P.A.M. Transportation Services, Inc. — 2018 Q1 Form 10-Q Summary
Business context and reporting period
P.A.M. Transportation Services, Inc. operates primarily as a motor carrier through truckload, brokerage, and logistics services in the United States, Mexico, and Canada. This unaudited filing covers the three months ended March 31, 2018, compared with the three months ended March 31, 2017. The company reported 6,179,071 common shares outstanding as of April 20, 2018.
Financial results and key metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue before fuel surcharge | $99.1 million | $93.6 million | 5.9% increase |
| Fuel surcharge revenue | $20.4 million | $15.8 million | 28.8% increase |
| Total operating revenue | $119.5 million | $109.4 million | 9.2% increase |
| Operating income | $3.8 million | $2.7 million | 41.1% increase |
| Operating margin on total revenue | 3.1% | 2.4% | Improved |
| Operating margin before fuel surcharge | 3.8% | 2.8% | Improved |
| Income before taxes | $1.7 million | $3.7 million | 46.0% decrease |
| Net income | $1.4 million | $2.3 million | 39.2% decrease |
| Diluted EPS | $0.22 | $0.36 | Decrease |
| Cash flow from operations | $15.7 million | $12.4 million | Increase |
| Capital expenditures | $13.2 million | $4.0 million | Increase |
Truckload revenue before fuel surcharge declined 2.4% to $80.5 million, while brokerage and logistics revenue increased 73.9% to $18.6 million. The truckload operating ratio improved to 96.4% from 97.2%, and the brokerage and logistics operating ratio improved to 95.5% from 96.6%.
Net income was adversely affected by a $1.1 million unrealized pre-tax loss in the marketable equity securities portfolio and the absence of the $1.8 million realized gain recognized in Q1 2017. The effective tax rate decreased to 19.2% from 38.9%, primarily reflecting state taxes and stock-based compensation tax benefits.
Liquidity, debt, and balance sheet
- Cash and cash equivalents were $0.2 million at March 31, 2018, compared with $0.2 million at December 31, 2017.
- Current assets were $106.6 million; total assets were $396.8 million.
- Total debt, including current maturities, was approximately $169.5 million, down from $172.6 million at December 31, 2017.
- The company maintained a $40.0 million revolving credit facility bearing interest at LIBOR plus 1.50%, or 3.16% at March 31, 2018. Outstanding advances were approximately $5.3 million, including $0.7 million of letters of credit, leaving $34.7 million available.
- Marketable equity securities totaled $26.1 million and supported approximately $6.3 million of margin-account borrowings.
- Shareholders’ equity increased to $129.3 million from $127.6 million at year-end 2017.
Management stated that cash balances, operating cash flow, and expected financing availability should fund working capital and planned capital expenditures over the next twelve months. The company does not anticipate paying cash dividends in the foreseeable future.
Material changes versus the prior comparable period
- Average fleet size decreased from 1,912 tractors to 1,783, primarily because the company removed lanes where rates were below acceptable levels. The reduction lowered miles by approximately 4.1 million and revenue by approximately $5.6 million.
- Average rate per mile increased 5.1%, partially offsetting the fleet reduction.
- Company-driver pay increased approximately 12.6% per mile following a pay increase implemented in late December 2017, increasing first-quarter driver pay by approximately $1.7 million.
- Owner-operators under contract declined from 628 to 550. Expiring truck leases were replaced with company-owned equipment, shifting costs from rent and purchased transportation to depreciation.
- Brokerage and logistics revenue increased substantially due to higher load volumes and average rates.
- Operating cash flow improved, but investing cash use increased substantially due to equipment purchases.
- Adoption of ASU 2016-01 moved changes in marketable equity securities into net income and reclassified approximately $7.4 million from accumulated other comprehensive income to retained earnings.
Guidance, outlook, commentary, and risks
The company expects to purchase approximately 725 new trucks and 975 new trailers during the remainder of 2018, with anticipated net capital expenditures of approximately $106.2 million. Management expects to continue using operating cash flow, installment notes, equipment-sale proceeds, and credit facilities to finance equipment needs.
Principal risks include freight-rate pressure, excess trucking capacity, economic downturns, fuel-price volatility, driver recruitment and compensation costs, insurance and claims exposure, equipment resale values, interest rates, financing availability, competition, customer concentration, severe weather, and acquisition execution.
The company is defending a collective-action lawsuit brought by former drivers alleging violations of the Fair Labor Standards Act and Arkansas Minimum Wage Law, including claims concerning orientation pay, travel time, deductions, and related matters. Management cannot reasonably estimate any potential loss, and insurance is not expected to cover losses under this claim.
Market-risk disclosures indicate that a 10% decline in the market value of equity securities would reduce their carrying value by approximately $2.6 million. A 100-basis-point increase in LIBOR would increase annual interest expense by approximately $46,000 based on the stated variable-rate debt assumption. A 10% increase in diesel prices would increase annual fuel expense by approximately $4.1 million based on 2017 consumption.
Management concluded that disclosure controls and procedures were effective as of March 31, 2018, and reported no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the significant planned 2018 equipment purchases and approximately $106.2 million of expected net capital expenditures can be financed without materially increasing leverage.
- The sustainability of improved operating ratios amid lower truckload fleet size, higher driver compensation, and ongoing freight-rate pressure.
- The effect of marketable-equity-security volatility on reported earnings and the company’s use of margin-account borrowings.
- The potential financial exposure and timing of the collective-action driver lawsuit, for which no loss range was estimable.
- Whether brokerage and logistics growth remains durable and offsets weaker truckload revenue.
- Future fuel prices, interest rates, insurance costs, driver availability, and equipment resale values.
- The impact of the company’s accounting adoption and the comparability of future earnings affected by unrealized investment gains and losses.