Marten Transport, Ltd. 2017 Form 10-K Summary
Business context and reporting period
Marten Transport is a temperature-sensitive truckload carrier serving the United States and parts of Canada and Mexico. Its four reporting segments are Truckload, Dedicated, Intermodal and Brokerage. Approximately 66% of Truckload and Dedicated revenue was related to temperature-sensitive products and 34% to dry freight. The filing covers the fiscal year ended December 31, 2017, with comparative results for 2016 and 2015. The fourth quarter of 2017 is also presented in unaudited quarterly data.
At year-end, the company operated 2,738 tractors and 4,909 trailers, employed 3,492 people and contracted with 60 independent contractors. Walmart was the largest customer and represented approximately 19% of 2017 revenue.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Operating revenue | $698.1 million | $671.1 million | +4.0% |
| Operating income | $56.9 million | $58.3 million | -2.5% |
| Operating margin | 8.1% | 8.7% | Down 0.6 points |
| Operating ratio | 91.9% | 91.3% | Higher by 0.6 points |
| Net income | $90.3 million | $33.5 million | +169.8% |
| Net income excluding tax benefit | $33.8 million | $33.5 million | +1.1% |
| Diluted EPS | $1.65 | $0.61 | Increased primarily due to tax benefit |
| Diluted EPS excluding tax benefit | $0.62 | $0.61 | +1.6% |
| Cash flow from operations | $121.9 million | $133.8 million | Down $11.9 million |
| Cash and cash equivalents | $15.8 million | $0.5 million | Up $15.3 million |
| Long-term debt | None | $7.9 million | Debt repaid |
| Stockholders’ equity | $525.5 million | $437.3 million | +20.2% |
The $56.5 million deferred income tax benefit resulted from remeasuring deferred tax balances following the Tax Cuts and Jobs Act reduction in the federal corporate tax rate from 35% to 21%. Excluding this nonrecurring benefit, the effective tax rate was 40.1% in 2017.
Segment performance and material changes
- Truckload: Revenue increased 1.2% to $380.2 million, but revenue excluding fuel surcharges declined 1.0% to $336.6 million. Average tractors declined to 1,837 from 1,898, while revenue per tractor improved. Operating income decreased 4.1% to $26.3 million and the operating ratio increased to 93.1% from 92.7%.
- Dedicated: Revenue increased 6.0% to $166.9 million, supported by fleet growth and higher revenue per tractor. Operating income decreased 12.7% to $17.1 million, and the operating ratio worsened to 89.8% from 87.6%, primarily because of higher insurance and claims expense.
- Intermodal: Revenue increased 12.8% to $80.6 million on higher volume. Operating income increased 16.4% to $8.3 million, and the operating ratio improved to 89.7% from 90.0%.
- Brokerage: Revenue increased 6.0% to $70.4 million, primarily from higher revenue per load. Operating income increased 23.3% to $5.2 million, and the operating ratio improved to 92.7% from 93.7% through cost controls.
Fuel surcharge revenue increased to $67.1 million from $53.2 million due to higher fuel prices. Fuel and fuel taxes increased 12.0%, but net fuel expense declined slightly to $46.8 million because of improved fuel efficiency, purchasing practices and revenue rates. Insurance and claims expense rose 19.7% to $38.6 million, reflecting higher physical damage claims, workers’ compensation claims and auto liability premiums. Gains on revenue equipment dispositions fell to $5.5 million from $10.5 million because of a softer used-equipment market.
Cash flow, liquidity and capital resources
Operating cash flow of $121.9 million was primarily used for $87.6 million of net revenue-equipment purchases, $5.8 million of regional facility construction, $7.9 million of net debt repayment and $4.4 million of dividends. Gross revenue-equipment additions were $148.9 million, partially offset by $61.2 million of disposal proceeds.
The company had no outstanding borrowings under its $40.0 million unsecured revolving credit facility at December 31, 2017. After $12.9 million of standby letters of credit supporting self-insurance obligations, remaining borrowing availability was $27.1 million. The facility matures in December 2019, contains leverage and fixed-charge coverage covenants, and the company was in compliance at year-end.
Management expects approximately $115 million of 2018 capital expenditures net of disposal proceeds and believes liquidity is adequate for at least the next twelve months. Contractual obligations included $121.9 million of 2018 revenue-equipment purchases, a $4.0 million land purchase obligation and $0.7 million of operating lease obligations through 2021.
Outlook, risks and unusual items
- Management emphasizes organic growth, a modern fleet, regional truckload operations and expansion of Dedicated, Intermodal and Brokerage services. No formal revenue or earnings guidance was provided.
- The Tax Cuts and Jobs Act is expected to reduce the effective tax rate beginning in 2018 and permits full expensing of certain qualified property, partially offset by repeal of like-kind exchanges.
- Revenue recognition under ASC 606 was scheduled for adoption on January 1, 2018 using the modified retrospective method, with an estimated $485,000 increase to opening retained earnings and an expected immaterial ongoing effect on net income.
- Driver shortages, wage pressure, freight-rate competition and customer concentration remain significant risks. The top 30 customers represented approximately 64% of revenue, the top ten 45%, and the top five 36%.
- The company self-insures substantial portions of workers’ compensation, auto liability, cargo, property and health claims. It is responsible for the first $1.0 million of each auto liability claim and $750,000 of each workers’ compensation claim. Insurance and claims accruals were $26.2 million at year-end.
- Fuel prices, equipment costs, used-equipment resale values, weather, railroad capacity, regulatory changes and environmental or safety liabilities could materially affect results. A 5% increase in the average diesel price would have increased 2017 fuel expense by approximately $5.2 million.
- The entire tractor fleet had electronic logging devices before the December 2017 compliance deadline; strict enforcement was expected in April 2018.
- The company reported routine litigation, primarily transportation-related claims, but management considered a material adverse outcome remote. Grant Thornton issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts to verify
- Whether 2018 capital expenditures near the projected $115 million and committed equipment purchases of $121.9 million remain consistent with operating cash generation.
- Whether the improvement in underlying earnings excluding the $56.5 million tax benefit continues, given that 2017 reported net income was heavily affected by the benefit.
- Trends in insurance and claims expense, self-insured reserves and claim severity.
- Customer concentration and renewal or pricing developments, particularly involving Walmart and other major customers.
- Truckload fleet utilization, driver availability, revenue per tractor and the effect of freight-rate conditions.
- Fuel prices, surcharge recovery, non-revenue miles and the sensitivity of margins to fuel-price changes.
- Used tractor and trailer resale values and their effect on equipment-disposal gains.
- The actual financial impact of ASC 606 adoption and subsequent quarterly disclosures.