P.A.M. Transportation Services, Inc. — 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 Form 10-Q covers the three and six months ended June 30, 2017, compared with the corresponding 2016 periods.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue before fuel surcharge | $93.1 million | $98.9 million | $186.7 million | $192.6 million |
| Fuel surcharge revenue | $15.5 million | $12.6 million | $31.4 million | $22.5 million |
| Total operating revenue | $108.6 million | $111.5 million | $218.1 million | $215.1 million |
| Operating income | $2.9 million | $7.4 million | $5.6 million | $12.9 million |
| Net income | $1.6 million | $4.0 million | $3.9 million | $6.9 million |
| Diluted EPS | $0.25 | $0.61 | $0.61 | $1.01 |
| Cash flow from operations | — | — | $27.4 million | $28.1 million |
Operating margin was approximately 2.7% of total operating revenue in the second quarter and 2.6% for the first six months. Net margin was approximately 1.5% and 1.8%, respectively, based on total operating revenue. Before fuel surcharge, net income represented 1.7% of revenue in the second quarter and 2.1% for the first six months.
- June 30, 2017 cash and cash equivalents were $189,000, compared with $137,000 at December 31, 2016.
- Current assets were $96.3 million and current liabilities were $86.9 million. Marketable equity securities were $24.7 million and included $10.1 million of unrealized gains before tax.
- Total debt, including current maturities, was $151.4 million, down from $167.2 million at December 31, 2016. Long-term debt excluding current maturities was $101.7 million.
- The company maintained a $40.0 million revolving credit facility. At June 30, 2017, approximately $700,000 was outstanding, entirely as letters of credit, leaving approximately $39.3 million available. The facility bears interest at LIBOR plus 1.50% and matures July 1, 2018.
- Investing activities used $6.9 million of cash, including $14.4 million of property and equipment purchases and $5.5 million of proceeds from equipment dispositions.
- Financing activities used $20.4 million, including $21.8 million of long-term debt repayments and $1.2 million of common-stock repurchases.
Material changes versus the prior comparable period
- Total operating revenue declined 2.6% in the second quarter but increased 1.4% for the first six months, primarily because higher fuel surcharge revenue offset lower underlying revenue.
- Revenue before fuel surcharges declined 5.9% in the second quarter and 3.0% for the first six months. Truckload revenue before fuel surcharges decreased 6.0% and 2.6%, respectively; brokerage and logistics revenue decreased 5.0% and 6.2%.
- Truckload revenue pressure reflected lower customer rates, fewer trucks, lower utilization, fewer miles, and adverse weather. Average trucks declined from 1,916 to 1,891, average daily miles per truck declined from 495 to 485, and total miles declined from 60.7 million to 58.7 million in the second quarter.
- Operating income declined 60.6% in the second quarter and 57.0% for the first six months. Net income declined 59.7% and 43.8%, respectively.
- Truckload operating ratio worsened from 92.0% to 96.8% in the second quarter and from 92.8% to 97.0% for the first six months. Brokerage and logistics operating ratio worsened from 96.8% to 97.4% and from 96.5% to 97.0%.
- Rent and purchased transportation increased substantially as a percentage of revenue, primarily because average owner-operators increased from 559 to 673 in the second quarter and from 536 to 652 for the first six months.
- Depreciation increased because of lower estimated residual values for certain equipment and higher equipment costs. The reduced residual values added approximately $900,000 of depreciation in the second quarter and $1.7 million for the first six months.
- Gains on equipment dispositions in the 2016 periods were replaced by a $130,000 loss in the 2017 periods, primarily because fewer trailers were sold.
- Non-operating income was $650,000 in the second quarter and $2.7 million for the first six months, compared with negligible non-operating income in 2016. The 2017 amounts included realized gains on marketable equity securities.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected to purchase approximately 350 new trucks and 500 new trailers during the remainder of 2017, with estimated net capital expenditures of approximately $52.6 million.
- Management believed available cash, operating cash flow, and financing sources would fund near-term working capital and planned capital expenditures and did not expect significant liquidity constraints in the foreseeable future. The company stated that it intends to retain future earnings and does not anticipate cash dividends in the foreseeable future.
- Key risks include excess trucking capacity, economic and customer-cycle weakness, fuel-price and interest-rate volatility, driver recruitment and compensation costs, insurance and claims exposure, equipment resale values, financing availability, competition, weather, and customer concentration or loss.
- A collective-action lawsuit brought by former drivers alleges violations of the Fair Labor Standards Act and Arkansas minimum-wage law, including claims involving orientation, travel time, deductions, and compensation. The case was under preliminary review; the company could not estimate any potential loss, and stated that losses would not be covered by existing insurance.
- Marketable equity securities expose the company to equity-price volatility. A 10% decline in their market value would reduce carrying value by approximately $2.5 million. Margin-account borrowings secured by these securities were approximately $6.8 million at June 30, 2017.
- A hypothetical 100-basis-point increase in LIBOR on $1.0 million of variable-rate debt would increase annual interest expense by approximately $10,000. A 10% increase in diesel prices would have increased annual fuel expense by approximately $3.9 million based on 2016 consumption.
- The company adopted ASU 2016-09 during 2017 without a significant impact. Management expected the then-pending revenue, financial-instrument, lease, credit-loss, and cash-flow standards generally not to have a material financial-condition or cash-flow impact, although ASU 2016-01 was expected to affect earnings presentation through periodic market-value changes.
- Internal control and disclosure controls were reported effective as of June 30, 2017, with no material changes in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the deterioration in operating ratios and earnings is temporary or reflects sustained pressure on freight rates, utilization, and equipment economics.
- Whether the planned $52.6 million of second-half net capital expenditures can be funded while reducing debt and maintaining adequate liquidity.
- The sensitivity of earnings and cash flow to fuel prices, interest rates, used-equipment values, insurance claims, and driver costs.
- The status and potential exposure from the collective-action driver lawsuit, for which no loss estimate was available.
- The valuation and concentration of the $24.7 million marketable-equity portfolio and related margin borrowings.
- Whether higher reliance on owner-operators improves overall economics despite shifting costs from salaries and fuel into rent and purchased transportation.