied to $18.1 million of variable-rate debt would increase annual interest expense by approximately $1.8 million.
- Management reported effective disclosure controls and procedures and no material changes in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the strong revenue and margin improvement is sustained as freight rates, utilization, fuel prices and brokerage volumes change.
- The effect of replacing leased equipment with company-owned equipment on depreciation, debt service, maintenance and free cash flow.
- Debt maturities, revolving-credit availability, covenant compliance and the company’s ability to fund planned equipment purchases.
- The potential exposure and developments related to the collective-action driver lawsuit.
- The volatility and concentration of the $28.7 million marketable equity securities portfolio, including investment gains or losses recognized in earnings.
- Whether accounts receivable growth and higher accounts payable remain consistent with operating growth and do not create working-capital pressure.