Business Context and Reporting Period
Patriot Transportation Holding, Inc. filed an unaudited Form 10-Q for the quarter ended March 31, 2012, the second quarter and first six months of fiscal 2012. The company operates three reportable segments: transportation of petroleum, liquid and dry-bulk commodities; mining royalty land; and developed office/warehouse property rentals, primarily in the Southeastern and Mid-Atlantic United States.
The filing identifies the registrant as Patriot Transportation Holding, Inc.; the request metadata refers to FRP Holdings, Inc. Investors should verify the applicable legal entity and filing identifier.
Financial Performance and Position
| Metric | Three months ended March 31, 2012 | Three months ended March 31, 2011 | Six months ended March 31, 2012 | Six months ended March 31, 2011 |
|---|---|---|---|---|
| Total revenue | $31.326 million | $28.590 million | $61.685 million | $56.853 million |
| Operating profit | $3.444 million | $3.184 million | $6.658 million | $6.372 million |
| Income from continuing operations | $1.639 million | $1.505 million | $3.764 million | $2.973 million |
| Net income | $1.643 million | $1.683 million | $3.767 million | $8.078 million |
| Diluted EPS | $0.17 | $0.18 | $0.40 | $0.85 |
| Cash flow from operating activities | Not separately provided | Not separately provided | $8.444 million | $9.177 million |
Quarterly operating margin was approximately 11.0%, compared with 11.1% in the prior-year quarter. Six-month operating margin was approximately 10.8%, compared with 11.2% in the prior-year period. Transportation operating margin declined to 7% for the quarter and 6% for the six months, while developed property rentals operating margin increased to 31% for both periods.
- Transportation revenue increased 10.5% for the quarter and 9.3% for the six months. Revenue miles increased 6.4% and 4.1%, respectively. Fuel surcharges increased, but fuel costs rose faster than surcharge recovery.
- Mining royalty land operating profit increased 24.0% for the quarter and 4.8% for the six months, primarily due to higher timber sales and lower allocated indirect costs.
- Developed property rentals revenue increased 4.7% for the quarter and 6.6% for the six months. Occupancy was 86.0% at March 31, 2012, versus 77.2% a year earlier.
- Cash and cash equivalents were $20.037 million at March 31, 2012, compared with $21.026 million at September 30, 2011.
- Total debt was $64.862 million, including $5.068 million due within one year, compared with $67.272 million at September 30, 2011.
- Shareholders’ equity was $169.648 million, compared with $164.447 million at September 30, 2011.
- Capital expenditures and investments included $5.403 million for transportation equipment, $4.046 million for developed property rentals and $70,000 for the joint venture.
Material Changes Versus Prior Comparable Period
- Quarterly net income decreased 2.4%, despite an 8.2% increase in operating profit, because discontinued operations contributed only $4,000 versus $178,000 in the prior-year quarter.
- Six-month net income decreased 53.4%, primarily because the prior-year period included a $4.926 million after-tax gain from an exchange of property. Six-month 2012 included only $3,000 from discontinued operations.
- Continuing-operations income increased 8.9% for the quarter and 26.6% for the six months. The six-month increase included a $1.039 million pretax gain from non-refundable deposits after termination of the Windlass Run Residential sale contract.
- Transportation costs increased faster than revenue. Six-month transportation cost of operations rose to 94% of revenue from 91%, driven by fuel, workers’ compensation and health insurance claims, driver compensation, repairs, tires and growth initiatives.
- Developed property rentals benefited from higher occupancy, lower real estate taxes and lower snow-removal costs, partially offset by maintenance, professional fees and indirect management costs.
- The company repurchased 7,013 shares for $137,000 during the first six months. As of March 31, $4.093 million remained authorized for repurchases, and the company did not pay cash dividends.
Liquidity, Outlook, Risks and Unusual Items
The company had a $37.0 million unsecured revolving credit agreement maturing December 13, 2013. Letters of credit totaling $12.082 million were issued under the facility, leaving $24.918 million available for borrowing at March 31, 2012. The company stated that it complied with all debt covenants. The revolver restricts availability and includes limitations on cash dividends.
Management expects transportation miles to increase during fiscal 2012 as the company adds drivers and customers. Property-rental occupancy improved, and development of Patriot Business Park resumed April 1, 2012. A 15.18-acre land sale was signed for approximately $4.775 million, subject to completion, and a build-to-suit lease for a 117,600-square-foot building was signed April 2.
The company is evaluating the market value of its office/warehouse portfolio with Jones Lang LaSalle but had made no decision regarding a potential transaction. It also entered into a conditional agreement to form a roughly 50%-owned joint venture for a planned approximately 300,000-square-foot residential and retail project at RiverFront on the Anacostia. Formation depends on zoning and other conditions; construction is anticipated in early 2014 if conditions are satisfied.
- Key operating risks include fuel-price volatility and delays in recovering fuel surcharges, driver availability and cost, accident and workers’ compensation severity, insurance costs, regulation, customer concentration, economic conditions and competition.
- The ten largest transportation customers represented approximately 53.7% of transportation revenue for the first six months; one customer represented 19.2%. One mining royalty lessee represented 82.0% of mining royalty land revenue.
- Self-insurance liabilities for vehicle and workers’ compensation claims may be understated or overstated; management stated that the possible range could not be estimated.
- Developed-property vacancies remained material at two Delaware buildings affected by automobile plant closures and the residential housing downturn.
- The filing states that a 50-basis-point adverse interest-rate movement would have an immaterial effect on results and cash flows, although economic effects associated with such a change were not modeled.
Important Facts for Investors to Verify
- Confirm the legal registrant and ticker identity, because the filing text names Patriot Transportation Holding, Inc. while the request metadata names FRP Holdings, Inc.
- Assess whether transportation margins can recover from fuel, insurance, driver and maintenance cost pressure, and whether fuel surcharges adequately offset future fuel increases.
- Review customer concentration and the financial consequences of losing or reducing business from major transportation customers or the principal mining lessee.
- Verify availability under the revolving credit facility, letter-of-credit obligations, covenant compliance and scheduled debt maturities.
- Evaluate the sustainability of earnings excluding the $1.039 million Windlass Run contract-termination gain and the prior-year discontinued-operation gain.
- Track occupancy, vacancies, development spending, the Patriot Business Park land sale and the conditions for the RiverFront joint venture.
- Review the company’s self-insurance reserves and unresolved claims, whose potential range was not estimable in the filing.