P.A.M. Transportation Services, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and nine months ended September 30, 2019, filed November 1, 2019. P.A.M. provides truckload transportation and brokerage and logistics services in the United States, Mexico and Canada, with substantial exposure to the automotive industry. Truckload and brokerage operations are aggregated into one reportable segment.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Total operating revenue | $129.0 million | $140.3 million | $390.7 million | $395.1 million |
| Revenue before fuel surcharge | $110.1 million | $117.3 million | $332.8 million | $329.2 million |
| Operating income | $7.5 million | $13.2 million | $30.4 million | $26.9 million |
| Operating margin | 5.8% | 9.4% | 7.8% | 6.8% |
| Net income | $4.6 million | $9.2 million | $21.5 million | $17.9 million |
| Diluted EPS | $0.79 | $1.52 | $3.65 | $2.89 |
| Cash flow from operations | Not separately reported | Not separately reported | $76.4 million | $57.5 million |
- Q3 total revenue declined 8.1%, while nine-month revenue declined 1.1%. Fuel surcharge revenue decreased to $18.8 million in Q3 and $57.8 million for the nine-month period.
- Q3 net income fell approximately 50%, primarily reflecting lower brokerage revenue, higher company-driver and fuel-related costs, higher depreciation and increased interest expense. Nine-month net income increased approximately 20%.
- Operating cash flow of $76.4 million funded $68.0 million of property and equipment purchases, with investing activities using $53.8 million. Financing activities used $22.6 million, including $13.6 million for share repurchases.
- Cash and cash equivalents were $0.3 million at September 30, 2019. Marketable equity securities totaled $28.8 million, including $3.6 million of unrealized gains.
- Total debt, including current maturities, was approximately $230.6 million, compared with $221.2 million at December 31, 2018. Current maturities were $61.3 million and long-term debt was $169.3 million.
- The $60.0 million revolving credit facility had approximately $9.8 million outstanding, including $0.5 million of letters of credit, and $50.2 million of available capacity. The facility bears interest at LIBOR plus 1.25%, or 3.35% at September 30, 2019, and matures July 1, 2022.
- Stockholders’ equity increased to $148.1 million from $139.4 million at year-end 2018. The company repurchased approximately $13.6 million of common stock during the first nine months, including a $11.6 million tender offer.
Material changes versus the prior comparable period
- Truckload revenue before fuel surcharge decreased 0.4% in Q3 but increased 4.9% for the first nine months, supported by larger average fleet size and higher rates per mile.
- Brokerage and logistics revenue before fuel surcharge decreased 27.5% in Q3 and 13.8% for the first nine months due to fewer loads and lower average rates.
- Truckload operating ratio worsened to 92.6% from 87.4% in Q3, but improved to 90.2% from 91.1% for the first nine months. Brokerage operating ratio worsened to 96.0% from 94.1% in Q3, while improving modestly to 94.0% from 94.6% for the first nine months.
- Salaries, wages and benefits increased due to more company drivers and higher driver pay. Fuel-related operating supplies increased materially, partly because lower fuel surcharge collections did not fully offset fuel costs.
- Rent and purchased transportation declined as the company used more company-owned equipment and fewer third-party carriers. Depreciation increased due to fleet growth.
- Non-operating income benefited from approximately $2.7 million of market-value gains on equity securities in the first nine months, compared with an approximately $0.3 million decrease in the prior-year period.
- Interest expense increased to $6.3 million from $4.2 million for the first nine months, reflecting higher interest rates and increased equipment financing.
Guidance, outlook, risks and unusual items
- Management expected to purchase approximately 125 trucks and 60 trailers during the remainder of 2019, with anticipated net capital expenditures of approximately $13.0 million.
- Management stated that cash, operating cash flow and expected financing availability should fund working capital and planned capital expenditures over the next twelve months, while noting significant longer-term capital requirements.
- A United Auto Workers strike against General Motors, the company’s largest customer, reduced Q3 miles driven. Management identified excess trucking capacity, economic and customer-cycle downturns, fuel and interest-rate volatility, driver availability and compensation, insurance claims, equipment values, financing access, competition and technology risks.
- Approximately 46% of 2018 revenue came from the automotive industry; the three largest customers accounted for approximately 37% of 2018 revenue. Major customer concentration and the absence of long-term contracts create material demand risk.
- The company became self-insured for certain property damage and auto-liability exposures, reducing premiums but potentially increasing future claims expense.
- Two collective-action lawsuits allege wage-and-hour violations, improper deductions and related claims involving former drivers and independent contractors. The company cannot reasonably estimate any potential loss, and existing insurance is not expected to cover losses.
- The company adopted the new lease standard and recognized approximately $1.4 million of operating lease assets and liabilities; management reported no material impact on financial condition, results or cash flows.
- Marketable equity securities expose the company to valuation volatility. A 10% decline in their market value would reduce carrying value by approximately $2.9 million. A 100-basis-point increase in LIBOR was estimated to increase annual interest expense by approximately $92,000.
- No cash dividends were anticipated in the foreseeable future. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether automotive customer concentration and labor disruptions continue to affect freight volumes and utilization.
- Whether the Q3 deterioration in truckload and brokerage operating ratios persists, particularly the impact of company-driver costs, fuel costs and fixed operating expenses.
- The sustainability of earnings excluding the approximately $2.7 million marketable-securities gain recognized in the first nine months.
- Equipment purchasing plans, debt repayment requirements, interest-rate exposure and continued availability under the revolving credit facility.
- Potential liabilities and legal developments associated with the two wage-and-hour and independent-contractor lawsuits.
- Future claims experience following the expansion of self-insurance and the company’s exposure to fuel prices, equipment resale values and equity-market volatility.