Marten Transport, Ltd. — Form 10-Q Summary
Business Context and Reporting Period
Marten Transport provides temperature-controlled and dry-freight transportation across the United States, Mexico and Canada through Truckload, Dedicated, Intermodal and Brokerage segments. This unaudited report covers the quarter and six months ended June 30, 2018, compared with the corresponding 2017 periods. The company had 54.7 million common shares outstanding as of July 31, 2018.
Financial Performance and Position
| Metric | Three Months 2018 | Three Months 2017 | Six Months 2018 | Six Months 2017 |
|---|---|---|---|---|
| Operating revenue | $197.0 million | $171.5 million | $384.0 million | $344.7 million |
| Operating income | $18.2 million | $15.6 million | $31.8 million | $29.5 million |
| Net income | $13.7 million | $9.1 million | $24.0 million | $17.4 million |
| Diluted EPS | $0.25 | $0.17 | $0.44 | $0.32 |
| Operating ratio | 90.8% | 90.9% | 91.7% | 91.4% |
- Six-month operating revenue increased 11.4%, while revenue excluding fuel surcharges increased 6.6%.
- Six-month net income increased 38.5%; the effective tax rate declined to 25.2% from 40.6%, primarily because of the Tax Cuts and Jobs Act.
- Six-month operating cash flow was $67.4 million versus $65.2 million in 2017. Investing cash flow was negative $59.2 million, including $85.3 million of equipment additions and $32.0 million of equipment-disposition proceeds.
- Cash and cash equivalents totaled $22.0 million at June 30, 2018, compared with $15.8 million at December 31, 2017. Stockholders’ equity was $549.2 million.
- The company had no outstanding debt under its $40.0 million unsecured credit facility. Standby letters of credit totaled $14.6 million, leaving $25.4 million of borrowing availability. All debt covenants were satisfied.
- Quarterly dividends increased to $0.025 per share from $0.015 per share in the comparable 2017 periods. No shares were repurchased during the first six months of 2018.
Material Changes Versus the Prior Comparable Period
- Six-month Dedicated revenue increased 29.4% to $105.8 million, driven by fleet growth and additional customer contracts; however, segment operating income declined 15.6% to $8.1 million because of startup costs, higher insurance and claims expense, and increased employee bonus costs.
- Intermodal revenue increased 30.9% to $50.1 million due to higher volume, and operating income increased 31.1% to $5.5 million.
- Brokerage revenue increased 19.5% to $40.6 million, with operating income increasing 21.1% to $2.8 million.
- Truckload revenue declined 1.7% to $187.4 million, primarily because average tractors decreased. Higher revenue per tractor and customer rates improved the Truckload operating ratio to 91.7% from 92.9%.
- Fuel surcharge revenue increased to $50.9 million from $32.2 million. The increase reflected higher fuel prices and a customer-contract change that shifted $5.4 million of line-haul revenue into fuel surcharge revenue without changing total revenue.
- Net fuel expense as a percentage of applicable segment revenue declined to 5.7% from 8.1%, despite higher diesel prices.
- The company adopted ASC 606 on January 1, 2018 using the modified retrospective method, increasing opening retained earnings by $485,000. Revenue and related costs are now recognized over the transit period of each load. Management expects the ongoing effect on net income and financial position to be immaterial.
Guidance, Outlook, Risks and Unusual Items
- Management expects approximately $65 million of capital expenditures, net of equipment-disposition proceeds, during the remainder of 2018. The company was also committed to purchase $55.6 million of new revenue equipment through year-end.
- Management believes available cash, operating cash flow, borrowing capacity and other financing sources are adequate for at least the next twelve months and does not anticipate significant liquidity constraints.
- Management cited economic conditions, freight demand, truck and rail capacity, driver availability, fuel prices, severe weather, customer concentration and seasonality as factors affecting results.
- The company self-insures portions of workers’ compensation, auto liability, general liability, cargo, property damage and employee health claims. Insurance and claims accruals were $25.6 million at June 30, 2018. Significant adverse claims development could materially affect results.
- A 5% increase in average diesel fuel costs would have increased first-half 2018 fuel expense by approximately $3.0 million. Fuel surcharges do not fully protect against fuel used for non-revenue miles or idling.
- The company is responsible for the first $1.0 million of each auto liability claim and the first $750,000 of each workers’ compensation claim. It maintains $14.6 million of standby letters of credit supporting self-insurance programs.
- Contractual obligations totaled $56.1 million, including equipment purchases and operating leases. The company also reported a $4.1 million nonqualified deferred compensation obligation payable in 175,828 shares, excluded from the contractual-obligations table because timing is uncertain.
- Management stated that there were no material changes to previously disclosed risk factors and that ordinary-course legal proceedings were not expected to have a material adverse effect.
- The company owns 45% of MW Logistics, LLC. Revenue from loads transported by Marten and arranged by MW Logistics increased to $3.2 million from $384,000 in the first six months of 2017.
Important Facts for Investors to Verify
- Whether Dedicated segment profitability improves as new contracts mature and startup costs decline.
- The sustainability of revenue growth excluding fuel surcharges, particularly given the decline in Truckload volume and tractor count.
- Actual 2018 equipment spending and its effect on cash balances, depreciation and borrowing capacity.
- Changes in diesel prices, fuel-surcharge recovery and unrecovered fuel costs.
- Development of self-insured claims, insurance accruals and related standby letters of credit.
- Implementation effects of ASC 606 and the forthcoming lease-accounting standard effective in the first quarter of 2019.
- Customer concentration, driver recruitment and retention, equipment pricing, and exposure to seasonal weather conditions.