Marten Transport, Ltd. — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the quarter and six months ended June 30, 2017, filed August 8, 2017. Marten provides temperature-controlled and dry freight transportation through Truckload, Dedicated, Intermodal and Brokerage segments across the United States and into and out of Mexico and Canada.
The financial statements are unaudited and presented under U.S. GAAP for interim reporting. A five-for-three stock split was effected July 7, 2017, and all presented share and per-share data were adjusted retroactively.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2017 | Three Months Ended June 30, 2016 | Six Months Ended June 30, 2017 | Six Months Ended June 30, 2016 |
|---|---|---|---|---|
| Operating revenue | $171.5 million | $166.1 million | $344.7 million | $328.0 million |
| Operating income | $15.6 million | $14.8 million | $29.5 million | $28.9 million |
| Net income | $9.1 million | $8.5 million | $17.4 million | $16.7 million |
| Diluted EPS | $0.17 | $0.16 | $0.32 | $0.31 |
| Operating ratio | 90.9% | 91.1% | 91.4% | 91.2% |
- Six-month revenue, net of fuel surcharges, increased 2.5% to $312.5 million. Fuel surcharge revenue increased to $32.2 million from $23.3 million, primarily because of higher fuel prices.
- Six-month operating income increased 2.1%, while net income increased 3.8%. The six-month effective tax rate declined to 40.6% from 41.2%, partly due to the adoption of ASU 2016-09.
- At June 30, 2017, cash and cash equivalents were $10.1 million, total assets were $670.6 million, stockholders’ equity was $454.6 million, and net property and equipment was $568.2 million.
- There was no outstanding principal balance under the unsecured credit facility. The facility had $27.4 million of remaining borrowing availability and $12.6 million of standby letters of credit outstanding. The facility matures in December 2019.
- Six-month cash flow from operations was $65.2 million, compared with $80.2 million in the prior-year period. Investing cash outflow was $47.0 million, including $76.2 million of revenue equipment additions and $31.3 million of disposition proceeds. Financing cash outflow was $8.7 million.
- Net revenue equipment investment was $44.9 million during the first six months. Management estimates approximately $53 million of additional net capital expenditures for the remainder of 2017.
- Quarterly dividends were $0.015 per share, totaling $1.6 million during the first six months. No shares were repurchased during the first two quarters of 2017.
Material Changes Versus the Prior Comparable Period
- Second quarter: Revenue increased 3.3%, operating income increased 5.4%, and net income increased 7.2%. The consolidated operating ratio improved to 90.9% from 91.1%.
- First six months: Revenue increased 5.1%, but operating expenses increased 5.4%, causing the operating ratio to rise to 91.4% from 91.2%. Operating income increased 2.1% and net income increased 3.8%.
- Six-month segment revenue increased 3.5% in Truckload, 7.1% in Dedicated, 9.5% in Intermodal and 4.4% in Brokerage. Truckload operating income declined 2.9%, while Dedicated, Intermodal and Brokerage operating income increased 1.1%, 11.7% and 26.2%, respectively.
- Insurance and claims expense increased $2.7 million, or 18.0%, in the first six months, primarily due to higher workers’ compensation, auto liability and physical damage claims and higher auto liability premiums.
- Depreciation expense increased $2.3 million, or 5.6%, reflecting higher equipment costs and fleet growth. Fuel and fuel taxes increased 17.0%, although net fuel expense declined 1.6% because of fuel surcharges, purchasing discounts and improved fuel efficiency.
- Other operating expense declined $2.4 million, partly because of $1.0 million of net proceeds from a lawsuit settlement and cost-control measures.
- Truckload revenue net of fuel surcharges increased only 0.7% for the six months, while average revenue per tractor increased. The Truckload operating ratio deteriorated to 92.9% from 92.5%, primarily because of higher depreciation and insurance costs.
Guidance, Outlook, Risks and Unusual Items
- Management believes liquidity is adequate for current and anticipated needs for at least the next twelve months and does not anticipate significant liquidity constraints.
- Management expects approximately $53 million of net capital expenditures during the remainder of 2017 and has committed to purchase $60.8 million of new revenue equipment during that period.
- Management expects gains on revenue equipment dispositions to be approximately $1.5 million for the remainder of 2017. Future gains or losses depend on used-equipment market 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 $21.8 million at June 30, 2017.
- Fuel prices remain a material market risk. A 5% increase in the average diesel cost, based on first-half consumption, would have increased fuel expense by approximately $2.5 million. Fuel surcharges recover a substantial portion, but not all, of fuel-cost increases.
- Revenue is affected by economic conditions, freight demand, truck and rail capacity, driver availability, severe weather, fuel prices and customer concentration. Winter weather can reduce productivity and increase accidents, claims, repairs and fuel consumption.
- The company had $60.9 million of contractual obligations, including $60.8 million of revenue equipment purchase obligations and $266,000 of operating lease obligations. A $2.6 million nonqualified deferred compensation obligation was excluded from the contractual-obligation table because payment timing is uncertain.
- Management stated that there were no material changes to previously disclosed risk factors. The company was in compliance with its credit facility covenants at June 30, 2017.
- Revenue recognition guidance under ASC 606 is scheduled for adoption January 1, 2018. The company currently expects to use the modified retrospective method and is still evaluating the quantitative impact and required disclosures. Lease accounting guidance is scheduled for adoption in 2019 and is not expected to have a significant financial statement impact.
- The company received $384,000 of revenue in the first six months from loads arranged by MW Logistics, LLC, in which Marten owns a 45% equity interest. Purchases from related party Bauer Built, Inc. were $182,000 during the period, plus $1.5 million paid to tire manufacturers for tires provided by Bauer Built.
Important Facts for Investors to Verify
- Reconcile revenue growth excluding fuel surcharges with underlying volume, pricing and fleet productivity trends.
- Monitor the sustainability of insurance and claims accruals, self-insured exposures and future accident severity.
- Assess whether planned equipment purchases and higher depreciation can be funded while maintaining cash, dividends and debt-free status.
- Review the effect of fuel prices, surcharge recovery, non-revenue miles and fuel-efficiency initiatives on margins.
- Evaluate the Truckload segment’s declining six-month operating income and worsening operating ratio relative to the growth of Dedicated, Intermodal and Brokerage.
- Confirm the eventual effects of ASC 606 adoption, including timing of revenue and expense recognition and any changes to disclosures.
- Consider customer concentration, driver availability, freight demand, capacity, seasonality, used-equipment values and self-insurance claims as principal operating risks.