Marten Transport, Ltd. — Form 10-Q Summary
Business Context and Reporting Period
Marten Transport provides temperature-controlled and dry freight transportation through Truckload, Dedicated, Intermodal and Brokerage segments across the United States and into and out of Mexico and Canada. This unaudited report covers the three months ended March 31, 2018, compared with the three months ended March 31, 2017. The company had 54.6 million common shares outstanding as of May 1, 2018.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Operating revenue | $187.0 million | $173.2 million | 8.0% increase |
| Operating income | $13.6 million | $13.9 million | 2.5% decrease |
| Operating margin | 7.3% | 8.0% | Down 70 basis points |
| Income before taxes | $13.8 million | $13.8 million | Essentially unchanged |
| Net income | $10.3 million | $8.2 million | 25.8% increase |
| Net margin | 5.5% | 4.7% | Up 80 basis points |
| Diluted EPS | $0.19 | $0.15 | Increase |
| Operating cash flow | $23.2 million | $37.7 million | Decrease |
| Cash and equivalents at period end | $10.4 million | $9.1 million | Compared with prior-year period end |
At March 31, 2018, total assets were $712.0 million, stockholders’ equity was $535.5 million and net property and equipment was $591.2 million. The company had no outstanding borrowings under its $40.0 million unsecured credit facility, $27.1 million of remaining borrowing availability after $12.9 million of standby letters of credit, and compliance with all debt covenants.
Capital expenditures included $37.7 million of revenue equipment additions and $4.6 million of buildings, land and other additions, partly offset by $14.9 million of equipment disposition proceeds. Dividends paid were $1.4 million, and a quarterly dividend of $0.025 per share was declared.
Material Changes Versus the Prior Comparable Period
- Total revenue increased 8.0%, while revenue excluding fuel surcharges increased 4.7%.
- Truckload revenue declined 2.8% to $93.0 million; revenue excluding fuel surcharges declined 5.4%, primarily because average tractors decreased to 1,696 from 1,931. Higher revenue per tractor improved the segment operating ratio to 92.7% from 93.8%.
- Dedicated revenue increased 21.2% to $48.8 million, driven by fleet growth and additional customer contracts. Its operating ratio worsened to 94.9% from 88.9% because of startup costs for new business and higher insurance and claims expense.
- Intermodal revenue increased 28.5% to $24.7 million on higher volume. Its operating ratio improved to 87.9% from 88.8%.
- Brokerage revenue increased 13.4% to $20.5 million, primarily from higher revenue per load, while its operating ratio increased to 93.6% from 92.6% as carrier costs rose.
- Fuel surcharge revenue increased to $23.1 million from $16.6 million, reflecting higher fuel prices and changes in customer agreements. Net fuel expense declined 18.1% to $9.3 million.
- Purchased transportation increased 19.3%, insurance and claims expense increased 15.4%, and other operating expense increased 48.2%. The latter was affected by a lawsuit settlement received in the 2017 period.
- The effective tax rate declined to 25.0% from 40.5%, primarily because of the lower federal corporate tax rate under the Tax Cuts and Jobs Act of 2017.
- The company adopted ASC 606 on January 1, 2018 using the modified retrospective method. Opening retained earnings increased by $485,000. Revenue and related expenses are now recognized over time as loads progress; management expects the ongoing impact on net income and financial position to be immaterial.
Guidance, Outlook, Risks and Unusual Items
- Management expects approximately $90 million of net capital expenditures for the remainder of 2018 and was committed to purchase $90.5 million of new revenue equipment through the remainder of the year.
- Management believes available cash, operating cash flows, borrowing capacity and other financing sources are adequate for at least the next twelve months and does not anticipate significant liquidity constraints.
- Management expects to continue quarterly cash dividends, subject to financial condition, cash requirements, covenant restrictions and board approval. No shares were repurchased during 2017 or the first quarter of 2018.
- Key operating risks include fuel price and availability, driver availability, freight demand, capacity, severe weather, seasonality, inflation, equipment costs and customer concentration.
- The company self-insures portions of workers’ compensation, auto liability, cargo, property damage and health claims. It retains the first $1.0 million of each auto liability claim and the first $750,000 of each workers’ compensation claim. Insurance and claims accruals were $25.4 million at March 31, 2018.
- A 5% increase in diesel fuel cost would have increased first-quarter fuel expense by approximately $1.4 million based on reported consumption. Fuel surcharge programs do not fully offset fuel used for non-revenue miles or idling.
- Legal actions arising in the ordinary course were not expected by management to have a material adverse effect, although actual outcomes could differ from estimates.
- The company had $654,000 of operating lease obligations through 2021 and $4.0 million of nonqualified deferred compensation obligations payable in company shares, excluded from the contractual-obligations table because of timing uncertainty.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. The filing states that there were no material changes to previously disclosed risk factors.
Investor Verification Checklist
- Verify whether Dedicated segment startup costs and insurance claims normalize and whether the segment’s operating ratio improves.
- Track Truckload tractor counts, revenue per tractor, freight rates and utilization to assess whether the lower fleet size is intentional and profitable.
- Assess the sustainability of revenue growth in Intermodal and Brokerage relative to purchased transportation and carrier costs.
- Monitor cash generation against the approximately $90 million remaining 2018 capital expenditure plan and equipment purchase commitments.
- Review self-insurance reserves, claims severity and the $12.9 million of standby letters of credit.
- Evaluate the effect of fuel prices, fuel surcharge pass-through limitations and driver availability on future margins.
- Confirm the ongoing effects of ASC 606, including contract assets and revenue recognized for loads in progress.
- Consider customer concentration and the company’s 45% equity investment in MW Logistics, including related-party balances and transactions.