MARTEN TRANSPORT LTD quarterly report, Q3 FY2017

Marten Transport, Ltd. — Form 10-Q Summary

Business Context and Reporting Period

Marten Transport is a temperature-controlled and dry-freight transportation company operating through Truckload, Dedicated, Intermodal and Brokerage segments. This unaudited Form 10-Q covers the three and nine months ended September 30, 2017, with comparisons to the corresponding 2016 periods. The filing was dated November 6, 2017.

Key Financial Metrics

Metric	Three Months 2017	Three Months 2016	Nine Months 2017	Nine Months 2016
Operating revenue	$170.7 million	$170.5 million	$515.3 million	$498.5 million
Operating income	$13.0 million	$14.9 million	$42.5 million	$43.8 million
Net income	$7.9 million	$8.4 million	$25.2 million	$25.2 million
Diluted EPS	$0.14	$0.15	$0.46	$0.46
Operating ratio	92.4%	91.3%	91.7%	91.2%
Net cash from operating activities	Not separately provided	Not separately provided	$94.7 million	$104.3 million

Nine-month revenue increased 3.4%, while net income was essentially unchanged. The nine-month operating margin was approximately 8.3%, compared with approximately 8.8% in 2016. The third-quarter net margin was approximately 4.6%, compared with approximately 4.9% in the prior-year quarter.

At September 30, 2017, cash and cash equivalents were $1.2 million, total assets were $676.3 million and stockholders’ equity was $461.3 million.
Net property and equipment was $579.6 million, up from $557.8 million at December 31, 2016.
No long-term debt was outstanding at September 30, 2017, compared with $7.9 million at December 31, 2016.
The unsecured credit facility matures in December 2019, has a $40.0 million commitment, $12.9 million of standby letters of credit outstanding and $27.1 million of remaining borrowing availability.
Capital expenditures for revenue equipment were $135.0 million in the first nine months, partly offset by $53.6 million of equipment disposition proceeds. Net revenue-equipment investment was $81.4 million.
Nine-month financing cash outflows included $3.0 million of dividends and $7.9 million of net debt repayments. No shares were repurchased in the first nine months of 2017.

Material Changes Versus the Prior Comparable Period

Nine-month revenue growth was led by Dedicated revenue, up 5.9% including fuel surcharges; Intermodal, up 9.1%; and Brokerage, up 3.7%. Truckload revenue increased 1.2% including fuel surcharges, but revenue excluding fuel surcharges declined 0.9% because of a smaller average tractor fleet.
Fuel surcharge revenue increased to $47.8 million from $37.9 million, primarily because of higher fuel prices.
Nine-month operating income declined 2.8% and the operating ratio worsened to 91.7% from 91.2%. Insurance and claims expense increased $5.9 million, while depreciation increased $2.7 million.
Third-quarter operating income declined 12.4%, and the consolidated operating ratio increased to 92.4%. Recent hurricanes negatively affected Truckload operations in Texas and the Southeast.
Third-quarter insurance and claims expense rose $3.1 million, or 38.3%, primarily due to physical damage, auto liability, workers’ compensation claims and higher premiums.
Gains on equipment dispositions declined to $4.9 million for the first nine months from $7.5 million, reflecting a softer used-equipment market.
Other operating expenses benefited from approximately $1.0 million of proceeds from a lawsuit settlement, net of current-period legal expenses.
The company completed a five-for-three stock split on July 7, 2017; historical share and per-share data were adjusted retroactively.

Guidance, Outlook, Risks and Unusual Items

Management estimated approximately $22 million of net capital expenditures for the remainder of 2017 and stated that liquidity was adequate for at least the next twelve months.
Management expected equipment-disposition gains of approximately $500,000 for the remainder of 2017.
Management expected to continue quarterly cash dividends, subject to financial condition, cash requirements, corporate-law requirements and Board approval.
Remaining 2017 commitments included $11.6 million of revenue equipment purchases and a $3.4 million building purchase obligation. Total contractual obligations disclosed were $15.2 million.
The company self-insures portions of auto liability, workers’ compensation, cargo, property damage and health claims. Insurance and claims accruals increased to $25.2 million from $19.4 million at year-end 2016. Management noted that claim frequency, severity and litigation outcomes could materially affect results.
A 5% increase in diesel fuel prices would have increased first-nine-month fuel expense by approximately $3.8 million. Fuel surcharges recover a substantial portion, but not all, of fuel-cost increases.
Seasonality, winter weather, driver availability, freight demand, transportation capacity, fuel prices, equipment prices and customer concentration remain important business risks. Management stated that there were no material changes to previously disclosed risk factors.
The company planned to adopt the new revenue-recognition standard on January 1, 2018, using the modified retrospective method. Management was still evaluating the quantitative impact; revenue and related expenses are expected to be recognized over time rather than when freight shipment is completed.
The company adopted ASU 2016-09 for share-based compensation in 2017, resulting in a $152,000 reduction to income-tax expense during the first nine months.
Management stated that disclosure controls and procedures were effective as of September 30, 2017, with no material changes to internal control over financial reporting.

Important Facts for Investors to Verify

Whether insurance and claims costs continue to pressure operating ratios and earnings.
The effect of the smaller Truckload fleet, fleet growth in Dedicated, and volume growth in Intermodal on future revenue and margins.
Actual equipment-disposition gains and used-truck and trailer market conditions.
The final balance-sheet and income-statement impact of ASC 606 revenue recognition upon adoption in 2018.
Cash conversion after capital expenditures, including the planned $22 million of remaining 2017 net capital spending.
Availability under the credit facility after standby letters of credit and compliance with leverage, fixed-charge and dividend covenants.
Development of self-insured claims, including the $1.0 million auto-liability and $750,000 workers’ compensation retention levels.
Customer concentration, fuel-price exposure and the ability of surcharge programs to offset higher fuel costs.