P.A.M. Transportation Services, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2016. The unaudited filing covers motor-carrier operations consisting primarily of truckload services and brokerage and logistics services.
Key Financial Metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue before fuel surcharge | $98.9 million | $91.1 million | $192.6 million | $173.7 million |
| Fuel surcharge revenue | $12.6 million | $17.0 million | $22.5 million | $33.8 million |
| Total operating revenue | $111.5 million | $108.0 million | $215.1 million | $207.5 million |
| Operating income | $7.4 million | $11.9 million | $12.9 million | $21.0 million |
| Net income | $4.0 million | $7.0 million | $6.9 million | $12.4 million |
| Diluted EPS | $0.61 | $0.94 | $1.01 | $1.66 |
| Operating margin on total revenue | 6.6% | 11.0% | 6.0% | 10.1% |
| Net margin on total revenue | 3.6% | 6.5% | 3.2% | 6.0% |
Revenue before fuel surcharge increased 8.6% in the quarter and 10.8% year to date, while total revenue increased 3.2% and 3.7%, respectively. Net income declined approximately 43% in the quarter and 44% year to date.
- Cash flow: Six-month cash provided by operating activities was $28.1 million, compared with $37.1 million in 2015. Investing activities used $26.3 million, principally for $40.4 million of property and equipment purchases, partly offset by $19.0 million of equipment-sale proceeds. Financing activities used $1.9 million.
- Liquidity: Cash and cash equivalents were $146,000 at June 30, 2016, compared with $157,000 at December 31, 2015. Marketable equity securities were $27.4 million. The company had $33.6 million of availability under its $40.0 million revolving credit facility, which had $6.4 million outstanding, including $0.8 million of letters of credit.
- Debt: Current maturities were $42.0 million and long-term debt was $115.0 million, for total debt of approximately $157.0 million, versus $139.2 million at year-end 2015. New equipment installment obligations of approximately $43.6 million were entered into during the first six months at a weighted-average interest rate of 2.31%.
- Balance sheet: Total assets were $377.8 million and shareholders’ equity was $90.6 million at June 30, 2016. Trade accounts receivable increased to $58.2 million from $49.3 million at year-end.
Material Changes Versus Prior Comparable Period
- Truckload revenue before fuel surcharge increased 9.3% in Q2 and 11.1% year to date, driven by a larger fleet, higher utilization, increased miles, and a modest increase in average customer rates.
- The average truck count increased to 1,915 in Q2 from 1,818, and average miles per truck per workday increased to 495 from 478. Average owner-operator count increased to 559 from 402.
- Truckload operating ratio worsened to 92.0% from 85.6% in Q2 and to 92.8% from 86.6% year to date. Higher rent and purchased transportation, recruiting and training costs, depreciation, and less favorable used-equipment pricing were key pressures.
- Brokerage and logistics revenue increased 4.3% in Q2 and 8.7% year to date. Its operating ratio modestly worsened in Q2 to 96.8% from 96.4%, but improved year to date to 96.5% from 97.0%.
- Interest expense increased to $0.9 million in Q2 from $0.6 million and to $1.7 million year to date from $1.3 million, reflecting higher debt levels.
- Fuel surcharge revenue declined because of lower fuel prices, while surcharge-adjusted fuel costs and recruiting expenses increased. Recruiting costs rose by approximately $1.0 million in Q2 and $2.5 million year to date.
- The company repurchased 674,308 shares during Q2 for approximately $19.9 million, including 567,413 shares accepted in a tender offer at $31.00 per share. Outstanding shares declined materially, but treasury stock increased to $121.7 million from $101.8 million.
- A previously reserved collective-action wage lawsuit was finally approved and settled for approximately $3.5 million, paid in June 2016, with no insurance coverage.
Outlook, Risks, and Unusual Items
- Management expected to purchase approximately 150 new trucks and 870 new trailers during the remainder of 2016, with anticipated net capital expenditures of approximately $30.5 million.
- Management stated that cash balances, operating cash flow, and expected financing availability should fund near-term working capital and planned capital expenditures, and that it did not expect significant liquidity constraints in the foreseeable future.
- The company expects to retain earnings and does not anticipate paying cash dividends in the foreseeable future.
- Key risks include excess trucking capacity, economic and customer-cycle downturns, fuel and interest-rate volatility, driver recruitment and retention, insurance and claims costs, equipment resale values, competition, financing availability, severe weather, and loss of a significant customer.
- Marketable equity securities totaled $27.4 million and generated a net unrealized gain of $1.8 million after tax in the first six months. The company recorded approximately $0.3 million of impairment expense in Q2 and $0.5 million year to date. A 10% decline in the portfolio’s market value would reduce its carrying value by approximately $2.7 million.
- The revolving credit facility bears interest at LIBOR plus 1.50%; a hypothetical 100-basis-point increase in LIBOR on $1.0 million of variable-rate debt would increase annual interest expense by approximately $10,000.
- Based on 2015 fuel consumption, a 10% increase in average diesel prices would increase annual fuel expense by approximately $5.1 million.
- The company has operating leases for revenue equipment with $9.9 million of future minimum payments at June 30, 2016. It is evaluating the future accounting impact of new lease and financial-instrument standards.
- Management reported that disclosure controls were effective as of June 30, 2016 and that no material changes occurred in internal control over financial reporting during the quarter.
Investor Verification Items
- Verify whether fleet expansion and higher utilization can offset rising purchased transportation, recruiting, depreciation, insurance, and maintenance costs.
- Assess liquidity after planned capital expenditures, debt maturities, equipment purchases, and share repurchases, given cash of only $146,000 and substantial reliance on securities and financing availability.
- Monitor truckload operating ratio, freight rates, miles, owner-operator mix, fuel costs, and used-equipment resale values.
- Review the terms, covenants, collateral requirements, and maturity profile of the revolving facility, margin borrowings, and equipment installment debt.
- Evaluate exposure to marketable-equity-securities volatility, fuel-price changes, driver shortages, insurance claims, and customer concentration.
- Confirm the final cash impact of the wage litigation settlement and any remaining legal, tax, or contingent liabilities.