Marten Transport, Ltd. 2016 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
Marten Transport provides temperature-controlled and insulated transportation services across the United States and into and out of Mexico and Canada. Its reporting segments are Truckload, Dedicated, Intermodal and Brokerage. This unaudited Form 10-Q covers the three and six months ended June 30, 2016, compared with the corresponding 2015 periods.
Key Financial Metrics
| Metric | Q2 2016 | Q2 2015 | Six Months 2016 | Six Months 2015 |
|---|---|---|---|---|
| Operating revenue | $166.1 million | $163.6 million | $328.0 million | $324.9 million |
| Operating income | $14.8 million | $14.2 million | $28.9 million | $31.5 million |
| Net income | $8.5 million | $8.4 million | $16.7 million | $18.5 million |
| Diluted EPS | $0.26 | $0.25 | $0.51 | $0.55 |
| Operating margin | 8.9% | 8.7% | 8.8% | 9.7% |
| Net margin | 5.1% | 5.1% | 5.1% | 5.7% |
| Operating ratio | 91.1% | 91.3% | 91.2% | 90.3% |
Six-month operating cash flow was $80.1 million, compared with $71.8 million in 2015. Investing cash flow was negative $39.7 million, including $66.0 million of revenue-equipment additions and $29.1 million of equipment-disposition proceeds. Financing cash flow was negative $40.7 million, principally reflecting $33.5 million of net debt repayment, $7.5 million of share repurchases and $1.6 million of dividends. Cash and cash equivalents declined to $208,000 from $434,000 at December 31, 2015.
At June 30, 2016, total assets were $627.6 million, stockholders’ equity was $419.5 million, current liabilities were $62.5 million and long-term debt was $4.4 million. The unsecured credit facility matures in December 2019, had a $30.0 million commitment, $4.4 million outstanding borrowings, $11.2 million of standby letters of credit and $14.4 million of remaining borrowing availability. The company was in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue increased 1.5%, while six-month revenue increased 1.0%, despite a 42.2% six-month decline in fuel-surcharge revenue caused by lower fuel prices.
- Six-month revenue excluding fuel surcharges and discontinued dry-container revenue increased 7.6% to $304.8 million.
- Dedicated revenue increased 59.6% in the first six months, driven primarily by a 72.5% increase in average fleet size and more customer contracts. Dedicated operating income increased 107.1%.
- Truckload revenue declined 9.8% in the first six months, with revenue excluding fuel surcharges down 4.3%, primarily because of lower average revenue per tractor and a continued soft freight market. Truckload operating income declined 28.4%.
- Intermodal revenue declined 11.3% on a reported basis, partly reflecting the 2015 discontinuation of dry-container service. Intermodal operating income increased 69.0% and its operating ratio improved to 89.3% from 94.4%.
- Brokerage revenue decreased 2.6%, while Brokerage operating income increased 15.2% due primarily to lower carrier payments as a percentage of revenue.
- Six-month operating income declined 8.2% because the 2015 period included a $3.7 million gain on sale of a facility. Excluding that gain, management states that 2016 earnings improved 2.2%.
- Salary, wage and benefit expense increased 11.3% for the first six months, reflecting higher company-driver miles, compensation costs and self-insured medical claims. Depreciation increased 11.8% due to fleet growth and higher equipment costs.
- Net fuel expense increased 18.5% for the first six months despite lower diesel prices, reaching $23.0 million, or 8.5% of applicable segment revenue excluding fuel surcharges.
Guidance, Outlook, Risks and Unusual Items
- Management expects approximately $80 million of capital expenditures, net of disposition proceeds, during the remainder of 2016. It believes liquidity is adequate for at least the next twelve months and does not anticipate significant near-term liquidity constraints.
- The company committed to purchase $84.9 million of new revenue equipment during the remainder of 2016, in addition to $123,000 of building construction obligations and $281,000 of operating lease obligations through 2018.
- Management expects to continue quarterly cash dividends, subject to financial condition, cash requirements, corporate-law requirements and board approval. A lender waiver applies to the credit-facility limitation on dividends and stock repurchases for 2015 and 2016.
- Key operating risks include a soft freight market, driver availability, fuel-price volatility, inflation in equipment and labor costs, customer and freight concentration, seasonality, severe weather and capacity conditions.
- The company self-insures portions of workers’ compensation, auto liability, general liability, cargo, property damage and employee health claims. It retains 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 $17.4 million at June 30, 2016.
- A 5% increase in average diesel fuel costs would have increased six-month fuel expense by approximately $2.1 million. The company had no outstanding fuel-hedging instruments.
- Related-party transactions included payments to Bauer Built, Inc., a company affiliated with a director, and transportation activity involving MW Logistics, in which Marten owns a 45% equity interest.
- Management reported no material changes to previously disclosed risk factors, no other material off-balance-sheet arrangements beyond standby letters of credit and operating leases, and effective disclosure controls as of June 30, 2016.
- Recent accounting standards on revenue recognition, leases and share-based compensation were not expected to have a significant overall impact, although the share-based compensation standard may cause quarterly tax-provision volatility.
Important Facts for Investors to Verify
- Whether Dedicated segment growth and improved margins can offset continued Truckload pricing and utilization pressure.
- The timing and funding of the remaining $80 million of planned 2016 net capital expenditures and the $84.9 million equipment purchase commitment.
- Available borrowing capacity after considering the $4.4 million debt balance and $11.2 million of standby letters of credit.
- Trends in net fuel expense, fuel-surcharge recovery, driver compensation, insurance claims and self-insured medical costs.
- The sustainability of equipment-disposition gains, which were $4.1 million in the first six months of 2016.
- The impact of customer concentration, related-party activity and the $3.8 million accrued liability to MW Logistics.
- Future dividend and repurchase capacity under the credit agreement and applicable lender waivers.