P.A.M. Transportation Services, Inc. — 2020 Q3 Form 10-Q Summary
Business context and reporting period
P.A.M. Transportation Services, Inc. is a motor carrier providing truckload, brokerage and logistics services in the United States, Mexico and Canada. The filing covers the unaudited three and nine months ended September 30, 2020, compared with the corresponding 2019 periods. The company reported as a smaller reporting company and accelerated filer.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Total operating revenue | $121.9 million | $129.0 million | $344.1 million | $390.7 million |
| Revenue before fuel surcharge | $109.9 million | $110.1 million | $307.4 million | $332.8 million |
| Operating income | $10.1 million | $7.5 million | $17.6 million | $30.4 million |
| Net income | $6.0 million | $4.6 million | $3.9 million | $21.5 million |
| Diluted EPS | $1.04 | $0.79 | $0.67 | $3.65 |
| Net cash from operating activities | Not separately provided | Not separately provided | $53.1 million | $76.4 million |
Q3 operating margin was approximately 8.3%, versus 5.8% in the prior-year quarter. Nine-month operating margin was approximately 5.1%, versus 7.8% in 2019. Net margin was approximately 4.9% in Q3 2020 versus 3.6% in Q3 2019, but only approximately 1.1% for the first nine months versus 5.5% in the prior-year period.
- Truckload revenue before fuel surcharge declined 10.3% in Q3 to $82.9 million and 11.3% for nine months to $244.2 million.
- Brokerage and logistics revenue before fuel surcharge increased 52.0% in Q3 to $26.9 million and 9.9% for nine months to $63.2 million.
- Cash and cash equivalents were $0.3 million at September 30, 2020, compared with $0.3 million at December 31, 2019.
- Marketable equity securities were $25.2 million, down from $29.5 million at year-end, with a $1.4 million unrealized loss at September 30, 2020 versus a $5.4 million unrealized gain at year-end 2019.
- Total current assets were $108.7 million and current liabilities were $135.5 million, producing reported current assets below current liabilities.
- Aggregate current maturities and long-term debt were approximately $258.5 million, up from $241.8 million at December 31, 2019. The company also had $12.7 million of margin-account borrowings included in accrued liabilities.
- The revolving credit facility had $11.4 million outstanding, including $0.3 million of letters of credit, and $48.6 million of remaining availability at September 30, 2020. The facility matures July 1, 2022 and bears interest at LIBOR plus 1.25%.
- Investing activities used $29.4 million and financing activities used $23.7 million during the first nine months of 2020. Capital expenditures and other asset purchases totaled approximately $83.7 million, substantially financed with debt and other sources.
Material changes versus the prior comparable periods
- COVID-19-related shutdowns at automotive customers, which represented approximately 45% of revenue, reduced freight volumes and materially affected the first nine months of 2020. Automotive operations resumed during the second quarter, but recovery remained uncertain.
- Lower truckload revenue reflected approximately 10% fewer trucks in the fleet during Q3, primarily due to a reduced independent-contractor fleet, as well as weaker market conditions.
- Brokerage and logistics became a larger portion of revenue, representing 24.5% of revenue before fuel surcharge in Q3 2020 versus 16.1% in Q3 2019.
- The truckload operating ratio improved to 89.7% in Q3 from 92.6%, but deteriorated to 94.0% for the first nine months from 90.2%. The brokerage and logistics operating ratio improved to 94.3% in Q3 from 96.0%, but worsened to 95.6% for nine months from 94.0%.
- Non-operating results declined sharply because of marketable-equity-security losses: nine-month non-operating expense was $6.2 million in 2020 versus $3.8 million of income in 2019. The nine-month portfolio loss included approximately $7.4 million of recognized loss or decline in market value.
- Insurance and claims expense declined, partly because the company became self-insured for certain auto-liability layers beginning September 1, 2019 and benefited from a litigation settlement below previously accrued amounts.
- The company purchased a 51.6-acre Laredo, Texas terminal, increasing land by approximately $8.8 million and structures and improvements by approximately $10.9 million. It financed the purchase with a $17.6 million ten-year term loan at a fixed 3.021% rate.
- Accounts payable increased to $42.2 million from $16.6 million at year-end, primarily because of extended supplier payment terms. Trade accounts receivable increased to $70.0 million from $61.8 million.
Guidance, outlook, risks and unusual items
- Management expected to purchase approximately 300 new trucks and 500 new trailers during the remainder of 2020, with anticipated net capital expenditures of approximately $38.0 million.
- Management stated that cash balances, operating cash flow and expected financing availability should fund near-term working capital and planned capital expenditures over the following twelve months, while acknowledging significant long-term capital requirements.
- The company does not anticipate paying cash dividends in the foreseeable future and intends to retain earnings for growth.
- The principal stated risks include prolonged or renewed COVID-19 disruption, automotive-sector concentration, reduced freight demand, excess trucking capacity, fuel-price volatility, driver recruitment and retention, insurance and claims exposure, financing availability, used-equipment values, competition, litigation, technology risks and Mexico-related operating risks.
- The company paid $16.5 million in August 2020 to settle a collective- and class-action lawsuit involving employee-driver wage and deduction claims. Management stated that the loss was not covered by insurance. A separate independent-contractor lawsuit was settled for approximately $421,000 plus legal fees, with excess reserves reversed.
- Marketable equity securities and the margin account create equity-price and liquidity exposure. A 10% decline in the securities portfolio would reduce carrying value by approximately $2.5 million.
- A hypothetical 100-basis-point increase in LIBOR would increase annual interest expense by approximately $125,000 based on $12.5 million of variable-rate debt. A 10% increase in diesel prices would increase annual fuel expense by approximately $5.1 million based on 2019 consumption.
- Management reported effective disclosure controls as of September 30, 2020 and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Verify the effect of the $16.5 million litigation settlement on reported nine-month earnings, cash flow and accrued liabilities.
- Assess whether automotive freight volumes and customer production recovered after the filing date and whether customer concentration remains approximately 45% of revenue.
- Reconcile the company’s very low cash balance and current-liability position with revolving-credit availability, margin borrowings and other debt obligations.
- Monitor the planned $38.0 million net capital expenditure program, equipment purchases, fleet size and related financing needs.
- Review the volatility of the marketable-equity-securities portfolio and the potential for additional non-operating gains or losses.
- Confirm the sustainability of improved Q3 operating performance given the weaker nine-month results, lower truckload volumes and increased reliance on brokerage and logistics revenue.