P.A.M. Transportation Services, Inc. — 2019 Q2 Form 10-Q
Business context and reporting period
P.A.M. Transportation Services, Inc. is a motor carrier providing truckload transportation, brokerage and logistics services in the United States, Mexico and Canada. This unaudited Form 10-Q covers the three and six months ended June 30, 2019, with comparisons to the corresponding 2018 periods.
Financial performance and key metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total operating revenue | $133.0 million | $135.3 million | $261.7 million | $254.8 million |
| Revenue before fuel surcharge | $112.4 million | $112.9 million | $222.7 million | $212.0 million |
| Operating income | $13.2 million | $10.0 million | $22.9 million | $13.8 million |
| Net income | $8.7 million | $7.3 million | $17.0 million | $8.7 million |
| Diluted EPS | $1.45 | $1.17 | $2.84 | $1.39 |
| Operating margin on total revenue | 9.9% | 7.4% | 8.8% | 5.4% |
| Net margin on total revenue | 6.5% | 5.4% | 6.5% | 3.4% |
- Q2 total revenue declined 1.7%, primarily because fuel surcharge revenue decreased to $20.6 million from $22.4 million. Revenue before fuel surcharge was broadly stable.
- Six-month revenue before fuel surcharge increased 5.1%, while total operating revenue increased 2.7%.
- Truckload revenue before fuel surcharge increased 4.2% in Q2 and 7.8% for the six-month period. Brokerage and logistics revenue decreased 18.0% in Q2 and 5.9% year to date.
- Operating income increased 31.9% in Q2 and 66.2% for the six-month period. Management attributed the improvement mainly to greater company-owned capacity, lower purchased transportation costs, lower insurance and claims costs, and improved utilization of fixed costs.
- Q2 truckload operating ratio improved to 87.1% from 90.2%; the six-month ratio improved to 89.0% from 93.2%. Brokerage and logistics operating ratios improved to 93.9% from 94.4% in Q2 and to 93.1% from 94.8% year to date.
- Interest expense increased to $2.1 million in Q2 from $1.4 million and to $4.1 million for six months from $2.5 million, primarily due to higher market interest rates.
- Non-operating income was affected by marketable equity securities. The company recorded an approximately $0.6 million unrealized loss in Q2 2019 versus an approximately $0.3 million gain in Q2 2018; for six months, the comparable amounts were an approximately $2.6 million gain and $0.8 million loss.
Cash flow, balance sheet, debt and liquidity
- Six-month operating cash flow was $53.2 million, compared with $29.5 million in 2018.
- Investing activities used $18.5 million, including $26.9 million of property and equipment purchases and $7.8 million of equipment-sale proceeds.
- Financing activities used $34.7 million, including $37.0 million of long-term debt repayments and $13.4 million of common-stock repurchases.
- Cash and cash equivalents were $0.3 million at June 30, 2019, compared with $0.3 million at December 31, 2018. Total current assets were $106.7 million and total current liabilities were $103.3 million.
- Total debt, including current maturities, was approximately $217.1 million at June 30, 2019 versus $221.2 million at December 31, 2018. The balance included $58.7 million of current maturities and $158.4 million of long-term debt.
- The revolving credit facility was increased to $60.0 million, with maturity extended to July 1, 2022. Borrowings bear interest at LIBOR plus 1.25%, or 3.69% at June 30, 2019. Outstanding advances were approximately $11.3 million, including $0.6 million of letters of credit, leaving $48.7 million available.
- Marketable equity securities were $29.5 million, including $3.7 million of unrealized gains. These securities may be used as collateral for margin borrowings; margin-account borrowings were approximately $10.1 million.
- During the first six months, the company entered into approximately $32.4 million of installment obligations for revenue equipment and financed approximately $16.0 million of equipment purchases through noncash financing.
Material changes, outlook and unusual items
- The company repurchased 43,138 shares for approximately $1.8 million under its repurchase program and accepted 192,743 shares in a June tender offer at $60 per share, for approximately $11.6 million. Total Q2 repurchases were 196,233 shares at an average price of $59.86.
- The company became self-insured for property damage on company-owned trucks effective September 1, 2018. Insurance and claims expense declined as a percentage of revenue in both comparison periods.
- The company adopted the new lease standard on January 1, 2019 without a material overall impact. A May 2019 operating lease resulted in recognition of a $1.3 million right-of-use asset and lease liability.
- Management expects to purchase approximately 320 new trucks and 350 new trailers during the remainder of 2019, with anticipated net capital expenditures of approximately $43.6 million.
- Management believes cash balances, operating cash flow and available financing will meet working-capital and planned capital-expenditure needs over the next twelve months and does not expect significant near-term liquidity constraints. The company does not anticipate paying cash dividends in the foreseeable future.
- A collective-action lawsuit by former drivers alleges violations of federal and Arkansas wage laws, including unpaid orientation and travel time, unlawful deductions and breach of contract. The company is vigorously defending the case, cannot reasonably estimate any potential loss, and states that losses would not be covered by existing insurance.
- Key disclosed risks include freight-rate pressure and excess trucking capacity, economic downturns, fuel and interest-rate volatility, driver recruitment and retention, equipment values, insurance and self-insurance claims, financing availability, cybersecurity and information-technology failures, competition, litigation, Mexico-related risks, customer concentration and fluctuations in the equity securities portfolio.
Important facts for investors to verify
- Verify whether the improvement in operating margins is sustainable after factoring in fuel prices, freight rates, fleet growth and the shift from third-party carriers to company-owned capacity.
- Monitor the substantial planned equipment purchases, related debt financing and the company’s ability to convert operating cash flow into durable free cash flow.
- Assess exposure to floating-rate debt, margin borrowings and the $29.5 million marketable equity portfolio, whose value can materially affect earnings.
- Review the potential financial impact and status of the unresolved driver wage lawsuit, for which no loss estimate is currently provided.
- Evaluate the risks and future claims experience associated with the company’s self-insured property-damage program.
- Confirm the remaining repurchase authorization, treasury-stock balance and effect of reduced share count on per-share results.