Marten Transport, Ltd. — Form 10-Q Summary
Business Context and Reporting Period
Unaudited results cover the three months ended March 31, 2014, compared with the three months ended March 31, 2013. Marten provides temperature-controlled and dry truckload transportation, brokerage, intermodal and other logistics services. It reports two segments: Truckload and Logistics. The company deconsolidated its 45%-owned MW Logistics, LLC affiliate effective March 28, 2013 and thereafter accounts for it under the equity method.
Key Financial Metrics
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Operating revenue | $159.4 million | $164.5 million |
| Operating income | $8.6 million | $12.5 million |
| Operating margin | 5.4% | 7.6% |
| Net income | $5.3 million | $7.2 million |
| Net margin | 3.3% | 4.4% |
| Diluted EPS | $0.16 | $0.22 |
| Operating cash flow | $27.5 million | $22.0 million |
| Capital expenditures, gross | $31.2 million | $25.7 million |
| Cash at period end | $19.3 million | $9.0 million |
At March 31, 2014, total assets were $536.3 million, stockholders’ equity was $364.2 million and net property and equipment was $424.1 million. The company had no outstanding borrowings under its $50 million unsecured credit facility, $41.7 million of remaining borrowing availability after $8.3 million of standby letters of credit, and no long-term debt outstanding. The facility matures in May 2016 and permits an increase to $75 million subject to lender amendments.
Material Changes Versus the Prior Comparable Period
- Revenue decreased $5.1 million, or 3.1%, primarily because Logistics revenue declined $7.4 million, or 17.3%. Truckload revenue increased $2.3 million, or 1.9%.
- Revenue excluding fuel surcharges and MWL revenue increased 1.2% to $127.5 million. Truckload revenue excluding fuel surcharges increased 2.7%, supported by a 3.9% increase in average revenue per tractor per week, while average tractors declined 1.2%.
- Brokerage revenue decreased, while intermodal revenue and loads increased. Intermodal revenue increased to $23.7 million from $21.6 million, and intermodal loads increased to 10,523 from 8,590.
- Operating income declined $3.9 million, or 31.1%. Truckload operating income fell 25.0% and Logistics operating income fell 55.1%.
- The consolidated operating ratio worsened to 94.6% from 92.4%; the ratio excluding fuel surcharge revenue increased to 93.2% from 90.6%.
- Severe winter weather reduced freight volumes and increased maintenance, claims and other operating costs. Supplies and maintenance expense increased 9.5%, including a $1.6 million increase in repairs, parts and tires.
- The gain on disposition of revenue equipment declined to $0.7 million from $2.4 million, reflecting lower used-equipment market values and fewer planned tractor dispositions.
- Net income decreased 26.6%, while the effective tax rate declined to 39.5% from 42.2%.
- Operating cash flow increased $5.5 million. Net cash used in investing activities increased to $21.4 million from $13.1 million, primarily due to higher equipment and facility spending.
Guidance, Outlook, Risks and Unusual Items
- Management estimates approximately $79 million of capital expenditures, net of equipment disposition proceeds, for the remainder of 2014. The company was committed to $42.0 million of revenue equipment purchases and $2.6 million of building construction and acquisition expenditures during the remainder of 2014.
- Management believes available cash, operating cash flow, borrowing capacity and other financing sources are adequate for at least the next twelve months and does not anticipate significant liquidity constraints.
- The company expects higher future tractor and trailer ownership costs, including depreciation, because of increased equipment prices. Expired federal and state bonus depreciation provisions are expected to increase current income tax payments as deferred tax liabilities reverse.
- Fuel prices, driver availability, severe weather, freight demand, customer concentration, equipment costs, claims, insurance, and transportation capacity are significant operating risks. A 5% increase in average diesel prices would have increased Q1 2014 fuel expense by approximately $2.0 million based on reported consumption.
- Marten self-insures portions of workers’ compensation, auto liability, general liability, cargo, property damage and health insurance claims. A 5% increase in historical claims development factors would have increased estimated loss reserves by approximately $3.6 million.
- The company has committed quarterly dividends, subject to Board approval. The Q1 dividend was $0.025 per share, compared with $0.017 per share paid in the comparable 2013 period.
- Related-party transactions included payments of $376,000 to Bauer Built, Inc. and tire manufacturers for fuel and tire-related services. Bauer Built is controlled by a company director.
- Marten recognized $1.7 million of revenue from loads arranged by MW Logistics and had a $694,000 receivable from MWL and a $2.2 million accrued liability to MWL at March 31, 2014.
- Management stated that there were no material changes to the risk factors disclosed in the 2013 Form 10-K. Disclosure controls and procedures were deemed effective as of March 31, 2014.
Investor Verification Priorities
- Verify whether the deterioration in operating ratios, particularly in Logistics, was temporary weather-related pressure or a persistent margin issue.
- Monitor the conversion of the $79 million remaining 2014 capital expenditure plan into equipment growth, depreciation and operating cash flow.
- Assess the effect of fuel prices, surcharge recovery limitations and driver availability on future margins.
- Review self-insurance reserves, claims development and the $8.3 million of standby letters of credit.
- Evaluate the comparability of year-over-year Logistics results after MW Logistics’ deconsolidation.
- Track brokerage volumes, intermodal growth and the company’s ability to sustain higher truckload revenue per tractor.