Marten Transport, Ltd. 2019 Form 10-K Summary
Business Context and Reporting Period
Marten Transport, Ltd. is a temperature-sensitive and dry freight transportation company operating through Truckload, Dedicated, Intermodal and Brokerage reporting segments, with MRTN de Mexico activities included within Truckload and Brokerage. The filing covers the fiscal year ended December 31, 2019, and was filed February 28, 2020. Approximately 99% of revenue was generated in the United States.
The company operated 3,212 tractors, 5,464 trailers and 237 refrigerated containers at year-end. Temperature-sensitive products represented approximately 57% of Truckload and Dedicated revenue, while dry freight represented approximately 43%.
Financial Performance and Liquidity
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Operating revenue | $843.3 million | $787.6 million | 7.1% increase |
| Operating income | $76.5 million | $70.3 million | 8.7% increase |
| Net income | $61.1 million | $55.0 million | 11.0% increase |
| Diluted earnings per share | $1.11 | $1.00 | 11.0% increase |
| Operating ratio | 90.9% | 91.1% | 20 basis-point improvement |
| Cash flow from operations | $153.2 million | $150.6 million | 1.7% increase |
Revenue excluding fuel surcharges increased 8.6% to $739.9 million. Fuel surcharge revenue declined to $103.4 million from $106.2 million. The net fuel expense increased 2.2% to $30.1 million but declined to 4.8% of Truckload, Dedicated and Intermodal revenue excluding fuel surcharges from 4.9%.
| Segment | 2019 Revenue | Revenue Change | 2019 Operating Income | Operating Income Change |
|---|---|---|---|---|
| Truckload | $378.0 million | 0.7% increase | $29.7 million | 15.4% decrease |
| Dedicated | $266.0 million | 18.8% increase | $31.2 million | 68.1% increase |
| Intermodal | $90.4 million | 11.4% decrease | $6.6 million | 40.7% decrease |
| Brokerage | $108.9 million | 26.1% increase | $9.0 million | 61.9% increase |
At December 31, 2019, cash and cash equivalents were $31.5 million, stockholders’ equity was $597.6 million, and the company had no outstanding long-term debt or credit-facility borrowings. The $30.0 million revolving credit facility had $14.3 million of remaining borrowing availability after $15.7 million of standby letters of credit. Management stated that liquidity was adequate for at least the next twelve months and that no significant liquidity constraints were anticipated.
Capital expenditures, net of equipment dispositions, were $133.7 million in 2019. Management estimated 2020 net capital expenditures of approximately $153 million. The company paid $42.1 million of dividends in 2019, including a $0.65 per-share special dividend, and had authorization for up to $34 million of future share repurchases, although no shares were repurchased in 2019.
Material Changes Versus the Prior Comparable Period
- Dedicated revenue grew primarily from fleet expansion, additional contracts and higher average revenue per tractor. Its operating ratio improved to 88.3% from 91.7%.
- Brokerage revenue increased because of higher load volume, while its operating ratio improved to 91.8% from 93.6%.
- Truckload operating income declined despite modest revenue growth, primarily because salaries and wages increased as a percentage of revenue; its operating ratio worsened to 92.2% from 90.7%.
- Intermodal revenue and profitability declined because of lower load volume and higher salaries, fuel expense and railroad costs as a percentage of revenue.
- Operating expenses increased 6.9%, including increases in salaries and benefits, purchased transportation, supplies and maintenance, and depreciation.
- Net property and equipment increased to $640.4 million from $588.2 million, reflecting continued fleet investment.
- The company adopted ASC 842 lease accounting in 2019, recording approximately $1.1 million of additional lease assets and liabilities at adoption without an impact on net earnings or cash flows.
- The company sold its 45% interest in MW Logistics, LLC, effective October 31, 2019, for approximately $1.3 million.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal revenue or earnings guidance. Management expected approximately $153 million of 2020 net capital expenditures and continued quarterly dividends, subject to board approval, financial condition, cash requirements and credit-facility restrictions.
- Demand, freight rates, excess industry capacity, customer concentration and general economic conditions may materially affect results.
- The top 30 customers represented approximately 69% of 2019 revenue, the top ten represented 50%, and the largest customer, Walmart, represented 17%. Most Truckload and Brokerage customer arrangements are generally one-year contracts without firm shipment commitments.
- Driver shortages and compensation pressures may reduce capacity, increase costs and constrain growth.
- Fuel-price volatility remains a key market risk. Management estimated that a 5% increase in the average diesel price would have increased 2019 fuel expense by approximately $6.0 million. The company had no fuel hedging instruments at year-end.
- The company self-insures substantial portions of auto liability and workers’ compensation claims, retaining 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 $31.7 million at year-end.
- Standby letters of credit, purchase obligations and operating leases included $90.9 million of 2020 revenue-equipment purchase obligations and $1.2 million of operating lease payments through 2024.
- Seasonality and severe weather can reduce tractor productivity while increasing accidents, claims, repairs and fuel consumption.
- Regulatory risks include driver hours-of-service rules, electronic logging requirements, drug and alcohol testing, safety standards and environmental requirements. The company reported that its fleet had converted to electronic logging devices before December 2019.
- A critical audit matter involved estimation of auto liability and workers’ compensation self-insurance reserves. The independent auditor issued an unqualified opinion on the financial statements and internal controls.
Important Facts for Investors to Verify
- Confirm the sustainability of Dedicated and Brokerage growth and whether Truckload and Intermodal margins recover.
- Review fleet expansion, equipment replacement commitments and whether planned 2020 capital spending can be funded from operating cash flow without increasing debt.
- Monitor customer concentration, contract renewals and exposure to Walmart and other major customers.
- Assess driver availability, wage inflation, turnover and the effect on fleet utilization.
- Evaluate self-insurance reserve adequacy, claims severity, insurance premiums and the $15.7 million standby-letter-of-credit requirement.
- Track fuel prices, surcharge recovery and exposure from non-revenue miles and idling that fuel surcharges do not fully offset.
- Review dividend capacity under the revolving credit facility and the company’s future use of the $34 million share-repurchase authorization.
- Consider the assumptions supporting equipment salvage values, useful lives and used-equipment resale gains; a 5% decrease in estimated salvage values would have reduced year-end net property and equipment by approximately $12.3 million.