P.A.M. Transportation Services, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and nine months ended September 30, 2016. P.A.M. operates primarily in truckload transportation, with additional brokerage and logistics services, across the United States, Mexico, and Canada. The financial statements are unaudited interim statements.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Operating revenue | $109.4 million | $107.1 million | $324.5 million | $314.6 million |
| Revenue before fuel surcharge | $95.9 million | $92.1 million | $288.5 million | $265.8 million |
| Operating income | $5.3 million | $10.2 million | $18.2 million | $31.3 million |
| Net income | $3.5 million | $5.8 million | $10.4 million | $18.2 million |
| Diluted EPS | $0.53 | $0.80 | $1.54 | $2.46 |
| Operating margin | 4.8% | 9.5% | 5.6% | 9.9% |
- Operating revenue increased approximately 2.1% in the quarter and 3.1% year to date. Revenue before fuel surcharge increased approximately 4.2% and 8.5%, respectively.
- Operating income declined approximately 48% in the quarter and 42% year to date. Net income declined approximately 40% and 43%, respectively.
- Fuel surcharge revenue declined to $13.5 million in the quarter and $36.0 million year to date, from $15.0 million and $48.8 million in the comparable periods.
- Truckload revenue before fuel surcharge increased 6.3% in the quarter and 9.5% year to date. Brokerage and logistics revenue declined 10.3% in the quarter but increased 2.0% year to date.
- Q3 truckload operating ratio deteriorated to 93.9% from 87.5%; the nine-month ratio increased to 93.2% from 86.9%. Brokerage and logistics operating ratio was 99.0% in Q3 and 97.3% year to date.
- Net cash provided by operating activities was $42.2 million, compared with $66.9 million in the first nine months of 2015. Investing activities used $36.2 million and financing activities used $6.0 million.
- Capital expenditures were $55.9 million, partly offset by $24.5 million of equipment-disposition proceeds. Cash and cash equivalents were $139,000 at September 30, 2016.
- Total debt, including current maturities, was $155.3 million, up from $139.2 million at December 31, 2015. The $40.0 million revolving credit facility had $7.7 million outstanding, including $0.8 million of letters of credit, and $32.3 million of availability.
- Marketable equity securities totaled $25.6 million and were available as a liquidity source but exposed the company to equity-market risk. Margin-account borrowings were approximately $10.6 million.
- Total assets were $376.2 million and shareholders’ equity was $92.4 million at September 30, 2016.
Material changes versus the prior comparable period
- Profitability weakened despite higher freight volume. Average trucks, miles per truck, and total miles increased, but customer rates declined and costs rose faster than revenue.
- Rent and purchased transportation increased materially, reflecting growth in owner-operators under contract from 422 to 567 in Q3 and from 395 to 546 year to date.
- Depreciation increased because of fleet expansion, higher equipment costs, and a $0.5 million increase from reducing estimated residual values of certain trucks amid a depressed used-truck market.
- Driver recruiting and training costs increased by approximately $1.0 million in Q3 and $3.6 million year to date. Salaries, wages, and benefits also increased, partly because of higher self-insured health claims.
- The company paid approximately $3.5 million in June 2016 to settle a driver wage collective action and became entitled to receive approximately $350,000 in unclaimed settlement amounts during Q3.
- The company repurchased 149,687 shares for approximately $3.0 million under its repurchase program and accepted 567,413 shares in a tender offer for approximately $17.6 million, excluding fees and expenses. Shares outstanding declined materially year over year.
- Accounts receivable increased to $58.0 million from $49.3 million at year-end 2015, while accounts receivable-other increased to $12.7 million from $5.9 million, primarily because of amounts held by a qualified intermediary and other operating receivables.
Guidance, outlook, commentary, and risks
- Management expected to purchase approximately 143 trucks and 406 trailers during the remainder of 2016, with anticipated net capital expenditures of approximately $18.4 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 does not anticipate paying cash dividends in the foreseeable future and intends to retain earnings for growth.
- Principal risks include excess trucking capacity, economic and customer-cycle downturns, fuel-price and interest-rate volatility, driver recruitment and retention, insurance and claims exposure, equipment resale values, financing availability, severe weather, competitive pricing, and dependence on key customers.
- A 10% increase in annual diesel prices based on 2015 consumption would increase annual fuel expense by approximately $5.1 million. A 100-basis-point increase in LIBOR, assuming $7.0 million of variable-rate debt, would increase annual interest expense by approximately $70,000.
- The company recorded a $176,000 marketable-securities impairment charge in Q3 and a $709,000 charge year to date. Marketable securities had $10.0 million of unrealized gains at September 30, 2016.
- Operating leases for revenue equipment generated $7.4 million of rent expense in the first nine months, with $7.5 million of future minimum payments disclosed through 2018.
- Management reported effective disclosure controls as of September 30, 2016 and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether higher fleet utilization and truckload volume can offset lower freight rates and rising owner-operator, recruiting, health-care, and depreciation costs.
- The sustainability of operating cash flow relative to planned fleet investment, debt repayment, and share repurchases.
- Available borrowing capacity, covenant compliance, floating-rate exposure, and the effect of increased total debt.
- The valuation and liquidity of the $25.6 million marketable-securities portfolio, including potential impairment or collateral risks associated with margin borrowings.
- Used-truck market conditions and their effect on equipment resale gains, residual values, and depreciation.
- Potential additional costs from driver wage claims, insurance claims, self-insured programs, and other litigation.
- Future effects of pending accounting standards, particularly revenue recognition, leases, financial instruments, stock compensation, and cash-flow classification.