Marten Transport, Ltd. — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three and six months ended June 30, 2014, filed August 8, 2014. Marten provides temperature-controlled and dry truckload transportation, intermodal services, brokerage, and other logistics services. Reporting segments are Truckload and Logistics.
The company owns a 45% equity interest in MW Logistics, LLC (MWL), which was deconsolidated effective March 28, 2013 and is now accounted for under the equity method. Comparisons with 2013 are therefore affected by the change in presentation.
Financial Performance and Position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Operating revenue | $168.4 million | $161.4 million | $327.8 million | $325.9 million |
| Operating income | $12.9 million | $13.1 million | $21.6 million | $25.7 million |
| Net income | $7.9 million | $7.7 million | $13.2 million | $14.9 million |
| Diluted EPS | $0.24 | $0.23 | $0.39 | $0.45 |
| Operating ratio | 92.3% | 91.9% | 93.4% | 92.1% |
- Q2 revenue increased 4.3%, while operating income declined 1.4%. Net margin was approximately 4.7%, compared with 4.8% in the prior-year quarter.
- Six-month revenue increased 0.6%, but operating income fell 15.9% and net income fell 11.1%. Six-month net margin was approximately 4.0%, compared with 4.6% in 2013.
- Truckload revenue increased 1.8% in Q2 and 1.8% for the six-month period. Logistics revenue increased 13.8% in Q2 but decreased 3.4% for the six-month period, partly reflecting MWL deconsolidation and lower brokerage activity.
- Average truckload revenue, net of fuel surcharges, per tractor per week increased 4.1% in Q2 and 4.0% for the six-month period, while average tractors declined 1.8% and 1.5%, respectively.
- Cash flow from operations was $40.7 million for the first six months, down from $47.8 million in 2013. Investing cash flow was $(69.5) million, primarily for equipment and facilities, compared with $(54.4) million in 2013.
- Net cash used for revenue equipment purchases, after dispositions, was approximately $44.7 million. Facility acquisitions and construction used approximately $22.0 million.
- Cash and cash equivalents were $956,000 at June 30, 2014, compared with $13.7 million at December 31, 2013. Total assets were $562.1 million and stockholders’ equity was $372.4 million.
- Long-term debt was $16.8 million, compared with none at year-end 2013. The company had $24.1 million of remaining borrowing availability and $9.2 million of standby letters of credit under its credit facility.
- Quarterly dividends were $0.025 per share in each of the first two quarters, compared with $0.017 per share in the corresponding 2013 quarters.
Material Changes Versus the Prior Comparable Period
- Six-month profitability was pressured by severe first-quarter weather, which reduced freight volumes and increased operating costs, including maintenance and claims expense.
- The gain on disposition of revenue equipment declined to $1.9 million from $3.7 million, reflecting lower used-equipment market values and fewer planned tractor dispositions.
- Six-month salaries, wages and benefits increased 4.7%, including a $1.6 million increase in self-insured medical claims. Supplies and maintenance increased 6.4%, and insurance and claims increased 10.1%.
- Net fuel expense declined 2.4% for the six-month period, and fuel efficiency initiatives reduced net fuel expense as a percentage of truckload and intermodal revenue, net of surcharges, to 10.6% from 11.3%.
- Truckload operating income declined 9.5% for the six-month period, while Logistics operating income declined 48.0%. Logistics’ operating ratio increased to 97.0% from 94.5%, partly because of a greater mix of dry-container intermodal activity and railroad service issues.
- MWL-related revenue recognized by Marten was $3.6 million in the first six months of 2014, compared with $4.2 million in 2013. Marten also reported an $891,000 receivable from MWL and a $1.7 million accrued liability to MWL at June 30, 2014.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expects approximately $45 million of capital expenditures, net of dispositions, for the remainder of 2014 and was committed to purchase $29.0 million of new revenue equipment during that period.
- Management believes liquidity is adequate for at least the next twelve months and does not anticipate significant liquidity constraints. The credit facility matures in May 2016, bears variable-rate interest, and includes leverage, fixed-charge coverage, and dividend restrictions. The company was in compliance with its covenants at June 30, 2014.
- Total contractual obligations disclosed at June 30, 2014 were $46.7 million, including equipment purchases, debt, operating leases, and building obligations. A $1.4 million nonqualified deferred compensation obligation was excluded because payment timing is uncertain.
- The company self-insures portions of workers’ compensation, auto liability, cargo, property damage, and health claims. A 5% increase in claims development factors would have increased estimated insurance and claims accruals by approximately $3.7 million.
- Fuel-price exposure remains significant. Management estimated that a 5% increase in the average diesel cost would have increased fuel expense by approximately $4.0 million based on first-half consumption. Fuel surcharges recover a substantial portion, but not all, of fuel increases.
- Other risks include driver availability, severe weather, railroad service performance, customer concentration, equipment costs, insurance claims, economic conditions, and fluctuations in freight demand. Management reported no material changes to the risk factors in the 2013 Form 10-K.
- The company has no outstanding fuel-hedging instruments. It may use derivatives or other financial instruments in the future.
- Management stated that the May 2014 revenue-recognition standard, effective in 2017, is not expected to have a significant effect on the company’s financial condition, results, or cash flows.
- Disclosure controls and procedures were assessed as effective, with no material changes to internal control over financial reporting during the quarter.
Investor Verification Checklist
- Verify the effect of MWL’s deconsolidation on year-over-year revenue, expenses, segment results, and related-party balances.
- Monitor whether weather-related costs, medical claims, insurance claims, and railroad service issues continue to pressure operating ratios.
- Reconcile projected second-half capital expenditures and the $29.0 million equipment commitment with operating cash flow, cash balances, and credit-facility availability.
- Review debt covenant compliance, variable interest-rate exposure, standby letters of credit, and the company’s low cash balance.
- Assess the sustainability of higher revenue per tractor and the effect of a smaller average fleet on future growth.
- Evaluate sensitivity to diesel prices, including the portion of fuel costs not recovered through customer surcharges.
- Review related-party transactions with Bauer Built, Inc. and MWL, including pricing, receivables, payables, and the company’s 45% equity investment.