P.A.M. Transportation Services, Inc. — 2018 Q2 Form 10-Q
Business context and reporting period
P.A.M. Transportation Services, Inc. operates truckload transportation and brokerage and logistics services in the United States, Mexico and Canada. The filing covers the three and six months ended June 30, 2018; financial statements are unaudited. The company reports one aggregated motor carrier operating segment.
Key financial metrics
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 | Six months ended June 30, 2018 | Six months ended June 30, 2017 |
|---|---|---|---|---|
| Total operating revenue | $135.3 million | $108.6 million | $254.8 million | $218.1 million |
| Revenue before fuel surcharge | $112.9 million | $93.1 million | $212.0 million | $186.7 million |
| Operating income | $10.0 million | $2.9 million | $13.8 million | $5.6 million |
| Net income | $7.3 million | $1.6 million | $8.7 million | $3.9 million |
| Diluted EPS | $1.17 | $0.25 | $1.39 | $0.61 |
| Operating margin on total revenue | 7.4% | 2.7% | 5.4% | 2.6% |
- Fuel surcharge revenue was $22.4 million in the second quarter and $42.8 million for the first six months, compared with $15.5 million and $31.4 million, respectively, in the prior-year periods.
- Net income margin before fuel surcharge revenue was approximately 6.5% in the second quarter and 4.1% for the first six months, versus 1.7% and 2.1% in the comparable 2017 periods.
- Truckload revenue before fuel surcharges increased 9.2% year over year in the quarter and 3.1% year to date. Brokerage and logistics revenue increased 107.6% in the quarter and 91.3% year to date.
- The truckload operating ratio improved to 90.2% from 96.8% in the quarter and to 93.2% from 97.0% year to date. The logistics and brokerage operating ratio improved to 94.4% from 97.4% in the quarter and to 94.8% from 97.0% year to date.
- Cash flow from operations was $29.5 million for the first six months, compared with $26.3 million in 2017. Investing activities used $37.3 million, primarily for property and equipment purchases of $39.8 million.
- Cash, cash equivalents and restricted cash increased slightly to $263,000 at June 30, 2018, from $224,000 at December 31, 2017.
- Total debt, including current maturities, increased to approximately $199.6 million from $172.6 million at year-end 2017. Long-term debt excluding current maturities was $127.6 million, and current maturities were $72.0 million.
- The company maintained a $40.0 million revolving credit facility. At June 30, approximately $26.0 million was outstanding, including $0.7 million of letters of credit, leaving $14.0 million available. The facility bears interest at LIBOR plus 1.50%, or 3.48% at June 30, 2018, and matures July 1, 2019.
- Marketable equity securities were $27.9 million, with $6.9 million of unrealized gains. A 10% decline in their market value would reduce carrying value by approximately $2.8 million.
Material changes versus the prior comparable period
- Results benefited from higher customer rates and significantly stronger brokerage and logistics volumes, while the company operated fewer tractors and experienced lower miles per tractor.
- Driver compensation increased following a per-mile pay increase implemented in December 2017. Salaries, wages and benefits rose to 32.5% of truckload revenue before fuel surcharge in the quarter from 30.2% a year earlier, and to 33.5% from 30.4% year to date.
- Rent and purchased transportation declined as the company completed the transition from leased trucks to company-owned equipment and used fewer owner-operators. Depreciation increased as a result of the larger owned fleet and higher trailer investment.
- Interest expense increased because of higher interest rates and greater equipment financing. The effective tax rate fell to 21.2% from 38.7% for the first six months, principally reflecting the lower U.S. federal tax rate and tax benefits from stock compensation.
- Non-operating income declined year to date because ASU 2016-01 requires changes in the fair value of equity securities to be recognized in net income. The company recorded a net unrealized pre-tax loss of approximately $877,000 in the first six months of 2018, compared with approximately $2.2 million of realized gains in the 2017 period.
- The company repurchased 185,597 shares through a tender offer at $40.00 per share for approximately $7.4 million, excluding fees. It also repurchased 1,000 shares under its existing program during the first six months.
- Shareholders’ equity increased to $129.6 million from $127.6 million despite the tender offer. Accumulated other comprehensive income was eliminated and approximately $7.4 million was reclassified to retained earnings upon adoption of ASU 2016-01.
Guidance, outlook, risks and unusual items
- Management expects to purchase approximately 510 new trucks and 560 new trailers during the remainder of 2018, with anticipated net capital expenditures of approximately $63.0 million.
- Management believes cash balances, operating cash flow and expected financing availability will fund near-term working capital and planned capital expenditures, and does not expect significant liquidity constraints in the foreseeable future. The company expects to retain earnings and does not anticipate cash dividends.
- Key risks include trucking industry excess capacity, economic and customer-cycle downturns, fuel and interest-rate volatility, driver recruitment and compensation, insurance and claims, equipment values and financing availability, competition, weather, and dependence on key customers.
- A 100-basis-point increase in LIBOR, assuming $25.3 million of variable-rate debt, would increase annual interest expense by approximately $2.5 million. A 10% increase in diesel prices would increase annual fuel expense by approximately $4.1 million based on 2017 consumption.
- The company is defending a collective-action lawsuit brought by former drivers alleging wage, travel-time, deduction and contract violations. Management cannot reasonably estimate any possible loss or range of loss, and any losses are not expected to be covered by insurance.
- Legal fees related to the lawsuit increased other expenses. The filing also reports gains on equipment dispositions in 2018 versus losses in the prior-year periods.
- Management stated that disclosure controls and procedures were effective as of June 30, 2018, with no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the substantial brokerage and logistics revenue growth is sustainable and how it affects margins and purchased transportation costs.
- Execution of the planned fleet purchases and the resulting capital spending, depreciation, debt levels and interest expense.
- Availability and renewal terms for the revolving credit facility, including exposure to LIBOR and other variable-rate borrowings.
- Cash conversion and working-capital requirements, particularly the increase in accounts receivable to $75.0 million and the company’s very low cash balance.
- Market value volatility and collateral requirements associated with the $27.9 million equity-security portfolio and margin borrowings of approximately $7.5 million.
- Potential exposure and developments in the collective-action driver lawsuit, for which no loss estimate or accrual is clearly provided.
- Whether operating improvements persist after adjusting for fuel surcharges, equipment-disposition gains and equity-security valuation changes.