MARTEN TRANSPORT LTD quarterly report, Q3 FY2015

Marten Transport, Ltd. — Form 10-Q Summary

Reporting period: Quarter and nine months ended September 30, 2015; filed November 6, 2015. The interim financial statements are unaudited. Marten provides temperature-controlled and other transportation services through Truckload, Dedicated, Intermodal and Brokerage segments.

Key financial metrics

Metric	Q3 2015	Q3 2014	9M 2015	9M 2014
Operating revenue	$171.3 million	$171.6 million	$496.2 million	$499.4 million
Operating income	$14.4 million	$13.0 million	$45.8 million	$34.6 million
Net income	$8.4 million	$7.7 million	$27.0 million	$20.9 million
Diluted EPS	$0.25	$0.23	$0.80	$0.62
Operating ratio	91.6%	92.4%	90.8%	93.1%
Net cash from operations	Not separately provided	Not separately provided	$101.4 million	$58.4 million

Q3 net margin was approximately 4.9%, compared with 4.5% in the prior-year quarter. Nine-month net margin was approximately 5.4%, compared with 4.2% in the prior-year period. The company declared quarterly dividends of $0.025 per share in each of the first three quarters of 2015.

Revenue and segment performance

Truckload: Nine-month revenue declined 9.9% to $302.5 million, including a 1.7% decline in revenue excluding fuel surcharges. Operating income increased 2.1% to $27.6 million, and the operating ratio improved to 90.9% from 91.9%.
Dedicated: Nine-month revenue increased 70.0% to $82.3 million, primarily from an 85.2% increase in average fleet size and more customer contracts. Operating income increased 77.0% to $8.5 million.
Intermodal: Nine-month revenue declined 20.9% to $59.3 million. The company disposed of its dry containers in March 2015, while temperature-controlled intermodal volume increased. Operating income rose to $3.4 million from $0.8 million.
Brokerage: Nine-month revenue increased 29.7% to $52.2 million, primarily from higher volume. Operating income increased 34.6% to $2.6 million.
Revenue excluding fuel surcharges increased 8.8% for the first nine months, while fuel surcharge revenue declined to $57.6 million from $96.2 million because of lower fuel prices.

Cash flow, capital investment, debt and liquidity

Operating cash flow was $101.4 million for the first nine months, compared with $58.4 million in 2014.
Investing cash flow was negative $103.5 million, including $139.8 million of revenue equipment additions and $43.5 million of equipment disposition proceeds. Net revenue equipment purchases were approximately $96.3 million.
Financing cash flow was positive $2.1 million. Borrowings under the credit facility and long-term debt totaled $94.4 million, while repayments totaled $92.5 million.
Cash and cash equivalents were only $145,000 at September 30, 2015. The company had $26.3 million of long-term debt, $13.3 million of remaining credit availability and $10.4 million of standby letters of credit.
The unsecured $50 million credit facility matures in December 2019 and may be increased to $75 million subject to lender approval. The weighted-average interest rate was 0.90% at September 30, 2015.
Management stated that liquidity is adequate for at least the next twelve months and that it does not anticipate significant liquidity constraints. The company was in compliance with its credit covenants.
Remaining 2015 commitments included $28.2 million of revenue equipment purchases, $692,000 of building construction and $549,000 of operating lease payments. Management estimated approximately $26 million of net capital expenditures for the remainder of 2015.

Material changes and unusual items

Net income increased 29.2% for the first nine months, benefiting from lower net fuel expense, improved Intermodal performance, Dedicated growth and easier comparisons with severe weather and rail-service issues in early 2014.
A $3.7 million gain on the disposition of a facility increased nine-month operating income and contributed approximately $0.06 to diluted EPS. Excluding this gain, the nine-month operating ratio was 91.5%.
Net fuel expense declined 18.3% to $30.8 million for the first nine months. Management identified lower diesel prices and fuel-efficiency initiatives as primary drivers.
Salaries, wages and benefits increased 14.9% for the first nine months, while insurance and claims expense increased 15.7%, reflecting higher driver compensation, employee health claims, auto liability claims and physical damage claims.
Net property and equipment increased to $532.6 million from $465.7 million at December 31, 2014, reflecting fleet and facility investment. Depreciation increased to $55.5 million from $50.5 million.
Stockholders approved an increase in authorized common shares from 48 million to 96 million and adopted a new 2015 Equity Incentive Plan authorizing up to 800,000 shares.

Outlook, risks and contingencies

Management cited a soft freight market in the second and third quarters of 2015 and expects transportation results to remain sensitive to freight demand, capacity, driver availability, weather and customer-specific volume.
Fuel prices remain a major market risk. A 5% increase in average diesel prices would have increased first-nine-month fuel expense by approximately $4.0 million based on reported consumption. Fuel surcharges do not fully offset fuel used on non-revenue miles or while idling.
The company self-insures portions of auto liability, workers’ compensation, 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 $14.8 million. Management estimated that a 5% deterioration in claims development factors would have increased the required accrual by approximately $3.7 million.
Trade receivables are concentrated among a limited number of customers. The allowance for doubtful accounts was $410,000 at September 30, 2015.
The company has related-party transactions with Bauer Built, Inc., an entity controlled by a director, and owns 45% of MW Logistics, LLC. At September 30, 2015, Marten had a $3.9 million accrued liability to MW Logistics.
Management reported no material changes to the risk factors disclosed in the 2014 Form 10-K. Legal proceedings are considered unlikely to have a material adverse effect, based on current information.
The company expects higher current income tax payments as expired bonus depreciation provisions cause deferred tax liabilities related to property and equipment to reverse.

Investor verification points

Assess whether Dedicated growth and improved Intermodal profitability can offset Truckload weakness and a soft freight market.
Review operating performance excluding the $3.7 million facility gain and other equipment-disposition gains.
Monitor capital spending, fleet growth, depreciation and the company’s very low cash balance relative to ongoing equipment commitments.
Evaluate availability under the credit facility after standby letters of credit and compliance with leverage and fixed-charge covenants.
Track insurance claims development, self-insured exposure and related accrual adequacy.
Confirm the sustainability of fuel-related savings as diesel prices and fuel surcharge revenue change.
Review customer concentration, MW Logistics-related balances and other related-party transactions.