MARTEN TRANSPORT LTD annual report, FY2013

Marten Transport, Ltd. — FY2013 Form 10-K Summary

Business Context and Reporting Period

Annual report for the fiscal year ended December 31, 2013, filed March 12, 2014. Marten is a temperature-sensitive truckload carrier serving the United States, Canada and Mexico, with substantially all revenue generated in the United States. It reports Truckload and Logistics segments, including brokerage and intermodal services.

2013 operating revenue: $659.2 million; approximately 79% of truckload revenue was temperature-sensitive and 21% was dry freight.
Fleet at year-end: 2,255 tractors and 4,105 trailers; approximately 77% of the tractor fleet supported regional or dedicated operations.
Major customer concentration remained significant: top 30 customers represented approximately 62% of revenue, top ten 42%, and top two 14%.

Financial Performance and Key Metrics

Metric	2013	2012	Change
Operating revenue	$659.2 million	$638.5 million	3.3% increase
Operating income	$52.0 million	$45.9 million	13.4% increase
Net income	$30.1 million	$27.3 million	10.6% increase
Diluted EPS	$0.90	$0.82	Increase
Operating ratio	92.1%	92.8%	70 basis-point improvement
Net cash from operating activities	$89.2 million	$85.5 million	Increase
Cash and cash equivalents	$13.7 million	$3.5 million	Increase
Long-term debt	None	$2.7 million	Repaid in 2013

Truckload revenue increased 5.0% to $507.3 million, while Truckload operating income increased 21.9% to $44.9 million. The Truckload operating ratio improved to 91.2% from 92.4%.
Logistics revenue declined 2.1% to $151.9 million, although revenue excluding intermodal fuel surcharges and MWL revenue increased 15.0%. Logistics operating income declined 21.2% to $7.1 million, and its operating ratio deteriorated to 95.3% from 94.2%.
Revenue net of fuel surcharges and MWL revenue increased 7.8% to $524.8 million.
Net fuel expense declined 5.0% to $53.4 million, supported by purchasing programs, route optimization, auxiliary power units and improved refrigeration-unit management.
Insurance and claims expense increased $3.0 million, or 14.3%, primarily from higher physical-damage and self-insured auto-liability claims.
Effective tax rate increased to 42.4% from 39.9%, primarily because of a favorable state tax apportionment-related deferred tax adjustment in 2012.
Net property and equipment was $415.0 million, compared with $394.5 million at December 31, 2012. Stockholders’ equity was $359.1 million.

Cash Flow, Capital Structure and Liquidity

2013 operating cash flow of $89.2 million was primarily used for $54.8 million of net revenue-equipment purchases, $16.9 million of regional-facility construction and acquisitions, $2.8 million of dividends and repayment of $2.7 million of debt.
2014 estimated capital expenditures, net of proceeds from dispositions, were approximately $68 million.
The unsecured revolving credit facility provides $50 million of committed capacity, expandable to $75 million, and matures in May 2016. There was no outstanding principal balance at year-end 2013; $41.7 million remained available after $8.3 million of standby letters of credit.
Management stated that liquidity sources were adequate for current and anticipated needs for at least the next twelve months and that no significant liquidity constraints were expected.
The credit facility restricts annual dividends to 25% of prior-year net income absent a waiver and includes leverage and fixed-charge coverage covenants. The company was in compliance at year-end.
Contractual obligations included $4.2 million of building construction and acquisition commitments in 2014 and $1.1 million of operating lease obligations through 2017.

Material Changes Versus the Prior Comparable Period

Profitability improved despite only modest consolidated revenue growth, driven primarily by stronger Truckload pricing and productivity, fleet growth and lower net fuel expense.
Truckload average revenue, net of fuel surcharges, per tractor per week increased 3.8% to $3,465; average tractors increased 2.3% to 2,216.
Intermodal revenue increased to $92.5 million from $71.3 million, while brokerage revenue at Marten declined slightly to $52.7 million.
MW Logistics was deconsolidated effective March 28, 2013. Marten retained a 45% equity interest and began accounting for MWL under the equity method. This change reduced reported Logistics revenue comparability and eliminated MWL’s consolidated noncontrolling interest at year-end.
Cash dividends declined substantially to $2.8 million from $18.7 million because 2012 included a $0.50-per-share special dividend. Regular quarterly dividends continued.
The company completed a three-for-two stock split in June 2013; historical share and per-share information was retroactively adjusted.

Guidance, Outlook, Commentary and Risks

Management emphasized continued expansion of regional temperature-controlled operations, intermodal and brokerage services, supported by a modern fleet, cost controls and a strong balance sheet.
Management expected higher future tractor and trailer ownership costs because of higher equipment prices and emissions-related requirements.
Key risks include customer concentration, intense competition, driver shortages and compensation pressure, fuel-price volatility, weather and seasonality, insurance and claims volatility, regulatory changes affecting hours of service and safety, railroad service reliability, environmental compliance and technology-system disruptions.
A 5% increase in average diesel fuel cost would have increased 2013 fuel expense by approximately $8.0 million. Fuel surcharges recover a substantial portion of increases but do not fully protect against fuel used in non-revenue miles or idling.
The company self-insures significant exposures, including the first $1.0 million of each auto-liability claim and the first $750,000 of each workers’ compensation claim. A 5% increase in estimated claims-development factors would have increased outstanding loss reserves by approximately $3.4 million.
Legal proceedings were described as routine and incidental to operations; management considered a material adverse outcome remote.
Management reported effective disclosure controls and internal control over financial reporting. KPMG issued an unqualified audit opinion on the financial statements and internal controls.

Important Facts for Investors to Verify

Confirm the effect of MWL’s March 2013 deconsolidation when comparing Logistics revenue, expenses, margins and balance-sheet amounts.
Assess whether Truckload margin improvement can persist as equipment, driver, insurance and regulatory costs rise.
Review customer concentration, contract renewal terms and exposure to reduced freight volumes or lost bids.
Reconcile expected 2014 capital expenditures with operating cash flow, available credit and dividend capacity.
Monitor self-insured claims reserves, standby letters of credit and potential adverse claims development.
Evaluate the sensitivity of earnings and cash flow to diesel prices, noting that the company had no fuel-hedging instruments outstanding at year-end.
Verify quarterly fourth-quarter 2013 results: revenue of $166.2 million, operating income of $12.7 million, net income of $7.3 million and diluted EPS of $0.22.