P.A.M. Transportation Services, Inc. — Form 10-Q Summary
Business context and reporting period
This unaudited Form 10-Q covers the quarter ended March 31, 2017, with comparison to the quarter ended March 31, 2016. P.A.M. operates primarily in truckload transportation and brokerage and logistics services across the United States, Mexico, and Canada. Truckload services generated 88.6% of revenue before fuel surcharges, compared with 87.7% in the prior-year quarter.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue before fuel surcharge | $93.6 million | $93.6 million | Essentially flat |
| Fuel surcharge revenue | $15.8 million | $9.9 million | Up $5.9 million |
| Total operating revenue | $109.4 million | $103.6 million | Up 5.6% |
| Operating income | $2.7 million | $5.6 million | Down 52.4% |
| Net income | $2.3 million | $2.9 million | Down 22.2% |
| Diluted EPS | $0.36 | $0.41 | Down $0.05 |
| Cash flow from operations | $12.5 million | $15.4 million | Down $2.9 million |
- Operating margin was approximately 2.4% of total revenue, versus 5.4% in Q1 2016. Net margin was approximately 2.1% of total revenue, versus 2.8%.
- Using revenue before fuel surcharge, management reported net income margins of 2.4% in Q1 2017 and 3.1% in Q1 2016.
- Truckload revenue before fuel surcharge increased 1.0% to $82.9 million. Brokerage and logistics revenue declined 7.4% to $10.7 million.
- The average fleet increased from 1,891 to 1,912 trucks, miles traveled increased from 57.4 million to 60.1 million, and average daily miles per truck increased from 474 to 491. The average customer rate per total mile declined by $0.05.
- Cash and cash equivalents were $0.2 million at March 31, 2017. Marketable equity securities were $25.5 million, with $10.6 million of net unrealized gains.
- Current assets were $100.7 million and current liabilities were $81.9 million. Accounts receivable increased to $60.2 million from $56.1 million at December 31, 2016.
- Total long-term debt and current maturities declined to approximately $155.0 million from $167.2 million at December 31, 2016. The $40.0 million revolving credit facility had approximately $1.2 million outstanding, including $0.8 million of letters of credit, and $38.8 million of availability at quarter-end.
- Net cash used in financing activities was $14.7 million, primarily reflecting debt repayments. Investing activities provided $2.2 million, including equipment-sale proceeds exceeding equipment purchases.
- Shareholders’ equity increased to $95.9 million from $94.2 million at December 31, 2016. Weighted-average diluted shares declined to 6.4 million from 7.1 million.
Material changes versus the prior comparable period
- Revenue growth was driven by higher fuel surcharges, while revenue before fuel surcharges was essentially unchanged because higher mileage and utilization were offset by lower rates.
- Operating profitability deteriorated primarily because rents and purchased transportation, depreciation, and insurance costs increased as percentages of revenue. The truckload operating ratio rose to 97.2% from 93.7%, and the brokerage and logistics operating ratio rose to 96.6% from 96.2%.
- Rents and purchased transportation increased to 40.5% of truckload revenue before fuel surcharge from 32.8%, reflecting growth in owner-operators from 511 to 631 on average.
- Depreciation increased to 12.8% from 11.2%. A reduction in estimated residual values of certain trucks contributed approximately $0.9 million of additional depreciation in Q1 2017.
- Insurance and claims increased to 5.7% from 4.9%, due primarily to higher auto-liability premiums and claims.
- Q1 2016 included a $1.4 million gain on equipment dispositions; Q1 2017 had a negligible gain. Conversely, Q1 2017 included approximately $1.8 million of realized gains on marketable equity securities, compared with a realized loss of approximately $0.1 million in Q1 2016.
- Operating cash flow declined despite lower capital expenditures, partly because of working-capital movements and lower net income.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects to purchase approximately 400 trucks and 400 trailers during the remainder of 2017 while selling or trading older equipment, resulting in expected net capital expenditures of approximately $54.3 million.
- Management believes cash, operating cash flow, and available financing will fund near-term working capital and planned capital expenditures and does not anticipate significant liquidity constraints in the foreseeable future. The company does not anticipate paying cash dividends in the foreseeable future.
- The company is exposed to excess trucking capacity, freight and customer-cycle weakness, fuel-price volatility, driver recruitment and compensation costs, insurance and claims, equipment resale values, interest rates, competition, financing availability, weather, acquisitions, and customer concentration.
- A 10% increase in annual diesel prices, based on 2016 consumption, would increase annual fuel expense by approximately $3.9 million. A 10% decline in the market value of equity securities would reduce their carrying value by approximately $2.6 million.
- The company is defending a collective-action lawsuit filed in the Western District of Arkansas by former drivers alleging wage, deduction, travel-time, and contract violations. The proceeding is under preliminary review; potential losses cannot currently be estimated and are not covered by existing insurance.
- Marketable equity securities and margin borrowings introduce equity-price and liquidity risk. Margin account borrowings were approximately $7.8 million at March 31, 2017, compared with $10.4 million at December 31, 2016.
- Adoption of ASU 2016-09 on January 1, 2017 did not materially affect the financial statements. The company expects future accounting standards, including financial-instrument, revenue, lease, credit-loss, and restricted-cash guidance, generally to have limited balance-sheet or cash-flow effects, although ASU 2016-01 is expected to affect earnings through periodic changes in marketable-security values.
- Management stated that disclosure controls were effective as of March 31, 2017 and that no material changes occurred in internal control over financial reporting.
Investor verification items
- Verify whether freight rates, utilization, and fleet growth improve enough to offset higher owner-operator, depreciation, insurance, and equipment costs.
- Reconcile the planned $54.3 million of 2017 net capital expenditures with operating cash flow, equipment-sale proceeds, and debt repayments.
- Monitor total debt maturities, revolving-credit availability, margin borrowings, and the company’s very low cash balance.
- Assess the volatility and concentration of the $25.5 million marketable-equity portfolio and its contribution to reported earnings.
- Track the driver collective-action lawsuit, potential damages, legal costs, and any effect on insurance or reserves.
- Confirm the sustainability of fuel-surcharge revenue and the effect of future fuel-price movements on net operating costs.
- Review the company’s quarterly filing and subsequent disclosures for changes in guidance, customer demand, equipment values, and accounting-standard adoption impacts.